By Francis Lee for the Saker Blog

Between 1989 and 1992 Soviet GDP per head fell by approximately 40 per cent. What happened?

The short century of the Soviet Union which began in 1917 reached its nemesis in 1989. The great experiment was, to all intents and purposes, over. Symbolically this was occasioned by the fall of the Berlin wall when huge crowds of East Germans simply strolled, unmolested by the Volkspolizei, into the western sector of the City. Moreover this historical watershed was to become highly infectious and led to a succession of Potemkin states in the rest of Eastern Europe going their own way (with a little encouragement from the west of course). These monumental events represented an unexpected application of the American ‘domino theory’.

It would be wrong, however, to understate the achievements of Soviet communism. No political/economic system is all bad; name one which is? Russia and its periphery were transformed from rural backwardness into an industrial and military super-power, albeit at a tremendous cost of civil wars and the great purges of the 1930s. That being said the modernization of the USSR enabled it to defeat the Wehrmacht in the Great Patriotic War 1941-45. In Winston Churchill’s words the Red Army had ‘torn the guts’ out of the once mighty German military machine in titanic battles most critical of which were Stalingrad and Kursk – but at a huge cost both economic and human.

On the more positive side the system introduced mass education and welfare systems which provided social security for its citizens. However, all this was achieved at a terrible cost in human lives, economic and social mayhem, including famine in the Ukraine, and absurd and inquisitorial show trials, and the mass destruction and near extinction of the country resulting from its ill-preparedness for war. But the USSR survived and counter-attacked.

As the Red Army went on the offensive and rolled forward into Eastern Europe after Kursk (1943) Soviet client regimes in eastern Europe were created in the Soviet image with the imposition of the Stalinist political and economic system. This was essentially a setting up of puppet states, but almost certainly a mistake as many of these regimes had been former enemies including Romania, Hungary and Slovakia who were integrated into the Soviet bloc with their own little marionette leaders such as Ceaucescu in Romania. Unfortunately, this was accompanied with an unprepossessing and macabre parody of the Great Terror of the 1930s ‘Yezhovschina’ – accompanied by the sinister pantomime of show trials and summary ‘liquidations’.

Moreover, armed insurrections against the regimes in both East Germany 1953 and Hungary 1956 were brutally suppressed. The system became a little more tolerant after the 1960s but never really lost its essentially totalitarian character. This was unquestionably a rigidly hierarchical society and, contrary to its claims, never in any sense egalitarian. However, unlike capitalism where power was in the hands of the owners of the means of production and their political apologists, power in these societies was concentrated in the state bureaucracy which included most importantly the communist party and the secret police.

It is in the nature of things that wherever societal scarcity exists – and this includes just about all societies – inequalities will arise. In this respect communism was no different to capitalism. The prominent East German dissident, Rudolf Bahro drew attention to this in 1978 as follows. ‘’ … Individual opportunity in our society – the DDR – is on the whole just as unequally distributed as in late capitalist society.’’ (1)

However it was the structural anomalies internal to the system rather than individual shortcomings of particular party officials such as Stalin and Ceaucescu, although these certainly played a key role. No, the problem was ultimately systemic, and it was this which eventuated in the final collapse. These internal structural weaknesses – which incidentally were just as applicable to capitalism and communism, given that the nature of these fault-lines and the dates were different – gave rise to inertia, and stagnation. The crisis became unavoidable.

This situation was in the fullness of time to become common knowledge as early as 1960. Disturbing reports from Soviet economists showed slowing rates of growth particularly in agriculture and manufacturing, in addition the poor quality of many goods and the most backward industry in the modern world. In particular there was criminal wastage in production ranging from timber to steel. Among the workforce there was widespread absenteeism and alienation. By 1980 the situation had reached critical levels. Gorbachov’s perestroika and Glasnost reforms were too little, too late, since by this time the entire system was beyond reform.

Various reasons have been put forward to explain this collapse. What gave rise to this systemic failure of communism and the command economy? The short answer was a lack of understanding of economic policy based upon a system of central planning and the role of the market mechanism. In a market economy price signals tells producers what, how, and when to produce. Take away this mechanism and decisions of these types are left to the planners. This is not to say that a market mechanism cannot be part of an integrated system of overall economic planning. Models of economic integration based upon markets and planning have been part of state-capitalist and social-democratic economic systems for at least a century and perhaps more. But the Gosplan model was characterised by the almost total exclusion of the market mechanism from economic policy. Instead of which various ministries were set up with a brief to oversee the establishment and implementation of what turned out to be policies with which none had any experience of the business end of economics whatsoever. Ministries responsible for the production of goods were not joined up to other ministries responsible for packaging, production and distribution. The situation was frankly amateurish, and the lack of overall coordination was built into the system from the outset.

Then there were also additional problems of accountability. These unwieldly and unresponsive bureaucracies, which were becoming increasingly parasitic and self-serving had little idea of what to produce and how much. In a market system a product which is shoddy will often fail as consumers turn to other producers to spend their hard-earned cash. In a command economy firms which do not deliver the goods go bust. But this was not a market economy; it was a centrally planned economy which could not go bust and there was insufficient incentive to maintain standards of excellence. In defence of a command economy it could be argued that it is good for producing T34 tanks, but the war was over and economic diversification was conspicuous by its absence.

Certainly efforts at quality control were attempted but none of them worked satisfactorily. Planners would specify a number of tractors to be produced by tonnage and the response of the local manager was to weld steel plates to each tractor as it moved off the assembly line. Tonnage quotas were thus being duly met and even over-fulfilled.

Given the distance between the planners and the local managers the imposition of production targets by the former tended always to be overoptimistic and politically driven. It became a pretend game. Everything was fine and dandy and nobody wanted to rock the boat. This was eerily similar to the current situation of western capitalism in 2008 and 2020. A much vaunted but totally overblown, western economic model – wholly deregulated, privatised and liberalised and based upon ‘pretend and extend’ gimmicks as well as other exotic variations of a Ponzi scheme whereby existing (record) debt levels are serviced by newer injections of debt.

But let’s get back to the USSR (courtesy) of the Beatles. This lack of economic realism was mirrored on the part of the local managers. These functionaries had a vested interest in keeping the production figures low and exaggerate the need for as much as possible in terms of resource allocation. So from the outset the information flow from managers to planners was invariably mendacious and distorted. Resources required would always be overstated, capacity underestimated and hoarded resources undeclared. This of course resulted in a gross misallocation of resources. Colossal waste was also a feature of this system since there was no incentive to reduce costs.

The system was to become ossified with the final nail in the coffin, being the Soviet economy’s inability to integrate the new technologies – which were just coming on stream in the 1970s and 1980s – into its production methods. A writer at the time noted that ‘’ … the most telling evidence of the command economy’s failure … was its inability to absorb and apply the latest developments in science and technology to the Soviet economy.’’ The book further quotes Gorbachov as saying: ‘‘At a time when the western countries started a large-scale restructuring of their economies with the emphasis on resource saving and the latest science and state-of-the-art technology, scientific progress slowed down (in the Soviet Union) mostly because the economy was not responsive to change.’’ (2)

This was hardly surprising given the universal nature of bureaucracy (the ‘Iron Cage’ as the great social theorist Max Weber 1864-1920 had called it) and its tendency toward routine and inertia. Like it or not this is a universal drift in the modern age. For those pursuing career paths within the organization, it became no longer a means to an end, but an end in itself. In sociological jargon this is known as ‘’goal displacement’’, This is explained as follows:

‘Initiative within a bureaucracy is always restricted and discouraged … not so much by getting the initiator into trouble … but rather by the experience of the fruitlessness of personal investment in any affair which oversteps one’s realm of competence. As far as careers are concerned … a progressive image is far more useful than any genuine activity, which disturbs the ‘’normal functioning’’ and may always be inconvenient, for whatever reason. The purpose of rivalry between employees who wish to get ahead can only ever be to present a ‘’positive appearance’’ to those above. The incentive to conform is thus built into the initiative mechanism from the outset … Bureaucracy, as the dominant form of management and work organization produces a specific human type of conservative mediocrity.’ (3)

By the 1980s the USSR was lagging badly behind the capitalist west in the development and application of computer technology, cybernetics, robotization, new energy sources, chemically-created construction materials, biotechnology and the like. Military spending was double that of the US from an economy half its size. What had become known was that ‘actually existing socialism’ was losing and eventually lost the economic cold war with western capitalism.

By 1990/91 the jig was up. The end of the Soviet system had sealed the initial, and I emphasise ‘’initial’’, triumph of globalization. The country was then thrown open to the vagaries of unrestricted competition both internal and external. The Soviet Union was fragmented into a number of smaller quasi-states with Russia being stripped of its industries. This involved the giving away of most massive of former state enterprises for pennies in the pound to ex-communist technocrats and secret service thugs. Russia was left with 70% of its economy in the hands of thirty-six corporations. That is to say, 36 men. It had been converted from a highly centralised public system into the most concentrated private sector of the world’s big economies. This was the beginning of the Yeltsin catastrophe: privatisation, liberalisation and free-trade became the new orthodoxy; about which the less said the better. It took Putin to stop the rot in 2000 but the struggle between the Atlantic integrationists and Eurasian Sovereignists – continues and is far from over.

The damage done during the Yeltsin period set back Russia and its economy to a semi-peripheral status. Trade policy became a case in point. It shouldn’t be a secret to anybody with a rudimentary understanding of international trade relations that when developed nations trade with developing nations most of the trade advantages accrue to the developed nations. This is due to the formers lower cost structures, higher levels of productivity, and comparative advantages in higher, value-added, research-intensive goods in the secondary product markets. However, the peripheral economies tend to produce primary goods – predominantly agriculture, raw materials, and plantation fruits.

As income rises expenditure on these income-inelastic primary goods stays static, or actually falls; contrariwise the demand for secondary goods, which are income-elastic – predominantly cars, computers, IPhones, etc. – rises in line with rises in incomes. From this it follows that primary exporting states need to sell more of their goods to developed states because the ‘Terms of Trade’ (see below fn 4) have a tendency to move in favour of the developed economies and against the developing states. It is argued that contemporary Russia is in international terms a semi-peripheral economy.

It has been particularly difficult for Russia to break out of this straight-jacket since Russian leaders have been seriously handicapped by the need to struggle against this internal corporate/criminal power structure. And it is a struggle which continues. Underdeveloped or semi-developed economies will not ascend the ladder of economic growth by relying on the production of primary goods. A policy of free-trade (actually there is no such thing, but let that pass) was rejected in the 19th century by the United States – under the influence of Alexander Hamilton, and in Germany by Friedrich List. The object of their mercantilist strategic trade policy was to catch up and pass Britain during the course of the 19th century, which they did. Russia would do well to note this.

Summing up: The development of the USSR so long as the economic goals were simple and could be calibrated quantitatively – tons of steel, kilowatts of electricity, or numbers of tractors produced – centralised planning worked relatively well. Alec Nove, probably the most objective analyst of the Soviet economy over the years said.

‘’Planning worked in those sectors to which the state gave priority and whose needs could easily be quantified. This applied first and foremost to armaments, but also to electrical energy, where the product is homogeneous and thus readily ‘plannable’. It also applied to the production of oil and gas, and to the construction of a network of pipelines. In each of these fields the Soviet Union made impressive gains.’’ (5)

However as the Soviet economy became more complex, as the number and variety of products expanded, and it became increasingly obliged to measure its performance against that of advanced capitalism the systems inherent limitations and negative aspects were revealed.

‘’The plan as it turned out, was not really a plan at all. Simply at the technical level the central apparatus had no way to process – let alone to absorb and evaluate – all the necessary information on resources, performance, transportation, warehousing, technology, consumer needs, and so on that would have to go into developing a realistic plan. (Since computers might have made at least the gathering and processing of such information possible, the fact that the Soviet planners never managed to ensure the full development and employment of computer technology is itself highly suggestive of the plans arbitrary character and the systems inherent inertia.) (6)

The Soviet Union and the other command economies stagnated and collapsed due to their general backwardness and involving inter alia the absence of any reliable method of resource allocation and quality control. The absence of the market mechanism in this respect left production and allocation decisions dependent on the subjective judgements of the planners as well as those nefarious semi-criminal activities cited above. This resulted in a misallocation of resources on a gigantic scale as well as inferior quality goods

However, it should be noted that the collapse of the command economies in Eastern Europe did not herald the beginning of any capitalist nirvana – quite the contrary. If anything the post-communist societies all experienced a catastrophic fall in production, living standards and most seriously of all depopulation. Some have now recovered but many are still worse off than before the fall of communism, and many are nostalgic for the old days of communist rule. The move from the command economy to the most extreme form of capitalism was in fact a jump out of the frying pan into the fire for some.

Thus by way of conclusion we may say that in contemporary society any viable economic system must include both planning and market/price mechanisms. Heeding the lessons of history it can clearly be discerned – unless we are ideologically blinkered – that both pure free markets (if they ever really existed) and command economies simply do not work in the narrower sense and record; the first because it is based upon totally unrealistic assumptions and works with timeless and purely formal categories of value, price and efficiency; these categories have little or no relation to the real world of actually existing capitalism, devoid as they are of any human or empirical dimensions; and the latter because it is simply too rigid and unresponsive to change and innovation which, because of its essential characteristics, it will tend to stifle and suffocate.

Markets are a good servant but a bad master. A system of regulated markets – this regulation being particularly rigorous in the case of financial markets – and economic planning are essential to any economic system since it is necessary to combine innovation and dynamism with stability and continuity. It is to be hoped perhaps some time in the future economists will remember these lessons when attempting to construct any social and economic orders.

(1) Rudolf Bahro – The Alternative in Eastern Europe – 1987

(2) Irwin Silber – Socialism: What Went Wrong? – 1996.

(3) Bahro – Ibid

(4) Terms of Trade. The main theory for the declining commodity terms of trade is known as the Prebisch-Singer thesis, after two development economists who explored its implications in the 1950s. They argued that there was and would continue to be a secular decline in the terms of trade of primary commodity exporters due to a combination of low income and price elasticities of demand. This decline would result in an ongoing transfer of income from poor to rich countries would only be combated only by the efforts to protect domestic manufacturing industries through a process that has become to be known as import substitution. But as well as this growth and modernisation can and has been achieved by export driven growth characteristic of East Asian countries. It could be argued that this problem of primary producing countries is not dissimilar to the position of Russia. It was argued that,

‘’After the Soviet Union collapsed, its former constituent republics embarked on the transition to capitalism. But this was not, and could not be, a transition to the highly developed capitalism of the global centre … within the framework of the world capitalist system, these newly converted states could only occupy a place in the backward and dependent periphery … The share in exports represented by products of manufacturing industry is very low … (Moreover) the data shows that the net outflow of private capital is a persistent tendency of the Russian economy. In the crisis of 2014-15, alone, it exceeded $210 billion. This huge amount could have been used to increased wages and investment and overcome the slump.’’ See Semi-Peripheral Russia and the Ukraine Crisis, Ruslan Dzarasov – Department of Political Economy, Plekhanov Russian University of Economics, Moscow.

(5) Abraham Brumberg – Chronicle of a Revolution – 1990 – p.54)

(6) Irwin Silber – Actually Existing Socialism – Socialism: What went wrong. pp,124/125 – Pluto Press 1994