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Why Capitalism has worked and Communism has not Around the turn of the nineteenth century, the

new and radical system of Communist government and centralised market coordination emerged to challenge the stalwart that is the longpracticed and proven Capitalism and free market. Marx and Engels with The Communist Manifesto (1848) proposed that the removal of status and the union of the proletariat could ameliorate the problems inherent to the Capitalist system. 161 years on and Communism is – except for a few small nations – nowhere to be seen, with the supposedly heavily flawed capitalism governing the majority of the world. Of course the downfall of communism has something to do with governmental corruption and poor management, but for a system that is that “perfect” to have nearly no national following 161 years on, there must be some problems that inherently belong to the theory itself. The Communist Manifesto set out ten necessary conditions that are necessary for the transition into a Communist system: 1. “Abolition of property in land and application of all rents of land to public purposes. 2. A heavy progressive or graduated income tax. 3. Abolition of all right of inheritance. 4. Confiscation of the property of all emigrants and rebels. 5. Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly. 6. Centralisation of the means of communication and transport in the hands of the State. 7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan. 8. Equal liability of all to labour. Establishment of industrial armies, especially for agriculture. 9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equal distribution of the population over the country. 10. Free education for all children in public schools. Abolition of children's factory labour in its present form. Combination of education with industrial production.” (K. Marx, F. Engels, The Communist Manifesto, 1848) Inequality between the proletariat and the bourgeoisie is clearly the main disadvantage that Marx and Engels set out to remedy. Considering the time in which The Communist Manifesto was conceived and written, this is certainly a valid point. Communism is an ideology based entirely around bringing about equality and the

It is unfortunate however. In order to understand the reasons why communism has not flourished. In a Communist system. the presence of property rights gives an enormous boost to economic growth. a house is merely a place of residence. where public housing has – surprisingly to the government – not helped the indigenous inhabitants emerge from poverty. opposes one of the economic necessities most vital to economic growth. Conditions 1. When a house is purchased. removing many of the benefits that come with property rights in the capitalist system. there is no incentive to maintain the property. it is important to understand how these ten conditions are not conducive to natural economic theory and process. In a communist system however. governments have sunk billions of dollars into new public housing with very little to show for it. an asset and something that can be loaned against in order to accumulate more wealth in the future. for example. and the 10 conditions laid out by the authors clearly exhibit that this is the case.removal of status. The political economy of property rights. Weimer. and that a market system with significant private property rights is an essential. due to the absence of property rights. In a capitalist system. Without the right for one to own the house in which one lives. forever adding to the cash flow and increasing economic growth. let alone put one’s own time and effort into improving it. although not an exclusive. A good example of the hindrances of withholding property rights can be seen in Aboriginal communities in the Northern Territory in Australia. “Over the last 30 years.” (D. under the theory that the state has the best means for allocation of wealth and overseeing of expenditure. and how they hinder economic growth. renovations and refurbishments take place to add value to the property and again generate economic growth. what incentive is there for the owner to improve the house? In a Capitalist system. 3 and 4 all dictate the seizure or removal of property rights. condition for democracy. but an investment. the idea of incentive and capital. “Empirical evidence suggests that countries with strong property rights systems have economic growth rates almost twice as high as those of countries with weak property rights system. without property rights and without ownership. that Marx’s 10 conditions are “beneficial” to the proletarian at the cost of economic suitability to society. 1997) The idea of incentive is a similar and equally important asset that Capitalism possesses and Communism does not. This confiscation of property rights and removal of inheritance however.L. the purchaser is not just purchasing a dwelling. Lack of .

with no deadweight loss.maintenance has meant that few houses last more than 10 years before they become uninhabitable. Free market price setting in an ideal situation is perfectly efficient. (similar to the way in which the Australian government sets the price of water below the equilibrium) the result is excess demand and reduced supply. resulting in a shortage of goods. The free market via the invisible hand is efficient at responding to market movements and setting exchange value at a price that is the most socially optimal. Rules 5 and 6 dictate market centralisation and heavy co-ordination. These three of the ten conditions proposed by Marx and Engels contribute heavily to the inability of the Communist system to operate effectively in the long term. a detriment to society. a system that is diametrically opposed to the nearly perfectly deregulated market system of most capitalist nations. Hudson. and where the most societal needs are satisfied. At this point. “ (S. It’s no surprise then that the Communist system has failed when it has taken one of the most valuable forms of capital and stripped it of nearly all it’s worth. the sole flaws. Creating such noncompetitive markets where the government regulates the sale of all goods in a Communist system can only lead to inefficiency and a suboptimal level of production. When Communist governments regulate and control all industries that would in a Capitalist system be privately owned in order to promote “equality. capitalist market. Communism requires government regulation in business in order to set prices at a level that allows all citizens equality. The diagram on the left shows how prices are set in a free.” what generally happens is in fact a chronic shortage of supply. This practice is socially suboptimal. producer and consumer surplus (shaded in blue and red respectively) are equal. and is another reason why communism has not worked efficiently. “Capitalism and entrepreneurship clear the way for enterprise and . They are not. Indigenous people in NT deserve fair go at private homeownership. however. The diagram on the right however. The communist ideal of “universal equality” only serves as ironically. 2009) Without incentive to improve or ability to generate wealth from property. an imbalance in producer/consumer surplus and a deadweight loss (shaded in green). shows the results of a communist government determining the price at below the market equilibrium. it becomes nearly worthless as an economic asset. Where the supply curve meets the demand curve (P1.Q1) is where the equilibrium price is set.

it is as rich as Portugal. inequalities. not within-country. is populated entirely of people who lived a century or more ago. 2000) These 10 conditions as previously mentioned sought to promote equality for all and to strip society of the hierarchy and wage differences that were rife at the time that Marx and Engels conceived The Communist Manifesto. An interesting thing to note is that the 10 people on the list of the wealthiest people of all time (lead by J. There is no doubt that in the modern capitalist world. In a secretariat study published by the World Trade Organisation in 2000. For example. The very system they decried for promoting inequality has over historically instead reduced the level of inequality in the world. South Korea was as poor as Ghana. Although at the .initiative in the economy… it is faster at increasing production and labor productivity. with the amount of people living on less than $2 falling from 44% to 18%. there are less of the inordinately rich. and thereby the material welfare of human beings” (J. The General-Director of The WTO Mike Moore said that: “[free trade] is essential if poor people are to have any hope of a brighter future. Sala-iMartin. 2002) Furthermore. 30 years ago. one of the main reasons that developing countries are still less economically developed than countries like The United States and Australia is that trade barriers are yet to be totally deregulated. “All indexes show a reduction in global income inequality between 1980 and 1998.D. Within-country disparities have increased slightly during the sample period. Rockefeller). Sala-i-Martin. What the change of system from Socialism to Capitalism Does and Does Not Mean. We also find that most global disparities can be accounted for by across-country. 2002). but not nearly enough to offset the substantial reduction in across-country disparities. Today. Kornai. the poverty rate of people living on less than $1 a day has fallen from 20% to 5%. there were between 300 and 500 million less of the poor in 1998 than there were in the 1970s (X. who have been judged by their approximate wealth (judged on total wealth in contemporary figures after adjusting for inflation). thanks to trade led growth. and less of the inordinately poor. it was found that liberalisation of trade barriers helps developing countries in breaking out of poverty.” The very thing keeping these developing countries from catching up is a practice that is a necessary condition of Marx’s communism. In addition. Over the past 25 years.” (X.

The reason that Communism has not worked certainly has something to do with administrative corruption. but the major flaw in the system is that the conditions necessary to uphold it decry some of the most basic requirements crucial for an economy to flourish .time of conceiving communism. but it was only a matter of time until the pursuit of economic efficiency narrowed the gap of inequality by itself. Unfortunately however. Karl Marx may have been justified in thinking that the world’s problems of problems of inequality between the hierarchies of society needed mending. The quest for equality via the communist way disregards the necessities of extensive property rights. the economic practicability of the theory was evidently lacking. The theory of communism proposed by Marx and Engels had the most noble of intentions. optimum efficiency and free and deregulated markets that are needed to stimulate economic growth.