The Political Economy of
Soviet-Style Central Planning
significance for one-third of world population.
of broader class of command economies in Egypt, Mesopotamia,
Middle America, Nazi Germany.
of market transitions in Central Eurasia and China
of state ownership for productive resources, lesser role of
collectives, cooperatives, and private ownership.
could own personal items, a house (but not the land beneath
it), and savings.
III. Political and Economic Institutions
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.
Secretariat—directed work of Central Committee
departments, which controlled appointments to other
Central Committee—about 300 members from
national and regional agencies. Elected Politburo and
Secretariat, controlled press organizations, provided forum
for communication and debate.
Congress—supposed supreme body of the Party,
provided media event to "elect" new Central Committee and
1989, Supreme Soviet was "rubber stamp"
of the Supreme Soviet—smaller and more powerful.
of the Presidium, or President, was
ceremonial head of state.
The Administrative Branch
Premier, or prime minister, had
direct responsibility for management of the economy, and
usually introduced new five-year plans and major reforms.
of Ministers—supreme administrative body.
Planning Committee (Gosplan)—coordinated
creation and execution of plans.
and state committees—administered all
aspectes of the economy, including production, distribution,
and enterprises—handled actual production. Had
little formal autonomy, but had a modicum informal
time periods—longer-term plans had less detail.
and Distribution Planning
a. Priorities - Set by
b. Control Figures - Rough
draft prepared by Gosplan.
c. Disaggregation / Bargaining
- By ministries and enterprises.
d. Material Balances - Prepared
by Gosplan and others to impose consistency.
practice, many targets derived from the achieved
level—a markup over this year's production.
f. Approval - By Supreme Soviet
to give the plan force of law.
of Inconsistent Production Plans
a. Storming - Enterprises
typically waited until last days of plan period to meet
b. Tolkachy - Agents who
located supplies of raw materials and arrange unplanned
c. Vertical Integration -
Self-supply. Reduced efficiency because it encouraged
small scale production and discourages specialization.
1. Political Priorities -
Determine the structure of output, and the structure of
output determines the required structure of capital
2. Economic Criteria - Used to
choose technology after decision to invest is
Agricultural Organization and Planning
1. Kolkhoz - Collective farm,
supposedly owned and managed by members, but
members had few ownership rights. Impoverished before 1958
by low prices of compulsory deliveries.
2. Sovkhoz - 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.
3. Private 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
Trade Organization and Planning
1. State 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.
2. Weaknesses of Planned Foreign Trade
a. Unpredictable - 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.
b. Product Choice - Impossible
to make rational import and export decisions based on
controlled prices and exchange rates.
c. Incentives - Quantitative
output orientation discourages production of high-quality
goods that can be sold overseas.
Finance, Incentives, and Prices
system played secondary role in economy based
on physical output targets. Profit-oriented planning could
conflict with political priorities.
by the ruble—surveillance
of enterprises by the unitary State Bank to monitor and
enforce plan fulfillment.
1. Household Sector - Planned
value of consumer goods provided to the population must be
roughly equal to planned disposable income, adjusted for
2. Business Sector -
Enterprises receive sufficient income to cover payroll and
cost of production. Failing business are subsidized
and successful ones are highly taxed.
3. International Sector -
Reflected in the balance of payments.
4. Balance of the Government -
Planned in the state budget. Business profit was the largest
revenue source and business subsidies were the largest
and moral incentives were used extensively,
but relative importance of material
grew through the years.
2. Wages and Salaries - About
70% if income. Higher authorities determined the number of
workers and the average wage that an enterprise could hire
3. Bonus Income—about 30% of
a. Payment - Depended on plan
fulfillment. If plans were overfulfilled, bonuses increased
b. During 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.
The Price System
Prices set by State Price Committee, changed
Prices interacted with managerial incentives through
value-based plan targets and financial balances.
Wholesale price = average (not
marginal) industry-wide unit cost plus small profit markup
related to capital intensity.
Enterprises with above-average costs immediately ran losses,
requiring state subsidies.
Provided little incentive for enterprises to respond to
Poor guides for investment and foreign trade decisions.
Retail prices - 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.
Shortages, long lines, black-market activities, encouraging
corruption and dilution of work incentives.
Budgetary problem when many wholesale prices exceeded retail
VI. The Second Economy
Unplanned production and exchange.
Partly legal, but, even after 1987, Soviet Union forbade:
employment outside family
production of fur hats, jewelry,
weapons, and copiers
operation of amusement rides or
teaching courses not offered in
public schools and colleges
organization of entertainment
Some illegal activities were massive, requiring bribes and
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
Plan Fulfillment and Economic Growth
No clear evidence of accelerated long-term growth, compared
to the pre-Soviet era (1885-1913).
found that four socialist countries utilized resources
25-34% less efficiently than capitalist competitors.
authorities claimed achievement of actual growth nearly
equal to planned growth, but conceded that long-term
agricultural growth was less than half the planned average.
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
Frequent plan revisions caused many to question whether
Soviet Union was, in fact, "centrally planned." Still, the
plans set and communicated national priorities.
During 1960s, caused entirely by a deceleration of factor
productivity. During 1970s and 1980s, caused equally by
slower input growth and negative productivity growth.
returns to capital.
of accessible natural resources.
growth of technological progress.
on central planning in larger economy and more complex
Industrial development had high priority beginning in late
1920s, with initial success in many sectors, contributing to
military superpower status.
High priority of heavy military-industrial production
postponed development of agriculture, industrial consumer
goods, services, and housing.
Emphasis on quantitative plan targets provided little
incentive for product quality or technological
Central planners encouraged creation of very large,
to draw world attention to achievements of socialism.
thinking that large factories were more efficient
to simplify to coordinate the construction of a smaller
number of big factories.
to simplify formulation and monitor execution of economic
Agricultural Performance -- perhaps the worst failure of
Soviet-style system. Problems:
Low priority for agricultural infrastructure.
Climate, inferior to American corn belt.
Inflexibility of central planning.
Employment and Labor Mobility
Indeed, the system generated apparent labor shortages,
overstaffing, and "unemployment on the job."
Stalin-era restrictions on labor mobility, reduced after
Income Distribution and Poverty
Inequality persisted, as income rewarded plan fulfillment,
skill, and high-priority professions.
Inequalities reduced through price subsidies, public goods,
small wage differentials.
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.
Before 1970s, high stability, low inflation.
Starting in 1970s, problems in reform-oriented Yugoslavia,
Poland, and Hungary.
Foreign Economic Relations
System prevented trade based on comparative advantage.
Poor incentives for high-quality export production.
In principle, planning should allow environmental
In fact, degradation caused by:
Tragedy of the commons
APPENDIX: Input-Output Economics
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:
C. Result - Provides gross
outputs that are necessary to provide a vector of final
demands to consumers.
and political opposition.
were not compiled with sufficient frequency or detail.
4. Built inefficiency of past into plans
for consistency but not optimality.