Socialism's moral failure
neither technological change nor globalization can explain the fact that socialist economies did not merely lag the West: they actually went into decline, and then collapse. Why couldn't they at least hold on to what they had?
I don't think anyone really knows the answer, but let me make a conjecture: the basic problem was not technical, but moral. Communism failed as an economic system because people stopped believing in it, not the other way around.
A market system, of course, works whether people believe in it or not. You may dislike capitalism, even feel that as a system it will eventually fail, yet do your job well because your family needs the money you earn. Capitalism can run, even flourish, in a society of selfish cynics. But a non-market economy cannot. The personal incentives for workers to do their jobs well, for managers to make good decisions, are simply too weak. In the later years of the Soviet Union, workers knew that they would be paid regardless of how hard they tried; managers knew that promotions would depend more on political connections than on performance; and nobody was offered rewards large enough to justify taking unpopular positions or any sort of serious risk.
So socialism was finished once workers stopped believing in the utopian possibilities of shared effort and shared goods. Once personal selfishness takes priority over one's integrity of effort, it becomes a game of manipulating the system and figuring out ways to minimize effort and maximize gain. In other words, one starts acting "rational" -- it may be that as Eric Hoffer suggests in The True Believer this sort of rational behavior can only be suspended in times of upheaval and revolution; eventually the egalitarian will to sacrifice fades and the reality of people having differing levels of talent returns to the fore. It becomes clear that everyone is not really equal in terms of opportunities or outcomes, and people search for new ways to bring their personal advantages to bear on their living conditions. This is the lesson of Hawthorne's Blithedale Romance, which depicts the Brook Farm experiment as a cauldron of thwarted ego and personal jealousies. The lesson there is that charisma can't be redistributed the same way property can, and it always reestablishes the hierarchies you are trying to eliminate.
Krugman's aside that capitalism may "even flourish" in a cynical society is what strikes me as most interesting. Rigorous self-centeredness and a refusal to compromise personal interests for collective ideals is what helps capitalism function and what permits zealots to proclaim selfishness is virtue and greed is good. Thereby capitalist ideologues can redefine cynicism: It's not rejection of shared ideals but the cowardly refusal to compete and the excuses such shirkers and slackers make.
But capitalism does require a certain set of beliefs to reproduce itself. It's not some remainder that's left after ideology is purged. But it's more a matter of believing that work and pleasure are opposites, that cooperation is a tactic, that competition builds character, that identity is built through collecting consumer goods rather than making things.