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Index
Command or ''Planned'' Economies
A planned economy is one where the government, through a central planning body, takes responsibility for answering the "What, How and For whom" questions.
The degree of centralized control varies from economy to economy.
Socialism is a type of economic system that
allows private enterprise
and private property to exist in an economy, but also requires the state
to be a major producer and employer. Often, the state owned key industries
like communications, steel, transportation and medical care.
Communism, in its most ideal form, requires all decisions on
the allocation of resources and production to be made by a central planning
bureaucracy. Since the late 1980's, most centrally planned economies have
moved towards free market structures.
 Karl Marx, the philosopher and political leader who was revered as the founder of Communism, wanted governments to make decisions on production and distribution, so that everyone in a society received a fair share of the resources of the economy. Marx said "From each according to his ability, to each according to his need". |
 Vladimir Illych Lenin was the leader of the ''Bolsheviks'', a Russian revolutionary party and a disciple of Marx. He was determined to create a new state on a Marxist basis. Lenin's older brother was executed for engaging in ''revolutionary'' acts, by the Imperial Russian police, when Lenin was only a teenager. After the revolution of 1917, Lenin ordered the execution of the Czar and his family. |
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The Russian Revolution - 1917
| Lenin and the Bosheviks overthrew the Imperial Russian Czar Nicholas in 1917, with the assistance of Germany. Lenin immediately declared a truce with Germany, and Russia withdrew from World War I. |  |
| The war had been hugely unpopular, and Lenin's promise to the peasant
soldiers of the Russian army of ''Bread and land'' on their return
was irresistable. Lenin set about developing a new Russia. The new government was determined
to transform Russia into a modern, industrialised state.
(Video not linked). Video copyright the Marxism Leninism Project |
The Constitution of the new USSR made it very clear that production in the new economy was to be centrally determined :
Article IV of the Soviet constitution :andThe economic foundation of the USSR is the socialist system of economy and the socialist ownership of the instruments and means of production, firmly established as a result of the liquidation of the capitalist system of economy,the abolition of private ownership of the instruments and means of production, and the exploitation of man by man.
Article V :In the USSR, the government (which was in reality the Communist Party) developed "Five Year Plans" and made decisions on what goods and services would be produced.Socialist property in the USSR exists either in the form of state property (belonging to the whole people) or in the form of co-operative and collective farm property (property of collective farms, and property of collective societies).
Article XI :The government also set wage rates. If the priority of the Plan was to develop natural gas pipelines from Siberia, the weekly wage for a welder in Siberia would be set at a rate higher than that of a doctor. This would encourage workers to train and develop skills in areas the government saw as high need. The government provided "free" health care and education to all. People on low incomes were given ration vouchers or tickets, which could be used to purchase goods and services, if the person did not have enough money.The economic life of the USSR is determined and directed by the State National Economic Plan, with the aim of increasing public wealth, of steadily raising the material and cultural standards of the working people, and of consolidating the independance of the USSR and strengthening its defensive capacity.
Ideally, Communism wanted to replace "self-interest with social interest". Production would be determined on the basis of what was good for the whole community, not just for those who had high incomes or who were wealthy.
However, the central planners made many mistakes.
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Interdependency and ''Bottlenecks''
The first issue Soviet planners failed to comprehend was the simple
fact that the production of anything is dependent on the levels of production
of just about everything else. Any industry requires the outputs of other
industries - indeed, some of its own output as well - as its inputs. Outputs
of steel are inputs in the production of freight trains, which are used
to carry coal, and iron ore and the workers of the factories who transform
the inputs into steel, which is used to make freight trains.
Soviet planners soon found out they could not say ''increase the production
of steel by 10%'', and expect the steel to magically appear. All industries
were given targets, and allocated resources to reach these targets. To
increase steel production meant that targets in a whole range of other
industries and activities had to be altered, and additional resources allocated
to these areas of production.
Additional workers in steel production required additional capital;
buildings, factory equipment, raw materials as well as food, housing, schooling
for their children, doctors, electricity supply, water ... the list goes
on. What happens if not enough of just one input is supplied? Steel production
is handicapped and the target will not be met. The lack of one key input
that effectively stops all further production occuring is called a bottleneck.
Let's say a special rubber is needed for seals on conveyer belts in
the steel factories. What happens if you can not get this special rubber?
The steel can not be moved efficiently, and production has to be slowed
down. Production can not keep up with distribution. You have a ''bottleneck''.
Soviet factory managers tried to avoid bottlenecks by keeping reserve
stocks of scarce commodities and spare parts for machinery. However, this
''hoarding'' had effects on other factories, who soon complained they could
not get the inputs they needed.
Once the Five Year Plan was prepared, it was very difficult to change
the plan; the command economy was fundamentally rigid and unresponsive
to changes in circumstances and demand. By 1980 in the USSR, the targets
set in 1960 had only been 60% achieved. The Soviet system suffered
from economic arthritis.
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Tolkachi
The economic system of the USSR was almost impossible to reform from within.
Managers of Soviet factories were set production targets by the GOSPLAN
(State Planning Committee), and they had to apply to GOSSNAB
(State Committee on Material-Technical Supply) for raw materials and for
capital items used in production.
If a firm needed raw materials, it had to be sure it got enough to cover
any potential problems in production. All requests for items had to be sent
to GOSPLAN and GOSSNAB in Moscow. Of course, in such circumstances, delays in
the bureaucracy were lengthy. Firms did not over-order raw materials and capital
because production methods were always poor and waste was a way of life. Managers
of these firms would lose their jobs if they did not meet their quotas, and the
natural tendency to over-order. If a factory found it had more stocks of materials
or unused capital, it was not allowed to trade with other firms. Officially, that is.
Black markets for factory inputs soon arose, and factory managers bartered for
materials they needed. A ''special'' type of manager was required to engage in
illegal activities. These men were nicknamed ''tolkachi'' and they
were excellent ''white collar'' criminals, manipulating balance sheets and
selectively recording transactions, falsely recording prices and quantities.
Many of Russia's richest men today were former Communist Party
''tolkachi'', or ''dealers''.
In a free enterprise economy, a shortage in one area would have caused
prices to rise, and entrepreneurs would seize on the opportunity for profit
making. The goods needed would be produced; prices would rise, and production
of other goods in other areas may fall. In the Soviet system, prices were
not allowed to rise, and entrepreneurs were seen as exploiting the working
class. Soviet managers looked for excuses and someone else to blame,
and not solutions, because the best solution was to scrap the system. To
publicly express this opinion would lead to your sacking and imprisonment.
Who would speak out?
The Need for Competition
Another major mistake was to eliminate competition from the market
place. Why have several companies making light bulbs or cars or televisions?
These companies would waste money on advertising and fighting for a share
of the market. Surely it was better to have one single manufacturer of
a good?
What the planners did not understand was that competition created a
system of continuous quality control and technological improvement.
A single monopoly producer only had to reach a quota, or target level of
production - a quantity. For the producer, there was no financial penalty
if their light bulbs did not last as long as lightbulbs from free market
economies. Imports were banned, anyway, and if the light bulb filament
fused after a short time, the consumer would be forced to buy another.
The standard of living in the USSR gradually fell behind that enjoyed by
citizens of free enterprise economies, as inefficiency was allowed to continue.
In reality, inefficiency and poor work practices were rewarded. Why work
harder than you have to?
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The Rise of Stalin
A close associate of Lenin, Stalin took part in the October revolution
in 1917. He was a member of the revolutionary military council from
1920 to 1923 and general secretary of the Central Committee
of Communist party from 1922-53, the most powerful position in the Communist
Party. After Lenin' s death in 1924, Stalin established himself as a ruthless
dictator, responsible for the deaths of millions.
The Crisis in Soviet Agriculture
Actual levels of agricultural production in the USSR always lagged behind
the targets set in the national plans. From the 1930's, individual farms
were merged and collectivised into huge ''state farms'' called sovkhoz
and into ''collective farms'' or kolkhoz. Ordered by Josef
Stalin,
the farm owning class, or kulaks, resisted the state take over of
their assets. Millions were killed or sent into exile, in the terrible
years before World War II.
Workers on state farms were paid a wage. They were employees of the
state. Half of all farming land in the USSR was organised into state farms,
yet these farms only produced a quarter of the total output of the agricultural
sector. State farms were set production targets by the central planners,
and all production was transferred to the state. All these assets of a
state farm were owned by the state.
The central planners, frustrated at the poor performance of state farms,
allowed a new initiative, the ''collective farm'' to develop. On a collective
farm, groups of farmers (usually about four hundred families) were allowed
to own all the assets of the farm (such as machinery and livestock), except
the land itself. In theory, the farmers were given the freedom to grow
what crops they liked, and to determine how the crops would be produced.
All output, however, had to be sold to the state, at prices set by the
state. Just under half of all land was soon collectivised, and output increased
by over 50%, compared to the production levels achieved by state farms.
State farms still continued, especially in areas where key crops, like
wheat, were grown.
The State planners allowed peasant farmers to set aside small plots
of land for their own private production (and, it was assumed, private
consumption). These private plots of land, in total, comprised a tiny 3%
of total agricultural land in the USSR. Yet, these private plots soon produced
one
third of all agricultural output in the country.
The level of inefficiency here is breath taking. State farms covered
nearly half of all suitable land, and yet produced only a quarter of total
output. Private agriculture produced levels of output twenty times higher.
What was going on?
Put yourself in the shoes of a peasant farmer on a collective or state
farm. You have been set a target for production by a bureaucrat in Moscow,
who you probably have never met. You are told what to produce, and how
much to produce, and how to produce it. On a state farm, there is no incentive
to work hard; you are paid a wage, that does not depend on your level of
production. On a collective farm, things are slightly better; you can,
potentially, earn more, because the more you produce, the more you can
sell to the state. However, the government has set very low prices for
your production, because it wants consumers in the cities to have access
to cheap food. Again, what incentive is there to exert yourself?
After a day's work for ''Uncle Joe Stalin'', it's time to really go
to work; on your own private plot. Here, you produce high value commodities;
pigs, beef cattle, chickens for eggs and meat, milk cows, fruit and vegetables.
Most of this you and your family consume, yourselves. However, you may
have a small surplus. Soon, unofficial markets come into existance, and
producers and consumers meet, and settle prices according to the laws of
''supply and demand''. The central government is unhappy with the continuing
existance of ''free enterprise'', but there is little they can do. The
nation relies on the production of the private plots to feed itself.
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The Beginning of the End
The command economy of the USSR imploded (the opposite of ''exploded'')
in the 1990's for a variety of reasons. The first was due to the imperfect
nature of humanity. Lord Acton, a British parliamentarian said over two
hundred years ago, after observing the poor state of many European economies,
that ''Power corrupts, and absolute power corrupts, absolutely''.
In a command economy, someone has to give the orders. In the USSR's case,
power was held by the Communist Party alone. To be a member of the
government of the USSR, you had to be a member of the Communist Party.
You therefore had greater access to the resources of the USSR's economy
than non Party members. The Communist bureaucracy soon gathered
to itself more and more of the production of the economy than Marx would
have agreed to; after all, he said, production should be allocated according
to need. After World War II, production was soon allocated according
to greed. The Communist Party civil service soon enjoyed a standard
of living better than the general population. These people were scornfully
called apparatchiks (''parts of the ''appartus'', or ''system''),
and the nomenklatura (''the ''named class'', or those who ran the
system). Of course, you had to be careful who you talked to; criticising
the Communist Party or the Government (the two were synonymous, really)
could lead to your being imprisoned in a gulag or a prison for ''political
prisoners''.
Iosif Vissarionovich Dzhugashvili
(pronounced '' jue - gesh-
'vyel-yi") was born in 1979 in Georgia, a small state situated
between the Black Sea and the Caspian Sea, north of eastern Turkey
He died in 1953. Stalin as he called himself (his ''revolutionary
name means ''man of steel'') was one of the original supporters of Lenin,
and a founding member of the Bolshevik faction of the Russian Communist
Party. Stalin was repeatedly exiled for revolutionary activities in the
period 1904 - 1917, by the Imperial Secret Police.
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The ''apparatchiks'' soon allowed themselves access to imported goods from the West. These were sold in special department stores only open to the elite. Corruption and nepotism soon spread through all parts of the USSR society and economy. Inefficiency and waste became the norm. Since the elite could consume goods from the West, their standard of living rose, and the complaints of the average citizen were ignored, if any such person was courageous or foolhardy enough to criticise the system. In the 1970's, under Brezhnev, corruption was rife. After his death, power was passed on to a series of ineffectual leaders, and the USSR economy stagnated. |
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George Orwell in his masterpiece, Animal Farm, prophesised
the eventual destruction from within of the Soviet state, in the 1940's.
The book describes life on a farm when the animals rise up in revolt against
the farmer, and drive him away. The pigs, being the ''smartest'' farm animals,
soon become the leaders. Napoleon, the leader of the pigs (and a clear
representation of Stalin), soon begins to exploit the other farm animals.
The pigs take more and more of the farm's production for themselves, while at the same time exhorting the other animals to work even harder. |
Napoleon parodies Marx, when he says
''All animals are created equal; but some animals are created more equal than others.''Needless to say, Animal Farm was immediately banned in the USSR as soon as it was published.
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The boast of Krushchev, the USSR's leader in the
1950's and early 1960's, that the USSR would surpass the West in terms
of the quantity and quality of goods and services produced, was soon regarded
as a joke. And a rather humourless joke at that.
During Krushchev's time, one Russian joke that did circulate was this : in the West, under capitalism, man exploits man. In the USSR, under communism, it's completely the opposite. (That is ''man exploits man'', or, ''there is no difference at all'') |
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The Rise of Gorbachev
| In the 1980's, control of the Communist Party fell to Gorbachev. He soon introduced to new policies glasnost or ''openness'' and peristroika or ''restructuring''. Gorbachev allowed the USSR's media more freedom to criticise the weaknesses in the economy, so that managers of state run firms would feel the pressure of public opinion, and hopefully, improve the performance of the businesses they controlled. At the same time, he made state owned businesses more financially accountable, and allowed some of these to go bankrupt. More importantly, Gorbachev allowed small family run businesses to operate openly, in competition with state-run firms. |  |
| The USSR's economy was in bad shape; the annual Budget was never in balance. ''USSR'' meant ''Union of Soviet Socialist Republics''. The Communists had taken over control of the old imperial Russian empire, and vast areas of land in the east and south east. Only half of the USSR's population were ethnic Russians; the rest were a large number of ethnic minorities. In many of the states of the Union, there was a local ethnic majority, each with their own language and customs. |  Click on the map for greater detail |
These states were ''subsidised'' by the central government, as local taxation could not pay for all the services that were provided to the local people. Gorbachev cut Moscow's payments to many of these states, and gave them their independence. In this way, scarce resources to be concentrated on the smaller Commonwealth of Independent States or C.I.S., which now had an ethnic Russian majority.
Gorbachev hoped the new republics of Uzbekistan, Turkmenistan, Armenia, Georgia, and others would remain economically dependent on the CIS. Their independence would be political, rather than economic.
Gorbachev hoped that he could manage to restructure the USSR's economy, with having the Communist Party lose its monopoly control of the political process. However, it was just too little, too late. Perhaps Gorbachev's greatest achievement was to tell the governments of the Communist states of eastern Europe that, from now on, they could not look to the USSR for subsidies for their own economies. They would have to compete themselves for markets. Gorbachev also began withdrawing the massive Soviet military force from eastern Europe, and reduced the size of the army, in an attempt to release funds that could be used to encourage economic growth elsewhere in the civilian economy.
In East Germany, the Communist government was stunned. They had relied on the Soviet army to help crush any civilian unrest, and the USSR had been East Germany's biggest market. The East German people began demonstrating against their own (unelected) government, and demanded democracy and free speech. Gorbachev made a well publicised visit to East Berlin, and told Honecker, the Chairman of the East German Communist Party he was on his own. The USSR's military were leaving, and would not intervene in local issues. In an amazing week of demonstrations, the East German people began gathering around the Berlin Wall, and began chanting and organising in their hundreds of thousands, demanding the right to freely enter free market, democratic West Berlin. The East German border guards, realising the Communist Government was losing control, refused to fire on the demonstrators, who began to spontaneously tear down the wall with their bare hands, and anything else they could lay their hands on. When the wall came down, it was a symbol of the overthrow of the East German command economy. Watching the events on the television as they happened, I was overwhelmed by the emotion, and the demonstration of ''people power''.
The CIS economy continues to struggle along, the government heavily dependent on loans from western international bodies like the International Monetary Fund to provide the funds to pay for the restructuring of the economy. Foreign investment is encouraged; the leaders of the CIS know they need assistance for industry to become more innovative and efficient. However, the CIS suffers from high levels of unemployment. Inflation is expected to be 30% in 1999.
| Tranforming the command economy to a market based, free enterprise economy will take a long time. Meanwhile, income inequality continues to grow, as employees in bankrupt state owned firms can find little in the way of employment. The standard of living of the poor, and the elderly has fallen alarmingly, as the CIS government can not pay pensions, or continue to subsidise basic food, like bread. As prices move to reflect the true cost of production, pensions and other payments have not risen at all. Crime has escalated to alarming levels. |
Follow this link to see a Russian pensioner talk of her life since the collapse of the USSR. (From the World Bank - 1998)
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