“The Soviet example of how communism works and why it always fails”


Marx Got Economics Right, Comrade
Talk at the Heritage Foundation
by Darian Diachok
ACAT Speakers Bureau
 July 2, 2019

Why is Communism relevant today?  Ignorance! Just ask around. You may be shocked to find that nearly no one under twenty-five has ever heard of Stalin, whose genocide exceeded Hitler’s by a factor of five.

Communism is being repackaged in this atmosphere of ignorance. Films like “Motorcycle Diaries” and “Young Marx” portray Che and Marx as wise, prophetic figures fighting for mankind’s betterment.  Idealistic youth is responding enthusiastically in their need for heroes.   If you travel abroad, say to India or South America, you can see full-scale marches complete with red banners and portraits of Stalin.

How do you get through to the youth? Philosophical arguments?  Theism versus atheism? We can argue these issues, but let’s for a moment examine the one thing Marx was sure he got right – economics – economics, where the rubber meets the road, the proof of the pudding, so to speak.

Brief review:  The worldwide Communist Revolution began when Marx published the Labor Theory of Value – a theory that seemed intuitively obvious to lots of folks – that employers exploit the laborers they hire.  Specifically, Marx said that the price of a product comes from the labor to produce it, and that therefore the laborer, and not the employer, is entitled to the proceeds.  He dreamed of a world where no one exploited anyone else.  Borrowing from Hegel, Marx believed history was evolving through a series of political convulsions from private ownership to communal ownership – toward a utopia where all of mankind equitably shared the fruits of labor.

Curiously, Marx didn’t specify how this new utopia would function – but he did paint the most negative picture of the institutions that he believed stood in the way:  the worst offenders being, free enterprise, the rule of law, the family, and religion.  Only a final violent convulsion could overthrow these institutions. And once the Revolution came, the State, run by idealistic Marxists, would set up the new economy. But until utopia materialized, the State could not permit the individual any economic freedom, since individual enterprise would lead back to exploitation. The State also had to eliminate anyone at all who opposed it.

All of this seems fanciful and even crazy, but it’s exactly how Communist revolutionaries thought – and still think. How did this theory work out in practice?

When we first arrived in 1993 in the Former Soviet Union, two years after the fall of Communism, things seemed familiar – men wore ties, women skirts, people drove on the right side and used forks and knives.  But there were hints that things were radically different. My Ukrainian co-worker’s daughter was bitten in the face by a dog in school.  He left immediately – to apologize and to pay a hefty fine.  Why? The dog represented State authority and the girl must have been misbehaving.  That same week, a shopkeeper slapped my son for touching a toy.  Why?  In an economy of scarcity, the customer must be on his best behavior if he hopes to make a purchase.  And one day I bought my wife the only iron I could find, but one almost too heavy for her to lift. Why too heavy? Let’s get back to the Communist Revolution to understand.

After the brief revolutionary euphoria in 1917, no one quite knew what to do next.  Slogans about creating a new world were fine but people needed specific incentives.  How, exactly, were they going to reach this utopia?  The new rulers’ appalling incompetence – they had assumed that destroying the old institutions would produce instantaneous brotherhood – their incompetence quickly produced nothing but scarcity and famine, with the Army called out again and again to shoot protesters.

The Communists regrouped and finally created incentives – a system of artificial quotas.  One State organ would set production quotas for every single item – from ball bearings to trucks – another would distribute them.  The rules for managers?  Reach your quota or face the consequences, firing or prison.  Meet your quotas and good things happen. Oh, yes, and the State would set all prices to avoid “exploitation”. Okay, but one major problem – the complexity of the economy far exceeds any planner’s ability to accurately model it.  Totally planned economies inevitably produce shortages of some goods and overproduction of others.

In this new system, factory managers rarely got all they needed to make their quotas. So, they learned to informally wheel and deal to get missing parts. A factory in Kazakhstan might have extra glass; one in Kiev might have extra batteries. Eventually, an underground bartering system developed – but in secret, since no one could accuse the State of incompetence and live to tell about it. It is estimated that half of the Soviet Union’s rail freight eventually shuttled illicit goods back and forth to make monthly quotas. It was like that when we arrived – with managers keeping two sets of books – one for State inspectors; the other for themselves.

Managers learned other tricks.  For example, some factories welded heavy pig iron plates to the bottom of sewing machines and even radios to increase their weight to make their tonnage quotas.  Production therefore became a numbers game where quality mattered little. Soviet emigres estimate that about a quarter of all Soviet production was pure junk, another quarter useful if repaired; another quarter sort of serviceable, and the top quarter reserved for the military and the Party.

Quotas also controlled mining.  Whereas Western firms extract hydrocarbons only from fields that give a profit on investment, Soviet enterprises ignore operating costs. Costs of labor and equipment were artificially set anyway.  Our teams were stunned to find that Soviet engineers had never even heard of the concept of economically recoverable reserves. They simply extracted to meet quota regardless of cost.  It became clear that realistic profit and loss in the Soviet Union was impossible to calculate. The economy operated in the dark and was kept artificially afloat – a recipe for bankruptcy.

In our work with Moldova, for example, the chief accountant for the country’s powerplants explained that management conducts yearly inventories and simply transfers funds to plants running at a loss – which eliminates any incentive to improve operations.

Finally, in retail outlets like bookstores, shopkeepers learned to hoard bestsellers as barter for hard-to-get items, like milk.  In short, everyone at every level learned to game the system – to survive.

The Soviet Union finally collapsed of its own weight in 1991 – with State enterprises, like the powerplants we worked with, left bankrupt, about to fail.  But despite the collapse, the economic system still lives on in the minds of its victims, the people who were supposed to be led to utopia.

I’d say we encountered good people, sincere people, but with a deeply imbedded culture of corruption that the system itself created.  We all detected a tendency for ex-Soviets to tell us exactly we wanted to hear.  Under the old system, they had learned to toe the line, to pretend to be on board, but to go around us and to milk the system for everything it was worth.

Perhaps the most disturbing legacy we found was management’s inability to plan, to set priorities and to develop realistic workplans – I suppose because taking such initiatives had been severely punished and even called, “guerilla warfare against the prerogatives of the State.”  Initiative, such as it was, was limited to scheming for whatever you could finagle for yourself and your family.

In addition to the unworkable economics and a devastated environment, we knew the Communist system constantly eliminated the best people since it wouldn’t tolerate independent thought and action. It also forbid independent literature and art, and any open inquiry, all of which led to a gray, pervasive cynicism – still a legacy; and finally, it forbade religion – but without providing a substitute for mankind’s perennial concerns about the realm of the spirit and of life after death.

Today, no honest economist takes Marx seriously. Yet we’re seeing a wave of Socialists and would-be-Communists surging into the political light, to the applause of a generation raised in historical ignorance.  I pray that we can show this youth – this youth that believes in universal brotherhood and social justice – that these pied pipers can never lead them to a utopia.


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