Businesses Under Communist Systems

The Communist Economic System

The communist economic system is one where class distinctions are eliminated and the community as a whole owns the means to production.

Learning Objectives

Explain how a communist economic system is representative of a command planned economy

Key Takeaways

Key Points

  • Karl Marx and Freidrich Engels wrote the Communist Manifesto in 1848, in response to poor working conditions for workers across Europe. The goal was to establish a system where class distinctions were eliminated and the means of production were owned by the masses.
  • Recent attempts at creating political economic systems have led to state-driven authoritarian economies with unaccountable political elites, further driving power away from the hands of the masses.
  • A Command Economy is characterized by collective ownership of capital: property is owned by the State, production levels are determined by the State via advanced planning mechanisms rather than supply and demand, and prices are regulated and controlled.

Key Terms

  • bourgeoisie: In sociology and political science, bourgeoisie (Fr.: [buʁ.ʒwa’zi] | Eng.: /bʊrʒwɑziː/) and the adjective bourgeois are terms that describe a historical range of socio-economic classes. Since the late 18th century in the Western world, the bourgeoisie describes a social class that is characterized by their ownership of capital and their related culture. In contemporary academic theories, the term bourgeoisie usually refers to the ruling class in capitalist societies. In Marxist theory, the abiding characteristics of this class are their ownership of the means of production.
  • Command Economy: Most of the economy is planned by a central government authority and organized along a top-down administration where decisions regarding production output requirements and investments are decided by planners from the top, or near the top, of the chain of command.
  • proletariat: The proletariat (from Latin proletarius, a citizen of the lowest class) is a term used to identify a lower social class, usually the working class; a member of such a class is proletarian. Originally it was identified as those people who had no wealth other than their children.

The Communist Economic System

A communist economic system is an economic system where, in theory, economic decisions are made by the community as a whole. In reality, however, attempts to establish communism have ended up creating state-driven authoritarian economies and regimes which benefit single party political élite who are not accountable to the people or community.

Communist theory was developed by a German philosopher in the 1800s named Karl Marx. He thought that the only way to have a harmonious society was to put workers in control. This idea was established during the Industrial Revolution when many workers were treated unfairly in France, Germany, and England.

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Communist Ideology: The Hammer and Sickle represents the communion of the peasant and the worker.

Marx did not want there to be a difference in economic classes and he wanted class struggle to be eliminated. His main goal was to abolish capitalism (an economic system ruled by private ownership). Marx abhorred capitalism because the proletariat was exploited and unfairly represented in politics, and because capitalism allows the bourgeoisie to control a disproportionate amount of power. Therefore, he thought that if everything was shared and owned by everyone, a worker’s paradise or Utopia could be achieved.

Together with Friedrich Engel, a German economist, Marx wrote a pamphlet called the Communist Manifesto. This was published in 1848 and it expressed Marx’s ideas on communism. However, it was later realized that communism did not work. Most interpretations or attempts to establish communism have ended up creating state-driven authoritarian economies and regimes which benefit single party political élite who are not accountable to the people at all.

Command Planned Economy

An economy characterized by Command Planning is notable for several distinguishing features:

  1. Collective or state ownership of capital: capital resources such as money, property and other physical assets are owned by the State. There is no (or very little) private ownership.
  2. Inputs and outputs are determined by the State: the State has an elaborate planning mechanism in place that determines the level and proportions of inputs to be devoted to producing goods and services. Local planning authorities are handed 1 year, 5 year, 10 year or, in the case of China, up to 25-year plans. The local authorities then implement these plans by meeting with State Owned Enterprises, whereby further plans are developed specific to the business. Inputs are allocated according to the plans and output targets are set.
  3. Labor is allocated according to state plans: in a command planning economy, there is no choice of profession; when a child is in school (from a very early age), a streaming system allocates people into designated industries.
  4. Private ownership is not possible: under a command planning system an individual cannot own shares, real estate, or any other form of physical or non-physical asset. People are allocated residences by the State.
  5. Prices and paying for goods and services: prices are regulated entirely by the State with little regard for the actual costs of production. Often a currency does not exist in a command planning economy and when it does, its main purpose is for accounting. Instead of paying for goods and services when you need to buy them, you are allocated goods and services. This is often also called rationing.

In western democratic and capitalist societies, the price mechanism is a fundamental operator in allocating resources. The laws of demand and supply interact, the price of goods (and services) send signals to producers and consumers alike to determine what goods and quantities are produced, and helps determine what the future demands and quantities will be.

The law of demand states that the higher the price of a good or service, the less the amount of that good or service will be consumed. In other words, the quantity of a good or service demanded, rises when the price falls and falls when the price increases.

The Benefits of Communism

Communism ideology supports widespread universal social welfare, including improvements in public health and education.

Learning Objectives

Explain how the theoretical benefits of communism may lead to a more equitable society

Key Takeaways

Key Points

  • The theoretical advantages of communism are built around equality and strong social communities.
  • Communist ideology advocates universal education with a focus on developing the proletariat with knowledge, class consciousness, and historical understanding.
  • Communism supports the emancipation of women and the ending of their exploitation.
  • Communist ideology emphasizes the development of a “New Man”—a class-conscious, knowledgeable, heroic, proletarian person devoted to work and social cohesion, as opposed to the antithetic “bourgeois individualist” associated with cultural backwardness and social atomisation.

Key Terms

  • proletariat: The working class or lower class.
  • antithetic: Diametrically opposed.
  • bourgeois: Of or relating to capitalist exploitation of the proletariat.
  • Communism: a political philosophy or ideology advocating holding the production of resources collectively

The Benefits of Communism

Theoretically, there are many benefits that can be achieved through a communist society. Communist ideology supports widespread universal social welfare. Improvements in public health and education, provision of child care, provision of state-directed social services, and provision of social benefits will, theoretically, help to raise labor productivity and advance a society in its development. Communist ideology advocates universal education with a focus on developing the proletariat with knowledge, class consciousness, and historical understanding. Communism supports the emancipation of women and the ending of their exploitation. Both cultural and educational policy in communist states have emphasized the development of a “New Man”—a class-conscious, knowledgeable, heroic, proletarian person devoted to work and social cohesion, as opposed to the antithetic “bourgeois individualist” associated with cultural backwardness and social atomization.

Other theoretically beneficial ideas characteristic of communist societies include:

  1. People are equal. In a communist regime, people are treated equally in the eyes of the government regardless of education, financial standing, et cetera. Economic boundaries don’t separate or categorize people, which can help mitigate crime and violence.
  2. Every citizen can keep a job. In a communist system, people are entitled to jobs. Because the government owns all means of production, the government can provide jobs for at least a majority of the people. Everyone in a communist country is given enough work opportunities to live and survive. Every citizen, however, must do his or her part for the economy to receive pay and other work benefits.
  3. There is an internally stable economic system. In communism, the government dictates economic structure; therefore, economic instability is out of the question. Every citizen is required to work in order to receive benefits, and those who don’t have corresponding sanctions. This creates an incentive to participate and to encourage economic growth.
  4. Strong social communities are established. In communism, there are certain laws and goals which determine resource and responsibility allocation. If the citizens abide by these laws, this leads to a harmonious spirit of sharing one goal. Consequently, this builds stronger social communities and an even stronger economy.
  5. Competition doesn’t exist. In communist societies, everyone can work harmoniously without stepping on each other’s toes. Work, responsibility, and rewards are shared equally among the citizens. If people have no sense of envy, jealousy or ambitions that counter the goals of the state, then a harmonious economic development can be maintained.
  6. Efficient distribution of resources. In a communist society, the sense of cooperation allows for efficiency in resource distribution. This is very important, especially in times of need and in emergency situations.

The Disadvantages of Communism

Businesses under Communist system have very strict limitations as to what they can and cannot do, which can hamper productivity and innovation.

Learning Objectives

Summarize how the strict rules placed on businesses in a communist economic system can lead to social unrest

Key Takeaways

Key Points

  • In a Communist system, the central authority dictates the means and quantity of production, and places strict rules on businesses.
  • Since there is no competition amongst firms, each is given the same amount of money and each worker is paid the same, with the same expectations of each.
  • All businesses are ultimately owned by the government.
  • Populations tend to be treated homogeneously, meaning that common goals or sets of rules will not apply to different segments of the population and community.
  • Without a price mechanism, supply and demand are difficult to balance perfectly over time.

Key Terms

  • Price mechanism: An economic term that refers to the buyers and sellers who negotiate prices of goods or services depending on demand and supply. A price mechanism or market-based mechanism refers to a wide variety of ways to match up buyers and sellers through price rationing.

Disadvantages of Communism

The economic and political system of Communism effectively dictates what can and cannot be done in the realm of business. There are defined limitations for the amount a business can produce and how much money it can earn.

In addition to directly controlling the means of production, Communism places strict rules as to how businesses operate in such a way that a classless society is born. No matter what field a business specializes in, the same amount of funds will be allocated to each, and each worker will receive the same amount of money. This can cause emotional unrest between workers who wish to be specially recognized for their work. It can serve to create uncomfortable conditions for workers in a society without rank or varying specialty. Finally, it can be stifling to entrepreneurial spirit, which is key to a country’s economic growth and development. The U.S., a capitalistic nation, has greatly benefited from that small business and entrepreneurial atmosphere, a backdrop for the American dream.

More specifically, in Communism:

  • The government owns all the businesses and properties (the means of production).
  • There is no freedom of speech.
  • Large or geographically-broad populations tend to be diverse, making it difficult to maintain a common goal or set of rules for shared effort and resources.
  • Central planning is difficult to achieve.
  • Consumers ‘ needs are not taken into consideration.
  • Productivity and efficiency are difficult to achieve without profit motive for the workers.
  • It is difficult to achieve internal balances between supply and demand without a price mechanism.
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The Kremlin: Only the government has a say in production planning under a Communist system.