Obviously, I am new to economic theory, and some questions have been dogging me for quite some time. Before I begin, I have studied North Korea and other socialist/communist ideologies for a few years. Granted, these studies are based on speculative subjects and humanitarian issues and a smattering of centrally planned models.
Now, since such economies led to its eventual downfall, major reforms (successful or not) and the like, in the theoretical sense of the word, I am trying to understand the basis of the ideas along with how such diametrically opposed ideas such as the former Soviet Union and the United States traded for example. Here are the questions:
1. Theoretically, the communist idea is to have equality despite skill and difficulty in the task. From my understanding, everybody gets the same things from the state such as clothes, housing, food, and the like. If such things are provided by the state, one only has to present a ration card of some kind, and I am guessing that means currency becomes obsolete, right?
Then comes the next issue:
2. Say for instance such a society came about and no currency was in use. Would trade with capitalist or other countries using free market models be difficult? Would trade be dealt with just the output of the country and not deal with currency? Now here comes another issue. If said communist country is paid in other currencies for goods/services rendered to another market based country, would the currency be valueless because they do not deal with currency, or is the cash/currency converted into some commodity in the upper echilons of the society to trickle down?
How would trade work exactly?
3. Also, since "prices" are fixed by a communist government, and is not regulated by a market, how is investment conducted by free market countries when the numbers are unknown because I am guessing the rates are valued artifically. Would such ventures in a theoretical society be a huge risk?
Now in practice, we all know it did not work that way. Which again, leads to more questions:
Every communist country I have looked into had currency. As time went on, they eventually went to rely on other currencies such as the dollar, Euro, etc. Were currencies such as the Ruble not worth anything in practice? How was credit extended if said currency was not worth anything or not indexed (I am guessing) say on FOREX? Would communist countries only extend credit to similar ideologies and not free market based economies?
I am also interested in the inevitable development of the bottom-up marketization of such economies to fill the lack of light industry because for some odd reason, communist countries focused on heavy industry and forgone light industry.
I think that is a start. I am very new to this, and I could be asking the wriong questions, making wrong assumptions and coming up with the wrong conclusions.
Eastern Block had a Council for Mutual Economic Assistance which was supposed to be its anwser to European Economic Community, but it never amounted to much for the reasons that centrally planned economies lacked information about themselves. Hungary simply could not tell how much good it would do to her economy if Soviet Union sent her 5,000 wagons of timber. It is not a question of wether a currency has value, but wether it has meaning. If you can get something for rubles then they have value for you. However in an economy that would be fully centrally controlled currency would in practice become no different from a coupon or a ration card, because prices would be meaningless, having been set arbitrarily instead of by trade.Such economy will have trouble figuring out which products to produce and which industries to develop, never mind the trouble deciding what to export at what price, that is really just an extension of this underlying problem. Really how can North Korea know if it is easier (cheaper) for her to give each family two bicylces or 10 sweaters? How much does a sweater cost it?
Thank you for the reply Marko.
Since I am only a student of the North Korean economy (and limited at that), I am pretty interested in the trade and transactions between free market and centrally planned economies. That is something I cannot seem to grasp since they are so different.
Or are they?
Jack: Then comes the next issue: 2. Say for instance such a society came about and no currency was in use. Would trade with capitalist or other countries using free market models be difficult? Would trade be dealt with just the output of the country and not deal with currency? Now here comes another issue. If said communist country is paid in other currencies for goods/services rendered to another market based country, would the currency be valueless because they do not deal with currency, or is the cash/currency converted into some commodity in the upper echilons of the society to trickle down?
Marx in his Communist Manifesto stated that a real communist country would NOT trade with any other nation - hence it would be self-sufficient (atleast thats what I remember, but I don't have the book with my to check).
I am kind of curious myself. I read parts of the Manifesto, and now I need to see how Marx formulated trade, if any.
I do know the DRPK has a system of self-reliance "Juche", but that has little to do with communism, but more on the lines of patriotic socialism (not even nationalism as argued by Dae Sook Suh) in a private domain of an oligarchy. In theory, the DPRK would produce everything locally without the need of assistance from others, problem was and is, there is not enough to produce without some form of trade, aid or some other assistance which has always been the case.
When the major donor, the Soviet Union introduced the reforms in the mid-late 1980's, the DPRK started to see economic fraying, and once the Soviet Union collapsed, the North Korean economy did not have the inputs and other perks from its biggest donor. Of course, they do have China, but it seems to me China is on a hybrid of a shell of communism with special economic zones, and I also heard North Korea wanted to emulate this system somewhat. problem is. while there are special economic zones say in Kaesong, it is torn between loosening control to increase the flow of outside money along with cheap labor for the South, so theoretically, it is a win-win. However, that would threaten the dictatorship's control because the ideology is fragile. So it seems China is on an arm's length aliiance with North Korea, and of course, does not want to see the collapse of the regime for it will cause instablity and possible installation of another regime that is not friendly along the Yalu and Tumen.
In this sense, did other communist countries believe that trade between friendly economic systems mean being "free" from the bourgeoisie at large?
Jack, I hope I understand what are you asking and that we are not talking past eachother.There is no inherent obstacle to trade betweem centrally planned and free economies. As long as centrally planned economy produces something a free economy has a use for trade is possible. Soviet Union was the world`s largest producer and exporter of arnaments and among her clients were non-socialist states like Finland and India.To my knowledge the deals were done in "transferable rubles" which was a ficticious currency fixed to the dollar at an arbitrary rate. So in essence they were done in dollars. This was true for deals done with communist satellites like Mongolia just as well as for deals done with free market Nigeria.
I will look the things you have mentioned, trade, and currency. I think I was asking the wrong questions and coming to the wrong conclusions.
Jack, I'm not sure it will address your questions exactly, but I'll try anyway.
The reason why communist countries ended up using other currencies was to perform economic calculation. There was little outside capital investment in communist bloc countries, I believe because of the anti-capitalist atmosphere, and the constant threat of nationalization.
The problem with socialism, is that it undoes economic calculation. Since the incentives are skewed, and production and consumption are not matched in any meaningful way, when trading outside their own blocs, particularly with the west, countries like the USSR would have to use market prices from the west, in order to price their goods. This was because in a centrally planned economy, again the correlation between inputs and outputs is skewed. The Soviet Union may have been able to make enough shoes to keep everyone's feet covered, but through lack of competition, it may have come at a cost of having enough bread.
Currency is necessary, for no other reason than to provide a measurement of prices between different producers, and different products. In a closed socialist system, where you can get Shoe A or Shoe A, rather than Shoe A or Shoe B, there is little need for currency. But as soon as you want to sell an excess 2 million Shoe As on the global market, with a myriad of similar goods and producer-competitors, then pricing, and a currency standard becomes necessary.
"If such things are provided by the state, one only has to present a ration card of some kind, and I am guessing that means currency becomes obsolete, right?""Also, since "prices" are fixed by a communist government, and is not regulated by a market, how is investment conducted by free market countries when the numbers are unknown because I am guessing the rates are valued artifically."You are on to something here. You came to knock on the walls of the problem of economic calculation on your own. Look it up and it will give you much more of an idea how come communist countries "forgot" to develop light industry. Simply when you set prices arbitrarily you are left without the information you need to make good economic decisions. Nevermind the trouble a free market economy would have in investing into a communist country, the communist systems themselves were faced with the very same problem.
liberty student: There was little outside capital investment in communist bloc countries, I believe because of the anti-capitalist atmosphere, and the constant threat of nationalization.
There was little outside capital investment in communist bloc countries, I believe because of the anti-capitalist atmosphere, and the constant threat of nationalization.