The main reasons why Communism failed was that it could not provide a decent standard of living for its people. This was because the absence of a market meant Communism was enormously wasteful with resources. The system was notable for its crippling inefficiencies and gross mismanagement. Despite having some of the highest levels of investment, they had some of the lowest returns. This was due to the absence of market forces and signals, the primacy of political influences and a lack of accountability.
The free market has many flaws as I regularly discuss on this blog. However, it has some advantages (though they are often exaggerated) which make it essential to an economy. The most important of which is that it can send signals. If you try selling shoes and no one buys them, this is the market signalling that you should switch to something else. This is signal is not perfect and in some cases can be seriously flawed, but in general it works. The problem with Communism is that it abolishes the market’s ability to signal. Consumers had very little choice so they would buy the shoes even if they hated them. Thus there was no way to know what was a good or a bad investment. Factories would be built and products made even if no one wanted them. Rising prices is a way for the market to signal that there is high demand for a good. But if prices are fixed by the state, then there is no way to know what is or is not in demand.
The second problem with removing a market is that there is no longer a way to punish inefficiency and reward competence. In a capitalist system inefficient producers go bankrupt (this is a rough rule of thumb that holds best at the extreme) whereas under Communism a factory can be extremely inefficient and continue in business. It was possible to make poor quality goods and people would still have to buy it. The state would cover all losses and credit was easily available. Thus there was no incentive to take risks on changing production structure or shaking up the system. It was easier to just continue with the old ways of wasting resources.
Instead decisions were made for political reasons. Managers and administrators were chosen not based on their knowledge of economics or proven competence but rather based on political loyalty. It was preferable to have a group of inept loyalist than successful dissidents who may undermine your position. As there was no market guidance as to where best to invest, political connections were most important. The focus was then on what best benefited the party elite rather than what benefited the economy. Hence huge statues to political leaders dominated poorly constructed buildings that lay empty. If success was determined for political rather than economic reasons, then praising the leader became more important that being economically efficient.
Due to the political structure and without a market, decision makers were unaccountable. There was no way to punish failure or incompetence. The lack of transparency meant large amounts of money could not be accounted for. In this climate corruption flourished. Communist countries were notoriously corrupt and their leaders completely unaccountable. As a firm could sustain any amount of losses, disappearing money wasn’t a problem. Inefficient firms dominated by nepotism and corruption couldn’t be driven from the market and sold just as much as more efficient firms. Political connections and bribery determined where resources went even if it was harmful for the economy.
At the core of the economic failure of Communism was the abolition of the free market. Many countries can prosper with heavy regulations, high taxes or state intervention, but all cases where the market itself was abolished have failed. Without a market there is no way to accurately make economic decisions, to maximise economic efficiency or to use resources in the best way. Central planning fails as an alternative as it lacks sufficient accurate information and is open to political manipulation and corruption. By abolishing the market, Communists hoped to protect the economy from cycles of boom-and-bust. Instead they condemned the economy to stagnation.