Why Did Communism Fail? #3 – Incentives

The most common and simple explanation for why communism failed is that people are greedy. This is a gross simplification but does contain some truth. Communism failed to provide incentives for workers and citizens to work hard and be productive. While there are many benefits from equality, if pushed to an extreme it robs people of an incentive to make an effort. There was little if any reward for hard work or innovation and a lack of punishment for poor or inefficient work. The lack of incentives was a major reason for the poor performance of Eastern Europe economies. Why bother working hard if the reward was the same as doing the bare minimal?

The lack of incentives was system wide. Employees had little incentive to work hard as they would be paid the same regardless. While egalitarianism has many merits, under Communism it was taken to an extreme. There was too little difference in pay between professions to encourage workers to improve their skills and work harder. As there was no unemployment, there was no threat of firing, so people were guaranteed a job no matter how badly they worked (if at all). With neither a credible threat nor promise of reward to motivate staff, productivity in Communist countries stagnated.

This problem affected management too. Under Communism managers were not incentivised to be economically efficient, but to fulfil the plan. This meant there was a huge emphasis on quantity even if the quality was very poor. Managers often resorted to lying to meet unrealistic quotas. They suffered from perverse incentives that placed fulfilling political goals ahead of efficiency. Firms in general had little incentive to be efficient or control costs. They could easily access credit and further state funding to cover their costs. Financial losses meant little to managers as there was no chance of the firm going bankrupt. No matter what the difficulties, the state would pay to bail the business out. The state guarantee of a job has meant everyone must be employed even if they add little to the factory.

One of the greatest failings of communism was its inability to innovate. Eastern Europe failed to develop new technologies or adopt more efficient processes, instead remaining with obsolete methods. This was especially apparent in the 1980s when the West prospered and made advances in IT while the Communist Bloc stagnated with the same technology it had been using for decades. This isn’t to say there were no innovations under Communism, just that there were very few of them and they were mainly concentrated in the field of military and space. Of all the main inventions and technological advances of the late 20th century, almost none of them were made in communist countries and almost all were made in the USA.

This was mainly due to the lack of incentives to innovate. This is because capitalist firms can profit from new inventions or suffer losses for being technologically backward. A communist firm gains no reward for innovation and suffers no loss for backwardness or even stagnation. Capitalism is more flexible and allows new businesses to enter with new ideas, whereas communism is rigid and slow to adopt to change. Due to the repressive atmosphere of Communism, creativity was discouraged and treated with suspicion. Ideas had to conform to the party line; dissent was neither wise nor rewarding. The heavy levels of bureaucracy stifled attempts at innovation and the rigidity of the central plan made it exceptionally difficult for new innovations to be put into practice.

Communism greatest weakness was its failure to adapt. Whatever the merits of Communism’s Five Year Plan during the 1930s, the world changed and Communism failed to keep up. It couldn’t create new and more efficient methods of production and as a result it stagnated. It never moved on past the heavy steel mills even after these ceased to be competitive. By the 1980s the economic system was bankrupt of fresh ideas, with preference still being given to the stale old methods. This lack of innovation (especially in the IT sector) was crippling and one of the fatal flaws of Communism. This coupled with an inability to incentivise workers to work hard and efficiently, meant Communism did not succeed as an economic system.

23 thoughts on “Why Did Communism Fail? #3 – Incentives”

  1. Are you familiar with the great famine in Russia after the first world war? The Bolsheviks took so much grain from Russian farmers they couldn’t even plant crops the following season, or were forced to eat seed stocks. 6 million people died. Corruption, disastrous failure of the railway system, drought, and religious (russian orthodox church) mistrust collided to stir up the perfect storm. Interesting bit of history which speaks volumes as to why Communism, like Capitalism feeds the rich and starves the poor.

    1. Isn’t that happening in America today? Aren’t the capitalists taking so much out of the system that you have growing poverty across the country? The NYTimes reported this weekend that half the people who live in NYC meet the definition of poverty. I think capitalism succeeded because it had communism. Why do you think that the great robber barons agreed to a top rate of 90%. I think it is because they feared communism. That fear, actually had the effect of strengthening capitalism. But now that the threat of communism is gone, capitalism is showing the same excesses of communism. And it will end the same way.

      1. I agree with you 100% Capitalism has gone berserk. I live in Canada so the playing field has been a little more level – but not for long. Canada may be spared influence from organized lobby groups, but are so busy rolling out the red carpet to Chinese investment, or foreign ownership of resources – I fear for the Canada I know and love. Even our sacred icons of social medicine and social responsibility are beginning to tatter. Many of our hospitals, and insurance companies are now controlled by American money. It scares me to death.

  2. A few decades back there was a large influx of Eastern European students into California colleges. A number of these students got jobs on campus and one of the things we noticed was that if they were given a specific task to do, they would do it and do it well … and then they would wait for another task to be given them. They showed little of the initiative we expect for go-getter students. A couple of older students explained to us that “back home” if they showed such initiative other workers would take them aside and insist that they slow down because they were taking work away from others.

    Basically even work was being rationed, as though “work expands to fill the time alotted” became policy.

    1. What could go possible go wrong? There was this little example of greed almost crashing the economy, I’m not sure if you heard about it, it was called the 2008 financial crash . . . .

      1. I suppose a crash must be fixed (note the sarcasm)…I thought a crash was the market correcting itself (ie punishing the greedy individuals)…but what caused the crash in the first place…not govt intervention pumping up a bubble? But then the same govt turns around to undo the market’s correction (crash) with taxpayer dollars. Crony capitalism.

        Like religion without hell, there is no Capitalism without Bankruptcy…govt needs to stay out the business of picking winners and losers. Fear of failure is the greatest incentive for good business practice…but if your risk is backed up by Govts’ “too big to fail policies” then there exists no true market.

        1. A correction implies an improvement and I would not call stagnant growth and high unemployment an improvement or correction. You see economics is not a morality story where the greedy get their commeupance and the virtuous are rewarded. It is the working class who have suffered the worst of the recession, not the greedy.


          You may treat the idea of intervening in the economy with sarcasm, but lassiez faire means leaving the economy stuck in a ditch. Mass bankruptcies destroys an economy, it does not spur it on. You misunderstand the meaning of “too big to fail”. It refers to private businesses who grew to such height that were they to go bankrupt like you suggest it would destroy the economy. The reason they are so big is that the government refused to intervene to limit their size and the solution is regulation preventing banks from getting that large and forcibly separating them.

        1. Just like the eastern bloc communist countries did, except they used torture, imprisonment and deprivation as their means of control.

    2. Greed is primarily self-destructive. It induces people to chase great gains after the point where they should quit. In the pursuit of great gain, they wind up losing everything, sometimes even their very lives. Lack of temperance and honesty ruins those afflicted with such vice. Greed superficially resembles rational self-interest, but in fact, it is the opposite.

  3. Under any economic system, individuals respond to incentives. The economic problem is how to make incentives for individuals correspond with what is good for society as a whole. What’s good for you and good for me isn’t necessarily good for us.
    In the old Soviet Union, the incentive was (1) to manifest loyalty to the leader and his ideas and (2) to carry out orders or to appear to carry them out whether they made sense or not. With rare exceptions, the same incentives apply (to a lesser extent) to employees of large corporations.
    Here’s a link to a good article on incentives.

    In the case of the Wall Street crash, the normal boom-and-bust economic cycle was made worse by bankers and speculators who manipulated government into allowing them to (1) be rewarded for taking big risks with out people’s money, (2) take gains and shift losses to suckers, (3) be bailed out from failure and (4) enjoy impunity from fraud prosecution.
    This is corruption. It has nothing to do with economic theories about the merits of a free market vs. a planned economy.

  4. Actually Thatcher’s policies didn’t stimulate the economy in any real sense. The measures of the economy are inadequate to measure outsourcing and machine productivity versus human productivity in the domestic economy.

    Machine productivity and outsourcing in the economy both weigh in on the side of the factor – meaning that growth’s profitability goes to the business owner and is not reasonably shared with the worker. Capitalism as a pure play is a corruptible as communism. Strong regulation of the excesses of capitalism is what produced the golden age in the US, not capitalism itself. I think the willingness of capitalists to submit to regulation was the fear of communism and the strong unions working at the same time, though not necessarily together.

    The excess of capitalism without regulation is why you have the growth of billionaires and poverty at that the same time. We are told that the US has the most productive workforce in the world. But as fast as we create a few hundred billionaires we creating a few million people in poverty. Economics is in the end a zero sum game.

    Thatcher’s stimulation of the economy is true as long as you don’t disaggregate work that is being done by machines which have displaced human workers, and don’t further disaggregate the value of outsourcing, where the same thing is made for cheaper labor but sold for the same or nearly the same price. The pie getting bigger, but the slices getting smaller for most people is not really the sign of a purposefully stimulated economy.

    Reagan and Thatcher worked a one-two punch on the leading economies that had strong workforces (unions) for the benefit of capitalists. I think the world was more honest about it when Thatcher died. We still tend to see Reagan through rose colored lenses, though I think history will judge him as harshly as it does Thatcher today.

    1. This is based on an essay I wrote for university. I didn’t want to have it overly dense and technical so I removed the academic references. Here they are:

      Broekmeyer, Marius, (1977), “Self-Management in Yugoslavia”, Annals of the American Academy of Political and Social Science, Vol 431, p. 133-140
      Brown, 2010, The Rise & Fall Of Communism, Vintage Books Ltd, London
      Clark & Wildavsky, 1990, “Why Communism Collapses: The Moral and Material Failures of Command Economies Are Intertwined”, Journal Of Public Policy, Vol. 10 No. 4
      Estrin, Saul, (1991) “Yugoslavia: The Case Of Self-Managing Market Socialism”, The Journal of Economic Perspectives, Vol. 5, No. 4, p. 187-194
      Hill, 1990, Soviet Union: Politics, Economics And Society (2nd ed), Pinter Publishers, London
      Kaminski, 1991, The Collapse Of State Socialism: The Case Of Poland, Princeton University Press, New Jersey
      Korbonski, 1995, “Poland”, in The Legacies Of Communism In Eastern Europe, edited Barany & Volgyes, John Hopkins University Press, Balitmore
      Kournai, 1992, The Socialist System, Oxford University Press, Oxford
      Pearson, 2002, The Rise And The Fall Of The Soviet Empire (2nd ed), Palgrave, New York
      Schopflin, 1990, “The End Of Communism In Eastern Europe”, International Affairs, Vol. 66, No. 1
      White, 2001, Communism And Its Collapse, Routledge, London
      Zatlin, 2010, “Unifying without Integrating: The East German Collapse and German Unity”, Central European History, Vol. 43

  5. To put it simply, most people want “equality”, only if that “equality” is greater than what they already have. For example, If A has 30 and B has 70, the “equality” would be “50”. A would want the equality, but B would not. This is not because A is a good person and B is a bad person. If A were in B’s position, A would acted the same way.

    Employees fight for higher payment, and employers refuse to do so. We depict that those employees moral, and those employers are evil. But if we kill all employers now and choose some of the employees as employers, probably a lot of them would also act like the employers we killed. It is just two sides of one coin named “selfishness”.

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