The failures of capitalism are all around us: from the lack of any impetus from our market economy to meet the challenge of the burgeoning climate catastrophe, to the growing impoverishment in the system’s own most developed heartlands, to the grinding down of productivity growth in the last 15 years to almost zero in major Western economies. Under advanced, liberal capitalism, with pluralist democracy and the “rule of law” providing what ought to be the most perfect environment for it to flourish, the private enterprise system’s only recent economic success is the one which is bitterly predicted by its accusers – making rich people richer.
Yet the notion persists, even among people who are critical of the outcomes of capitalism, that it is socialism which doesn’t work – a notion based on the concepts and terminology of those who theorized the success and superiority of “free market” capitalism. Thus, for example, Branko Milanović, former Chief Economist at the World Bank, wrote in 2019:
[F]ollowing the Russian Revolution in 1917, capitalism shared the world with communism, which reigned in countries that together contained about one-third of the human population. Now, however, capitalism is the sole remaining mode of production […]
[T]he ineluctable truth is that capitalism is here to stay and has no competitor. Societies around the world have embraced the competitive and acquisitive spirit hardwired into capitalism, without which incomes decline, poverty increases, and technological progress slows. (Milanović, 2020a)
This is a charge which cannot merely be brushed aside; nor can its “exhibit number one”: the supposedly dreadful economic record of the Soviet Union and allied countries. If public ownership and state management tend intrinsically to inefficiency and stagnation, is the best that can be done not some light touch regulation and redistribution, together with some incentives to moderate the speed of our rush towards environmental calamity, while allowing the market the scope to “create wealth”? But that is indeed what we already have as the basis of policy in most Western countries.
Nor is this accusation deflected by saying of the Soviet experience, “that wasn’t really socialism” or “that was the wrong kind of socialism”. To such an argument, Milanović responded:
I think that this is a very wrong view. Whether “the really existing socialism” was 100% compatible with Marx cannot be taken as a criterion whereby we judge whether it was “socialism” or not. There is no doubt that its essential characteristics, non-private ownership of the means of production and centralization of economic decisions, were fully in accord with traditional, including Marx’s, conception of socialism. Furthermore, we do not deny that today’s capitalism is “capitalism” even if some libertarians or even Friedmanites might not think so because of (say) too strong role of the state, existence of trade unions or high taxes. Such absolutely “pure” theoretical constructs, whether we speak of capitalism, socialism or feudalism have never existed […] “really existing socialism” was indeed socialism. (Milanović, 2021)
Further, these were the societies which were created in places, from Russia, China, Vietnam, Central Asia, and Central Europe to Cuba, where the people who espoused communist and socialist views found themselves in a position to build a new economic system. Why should a repudiation of the economies that followed – accompanied by promises that a future socialist economy would be different in ways that would somehow solve the alleged intractable inefficiencies and drawbacks of the previously existing socialized systems – be taken at face value?
But there is plenty of evidence to counter the categorization of 20th-century socialism as an economic failure. The USSR (and communist-led allies) outpaced the Western bloc in GDP growth over the period of the “Soviet planning model”. As a RAND study noted: “The annual average growth rate of Soviet GNP since 1928 [up to 1985] is 4.2 percent. This clearly qualifies as a sustained growth record.” (Ofer, 1988). There is evidence also of innovation, efficiency, and meeting consumer needs – everything that socialized economies and industries are supposedly unable to do.
Growth, technology, and US power
Before going further, it is helpful to be clear about what economic growth is and how it can occur. Of basic importance is the inextricable connection between long-term economic growth and improvements in production technology. As a Harvard study group introduction puts it: “[T]echnology is the key driver of economic growth of countries, regions and cities. Technological progress allows for the more efficient production of more and better goods and services, which is what prosperity depends on” (Harvard University, 2022). The distinction between producing “more” and producing “better” takes us to the concepts of process innovation and product innovation. The former is the creation of new processes for making things; the latter is the production of new kinds of things or better versions of those things.
If we put aside for now such factors as an increase in the size or the working hours of the workforce, the discovery of new natural resources, or appropriation of income through financial structures, and also the ups and downs of capitalist booms and crises, currency markets, pandemics etc, then:
– Long-term economic growth essentially is the introduction and use of improved production technology.
– The gap between the rich developed countries and the poorer countries essentially is the gap in the level of production technology in general use in those countries.
Technology, in this context, means not only the machinery and processes used in producing goods and services, but the knowledge used to advance the process of production; this can be embodied in production equipment, or in “know-how”, for instance in understanding how to design or use such equipment. Technology can be developed in institutes but also arises from the day-to-day experience gained in advanced production processes; it can be held or transferred, in the form of designs, patents, technology licenses, etc.
Thus, a US government sub-committee, reporting on measures taken to prevent the USSR from gaining access to production methods used by Western civilian aircraft manufacturing corporations, explained:
The critical technology related to commercial aircraft and jet engines lies in the design, materials, and manufacturing processes, not in the end products […]
This know-how consists of various techniques for design integration, materials selection and processing, and manufacturing and assembly procedures critical for production. The product that results is not in itself critical technology but the result of a combination of processes constituting the know-how of the end product’s manufacturer. (Institute of Medicine et al., 1991)
So the important thing for that particular economic battle was not so much stopping the Soviet Union getting hold of advanced US or West European-made airplanes, but preventing the USSR from finding out how they were made (although the US authorities still obstructed the export of Western aircraft and components to the USSR).
Soviet manufacturers did become highly proficient at producing both civilian and military aircraft of a very good standard, but having to develop their technology in relative isolation from developments in the USA and Western Europe meant that more resources were required for this than would otherwise have been the case.
But was it the entrepreneurial spirit and spontaneity of liberal capitalism that gave the United States its technological lead in the first place? The US Government’s own researchers came to a more straightforward conclusion. As a US Congress report in 1981 stated:
America’s technological lead was largely attributable to two factors: it outspent most other countries in research and development and the wealth of technological “know-how” and equipment produced by U.S. R&D had remained resident in U.S. corporations. (International Security and Commerce Program, 1981)
That huge R&D spending (much of it in the public sector or from public funds), made possible because of the USA’s massive wealth and economies of scale, amounted, according to the USA’s own estimate, to a colossal 69% of world R&D expenditure in the year 1960. (By 2020, the proportion of global R&D spent by the USA had considerably reduced, but it still substantially outspent China.) (Sargent, 2022).
Nevertheless, the advancement of production technology is a global phenomenon; research and discovery thrives on interaction with the most advanced in the field. The advances which eventually made Western Europe and the USA the centers of the industrial revolution of the 19th century followed the gradual accumulation through trade, exploration, and military subjugation, of theoretical and practical discoveries which had been made elsewhere (to say nothing of the transfer of physical wealth via the slave trade, the robbery of gold and other resources, etc.). Decimal numbers and algebra, block and movable-type printing, gunpowder, the magnetic compass, the use of coal to smelt iron, the spinning machine – these indispensable precursors of Western technology were not Western inventions. Even today, US public and private sector R&D thrives on the input of highly skilled researchers recruited from all over the world.
However, the global contribution to the economic supremacy of the West is repaid mainly by further subjugation and underdevelopment, extensively through the US and Western hoarding of technology, or the disbursement of technological crumbs at high prices and with conditions attached. A paper by Helen Milner and Sondre Solstad confirms:
Research and development efforts are concentrated in a relatively small number of highly developed countries, which means that most countries most of the time rely on adopting technology from abroad.
Even for the OECD countries, most new technologies are obtained internationally rather than being internally developed; foreign sources account for 90% or more of technology-based productivity growth for most countries. Further:
Technology adoption is not costless or easy. International technology diffusion (ITD) is either direct (buying access to new technologies) or indirect (employing specialized and advanced intermediate products invented abroad). But the market for new technologies is plagued by problems due to asymmetric information and incentives to misrepresent technologies’ value. Firms try to monopolize the benefits of a technological advantage by keeping new technology secret […] A range of empirical evidence indicates that international technology transfers carry significant resource costs… (Milner & Solstad, 1988)
Whatever its economic system, and even had the Soviet Union not been emerging from a position of backwardness, it would still have been highly reliant on importing technology from industrially advanced countries, and would thus have been vulnerable to the long-term impact of technology sanctions.
Would any honest enquirer dream of examining the problems and progress of economic development in Cuba, Venezuela, or Iran without looking at the impact of the US-imposed sanctions (including technology export controls) on those countries? And now, pro-establishment Western journals are gleefully reporting on the impact which the USA’s extra-territorial technology sanctions are already having on Russia and even China, although they have only been imposed relatively recently, and although China had by the late 2010s already caught up with the USA in (purchasing power parity) GDP – although not of course in per capita production (e.g., The Economist, 2022).
In the case of the Soviet Union, however, the usual narratives regarding its economic development and its eventual slowdown have paid no attention whatsoever to this factor.
The origins of TINA
The basic core of the assertion of socialism’s unviability was set out by the influential 19th-century “social Darwinist” philosopher Herbert Spencer. It was he whose remarks were paraphrased by Margaret Thatcher into her notorious catchphrases “There is no alternative” (to free market capitalism) and “There is no such thing as society”.
A component of Spencer’s philosophy was his view that unfettered capitalism was useful in weeding out those who, he believed, are “worst fitted for existence” (thus he even opposed regulation of food and medicines, reasoning that the elimination of people who consumed poisonous products was a boon in terms of survival of the fittest). Universal suffrage and literacy having curtailed some of the former brutal honesty in pro-capitalist arguments, these views are nowadays something of an embarrassment.
But Spencer’s perspective later became the basis of the Austrian School of radical pro-capitalist economics (see Nuoscio, 2016); holding that laissez-faire capitalism is the natural order of society, whereas socialism would be artificial, imposing a stultifying bureaucracy instead of the spontaneous market; socialism and communism cannot work, because they run counter to man’s “natural” desire to acquire property. Spencer argued:
An argument fatal to the communist theory, is suggested by the fact, that a desire for property is one of the elements of our nature […] it is also true that no change in the state of society will alter its nature and its office. To whatever extent moderated, it must still be a desire for personal acquisition […] and this presupposes a right of private property, for by right we mean that which harmonizes with the human constitution as divinely ordained. (Spencer, 1851)
And Ludwig von Mises, the acknowledged founder of the Austrian School, asserted:
The situation is completely transformed when an undertaking is nationalized. The motive force disappears with the exclusion of the material interests of private individuals … it is now generally recognized that there is no internal pressure to reform and improvement of production in socialist undertakings, that they cannot be adjusted to the changing conditions of demand, and that in a word they are a dead limb in the economic organism. (Mises, 2012)
Prices, knowledge, and nonsense
The Austrian School economists of the 20th-century added two technical weapons to the armory of anti-socialist theory. One, the so-called “socialist calculation problem”, was devised by Mises: the proposition that, due to the lack of a market involving private ownership of the means of production (e.g., land, machines, and raw materials), a socialist economy cannot arrive at correct prices; thus, rational choices would be impossible under socialism.
Rejecting the labor theory of value or any other objective basis underlying prices, Mises asserted that free market prices are correct by definition, as they result from the compilation, via the market, of thousands of individual subjective preferences.
The claim that these capitalist prices are necessarily superior to a socialist calculation of costs (which could be based on factors including, for example, the hours of differently qualified labor involved, the utilization of raw materials of varying availability, the impact on the environment, etc.) is surely disputable. Certainly, the volatility and levels of prices under 21st-century capitalism for such items as housing and energy, and treatment in the US health sector, are hardly straightforward evidence for the rationality of prices under capitalism.
The second anti-socialist theoretical innovation was Friedrich von Hayek’s so-called “knowledge problem”. Hayek asserted that only the market could collate and process economic knowledge. In summary:
For Hayek, the ultimate flaw of socialism is the fact that knowledge, in particular “the knowledge of the particular circumstances of time and place,” exists only in a widely dispersed form as the personal possession of various individuals; hence, it is practically impossible to assemble and process all the actually existing knowledge within the mind of a single socialist central planner. (Hoppe, 1996)
A serious problem here is that any organization, including huge capitalist corporations, does plan its operations by assembling and processing the knowledge from its constituent units; thus, these and other institutions should be unable to function. This has been noticed by some on the left, for example, the authors of The People’s Republic of Walmart; and even by some within the anti-socialist Austrian School itself. Thus, the market fundamentalist economist, Hans-Hermann Hoppe, writes of Hayek’s theory:
[T]his is surely an absurd thesis. First, if the centralized use of knowledge is the problem, then it is difficult to explain why there are families, clubs, and firms, or why they do not face the very same problems as socialism. Families and firms also involve central planning. The family head and the owner of the firm also make plans which bind the use other people can make of their private knowledge […]
Every human organization, composed as it is of distinct individuals, constantly and unavoidably makes use of decentralized knowledge. In socialism, decentralized knowledge is utilized no less than in private firms or households. As in a firm, a central plan exists under socialism; and within the constraints of this plan, the socialist workers and the firm’s employees utilize their own decentralized knowledge of circumstances of time and place to implement and execute the plan […] within Hayek’s analytical framework, no difference between socialism and a private corporation exists. Hence, there can also be no more wrong with the former than with the latter.
From which Professor Hoppe concludes decisively: “Clearly, Hayek’s thesis regarding the central problem of socialism is nonsensical” (Hoppe, 1996).
Hayek’s theory is sometimes presented as being compatible with a planned economy performing strongly initially, but inevitably grinding to a halt as the range and complexity of economic processes increases, overwhelming the capacity of planners to deal with all the information. However, this version suffers from its own important problem: that, as a country’s economy (or the functions of a firm) becomes more complex, so does the technical means by which planners can integrate and process the information. As an agency with some relevant influence, it would have been odd if Gosplan (the USSR’s central planning agency) had not succeeded in acquiring computers for its own use, when they became available in the Soviet Union, and ensuring that Gosplan was a priority to receive more advanced equipment as this became available. Indeed, as Vladimir Kitov and Nikolay Krotov have recorded:
[I]n October 1959 the USSR Council of Ministers issued a decree on the creation of a Computer center of the USSR State Planning Committee (Gosplan of the USSR) for providing calculations of the economy and planning. This Computer center […] existed for over 30 years, until the collapse of the Soviet Union in 1991. It was the largest civil computer center in the USSR with the advanced powerful computers (for its time) to solve a variety of planning and economic management tasks. More than 1200 specialists worked in it. (Kitov & Krotov, 2017)
“Extensive” vs “intensive” growth, and free market “efficiency”
A related theory espousing the long-term unviability of socialism utilizes the concepts of extensive and intensive economic growth, positing that a state-managed economy can facilitate the former but not the latter. This is linked to the concept of “total factor productivity” (TFP) which denotes the additional output which, supposedly, is not accounted for by such mundane factors as labor and capital.
The economist and former Clinton presidential advisor, Professor Paul Krugman, based his 1994 article “The Myth of Asia’s Miracle” on this theory. As he recalled:
when Khrushchev pounded his shoe on the U.N. podium and declared, “We will bury you,” it was an economic rather than a military boast. It is therefore a shock to browse through, say, issues of [US establishment journal] Foreign Affairs from the mid 1950s through the early 1960s and discover that at least one article a year dealt with the implications of growing Soviet industrial might…
Illustrative of the tone of discussion was a 1957 article by Calvin B. Hoover […] Hoover criticized official Soviet statistics, arguing that they exaggerated the true growth rate. Nonetheless, he concluded that Soviet claims of astonishing achievement were fully justified…
These views were not considered outlandish at the time. On the contrary, the general image of Soviet central planning was that it might be brutal, and might not do a very good job of providing consumer goods, but that it was very effective at promoting industrial growth.
The thrust of Krugman’s article was to warn against the USA following the example of some Asian economies (his example was Singapore, describing it as “the economic twin of Stalin’s Soviet Union”) in using state planning to increase economic growth. Krugman argued that state-led expansion is unsustainable because it is based, “merely” on mobilizing more “inputs” to add to the production process – e.g., more labor, more education, more machinery.
Professor Krugman argued convincingly that there was no magic behind the industrial transformation of the USSR:
The immense Soviet efforts to mobilize economic resources were hardly news. Stalinist planners had moved millions of workers from farms to cities, pushed millions of women into the labor force and millions of men into longer hours, pursued massive programs of education, and above all plowed an ever-growing proportion of the country’s industrial output back into the construction of new factories. Still, the big surprise was that once one had taken the effects of these more or less measurable inputs into account, there was nothing left to explain. The most shocking thing about Soviet growth was its comprehensibility.
Krugman conceded that output per worker increased greatly in the USSR. But, in his view:
Increases in labor productivity, however, are not always caused by the increased efficiency of workers. Labor is only one of a number of inputs; workers may produce more, not because they are better managed or have more technological knowledge, but simply because they have better machinery. A man with a bulldozer can dig a ditch faster than one with only a shovel, but he is not more efficient; he just has more capital to work with…
Mere increases in inputs, without an increase in the efficiency with which those inputs are used – investing in more machinery and infrastructure – must run into diminishing returns; input-driven growth is inevitably limited. (Krugman, 1994)
This example illustrates the incoherence of the extensive vs intensive growth paradigm. Putting aside Krugman’s dismissal of the huge increase in the effectiveness of human labor by means of “simply” using better machinery; if better skills and better management would make that worker more proficient at using the bulldozer – or even at using a shovel – to provide that better knowledge and management would require the worker and the manager to have additional training; and training, as Krugman himself must concede, is an input.
And the bulldozer is not just more capital – a hundred more shovels would have been more capital, but that would not have resulted in any increase in production per worker.
Krugman was of course correct to assert that there is no mystery about economic growth in the USSR. But economic growth and “competitiveness” under capitalism is also “shockingly comprehensible”. Collaborative work involving huge inputs, mainly the investment of resources by large organizations, produces the bulk of new production methods and products. Beyond that, as experience testifies, employers and governments under capitalism improve “efficiency” by increasing working hours and the intensity of work, reducing worker protections, reducing job security and such costs as pension benefits.
There is also some validity in the parallel between development in the USSR and that of several US-allied countries in East Asia. The main development pattern of these “tiger” economies, which roughly followed the example of Japan, was the mobilization of high levels of industrial investment, coordinated by the state, using technology from abroad. For Singapore, South Korea, and Taiwan, the model involved central economic planning as well as extensive state ownership. But these countries had two crucial advantages which were emphatically not available to the Soviet Union. First, the USA happily supplied them with technology. Second, they could use their much lower wage levels as a means of becoming export-focused economies, acquiring market share in the West with very cheaply manufactured goods; income was then recycled into machinery to produce more sophisticated products, thus moving up the so-called “value chain”.
The high growth rates of the countries using this model slowed after trade union struggles and political factors began to close the gap between wages in these Asian economies and pay levels in the West; and tailed off further after global institutions started to insist on these countries privatizing their industries and ending central state planning.
The surprising efficiency of state-planned socialism
Other proponents of the inherent inefficiency of “centrally planned” socialism, for instance Alec Nove, are eclectic in their theoretical perspective, buttressing their positions with a plethora of anecdotal examples and accounts from the Soviet press to illustrate the inefficiency of that system. An example is the use of a satirical cartoon from the Soviet magazine Krokodil showing a single giant nail, too big to be actually used, produced by a factory which had thereby fulfilled its plan target that presumably had been specified only in tons (e.g., not in numbers of different types and dimensions of nails, etc.) (Nove, 1977: 94).
Seemingly escaping such harvesters of evidence for Soviet inefficiency is that these cartoons and critical Soviet media articles (published next to glowing reports of workers who had fulfilled or over-fulfilled the plan while producing high-quality products), by shaming the perpetrators of poor production, were aiming to create social pressure for workers and managers to strive towards both the spirit and the letter of the plan – rather than portraying these instances as representative of the generality of Soviet economic performance.
Another missing understanding is that the requirement to fulfill the plan target “on paper” was far from the only influence on managers in the USSR. The latter were responsible to the industrial ministries whose role was to build and coordinate their own economic sector to contribute to the overall development of the Soviet economy. And significantly, there was the role of the Communist Party, whose structures were active at factory level, politicizing the work unit’s contribution to the overall struggle for the victory of socialism, and keeping a watchful eye on production.
In fairness to Alec Nove, it must be said that, although influenced by perspectives hostile to socialism, he was far from being a pro-capitalist fundamentalist. He did not advocate the abolition of socialism in the USSR, but rather implementation of market reforms on the lines of those introduced in Hungary in 1968 (Nove, 1980: 14–15).
Of course, there were inefficiencies and glitches in the functioning of the 20th-century socialist economies. One of these was the prevalence of shortages, which related to the tendency in socialist societies to increase the amount of money in the consumer sector (e.g., by raising wages, pensions, etc.) faster than the rate of economic growth could provide for. But the existence of such problems is used to hold the former “actually existing socialism” against an illusory standard, that of the idealized market economy as represented in pro-capitalist theory, rather than that of the actually existing capitalist economies.
The counterpart of the shortages under socialism is the perennial inflation which is the norm, and sometimes gets out of control, in market economies. This is even without considering the “big picture” wastefulness of capitalism, ranging from the enforcement of poverty and denial of human development, the transaction costs resulting from the process of buying and selling, and the negative “externalities” of the operations of capitalist firms which have to be borne by society as a whole.
Running counter to these unrealistic comparisons is a study with the abstruse title, Can Neoclassical Economics Underpin the Reform of Centrally Planned Economies?, authored by Professor Peter Murrell. The article analyzed results from many studies on levels of efficiency in different sectors in various countries, capitalist and socialist. These results were so surprising that Professor Murrell felt obliged to remark that the data, although out of step with conventional understanding, could not be accused of being unreliable:
The consistency and tenor of the results will surprise many readers. I was, and am, surprised at the nature of these results. And given their inconsistency with received doctrines, there is a tendency to dismiss them on methodological grounds. However, such dismissal becomes increasingly hard when faced with a cumulation of consistent results from a variety of sources. (Murrell, 1991)
The evidence showed that, for a given level of technology, the planned socialist economies performed as well or better than the market capitalist economies.
As one summary of Murrell’s paper related:
First he reviewed eighteen studies of technical efficiency: the degree to which a firm produces at its own maximum technological level. Matching studies of centrally planned firms with studies that examined capitalist firms using the same methodologies, he compared the results. One paper, for example, found a 90% level of technical efficiency in capitalist firms; another using the same method found a 93% level in Soviet firms. The results continued in the same way: 84% versus 86%, 87% versus 95%, and so on.
Then Murrell examined studies of allocative efficiency: the degree to which inputs are allocated among firms in a way that maximizes total output. One paper found that a fully optimal reallocation of inputs would increase total Soviet output by only 3%–4%. Another found that raising Soviet efficiency to US standards would increase its GNP by all of 2%. A third produced a range of estimates as low as 1.5%… (Ackerman, 2012)
An exception to the very creditable performance noted among the socialist countries was Hungary, with an allocative efficiency 20% below that of West Germany. But, as Murrell remarks, “Hungarian allocative efficiency decreased after the decentralizing reforms of 1968.” Thus, the study provided no evidence – rather the reverse – for the idea that reducing the scope of planning and increasing that of markets is a more efficient way of running socialism.
The example of Yugoslavia is also instructive, particularly with regard to the idea that an increased role for markets, combined with workplace democracy, is a better way forward than central planning. Initially implementing a socialist planning system after the end of World War II, Yugoslavia subsequently began amending it with market mechanisms, combined with democratic control over industrial decision-making at factory level.
Following serious political disagreements between Yugoslavia’s leader, Josip Tito, and the leadership of the USSR, the USA encouraged this division by providing Yugoslavia with technology and trade opportunities that were denied to the Soviet Union, hence Yugoslavia initially achieved very high rates of economic growth. But as time went on and more reforms were introduced, the country was overtaken by economic turbulence, growing regional disparities, and mass unemployment. In the 1970s, inflation began to take hold, gathering pace into hyperinflation by the late 1980s.
As noted by Branko Milanović, the interaction between worker control and markets, in the context of a mainly publicly owned economy, particularly the tension between (democratically decided) wage levels, employment levels, and investment in machinery, had led to some very serious problems (Milanović, 2020b).
USSR plc
With regard to the Soviet Union, the challenge facing the communists in the early period of the new socialist state was considerable. The vast majority of the population were peasants, employing primitive tools to eke out a living. The Russian Empire’s 70% adult illiteracy rate in the early 20th century can be compared to the 5% found by the US census of 1910 and to estimates of under 10% for Japan. Such industry as there had been before the revolution was largely foreign-owned – and it had since been mostly destroyed in the years of civil war and incursions by British, German, French, US, and Japanese troops.
The aim of the Soviet Communist Party from the 1920s onwards was to overcome underdevelopment and to create socialism, which was considered to be the first stage of communist society. It was with both these aspects in mind that the Soviet communists developed a system in which resources were allocated on the basis of a unified plan, rather than by market forces.
The economy of the USSR has been likened to the operations of a single firm, as by Philip Hanson:
The basic institutions of the Soviet Economic system took shape in the First Five Year Plan (1928/29–32). Subsequent modifications were numerous, but not substantial. Basically, the whole economy was run like a single giant corporation – USSR Inc. As corporations go, USSR Inc was of exceptional workforce size and was a conglomerate with the most extreme range of activities, yet it was run in a more centralised way than most. (Hanson, 2003: 9)
Industries in the Soviet Union were run directly by government ministries on the basis of overall plans developed by the state planning commission, known as Gosplan. According to Hanson, the instructions to each enterprise leadership included directions on a range of matters including:
The product mix: what to produce and in what proportions;
Output targets;
Who will supply the enterprise, with what and how much;
A labor plan: how many workers and the total wage bill;
Who are the customers and what they should each be provided with;
The prices of inputs and outputs;
An investment plan, for replacing and modernizing equipment.
Hanson’s analogy has validity – these are not too different from the kind of instructions which the head office of a capitalist industrial firm issues to its factories and offices. But as distinct from capitalism, the relationships between the enterprises and between the sectors of the economy were coordinated by agencies of the state. Despite the phrase “central planning”, the center determined the overall proportions for the growth of different sectors of the economy as well as targets for key products, with many other decisions delegated and decentralized to ministry and enterprise level.
The Soviet system reduced money and the process of buying and selling to subordinate roles. There was no market in the “means of production”, e.g., machinery, factories, land, etc. Workers received wages for their work, comprised of piece rates or time rates dependent on occupation, and bonuses for fulfilling targets. They purchased consumer goods with this money; but consumption of most services and many goods was not regulated by price. Alongside free education and healthcare, housing and many other services were charged at nominal fees; food in the factory canteens and in later decades in the shops was heavily subsidized.
Industrial products also had monetary values assigned to them, and banking and accounting systems were used to control the movement of goods between enterprises and to incentivize efficient production. However, for most operations, material resources were assigned directly to and between enterprises. The planning process involved communication and negotiation with the country’s leadership and with the workers and wider population (often taking the form of mass meetings); with the planners and ministry officials using their technical expertise to assess the estimates and requests provided by enterprise managers.
During the 1930s, and again in the 1950s, following reconstruction from the appalling destruction of World War II, the results obtained while using this system were phenomenal.
Technology transfer
The planning of industrial growth can be conceived of as bringing together three sources of increasing wealth: human labor power, natural resources, and technology. In the Soviet Union, ample reserves of the first two of these existed within the country. Millions of workers would migrate from the countryside to build and staff the new industries. However, due to the mechanization of farming, the reduced numbers still employed in agriculture were subsequently able to feed the cities and the rural areas.
The USSR was abundant in the necessary mineral resources, including coal, oil, and iron ore – if only they could be got out of the ground. The limiting factor was the up-to-date production knowledge and the embodiment of that knowledge in modern plant and machinery.
The Soviet state therefore endeavored to gain access to the world’s most advanced technology, held in the USA and Western Europe, with special efforts to acquire it from the USA, which since the late 19th century, had taken over from Britain as the world’s leader in advanced production methods.
Soviet emissaries were sent to buy machinery from abroad, purchase licenses to make machinery of foreign design, and to hire firms and experts from the advanced capitalist countries. According to Steven Kotkin:
The list of capitalist firms which built Stalin’s industrialized Soviet Union is a who’s who of the most famous and advanced capitalist firms of the 20th Century. It includes not only American ones, but Italians and Germans, etcetera. Later on they would be embarrassed by this collaboration and remove this episode from their company histories, which were produced in the Cold War period after 1945.
A fall in the world price of grain (the USSR’s biggest export at the time) put the Soviet Union at a trading disadvantage; but this was balanced by the reduced opportunities for Western firms following the 1929 crash, making the USSR a very valuable customer. Operating as a single large entity rather than a collection of competing companies allowed the USSR to negotiate from a relatively strong position:
If they would sell, for example, an entire steel plant from the blast furnaces all the way through to the finished rolled steel and the rails that were produced, it was often the case that the Soviets would pay only for one plant. Then, they would take the drawings and the technology, which was for that one plant, and reproduce it somewhere else, having paid only for one. So, they would get three or four or five steel plants for the price of one […] the American firm was afraid the German firm would get the contract and the Soviets were playing off one capitalist firm against another. (Kotkin, 1999)
Soviet engineers did not merely reproduce the foreign technology. In 1928 a delegation of Soviet engineers visited the Ford plant in Detroit; soon afterwards the Soviet Government approved a plan to construct what would become the Gorky Automotive Works (GAZ). But after gaining experience in building vehicles, the Soviet specialists developed new models suited to local conditions. The M-1 automobile, for instance, was significantly modified from the US design, with changes to the engine, chassis, and wheels to suit the rougher local conditions (Chanaron, 2003).
The Soviet Union was also able to make use of the services of Albert Kahn Inc, the USA’s most prominent industrial architecture firm. Unlike some other companies, the firm did not conceal its role in the emergence of the USSR as an industrial power. The company’s official history recorded:
The impact of Kahn’s work reached far outside the U.S. During the Great Depression, Kahn’s firm assisted the Soviet government in its massive industrialization effort. Between 1930 and 1932, the firm’s office in Moscow helped train more than 1,000 engineers and built 521 factories. (Kahn, 2005)
Also among the thousands of American and other foreign experts who came to the USSR to live and work in the early 1930s was Colonel Hugh L. Cooper, the famous US dam builder, who personally supervised the construction of the largest hydroelectric installation in the world at Dneprostroi in Ukraine.
Thus, the Soviet communists, while part of a worldwide political movement which aimed to replace capitalism with socialism, engaged with the biggest capitalist firms and with specialists from capitalist countries, organizing not just the import of technology but the assimilation of the new knowledge as the basis for making their own innovations.
This mass technology transfer was trade, not aid; it was paid for by the export of grain, minerals, and other basic commodities. Notably, there was nothing unusual at that time about a firm commercially engaging with a nation that was in disagreement or rivalry with the government of the country where that firm is based. For example, most of the machine tools and parts bought by the Mitsubishi Aircraft Company between 1936 and 1940 had been supplied by US firms; and US-owned companies were active in Germany up to and even during World War II.
Material prosperity
Western accounts of the changes in the USSR in the late 1920s and 1930s emphasize the extreme hardships of the period. In 1932, two years after most farms in the USSR had been collectivized, there was a poor harvest leading to a famine in much of the countryside. For the millions who moved to work in the cities and the new industrial centers, conditions were very basic, particularly in the early years. It was usual for two or more families to share a small flat, and many workers were accommodated in barrack-like hostels.
But by the late 1930s, a major improvement in the standard of living in the urban areas had taken place. The emphasis on producing industrial machinery led rapidly to increases in the output of the consumer goods sector. The production of manufactured consumer goods in the USSR (including clothing, shoes, clocks, watches, phonographs, radios, and bicycles) increased by 79% between 1928 and 1937. In concluding a detailed paper which applies modern statistical analysis to material from the Soviet archives, the Canadian researcher, Robert C. Allen, remarks:
The dominant interpretation of Soviet industrialisation maintains that the average standard of living fell in the 1930s. However, when the most recent evidence and theory are used to measure per capita consumption, they show that it increased 22% between 1928 and 1938. This was exceptionally rapid growth – not abject failure. (Allen, 1997)
Allen adds that this rise in material prosperity does not necessarily prove that the quality of life in the USSR was getting better, because of the negative aspects of life in the Soviet Union at the time – for instance the high level of political repression. However, the picture is not balanced unless the changes in the cultural conditions of the people are also considered. William Mandel, the son of an American engineer working in Moscow in the early 1930s, gives some impression of the transformation which was taking place in Russia at that time:
After some months of private tutoring in the Russian language, I enrolled at the University to study biochemistry. My fellow students were, with one exception, the children of labouring people and peasants who would never have dreamed of this opportunity under the [Tsarist] empire […]
After a long, hard day at the University they would pile into open trucks, go to construction sites, and teach illiterate working men and women how to read and write. The working people were grateful for this. They would put in extra hours, quite voluntarily, because to them socialism was not a theory but a very practical thing: steady jobs, education, opportunity for advancement, free doctors, open doors for women and minorities. Thirty years later, I visited one of the plants that had been under construction in 1932 and found that the management consisted of some of the same people my fellow students had taught their alphabet. (Mandel, 1965)
Between 1926 and 1939 the literacy rate in the USSR (for people from 9 to 49 years of age) increased from 56.6% to 87.4%. Particularly impressive improvements took place in the USSR’s Central Asian Republics, where previously the ability to read and write was an attribute of a tiny elite. In Uzbekistan the proportion of literate people increased from 11.6% in 1926 to 78.7% in 1939; in Kazakhstan it rose from 25.2% to 83.6%. By 1959 the USSR had achieved overall literacy of 98.5%, reaching the level of the advanced capitalist countries in this respect.
The remarkable nature of this achievement can be seen from the fact that, even by the year 2000, the overall world literacy rate according to UNESCO was 79.7%, including 60.1% in the Arab countries and 55.3% in South and West Asia (Wagner & Kosma 2003).
The growth in material living standards in the USSR was interrupted by preparations for World War II; for obvious reasons individual consumption fell drastically during the war. Subsequently, resources were concentrated on rebuilding of the country’s base of infrastructure and industry, on health and educational provision, and on the arms race with the USA. Yet material living standards recovered and by the mid-1950s were rising rapidly. The figures in Table 1 are calculated by Western researchers.
From the 1950s onwards a huge housing building program took place; the rate of state and state-assisted construction increased from 127.1 million (square meters of living space) to 394.4 million, between 1946–50 and 1961–66. House construction on the collective farms also “more than doubled … as incomes in the countryside improved” (Hanson, 2003: 64). Hanson concedes that the improvement in housing was “very great indeed”.
Technological reparations
During World War II, some technology transfers from the USA to the Soviet Union continued by means of the Lend Lease program, by which the US supplied its allies with essential material for the conflict. Although the USSR received less than a quarter in value of the supplies which were provided to Britain, these items, nevertheless, were significant and they included industrial equipment as well as food and weaponry. For the greater part of the war, Lend Lease to the USSR was a substitute for the involvement by US troops in the key arena of fighting in Europe. Then, in a harsh signal of what was to come, most of the US provision to its Soviet ally was abruptly terminated when victory was declared in Europe. Former US State Department official Willis G. Armstrong recalled:
What happened immediately after V-E Day was a decision that lend-lease to Russia should be stopped “where physically possible” – that was the term used – except where the goods were identifiable in connection with the prospective entry of the USSR into the war with Japan… (Armstrong, 1973)
Balancing this US decision, the outcome of the war subsequently provided the Soviet economy with advanced German technology to which the USSR had previously not had access, and which proved to be of huge assistance in recovering from the war and further modernizing both civilian and military industries. This is crucial in understanding the leap in productivity which took place in the Soviet Union through the decade of the 1950s.
As part of the war reparations agreed between the victorious allies, whole factories in the East of Germany were disassembled and transported to the USSR; these included production equipment for the Opel Kadett, which Soviet engineers used as the template for the Moskvich car which was manufactured in Moscow from 1947.
Among many other Soviet industrial sectors which were able to upgrade their production using German knowledge was the optical industry. An article in the Zeiss Historica Journal records:
As early as November of 1945, the Russians stated that they wanted Carl Zeiss (not Zeiss Ikon) to provide them with sufficient knowledge, technical drawings, and instruction for the Russians in Kiev. The production machinery and design process were to be designed to produce 5,000 cameras per month.
[…] The Russians did take a good number of Carl Zeiss and Zeiss Ikon technicians and managers with them to assure the startup of the new operation […] There was the movement of Carl Zeiss microscope facilities to the area near St. Petersburg. This new firm named “LOMO” is active in microscope manufacture to the present day […] The Zeiss Ikon specialist in photocells, Paul Görlich, also spent five years in Russia and returned to work in Jena and not in the Dresden photographic kombinats. Clearly, there were Russian binocular manufacturing locations that were aided by the reparations from Carl Zeiss. (Gubas, 2001)
As in the 1930s, Soviet technicians did not merely copy and integrate this foreign knowledge – they learned from, adapted, and developed it, providing a platform for sustained improvements in productivity and product range and quality.
The economic Cold War
By the late 1940s, the USSR’s ability to increase its technological level by freely buying production equipment from abroad and contracting with foreign firms had been ended. In Armstrong’s account:
we began to withhold from the Russians certain machinery and equipment that they wanted to buy commercially from us, and we began a discriminatory export licensing policy for security reasons in the summer of 1948 – I believe it was the summer. This was really in violation of our trade agreement with the Russians, but it was necessary for security reasons. I then became very active in that program in the State Department of keeping things away from the Russians. I worked at that in ‘48 and ‘49 and ‘50 and on through the Truman administration. (Armstrong, 1973)
The justification was that, quoting the US Joint Chiefs of Staff, “It would be undesirable to assist, directly or indirectly, either the military or the economic potential of the USSR and her satellites as they are our most probable enemies.”
Humanitarian considerations did not stand in the way of this policy. Professor Hanson describes the desperate shortage of streptomycin (then a recently developed antibiotic used for treating TB sufferers) in the USSR in the early 1950s, implying that either the planning system or the priorities of the Soviet leadership were at fault, and with no mention of what had prevented the USSR acquiring the ability to produce this medicine. But in fact:
The pharmaceutical manufacturing firm, Merck & Co. of New York became aware of this growing opposition to trade with the Soviets, and after discussions with the State Department in November 1947 the corporation discontinued its arrangements for exporting a penicillin and streptomycin manufacturing plant to the Soviet Union. (Cain, 2005)
Although technology transfers to the socialist countries were now strictly forbidden, the US authorities went further than this; with varying degrees of success they sought to obstruct other trade with the USSR and its allies.
The recovery of Western Europe from the war, and its further economic development, was bound up with access to Marshall Plan aid, which was not purely financial but included very substantial technological assistance from the USA. This aid was dependent on some very important formal and informal conditions: recipient countries could not elect a communist government; they must integrate their economies into a capitalist trading bloc to the exclusion of significant economic relationships with the USSR; and they must not sell to the Soviet Union, China, or countries allied to them any “strategically” important products.
The USA enshrined its ban on the export of technology and many goods to the socialist countries into legislation in the 1949 Export Control Act. In early 1950, the US and its West European allies set up a body called the Co-ordinating Committee on Multilateral Export Controls (CoCom) to ensure that the capitalist countries (including Japan) observed the embargo. Before entering into trade with any socialist country, firms were required to apply to CoCom and submit to assessment and verification procedures. The original list of items covered by CoCom specified 144 classes of products which were fully or partially covered by the ban including machine tools, petroleum equipment, chemicals and chemical equipment, scientific equipment, and 12 non-ferrous metals; during the 1950s the list was expanded to over 450 classes.
As Kenneth I. Juster, who was US Under-Secretary of Commerce for Industry and Security in the George W. Bush administration, remarked:
In effect, CoCom’s principal objective was to serve as the de-facto economic arm of NATO, and impede the Communist Bloc’s ability to develop its defense industrial base. Over the years, the scope of CoCom controls was quite expansive, reaching a wide range of commodities that were readily available over the counter at retail outlets. The fundamental supposition was that the export of any controlled item to proscribed destinations should be considered as an export for a hostile military use – in other words, that any export could and would be diverted to support hostile military operations.
These stringent measures were, in fact, effective for many years because the CoCom members possessed a virtual monopoly on the technologies that they controlled. (Juster, 2003)
Thus, the socialist bloc was effectively put into technological and economic quarantine.
This new situation, extremely disadvantageous for the USSR’s long-term development, stemmed from a change in global power relationships. Whereas the USA emerged from World War II much richer than before, Britain was almost bankrupt, France was recovering from occupation, and Germany and Japan were defeated and occupied; thus, the US was supremely powerful among the capitalist countries.
The USSR, although impacted by more human and industrial damage than any other country, had gained prestige and now had allies in Eastern Europe and, for a time, China; this, however, made its socialist system much more of a threat to the main capitalist powers. The USA therefore had both the motive and the opportunity to suffocate the still relatively backward Soviet economy by depriving it of the oxygen of technology, remove its opportunity to develop comparative advantages by means of trade, and also to overstretch it through a diversion of resources into a relentless arms race. The official US name for this policy was containment.
The long-term vulnerability of the USSR to the containment policy is by no means an indictment of its economic system. None of the presently powerful capitalist countries have faced such a sustained obstacle.
Following the emergence of political disagreements between the USSR and China which resulted in a split between the two great socialist powers in the early 1960s, world communism presented less of an immediate threat to the capitalist ruling classes. Britain, Japan, and other US allies began to complain that they were suffering economically as a result of the loss of trading opportunities. The USA agreed that the CoCom list would be regularly reviewed, so that when the USSR acquired the ability to make a product, it would be removed from the list of banned exports.
Soviet diplomacy was very active throughout the Cold War in seeking to moderate and subvert the CoCom regime and overcome barriers to trade with the Western countries and Japan. Relaxation of East–West tensions in the 1960s, the effect of the Soviet achievement of approximate military parity with the West, and the Western energy shift from coal to gas, allowed the USSR under Khrushchev and Brezhnev to make some limited transfer achievements, facilitating Soviet imports of some plant and equipment which could not conceivably be used for a military purpose.
But with few exceptions the processes which the socialist countries acquired through trade with the capitalist bloc did not embody cutting-edge technology, and imports were delayed by the CoCom scrutiny process and diplomatic pressure by the US authorities. The most advanced computers, and of more importance, the plans, equipment, and components for making computers, were always denied to the Soviet Union.
The USSR’s hopes of a breakthrough in constructive economic engagement with the United States were cut short by the Jackson-Vanick Amendment of 1975, which used the pretext of the Soviet Union’s restriction of emigration to Israel as a reason to prevent the normalization of trade relationships with the USSR. Sanctions against the USSR were tightened again in 1980, following the entry of Soviet troops into Afghanistan.
Although the usual publicly stated reason for the anti-Soviet sanctions was to hamper the development of its military capacity, the Soviet Union nevertheless surprised Western experts by its defense industry achievements. As Hanson remarks:
It was always difficult for economists to square the backward state of the Soviet economy with the military prowess of the USSR … how could its defence effort come anywhere near matching that of its opposing superpower? This was something that was endlessly debated among Western policy analysts during the Cold War. (Hanson, 2003)
This was less of a paradox than it appeared. In the context of the Cold War sanctions, the USSR was responding to the US technological lead in the arms race by concentrating its R&D and investment efforts on the defense sector, leaving some of the civilian industries trailing behind. The approximate military parity with the USA and its allies, which the Soviet Union had achieved by the mid-1970s (and which found expression in the beginning of the Strategic Arms Limitation Treaty negotiations between the US and USSR) was a stupendous feat of industry, involving not only the production of large quantities of high-quality steel, non-ferrous metals, and other intermediate products required for the building of submarines, missiles and missile silos, tanks, jet fighters, etc.; it also involved the concentration of the USSR’s most advanced sectors, for example the electronics and aviation industries, on areas of military importance and the deployment of a high proportion of all R&D activity into military research.
The sacrifice which this involved was not lost on US administrations, which from the late 1970s onwards pursued a policy of spending the USSR into the ground, by continual increases in military spending which the Soviet leadership felt it had to match. The USA insisted also that its NATO allies increased their military budgets year on year, adding to the pressure on the USSR.
Prosperity and dynamism in the “stagnation period”
After the effect of the incorporation, adaptation, and development of Germany’s technological reparations ran its course, the USSR’s overall rate of growth in industrial productivity per worker, although still high in comparison with the USA’s rate of growth, began to slow down, an issue which started to become noticeable around the time when Leonid Brezhnev became General Secretary of the Soviet Communist Party. An experiment to increase growth rates by reducing the number of output targets for firms, and increasing incentives for profitability, was introduced in 1965 but had no substantial positive effect.
But despite this overall growth reduction, and the impact of the diversion of resources into the military sector, the phrase “stagnation period” which was later used to describe the subsequent years until Gorbachev took office, conceals as much as it reveals. Contrary to claims that the planned economy was unable to meet consumer needs, the ownership of household consumer durables rose rapidly. The diet of Soviet citizens also changed; the traditional reliance on bread and potatoes was supplemented by the greatly increased availability of dairy products, eggs, fish, and meat. The figures in Table 2 are from the Soviet statistical service.
Material prosperity indicators, USSR
(1964)
Source: Narkhoz, via Slavic Research Center Library, 2000.
In sectors where it was able to work around, or negotiate exceptions to, the CoCom technology restrictions, the Soviet Union continued to make remarkable industrial achievements in this period, belying the assertions by anti-socialist theorists that there is “no pressure to reform and improvement of production in socialist undertakings” and that “they are a dead limb in the economic organism”. To take three disparate examples:
(1) Using a combination of reverse engineering and indigenous research, experimentation and design, Soviet industry produced a wide range of new and better models of civilian aircraft, upgrading them as technology and experience progressed. A meritocratic and pluralist system operated in which the leading innovators were each appointed to head an institute which bore the name of the chief designer and whose names were attached to the airplane they created. The performance and durability of Soviet-designed civil aircraft is indicated by the fact that many Tupolev TU 134s and 154s, and Ilyushin Il 86s and Il 96s, continued in use many years beyond the demise of the USSR, as did many Antonov air freighters.
Soviet designers and manufacturers could produce aircraft to very high safety standards. Following the Russian double air disaster on 25 August 2004, and before the crashes were confirmed as resulting from terrorist bombs, Paul Duffy of Air Transport World assessed the TU 154’s safety record very positively; and aviation expert David Learmount of Flight International magazine commented: “The airplane itself is built like a tank, it’s a very, very good airplane” (Duffy, 2001). Despite its very solid construction, the TU 154 was extremely fast for a civilian passenger plane, with a maximum speed of 975 kph.
The creativity of Soviet innovators is revealed also in their ability to work around problems which could not be overcome directly. Undercarriages were designed with wheels whose low-pressure tyres allowed aircraft to take off and land in very inhospitable conditions, even on gravel and snow-covered runways. Noting the how the significant Western lead in computer technology affected the development of flight control systems in commercial aircraft, a CoCom sub-committee reported that “the Soviets have compensated for a relative lack of computational power with innovative mathematics” (Institute of Medicine et al., 1991).
(2) The Soviet Union’s chemicals industry also underwent massive modernization during this period. Lacking any potential military application, some technology transfers to the USSR in the field of nitrogenous fertilizer production were allowed; this resulted in huge increases in output that were of great significance for Soviet farming’s shift to producing animal protein. From the mid-1960s into the 1980s, the USSR became a major exporter of mineral fertilizers, defraying the cost of importing the Western technology. (Hanson 1981).
(3) Another interesting success story was in the design and manufacture of wristwatches. The varied and attractive watches produced in Soviet factories were valued as fashion items by Soviet citizens, with frequent new designs, to the extent that they were made subject to a high rate of purchase tax by the USSR authorities. In the 1970s and 1980s, the Soviet Union achieved a remarkable breakthrough into the European, and especially the British, consumer markets with its watches under the brand name Sekonda, which became the highest selling brand of mechanical watches in the UK. Timex, the US-owned watch manufacturer which was knocked off its top spot in the British market, responded by taking a legal case against Sekonda to the EEC (precursor of the European Union) to try to recover its market share. (See Timex, Council and Commission 1985.)
Bitter ends
In seeking to address the hostile US-imposed policies affecting their economy, the USSR’s communist leadership found itself in a dilemma. It sought to encourage the pro-trade and pro-détente doves in the USA and Western Europe, and to discourage and isolate the hawks. But both these tendencies in the Western elites were in favor of capitalism and against socialism. To admit that the hawkish strategies were effective in weakening the socialist bloc might have made their adherents even more powerful and influential. The CPSU therefore maintained a position of optimism about the potential of the Soviet Union to generate its own indigenous technical advances, and of glossing over the full negative economic effect of the USSR’s defense effort.
Nevertheless, an issue with very serious political consequences had arisen. Soviet figures for the value of the USSR’s net material product (i.e., output not including services) in comparison to that of the USA include those given in Table 3.
Because of the greater population of the USSR, its higher proportion of women in the full-time workforce, the much higher share of production used on defense, and the non-inclusion in these figures of earnings from commercial services and profits from international operations, these statistics do not mean that the average Soviet household achieved two-thirds of the material prosperity of the average US household, or that productivity per worker had reached anywhere near two-thirds of the US level.
What the figures do show is that the Soviet effort to catch up with the USA in material production had peaked. In addition, the USA’s ally Japan was rapidly expanding industrially. The strategy of peaceful competition, through which the socialist countries aimed to catch up and overtake the capitalist bloc economically, and on that basis lead the world towards communism, had failed.
Other international factors added to creeping demoralization in the Soviet Communist Party. There were no signs of socialist revolution in the advanced capitalist countries, and revolutionary movements in the Third World – for instance in Angola, Mozambique, Nicaragua, and Afghanistan – had been stalled by the military intervention of US-backed proxy forces. Nevertheless, the crisis which led to the catastrophic break-up of the Soviet Union was provoked not by the Soviet economic model, but by its abandonment.
Gorbachev was elected by the Soviet Communist Party Central Committee in 1985, as a leader who claimed that a breakthrough was possible, promising the renewal of socialism, not a return to capitalism. The first economic reforms to have a major impact came into effect in 1988; they encompassed independence of enterprises from Gosplan and the ministries; the reduction of state control over foreign trade; and the right to set up capitalist firms (which were allowed to set their own prices), including in the banking sector. This was the end of meaningful central control of the economy.
Both inflation and shortages grew, asset-stripping began as goods and funds were siphoned away from state-owned enterprises, and a new class of wealthy people began to arise. Demands for full-scale privatization were voiced and gathered momentum.
The eventual abolition of the Soviet Union took place despite a referendum in March 1991, in which 78% of the people, on a turnout of over 75%, voted for the retention of the USSR.
By 1999, Russian output had fallen to 57% of its 1990 level. Ukraine and Moldova fared even worse, with declines to 36% and 31% of 1990 GDP. Accompanying this destruction of the productive economy was a catastrophic upsurge in poverty, unemployment, disease, and death. Average male life expectancy fell from 64 to 58. Russia’s economy subsequently began a limited recovery on the strength of higher gas prices and some reassertion of state control under Putin’s government.
Of course, the transition in Russia and the other former constituent republics of the USSR has not been to an “ideal” capitalism, but to a capitalism determined by these countries’ historical and international positions. Equally, the socialism which existed in the Soviet Union was never an “ideal” socialism, but one whose opportunities for development were constricted by historical and international factors.
Socialism, planning, and the China question
The hopes of socialists in the 20th century, that the Soviet model of development could overcome all obstacles and outcompete a technologically superior bloc of advanced capitalist nations, were dashed. But the Soviet experience, in both its achievements and its difficulties, remains a valuable resource for those who are serious about building an alternative to capitalism.
Of the lessons which can usefully be drawn from that experience, one is surely a positive one, in terms of the potential of socialism for economic and human development. Another is that the power of central direction and planning is not something which needs to be abjured on the grounds which are alleged against it by pro-capitalist ideologists.
A third is that, aside from the USA itself, any country that aims to take a path that does not meet the approval of the ruling circles of the United States will, in the long if not in a shorter term, encounter very serious economic challenges. The question remains as to whether the People’s Republic of China, which is currently hugely increasing its investments in industrial R&D, will be able to end the situation by which the USA is the world’s technological blackmailer in chief. If so, the choices in terms of developmental pathways as this century progresses may become very different to those that seem available today.