Econ model project
saizo0816
PlannedSocialismTheSovietUnionSpr191.pptxThe Soviet Union
Planned Socialism &
The Soviet Union
Defining Socialism
Socialism is any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods. (Merriam-Webster)
Socialism is a social and economic system characterized by social ownership of the means of production and co-operative management of the economy, as well as a political theory and movement that aims at the establishment of such a system. (Wikipedia)
Socialism is a social and economic doctrine that calls for public rather than private ownership or control of property and natural resources. (Encyclopedia Britannica)
Why Socialism?
Equity in income, wealth, consumption distribution
Equity in governing
Greater stability
Greater capital accumulation
Ultimate utopia
Types
Planned
Market
Theory of Socialism
2
Intellectual & Historical Origins
Marx’s Post Capitalist Stages
Socialism
Transition state during which scarcity exists and a strong state is required.
A “Dictatorship of the Proletariat” governs.
Proletariat (working class) uses the state as a means to overthrow the Bourgeoisie (capitalist class).
Democracy is rejected.
Productivity is rewarded: “He who does not work does not eat”.
Ironically, the greatest resemblance between the soviet and capitalist model was in the labor markets, where workers were rewarded based on productivity.
Communism
Highest stage of economic development characterized by the absence of markets, money, abundance, and state.
Productivity no longer needs to be rewarded: “From each according to ability, to each according to need”.
3
Intellectual & Historical Origins
Russian Revolution
Marxist revolutionaries (Bolsheviks) seize power from Czarist rule (1917).
Leads to a Russian Civil War (1917-1922)
Headed by Vladimir Lenin
Red Terror
Mass killings, torture, and political repression of rebel forces by the Bolsheviks during the Russian Civil War.
Lenin’s War Communism
Soviet economic system implemented during the Russian Civil War from 1918-1921.
Nationalized industry and criminalized private enterprise.
Production collapsed: industrial and transportation 80%; agriculture 35%.
The ABC of Communism: Nikolai Bukharin (1920)
Promoted an economy where workers collectively own the means of production, goods are kept in public warehouses, and people take what they need.
National Economic Plan
Direct resources toward the most important sectors of the economy.
Planning to be done by proletariat specialists rather than bureaucrats.
Chaos and confusion initially exists but is transitory as workers organize production toward a united front.
Vladimir Lenin
1870-1924
Lenin’s New Economic Policy (NEP)
Soviet economic system from 1921-1928
Privatization of industry restored for smaller enterprises: a sort of “Market Socialism”.
Commanding Heights
Centralization of only the most important industries (e.g. oil, energy, communications, transportation).
Production improved: by 1927 the economy was at pre War-Communism levels.
Stalin’s Great Break (1929-1940)
Stalin opted for “socialism in one country” rather than the Marxist ideal of global communism.
Abandoned NEP, established a totalitarian government, and command economic system.
Cult of Personality
Use of idealizing propaganda to muster support for a leader.
Cities named in his honor, history books rewritten, government controlled media.
Collectivization of farms and confiscation of private property (led to a peasant rebellion).
Established Secret Police (i.e. KGB) to ferret out political and economic enemies.
Intellectual & Historical Origins
Joseph Stalin
1878-1953
Stalin’s New Soviet Person--Homo Soveticus
A new breed of worker, expert, and manager, who shares the idealistic goal of building socialism and will work unselfishly for that goal: honest, comradely, and heroic.
“For the first time after centuries of working for others, of working in subjection for the exploiter, is has become possible to work for oneself, and moreover to employ all the achievements of modern technique and culture in one’s work”: V. Lenin
Stalin combined the assumption of Homo Soveticus with party infallibility to justify purges of workers, experts, and managers.
1935 he declared “cadres decide all” blaming economic failures on “enemies of the people” and justifying the mass imprisonment and slaughter of over 2 million from 1935-1938 alone.
Intellectual & Historical Origins
6
Time-line of Leadership
Lenin 1917-1924
Stalin 1924-1953
Khrushchev 1955-1964
Brezhnev 1965-1982
Gorbachev 1985-1991
Theory of Planned Socialism
Socialist Controversy
Debate as to whether a planned socialist economy can operate efficiently.
The Ministry of Production in the Collectivist State:
Enrico Barone; 1907
Mathematically demonstrated that a centrally planned state could achieve efficient resource allocation if they possessed perfect knowledge of:
Individual demand schedules
Enterprise production functions
Existing stock of producer and consumer goods
Relative Valuations
Calculated ratios would substitute for market prices.
Enrico Barone
1859-1924
8
Planning Process
Directive Planning
Binding output targets would be set by the planners.
Technical Coefficients
Created by engineers and used to determine the inputs necessary for production.
Typically based on historical data and rarely changed.
Material Balance
Occurs when available inputs balance with targeted outputs.
Sources: output, existing stock, and imports
Uses: intermediate and final
Theory of Planned Socialism
Planning Structure
Vertical Transaction
Order from an administrative superior that is binding on the subordinate.
Vertical Trust
Present when subordinates obey orders given to them by superiors.
Horizontal Transaction
Conducted by subordinates at the same level of the administrative structure without the approval of administrative superiors.
Horizontal Trust
Present when parties to horizontal transactions trust each other sufficiently to engage in transactions not sanctioned by superiors.
Planners attempted to maximize vertical and minimize horizontal transactions/trust.
When the majority of transactions are horizontal, the system may no longer be a “planned” economy.
Theory of Planned Socialism
Second Round Effects
Changes in one part of the plan necessitated changes in the entire structure of production.
Planning from the Achieved Level
Planners made few changes to the plan, repeating historical patterns to avoid major disruptions of the material balance and second round effects.
Non-Price Information
Physical counts of inputs and outputs were used rather than monetary units.
Served a similar function as prices to bring about a balance in supply and demand.
Difficult and costly to determine relative value of inputs and outputs.
Socialist Critique (Hayek and Mises)
Information Problem: relative scarcities cannot be adequately known without market prices.
Motivation Problem: Individuals will not be motivated to produce without private property rights.
Challenges of Planned Socialism
Soviet Governance
Communist Party
Communist party played a Leading Role and was the primary decision making body.
Formulated the general outline of resource allocation.
At its peak had 10% of the adult population as members (elite class).
Central Committee met periodically in Plenums on major issues.
Politburo met in interim and made the majority of decisions.
Nomenklatura
Various government positions that the Communist Party was authorized to fill from its ranks.
Primary Party Organization (PPO)
Lowest level of communist party leadership that governed alongside the manager of each enterprise.
Soviet State
Council of Ministers
Responsible for executing the directives of the Central Committee/Politburo.
Gosplan
Received plans from the Council of Ministers or directly from the Central Committee/Politburo.
State Planning Commission that converted the party’s general outline into an operative plan.
Soviet Enterprises
Administrators: gave orders.
Managers: implemented orders.
Petty Tutelage
Constant interventions by administrators.
Success Indicator Problem
Managers were forced to select a multitude of orders that were often inconsistent.
Output became the most important indicator manager’s followed.
Gross Value of Output
Planned output stated as a quantity or monetary value.
Managers had discretion in how to produce so long as targets were met.
Principal-Agent Problem
Managers had more information regarding enterprise capabilities compared to administrators.
Often secured “easy” output targets.
Meeting targets brought hefty bonuses (25-30% increases in income) and prestige.
Minimized innovation and cost containment to avoid raising the bar.
Soft-budget constraint: If a plant met target but its costs were greater than revenue, government would assist.
Stockpiled materials when possible.
Second Economy
An informal market for shortage goods.
Labor Allocation
Demand based on technical coefficients
Wages set based on job type and region.
Jobs Right Economy
Citizens were guaranteed a job.
“we pretend to work and they pretend to pay us”
Supply was household driven
Training was directed by the state based on industry goals.
Internal passport system required residency permits across cities.
Overemployment was common.
Capital Allocation
Demand based on technical coefficients
Supply driven by high savings rates and state controlled wages
Coefficient of Relative Effectiveness
Used to choose among competing investment projects.
Subjectively determined return indicator (i.e. IRR).
Soviet Labor and Capital
Soviet Prices, Money, and Trade
Prices and Money
Industrial Prices
Set to equal the average cost of the industrial branch.
Savings Overhang
Accumulation of forced savings resulting from having nothing to buy.
Autarky
Trade Aversion
The deliberate underutilization of trade potential.
Soviet Foreign-trade Monopoly
Managed all aspects of trade with foreign agents.
Russian Ruble was not tradeable in foreign exchange markets.
Imports relegated to necessities that could not be produced domestically.
Exports, primarily agriculture, were only to be used to pay for imports.
Economic Growth
Slowing pace: approx. 6%, 5%, 3.5%, and 2% each decade from 1950s through 1980s.
Primarily extensive vs. intensive growth resulted in diminishing returns.
Lower Static and Dynamic Efficiency.
Total Factor Productivity grew minimally and actually fell in the 1980s.
TFP measures technological advances since it is output per unit of labor or capital.
Growth may be overstated as much of production had negative value added.
Revealed when markets in liberated East Germany valued over 30% of capital at zero.
Income Distribution
No income earned for non-labor assets (e.g. capital & land)
Human capital was rewarded but access was unequal.
Research suggests the Soviet Union had greater equality of income than the U.S. but less when compared to other Eastern European countries.
Surprising since it was expected that capital and land ownership would be more income equalizing.
Soviet Economic Outcomes
The End of the Union of Soviet Socialist Republics (USSR)
Perestroika (restructuring) & Glasnost (openness)
Led by Mikhail Gorbachev beginning in 1985
Involved marginal changes toward democratization, international trade, media and religious freedoms.
Represented the beginning of the dismantling of the Soviet Union.
In 1991 the Soviet Union dissolved into 15 independent nations.
Boris Yeltsin emerged as premier of Russia.
December 21, 1991 Gorbachev resigned from the presidency of a nation that no longer existed.
Relative Performance: Planned Socialism
Efficiency
Low: Deficient information and lack of motivation.
Stability
Stable: Can experience a “business cycle” in the form of underemployment, shortages, and surpluses; however, employment is consistently high.
Income Distribution
Determined by central planners.
Generally equal in consumption but insiders may receive additional allocations.
Economic Growth
Low over the long-run
Lower in long-run due to static and dynamic inefficiency (decreases intensive growth).
Higher in short-run due to savings/investment being controlled by the state.
Viability
Historically, the system appears tenuous, although Cuba and North Korea have managed to maintain it for decades.
