Saturday, January 8, 2011

Communism and the efficiency paradox

As anyone visiting this blog knows; communism doesn't work. It is not efficient. There are several reasons for this; the lack of prices (described by Ludwig von Mises back in 1920) being the most obvious.

In this post, I would like to discuss another issue with communism: It cannot be efficient by definition, at the same time as it requires efficiency.

Think about it: Communism promises everyone a job That's the thing that makes it attractive in the first place; no-one will have to worry about unemployment.

When a company is made more efficient, workers are usually at least temporarily laid off - they can now satisfy the same demand with fewer workers. These workers, in a market economy, will however find job elsewhere (if not in the same industry once demand has increased) since consumers will have more money to spend - they may lose their jobs at the car plant, but consumers will now get cheaper cars and more money to buy fridges (or something else), and so they can get a job at a factory producing fridges instead.

In a communist economy, this is not so easy.

If a plant where to install better machines, but have the same demand to meet, they would have to lay off workers. That would cause unemployment and so be against communistic doctrines.

Couldn't you move the workers? Yes, but in communism, the workers decide. You could certainly relocate them to another plant, but that would certainly cause a lot of unhappiness (in particular if the plant was far away - like in Siberia or something...). You also couldn't provide them with any incentive because in communism, everyone is equal. You cannot bribe them with higher salaries if they agreed to move, and even if you could, that in itself wouldn't be efficient - since they would be inexperienced when they started to work at the other plant, it would make more sense if they were paid less than their coworkers as they were less productive.

Couldn't you just cut back their hours, so they all work part-time instead? Yes, but then, what would happen when workers at other plants realized that their comrades at the now efficient plant are working part-time, but are paid the same? Remember, equality is the most important thing in communism. But what if you did cut their pay? They wouldn't accept that, they would see it as a punishment for a "crime" (the purchase of a new machine) they didn't committ.

But can't you just increase production? You could, but there's only so much demand. You can't produce things that people don't want, the products will just take up space in the warehouses and, if we are talking about food, get spoiled. Also, in communism, production is tied to a strict five-year plan, which means an increase in production isn't possible; workers will have to be laid off and in order not to be unemployed, they will have to be relocated. And at their new workplace, they will have to be paid as much as everyone else despite the fact that they don't know the job as well as the others do and are much less productive - that is inefficient.

Efficient communism involves people being forced at gunpoint to relocate. Essentially, this is slavery. Slavery has died out in many places naturally (as a matter of fact, America is the only country which had to fight a war to abolish it), and the reason why it doesn't work is because work gets more complicated, requires longer education (many jobs today that you used to be able to do after high school now require college degrees) and creativity (you cannot force someone to be creative and you cannot measure whether or not he is doing his best). The only work were slave labor can be efficient is work that doesn't require machines but can be done entirely by hand.

Since in communism, the workers are slaves, the only areas where communism can be efficient are areas where you can actually check that people are working and doing their best - like in a salt mine without machines (and there were a lot of those in Siberia). As soon as advanced machinery is introduced, you can no longer check (or, not as well as before) whether people are doing their best - and they get the same salary if they aren't working, so why would they? This is inefficient. A system which stops a country from developing beyond an agricultural economy, is by definition inefficient.

We should also add that the workers decide in communism, and they are highly unlikely to vote for new, advanced technology that means they lose their jobs. The consumers may benefit, but the workers don't care about that. Society as a whole are better off with constantly improving technology, but the individual actors are in the short term better off without it. It reminds of the prisoner's dilemma: If one player (group of workers at one factory) chooses Technology, while the other player (another group of workers at another factory) does the same, they both gain 10. If none of them chooses Technology, they gain 0. If one of them does choose technology while the other don't, he will lose 5 while the other gain 15. In simple terms: If one factory agrees to put new machinery in place and downsize, that will help society because the cost of production will be lower and prices will so be lower. If all factories do this, then everyone will be better off - yes, everyone will run the risk of being fired in a downsizing, but everyone will also get to consume more. However, the best scenario for each individual player is not to choose technology while the other do - that will mean you get lower prices but won't have to run the risk of getting fired, because your factory isn't getting any more efficient. The worst scenario is the opposite, where you take the risk of being fired but you'll find the only products that are cheaper are the ones from your own factory.

Please note: Technological development does not lead to unemployment in the medium run, and hardly ever in short run either, over all. However, it can lead to companies firing some people that are no longer needed because their tasks are now done by machines. Sooner or later they will find other jobs of course, but it can be a painful process for them and workers certainly wouldn't vote for anything that may lead to them having to find another job. That is why companies shouldn't be ruled by workers but by managers and shareholders; it's better for everyone that way in the long run.

Yes, communism does have quotas - "you have to produce this much each day or we'll ship you off to Gulag", but some workers (or team of workers) can produce more than others. Some of them won't reach the target, despite trying their best, while others will easily reach it and be able to slack off for most of the day. This, of course, is very inefficient. It is impossible for the state to know how much each worker or team is capable off producing. In fact, it is hardly possible for the workers themselves to know. You don't know what you can do until you try, and communism leaves you with absolutely no incentive for trying anything. This means that a lot of people who would have made great doctors or lawyers will end up in a coal mine, because they never tried to develop any of those hidden skills. Quotas are not efficient, even if they force everyone to produce a certain minimum quantity - you simply don't get more money if you produce above this quantity, and so everyone will just produce the minimum (inefficient). If you raise the quota, more people - who weren't necessarily slacking off but who could have simply been more productive in another industry - will be punished and sent to work in salt mines (we can't assume they'll be more productive there, so it's clearly inefficient).

I now strayed somewhat from the subject, and I will try to end it here. The problem with communism is that it cannot be efficient without breaking its promises to the people (no unemployment/equality/allowing workers to own and control the factories etc), and in order to be at its most efficient level, everyone will have to work without machines, which is in itself inefficient. At the same time, communism needs to be efficient to survive, because people constantly want a higher living standard - and long-term growth is caused only by technology (the Solow model), which as we just established, cannot exist in communism.

This paradox - the need for growth together with the absence of the only thing that can cause long-term growth - causes the system to break down.

I hope I explained it well. Please leave comments.

John Gustavsson


Anonymous said...

I could'nt survive in a society where your individual efforts were frowned upon and not rewarded.

Thank God we're not quite there yet.


phil said...


Thank you for posting this. It's always good to take a look at things from an historical perspective. Hopefully, to learn from the mistakes of others.