1. Unit 2 Lesson 6 Why did Communism collapse?

2. Why did Communism collapse? Background Information A communist economic system is one in which the state owns and controls the means of production and distribution. For much of the twentieth century, communism and socialism dominated economic thinking in many nations of the world. Among these nations was the Soviet Union, where the Soviet Communist Party controlled the government and the economy, and sought to expand its power to control other regions in the world as well. The United States and other nations opposed Soviet expansion during a period known as the Cold War. In the 1950s, it appeared that the Soviet Union might win the Cold War. Soviet Premier Nikita Khruschev stated in 1957, “We will bury you.” But the Soviet Union collapsed abruptly in 1991. The Mystery Why did Communism collapse? But first, let’s learn the difference between a market economy and command economy.

3. Market Economy Private property: Private individuals and groups are the owners of the means of production – including factories, farms, and their own labor. Freedom of choice: Businesses are free to decide what products to produce, and they may purchase what they need from supplies of their choice. Consumers are free to spend or save their income in ways they choose. Self interest: People make choices they judge to be in their own interest. Adam Smith argued that in making such decisions people are led by an “invisible hand” to promote the good of society as a whole. Profit motive: Businesses are free to earn profits. Profits are viewed as rewards earned by those who take the risks involved in producing goods and services for consumers. Markets and prices: Most exchanges are handled through markets – local, regional, national, or international. Market prices are established through the interaction of buyers and sellers. Prices are used to allocate goods and services in the economy. Competition: Market systems depend on competition to restrain participants as they engage in self-interested behavior. In competitive systems, no one business can control market prices. Limited government: Market systems require a limited role for government. The government’s regulatory role is restricted by constitutional or other legal limits. Defining and enforcing property rights, however, is an important obligation of government in a market system.

4. Command Economy Public ownership: The government is the owner of the means of production, including factories, farms and so forth. Centralized decision making: A central authority such as a bureau, legislature, or government officials makes the fundamental decisions about what and how much will be produced. Economic planning: A central authority such as a bureau, legislature, or government official makes the fundamental decisions about how goods and services will be produced. National economic goals are often an important focus. Objectifies are established for each sector of the economy. Objectives are fine-tuned to provide instructions for each farm, factory, or mine. Allocation by command: A central authority such as a bureau, legislature, or government official makes the fundamental decisions about how goods and services are distributed. Raw materials and labor are assigned to factories, farms, and other units of production according to priorities established by government.

5. Soviet Union Facts The Soviet Union from 1945 until 1991 was regarded as a superpower. The Soviet Union was a potent force. The largest nation on the planet, the Soviet Union possessed a strong military force, major deposits of oil, natural gas, coal, and many strategic minerals. Many Western leaders feared the Soviet Union would become the dominant world power. The “Cold War” and the Vietnam War were fought to stop the spread of communist ideas. Yet, in 1991, the Soviet Union abruptly disappeared. In that year, Russian President Boris Yeltsin declared that the Soviet Union ceased to exist.

6. True or False True/False CluesTrue or False? 1. For much of the twentieth century, nearly one-third of the world’s population lived under communism or socialism. 2. The Soviet Union worked from the premise that only government planners could provide for the overall economic well- being of Soviet society. 3. In a market economy, prices send important information to producers and consumers regarding the relative value of goods and services. 4. In command economics, prices are controlled by the government. True

7. Why Did Communism Collapse? In approaching this question, we need to think about the Guide to Economic Reasoning: 1.People Choose. 2.People’s choices involve costs. 3.People respond to incentives in predictable ways. 4.People create economic systems that influence individual choices and incentives. 5.People gain when they trade voluntarily. 6.People’s choices have consequences that lie in the future. Soviet authorities assumed that government planners had superior information, enabling them to make better economic decisions than those made by individuals acting on their own behalf. But it was nearly impossible for government planners to understand local circumstances related to the production and consumption of goods and services. (Principle 4) The rules of the Soviet economic system abolished the incentives that ordinarily encourage producers to respond to consumers. First, most private ownership was abolished. Individuals were no longer allowed to benefit economically from the property they owned or worked. Second, under communism, the government owned businesses to meet government goals, not to make profits. This discouraged managers from responding to the interests of consumers. (Principles 3 and 4) In any economic system, prices send valuable messages to individuals and business owners. In a communist system, prices set by the government distorted the information sent to individuals and businesses. As a result, people often made poor decisions, causing waste and environmental damage. (Principles 3 and 4)

8. The Solution Under communism, government was thought to have superior information, enabling it to make better economic decisions than individuals might make acting on their own behalf. The rules of the economic system abolished the incentives that ordinarily encourage producers to respond to consumers: – Private ownership – Profit motive Prices and quantities set by the government distorted the information sent to individuals and businesses.

9. Closure Objectives Analyze the characteristics of a command economy. – Public Ownership – Centralized Decision Making – Economic Planning – Allocation by Command Analyze the characteristics of a market economy. – Private Property – Freedom of Choice – Self-Interest – Profit Motive – Markets and Prices – Competition – Limited Government Concepts Command Economy – An economy in which economic issues of production and distribution are resolved through central planning and control. Market Economy – An economy that relies on a system of interdependent market prices to allocate goods, services, and productive resources and to coordinate the diverse plans of consumers and producers, all of them following their own self-interests. Traditional Economy – An economy in which customs and habits from the past are used to resolve most economic issues of production and distribution. Economic Systems – The institutional framework of formal and informal rules that a society uses to determine what to produce, how to produce, and how to distribute goods and services.