Mankind has not succeeded in creating anything more efficient than a market economy.

            The "500 Days" Blueprint to Restructure the USSR (Adopted by the Parliament of the Russian Republic, September 1990)

The failure of central planning to "deliver the goods" for Soviet citizens has fomented experiments with market incentives and demands for political reform, punctuated in 1990 by declarations of independence from 13 of 15 of the USSR's republics. Nevertheless, central planning remains official policy, in part because of Soviet history.

History

The October Revolution of 1917 was led by V. I. Ulyanov (known as Lenin). Under Bolshevik communism, the Soviet economy floundered until the first Five Year Plan in 1929 under I. Djugashvili (known as Stalin). The Soviet economy averaged annual growth now estimated at 2 to 3 percent between 1929 and 1965, which is especially remarkable when the destruction of Soviet industry during World War II is taken into account.[1] Although Soviet economic growth has faltered in recent years, the distortions common under central planning make this early record even more impressive.

Central Planning

Most of American business detests the idea of central planning. Ironically, central planning resembles planning within many corporate giants, and central planning bureaucracies are similar to the hierarchies of giant corporations.

 

Central planning occurs when the government sets wages and prices and specifies output quotas in a detailed way.

 

Planning in business firms is geared to maximize profit, but if a government directly controls resources and ignores profits, how does it determine what, how, and for whom to produce? In large, diversified economies, coordinating production and distribution is incredibly difficult, but this has not prevented attempts at central planning in the USSR, China, and some of their satellites.

 

            Central planning requires detailed targets for every sector of the economy. After production quotas are set, the Soviet planning agency, Gosplan, must channel outputs across industries. For example, coal and iron ore are required for the steel industry to meet its quota. Chaotic coordination is common; production lines often sit idle while awaiting needed intermediate goods. After the central plan is set, "enterprise managers" are responsible for meeting quotas; their income now depends heavily on achieving these quotas. Quotas are set in specific success indicators such as number of units, product mix, weight, or value. Unfortunately, each indicator leads to a different type of distortion.

 

            Suppose you were in charge of nail production and your quota was set in tons of nails. What would be the easiest way to beat your quota? By weight, spikes are easier to produce than small nails. If your quota were in units of nails, you might produce lots of tacks. Length? Long skinny nails. Value? All nails would use only the costliest steel. The result is that consumers' needs have been poorly met. Gold-filigreed sewing machines that did not work resulted when quotas were set by value. Similarly, quotas for square feet of housing generate warped floors and cracked walls, and required units of clothing invite sloppy sewing on shoddy material. Former Premier Khrushchev cited a case when the chandelier quota was expressed in tons. You can imagine what happened. Many failures of central planning occupied warehouse space for years and finally became landfill.

 

            Why is similar gross misallocation relatively rare in market systems? The answer is that managers of capitalist firms know that profits require production to be cost efficient and to consist of goods that consumers demand. Otherwise, firms will go bankrupt.

 

            Why has the USSR relied on central planning? Ideology is a partial answer. Many Marxists view markets as evil and central planning as necessary. Another part of the answer is that top planning bureaucrats zealously guard their power. (In 1990, President Gorbachev's top economist, Nikolai Petrakov, labeled bureaucrats' antagonism to market reforms as "scorched earth policies.") But the strongest explanation is that the USSR grew slightly, despite central planning's inefficiencies, and used bloated statistics to claim even faster growth than that of more capitalistic countries. Ultimately, news media that crossed international borders made it obvious to Soviet citizens that their standards of living were falling further and further behind those enjoyed by people elsewhere. Table 1 compares historical growth in the Soviet economy with growth in some other major countries.

Table 1   Per Capita GNP for Selected Countries (in Billions of 1985 U.S. Dollars)

Per Capita GNP, 1985 U.S. Dollars

United States	$16,710
Sweden	10,600
France	9,280
United Kingdom	7,860
USSR	7,400
Yugoslavia	5,600
China	340

 

Per Capita GNP Growth for Selected Countries

                                1961--1965           1966--1970           1971--1975           1976--1980           1981--1985

United States	3.1	1.9	1.2	2.3	1.4
Sweden	4.5	3.5	2.2	1.0	1.6
France	4.5	4.5	3.2	2.8	.7
United Kingdom	2.5	2.0	2.0	1.7	1.3
USSR	3.1	3.9	2.1	1.4	1.1
Yugoslavia	N/A	N/A	3.5	4.8	.4
China	N/A	5.5	3.3	4.7	8.0

Source: CIA, Handbook of Economic Statistics, 1986.

           

Why did growth defy the handicaps of central planning? Most prices and wages are set within Gosplan. Setting high prices for consumer goods and holding wages down enabled planners to divert vast output to the military and heavy industry. It is paradoxical that surplus values extracted from workers were probably larger under central planning than they were in most capitalist economies. Massive military and investment spending severely depressed the living standards of most Soviet citizens.

 

            Soviet consumers now enjoy slightly larger pieces of a much larger pie because of these earlier sacrifices, but ignoring the forces of supply and demand has invariably meant shortages of many goods and surpluses of others. Moreover, because of time spent acquiring information about availability and then waiting, the real costs of most goods far exceed their ruble prices; even high prices and low wages have not shortened the lines for goods, lines in which most Soviet adults have spent almost 10 percent of their lives.

Stagnation

For more than seventy years, leaders of the USSR tried to justify the sacrifices of their people by threats of invasion from capitalist nations. This "external demon" theory allowed leaders from Lenin through Brezhnev to operate a costly police state. The desires of most Soviet consumers for a better life were ignored, while Communist Party officials, Olympic athletes, scientists, military officers, and high-ranking bureaucrats often lived luxuriously. For example, there are still fewer than three cars per 100 Soviet citizens, but in 1975, Premier Brezhnev, whose regime was infamous for nepotism and corruption, had a stable of 16 limousines, including a Cadillac, a Lincoln, a Mercedes Benz, and a Rolls-Royce.

 

            Orthodox Marxists view inflation and unemployment as diseases unique to capitalism. Consequently, Soviet inflation was hidden by long queues for goods, while every citizen was guaranteed a job. Political favoritism, however, often determined pay, promotions, and access to many goods that most workers in capitalist countries take for granted. This compounded the inefficiency of central planning and depressed many Soviet workers; drunkenness and loafing on the job became common because incentives for productivity were minimal. Soviet economic performance began to lag far behind that in most countries based on mixed capitalism. Marx's dream of a "withering away of the state" turned into a nightmare of rigid bureaucracy controlled by a small clique. Years of reasonable growth (1929--1965) deteriorated into stagnation and unmet Five Year Plans.

 

            Roberto Michels, an early sociologist, may have explained this bureaucratic inertia with an idea he termed the iron law of oligarchy. He observed that union leaders often used vertical hierarchies of underlings to protect their power, and that leaders' successors resembled themselves. He theorized that virtually all organizations from local PTAs to the United Nations follow this pattern. His theory clearly described most Soviet leaders until recently, with each generation of high-living bureaucrats being succeeded by another.

Faltering Reform

The economic morass created under central planning has unleashed powerful forces that may ultimately result in a Soviet economic structure similar to, for example, that in Germany, Sweden, or France. President Gorbachev's ascendance in 1985 brought a new generation to power. Under the banners of perestroika (economic and social reform) and glasnost ("openness"), these younger leaders began experimenting with market forces and political liberalization. For example, government by the Communist Party was a part of the Soviet constitution, but this monopoly was rescinded in 1990, and a multiparty election was held in the USSR for the first time in eight decades.

 

            Gorbachev's attempted sweeping reforms met with mixed success during his first five years in power. By 1991, production was grinding down because of uncertainty about the speed and precise direction of these reforms, and most of the 15 Soviet republics were demanding significant autonomy. A powerful backlash from entrenched officials and the military forced Gorbachev to try to slow the pace of change.

 

            Despite this recent reversal, reasonable long run predictions include democratization and massive privatization---the sale of state enterprises to private investors and market determination of wages and prices. Currency reform (e.g., international convertibility of the ruble) is also on the agenda. These predictions are based on the long-run effects of the expanding world economy and continued improvement in international flows of information. People everywhere try to emulate successful patterns. The failure of central planning is increasingly evident, and most of the Eastern European nations that have abandoned the system should soon experience increases in their rates of economic growth.

 

            Another source of pressure for reform is that technological gains to allow the USSR to compete economically requires free flows of information among industrial managers and researchers. Dictatorships cannot survive without secrecy, which is inconsistent with the information required to compete in the emerging global economy.

Convergence

The convergence hypothesis, first stated in the 1960s by a Soviet economist named Lieberman, suggests that capitalist economies will become increasingly socialistic, while centralized socialism increasingly will rely on market forces. Although growing regulation in the United States is sometimes cited as evidence for the convergence hypothesis, deregulation is also a strong trend. It appears that Lieberman's "convergence" is primarily in the direction of capitalism. Private markets are increasingly important in the USSR, despite crackdowns on "economic crime," which means illegally buying or selling things ranging from blue jeans to cars to industrial machinery. Without the grease of underground capitalism, the Soviet economy might grind to a halt. Our underground economy is probably tiny compared with Soviet underground markets, which have allowed a large number of ruble millionaires to buy their ways into the privileged life-styles of their country's ruling class.

 

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