USSR – An economic perspective
“Creating a
perfect society, by going counter to human nature is dead. The basic error of
communism is that it did not understand human nature”.
The Union of Soviet Socialist Republics (USSR)
spread from 1917 to 1989 from Central and Eastern Europe to Asia. Consider that
the Soviets NEVER considered themselves communists, but SOCIALISTS. Communism
was an ideal the socialistic society was striving towards. Was the USSR really
following Marxist Theory? Marx did propose to centralise all instruments of
production in the hands of the state, that is of the proletariat organised as
the ruling class, and to increase the total productive forces as rapidly as
possible. For an initial phase, Marx did propose centralized planning. As such,
the ruler has unlimited powers, and could put arbitrary schemes together. This
has consequences that differ from a market economy, such as “price setting”.
Some economists argue that it was initially based on Marx Theories, but the
system degenerated when Stalin rised to power, when it ceased to be democratic
but was based on the arbitrary plans of a single ruler. However, the
progression to that result could be inevitable: once you put the entire means
of production in the hands of the state, leaders get drunk by power.
We will start by retaking concepts from Karl
Marx, and compare that to liberal economical thinking. According to Marx, the
Labour Theory of Value says that all value comes from labour time
(effort/skill), not from supply and demand. Marx’s socialistic theory was based
on the Labour Theory of Value. Marx’s Exploitation Theory states that workers
do not receive the “full value” of their labour, because capitalists earn
profit (surplus-value) rather than only the “replacement rate” to pay for costs
of capital. LTV showed that market prices would not be necessary for economic
calculation because the “true value” of goods was based on the amount of labour
used to produce the goods. As I have mentioned before, I am totally against
this theory. For some reason, many business people calculate the final price by
adding a mark-up to the cost. But eventually, it will be the market that
validates if that price is accessible to the pockets of the final consumer or
not.
Marx laid out the basic groundwork,
justification, and vision. But it was Lenin who sorted out the details to put
theory into practice. Marx argued that a “dictatorship of the proletariat”
would be necessary in the transition period between capitalism and communism
period. This means all the workers coming together to govern a society, a “worker
state”. But did Marx advocate planning? He believed that competition would eventually
lead to concentration, as capitalism increases production and it’s ties to the
state increase production would fall to fewer and fewer larger firms. Freedom
of competition slowly erodes and changes into monopoly. The proposal was to
move towards state planning, but with worker control. All officials, without
exception, should perceive salaries at the level of ordinary “workman’s wages”,
while uniting the interests of the workers and the majority of the peasants, at
the same time serve as a bridge leading from capitalism to socialism. After
WW1, it was considered that a better way to organize society should be found to
combat famine. The ideal solution is a centralised production, methodically
organised in large units and, in the final analysis, the organization of the
world economy as a whole.
The Bolshevik Vision: “The communist way of
production presupposes not production for the market, but only for its own
needs. Not every individual produces for himself, but the entire gigantic
cooperative produces for all. We do not have commodities, only products, which
will not be exchanged, bought or sold. They will just go to joint warehouses
and be given to those who need them. In such conditions, money will not be
required. In a higher phase of communist society, division of labour would disappear,
becoming labour not only means of life but it’s prime want. From each according
to his ability, to each according to his needs!”. Consider that this was an
idealistic view of the future, and that socialism was a path towards this final
goal. We can now see clearly the difference between socialism and communism. In
a communistic society, money would disappear and people would work for the joy
of working. Communism was a dream, an utopian society which in it’s pure form
has never been applied, being the USSR actually a SOCIALIST country.
With the Bolsheviks revolution in October 1917,
private property was expropriated. Consider that staple food items were common
and the danger of famine was real. Small businesses, owners would be encouraged
to socialize voluntarily. Naturalisation of large-scale industry was primary,
as it allowed the formation of unions, which could be used to more easily plan
and direct the sectors centrally. Bank where nationalized as well, and in the
long term the idea was that only things in the plan would be allowed to produce.
Eventually they could slowly allowed money to dissolve by using non-cash
transactions for everything.
Lenin applied Five Year Plans for Centralised
Planning. The planned would provide scientific calculation about material,
financial and resource allocation based on industry. The plan should be analized
to study facts and figures, identifying mistakes and suggesting a remedy. One
of the challenges was how to maintain democracy under Centralised Planning. Democracy
within state enterprises was unworkable and one-man management had to be
introduced in order to guarantee efficiency. It was difficult to Plan the
Economy and take into account what individuals want. In the hope to abolish
money, inflation was ignored with the consequent destruction of the currency. A
“crude system of border” was introduced. Inequality persisted, even without
money, and people can become even more envious.
The industry was almost fully nationalized, and
increase in wages lead to shortage of machinery and manufactured goods.
Industrialization was the priority, so exceptional measures were introduced to
continue running the economy. The rise of Stalin saw a pseudo-dictatorial
state, which was a necessary evil to run a centrally planned economy. Decentralization
should have taken place in order to introduce democracy. The Workers Opposition
was always in favour of the party controlling the state, and thus the unions as
well. In order to maintain himself in power, Stalin became a tyrant eliminating
the opposition. Whether other leaders would have behaved differently than him,
it’s unclear. To manage a Centrally Planned Economy requires strong leadership,
and even if it starts with good intentions, it ends up in some sort of
dictatorship. Regardless of the everlasting intention of perpetuating the
Soviet Union as a ultra-left government, Right and Left also existed within it.
The programme of the Right was more market-friendly, more decentralized and
more democratic. Very clever, Stalin picked-up ideas both from the left and the
right and made them his own, in his goal to become the most powerful person in
the Soviet Union.
The German invasion of WW2 inflicted punishing blows to the economy of the Soviet Union, with Soviet GDP falling 34% between 1940 and 1942. Industrial output did not recover to its 1940 level for almost a decade. In 1961, a new redenominated Soviet ruble was issued. It maintained exchange parity with the Pound Sterling until the dissolution of the USSE in 1991. After a new leadership, headed by Leonid Brezhnev, had come to power, attempts were made to revitalize the economy through economic reform. Starting in 1965, enterprises and organizations were made to rely on economic methods of profitable production, rather than follow orders from the state administration. By 1970, the Soviet economy had reached its zenith and was estimated at about 60 percent of the size of the USA in terms of the estimated commodites (like steel and coal).
The German invasion of WW2 inflicted punishing blows to the economy of the Soviet Union, with Soviet GDP falling 34% between 1940 and 1942. Industrial output did not recover to its 1940 level for almost a decade. In 1961, a new redenominated Soviet ruble was issued. It maintained exchange parity with the Pound Sterling until the dissolution of the USSE in 1991. After a new leadership, headed by Leonid Brezhnev, had come to power, attempts were made to revitalize the economy through economic reform. Starting in 1965, enterprises and organizations were made to rely on economic methods of profitable production, rather than follow orders from the state administration. By 1970, the Soviet economy had reached its zenith and was estimated at about 60 percent of the size of the USA in terms of the estimated commodites (like steel and coal).
The Era of
Stagnation in the
mid-1970s was triggered by the Nixon Shock and aggravated by the war in Afghanistan in 1979 and led to a period of economic standstill
between 1979 and 1985. Soviet military buildup at the expense of domestic
development kept the USSR's GDP at the same level during the first half of the
1980s. The Soviet planned economy was not structured to respond
adequately to the demands of the complex modern economy it had helped to forge.
The massive quantities of goods produced often
did not meet the needs or tastes of consumers. The volume of decisions facing
planners in Moscow became overwhelming. The cumbersome
procedures for bureaucratic administration foreclosed the free communication
and flexible response required at the enterprise level for dealing with worker
alienation, innovation, customers, and suppliers. During 1975–85, corruption
and data fiddling became common practice among bureaucracy to report satisfied
targets and quotas thus entrenching the crisis.
One of the greatest strengths of Soviet economy
was its vast supplies of oil and gas; world oil prices quadrupled in the
1973-74, and rose again in 1979-1981, making the energy sector the chief driver
of the Soviet economy.
While all modernized economies were rapidly
moving to computerization after 1965, the USSR fell further and further behind.
Moscow's decision to copy the IBM 360 of 1965 proved a decisive mistake for it
locked scientists into an antiquated system they were unable to improve. They
had enormous difficulties in manufacturing the necessary chips reliably and in
quantity, in programming workable and efficient programs, in coordinating
entirely separate operations, and in providing support to computer users.
By 1970 the U.S. had 50 times as many computers as the USSR, which lagged in
most aspects of cutting-edge technology.
Many concepts can we sum-up as conclusion. The
Soviet Union was initially an agrarian society which, through Centralised
Planning, moved towards heavy industry much driven by it’s Oil & Gas sector,
after WW2. The Centrally Planned Economy forced a dictatorial leadership style,
which was also spread towards the organizational management. With equal salary
and no possibility to choose their career path, demotivated workers did not
help boost efficiency. Inflation, currency devaluations and shortage of goods
(or at least the inability to choose between different products), was quite
common. But, most importantly, the Centrally Planned Model hindred
entrepreneurship and technological development. In the long-run, the USSR
simply was left behind the Western Economies. No Apple, Google or IBM could
arise with heavy levels of government intervention. The model assured that
innovation could only take place in government facilities, and whatever influence
from private actors would easily be intervened by the government.
I am not against socialism (remember that
communism has never really existed), but it is a solution best applied to poor
countries. With all it’s downsides, it does provide a better solution to the
poor people in the short term. In the long term, only entrepreneurship and
technological development can secure wealth creation and distribution for
everyone. That is my humble opinion.
More to come, why “importing” economic models
has lead to failure and the disaster of “New Liberalism” policies in
Latinamerica.
Your friendly economist,
Cristian “Nash” Bøhnsdalen
Sources:
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