Why the Soviet Economy Failed
Brand, H.
The disintegration of the Soviet Union stemmed largely from the long decline of its economy. This decline undermined the role of the Communist party, which had been the central force in the...
...58 Joseph S. Berliner...
...It is remarkable that recent developments in the Soviet Union's industrial structure ran directly counter to those in the United States and elsewhere...
...their requirements were usually not considered by the planning agencies...
...Moreover, after 1987, enterprises were permitted to retain a large part of their profits, all or most of which had been previously appropriated by the state (in line with its command over the allocation of capital investments...
...It is true that the Soviet Union boasted more than four times as many degree engineers as the United States...
...Carstensen, eds...
...The decline of the Soviet economy cannot be reliably documented...
...the comparable enterprise in the Soviet Union averaged 2,608 in 1963...
...Alec Nove writes that in the 1970s, "it was hoped that greater effectiveness would be achieved by spending more on re-equipping existing factories than spending on totally new ones...
...20 Nove, System, op...
...8 Gregory Grossman, "Sub-Rosa Privatization and Marketization in the USSR...
...True, since the mid-1960s, attempts were made to make prices more responsive to efficiency in resource use, but the relevant reforms ". . . consisted in administrative manipulation and rules," that is, the inclusion in prices of markups for fixed and working capital, with only "limited results" achieved...
...190-1...
...that is, output per unit of input of labor, materials, and capital lessened steadily...
...SPRING • 1992 • 243 Spulber, op...
...The Soviet Union was until recently a totalitarian state, yet it sought to link its legitimacy with the socialist idea...
...It appears never to have occurred to the policymakers that repressing the sphere of consumption would in time result in the deterioration of productivity and thus constrict production, making the breakdown of the economy inevitable...
...The monopoly of the centralized supply agency (Gossnab) in allocating materials and equipment persisted...
...Infant mortality in the USSR: 25.1 per 1,000 live births...
...Users, say, of tractors had no choice but to accept delivery, even though this meant that the excess tractors would stand idle...
...The neglect of the Soviet transportation network, for example, is attributable largely to its not having been seen as directly "productive...
...But bureaucracies and monopolies have not ordinarily prevailed for an entire era of economic history...
...This model was defended as ideologically and materially appropriate well into the 1980s...
...These inputs are readily calculable...
...They include the following: • a steady decline in productivity—that is, output per unit of input of labor, capital, materials, and 242 • DISSENT fuel has kept shrinking over the past quarter century...
...In addition to the administrativeinstitutional reasons for excluding an objective standard of account and value from the planning system, there was the avoidance of consumer choice that true pricing would spell...
...Where they obtained them outside the law, their bribes made them even more dependent upon the arbitrariness of the authorities.' 2 As regards leaseholders, they remained subject to the directives of the state or collective farm from which they held their lease and to which they had to sell the larger part of their produce...
...It was not "someone" but "millions who steal and embezzle from the state or defraud it...
...45 The creation of overly large projects was essentially an outcome of the command economy...
...Furthermore, planning in the Soviet Union entirely disregarded the social and environmental costs of industry...
...cit., p. 126 ff...
...4 ' The priority of heavy industry in Soviet planning was not (so far as I know) originally justified as a foundation of military power...
...it was also to impress the world with Soviet industrial muscle...
...It sought to repress it by the controls inherent in the centralized planning system, by economic and political pressure, or by police measures...
...Among the limits imposed by the information load was the system's difficulty or inability to deal with changes (normally small and step-by-step) that occur at the factory level...
...That the attainment of these ends would depend on the participation of those affected by them was a key premise of socialist advocates of planning...
...large parts of it performed vital economic and administrative functions...
...The Weight of Dogma It is undeniable, nevertheless, that industrialization in the Soviet Union achieved a limited measure of success...
...9 In fact, enterprise management frequently steered its products to dealers in the shadow economy rather than into official channels...
...But observers have reported that the Soviet engineer's training and experience is narrower and levels of skill lower than his or her U.S...
...The question remains why success could not be sustained...
...36 See Alec Nove, The Soviet Economic System, third edition (Boston: Unwin, Hyman, 1988...
...The required enterprise autonomy and the learning processes such autonomy affords were lacking...
...But these controls were not to be "directives...
...48 Where, then, is the coherence one expects from economic planning...
...The third was to ensure the full utilization of the labor force...
...28, 83...
...44 John M. Blair, Economic Concentration, Structure, Behavior, and Public Policy (New York: Harcourt, Brace, 1972), 99...
...The Soviet bureaucracy abhorred all structural change as a threat to its position and privileges...
...We need hardly repeat that the precondition for all this—namely enterprise autonomy—was lacking in the Soviet Union...
...This did not happen to the desired extent, and we saw a decline in the already grossly inadequate rate of retirement of obsolete machinery...
...cit., p. 28...
...This was by no means a mere theoretical proposition...
...The wastage attributed to these and related deficiencies has been estimated at 25 percent of total agricultural output in the former Soviet Union, roughly equivalent to the amount of imported foodstuffs...
...The supplier cared only to fulfill the planning target...
...It disrupted supplies to intermediate or end users, causing production to drop, thus further disrupting the flow of distribution, now less easily bridged (if at all) by middlemen acting against or outside the law...
...44 American enterprises in the machine building and metalworking industries averaged seventy-four workers in 1958...
...beyond this, it involves the idea of socialism...
...There are many references to this problem...
...Asked why he would promote the failed British general whose troops had been defeated by the Japanese in Burma during World War II, Winston Churchill replied that it was not the failure but the quality of the effort that counted...
...by 1989, it had fallen to about 20, by 1990 to 10...
...The social conflicts that beset the Soviet Union manifested themselves in a degree of corruption that infected perhaps all strata of Soviet society, and that was associated chiefly with the never-ending shortages that the central planning system bred...
...That would facilitate capital accumulation in a capital-poor economy...
...The ruble is an instrument for the influence of the population upon economic plans, beginning with the quantity and quality of the objects of consumption," Leon Trotsky wrote in the mid-1930s...
...and Antony C. Sutton, Western Technology and Soviet Economic Development, 1945 to 1965 (Stanford: Hoover Institution Press, Stanford University, 1973...
...Operating with obsolete equipment is generally more wasteful of human labor, materials, and fuel than operating with its modernized replacement...
...18 The theory underlying centralized nonmarket planning and of the material balance system arose from the assumption that the disproporSPRING • 1992 • 235 tionalities inherent in the business cycles of capitalist economies could be overcome by applying "the principle of proportional functioning of the economy," which (according to Gosplan officials) central planning ensures...
...Planning historically embodied reason—reason as a moral value—and the ends for which it strove were inseparable from this value...
...Economic growth refers to the measured expansion in a nation's total output...
...There was never any thought of allowing participation by those affected by the planned targets, although enterprise management could attempt to bargain with the authorities...
...8 The enormous overhang of money since the late 1980s provided the incentive not only to illegally produce consumer goods that were scarce but to steal them from state enterprises...
...that could be enforced chiefly by suppressing the protest movements of working people and their advocates...
...Leaving aside the question of forced labor, which disappeared after Stalin's death in 1953, Soviet workers seemed to enjoy full employment...
...It also spelled the virtual elimination of inter-enterprise linkages unsupervised by the center...
...the perpetuation of a planning system that mandated physical quantities and volume as planning targets upon industry, construction, and agriculture, and proved unable to enforce norms of quality, unmanageable in a central planning system...
...Notwithstanding Bernstein and much other evidence, the closure or consolidation of smaller enterprises was in the Soviet Union pursued "ruthlessly" (the term is Trotsky's) after about 1924...
...Costs of the Command Structure Nor could perestroika bring about a fundamental change in the command structure of industry...
...143, 148 ff...
...Costs were not a constraint for either the supplier or the user, enterprise budgets being "soft," that is, deficits could be covered by frequently nonrepayable credits...
...5 The intensification of shortages has been attributed by some scholars to greater pull of demand arising from large earnings increases granted in the mid-eighties as part of a reform designed to enhance work incentives and raise productivity...
...Because they were financed in effect by printing more rubles, they added to liquidity, hence inflation...
...it was constrained not only by output targets but also by detailed specification of material use, product characteristics, and so on...
...plant maintenance, sanitation, and design...
...Their suppression facilitated central planning and the political control that went with it...
...6° U.S...
...They often stood to lose rather than to gain from innovation...
...It is characteristic of mobilizations that they draw mostly on existing technologies, exhaust resources, are heedless of long-term needs and social costs, and exact great human sacrifice...
...Nove, System, op...
...Efficiency is achieved to an extent by instituting economies: for example, by compelling fewer workers to produce the same output...
...Until recently, the official statistics indicated falling rates of economic growth rather than actual contraction...
...It gave priority to the construction and expansion of heavy industry—steel, coal, electrical generation and distribution, machinery, trucks, tractors, construction equipment...
...By contrast, in the Soviet Union, the "war economy" created the structures it required and gave them their permanence...
...Here, he held up the example of the German economy during World War I, which succeeded in supplying a large army and population in conditions of a two-front war...
...The intangible factors that composed productivity are estimated to have come to one-half or less the amount calculated for the American economy...
...Schumpeter has argued the impermanence of capitalist monopolies, their breachability...
...The Economy of the USSR...
...Between 1914 and 1937 when, according to John Blair, "the large plant was capturing the imagination of observers everywhere," average plant size measured in terms of employment declined in one third of the 204 industries for which comparable data were available...
...32 ibid...
...Whether leaseholds would be economically viable has been widely questioned...
...The relegation of health and educational services to "unproductive" status tended to justify, in the eyes of Soviet policy makers, their notorious underfinancing...
...In general, perestroika aimed to diffuse the system of centralized economic power, but it could not overcome the resistance of the bureaucratic-hierarchical structure...
...4 And it is even more strikingly evident from consumption standards, which were deliberately kept low so as to gain resources for capital investment...
...the control numbers were viewed as guides to the (essentially continued) relationship between enterprise and central plan...
...Furthermore, industrial innovations, unless specific to the establishment adopting them, cannot usually be pretested...
...It was adopted largely out of ideological motivations: Soviet industry was to overtake American capitalism, and thus demonstrate its superiority over the anarchy of the free market...
...cit., p. 125...
...The Law on State Enterprise, passed by the Supreme Soviet in mid-1987, exemplifies in its ambiguity the institutional obstacles to reform...
...For the late eighties, a downward trend has been confirmed by official Soviet sources as well as by CIA estimates...
...the dogmatism that informed Soviet economic policy led to dire consequences...
...However, leaseholds as conceived under perestroika would be unlikely even to begin to overcome, and might worsen, the low productivity in Soviet agriculture...
...Alec Nove cites a central regulation stipulating the norms for utilizing wire to bale hay on farms...
...The center's command over the economy lost effectiveness—not least because Gorbachev's "restrictions on ministerial powers were acSPRING • 1992 • 233 companied by an extraordinary cut in personnel," by close to one half.' The rise to prominence of the "shadow economy" —the black and gray markets—can only be explained in terms of the political demoralization of the center, a factor that deepened the crisis of the economy...
...One can trace at least some of the most serious problems of the Soviet economy, including lags in agricultural output, lags in automation of industrial processes and the use of computers, to the negative atmosphere created by the political authorities during the thirties...
...Presented to the Technology and National Security Subcommittee, Joint Economic Committee of Congress, 20 April 1990, Table C-4...
...Among lessons this economy can learn from monopoly capitalism is monopoly pricing, which the proletarian state could use as a form of taxation, charging dear for manufactures while buying cheap from the peasantry...
...The reform attempts have probably been rendered moot by the disappearance of the Soviet Union...
...but they persisted long after such backwardness had become a thing of the past...
...26 Such tasks as loading and unloading, shelving, feeding parts to machinery, long mechanized in Western industry, continued to be done by hand in the Soviet Union...
...16 In brief, the practice of central guidance endured although its scope was reduced somewhat...
...now they soared to unprecedented levels...
...43 L. Slomonski, op...
...The planning bureaucracy was averse to all diversity that threatened slippage of its control...
...Enterprise autonomy in this regard implies freedom to choose among suppliers on the basis of quality, promptness of service, and price...
...Direct links between customer and supplier would have derogated the center's powers to allocate resources...
...see also Aslund, op...
...Enterprises often overreported their output...
...The "state economy of the proletariat," Preobrazhensky wrote, has arisen in the global context of monopoly capitalism...
...cit., pp...
...In a market economy, the coherence and function of the division of labor are achieved socially by those networks, and economically by prices based on costs and validated by demand...
...Underlying these crisis manifestations was the failure of perestroika as an economic reform...
...Entrepreneurship in the Soviet Period . . . ," op...
...Perhaps the most important reason for inflation was that state prices remained fixed while prices on the black or gray markets, for exports, or for hard currency circulating domestically, were far higher...
...59 Ed A. Hewett, op...
...cit., p. 73...
...Gorbachev's Aims Some scholars have reproached Gorbachev with lacking the boldness to break radically with the command economy and institute a market...
...First of all, supply shortages worsened...
...No such reversal took place in the Soviet Union...
...A monopolistic pricing policy was also necessary because the capital gains available to early capitalism, which provided an important source of capital accumulation, were not available now...
...40 Nicolas Spulber, Restructuring the Soviet Economy: In Search of the Market (Ann Arbor: The University of Michigan Press, 1991), 56...
...16 Conert, op...
...That goes also for Gorbachev: he viewed as central the re-creation of Soviet industry on the basis of science and electronics and the upgrading of machinery and equipment to "world standards...
...leasing was to avoid the ticklish question of land ownership...
...2 In a study of the East European economies the CIA stated, "The region's poor performance can be attributed to a number of traditional factors— . . . declining labor and capital productivity, crumbling infrastructures, excessive bureaucratization, technological stagnation, and distorted incentives...
...n. 27, p. 145...
...But the objectives of the development of industrial technologies are as varied as the industries and production processes to which they are directed, and the markets their outputs serve...
...33 Adam Kaufman, "Small-scale Industry in the Soviet Union," Occasional Paper 80 (New York: National Bureau of Economic Research, 1962), 5. 34 Alex Nove, op...
...Alec Nove notes the great sacrifices that marked the Soviet industrialization drive...
...cit., p. 228...
...54 Innovations, the embodiment of technological and organizational changes, complicate planning, even vitiate it, because their effects elude prediction and depend on know-how the central planner can't assimilate...
...by three-fifths in construction...
...in OECD countries: 8.4...
...Moreover, management cannot be assured of receiving the appropriate supplies SPRING • 1992 • 241 that innovations may require...
...Once a certain organizational structure is decided upon for a certain enterprise, a statute is issued that requires all enterprises of that type to employ that structure...
...and the availability and proper array of skills and know-how internal to the innovating enterprise...
...The defense of this model reflects both the material interest of the party and its academic allies and their inflexible attachment to the dogma of "productiveness," by which perhaps the more conscientious among them rationalized their interests...
...and the coherence of such planning primarily derived—or was meant to derive—from the material balance system, consisting, for every major item of production, of estimates of supply needs balanced against estimated requirements, all in terms of physical (or volume) units, with allowances being made for underlying production technologies, composition of materials, etc...
...49 Edward F. Denison, Trends in American Economic Growth, 1929-1982 (Washington: The Brookings Institution, 1985), 111...
...In a sense, the administrative bureaucracy replaced what should have been the work of collective participants...
...38 Joseph Berliner, "Entrepreneurship in the Soviet Period: An Overview," in G. Guroff and F.V...
...This meant that deployment of the labor force was subject to the directives of the center just as material resources were...
...cit., p. 61...
...Perestroika was meant to restructure the economy along the following lines: to encourage cooperatives in services, distribution, and small manufacturing and to promote farm leaseholds (the letting of farmland to farmers for up to fifteen years...
...To approach problems in the spirit of reason has always been at the core of socialist thought...
...39 Ota Sik, op...
...The legitimacy of the party derived from its promise of social progress...
...The history of the Soviet Union renders these claims baseless, but they retain a powerful ideological influence—in an increasingly negative way...
...These inputs have been rising relative to the output they produce for a quarter century, perhaps more...
...and because users could not link up with suppliers other than those to which Gosplan and the ministries tied them, disequilibria became endemic to the system...
...35 ibid., p. 387...
...Gorbachev has stated that when "salt, sugar, flour, and many other goods that are not in short supply are continuously vanishing from the trade network . . . one automatically gets the idea that someone has a stake in maintaining shortages...
...48 ibid., p. 142...
...Government Printing Office, 1983), 122-124...
...247-249...
...56 A.S...
...Gorbachev's did have grandness of quality...
...23 Nove, System, op...
...and in agriculture, 70 percent...
...The integrative organs of the economy, articulated by the economic command hierarchy and the planning system they imposed, largely fell apart—albeit not the industrial enterprises on which they were based...
...But then the new measure was objected to by the customers using the pipe, whose own output was gauged by the weight of the installed materials...
...However, beginning in the late 1920s, there began purges of technical experts and denunciation of engineering personnel as "wreckers...
...cit., p. 158...
...Growth in the real national product or income hinges upon two kinds of increases: one consists of tangible or physical inputs, such as employment and hours worked...
...Thus, in the United States, the real national product rose at an average annual rate of 2.9 percent between 1929 and 1982...
...50 See the discussion and references in Ed A. Hewett, Reforming the Soviet Economy, op...
...the availability of labor displaced from large industry...
...to customers, to ascertain that their needs are more readily met than before...
...Central planning, however, leans toward uniform structures...
...Entrepreneurship in Imperial Russia and the Soviet Union (Princeton: Princeton University Press, 1983), 197...
...39 Finally, the Soviet bias toward heavy industry and extensive (resource-using rather than -saving) investment, the utter lack of balance between heavy and light industries, with the former allocated up to 90 percent of total manufacturing investment funds and the latter the pitiful remainder, again exemplifies Soviet conceptions of "productiveness...
...It takes 11 to 12 years . . . to carry out a construction project, in contrast to q- to 2 years everywhere else in the world...
...Spontaneity has long been regarded as a bad thing in Soviet history...
...56 Although many managers, technicians, and skilled workers emigrated after the Bolshevik revolution, many stayed, with the encouragement of Lenin...
...London: Penguin, 1989), 394...
...244 • DISSENT...
...in OECD countries: 71.6 and 78.0...
...cit., pp...
...Hansgeorg Conert, Die Oekonomie des unmoeglichen Sozialismus...
...The nodal point of centralized command structure was Gosplan...
...Diversity of structure and smallness of enterprise size have clearly fostered innovation...
...7 ibid., p. 196...
...So careful a student as Alec Nove early raised the question of Soviet economic growth's having stopped...
...37 Ota Sik, Plan and Markt im Sozialismus (Vienna: Fritz Molden, 1967), 90...
...cit., p. 405...
...and that was in large part responsible for the persistently low productivity levels of the Soviet work force...
...and the often ample availability of capital...
...45 ibid., p. 682...
...The more detailed the instructions or indicators, the less likely any deviation from the prescribed course of economic activity and the lower the "risk" of "spontaneity...
...the declining costs of materials and equipment that the very operation of large-scale industry brought about...
...The political center swiftly lost authority as democratic forces, opened up by glasnost and perestroika, asserted themselves...
...But that is the essence of market relations...
...cit., p. 197...
...The statement needs amending...
...The force with which the essential political ingredient of this crystallization would assert itself was unpredictable...
...Perestroika was an attempt to open Soviet institutions to the codetermination of the public and revitalized representative institutions...
...retained profits swelled by a factor of eight between 1985 and 1989, giving the enterprises great spending power...
...Princeton: Princeton University Press, 1978), 420...
...25 ibid., p. 88...
...One was the routinization of the tasks believed necessary to achieve 236 • DISSENT economic growth...
...Small Business Administration, The State of Small Business: A Report of The President (Washington: U.S...
...More strikingly, the defining of trade as "unproductive" in an economy where the household had long ago ceased to be self-sufficient led to a totally inadequate distribution system, which contributed to consumer goods shortages and low productivity...
...Its economic functions might be grouped into three categories...
...Insufficient production of plastics compels the use of fourteen to sixteen million tons more metal than would otherwise be called for...
...The system led ultimately to ruinous waste of resources and neglect of quality...
...The value of total Soviet output was not, or was not appropriately, adjusted for changes in prices...
...Needed raw materials or equipment or access to technologies were often unobtainable for them...
...But here, stringent capacity cutbacks of the least efficient operations as well as technological and organizational innovations (often to the detriment of the affected workers) in time reversed the trend...
...27 Alec Nove, History, op...
...Preobrazhensky explained this success as being due to the fusion between the capitalist state and the capitalist economy...
...How did this come about...
...The validity (or acceptance) of price relationships is premised on a monetary standard of value (or of account) whose stability, and whose reliability as medium of exchange, is ensured by appropriate financial policies...
...some of them even believed in The Second Socialist Revolution, the title of Tatyana Zaslayskaya's passionately argued work...
...A lighter, less material-consuming pipe was then developed, but it would have reduced output so measured...
...This underlay the ultimate ruin of the Soviet economy and the exhaustion of its working people...
...In this book, Preobrazhensky outlines the model of the industrial system that he called "socialist...
...22 But it was precisely such influence the planners sought to bar and the party never allowed...
...Birdzell, How The West Grew Rich: The Economic Transformation of the Industrial World (New York: Basic Books, 1985...
...jealous control of the economic planning monopoly and intolerance of autonomous actions by enterprise management...
...The pattern set in the 1930s has been termed "gigantomania," and the term was still used by Gorbachev in a speech he delivered in 1985...
...Since declining growth rates imply more and more idle capacity, the shortages should have been overcome and the earlier, more rapid rates sustained...
...Krise and Reform der sowjetischen Wirtschaft unter Gorbatschow (Crisis and Reform of the Soviet Economy under Gorbachev) (Muenster, Germany: Westfaelisches Dampfboot, 1990), 127...
...51 See Ronald Amann and Julian Cooper, Technical Progress and Soviet Economic Development (Oxford: Basil Blackwell, 1986...
...Between 1947 and 1963, a period of strong economic expansion, the number of manufacturing plants with 2,500 employees or more declined by 13 percent...
...counterpart's, at times even lower than those of a master mechanic...
...These factors, mostly due to advances in knowledge, are not calculable...
...The recent split -up of IBM into several autonomous design, production, and marketing divisions is a striking example of the "Schumpeterian" organizational behavior Berliner has in mind...
...5 Anders Aslund, Gorbachev's Struggle for Economic Reform (Ithaca: Cornell University Press, 1991), 183...
...13 ibid., p. 148...
...Bureaucracies exist in all modern states and industries without necessarily becoming insurmountable obstacles to progress...
...19 Quoted in Aslund, op...
...Summary and Recommendations (Washington: The World Bank), Appendix Table III...
...5° The material balance system and the command hierarchy that had created it stood as a barrier...
...They require links to suppliers to make sure of relevant delivery capacities...
...Sutton, op...
...9 ibid., p. 47...
...Waste and inefficiency have been ascribed to the "backwardness" of the labor resources available in the early days of Stalinist industrialization...
...a few examples will suffice...
...52 A.C...
...Although planning in the Soviet Union had some roots in a few undeveloped statements by Marx and Engels, its early model was the authoritarian wartime planning in Germany during World War I. Soviet planning was to be implemented by directives having the force of law...
...Monopoly capitalism, moreover, was conceived as a function of modern technology, which, so Lenin held, required the concentration of industrial and much agricultural production in a few giant establishments...
...57 Kendell E. Bailes, Technology and Society under Lenin and Stalin...
...And it prescribed ever more detailed planning targets...
...6 This led to empty shelves in state stores...
...the capital services rendered by the stock of machinery, equipment, and structures...
...Such Soviet giantism was inimical to the adoption of decentralizing technologies, such as are to be found in electronics, plastics products, computercontrolled manufacturing processes, and so on...
...We saw this in the adoption of "monopoly capitalism" as a kind of model for the Soviet economy...
...10 Nicolas Spulber, Restructuring the Soviet Economy: In Search of the Market (Ann Arbor: The University of Michigan Press, 1991), p. 220...
...These rates have been estimated to run to only about half of those in the United States...
...Zoltan J. Acs and David B. Audretsch, "Small Firms and Entrepreneurship: A Comparison Between West and East Countries" (Discussion Papers, University of Baltimore, August 1990), 32...
...More important in ensuring continuity of that relationship was the system of state orders also initiated under the new law, which captured virtually all the output of the state enterprises and in fact did not differ from the plans earlier imposed upon them.' 4 Finally, the enterprises remained subject to allocations of investment capital and material supplies—matters that belonged "entirely to the sphere of the command economy...
...1. The exclusion of a stable monetary standard obscured true costs and in part accounted for the ultimately unsustainable rise in inputs of capital, materials, and energy per unit of output...
...Also, the Soviet bureaucracy (along with its surviving republican counterparts) was more than just the parasitical power elite that Trotsky condemned...
...Furthermore, it seemed easier to plan for a small number of larger plants than for large numbers of smaller plants...
...33 Nor was efficiency the only reason for closing or consolidating small enterprises...
...However, this policy fueled inflation...
...That is evident from even such crude indicators as life expectancy and infant mortality, the one being much lower in the Soviet Union than in the OECD (Organization for Economic Cooperation and Development) countries, the other much higher...
...For Preobrazhensky, Bukharin, and Lenin, monopoly capitalism was no mere academic category...
...For democratic socialists, 232 • DISSENT planning historically has been thought of as dealing rationally with the blind forces of the market and of reconciling, to the extent possible, public and private interests...
...This had an inhibiting effect on technological innovation...
...15 ibid., p. 126...
...61 On the role of small enterprise, see also Nathan Rosenberg and L.E...
...Presented to, as in n. 2, May 16, 1990, p. 4. 4 Male and female life expectancy in the USSR: 64.2 and 73.3...
...We broach the subject because it will help us to examine the dysfunction of the centralized planning system...
...The "giantism" associated with scale had political and quasi-technical reasons...
...as well as insistence on the priority of heavy industry and an inability to diversify, and thus to modernize, Soviet industry, and with it the occupational structure of employment...
...diss., Columbia University, 1960), 71...
...38 Furthermore, the economic thinking that 238 • DISSENT evidently guided much of economic policy in the Soviet Union was often mistaken or wrong-headed...
...It left intact the disincentives to innovation that inhered in the quantitative target planning system...
...and by seven-tenths in agriculture...
...It was undertaken by leaders who had a more generous view of social possibilities than their predecessors...
...21 Spulber, op...
...Planning is facilitated, the enterprise's targets are more readily met and bonuses for "overfulfillment" of assigned targets more easily earned if long runs of standard products are ground out...
...15 The carrying out of the reforms was assigned to the various branch ministries, although Soviet commentators had offered devastating criticisms of their past work and attitudes...
...2° Reforms to move away from the imperative of physical balances and toward the use of economic levers (such as the ascription of value to physical inputs) essentially failed...
...41 ibid., p. 83...
...However, the law also provided that enterprise activity be based upon the state plan...
...42 In the 1930s and after, Soviet industries were created on a scale often far beyond the point of the lowest (most economical) cost per unit of output...
...Changing the output target measure to length and diameter was approved only after much wrangling with the bureaucracy...
...an inability to adopt, or adapt to, technologies and innovations that would make for more intensive uses of inputs, that is, that would save rather than expend inputs per unit of output...
...The Soviet bureaucracy's inability to carry out intensive economic development was caused in part by monopolistic industrial structures and by the destruction and subsequent intolerance of the horizontal relationships between autonomous business establishments, so basic to the spontaneous evolution of the social division of labor elsewhere...
...the constriction of industries supplying consumer goods and services, largely owing to an outmoded "productiveness" dogma that implied the priority of producing means of production, narrowly defined...
...and instrument and control manufacturing...
...32 The Bolsheviks, however, scorned such "revisionist" arguments...
...See also, Guy Standing, ed., In Search of Flexibility: The New Soviet Labour Market (Geneva: International Labour Organisation, 1991), essays by Y. Antosenkov, especially p. 64, and by A. Samorodov, especially p. 145...
...24 ibid...
...The Annals (January 1990), 44...
...Gloods are massively stolen...
...Equally important, Soviet economic thinking adhered to a notion of "productiveness" that was confined to the production of means of production and capital investment projects...
...47 Output per unit of capital input in Soviet industry dropped by more than one-third between 1960 and 1985...
...Thus, money was not a measure of value independent of administrative pricing decisions...
...29 E. Preobrazhensky, The New Economy (reprinted by Clarendon Press, Oxford, 1965), 127...
...it also included much double counting...
...The rates for agricultural output and labor productivity show similar trends for the two decades that ended in 1985.' Reported Soviet growth rates have been widely judged to be partly fictitious...
...In earlier decades, deficits had been minor—or were so reported—relative to the national income...
...a system predicated upon a rigid monopolistic structure of industry, consisting of mostly overlarge enterprises, all hierarchically tied to the center, unable to develop licit inter-enterprise ties and unable, furthermore, to rely on overlapping (nonexistent) networks of smaller firms as suppliers of goods, services, information, and spare capacity...
...55 There was also a disrupted tradition of innovation in Russia...
...but evidently, they were meant to get around the stiffly bureaucratic agricultural directorates, which resisted yielding autonomy to the farms under their control...
...66 6 6 4 [S]mall businesses are efficient performers of innovation . . . [and] contribute a disproportionately greater share of product innovation and bring these products to market faster than large business...
...The Soviet bureaucracy's class interest was tied to a rapid buildup of industry and military strength and to securing a stable social order...
...They conceived it to be immediately relevant to the formative phase of the Soviet economy...
...The technological backwardness of Soviet industry has been widely documented...
...It sought to substitute economic norms (that is, costs, prices, profits) for the physical quantities that had been assigned by Gosplan (the centralized planning agency) as output targets to state enterprises and to shift to them certain responsibilities from the industry-branch ministries...
...Small firms produce 2.5 times as many innovations as large firms, relative to the number of people employed...
...It was the deep revulsion against such pervasive corruption that moved people like Zaslayskaya to ally themselves with Gorbachev and his unsuccessful effort at restoring what they conceived to be socialism...
...Like no one else, Nove has analyzed the numerous deficiencies of the command economy, yet that these deficiencies would crystallize into large-scale failure he could not foresee...
...At any rate, the source of the much admired American efficiency was seen in America's "big" plants...
...All this was a misestimation of the capitalist economy as an industrial organization...
...Innovations may well cause slowdowns in production, owing to complications in dealing with the new learning curve...
...it is the opposite of control, and planning requires control," wrote Joseph Berliner...
...If general availability of foodstuffs in the Soviet Union was measured on a scale from 100 percent to zero, then in 1983 it stood at 90...
...an unwillingness to adopt a monetary nexus embodying a stable standard of account as a parameter of the planning system thus preventing any true judgment of relative values on the part of consumers and foreclosing rational calculation of input costs, thereby contributing to waste and excess of inputs and capital investment...
...A Summary In the former Soviet Union, all economic agents were controlled by the political center, closely identified with the Communist party of the Soviet Union (CPSU...
...An indication of technological backwardness is the low rate of retirement of obsolete industrial machinery, equipment, and structures that prevailed in the Soviet Union...
...but technological change, of which innovations are the vehicle, compels diversity of structure and introduces incalculable elements into the centralized planning on which the command structure of the Soviet economy depended...
...cit., p. 65...
...26 Ed A. Hewett, Reforming the Soviet Economy (Washington D.C.: The Brookings Institution, 1988), 91...
...17 These allowances, however, could not take account of myriad changes in technologies, work organization, production procedures, details in the composition of materials, and so on, which are normal where enterprises are autonomous...
...the remaining third was attributable to an improvement in productivity, with advances in knowledge judged to have been the most important factor...
...But gains in efficiency arise mostly from new or improved technologies, or from new ways of organizing work, plant layout, or delivery systems...
...Deep into the 1920s consumer goods output had depended vitally upon peasant households and handicrafts, but by the mid-1930s, "the Soviet Union became the only country in the world where the small independent producer of goods and services represented an insignificant segment of the economy...
...2 Alec Nove, An Economic History of the U.S.S.R...
...27 But the war economies of the Western states were superimposed upon economic structures that reasserted themselves once the war was over...
...the forced labor used to construct key infrastructure projects...
...the terrible violence against the peasantry that accompanied forced collectivization of agriculture...
...Central Intelligence Agency and Defense Intelligence Agency, The Soviet Economy Stumbles Badly in 1989...
...19 In fact, the material balance system was "an administrative-operational tool, designed to reshuffle resources between particular users in the light of priorities and bottlenecks...
...55 Joseph Berliner, The Innovation Decision in Soviet Industry (Cambridge: The MIT Press, 1976), 518...
...The greater emphasis he wanted to give to consumer goods output was a concession without a commitment...
...Aside from these reliability problems, the decline is puzzling in view of the pervasive shortages of goods and services...
...57 Joseph Berliner writes that "new combinations" must emerge to suit the requirements of new technological processes—new organizational setups, formed either by independent entrepreneurs or corporations...
...By contrast, in the OECD countries, the employment share of smaller manufacturing firms has been rising, even as manufacturing employment as a whole has receded...
...But there was a dark side here: full employment was possible largely because mechanization of manual labor was neglected in industry, where such labor accounted for 40 percent of the work force...
...it has no choice of supplier, which is made by its supervisory agency...
...Eduard Bernstein, an intellectual leader of German social democracy, basing himself on extensive data covering many countries, had already in 1899 argued the prevalence of smaller businesses, whose existence ran counter to the old Marxist theory of the inevitable concentration of capitalist production.m The continued viability of smaller firms, he wrote, arose from the following factors: the division of labor between them and larger, less flexible firms...
...cit., n. 44, p. 71...
...59 In the United States small firms contributed one half of the "salient" innovations in machine manufacturing...
...the smaller firms' ease of accessibility to consumers...
...22 Leon Trotsky, The Revolution Betrayed (New York: Pioneer Publishers, 1936), 76...
...cit., p. 48...
...cit., p. 24...
...However, Gorbachev viewed perestroika as a way to advance rather than to surrender his concept of socialism...
...That rate in fact had been falling over the previous twenty years, such that the service life of the Soviet stock of industrial capital averaged an estimated forty-seven years, compared to seventeen years for the United States...
...The Effects of Perestroika Before examining the Soviet economy's longterm decline, let us consider the crisis into which it led or, better, the crisis created by the reform efforts—perestroika...
...Here, his idea applies, but negatively: the Soviet bureaucracy and the monopolistic structures it composed were unbreachable...
...3 Enterprises could now devise their own annual and five-year plans...
...2. A more immediate cause for this authoritarian system's becoming a barrier to the development of the Soviet economy was its growing inability to absorb the information load that the innumerable input-output linkages of modern industry would impose on it...
...The causes of the Soviet economy's failure are rooted in policies, institutions, and dogmas tracing back sixty to seventy years...
...49 In the Soviet Union, even in years of vigorous economic growth (prior to about 1965), mainly "traditional" inputs fueled such growth...
...the values were not determined by the feedback that characterizes markets but were based on the very physical quantities they were supposed to replace, and which in effect continued to underlie the planning targets imposed upon the state enterprises . 2 ' We note three features of centralized planning and its material-balance method that contributed to the Soviet economy's decline...
...The development of military technology is linked to well-defined objectives whose effectiveness can be pretested...
...Alec Nove has written, "Most of the deformations of Soviet planning could be observed in the war economies of the Western states" (during World War II), and quotes Oskar Lange, the Polish economist, as describing the Stalinist economic system as a "war economy sui generis...
...For the study raises the question: how could sixty years of economic planning (the first five-year plan was introduced in 1929)—years that included a great war against an industrially superior foe, the creation of great industries and the deployment of a vast labor force, and the urbanization of what had been an overwhelmingly rural population —how could such achievements end in failure...
...Sources: International Monetary Fund, World Bank, and others...
...This decline undermined the role of the Communist party, which had been the central force in the country's political and economic structures...
...That is too simple a formulation...
...Reform in the context of the law meant the granting of autonomy to the state enterprise— the work collective was to decide all questions concerning the "development of production...
...In sum, innovative managers as well as workers risked partial nonfulfillment of the plan, and hence income loss and penalties...
...They would more or less perpetuate the farming of small inefficient plots conceded by Stalin in 1934 to a peasantry that had been beaten by collectivization in the early 1930s, and which subsequently cared little about the efficient operation of collectivized agriculture...
...The following example illustrates this: output of pipe was always measured in tons produced...
...The rural infrastructure (storage and refrigeration facilities, paved rural roads, and so on) remains profoundly deficient...
...28 Leon Trotsky, op...
...True, bureaucracies and monopolies in capitalist economies may retard that evolution—the know-how, innovation, spirit of initiative, diffusion of techniques that have marked the growth of modern economies...
...40 The Stalinist Model: Gigantomania Industrial expansion in the Soviet Union followed what has been termed the Stalinist model...
...Inasmuch as the rate of output growth in the Soviet Union was steadily diminishing, what the bureaucracy truly routinized was not output growth so much as a steady buildup of inputs, especially of capital equipment and construction projects, energy, and materials...
...Self-financing was now to be encouraged and reliance on (often) nonrepayable credits lessened—the beginnings of a "hard-budget constraint...
...47 N. Shmelev and V. Popov, The Turning Point (New York: Doubleday, 1989) 138-141...
...53 Shmelev and Popov, op...
...Perestroika meant to ease the dead 234 • DISSENT weight of bureaucracy and expand the reach of autonomous decisions...
...42 ibid., p. 76...
...Unlike earlier reforms, which also failed but did not lead to crisis, perestroika occurred in the context of a political liberalization that, with all its unquestionable benefits, fatally weakened the center's authority...
...To trace the roots of the Soviet bureaucracy's monopoly power, we must turn back to E. Preobrazhensky ' s The New Economy (1926...
...Here, a brief explanation concerning productivity...
...two-thirds of the rise originated in increased physical inputs, mainly employment...
...The intent of perestroika was to shift an increasing proportion of supply functions to wholesalers, but for this no substantial work force with the requisite training and service orientation was available...
...Efficiency subsumes intangible ways of saving labor, capital services, materials, and fuel per unit of output...
...3 Central Intelligence Agency, Eastern Europe: Long Road Ahead to Economic Wellbeing...
...12 Conert, op...
...Yet, in reality these efficiencies often stemmed from standardization, specialization, and from the linkages to suppliers and wholesalers with their own access to know-how and customer needs...
...cit., pp...
...23 Although some of the detailed rules were abandoned, the list of material utilization rules became longer over time, the aim being the reduction of waste inasmuch as in this setup economic incentives "in no way penalize waste and sometimes even reward it...
...It is true that declines in the rate of productivity advance also occurred in the United States and elsewhere after about 1970...
...But their productivity probably began to decline as early as thirty years ago...
...Striking examples of declining capital productivity are given by Soviet economists N. Shmelev and V. Popov in The Turning Point...
...Bureaucracy and Monopoly The Soviet bureaucracy has usually been regarded as the chief impediment to the economy's progress...
...The Economics of Infeasible Socialism...
...And there was an added pressure upon the "proletarian state" to pursue monopolization, which was that today's capitalist economy "stands arrayed in the full panoply of its fundamental advantages, which . . . make it impossible .. . for the socialist form to compete with it on a footing of equality...
...in construction, where 60 percent performed manual labor...
...43 But Soviet planners eschewed the horizontal linkages that smaller plants and subcontractors imply, since that would have meant the economy was escaping their control...
...Heavy industry was built in a manner profoundly wasteful...
...cit., p. 387...
...Efficiencies could be attained—as American consultants to the Soviet regime advised—in smaller plants and by means of subcontracting...
...the Soviet economy found itself in a permanent state of mobilization...
...The crucial importance of theft from the state for the Soviet underground cannot be overstated...
...I Grossman, op...
...31 Eduard Bernstein, Evolutionary Socialism (New York: Schocken Books), p. 59 ff...
...Soviet enterprise management was left little initiative to do so...
...24 3. The system bred not only indifference to change and improvements but resistance as well...
...Nor can the factors of decline be understood simply as "traditional...
...The nub of the problem was the continued suppression of horizontal, that is, interenterprise, direct supplier-customer linkages...
...In construction, "one fifth of the construction equipment stands idle, and for many years, 70 to 90 percent of the capital investment in construction has remained unfinished...
...the purges of the 1930s, which, according to a Soviet source, "caused an immense loss of economic cadres and disorganized the normal work of industry...
...cit., p. 127...
...50, #2, p. 65...
...In the Soviet Union, the central planning system as such existed above any monetary nexus, the ruble being used as a mere accounting device...
...Pre-revolutionary Russia had a record of significant innovations in a number of key industries, and by 1916 technology in many of these was on a par with world standards...
...For example, between 30 and 70 percent of the metal used in machine-tool manufacture in the Soviet Union was wasted as filings because of obsolete technology...
...It resisted decentralization...
...cit., p. 409...
...25 The system thus condemned itself to a kind of stasis with a gradual institutional and doctrinal disintegration...
...their magnitude, however, is 240 • DISSENT indicated by the difference in real value over time between physical inputs and outputs...
...cit., pp...
...54 ibid., p. 130...
...51 Military technologies and innovations were often on a par with those of the West...
...Although the number of cooperatives grew, the local economic directorates and Communist party organs interposed all manner of difficulties, often outlawing them altogether...
...consumer and producer goods had always been scarce, now their scarcity intensified...
...The development of an efficient agriculture, based on functional cooperatives (that is, selling, purchasing, credit), was seen as taking decades, and "in step with the preparation of the material and cultural conditions for it . . . "28 Hence, the exploitation of peasantry by way of the state's price policy had to be moderate...
...Industrial production was reported to have risen at an average annual rate of 8.5 percent during the five-year plan of 1966-70, but to have receded to 3.7 percent a year for 1981-85...
...Finally, no benefit may accrue to the enterprise if, as was likely, the increment in production that the innovation enables is incorporated in future production targets, without any change in allowed compensation...
...And it began to realign investment priorities in favor of consumer goods...
...46 Gregory Grossman, "Soviet Growth: Routine, Inertia, and Pressure," American Economic Review, vol...
...An Incoherent Economy Among the functions of the Soviet bureaucracy we listed the routinization of tasks necessary to promote the expansion of output—"year after year . . . from 5-year plan to 5-year plan," as one observer put it...
...Perhaps no socialist idea was more profoundly subverted by the Soviet regime than that of planning...
...We might reply with Gorbachev that "life" gave the answer: there was no coherence...
...statistical data are in dispute...
...Although the shadow economy was not a new phenomenon, "under Gorbachev (it) . . . increased markedly despite measures to suppress or to legalize it...
...A "war economy" is tantamount to mobilization...
...and materials and fuel...
...52 Yet, while weakness in industrial engineering is a proximate cause of a lack in innovation, it is the institutional impediments that prevented the Soviet engineer's native abilities from flourishing...
...29 The way to overcome these drawbacks—that is, the paucity of internal sources of capital and SPRING • 1992 • 237 the competitive external pressures from superior levels of technology —was to construe the individual Soviet enterprise as part of "the unified complex of the state economy," whose combined strength would back it up...
...Industrial reorganization in the Soviet Union since 1973 "was an attempt to concentrate power in the center of the decisionmaking hierarchy," resulting in a "massive merger movement...
...The question, as well as whatever answers one finds, addresses the fate of an entire people...
...14 Aslund, op...
...Soviet sources put the growth rate for the early 1980s at less than zero per capita...
...Another was to implement the planning targets set by the central authorities...
...17 Alec Nove, The Soviet Economic System, third edition (Boston: Unwin, Hyman, 1988), 23...
...Like the notion of monopoly capitalism, it derived from a simplistic perception of capitalist industrialism in the early twentieth century...
...30 Quoted in L. Slomonski, "The Scale of Soviet Industrial Establishment, 1928-1958: A Study in the Theory and Practice of Economic Planning" (Ph.D...
...Enterprise profit retention and lower taxation reduced state revenues, adding to the state deficit...
...6 ibid., p. 186...
...But the command economy that Stalin had built in the name of the party stymied the very progress, the very "forces of production" that were to be promoted...
...They were to operate within the ambit of economic controls, such as value of production, profit (or sales revenue), and so on...
...34 "Yet," Nove writes, "a great industry was built," and "the success of the Soviet Union, albeit by totalitarian and economically inefficient methods, in making itself the world's second industrial and military power is indisputable...
...3 This statement also largely fits the Soviet Union—largely, but not wholly: for there bureaucratization was not so much "excessive" as integral to the economic structure...
...The other variant is productivity—the efficiency with which physical inputs are transformed into output...
...They cannot be subjected to the commands of the planning bureaucracies because these bureaucracies are unable to master the necessary knowledge...
...It was part of the effort to outclass the United States...
...In the United States—and this bears on the dated view the Soviets had of American industry—plant size had actually been decreasSPRING • 1992 • 239 ing...
...It is of interest because together with Nicolai Bukharin, he was one of the two outstanding Soviet economists...
...Sutton, op...
Vol. 39 • April 1992 • No. 2
