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There’s no better illustration of this point than the historical example of the Soviet Union. The USSR and its leaders failed to accomplish their goal of establishing an efficient, effective command economy – but it wasn’t just because those leaders lacked the moral resolve to live up to their claimed ideology. It wasn’t because they weren’t really trying (contrary to the popular refrain that “true communism has never really been tried”). They were trying. It was simply impossible for them to succeed, given the inescapable flaws that are inherent to communism as a system of government. (Of course, the fact that many of them – Stalin in particular – also happened to be moral monsters didn’t exactly help; but there’s a reason why the USSR never became a communist paradise even after Stalin and his cronies had long been replaced by more normal leaders.) As compelling as communism might have seemed in theory, in practice it turned out to have fundamental faults that just couldn’t be overcome.

Daron Acemoglu and James A. Robinson describe how it went wrong:

Economic growth Stalin style was simple: develop industry by government command and obtain the necessary resources for this by taxing agriculture at very high rates. The communist state did not have an effective tax system, so instead Stalin “collectivized” agriculture. This process entailed the abolition of private property rights to land and the herding of all people in the countryside into giant collective farms run by the Communist Party. This made it much easier for Stalin to grab agricultural output and use it to feed all the people who were building and manning the new factories. The consequences of this for the rural folk were calamitous. The collective farms completely lacked incentives for people to work hard, so production fell sharply. So much of what was produced was extracted that there was not enough to eat. People began to starve to death. In the end, probably six million people died of famine, while hundreds of thousands of others were murdered or banished to Siberia during the forcible collectivization.

Again, like so much else in economics, it all came down to incentives. People don’t naturally want to work; that’s why we have to pay them to do it. If they’re allowed to keep the fruits of their labor, then they’ll work despite not wanting to, because the upside outweighs the downside – and the more they’re allowed to keep, the more they’ll typically be willing to work. But if you take this incentive away from them – i.e. if you announce that everyone in your glorious communist state must be economic equals, and therefore everyone must be paid the same amount and those who work more won’t be paid more – then you leave them no positive incentive to put any effort into their work at all, since they’ll be paid the same amount regardless. The only way to get around this dilemma, then, is either to rescind your pledge that everyone be paid equally, and to pay the more productive workers more than the less productive ones, or to abandon the use of positive incentives altogether and switch to using negative ones instead – punishing underachieving workers with however much brutality is necessary to turn things around. Ultimately, the USSR would end up resorting to both methods; but even then, it wasn’t enough to fix what was fundamentally wrong with the system as a whole. Acemoglu and Robinson continue:

Stalin understood that in the Soviet economy, people had few incentives to work hard. A natural response would have been to introduce such incentives, and sometimes he did—for example, by directing food supplies to areas where productivity had fallen—to reward improvements. Moreover, as early as 1931 he gave up on the idea of creating “socialist men and women” who would work without monetary incentives. In a famous speech he criticized “equality mongering,” and thereafter not only did different jobs get paid different wages but also a bonus system was introduced. It is instructive to understand how this worked. Typically a firm under central planning had to meet an output target set under the plan, though such plans were often renegotiated and changed. From the 1930s, workers were paid bonuses if the output levels were attained. These could be quite high—for instance, as much as 37 percent of the wage for management or senior engineers. But paying such bonuses created all sorts of disincentives to technological change. For one thing, innovation, which took resources away from current production, risked the output targets not being met and the bonuses not being paid. For another, output targets were usually based on previous production levels. This created a huge incentive never to expand output, since this only meant having to produce more in the future, since future targets would be “ratcheted up.” Underachievement was always the best way to meet targets and get the bonus. The fact that bonuses were paid monthly also kept everyone focused on the present, while innovation is about making sacrifices today in order to have more tomorrow.

Even when bonuses and incentives were effective in changing behavior, they often created other problems. Central planning was just not good at replacing what the great eighteenth-century economist Adam Smith called the “invisible hand” of the market. When the plan was formulated in tons of steel sheet, the sheet was made too heavy. When it was formulated in terms of area of steel sheet, the sheet was made too thin. When the plan for chandeliers was made in tons, they were so heavy, they could hardly hang from ceilings.

By the 1940s, the leaders of the Soviet Union, even if not their admirers in the West, were well aware of these perverse incentives. The Soviet leaders acted as if they were due to technical problems, which could be fixed. For example, they moved away from paying bonuses based on output targets to allowing firms to set aside portions of profits to pay bonuses. But a “profit motive” was no more encouraging to innovation than one based on output targets. The system of prices used to calculate profits was almost completely unconnected to the value of new innovations or technology. Unlike in a market economy, prices in the Soviet Union were set by the government, and thus bore little relation to value. To more specifically create incentives for innovation, the Soviet Union introduced explicit innovation bonuses in 1946. As early as 1918, the principle had been recognized that an innovator should receive monetary rewards for his innovation, but the rewards set were small and unrelated to the value of the new technology. This changed only in 1956, when it was stipulated that the bonus should be proportional to the productivity of the innovation. However, since productivity was calculated in terms of economic benefits measured using the existing system of prices, this was again not much of an incentive to innovate. One could fill many pages with examples of the perverse incentives these schemes generated. For example, because the size of the innovation bonus fund was limited by the wage bill of a firm, this immediately reduced the incentive to produce or adopt any innovation that might have economized on labor.

Focusing on the different rules and bonus schemes tends to mask the inherent problems of the system. As long as political authority and power rested with the Communist Party, it was impossible to fundamentally change the basic incentives that people faced, bonuses or no bonuses. Since its inception, the Communist Party had used not just carrots but also sticks, big sticks, to get its way. Productivity in the economy was no different. A whole set of laws created criminal offenses for workers who were perceived to be shirking. In June 1940, for example, a law made absenteeism, defined as any twenty minutes unauthorized absence or even idling on the job, a criminal offense that could be punished by six months’ hard labor and a 25 percent cut in pay. All sorts of similar punishments were introduced, and were implemented with astonishing frequency. Between 1940 and 1955, 36 million people, about one-third of the adult population, were found guilty of such offenses. Of these, 15 million were sent to prison and 250,000 were shot. In any year, there would be 1 million adults in prison for labor violations; this is not to mention the 2.5 million people Stalin exiled to the gulags of Siberia. Still, it didn’t work. Though you can move someone to a factory, you cannot force people to think and have good ideas by threatening to shoot them. Coercion like this might have generated a high output of sugar in Barbados or Jamaica, but it could not compensate for the lack of incentives in a modern industrial economy.

The fact that truly effective incentives could not be introduced in the centrally planned economy was not due to technical mistakes in the design of the bonus schemes. It was intrinsic to the whole method by which extractive growth had been achieved. It had been done by government command, which could solve some basic economic problems. But stimulating sustained economic growth required that individuals use their talent and ideas, and this could never be done with a Soviet-style economic system. The rulers of the Soviet Union would have had to abandon extractive economic institutions, but such a move would have jeopardized their political power. Indeed, when Mikhail Gorbachev started to move away from extractive economic institutions after 1987, the power of the Communist Party crumbled, and with it, the Soviet Union.

The truth is, no amount of inspired leadership or purity of intention could have saved Soviet communism from deteriorating into the mess it ultimately became. At the end of the day, if you’ve built your entire economic system on the foundational premise that your citizens can’t and won’t be rewarded in accordance what they produce, you’ve made it so the only way to avoid going back on that premise is to punish them for what they don’t produce. You’ve taken away the carrot, and all you’re left with is the stick. And so your system must necessarily lead to oppression and use of force against the populace, simply because there’s no other way for it to persist. That’s not merely an unfortunate-but-avoidable result of poor implementation or corrupt leadership; it’s an inevitable result of the design of the system itself.

Now, at this point you might still be inclined to blame the failures of Soviet communism on some unique pathology of Soviet leadership – and if so, well, it would be hard to totally blame you for feeling that way, given how uniquely malevolent Stalin and his ilk were. But if you do think that, then you also have to reckon with the fact that similar experiments have been tried all over the world at various points throughout history – and not once have they ended in anything other than tragedy. (China’s Great Leap Forward is obviously the best-known case study, but the collection of all-too-similar examples spans the globe.) In fact, believe it or not, a kind of communism was even tried in here America at one point, back when it was first being colonized by the British. Sure enough, though, as Michael Huemer recounts, the participants in this experiment ran into the same exact incentive problem that the Soviets did – and unfortunately, they faced the same disastrous results as a consequence:

[A basic] account of human nature [i.e. one that properly accounts for people’s fundamental self-interest] makes useful predictions about certain social systems. Take the case of a social theory proposing that all citizens should work for the benefit of society, while receiving equal pay. A simple theoretical prediction is that, in such a system, productivity will decline. Individuals have a high degree of control over their own productivity, and greater productivity usually demands greater effort. Since most people are rationally selfish, they will not exert great effort to be productive unless they expect to receive personal benefits from doing so. So if all are paid equally, and if there are no other rewards or punishments attached to quality and quantity of work, then people will not be very productive.

This prediction is in fact correct. The twentieth century’s experiments with social systems in this vicinity are well-known, so I shall not dwell on them. An interesting but little-known illustration is provided by America’s first experiment with communism, which took place at Jamestown, the first permanent English settlement in America. When the colony was established in 1607, its founding charter stipulated that each colonist would be entitled to an equal share of the colony’s product, regardless of how much that individual personally produced. The result: the colonists did little work, and little food was produced. Of the 104 founding colonists, two-thirds died in the first year – partly due to unclean water but mostly due to starvation. More colonists arrived from England, so that in 1609 there were 500 colonists. Of those, only 60 survived the winter of 1609-10. In 1611, England sent a new governor, Sir Thomas Dale, who found the skeletal colonists bowling in the streets instead of working. Their main source of food was wild plants and animals, which they gathered secretly at night so as to evade the obligation to share with their neighbors. Dale later converted the colony to a system based on private property, granting every colonist a three-acre plot to tend for his own individual benefit. The result was a dramatic increase in production. According to Captain John Smith’s contemporaneous history,

When our people were fed out of the common store and labored jointly together, glad was he [who] could slip from his labor or slumber over his task, he care not how; nay, the most honest among them would hardly take so much true pains in a week as now for themselves they will do in a day … so that we reaped not so much corn from the labors of thirty, as now three or four do provide for themselves.

One lesson from this episode is that, simple as the [self-interest-based] account of human nature […] is, it can yield very useful predictions. If the company that created the Jamestown charter had known a little economics, hundreds of lives might have been spared. Another lesson is that the impact of human selfishness depends greatly on the social system in which people are embedded: in one kind of system, selfishness may have disastrous consequences, while in another, it promotes prosperity.

This point about human nature is an important one. There’s always a natural tendency, when imagining what a utopian economic system might look like, to imagine that if only you could devise a system that was aimed at accomplishing a truly perfect, noble goal – e.g. economic equality for everyone – then even if that system required people to make some personal sacrifices, the sheer nobility of the end goal would compel them to want to participate anyway, out of pure love for their country and their fellow citizens. And in fact, in some cases that kind of reliance on patriotism can actually work, at least to some extent. Ultimately, though, it only goes so far; if you’re counting on it to form the entire backbone of your economic system on its own, then you’re asking for trouble. Sooner or later, your people will find themselves in situations where times are hard and they have to choose between doing what’s good for the Motherland and doing what’s good for themselves and their families – and faced with that kind of choice, even the most patriotic citizens will have a hard time willingly hurting their own families for some abstract idea of the greater good, especially if they’re being asked to do so on a constant basis. Whether we like it or not, then, we have to deal with human nature as it actually exists, not as we wish it existed. If it were otherwise, then as commenter neofederalist points out, we wouldn’t even be having to think about how to create a utopian economic system in the first place – because we’d already be living in one:

[You might] say something along the lines of “If everyone were nice and altruistic, and resources aren’t scarce, then [communism] would be the way to go.” Which I agree with, except for the fact that neither of those premises are true. If individuals were fundamentally unselfish and did their best to help those in need, the system of government we chose wouldn’t matter at all; the unselfish rich people would freely give away their money to those who need it more, and things like corruption, price gouging, and market failures wouldn’t exist by definition.

Granted, it’s hard to be mad at the Soviets for seeing the ugly consequences of human selfishness and wanting to do better. As I discussed in my last post, we as a society should want to do better. But there’s a difference between aspiring to a perfectly selfless culture which, if achieved, might theoretically enable you to implement your utopian communist economic system, and assuming that the reverse is also true – that by attaining power and implementing your communist economic system, you’ve therefore also created a perfectly selfless culture. And in a lot of ways, the Soviet communists’ fundamental mistake was to conflate these two. They thought that if only they could execute their plans efficiently enough, they could get their people to go along with them in spite of the people’s own individual interests. But by decoupling those people’s interests from the hard work that was being asked of them, the Soviet leaders – like the Jamestown colonists before them, and like the Maoists in China who would eventually follow in their footsteps – only ensured that (absent overbearing force) such work would not be done at all. Francis Fukuyama drives this point home by contrasting the levels of productivity under communism with the levels of productivity outside it:

By breaking the link between individual effort and reward, collectivization undermined incentives to work, leading to mass famines in Russia and China, and severely reducing agricultural productivity. In the former USSR, the 4 percent of land that remained privately owned accounted for almost one-quarter of total agricultural output. In China, once collective farms were disbanded in 1978 under the leadership of the reformer Deng Xiaoping, agricultural output doubled in the space of just four years.

The lesson here, then, should hopefully be clear by now: If you want your people to thrive, you have to preserve their stake in their own productivity. You have to ensure that if they’re willing to put in the work to produce goods and services for their fellow citizens, they’ll actually be able to keep some reward for that work, instead of being forced to give up everything to the state. In short, you have to establish basic private property rights, and you have to guarantee that those property rights will be respected.

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