Wednesday, March 8, 2017

Economy: The 100th Anniversary Of The Russian Revolution - No Reason To Celebrate

(Drivebycuriosity) - Today is the 100th anniversary of the Russian Revolution (nytimes). One hundred years ago, on March 8th 1917, started the largest economic experiment in history of mankind (wikipedia).  Russia replaced the regime of the tsars and transformed into the communist Sovjet Union. In the year 1991 the Sovjet empire - which also included Poland, Hungary and other European satellite states - broke finally down  - and proved the failure of the communist experiment.

The crash of the Sovjet empire wasn`t really surprising. It was surprising that the experiment had prevailed such a long time. In the 1980s I attended in Bonn a lecture by the German economy professor Wilhelm Krelle. The economist draw a graphic on the black board, which showed a steeply decling line. This was the GNP - the income - of the Sovjet Union, which was already in a free fall. The chart signaled that the Sovjet Union was approaching bankruptcy and couldn´t continue very long  - and so it happened.

The failure of the Russian Revolution can best shown in Germany. Actually there had been two Germanies: Shortly after World War II the country got split into two parts, the more or less capitalist Western Germany (Bundesrepublik Deutschland) and the communist Eastern Germany (Deutsche Demokratische Republik = DDR), another satellite of the Sovjet Union.  In the year 1990 Germany re-united. Then the Western part (and its whole population) was much wealthier than the Eastern part. Even the population of Western Berlin, which had been a capitalistic island in a socialistic ocean, was much wealthier than the residents in the  former socialist Eastern Berlin.

Western Germany is just one example, the USA, UK, France and many other non-communist countries also prospered and left the Sovjet Union and her satellite states far behind. Today there are still some countries which follow more or less the legacy of the Russian Revolution: Cuba, Northern Korea, Venezuela. They all belong to the poorhouses of the world.

Why did the Russian Revolution fail? The Sovjets disregarded the right and the ability of individuals to decide what is best for them. Instead they believed in a central government who decided for them. So the government decided what kind of goods and how many of them the companies have to produce and what the consumers are able to consume. This lead to inefficiency and a low productivity.

History proved that millions of individuals - consumers and company managers - are much more flexible and efficient than a centrally controlled economy. Western economies are based on markets where the production follow the demand of the consumers. Prices give signal to produce more or less and capital flows to the industries which have the most success. Over decades the flexible capitalist systems generated more innovations and was much more efficient & productive than the rigid communist economies.

The Sovjets also disregarded the profit motive which encourages people to work hard, to save and to invest.  Their system was based on commandos. Producers had to follow their targets which often lead to waste and to over- or underproduction. In the West profit maximizing producers try to gain and keep customers with relatively high quality and low prices - otherwise they will lose their customers.

Why did the Sovjet union survive so long in spite of her fundamental flaws? The answer: By exploiting workers and farmers. In the USA and other modern countries about 80% of the GDP are used for consume. In the Sovjet Union the government decided that most of the GDP is not ready for consume, instead most of the incomes got invested into the industry (compulsory saving) or used for military & space programs. A lot of capital flew into steel producers and other basic industries and got often wasted because of inefficiency and low productivity. As a result people had a very low standard of living, much lower then the people in Western Europe & the US, a forced sacrifice for the survival of the Sovjet Union.

The anniversary of the Russian Revolution is certainly no reason to celebrate. But maybe we can learn something from this failed experiment.

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