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Comparison of Communist and Capitalist Economies. Is "Shock Therapy" the Best Option during Transition?

Hausarbeit (Hauptseminar) 2016 9 Seiten

VWL - Sonstiges


Table of Content

1. Task I: Comparison of Communism and Capitalism Economies
1.1 Capitalism by the laissez-faire approach
1.2 Communism by the economic planning approach
1.3 Comparison of the successes, failures and the effectiveness of both systems

2. Task II: Is “Shock Therapy” the Best Option during Transition
2.1 Shock Therapy: From theory into practice
2.2 Assumption to the “success” of shock therapy


1. Task I: Comparison of Communism and Capitalism Economies

Compare and contrast communist Party and economic planning in a socialist system with the prices and the market in a capitalist economy. Discuss the successes, failures, effectiveness and flaws of each system in terms of economic and social aspects.

1.1 Capitalism by the laissez-faire approach

Capitalism is based on the idea of a laissez-faire approach, which means the attitude to let things go and take their own course without interfering. In the meaning of economics this means, that government isn’t interfering into the free market and let the system regulate the market by itself. However, the acting parties in the system can act more or less completely free with one another - the role of government is limited to punish only those who commit obvious crime or law violations, just to protect the integrity of free market. Adam Smith in 1776 first described the approach of capitalism in his book “The Wealth of Nations” with a metaphor of “the invisible hand” - he was convinced that the invisible hand is the best guide for economy growth and regulation, so therefore any government intervention seems redundant.1

Capitalism symbolizes economic freedom that allows private ownership of production and businesses. The decisions, what, when and for which price is produced are made by private owners and not the government. This free competition leads to the assumption that prices will be as low as possible because the consumer is able to choose the best product by himself. These individual rights will lead to a price determination by supply and demand. Consequently, this price elasticity should keep the prices in balance.2

1.2 Communism by the economic planning approach

Karl Marx and Friedrich Engels published in 1848 their “Communist Manifesto” and turned the world upside down with their theory of distributing wealth evenly. At this time most of the developed countries followed already some kind of capitalism. The theory of communism is actually based on principles which should counteract capitalist based problems to eliminate the existing gap between rich and poor in society. In communism this object is achieved by the principle, that there should be no private ownership of property allowed. In their opinion the Property has to be shared among the public as the government has to take control of all economic areas and act in the name of the people.3

As the equivalent to the capitalism laissez-faire approach, in communism they keen to track the approach of economic planning, which means that most economic decisions were made by the government itself. Consequently only government was able to arrange the productive resources of the territory. However, in the meantime even western countries adapted a diversified economic planning structure but without an extension of taking responsibility from the private sector. As there was actually no guidance to economic planning in the literature of Marx, the Bolsheviks in the Soviet Union had to run economy and industrialization without knowing if it will work out. Lenin shared even very utopian opinions:4

“As soon as we deal with an organized national economy, all basic problems of political economy, such as price, value, profit, etc., simply disappear…, for her the economy is regulated not by the blind forces of the market and competition but by the consciously implemented plan.”

In communist theory the welfare of society is above individual welfare, without disadvantaging somebody intentionally. There prevails an equal sharing of profits and work to the general mass without any distinctions of social status and hierarchy. In theory communism is probably the ultimate goal for humankind. As most of the people just have a rather inexplicit knowledge of communism, it has often been confused with socialism. Most states we probably think first in the manner of communism (Soviet Union, Cuba or China) were more socialist systems as the true transition to communism as political system wasn’t implemented supplementary anywhere.5

1.3 Comparison of the successes, failures and the effectiveness of both systems

Actually as mentioned already, there is probably no pure economic system of capitalism or communism in today’s world. Even the most likely capitalist state - the United States of America - has some socialist influences in their economy, and even China - as probably the last great economy influenced by communism in the world, has increased impacts of capitalism in their behaviors over the past decades.6

Nevertheless, both terms as itself can be seen as the complete opposite of one another, since their essential theoretical ideologies contrast their selves in the most conspicuous way imaginable. As World War II ended in 1945 - two superpowers, on the one hand the capitalist USA and on the other hand the communism USSR pursued these two very opposite economic approaches - which caused a 45 year long disagreement, called the Cold War. This wasn’t a bloody war - more a war of fear of the very different opposite economic approaches.

Presumably the most critical difference of these two systems is the ownership of economic production. As in the communist system the government is responsible for all decisions, the system of capitalism leaves the decisions and regulation more or less to the private sector. Historically seen the communism approach has only been successfully in very agricultural countries. Suspecting that the main goal of communists is an equal outcome for the whole society, as the main objective of capitalist is to just offer equal opportunities.7

As we’ve seen in the past instances - most of the communist systems were led by a one- party state with the function as a supervisory economic body that controls most aspects of people’s lives. This fact is probably one reason too, that capitalism had a more long term success. A more party’s system and free elections leads to the restriction of government’s actual power and their power to interference in private lives. The freedom of speech is beside of the right for security, probably the most prominent human basic need. Beside these valuable basic human needs the advantages of capitalism led to its worldwide success. The consumer’s choice is free and individual. This freedom of choice led to an increasing competition, which further led to better quality and enhanced services. This pressure resulted in the efficiency of economics had to be developed, so avoidable and expensive waste could be reduced. The associated growth and across border expansion lead to a sustainable increase of GDP and therefore most of the living standards were also improved. Possible disadvantages of capitalism are the inescapable inequality and the occurrence of a social division. This overlapping chance of free choice could also lead on the long term to an arising of monopoly vendor markets, as they weren’t regulated to avoid that. The lack of central regulation will also inevitably cause the economy’s experience of massive growth and massive inescapable devaluation over the time - also known as Kondratiev waves.8

With another point of view, the theory could therefore be seen as a very efficient approach by controlling and regulating the economy centralized through economic planning. This redistribution should lead to a greater social welfare for all representatives - in theory.

But as a representative example even the communist system in the Soviet Union under Lenin wasn’t able to forbid every kind of private sale - you can either permit it to a certain amount, as Lenin did 1921 for small businesses or you will have to counteract rising black market trading. These thoughtful countermeasures were probably necessary, on the one hand to satisfy the whole supply and demand, because it was almost impossible for the centralized economy to satisfy all the needs just in time. On the other hand, the principle, that everyone is equal in the system will prevent that someone is motivated to work harder without any reward.9

This view was also confirmed by the Austrian economists Ludwig von Mises and Friedrich Hayek. In their opinion it was presumptuous to think that it’s possible to rationally plan in a complex economy system without true market prices.10


1 Communism and Capitalism

2 Comparing Economic Systems - Capitalism

3 Comparing Economic Systems - Communism

4 Myint, Hla: Economic planning in Encyclopaedia Britannica

5 Kowalczyk, Henryk: Capitalism, Socialism and Communism in The Huffington Post

6 Comparing Economic Systems - Socialism

7 What are the differences between communism and capitalism?

8 Hurst, Melissa: Capitalism vs. Socialism

9 Myint, Hla: Economic planning in Encyclopaedia Britannica

10 Encyclopaedia Britannica: Austrian school of economics


ISBN (eBook)
ISBN (Buch)
838 KB
Institution / Hochschule
Fachhochschule Vorarlberg GmbH
Economic Systems Communism Capitalism Economy laissez-faire economic planning shock therapy



Titel: Comparison of Communist and Capitalist Economies. Is "Shock Therapy" the Best Option during Transition?