Capitalism isn't just flawed, it's broken. For every prosperous nation like the UK or Germany, there's half a dozen Haitis and Panamas.

By "communism", I presume you mean Marxist-Leninist state socialism, which indeed fails miserably. However, it isn't the only alternative to capitalism. Historically, there have been several communes during the Spanish and Russian civil wars that worked fine and didn't have a central leader, let alone a dictatorship. Although they died because of military blunders, this model is currently being followed more or less in Chiapas by the Zapatistas.

In these places, workers' councils ruled. Direct face-to-face democracy by neighbours were how most things were done. I recon that this is a fairly nice arrangement.

Democracy's flaws come from subversion by the wealthy and the fact that republics don't let people really participate, but rather choose people who participate in their place.