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What were the ECONOMIC reasons for the Communist dream crumbling? How should capitalism lead to economic salvation?

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Introduction

"Since the Communist dream crumbled, the peoples of the former Eastern Bloc have enthusiastically embraced capitalism as the means to economic ... salvation." Roger White (BBC Radio) (a) What were the ECONOMIC reasons for the Communist dream crumbling (b) How should capitalism lead to economic salvation? ___________________________________________________________________________ (1a) The communist dream was that at achieving a utopian society in which all men were equal and worked together for the good of society. The state would do all the planning and, through cooperation and obedience, prosperity would be achieved. The dream was shattered when it became evident that such a system was failing to achieve its goals. The problem lies in the way a communist state solves the basic economic problems of scarcity. Scarcity is present because human wants are unlimited and resources are not, thus making it desirable to optimise the use of such resources as are available, aiming for Pareto efficiency and hence maximising satisfaction. In the use of these resources, the three main questions are what goods to produce, how to produce them and for whom they should be produced. ...read more.

Middle

Consumer wants are frequently misjudged, reducing their welfare and production techniques are inadequate, raising costs. Another major problem is that of a lack of incentive. Since all men are treated equally and given rewards independent of their contribution, they have no incentive to work hard, reducing their productivity, and no desire to innovate and be efficient in production, reducing the productive efficiency of firms. Losses are underwritten by the state, no factories close down because of losses and employment is assured, thus removing the penalty for inefficiency. The lack of competition in a planned economy due to the guaranteed survival of firms and the lack of profit motive also means that inefficiency is tolerated and allowed to remain. The concentration of power in the bureaucracy also encourages corruption, leading to further wastage and resulting in government policies harmful to economic growth. The bureaucracy also tends to stifle personal initiative and creativity preventing the discovery of more efficient production methods. The long-time standoff between the Communist states and the West also severely restricted trade between them. ...read more.

Conclusion

In the capitalist system, resource allocation is automatically coordinated by price signals via demand and supply. If the price is too high, at P1, there will be an excess of Q1Q1', leading to competitive price cuts. If price is too low, at P2, a shortage will cause consumers to bid up prices. Thus, prices will tend to rise towards P0, where the market is cleared. This allocation system is cost-free and efficient. Also, because rewards are commensurate with contributions, people have the incentive to work hard so as to increase wages or innovate to increase profits, increasing productivity and lowering production costs. The system of inheritance also encourages savings and thus allows greater investments, which eventually increase the capital stock and lead to economic growth, raising living standards in the long run. Competition among producers ensures that only efficient firms survive. Consumers get a greater variety of goods which are also higher in quality, because producers innovate to increase profits. The transition of Capitalism, however, is not free of problems, as evidenced by the inflation, unemployment and crime without economic growth to compensate seen in Russia. ...read more.

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