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One suggestion is that Communism fails because it tries to take everything from the people and redistribute it among the population according to need. This is very harmful to the economy, as it does not promote growth; though "Robin Hood" taxation has been shown through Keynesian Economics to stimulate demand in hard economic times.

Many "socialist" economic practices have been retained in the World today; in the Scandinavian countries taxes are about 40-50%, though the rewards are reaped if a couple should have a baby, go to university, or have a serious injury. The state bestows money on them for the betterment of society as a whole. Ultimately, the Scandinavian countries are far from political disasters, Norway has scored first place on the UN's Human Development Index again this year due to it's socialist economic system.

The more compelling single reason (if only one can be chosen) as to why History's 17 Communist economies could not compete with their Capitalist counterparts is rather simple when boiled down:

In a Capitalist, or Market Economy, 9 out of 10 entrepreneurs fail in their business rather quickly. So the nine may have a bad year, the state does not really feel the full brunt of it as the state has not made a loss out of it because it has made no investment in it (though it has perhaps lost opportunity cost as those nine are not paying much tax this year); however, the capitalist economy wins with the successful entrepreneur as his successful business now bears fruit for the government that sheltered it in the form of taxes.

In a Communist, or Command Economy, 9 out of 10 entrepreneurial enterprises undertaken by the state will also likely fail. Nine investments squandered for the sake of one success. Even though it will take four times the taxes the successful businessman would pay, this may only up for the loss of its capital investment over the course of many years.

So, mathematically:

Market Economy: income = f(tax on the successful) = state profit

9 fails x 0 = 0

+ 1 success = 0.3 per annum (add the aggregate of all private enterprises undertaken this year / 10 x 0.3 (the tax rate)) = profit for the government!

Command Economy: income = f(losses sustained > successes x time) = state deficit

9 fails x 9 = -9

+ 1 success = +1

= - 8 multiplied by the aggregate of all failures for that year. It will take the economy 9 -10 years (depending on variables such as inflation etc.) to recover from this through the profits from the state-owned business over this time. = a great deficit for the government that will render it unwilling to undertake future enterprises.

So, in summary, the reason that Market economies won and command economies failed from 1917 to 1991 (and in some cases, still today) was because market economies allowed for (at least a fair degree of) freedom of contract, private ownership and free enterprise.

The market economies won because they didn't directly invest in failures (though a good government would not want these nine failed entrepreneurs to commit suicide, so it will probably be good to them and lower the taxes that they should pay and offer them some protection from bankruptcy and the mental stress this would cause - so that they can come back and try again some day!).

Command economies failed because the means of production were owned by the people (and administered by their Dictatorship, represented by those who knew what was best for them (even if they did not)); meaning the government. There was no great degree of freedom of contract, no private ownership, and no free enterprise.

So the state directly invested in enterprises that could not predictably succeed or fail. Every failure was the state's possession and its success could not make up for these bad debts. Especially not as they were trying to keep up with the largesse of the Jones'. The Jones have bought another ICBM, I'm gonna invest in ten thousand businesses to get one just like it!

However, it must be noted that Communist economies were not the greatest political failures of the 20th Century, not by a long way. The economic basket case of the world, Africa, never housed a communist state in its history for instance. Nonetheless, it was an experiment on a vast scale that showed the keen Historian or Economist many lessons for decades to come.

Some practices first championed by Marx, such as a heavy progressive tax and government spending going to each according to his need, have been retained by many countries with a great deal of success.

China, though it has disavowed Marxism and Maoism, still may have a better answer than both types of economy through its approach of "state-lead capitalism." It shall be interesting to see how this unfolds as the US' bold Market economy has shown signs of weakness in front of the world's oldest living society. Perhaps the Cold War was never won, in the eyes of China, it may be just beginning.

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Q: Why did the centrally planned economy failed?
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