The Political Economy of
Soviet-Style Central Planning
I. Why Study Planning?
significance for one-third of world population.
B. Example of broader
class of command economies in Egypt, Mesopotamia, Middle America, Nazi
C. Background of market
transitions in Central Eurasia and China
A. Dominance of state
ownership for productive resources, lesser role of collectives,
cooperatives, and private ownership.
B. Individuals could own
personal items, a house (but not the land beneath it), and savings.
III. Political and Economic Institutions
A. The Communist Party
1. "Leading and guiding
force of . . . society"
secretary—most powerful person in society.
of directors of the Party, controlling foreign and domestic policy and
appointments to top positions.
work of Central Committee departments, which controlled appointments to
other high-level positions.
Committee—about 300 members from national and regional agencies.
Elected Politburo and Secretariat, controlled press organizations,
provided forum for communication and debate.
6. Party Congress—supposed
supreme body of the Party, provided media event to "elect" new Central
Committee and announce policies.
B. The Legislature
1. Until 1989,
Supreme Soviet was "rubber stamp" legislature.
of the Supreme Soviet—smaller and more powerful.
3. Chairman of the
Presidium, or President, was ceremonial head of state.
C. The Administrative
or prime minister, had direct responsibility for management
of the economy, and usually introduced new five-year plans and major
2. Council of
Ministers—supreme administrative body.
3. State Planning
Committee (Gosplan)—coordinated creation and execution of plans.
and state committees—administered all aspectes of the
economy, including production, distribution, prices, wages.
5. Farms and
enterprises—handled actual production. Had little formal autonomy,
but had a modicum informal authority.
III. Central Planning
A. Interlocking time
periods—longer-term plans had less detail.
B. Production and
- Set by political leaders.
Figures - Rough draft prepared by Gosplan.
/ Bargaining - By ministries and enterprises.
Balances - Prepared by Gosplan and others to impose
e. In practice, many
targets derived from the
markup over this year's production.
- By Supreme Soviet to give the plan force of law.
2. Implementation of
Inconsistent Production Plans
- Enterprises typically waited until last days of plan period to meet
- Agents who located supplies of raw materials and arrange unplanned
Integration - Self-supply. Reduced efficiency because it
encouraged small scale production and discourages specialization.
Priorities - Determine the structure of output, and the
structure of output determines the required structure of capital stock.
Criteria - Used to choose technology after decision to invest
Organization and Planning
- Collective farm, supposedly owned and managed by members, but members
had few ownership rights. Impoverished before 1958 by low prices of
- State farm, organized like an industrial enterprise. Huge acreage.
Management was appointed by the government and workers were paid by a wage
and bonus system.
Plots - Gardens assigned to agricultural or industrial
workers. Output could be sold at market prices. Denounced by Stalin, but
supported by Gorbachev. Controlled 3 percent of the land, but produced 29
percent of output. Explained in part by stronger incentives and also
because they produce high priced goods.
E. Foreign Trade
Organization and Planning
Trading - Under traditional Soviet system, exports are sold to
FTOs under the Ministry of Foreign Trade at domestic prices, and sold
overseas at international prices. Price differences cause losses and
profits for FTOs, which are canceled by governmental taxes and subsidies.
of Planned Foreign Trade
- Foreign conditions change rapidly; cannot be planned; requires flexible
and decentralized management. Long-term trade agreements, designed to
stabilize trade with socialist countries, were often broken.
Choice - Impossible to make rational import and export
decisions based on controlled prices and exchange rates.
- Quantitative output orientation discourages production of high-quality
goods that can be sold overseas.
Incentives, and Prices
A. Finance system played
secondary role in economy based on physical output targets.
Profit-oriented planning could conflict with political priorities.
by the ruble—surveillance
by the unitary State Bank to monitor and enforce plan fulfillment.
Sector - Planned value of consumer goods provided to the
population must be roughly equal to planned disposable income, adjusted
Sector - Enterprises receive sufficient income to cover
payroll and cost of production. Failing business are subsidized and
successful ones are highly taxed.
Sector - Reflected in the balance of payments.
of the Government - Planned in the state budget. Business
profit was the largest revenue source and business subsidies were the
largest expenditure source.
D. The Incentive System
and moral incentives were used extensively, but relative
importance of material
incentives grew through the
and Salaries - About 70% if income. Higher authorities
determined the number of workers and the average wage that an enterprise
could hire and pay.
30% of income.
- Depended on plan fulfillment. If plans were overfulfilled, bonuses
Planning - Bonus system caused managers to misrepresent input needs
and production capacity and bargain for easy targets.
During Plan Fulfillment - Managers avoided
overfulfilling targets (to avoid higher targets in future). Also, system
encouraged management to hoard labor, equipment and resources, engage in
small-scale production, and sacrifice quality for quantity. Discouraged
technological innovation, which was poorly rewarded, interrupted
production schedules, and required new sources of materials.
E. The Price System
1. Prices set by
State Price Committee, changed infrequently.
2. Prices interacted
with managerial incentives through value-based plan targets and
average (not marginal) industry-wide unit cost plus small profit markup
related to capital intensity.
a. Enterprises with
above-average costs immediately ran losses, requiring state subsidies.
b. Provided little
incentive for enterprises to respond to consumer demand.
c. Poor guides for
investment and foreign trade decisions.
Initially set to equate quantity demanded with quantity supplied (as
controlled by planners), with adjustments to redistribute purchasing power
from the rich to the poor.
a. Shortages, long
lines, black-market activities, encouraging corruption and dilution of
b. Budgetary problem
when many wholesale prices exceeded retail prices.
VI. The Second Economy
production and exchange.
B. Partly legal, but,
even after 1987, Soviet Union forbade:
1. employment outside
2. production of fur
hats, jewelry, weapons, and copiers
3. operation of
amusement rides or games;
4. teaching courses
not offered in public schools and colleges
5. organization of
C. Some illegal
activities were massive, requiring bribes and corruption.
D. System provided
benefits and costs, and represented between 10 percent and 20 percent of
GNP. Lingering effects on entrepreneurial skill and legal culture.
VI. Performance of the Central Planning System
A. Plan Fulfillment
and Economic Growth
1. No clear evidence
of accelerated long-term growth, compared to the pre-Soviet era
2. Bergson found that
four socialist countries utilized resources 25-34% less efficiently than
3. Soviet authorities
claimed achievement of actual growth nearly equal to planned growth, but
conceded that long-term agricultural growth was less than half the planned
4. Western estimates
indicate that none of the Soviet medium-term national income plans were
fulfilled, that average growth rate between 1929 and 1990 was little more
than half the planned average, and that shortfalls were largest in
5. Frequent plan
revisions caused many to question whether Soviet Union was, in fact,
"centrally planned." Still, the plans set and communicated national
1. During 1960s,
caused entirely by a deceleration of factor productivity. During 1970s and
1980s, caused equally by slower input growth and negative productivity
2. Slower factor
a. Diminishing returns
b. Depletion of
accessible natural resources.
c. Slower growth of
d. Aging capital stock
e. Strain on central
planning in larger economy and more complex environment.
development had high priority beginning in late 1920s, with initial
success in many sectors, contributing to military superpower status.
2. High priority of
heavy military-industrial production postponed development of agriculture,
industrial consumer goods, services, and housing.
3. Emphasis on
quantitative plan targets provided little incentive for product quality or
4. Central planners
encouraged creation of very large, monopolistic enterprises:
a. to draw world
attention to achievements of socialism.
b. thinking that
large factories were more efficient
c. to simplify to
coordinate the construction of a smaller number of big factories.
d. to simplify
formulation and monitor execution of economic plans.
Performance -- perhaps the worst failure of Soviet-style system. Problems:
1. Low priority for
2. Climate, inferior
to American corn belt.
3. Inflexibility of
E. Employment and
1. Low unemployment.
2. Indeed, the system
generated apparent labor shortages, overstaffing, and "unemployment on the
restrictions on labor mobility, reduced after mid-1950s.
Distribution and Poverty
persisted, as income rewarded plan fulfillment, skill, and high-priority
reduced through price subsidies, public goods, small wage differentials.
3. Morrisson found
that Czechoslovakia had most equal distribution of income in the world.
Former USSR had more uneven income distribution than its neighbors in
central and eastern Europe; its level of inequality was comparable to the
average level of inequality of the OECD countries.
1. Before 1970s, high
stability, low inflation.
2. Starting in 1970s,
problems in reform-oriented Yugoslavia, Poland, and Hungary.
H. Foreign Economic
1. System prevented
trade based on comparative advantage.
2. Poor incentives
for high-quality export production.
1. In principle,
planning should allow environmental protection.
2. In fact,
degradation caused by:
a. Growth priority.
of the commons
row shows how the gross output of a particular sector was distributed
through the economy
by dividing the inputs in the first three columns by the
gross outputs of the sectors that use them, we obtain a matrix of direct
input coefficients, denoted by the letter A:
- Provides gross outputs that are necessary to provide a vector of final
demands to consumers.
1. Ideological and
2. Tables were not
compiled with sufficient frequency or detail.
3. Computer limits.
4. Built inefficiency of past into plans for future.
5. Provided for consistency
but not optimality.