Would communism work?
It depends if “work” means it makes the average person more prosperous.
Read more to find out why…
So what if communism was tried? What would happen to the economy? This report will objectively examine what would happen to the US economy given it’s current condition.
For the first month
GDP growth: 23.79%
Average wages (adjusted for inflation): -2.32%
It could work fiscally if the right leaders are put in charge. The government elite get rich, everyone else makes on average less.
Not all values calculated show math and reasoning behind them. This prevents this paper from being a Master’s thesis in economics.
Instituting communism is the first question. Initially we start with socialism, and slowly transition until everyone is employed by the state. In this form of socialism, all unemployed workers are given jobs by the state. Those jobs are for government owned businesses, this way the government can turn a profit, which is re-invested into the business and thus the economy. As people become unemployed, they are given government provided jobs. The transition between liberal markets and communism is made via socialism. Let’s assume government jobs are hierarchal in pay. This way people are economically incentivized to get an education once socialism transitions to communism. Let’s also assume government owned businesses are ran with identical efficiency to free market enterprises (this is a big and important assumption!).
Let’s use the US’s economy as an example. Communism is an economic theory, but it has no models. A theory is an well-substantiated explanation. In order to understand how communism will affect the economy, we must build what is known as a model. The tool we will use for our model is the linear regression. US unemployment is 4.4% as of writing this. This means we want to model how decreasing unemployment by 4.4% will affect the economy. For now, let’s just look at three statistics: GDP Growth (GDP is a measure of total economic output) Inflation, and Inflation adjusted wage growth. We will use data from August 2008 to December 2016. This makes sure that data from a recession is included when we build the model. Charts are shown if you scroll to the end of the article.
Plugging data from that time into the model calculates that if the US unemployment rate drops by 4.4% to 0%, then GDP is expected to increase by 23.79%, the average wage (inflation adjusted) is expected to decrease by 2.32%, and inflation is expected to increase by 1.94%. Another factor is an inverse correlation (-0.19) between future wage growth and past GDP growth. If GDP Growth is too rapid, wages will grow slower than inflation. One macro-economic explanation for the relationship is that when the economy grows, new jobs are created. When people first begin a job they are often payed less than employees who have spent longer at the firm. 23.79% GDP growth in one month is VERY rapid. The next few months after the process of converting the economy to communism will likely see a continued decline in wages.
This means on average everyone makes less money. However, the sum of everyone’s annual wages increases by at least $153.359B. This means government spending increases by at least that amount as well. One must take into account that employees account that employees make up between 30%-40% of a typical business’s expenses. This means government expenditures will likely be between $383.4B and $511.2B. As more people lose their jobs and begin work for the government this figure will rise. According to SageWorks, the average business throughout all industries has a profit margin of 7.7%. This means the government owned businesses will generate between $29.5B and $39.4B in profit a year. This figure is expected to rise proportionately with expenditures.
Eventually everyone capable of working will work for the government. Expenses will be about $11.6T (todays equivalent dollars) in resources per year. Profits should be $893.2B. In essence, the government and collective will make more money but the individual will make less. Please keep in mind Joseph Stalin’s authoritarian regime reached 20%+ economic growth at it is peak, while over 1000 people starved to death per day.
This report took an entire day from noon till 10pm to research and produce. This is much longer than most articles so if you could please share if you enjoyed this.
– Written by Alex
Amateur quantitative trader and economist.
Employs algorithmic trading for intra-day trading.
17 right now, but plans to study mathematical finance or computer science in college.