FEEM working papers "Note di lavoro" series
2011 .070

The Grand Experiment of Communism: Discovering the Trade-off between Equality and Efficiency


Authors: Etienne Farvaque, Alexander Mihailov, Alireza Naghavi
Series: Economy and Society
Editor: Giuseppe Sammarco
Keywords: Capitalism, Communism,  Inequality, Inefficiency, Ideology Transmission, Economic Transitions
JEL n.: C72, D31, D63, D74, D83, P51

Abstract

This paper aims to explain the rise and fall of communism by exploring the interplay between economic incentives and social preferences transmitted by ideology. We introduce inequality-averse and inefficiency-averse agents and analyze their conflict through the interaction between leaders with economic power and followers with ideological determination. The socioeconomic dynamics of our model generate a pendulum-like switch from markets to a centrally-planned economy abolishing private ownership, and back to restoring market incentives. The grand experiment of communism is thus characterized to have led to the discovery of a trade-o¤ between equality and efficiency at the scale of alternative economic systems. While our focus is on the long-run transitions from capitalism to communism and back observed in the course of the 20-th century, the model also derives conditions under which each of the systems can remain stable.

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