Leslie Holmes, Communist economy: Introduction

One of the clearest distinctions between Western systems and Communist ones was in how their economies functioned. To understand these differences, it is necessary briefly to consider how Western systems operate. Despite sometimes significant variations, all Western systems were (and remain) basically capitalist. Two of the main features of capitalist systems have been a predominance of private ownership and a broad commitment to letting the market rather than the state determine prices. This is not to suggest that there was no state ownership or state control of prices in capitalist systems; nationalization of parts of the economy was common in many West European countries after World War II, while such states also typically determined prices for citizens’ basic needs, such as water and other utilities, and provided many collective goods, such as subsidized public transport.

There were also major differences in the amount and type of state involvement Western countries opted for. Some believed that the best way in which a state could and should interfere in the economy, particularly when the latter was experiencing major problems such as no or negative growth, was for the government to kick-start it by commissioning large-scale projects, typically infrastructural ones such as major highways or new airports. The logic behind this was that such projects would then have positive knock-on effects elsewhere in the economy, which in turn would start to grow again. This version of capitalism is often called Keynesianism, after the British economist John Maynard Keynes who theorized and advocated it in the 1930s. While popular for only a brief period in the 1930s in the USA (in the form of President Roosevelt’s ‘New Deal’), the approach was popular in much of Western Europe for two to three decades after the end of World War II.

But starting in the 1970s, a more rugged – less state-dependent – form of capitalism began to spread in the West. This was neoliberalism, and was associated with Western politicians such as Margaret Thatcher (UK) and Helmut Kohl (Germany), as well as economic theorists such as Milton Friedman and Friedrich Hayek.

In this approach, the state leaves much more to the market than it does in the Keynesian version of capitalism. If the economy encounters serious problems, the state seeks to solve these not through funding major new projects, but through reducing interest rates. The thinking behind this approach is that if capital is cheap to borrow, entrepreneurs and investors will borrow money from banks and other lenders to invest in new or upgraded projects, thus stimulating the economy to grow.

But, at least until their final days, Communist governments in Eastern Europe and the USSR adopted neither of these capitalist approaches. They maintained that leaving pricing to the market was anarchic, while encouraging private ownership of the means of production, particularly large-scale industrial production, was immoral and outdated.