An Overview of the Soviet Economy

The purpose of this paper is to reflect the work done during an independent study of the economy of the USSR. The author is not an economist and this approach will not be a rigorous one. The independent study was done as part of a Russian Studies concentration focusing upon the history and politics of the Soviet period, and was intended to make clearer those aspects through a greater understanding of the economy. The study concerned itself primarily with the domestic component of the economy. Since the topic is extremely broad, the depth of study was necessarily limited by time. The breadth of the topic also limits the depth of this paper.

Most sections will begin with a historical outline of that particular segment of the economy.

General Characterizations

The tone of the Soviet economy since the revolution has been one of more or less continuous reform and experimentation. Changes have been in response to two factors: the goals of the leadership and the political and economic events of the times (civil war, destruction, recovery, collectivization, encirclement, etc.). That is not to say that all reforms have been suited to the needs of the times and that all were fully logical and rational.^[1] Some grew from ignorance, pigheaded stubbornness, or fear of the political machinations of real or imagined internal or external enemies. Useful techniques were ignored on occasion because they were felt to have their roots in the philosophies of opponents. (The leaders of the USSR were first and foremost revolutionaries and politicians, not technocrats, and were used to looking at things in a political manner.)

Most of the major periods of reform were preceded by a more or less open discussion of the issues. Throughout the period since the revolution, there have also been experiments with the use or abandonment of various practices. Because there were no previous systems of this type and the leadership had no guideposts to follow, these reforms and experiments had both an eclectic and pragmatic aspect to them. Most anything, including quack approaches by charlatans like Lysenko, was likely to be tried to see if it worked. The only criteria applied were whether or not it appeared to politically or ideologically undermine the system of government. In recent times, with the leadership feeling a little more secure, there has been a greater openness to different methods which may not be so ideologically pure.

The approach can also be said to be goal-oriented. The stated goals have always been for the long-term betterment of the working population. An authoritarian, one-party government was chosen for this, for many actions of long-term benefit would not have been chosen in the short term by many of the Soviet people. The approach has been termed a “command economy” and the approach as like a military campaign, somewhat like western economies during wartime, only much more so. The leadership did in fact feel that there was a military aspect to it, for they felt that strong, swift growth was the only way the USSR could physically survive and this development had to succeed at any cost. The noted military commander Marshall Georgi Zhukov summed up this “at any cost” approach this way to General Eisenhower: “If we come to a mine field, our infantry attack exactly as if it were not there. The losses we get from personnel mines we consider only equal to those we would have gotten from machine guns and artillery if the Germans had chosen to defend the area with strong bodies of troops instead of mine fields.” ^[2]

The road toward this economic goal is littered with corpses, as it is in the case of development in much of the rest of the world, but, if current conditions are compared to pre-revolutionary ones, it is obvious that much progress has been made toward the goal.

Historical Outline of the Economy ^[3]

During the last three decades before World War I, Russia underwent very rapid growth. Only four countries had higher growth rates. Industrial growth was concentrated in a very few geographic areas and was highly dependent upon foreign capital. It is estimated that foreign capital accounted for 40% of industrial investment and 20% of overall investment by the end of the tsarist era. Despite this, Russia was still a poor country, relatively backward and underdeveloped. The First World War significantly damaged the economy, and this was one of the causes of the revolution.

The period from the revolution to the beginning of the New Economic Policy (NEP) was one of constant turmoil. There were spontaneous as well as government decreed land seizures and nationalizations of factories, transport and banks. Less than two months after the revolution, the Supreme Council of the National Economy (VSNKh) was established with broad powers to oversee the economy and national finance. By September, 1919, 80-90% of large-scale industry was nationalized and organized into 90 trusts, with state enterprises financed from the state budget. Many factories were operated under workers’ control. The Civil War (1918-21) devastated productive capacity.

The NEP was set up to form a partnership between the weak Bolshevik government and the peasantry, who made up the majority of the population. Even though 75% of industry and 25% of retail were nationalized, there was a free market in most agricultural goods and many manufactured ones. It was hoped that this would spur consumption and pump money into the economy, to allow recovery to pre-War levels. Despite problems, such as the “scissors crisis” of 1923, where agricultural prices were falling and prices of manufactured goods were rising, the goal was largely accomplished by the mid-1920s. At that time, it was felt by many that the wealthier peasants (kulaks) were getting too powerful and that the limits of growth without large-scale saving and investment were reached. There then began the discussions leading up to the great industrialization and collectivization drives. This was also the period where informal economic planning organs were set up, such as the State Planning Commission (Gosplan).

The first Five Year Plan, ending in 1932, brought striking progress in many areas (see below). In this and following plans, at least until the death of Stalin, the consumer sector was used as a buffer. Any resource or capital shortfalls were removed from that sector to help fulfill the plan in higher priority areas. Growth in the industrial work force came from an increased number of working women, peasants leaving the rural area during the harsh collectivization drive, getting underway in earnest in 1929, and individuals threatened with punishment if they did no socially useful work. The labor participation rate was very high. Also, labor discipline became quite stern and earlier egalitarian notions of wage equality were abandoned in favor of incentives to spur production.

The leaders’ philosophy was that the plan had to triumph over the market, and this included market-determined prices. Prices were used for accounting, not allocative, purposes, and profits were relatively unimportant and meaningless.

During the Second World War, there was grave damage to the economy. Territories occupied by Germany contained the following productive features: ^[4]

Some 1523 industrial enterprises were moved east, 1360 of them large scale ones, and resumed production in a very short time. Also moved were over 10 million people. Due primarily to German wrecking, the industrial production of the Ukraine in 1943 was only 1.2% of 1940. The civilian labor force was down from 31 million in 1940 to 18 million in 1942. The war resulted in some 20 million dead, and this is still being felt in today’s labor shortage. The demographic loss of these people and the children they would have had is much larger than 20 million. Also destroyed were 70,000 villages, 1710 towns and the homes of 25 million people.

Although the basic economic system remained unchanged, there were some temporary organizational changes made to cope with the new circumstances. There was a greater free market in agricultural produce during the war, resulting in a significant degree of cash hoarding in rural areas. Labor discipline became even stricter than before. Although there was significant help from Lend-Lease, especially in transport, the vast majority of production for the war came from the USSR itself.

After the war, the economy reverted to its pre-war forms and labor discipline loosened up briefly, but was reimposed during the fourth Five Year Plan, designed to recover from war damage. Postwar real wages were very low, but improved after 1947. The tremendous investment in producer goods in the fourth FYP (87.9% of total investment) and the stern discipline resulted in a 22% over-fulfillment of the Plan and a substantial recovery of the economy by the Plan’s end.

The Khrushchev period was characterized by frequent, often contradictory, changes in the economic arena. It was noted that collective farms (kolkhozy) were often operating below cost, and steps were taken to correct this. These changes included increased inputs, more technical experts to the Machine Tractor Stations (MTS), a better private plots policy, plans specifying delivery obligations rather than sown area, state payment of transport costs, a vastly increased acreage under the plow (the Virgin Lands), reduced agricultural taxes and increased procurement costs. These resulted in a 50% increase in agricultural production between 1953 and 1958.

There were also benefits, in the early Khrushchev period at least, for consumers, with more product availability. Labor discipline was relaxed and there was a wage reform, spanning 1955-65. Features of this were less piecework, minimum wage standards, and general increases, especially for those at low wage levels. The average worker had an increase of ¹/3 by 1956. Also involved were a reduction of very high salaries, shorter hours for youth, a reduced work week, improved pensions, more free movement of labor (regulated by pay incentives) and improved trade union representation.

Organizationally, there were a series of changes: the party was divided into industrial and agricultural sections, agencies were consolidated and redivided. This created confusion and political turmoil which resulted in Khrushchev’s removal in 1964.

Under Brezhnev, many of Khrushchev’s more wrong-headed changes were undone, but the better changes were retained and expanded. Minimum wages and consumer production were again increased and more investment was devoted to agriculture. There was a continuation of discussions on reform of the economy begun under Khrushchev. Some of the reforms instituted early in this period were charges on capital received by enterprises and increased autonomy for managers.

Planning

Historical Outline

One of the goals of the leaders of the Russian Revolution was to institute a planned economy. They wanted to overcome the forces of the market and avoid the business cycling of capitalist market economies and other effects they saw as detrimental. With the formation of VSNKh in late 1917, the government started to take control of the economy. During the Civil War, the economy was run from the top in a chaotic fashion, under terrible circumstances. Much plant was lost in the fighting, but an additional amount was lost from poor operation and neglect, such as when workers left for the countryside out of hunger.

After the institution of NEP, with the ‘commanding heights’ of the economy already nationalized, the foundations of planning were laid. Gosplan was set up in 1921. During NEP, the planners in Gosplan, VSNKh, the People’s Commissariat of Finance (Narkomfin) and other commissariats and organizations in local areas provided ‘control figures’ to the industrial trusts. These figures were to be used as guides for investment decisions. Strict planning of output goals was used in only a few parts of heavy industry. The first material balance^[6] of the Soviet economy was drawn up in 1923-4, although real material balance planning (MBP) did not begin until 1925, when some materials started to become scarce, and the economy had essentially recovered to pre-World War I levels.

This was the period of the planning debate, which was conducted to decide just what kind of planning would be used. There were two main tendencies. The ‘Geneticists’ — Kondratiev, Bazarov, Groman and their cothinkers — favored planning following the direction of consumer demand. They felt that the planners should make forecasts and projections based upon market trends, what has come to be called indicative planning. The ‘Teleologists’ — Strumilin, Krzhizhanovsky, Kuibyshev, Feldman, and others — desired a plan formulated consciously in light of national goals established by the government, in effect performing social engineering.

With the first Five Year Plan (FYP) planning began in earnest, and more and more ambitious versions of the plan were written. Investment capital and other factors of production were not used efficiently; this was not really a consideration. The emphasis was on getting the job done. Indeed, strictly economic criteria have only very limited application in the midst of crash programs designed to build up heavy industry in the shortest possible time. This type of operation…is genuinely hard to reconcile with an economic theory in which choices are related to economic effectiveness, and particularly so because the typical administrative arrangements of a war economy — allocation of materials, priorities, strict price controls and so on — distort the measurement of economic advantage and of costs of alternatives. This is, of course, not a defense of irrationality; no doubt much avoidable inefficiency existed, and still exists in the USSR. The point is rather that arguments for subordinating arbitrariness to economic criteria obtain a better hearing when the period of crash-program industrialization passes and the problems pf normal functioning of a largely modernized economy loom larger.^[7]

The second FYP continued in the same vein, and with further gains. In 1932, VSNKh was replaced by a ministerial system, with each enterprise assigned to a ministry (coal, construction, food, railways, etc.). The Third Plan was abandoned, with preparations for war taking precedence.

Planning during World War Two remained essentially the same, but with a few new wrinkles. There were new agencies with wide powers, like the State Committee for Defense, formed to oversee war production, and the Evacuation Committee, in charge of moving people and equipment back from the war zone. Less emphasis was placed on plans for the entire nation and more on war related plans, which sector rose from 10% of the 1940 economy to 50% in 1943. With the strains of defense industry and greater scarcity of inputs, material balances became more critical and war-related ministries and Gosplan gained in power. The way the entire economy was shifted into largely military production in such a short time was a remarkable achievement.

In the post-war years, the Late Stalinist period, the economy and planning system reverted to its pre-war form, with a few changes in ministries. With the onset of the Cold War and the already developing nuclear industry, there was a permanent military component to the economy. Planning became increasingly centralized, with less republican autonomy. As before, disproportional burdens were put on the agricultural population.

During the Khrushchev years, planning organs were divided, and later divided again. After the first division, where regional organizations were given more planning responsibilities, some of the leading planners combined with the Stalinist Old Guard of the Politburo to oust Khrushchev. The effort failed and the General Secretary’s power was increased, with his changes surviving intact. The regionalization of planning was not successful, for the planning authorities paid proportionally less attention to national goals and more to regional ones.

With Brezhnev and Kosygin, after Khrushchev’s downfall, Gosplan was reconstituted as before, and other reforms (discussed later) were considered. The planning system was still essentially the same as that which came out of the 1930s.

Mechanisms of Central Planning^[8]

Soviet-style central planning is not all done centrally. Below is a rough outline of the procedure. There have been changes periodically in some of the workings, but this description gives a general picture of how material balance planning functions.

Gosplan draws up the material balances of the economy. (See Figure 5.) There are some 2000 important commodities (coal, steel, cement, etc.) which are called ‘funded commodities’ (meaning that their funding comes from the state budget) and are the subject of MBP. The leadership sets its goals for the period of the next plan (one year plans are the most important) in a general fashion, such as growth rates for certain sectors. Plans are usually quite taut, that is they strain at the limits of currently available inputs. Gosplan, with its own database, composes control figures, which are tentative output targets. With the aid of ministry planning departments, it estimates the inputs necessary to accomplish these targets, without bottlenecks. The figures are sent down through the ministry apparatuses while being disaggregated to figures for each enterprise.

The enterprise managers negotiate with their superiors for what changes in input and output figures they think they need and the revised figures ascend through the hierarchy back to Gosplan. Gosplan prepares material balances to make sure that targeted outputs don’t exceed inputs available and that overall goals are met. It is here that the consumer sector has taken a beating over the years. If inputs are required for priority areas, they have been shifted from consumer industries so the balance is maintained.

When the Council of Ministers approves (or alters) the plan, it descends back down the hierarchy. By the time it reaches the individual enterprise, it has been fleshed out into a technical-industrial-financial plan (techpromfinplan). The techpromfinplan, an order which is binding upon the enterprise, spells out not only the output target(s) but assortment, financing, the wage bill, suppliers, delivery obligations and input allocations. (Although there have been certain flexibilities introduced in some areas in recent years, there is still not much lateral communication between firms, and dealings are still by plan specification.)

Assuring that enterprises and ministries follow through on the plan is done in several ways. Enterprises operate under a strict financial accounting system, the khozraschet. The planning and ministerial organizations monitor progress. The State Bank controls an enterprise’s financial transactions and assures plan compliance. Also, the Communist Party, which maintains a parallel organization to the government bureaucracy, monitors compliance.

On the positive reinforcement side, there are incentives: bonuses for management and workers based upon various criteria, depending upon the product and process involved. They might involve profit, sales value, weight, size, etc. and can be quite substantial.

Some Problems of Planning

Lateness of the plan is a perpetual problem. Planning for all of the many thousands of commodities produced in such a large economy is a gigantic task, and is not always completed by the beginning of the year covered by the plan. This leaves enterprises not knowing what their targets are, where they will get their inputs, and having no financing to proceed. As possible solutions, there have been several suggestions: advance fund allotment (25% partial funding), the “correction principle” (advance estimates of the Plan) and Ministry reserving part of previous production to clear bottlenecks. It is also hoped that, in the longer term, computers will be of more help in processing the information flows quickly and helping bring plans out on time.

Success indicators and incentives have caused great problems, especially in the areas of quality control, production by customer specification and assortment. Managers tend to produce in a fashion which will guarantee themselves the best bonus. If the bonus is paid on the basis of weight, the product will be made very heavy. If by sales value, expensive inputs will be used. Every possible indicator or combination tried has been subverted in some manner. Customers sometimes receive unusable material, and this causes bottlenecks, for they cannot in turn fulfill their plans. Over the years, substantial quantities of unsalable consumer goods have been produced. With some items, as with clothing, retail enterprises have been given more flexibility to deal with suppliers and to specify their own needs, rather than having things just spelled out in the plan.

Supplies for enterprises have been a long-term bugaboo of the economy. Taut planning and supply problems have caused managers to hoard labor and materials to insure that they can fulfill their plan goals, and this practice has caused further supply problems and bottlenecks. This has resulted in the practice of ‘storming’, that is, making a big campaign at the end of a production period to reach a goal rather that working steadily all along. Many managers have employed expediters or scroungers, called tolkachi, to help them with their supply problems. This problem will be around for some time yet.

Optimality of inputs and methods and scarcity of inputs are problems because prices assigned to products are not based upon opportunity costs or actual scarcity of materials, but are determined administratively. This problem will last as long a prices are irrationally set.

Different planning agencies do not communicate well enough. An agency which plans production output may not be familiar with costs. There is no one responsible for plan consistency.

There is insufficient awareness that different industries require different techniques. For example, methods for planning for a commodity like coal or electricity, which is a uniform product, cannot be used for something like textiles, which is very variable and depends upon consumer tastes, artistic factors, natural and synthetic fiber availability, etc. Problems of assortment in some consumer goods have been solved in some areas by allowing some market allocation of assortment, as has been done in the area of labor for years.

Reforms in Planning

Four reasons for the economic reform discussion of the 1960s are given by Gregory and Stuart^[9]:

These reasons, and others noted above, resulted in a more open atmosphere for new ideas. In the discussions that followed, there were basically two trends, both related to the main positions in the planning debates of decades earlier. The liberal tendency favored making more decisions at lower economic levels; the more conservative reformers leaned toward making improvements in centralized planning. Some today^[10] see two trends on the more liberal side, with the radicals favoring much more decentralized, even market-oriented, reforms needed.

Aside from the mathematical economists, who will be discussed later, the first major set of reform proposals came from Evsei Liberman, and began with his 1962 paper “Plan, Profits and Bonuses”. The discussion has continued ever since.

Liberman made several proposals. First, bonuses should be paid after fulfillment of targets and should be based upon the profit/capital ratio, to encourage efficient use of capital investment. Second, the government should set profitability norms for each industry on which to judge performance. Third, there should be higher rewards for fulfilling ambitious, if a little risky, targets than for over-fulfilling easier ones. Fourth, directives of central planners should be limited to the assortment, delivery plans and quantity of output, based upon enterprise proposals, and allow enterprise managers to contract for their own inputs, setting their own wages and technological standards. Liberman was ambiguous on the question of decentralization and was not specific upon what kind of pricing system he favored, but was critical of the current one. He felt that managers knew their own jobs and situations best and, if given the opportunity, would make the right kinds of changes. These proposals are, for the most part, not implemented.

There has been a history of experiments of different approaches to methods of economic operations over the years. Jerry Hough and Merle Fainsod^[11] mention that in the 1940s, under Stalin, economists were permitted to conduct long-term experiments, such as one lasting several years on the effects of abolishing the MTS system.

Beginning in the 1960s, there were several more experiments of note. The NVP (“normative value of processing”) experiment, begun in 1962 and involved basing success criteria upon a value-added concept rather than gross output and was designed to improve efficiency. The “direct links” program was designed to improve assortment and quality control problems. It functioned primarily in the clothing and footwear industries and spread to a substantial number of firms. The experiment provided that enterprises would take orders directly from retail outlets and that unsold stocks would be returned and deducted from enterprise output. Also in the mid-60s was an experiment designed to increase the efficiency of trucking, in which concerns were allowed to seek their own customers, especially for return hauls, and to purchase trucks on their own initiative. Successes caused it to spread to other firms.

One of the most noted and long-term experiments was that begun at the chemical combine at Shchekino in 1967. It was designed to reduce redundancies in the workforce by laying off such workers and transferring wage savings back into the wage fund to increase other wages. This experiment covered some 1200 firms by 1978, but in many cases, beneficial effects were blunted. Obstruction was encountered from at least two directions. First, workers’ organizations opposed the layoffs and resisted them. Second, ministries often increased output targets and appropriated the saved wages. New guidelines were put into effect to prevent such resistance in 1978.

The overall effect of these reforms has not been too great. Despite some improvements and an increase in spontaneous performance by managers, the government felt that managers were taking too big a share of incentive funds, and amendments have been introduced over the years which, in effect, revert to pre-1956 methods. Power over enterprise practices, including the associations, has never really left the higher ministerial levels. Moreover, there has been a gradual evolution in philosophy, returning to ideas of making improvements to centralized administration rather than toward decentralized control. There has been, however a large increase in computer usage in planning and management (50% of plan calculations were done by computer in 1978), but it has a long way to go, both in hardware sophistication, standardization and compatibility, and amount of usage. There is resistance on the part of some managers to computerizing, for the computer is too likely to expose some of the fudging managers feel that they need to do to keep the operation running smoothly.

Alec Nove^[12] speculates that the reformers don’t directly threaten those on the upper levels of the CPSU structure, but rather those lower down. It is these regional and local officials who make it their business to interfere in the functioning of various enterprises. He feels that they will be the biggest resistors of change, for a smoothly functioning economy might make their jobs obsolete. It must be remembered, however, that it was these lower-level officials whose intervention kept Khrushchev in power in 1957, and whose alienation allowed him to be deposed in 1964. This lesson in politics will stand for a long time.

Mathematical Methods in Soviet Economics

Why mathematical economics in the Soviet Union? The planned nature of the economy does not allow the market to set prices based upon relative scarcities and demand as in capitalist systems. The setting of prices administratively has not enabled planners to optimize production as they would like, because prices mean very little regarding the actual value of various materials. Therefore, costs of production are not known and cannot be accurately calculated.

There have been attempts to calculate commodity values based upon Marx’s labor theory of value, a system which was not designed to be used in this manner, but these attempts have been very cumbersome and of doubtful use. Since the allocation of resources must be done in one way or another, methods to replace the market had to be found. Material balance calculation has been the method used since the 1920s. Now many inputs, including labor, are becoming more scarce and the nonpriority sectors of the past need more emphasis. The size of the economy has outgrown the ability of a few leaders to operate it personally from the top and greater efficiency and ease of planning is becoming much more essential.

The now-prestigious Mathematical Economics Institute has its origins in the 1920s, with the development of material balances. Except for that, mathematical economics was not allowed in the Stalin years, because it allegedly had its roots in capitalist economics. This is not entirely true. The roots of two major techniques, input-output analysis and linear programming, both have roots in the Soviet Union. Input-output, which allows the calculation of production inputs from desired outputs, was developed by Leontief in the United States. As he was educated in the USSR and was there when material balances were developed, this may have influenced his thoughts. The techniques of linear programming were developed by the Soviet mathematician Kantorovich in the 1930s, and later, independently, in the West. Linear programming allows the calculation of optimal levels of production of outputs by a series of equations and, as a by-product, produces what is known as “shadow prices,” which are very close to those which would have been generated by market mechanisms. Furthermore, using mathematical methods would allow greater use of computers.

These mathematical techniques still have not taken root as the basis of Soviet planning for several reasons. First, all data is not yet gathered in a form suited to processing by machine. Second, the number of products in this enormously complex economy exceeds both the statistical data-gathering capabilities of the planning system and of existing computers to process it. Huge input-output matrices with many hundreds of commodities on each side would involve trillions of calculations and enormous memory usage. A possible solution to this problem might be instituting a hierarchical system whereby the upper levels would use increasingly aggregated data inputs.

Mathematical economic methods would not be a panacea, but they would be a very useful tool. If used correctly, they could help optimize certain methods and speed plan production. One of their primary exponents, the late V.S. Nemchinov, did not intend that they be used a means to preserve total economic centralism, but to aid the central planning of essentials and to decentralize other factors, including markets for some producer goods.

Industry

Historical Outline

In the three decades preceding the Russian Revolution, there was a great deal of development in industry, concentrated in small areas of the country. These large concentrations contained some of the most modern industry in the world at that time, and had developed organized, relatively educated workforces.^[13] This industry was, as has been mentioned, severely damaged in the Civil War. By the mid-1920s, industry had recovered to pre-War levels, with the investments generated under NEP, but the rates of growth and of saving were dropping, and investment was slow. Many felt that without major changes, industry, especially heavy industry and the means of production, would not grow at an adequate rate to insure the USSR’s survival vis-à-vis the industrialized, capitalist West.

The Industrialization Debate was conducted to attempt to find the “correct” path for the future. There were three main factions. The left-wing faction, whose main exponent was Preobrazhensky, favored an unbalanced growth path favoring heavy industry, with the costs born disproportionately by the peasantry, especially the hated and feared (by the party) well-off peasants, the kulaks. It was hoped that this unbalanced growth would lead to the possibility of balanced growth in the future.

The extreme right-wing, represented by Shanin, favored just the opposite: unbalanced growth favoring agriculture, permitting a free market in agriculture. He argued that peasant saving was traditionally high, and would allow investment income generation, with exported agricultural surpluses used to buy machinery and technology in the West. Later, there could be a shift to industrialization, after the dangers of extreme inflation had passed.

The right wing, led by Bukharin, favored a balanced growth policy. He advocated retaining Bolshevik political control, but also harmony with the countryside, by allowing a free market. Bukharin stressed that peasants would voluntarily shift over to socialized methods when their superiority was demonstrated. By raising the levels of agriculture and industry side by side, each would feed the other, but keep capital accumulation within manageable levels and avoid goods famines, since industrial investment has a longer term payoff. Stalin used Bukharin to solidify his power, and then later switched to a very harsh version of Preobrazhensky’s views.

The first FYPs resulted in substantial gains, as is shown in Figure 6, but there was also waste, harsh work rules, population redistribution, and increased educational opportunities, because the economy needed trained workers and specialists. There was a high rate of job changing by workers, looking for better pay. Penalties were established and used to help control this.

It is clear from the table above how quickly Soviet industry rebounded from World War II. Although some amount of capital stock was removed from Germany and other parts of Europe as reparations, recovery was primarily from its own resources, as it did not participate in the Marshall Plan. Growth kept up at a 10+% rate through the 1950s, dropped off somewhat in 1960, held relatively steady into the early 1970s, then started a slow decline up to the present. The table shows the greater role played by the consumer goods sector, thanks to earlier investments.

The growth in both the agricultural and industrial sectors caused a great increase in transport variety (air, rail, inland water, marine) and extension (new rail lines, inland canals, northern marine routes, roads for trucking) and intensive development (double tracking, heavier rails, more modern equipment). There are still long hauls between resources and industry, and between industry and markets, and an over-utilization of railroads, but less cross-hauling. The government has made a conscious policy to locate newer industries, such as fertilizers and synthetic fibers, closer to markets to ease the load on transport. Textiles, on the other hand, are moving closer to resources, and more integrated mills are opening.

Demographic changes are causing a hardship for Soviet industry. The able-bodied working age population growth rate will be increasing at a very slow rate until the mid-1990s. The RSFSR will show a net decrease for about 13 years. The Central Asian region is showing a substantial net increase, however.

Unfortunately for industrial planners, living conditions are relatively good in Central Asia, and the government is having difficulty inducing workers to move to other parts of the country where employees are needed. To help ease the problem, the government is using first job placement prerogatives for higher education students to redistribute workers, and it hopes people decide to remain when the placement period is over.

Figure 10 —
Mathieson, page 108

There is relatively less emphasis on coal production with respect to petroleum, but production is still increasing, making use of more economical open cut mining techniques. Despite the growth of atomic power, thermal power still makes up about the largest share, 80% in the early 1970s.

Steel production is benefiting from advances in technology of production and also an upgrading of production efficiency. More types of steel and steel products are available. There is also a move toward regional self-sufficiency in steel, except for the Ukraine and Urals regions.

The Role of the Military in Industry

Industries under the control of the military, some of them making civilian goods, are the most efficient and have the least bottlenecks. This is because the military has priority toward resources, skilled manpower, new technology and other capital inputs. Their quality control is better, also: these industries, unlike most civilian ones, may refuse inferior inputs. The defense sector has been able to successfully organize projects of quite large scale.

The military has the best research and development facilities, and thus the opportunity to have more up-to-date technology than civilian industry.^[14] Research and development in the USSR has shown up best in the military sphere when new developments are follow-on systems to previous projects. Since these projects are centrally directed, R&D results do not easily spread laterally through industry, and this is aggravated by secrecy, both the military and political varieties.

The burden that the defense sector places on the economy as a whole is not clear, partly because accurate budgetary statistics are rare and partly because it is not known exactly what resources are kept out of civilian production by the military. However, it is estimated that approximately ¹/3 of machine building output goes to defense. The overlap between the two sectors complicates things still further. The arms race and constant military production is undoubtedly a factor in the current economic slowdown, but there are numerous others, as well.

Other Problems in Soviet Industry

There are certain costs to Soviet industry which are difficult to pin down. What is the effect on morale and productivity of malfunctions in the consumer sector? What are the costs due to people having to stand in line? They are sufficient to warrant occasional crackdowns on people who leave work to queue up to buy merchandise. What is the cost of the second economy? What are the benefits? (The second economy is discussed later.)

The output of Soviet industry often cannot be successfully exported, for it is not very competitive. Both design and quality control are factors. Alexei Kosygin stated, at the 25^th Party Congress in 1976, “Since foreign trade has become a major branch of the national economy, the problem arises of setting up a number of export oriented industries to meet the specific requirements of foreign markets.”^[15] These industries would require a priority for inputs like that of the military if this were to function under today’s conditions. There has been little discussion of the idea since that time.

Agriculture

Conditions for Agriculture in the USSR^[17]

Climatic conditions in the USSR are roughly similar to those in Canada, as the latitudes of the two countries are similar. Most areas have less than a 100-day growing season. Moisture is often a problem. The areas with seasonal surpluses are only in the north, and precipitation often varies from the norm. Some 50 million hectares (125 million acres) are subject to water erosion. Only 10.7% of the land is arable, with an additional 2.6% suitable for hay and 14.2% for pasturage, a total of 27.5% of the land, most of which is already in use. The 1970s was a rather bad period in term of weather. One of the long-term weather cycles was at its minimum in this period. (There are 5.5, 90 and 200 year weather cycles and 10-11 year sunspot cycles which seem to effect agriculture.)

In Central Asia, southern mountains block monsoonal winds, resulting in arid conditions. Certain winds cause problems: The very dry sukhovey winds blow out of the southeastern deserts in late summer causing plant dehydration and drought. In the winter, the bora winds blow from the Siberian high carrying very cold temperatures far into southern regions and can blow away the snow cover which insulates soils and plant growth from the cold and provides moisture when it melts. The even more severe purga wind blows out of Siberia toward more northerly regions causing blizzards and bitter cold. Frozen soil allows only spring-sown crops in many regions. Further, these frozen soils delay spring planting. The cold-warm cycle contributes to the breakdown of soils and makes them more susceptible to wind erosion. Some 40 million hectares are subject to wind erosion. The year 1960 was a particularly bad year for this, as well as 1953, 54, 57, and 59 in the Ukraine.

Historical Outline

Before the revolution, Russia was primarily an agricultural country. Agriculture was organized around the mir, the village commune. Many peasants left the rural areas to work full or part-time in industry. The Stolypin reforms of 1906-11 were designed to improve the lot of the peasantry and create a prosperous, landowning, loyal population.

After the revolution, many of the landed estates were seized by the peasants and divided up, or added to communal lands, where the mir was reconstituted. During the War Communism period there were forced requisitions in the countryside to feed the cities.

After the Civil War, NEP was instituted and was designed to favor the peasants to gain their political support, and to pump money into the largely destroyed economy. The wealthier, more productive peasants were both courted and feared, but were eventually destroyed as a class when agriculture was collectivized.

In the early 1930s, in response to on and off collectivizing drives, a huge proportion of livestock and draft animals were slaughtered and eaten, as a protest. Livestock levels were many years in recovering.

By 1932, the agricultural economy was in crisis. Bad weather, few animals, coercion, poor organization of work, low pay, bad planning, and a fodder shortage combined to take its toll. Agricultural exports in earlier years had depleted reserves and famine struck in 1933, costing millions of lives.

There was some retraction of requisitioning demands and some legalized free-market selling to help the rural population recover, but grain production was below 1928 levels until 1935. Compulsory crop deliveries were still too high, and livestock could not be adequately fed, lessening meat availability. Also set up in this period were state farms (sovkhozy). These tended to be larger than collective farms, and agricultural workers were employed there on the same basis as factory workers, except that there was an opportunity for having a small private plot and an animal or two.

After 1931, agricultural workers’ pay was based on the trudoden (workday unit) system. This system paid workers by the number of workday units earned by each person, with more skilled occupations worth more units than unskilled. The workers were paid in cash and in kind, out of what was left after procurements, taxes, insurance, capital and administrative expenses, etc. Because of low prices paid, these sums were very small.

By 1935, the form of collectivized agriculture was set until Khrushchev’s modifications. Farm machinery was organized in the Machine Tractor Stations, where equipment was shared by several farms. The MTSs were paid for their services in crops. Agricultural workers’ pay did not keep up with prices and the population had a hard time of it, but the cities were fed and agricultural production did increase.

During World War II, there were severe agricultural losses, primarily due to losses in territory. Procurements were down for the whole war, with 1942-3 as the low point. More private agriculture was allowed, along with other relaxed rules, to help spur more production. This led to high black market food prices, and significant cash enrichment by many peasants. In occupied areas, the Germans maintained the kolkhoz structure for their own procurements, and committed their own brutalities in addition. The net result was to keep most rural populations on the Soviet side.

After the War, supervision was again tightened, and land which had slipped into private use was recovered by the collective farms and state farms. To solve the problem of cash-rich peasants, there was a currency reform in 1947 in which only so many rubles could be cashed in for new rubles. The rest were lost. There were shortages all around, including houses, in war torn areas. The 1945-6 drought did not help matters. Pay was very low and, under the trudoden system, the combination of workers into larger brigades, rather than the smaller links, made it difficult to fairly distribute pay in accordance with real work contribution.

There was a good deal of effort given to agriculture in the postwar years to try to improve the situation. This was the period of the ascendancy of the pseudo-geneticist Lysenko, and some errors of this period can be traced to him. Another of Stalin’s advisors convinced him of the supposed panacea-like benefits of crop rotation and this travopol system was enforced even in areas where it made no sense, and stayed in effect until the early 1960s under Khrushchev. A good idea which had little initial success was the idea of shelter belts, rows of trees planted around fields to break the wind and help conserve soil and moisture. The trees were often planted in areas which would not support them, and resulted in wasted efforts. The ones which survived proved very valuable.

More agricultural equipment was given to the MTSs. The Ministry for Agriculture was even divided in three parts, but was reunited in 1947, due to the confusion caused. There was also a move to amalgamate collective farms into larger units to achieve more economies of scale. Some 250,000 farms were combined into 97,000. These amalgamations and the primitive nature of rural villages led Nikita Khrushchev to propose the concept of agro-towns, modern communities where people could live, and commute to work on the farms. The idea was attacked as “consumerist,” was beyond current resources, anyway, and went nowhere.

After the death of Stalin, the leadership was first dominated by Malenkov, and then by Khrushchev. This was a period of great shakeups in agriculture. It was soon open knowledge that there were grave problems in the agricultural sector: bad planning, losses, high taxes, low production, low investment. Changes had to be made. Typical of the squeeze in which collective farmers were caught is that procurement prices were less than the cost of production on many items, and the collective farms even had to pay for the transport of the crops off the farm. They were making less than nothing.

One of the earliest of the big changes was the Virgin Lands project. This was a revival of a plan, adopted in 1940 but never put into effect, to cultivate 13 million hectares of land in outlying areas, near the edges of the zones of adequate rainfall: southeastern Europe, southern Siberia and Kazakhstan. At the time the decision was made, most of the areas under consideration were actually relatively lower cost areas of agriculture. The first year, 1954, had good weather, and there was an increased harvest, so the plan was increased to nearly 30 million hectares. There were further increases: 2.6 million hectares in 1956 and 11 million in 1962.

It was made into a large campaign, with hundreds of thousands of permanent emigrants to the areas and many thousands more going temporarily to help out. The result was a substantial increase in grain and other produce. The new regions turned out to be higher cost areas of agriculture, but in the long term, the country has profited by it. It made up for a potential foreign exchange loss, were this grain to be purchased to increase meat production. Moving grain production east allowed the traditional areas of agriculture to be put to more profitable use, such as fodder for more animal products.

There were numerous other changes made to improve agricultural conditions. Farm prices were greatly increased, and the multilevel price system was abandoned. A more open attitude toward private plots was prevalent in Khrushchev’s early years, but this changed later on. The state made higher procurement purchases at the new higher prices, resulting in smaller volumes of goods available on the free market. To help farms break even or make a profit, past debts were written off, the state began paying transport costs, and taxes were dropped 60% in 1952-4. A greater electrification effort was made and more specialists were sent to the MTSs.

With the dismantling of the MTS system in 1958, the equipment was purchased by the farms, and specialists went to the farms, also. Unfortunately many equipment operators did not want to become farm employees, and left the areas, with maintenance of farm equipment suffering as a result. There was another move to amalgamate collective farms, from 125,000 in 1950 to 69,100 eight years later. All in all, the changes were quite significant and living conditions did improve.

After Khrushchev left the scene, some of the less desirable changes made by him were reversed, but the general policy of investing more in the agricultural sector continued, and was even increased. Agriculture accounted for 16% of total investment in the 1950s, but increased to 25% in the 1970s. Worker pay and farm prices were again increased, and restrictions on private livestock were lessened. To improve operations, better equipment maintenance was done, there were improved accounting and controls on state farms, power was returned to the ministries, and a modified version of multilevel pricing was instituted. In this period, the government focused more investment in agro-industrial complexes.

Overall, the differences between state and collective farms were disappearing, and this trend has continued. Because the larger farms have the means to provide more public and cultural services, there have been quite a number of small farms petitioning to become state farms.

Some other trends of this era were: an increase in incentives, larger investments and industrial inputs, and more specialization in agricultural enterprises. Due to the vagaries of weather and other conditions, there is a constant variation in output. There is also the problem of population shifts out of rural areas, especially youth with skills, but this trend is hardly restricted to the Soviet Union.

Innovation in Agriculture

The USSR has displayed a penchant for exploiting marginal resources. This might be because so many of their resources, at least in the agricultural sphere, are marginal in some way, whether it be in terms of weather, moisture, fertility, etc. This has forced upon them the necessity of coping with these problems, and Soviet scientists have come up with numerous techniques for ameliorating or compensating for the conditions. We have said that much of Central Asia is arid or semi-arid. Such devices as irrigation are commonly used to bring water to crops, but the creation of reservoirs actually alters local climatic conditions favorably up to a dozen miles from the man-made lake. Hot season temperatures are reduced, atmospheric humidity is increased, warm seasons are lengthened, and the climate is moderated in drought-prone areas.

The shelter belts help the soil retain moisture by preventing the winter winds from blowing away the snow cover. It was found that up to 60% would blow into ravines, causing water loss and erosion at melting time. Long stubble left standing from tall-stalk crops and irrigation are also used to help prevent droughts and dust storms. In wetter areas, swampy land useless for agriculture has been drained to expand acreage.

Forest depletion in western areas has caused timber harvesting to move east. Trees for lumber and pulp, used for paper and chemicals, like synthetic fibers such as rayon, are now 98+% mechanized and very scientifically managed in the Soviet Far East.

The short growing season has spurred other measures, such as the development of quick-maturing strains of crops, and the use of vernalization (exposure of seeds to heat to cause early germination). Fertilizers are now extensively used, as well.

The type of agriculture required by Soviet climate and soil structure is of necessity more labor intensive than that in much of the rest of the world, and requires larger investments in equipment and special techniques. Much of this additional investment has been made, and agriculture has taken great strides, but more is necessary in the future. This larger investment will increase the output of the agricultural sector, but it will probably always be a relatively high-cost system. The USSR is a large country and has a strong enough economy to sustain this cost. Despite the shortcomings, the 1953-78 average agricultural growth rate was 3.5%, while the rate for population growth was 1.4%.

International Aspects of the Soviet Economy

Historical Outline

The early years after the revolution were characterized by isolation, fear of further invasion and a compensatory trend toward autarchy. The government wanted more international ties, for the country needed technology and machinery from the West if it was to develop and be able to hold its own in the world. Trade picked up very slowly, imports starting in 1921 and exports in 1923. Stalin, after he was securely in the leadership position, rejected notions of trade for comparative advantage reasons in favor of isolation, to build socialism in one country. Trade was kept at a minimum. He was also disturbed by capitalist encirclement. Perhaps the low priority given to agriculture was another reason for limiting trade. The USSR was not a significant exporter of food, as was the Tsarist government.

After some internal discussion, the route of a state monopoly of foreign trade was chosen. Such a monopoly would isolate foreign interests from internal access and meddling in Soviet affairs. It had the concomitant benefit of limiting the importation of non-essential goods and focusing on urgent needs, problems which many modern developing countries face. Some exports were sold at quite low prices, in order to get needed foreign exchange for the purpose of purchasing the industrial goods which made up 80-90+% of its imports. From the mid-1920s to the prewar years, exports consisted of ²/3 industrial goods and raw materials, and ¹/3 agricultural items.

World War Two cut off Soviet exports, and limited imports to those items necessary for the country to survive the War. The $13 billion worth of Lend-Lease materials was split nearly equally between military and nonmilitary items, goods to aid the population (like food) and industry (like trucks, machinery and raw materials).

After the War came the Cold War. The USSR’s trade went less to the capitalist world and more to its socialist allies, over 80% by 1950. During this period, there were many restrictions on the shipment of industrial goods to the USSR. The accompanying tables show the structure of trade in the post-war period. Despite limitations, there has been a 29-fold increase in total trade from the end of World War Two to 1978.

Trends in Soviet Foreign Trade

There have been certain areas of mutual advantage in foreign trade developing, such as an agreement with Occidental Chemicals where fertilizer and technology is sent to the Soviet Union in exchange for raw materials. Outright purchases of technology are limited both by the USSR’s foreign exchange reserves and, sporadically, by political factors.

R.S. Mathieson^[18] suggests three principles that dominate Soviet foreign trade:

The climate and similar factors cause a rather unstable and fluctuating trade in some items, for example wheat and wool.

There are a number of internal barriers to trade by others with the USSR^[19]. First, Soviet enterprises are insulated by the state monopoly from direct contact with world markets and knowledge of their requirements. This question and a possible solution were addressed by Kosygin in 1976, as mentioned above. Second, the USSR has been unable or unwilling to export more raw materials, including crude oil, to hungry western markets. Third, the inconvertibility of the ruble causes problems. Soviet prices are little related to world market prices because the real value of the ruble vis-à-vis other currencies is not known, and because Soviet internal prices do not give trading organizations a good idea of what their goods really cost them. It is thus hard to evaluate the advantages and disadvantages of trade. Fourth, there is some difficulty in developing financing arrangements to handle imbalances of trade. Since the USSR cannot pay in a convertible currency, trade must either balance (barter), credit arrangements must be made, or payment must be made in western currencies or in gold.

Consumption

Historical Outline

For the first thirty years after the revolution, the consumer goods sector was the buffer, the expendable part of the economy. It was always planned to increase this section slowly, after a solid industrial base was laid. Consumer goods production was way down during the early years of the Civil War and War Communism. It rebounded during the NEP, but became a low priority under the first FYPs. Consumer goods production was apparently starting to rise in the late thirties, but changeover to war production interrupted it. After more overwhelmingly industrial investment in the recovery period after the Second World War, consumer production improved significantly after the death of Stalin, and continued to grow, but at a declining rate, until the present.

Traditionally, prices have been used both as a rationing tool and as a means to control inflation. Transfer taxes have been added to industrial costs to control demand by bringing consumer prices to market clearing levels. This has allowed the government to continue to use wage differentials as incentives without having to worry about great amounts of cash accumulating.

To help with some of the previously mentioned economic problems of stocks of unsold merchandise, the government started a Consumer Demand Institute to assist production enterprises in developing products to match public needs.

Problems in the Consumer Sector

Although the prices of many items are kept in affordable ranges as a matter of policy, shortages of many items frequently occur. One hears no end of stories about consumer frustrations coming out of the Soviet Union. These frustrations are complicated by the three queue system still common in the USSR. In this system, a retail customer lines up to select an item at the counter where it is sold. After selection, he or she then queues up at the cash register to pay for it, gets the cash receipt and returns to the original clerk to pick up the item. (It does not sound too dissimilar from the increasing number of warehouse-type retail stores in the US, where the customer selects, pays for, and picks up merchandise at three different locations.) The relatively low density of consumer outlets can also be inconvenient for the consumer, though it probably helps production enterprises, for there are fewer customers with whom they have to deal.

There is a great awareness within the USSR that many superior goods are produced in the other Eastern European countries. Many people save up large sums of money so that they or their friends can shop abroad on occasion. The same situation occurs internally between rural dwellers and Soviet cities: many people go to Moscow or other large cities to do shopping that they cannot do in their local regions.

The “second” or “counter” economy seems to be becoming an increasing factor, or is at least more frequently commented upon. This new, more condoned and socially acceptable version of the old black market does in fact have some redeeming qualities to it. Flourishing throughout the country, but especially in transport, in rural areas and in places like the Caucasus, it either adds to the existing supply of goods and services or redistributes those goods and services already in existence. It eases frustrations of consumers and maintains the effect of wage incentives offered by the government.

The second economy appears in a great variety of areas: private medicine, transport, timely appliance repairs (sometimes within state facilities), knitted clothing, engineering consulting services, grave markers, home-brew liquor, bribes to reserve merchandise for certain customers and much more. It has even been known to happen that enterprise managers sell materials on the black market to get cash to purchase supplies to help the firm meet the plan. It can also have a disruptive role, for the labor and materials used are diverted from regular production enterprises or land and supplies are effectively removed from state and collective farms. Furthermore, the control over the economy by the planners is diminished by these practices.

Because of its illegal nature, it is of course impossible to get exact statistics on how big a role it plays. It is said that in 1970 that 25% of all consumable alcohol was illegal and that in 1972, over 120 million gallons of gasoline was stolen for black market sale. Some writers feel that the second economy is not a very significant factor in overall economic terms and others feel that it is quite significant.

Conceptual Issues

This section attempts to briefly discuss a few ideas encountered during the course of study which help the student of the Soviet economy understand it better.

The Problem of Value

The Soviet Union is officially ideologically committed to the philosophy of Marxism, including the concept called the Labor Theory of Value. According to this theory, the value of a commodity ultimately stems from the human labor which was put into it (or into its precursors). Soviet economists have attempted to use this theory to calculate the prices of goods and resources circulating in the Soviet economy. Western economists have continually pointed out that this effort will not recognize other things which should be reflected in a commodity’s cost, such as scarcity or capital. Over the years, a growing number of Soviet economists have attempted to deal with this issue.

The approach of many Western economists to this question ignores the fact that this problem may have more than just one solution, the Western one.^[20] The fact that the attempts to make use of the Labor Theory of Value were cumbersome and did not produce useful prices does not invalidate that theory. It merely shows that an easier to use day-to-day method or technique for determining valuations or prices must be found, whether by supply and demand, linear programming, or whatever. The essence of the philosophical concept of where the real, total value comes from can remain. (It must be remembered that Marx did not intend for the concept to be used as a tool of economic practice, but as a part of his analysis of capitalism.)

For example, any US homeowner knows that his or her house has several valuations: the one by the local tax assessor, the one by the insurance company, the purchase price, the selling price, etc. The existence of this multiplicity of valuations, these different techniques for different purposes, does not ipso facto negate the capitalist definition of value.^[21]

Rationality

Rationality appears in different ways in different societies. It could be said that capitalism is rational at the micro level, but irrational at the macro level, while the reverse is true of the Soviet economy. The attitude in the USSR has been that the costs of irrationality at micro levels are worth paying in order to be able to develop rapidly through the mechanisms of planning. They realized that the market system does not respond well to centrally set goals. The accompanying graph shows clearly the distinction at the macro level. However, more than macro-level rationality must be considered. The irrationalities of the Soviet price and incentive systems have caused all sorts of chaos in the supply system. This compounded with the low priority given to the consumer sector has caused frustrations in the Soviet population. It is clearly possible that this may be affecting the recent slowdown in Soviet industrial productivity, despite macro rationality. Capitalist economies face the inverse of this situation: the rationalities of the market system at the micro level are causing misery and unemployment in the US as industry relocates to other countries.

Advocacy or criticisms of the levels of Soviet rationality must recognize the totality of the Soviet situation, including, history, politics, and attitudes toward the world. Rationality is not the ultimate goal of any society or economic system. Western economies engage in planning, especially in wartime, just as socialist countries may make use of the market. It is a tool to be used or not used as the situation demands, and its degree of use can change as the system evolves, without implying that past practices were necessarily incorrect.

Soviet Quality Control

A conceptual way of looking at Soviet problems of quality control deserves summarizing here. Jeffrey Miller^[23] makes use of an “organizational failures framework,” whose basic unit is the transaction. The transaction is where a good or service moves from one economic division to another, as in a sale. The administrative costs of these transactions are useful in measuring the efficiencies of a system. High costs can either prevent transactions from taking place, or allow them, but in a non-ideal fashion. Institutions in an economy should be designed to minimize these costs.

The way this conceptual construct applies to Soviet quality control is as follows. The “bounded rationality” idea relates to the interaction of plan and enterprises in determining supply and output. The volume of information necessary to exactly describe all qualities and standards of manufacture for every good in society is orders of magnitude beyond the capabilities of central planners to specify. Even in capitalist economies, where firms contract directly with each other, this amount of information is too large to be explicitly detailed in agreements. Firms rely on past experience with each other and judge whether what they are getting is or isn’t good enough, and just address the shortcomings. This is why the problems of success indicators and incentives have been so severe. Managers have no way of knowing just what is expected of them, so they operate to maximize their bonuses. Neither plan nor contract can cope with the whole task, and less formal interactions are needed to solve the problems.

Plan-specified supply arrangements and taut planning create the “seller’s market” atmosphere in the USSR, and facilitate the opportunistic behavior of supplying enterprises, much the way monopoly practices and lack of competition cause this problem in capitalist economies. Unlike the West, there are fewer options for Soviet managers, and most communication is via a third party — their ministry, who knows even less than the manager. They must accept what they get (unless they are in a priority sector, such as defense) or find a way to either manufacture it themselves or buy it on the black market, options not always possible, and usually forbidden, anyway. Those industries where more flexibility is permitted are improving their quality control. Other techniques tried are appeals to ministries about inferior goods and different prices for goods of different qualities, but they are of mixed success.

Atmosphere is less easy to pin down, because it cannot be quantified with numbers. If different parties trust those they deal with and share their goals and priorities on the one hand, and feel that their individual actions will make a difference on the other, the cost of compliance with plans and contracts will be lower. All parties will be pulling together. These attitudes can be hard to come by in a huge, organized, bureaucratic structure, where performance is measured by the very incentives which cause all of the problems. The Soviet government is conscious of this problem of atmosphere and tries to inculcate managers with a higher purpose and adequate codes of conduct.

The performance of certain sectors of Soviet industry indicates that quality goods can be produced. The costs, however are higher, for they include waste (produced goods refused by the user) and compliance (in-plant monitoring by the user). One key to solving the problem is shifting the “balance of power between producers and users” toward the users. The exact methods to use for all cases have yet to be found.

Evaluation and Conclusion

The evaluation of the Soviet Economy is an enormously complex task, but an attempt will be made here at a first approximation to such an evaluation. As a guide, the five criteria for evaluating an economic system provided by Putterman^[25] will be used. These criteria are:

Satisfaction of Basic Material Needs

This concept was one of the fundamental goals of the leaders of the Russian Revolution. There are several indications that this criterion has been met. The first is that the USSR has grown from a relatively backward underdeveloped economy into the second largest economy in the world. This would not have been possible without meeting the basic needs of the population. Along the way, there have been times when one or another sector was shorted, even sacrificed, in order that priority areas get developed. As it became possible to provide more and in a more balanced manner, it was done.

The overall income spread between the richest and the poorest has been narrower than in many Western economies, and to a significant extent, this is because certain things, like a job, education, health care etc., are regarded as rights and not privileges. Food availability, quality and variety has increased dramatically in the last generation. While there is evidence of poverty in parts of the USSR, it is neither as widespread nor as abject as in other parts of the world. The homelessness and utter destitution found in other countries does not seem to be present in the Soviet Union.

Equitable Distribution of Economic Outcomes.

As mentioned above, certain products of the economy are regarded as social rights, and are more or less automatically distributed throughout society. The lack of extreme wealth or poverty is further evidence of this equity. There are bound to be questions raised on this issue stemming from relative scarcities of some consumer goods, privileges of certain social layers and so forth, but they are inevitable due to individual preferences and value judgments of what is really important. It is beyond dispute, however, that enormous strides have been made in all forms of economic wellbeing across the board over the period since the Russian Revolution. The annual rate of growth of per capita consumption, including communal services, for 1928-78 was 2.8%, versus 1.7% for the US, 1929-78.^[26]

Some scholars note the problems of declining efficiency, supply, agriculture and incentives in the economy, and speculate that there will be problems in the future. While this is possible, the developed nature of the economy, the knowledge and economic means at the society’s disposal, and the experience and will for dealing with major problems shown in the past indicate that these problems will be overcome.

Efficiency in Production and Distribution.

It has only been in the relatively recent past that these problems have been factors of note, at least when compared with the problems faced by the country in earlier days. The leadership usually sought extensive rather than intensive solutions to problems. Now that the limits of so many of the lower-cost possibilities have been reached, declines in growth rates and problems of distribution are looming larger. These problems are usually noted in the consumer sector, and seem to be bigger problems in the areas of wants rather than needs. However, as noted, dissatisfactions in this area can lead to lower performance in others due to the costs of queuing, the second economy, and poor work performance due to motivational issues.

The roots of some of the production problems are political — privileged and powerful social layers not wanting to give up anything in the name of progress. Also in the political arena are the burdens placed on the economy by the war in Afghanistan and the arms race. Some are organizational — the problems of success indicators, irrationality of prices, the overloading of the planning apparatus. Others are demographic — the developing shortage of workers. The slow, constant nature of technological improvements, such as the computerization of information processing, will contribute to solution of the problems. The main feature which will tend to see the economy through these problems is the planned, goal-oriented, coordinated nature of economic functioning in the USSR.

Satisfaction of Social and Non-Material Needs

This is the hardest area to evaluate and the hardest to consider with relative objectivity. What are the most important non-material needs, and what are the standards of satisfaction? Just what wants are tied to the economic system and what are non-material? Does this cover job satisfaction? Expense-paid vacations to the Black Sea? Availability of opera tickets? These areas of non-material needs are also hard to evaluate because Soviet and Western value systems are different.

Some would say that the degree of emigration or desire to emigrate would weigh negatively against the USSR under this criterion. This is undoubtedly so, but the degree of the problem it indicates is open to question. The reasons for emigration are manifold: anti-Semitism or other alleged religious persecution, economic dissatisfaction, political dissatisfaction or even dissidence, etc. Not everyone has all of the reasons. Furthermore, some leave and discover that they are unhappy in their new homes and want to return to the USSR. Some find that they get to the land of opportunity, and find that they then have the opportunity to fail, and don’t like it.

As in many parts of the world, the distribution of these benefits is geographically uneven, with rural areas being deficient in many cultural activities. The government has difficulty inducing people to relocate to less developed areas of the country, despite high wage incentives, and it has been found necessary to restrict immigration to Moscow. Like many other aspects tied to the Soviet economy, the degree of satisfaction is difficult to assess, especially for the beginning student, but it is clear is that things are much better for more people now than before the revolution.

Environmental and Economic Stewardship and Bequest to Future Generations.

Had the disregard for efficiency, the pollution and other wasting of resources continued unabated from the early period of industrial development, the evaluation under this criterion would be negative. Fortunately, this is not the case. While it is not clear to this writer just how significant environmentally protective practices are in the USSR, there are definite signs that it is a consideration. One key factor in helping to keep air pollution levels down is the policy of emphasizing public transit over private automobiles.

Probably most of the low-cost, extensive exploitation of the vast natural resources of the country has been done already. However a great deal of infrastructure and knowledge has been developed so that future generations will be able to tap remaining resources more easily than past generations could.

A large industrial base has also been created for future use, and, unlike in certain other countries, is being constantly reinvigorated with new investment and technology. It is not being allowed to deteriorate or effectively moved to other parts of the world.

In sum, it would seem that under this criterion, also, the USSR passes the test.

Concluding Comments

Tsarist Russia was a rather undeveloped, agricultural country. Its industrialization effort was heavily dependent upon foreign capital. The keys to the development of the economy of the USSR were its radical breaks with the past: the overthrow of the tsar and domestic capitalism and the break with Russia’s previous close relationship with international capitalism. The former allowed the government to plan the course of its development without requiring dependence on individual capitalists or on the market. The latter, symbolized by its renouncement of tsarist Russia’s foreign debt, had both positive and negative ramifications. Negative effects were a limitation of the availability of foreign investment capital, trade isolation, and encouragement of military invasions (the Civil War, Hitler) and threats (rollback, the arms race).

The international break also had some very positive effects. It allowed resources and profits to remain in the USSR for reinvestment. It allowed the control of investment decisions to remain at home. It eliminated the political influence that follows foreign economic control. And it precluded a huge foreign debt burden. It should be noted that all of these things exist in the developing Third World today. These factors allowed the USSR to become primarily economically developed rather than underdeveloped. The example of the extremely rapid development of the Soviet economy has even led many economists to explore the question of whether this type of command economy should be advocated as a model for developing countries.^[27]

The Soviet Union has had to overcome some incredible obstacles: destruction from World Wars One and Two, the Civil War, enforced isolation from the world economy, a lack of economic models to follow in its development process, etc. Except for a modest amount of aid from its allies in World War Two and some food aid during some famines, it progressed by its own efforts. It did not have the benefits of any Marshall Plan as did other countries.

The rate of progress has been astounding. In 1928, the GNP of the USSR was 28% of the US’s, and in 1980, 75%. The population has been transformed from primarily an ignorant mass of peasants, with a relatively small industrial working class to one of the most educated, urban and industrialized in the world.

The human cost has been high, but it is an open question as to whether it is any higher there than in the rest of the developed world. First, since the period of growth has been so concentrated, most of the tribulations of the Soviet people are still within living memory. Who is alive to personally remember that much late Renaissance development was paid for by Bolivian and Mexican Indian slaves being worked to death in the gold and silver mines? How many alive today can remember the Trail of Tears or Wounded Knee or Nat Turner or Bloody Ludlow?

Second, the cost of development in the West was often paid by people in other countries, be they colonies or otherwise, not by the dominant groups now living there. (Without doubt, much that happened in the USSR, such as the Great Purges of the 1930s, was unnecessary by any stretch of the imagination; it was even counterproductive. If it did not contribute to development, can it be counted as a cost? That is a question for the philosophers and the politicians.)

We have mentioned certain serious problems faced by the Soviet economy, among them are irrational pricing, unsuccessful success indicators, quality control, industrial supply and a relative dearth of innovation, leaving the USSR behind in many fields of technological progress. Without trying to underestimate the seriousness of these problems, past experience indicates that they will be resolved in one fashion or another. Part of this optimism stems from the fact that, compared to some of the staggering hardships overcome in the past by the USSR, these are relatively less severe. The demonstrated ability of the country to focus its resources toward solving its problems will in all likelihood be brought into play again and solutions, possibly different ones from what we in the West predict, will be found.

These difficulties, like the economy in which they occur, are linked, and an improvement in one area will likely have positive effects in all. It is an incremental approach, addressing various parts of problems over an extended period of time, which is the most likely variant because it is most in tune with past practice and the political realities of the Soviet Union. The new Gorbachev leadership, while not yet having taken any radical steps, is already displaying an energy not seen for some time, and it seems to be getting a favorable response from the Soviet population. Other reasons for optimism are more specific and will be addressed one issue at a time.

The irrational pricing issue is definitely a difficult problem. The means for at least two possible responses to the issue are available already: mathematical methods and more use of market mechanisms. It is likely that both will be used, but in different situations.

Success indicator problems are somewhat subsidiary to the pricing problem. More rational prices will give more meaning to profitability (or at least the absence of loss, in sectors not subsidized as a matter of policy) as a valid objective criterion for performance judgments. Improvements in attitude and a change in the “sellers’ market” atmosphere are also necessary.

Quality control, like success indicators, is partially a subsidiary category. In certain consumer goods sectors, progress has already been made by letting retail outlets deal directly with manufacturers. This problem is also tied to the supply problem.

Industrial supply is another secondary problem. It will be resolved when materials are allocated more rationally, and in a less taut manner than in the past, with better quality control.

The general weakness of the Soviet Union in the area of technological innovation is a very serious problem, but certainly not an insoluble one. The highly structured, centralized and ponderous way the centrally planned economy has been run has done wonders for industrial development. Ideas already extant have been put to good use, although sometimes incompletely through society. Sectors making relatively good contributions through innovation (primarily defense) have accomplished this more by concentrating huge resources on the problems and have shown most success in the area of improvements rather than in new systems. This is in character with overall organization and practice.

Many in the West are fond of pointing out the differences between the inventiveness in certain advanced Western countries and the lack thereof in non-capitalist states, with the inference that “free enterprise,” with its incentive of the possibility of getting rich, is necessary for innovation to flower. Although the differences in innovativeness are obvious, it is far from clear that it is for the above-given reason.

Creative people need room to move and flexibility in order for their talents to blossom. Creativity is not responsive to commands. It is stifled when it must conform to rigid, hierarchical, bureaucratic environments. It must have resources on which to draw, even to put at risk. More of these qualities have heretofore been present in the West than in the planned economies.

Innovative people of course want to have a comfortable life for themselves and their families, but they tend to go on creating regardless of great success or lack thereof. It appears that they do it more for enjoyment than for any other reason. Wealth acquired is reinvested rather than spent on extravagant comfort and luxury. When they are too successful in an economic and business-organizational sense, many feel out of place and make some changes (to wit: Wozniak and Jobs of Apple Computer).

This problem faced by the USSR has been noticed in very large corporations, indicating that it is more a problem of organization than of incentive. Some of these corporations, which are in certain ways analogs of the organization of the USSR, have faced the question of innovation and creativity by setting up internal organizational divisions to encourage it. Creative people are given flexibility, resources and an opportunity to do what they do best. There is no reason whatever why similar practices cannot take place in the USSR. There are already examples of such practices there, in limited ways, in the second economy.

Scientific developments in the USSR (the space program, atomic weapons, etc.) indicate that the West has no monopoly on talent. Therefore, it comes down to an exploitation of this talent. If the USSR desires to become competitively more efficient through the use of technological change, it must make the changes necessary to best exploit this talent. With the state supplying the risk capital, the methods just outlined above could work on a larger scale. This is by no means the only way technological creativity could be expanded, but it indicates that the problem is soluble for the Soviet Union, and gives a solid basis for optimism that this problem, too, can be overcome.

This leaves the main question: Has the Soviet economy been generally successful? The evaluation criteria mentioned at the beginning of this section all seemed to weigh in favor of a positive answer. What if we choose other criteria? How does Soviet progress compare to that in other under-developed countries for the same period? Favorably. How does it compare to where it would be today if no revolution took place? We can never know for sure, but the answer is probably again favorable.

It is only when we compare day-to-day Soviet economic performance with that of certain advanced capitalist countries that there are negative results to the comparisons. These, however must be considered in the light of the generally longer histories of development they had relative to the USSR, the relatively greater level of international cooperation and aid they received, and the fact the social/economic system in the Soviet Union is historically new and the leadership had to devise by trial and error methods of functioning. If these are added into the equation, the performance of the Soviet economy looks rather good.

Post Script: The Problems of the Student

In addition to the fact that it is impossible to cover with any thoroughness such a vast topic as the Soviet economy in a single semester, there are a number of other problems which seem to conspire against the beginning student trying to understand this subject. Some of the most important are listed below for the information of critics who might be disturbed by errors which may have crept into this paper.

Deciphering Statistics.

Tables of numbers for production, growth rates, etc., are often presented very differently in the works of different writers. Data do not continuously cover the periods desired in one work, and trying to combine data from different works is a nightmare, because of different base years selected for indexed figures, different currencies used, different units used, and so forth.

The above is further complicated when dealing with the USSR because lack of free access to economic data, the inconvertibility of the currency and irrationality of prices make it impossible to assess the real value of anything in order to compare it to anything else. The Soviet government undoubtedly faces the same problems.

Biases of Writers.

This is assuredly the largest problem for the beginning student. A writer with a certain political animus often allows it to influence his or her writing. There is frequently no attempt to be objective. On seeing this, a conscientious student cannot help but ask “How much can I trust this information? How much is left out or weighted improperly? I see that there is a problem here, but just how big is it?” Some specific types of the results of unacknowledged bias encountered in this study are discussed below.

Some writers, to their credit, made a deliberate attempt to be objective, and succeeded quite well. This only goes to show how unnecessary these practices are in the rest of the writings used.^[29]

End Notes

[3] James Millar complains (in Cohen, page 137) that a recent Soviet book broke up the history of the economy into different periods than is usually done in the West and that it was only done to make growth statistics look better. The new Soviet periodization is: the revolution to the mid-’20s, mid ‘20s to 1941, 1941-1964, post 1964. Viewing these periods as those of recovery to pre-World War One levels, building the new economy, tinkering with the new economy, and the period of the mature economy, it seems to this writer that the new periodization is just as acceptable in describing the Soviet economy as the Western one.

[6] A material balance notes all of the various economic inputs and outputs and distributes them so that no more output is demanded that is possible from available inputs.

[13] One could view the way the Revolution developed as a confirmation of Marx’s ideas that the socialist revolution would take place in the most advanced country. It is possible to see two revolutions having taken place, the socialist one, under Bolshevik leadership, in the industrialized areas, and a peasant, anti-feudal revolution in the rest of the country, with the Bolsheviks in overall leadership because they had the most visionary program.

[14] The US Department of Defense estimated in 1980 and 1982 that in the 20 most important areas, the US led in 14, the two countries were about equal in 4, and the USSR led in the other two. Holloway, page 136.

[21] See Campbell, Seton, and Nemchinov. For a brief, succinct, Marxist discussion of the Labor Theory of Value, see Mandel, “Introduction to Marxist Economic Theory.”

[22] Nove, “The Politics of Economic Rationality: Observations on the Soviet Economy”, in Nove (1964), page 51. Much of this discussion is due to Nove.

[27] Despite resembling an underdeveloped country in certain limited ways, the USSR is without doubt primarily an industrial nation. Without these breaks, it might have gone the way of another primarily agricultural developing country, Argentina. “In 1933, Argentina signed the Roca-Runciman Pact, through which it could retain acceptable quotas in the English market in exchange for Argentine guarantees to purchase British goods and to insure profits to British businesses in Argentina.” (Skidmore, page 55.) Argentines suffered terribly from the depression in the 1930’s, as did people in many countries subject to capitalist business cycles. Argentina did make some headway in light industrial, import substitutional development while the advanced countries were busy fighting each other during World War II. After the War, it’s problems returned and Argentina now faces a staggering international debt.

[28] This section is largely influenced by both the Abbott Gleason article and on a talk given by Professor Gleason on his topic at the Brown University History Department in the Spring of 1985. [The talk was based upon Professor Gleason’s article entitled “Totalitarianism” in the April, 1984, issue of the Russian Review, Vol. 43, No. 2, pp. 145-159 (15 pages).]

[29] For more information on the operation of ideological biases appearing in scholarly writings, see the interesting exchange between Durgin and Goldman, with comments by Gray in the late 1984 ACES Bulletin issues, Durgin’s 1978 ACES article, and also the as yet unpublished Shaffer article.

Bibliography

Bergson, Abram, and Levine, Herbert S., The Soviet Economy: Toward the Year 2000, London, 1983.

Campbell, Robert W., “Marx, Kantorovich, and Novozhilov: Stoimost’ Versus Reality.” Slavic Review, October, 1961.

Cohen, Stephen F., Rabinowitch, A., and Sharlet, R.,eds., The Soviet Union Since Stalin, Bloomington, 1980.

Durgin, Frank A., Jr., “The Inefficiency of Soviet Agriculture Versus the Efficiency of US Agriculture: Reality or an Idol of the Mind”. ACES (Association for Comparative Economic Studies) Bulletin, #3-4, 1978.

___, “Review of ‘USSR in Crisis: The Failure of an Economic System’ by Marshall I. Goldman”. ACES Bulletin, Summer-Fall, 1984.

Gleason, Abbott, “‘Totalitarianism’ in 1984”. The Russian Review, April, 1984.

Goldman, Marshall I., “Reply to Frank Durgin”. ACES Bulletin, Summer-Fall, 1984.

Gray, Kenneth R., “The USSR in Crisis: Comment”. ACES Bulletin, Winter, 1984.

Gregory, Paul R., and Stuart, Robert C., Comparative Economic Systems, Boston, 1980.

Hoffman, Erik P., and Laird, Robbin F., The Politics of Economic Modernization in the Soviet Union, Ithaca, NY, 1982.

Hough, Jerry F., and Fainsod, Merle, How the Soviet Union is Governed, Cambridge, MA, 1979.

Kahan, Arcadius, and Ruble, Blair A., Eds., Industrial Labor in the USSR, New York, 1979.

Levine, Herbert S., “The Centralized Planning of Supply in Soviet Industry” in Holzman, Readings on the Soviet Economy.

Markish, Yuri, and Malish, Anton F., “The Soviet Food Program: Prospects for the 1980s”. ACES Bulletin, Spring, 1983.

McCauley, Martin, Khrushchev and the Development of Soviet Agriculture: The Virgin Land Program, 1953-64, New York, 1976.

Miller, Jeffrey B., “The Big Nail and Other Stories: Product Quality Control in the Soviet Union.” ACES Bulletin, Spring, 1984.

Nemchinov, V.S., and Nove, Alec, Eds., The Use of Mathematics in Economics, Cambridge, MA, 1964.

Nove, Alec, “The Problem of Success Indicators in Soviet Industry”. Economica, February, 1958

___, Economic Rationality and Soviet Politics or Was Stalin Really Necessary?, New York, 1964.

Rywkin, Michael, Moscow’s Muslim Challenge — Soviet Central Asia, Armonk, New York, 1982.

Seton, Francis, “The Question of Ideological Obstacles to Rational Price Settings in Communist Countries” in Abouchar, The Socialist Price Mechanism.

Shaffer, Harry G., “The Conventional Wisdom vs. Soviet Economic Reality.” University of Kansas. (As yet unpublished.) [Later published in Osteuropa Wirtschaft. - 31(2) June 1986 : 132-142]

Whiting, Kenneth R., The Soviet Union Today, a Concise Handbook, New York, 1966.

Web Contents

Blog/Home Stuff I Wrote The Right to Keep and Bear Arms Odd Words Other Interesting Places Hedda Garza Memorial ~ ~ ~ ~ Statement of Purpose Who Am I? Contact

Previous Essays: Index

Links I Like

Twenty Years of the CIO — This is a great piece of history!

The Ethical Spectacle NRA Fascinating Video Lecture International Journal of Occupational and Environmental Health Students for Concealed Carry on Campus

Gun Sales Up, Violent Crime Down (Again)

Book Review: “The Man Who Hated Work and Loved Labor — The Life and Times of Tony Mazzocchi” This is a fascinating book about a labor leader who has had tremendous influence on our lives, but whose name is not even known by millions of Americans. Please read my review.

An Overview of the Soviet Economy

Bruce A. Clark

Submitted in Fulfillment of an Independent Study on the Soviet Economy, IS 24, Brown University, Fall, 1985.

Professor Louis Putterman

Introduction

Approach

General Characterizations

Historical Outline of the Economy [3]

Planning

Historical Outline

Mechanisms of Central Planning[8]

Some Problems of Planning

Reforms in Planning

Mathematical Methods in Soviet Economics

Industry

Historical Outline

The Role of the Military in Industry

Other Problems in Soviet Industry

Agriculture

Conditions for Agriculture in the USSR[17]

Historical Outline

Innovation in Agriculture

International Aspects of the Soviet Economy

Historical Outline

Trends in Soviet Foreign Trade

Consumption

Historical Outline

Problems in the Consumer Sector

Conceptual Issues

The Problem of Value

Rationality

Soviet Quality Control

Evaluation and Conclusion

Satisfaction of Basic Material Needs

Equitable Distribution of Economic Outcomes.

Efficiency in Production and Distribution.

Satisfaction of Social and Non-Material Needs

Environmental and Economic Stewardship and Bequest to Future Generations.

Concluding Comments

Post Script: The Problems of the Student

Deciphering Statistics.

Biases of Writers.

End Notes

Bibliography

Last Updated — April 06, 2013 All Original Material on This Site ©Bruce A. Clark, 1999-2011 All Rights Reserved

Blog/Home
Stuff I Wrote
The Right to Keep and
Bear Arms
Odd Words
Other Interesting Places
Hedda Garza Memorial
~ ~ ~ ~
Statement of Purpose
Who Am I?
Contact

Previous Essays:
Index

Twenty Years of the CIO —
This is a great piece of
history!

The Ethical Spectacle
NRA
Fascinating Video Lecture
International Journal
of Occupational and
Environmental Health
Students for Concealed
Carry on Campus

Gun Sales Up, Violent
Crime Down (Again)

Book Review:
“The Man Who Hated Work and Loved Labor — The Life and Times of Tony Mazzocchi” This is a fascinating book about a labor leader who has had tremendous influence on our lives, but whose name is not even known by millions of Americans. Please read my review.

Submitted in Fulfillment of an
Independent Study on the Soviet Economy, IS 24,
Brown University, Fall, 1985.

Historical Outline of the Economy ^[3]

Mechanisms of Central Planning^[8]

Conditions for Agriculture in the USSR^[17]

Last Updated — April 06, 2013
All Original Material on This Site ^©Bruce A. Clark, 1999-2011 All Rights Reserved