The collapse of Communist rule in the former Soviet empire during 1989-91 is probably the most dramatic indication that we live in a period of great historic change. Four decades of confrontation between two superpowers, the United States and the Soviet Union, have suddenly come to an end. From our perspective, as the victors of the cold war, the disintegration of the Soviet command economy looks like the final triumph of capitalism over communism. These self-congratulory sentiments are quite understandable. After all, it is their system which is falling apart, not ours.
Central planning and government monopoly, although initially capable of redirecting resources toward rapid industrialization, lacked the technological dynamism and adjustment capacity of a system based on markets and free enterprise. Moreover, these pillars of Stalinism were prone to inefficiency and misallocation of resources. The lack of competition limited the range of available products and invited shoddy quality. The imposition of output targets from above prompted producing units to fudge their figures, hoard inventories, and focus on aggregate production quantities to the exclusion of other goals. Artificial price controls encouraged a combination of waste and shortages. These distortions ate up scarce resources while forcing brutal rationing on a discontented population. The absence of markets not only stifled entrepreneurial initiative but also deprived decision-makers of a crucial signaling device. In the end this repressive system could not maintain its social contract of providing its citizens with a great deal of economic security in exchange for forsaking political and commercial freedom.
While the failure of central planning illustrates the superiority of our own system, the liberalization now under way in hitherto mostly government-run