Soviet-type economic planning

Soviet-type economic planning (STP) is the specific model of centralized planning employed by
Marxist–Leninist socialist states modeled on the economy of the Soviet Union (USSR). Although there
was significant variation among these economies, Soviet-type planning and Soviet-type economies refers
to the major structural characteristics common to these economies.[1]

Soviet-type planning is a form of economic planning involving centralized investment decisions,

administrative allocation of economic inputs, material balances to reach equilibrium between available
inputs and targeted outputs, and to some extent the use of linear optimization to optimize the plans.[1]

The post-perestroika analysis of the system of the Soviet economic planning describes it as the
administrative-command system due to the de facto priority of highly centralized management over
planning.[2][3]

Contents
Characteristics
Institutions
Material balances
Analysis of Soviet-type planning
Features
Actual performance
Performance in the Eastern Bloc
Advantages
Disadvantages
See also
References

Characteristics

Institutions

The major institutions of Soviet-type planning in the USSR included a planning agency (Gosplan), an
organization for allocating state supplies among the various organizations and enterprises in the
economy (Gossnab) and enterprises which were engaged in the production and delivery of goods and
services in the economy. Enterprises comprised production associations and institutes that were linked
together by the plans formulated by Gosplan.

In the Eastern bloc countries (Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, and
Albania), economic planning was primarily accomplished through the Council for Mutual Economic
Assistance (CMEA), an international organization meant to promote the coordination of soviet economic
policy amongst the participating countries. The Council was founded in 1949 and worked to maintain the
soviet style of economic planning in the Eastern bloc until the Soviet Union’s dissolution in 1991.

There is a small amount of information in state archives regarding the founding of CMEA, but
documents from the Romania state archive suggest that the Romanian Communist Party was
instrumental in beginning the process which led to the creation of the Council. Originally, Romania
wanted to create a collaborative economic system which would bolster the country’s efforts to
industrialize.[4] However, the Czech and Pole representatives wanted to have a system of specialization
put into place, wherein production plans would be shared amongst members, and each country would
specialize in a different area of production.[4] The USSR encouraged the formation of the Council as a
response to the United States’ Marshall Plan, in hopes of maintaining their sphere of influence in
Eastern Europe. There also existed the hope that the less developed member states would ‘catch-up’
economically with the more industrialized ones.[5]

Material balances

Material balance planning was the major function of Gosplan in the USSR. This method of planning
involved the accounting of material supplies in natural units (as opposed to monetary terms) which are
used to balance the supply of available inputs with targeted outputs. Material balancing involves taking a
survey of available inputs and raw materials in the economy and then using a balance-sheet to balance
them with output targets specified by industry to achieve a balance between supply and demand. This
balance is used to formulate a plan for the national economy.[6]

Analysis of Soviet-type planning

There are two fundamental ways scholars have carried out an analysis of Soviet-type economic planning.
The first involves adapting standard neoclassical economic models and theories to analyze the Soviet
economic system. This paradigm stresses the importance of Pareto efficiency standard.[7]

In contrast to this approach, scholars such as Pawel Dembinski argue that neoclassical tools are
somewhat inappropriate for evaluating Soviet-type planning because they attempt to quantify and
measure phenomena specific to capitalist-based economies.[8] They contend that because standard
economic models rely on assumptions not fulfilled in the Soviet system (especially the assumption of
economic rationality underlying decision-making), the results obtained from a neoclassical analysis will
distort the actual effects of STP. These other scholars proceed along a different course by trying to
engage with STP on its own terms, investigating the philosophical, historical and political influences that
gave rise to STP whilst evaluating its economic successes and failures (theoretical and actual) with
reference to those contexts.

The USSR practiced some form of central planning beginning in 1918 with War Communism until it
dissolved in 1991, although the type and extent of planning was of a different nature before imperative
centralized planning was introduced in the 1930s. While there were many subtleties to the various forms
of economic organization the USSR employed during this 70-year time period, enough features were
shared that scholars have broadly examined advantages and disadvantages of Soviet-type economic
planning.

Soviet is not the same as economic planning in general as there are other theoretical models of economic
planning and modern mixed economies also practice economic planning to a certain extent, but they are
not subject to all of the advantages and disadvantages enumerated here.
Features
The unique features of Soviet-style economy were an ideologically
driven attempt to build a total economic plan for the whole society,
as well as unquestioned paradigm of superiority of Marxian
economy. Attempts to modify or optimize the former based on
pragmatic analysis of economic outcomes were hindered by the
latter. Dembinski describes the Soviet approach to Marxist economy
as "quasi-religious" with economic publications by Marx and Lenin
being treated as a "Scripture".[8]

Michael Ellman describes specific features of the Soviet economic

planning in economic and mathematical terms, highlighting its
primarily computational challenges.[9] The theoretical objective of
the Soviet economic planning, as executed by Gosplan, was rational
allocation of resources in a way that resulted in output of desired
assortment of goods and services. The plan was built and executed in
annual cycles: each year, a target output of specific goods were
determined and using estimates of available input resources Gosplan
would calculate balance sheets planning output for all factories. As
the number of commodities reached hundreds of thousands, a
"Catch up and overtake" (Russian:
Кто кого? Догнать и
number of aggregations and simplifications were made to facilitate
перегнать). A 1929 Soviet the calculations, which until late 60's were performed manually.[10]
propaganda poster based on 1917
paraphrase from Lenin, praising the
economic superiority of Marxian
Actual performance
economy.
In the initial phase, the USSR's growth in GDP per capita compared
favorably with Western Europe. In 1913, prior to the revolution of
1917, the Russian Empire had a GDP per capita of $1,488 in 1990 international dollars which grew 461%
to $6,871 by 1990. By comparison, Western Europe grew from a higher base of $3,688 international
dollars by a comparable 457% to $16,872 in the same period and reached $17,921 by 1998 and, unlike
USSR, it did not collapse. Following the fall of the USSR in 1991, its GDP per capita figure fell to $3,893
by 1998.[11]

One 1986 publication compared Physical Quality of Life Index (PQLI) based on infant mortality, life
expectancy and literacy rate (World Bank data) and other indicators such as number of patients per
physician and argued that countries with socialist-style economic planning achieved slightly better
indicators at low and medium levels of income than capitalist countries at the same levels of economic
development. The gap narrowed down in case of medium and high income countries, all of the latter
however in the "high income" category and none "socialist".[12]

Starting from 60's Soviet economy suffered from stagnation and became increasingly dependent on
undisclosed loans from capitalist countries of Club de Paris, while continuing to present the Marxism as
progressive and superior to market economy. At the moment of its default and dissolution of USSR,
Russia alone owed $22 billion to the Club,[13] with other Eastern Bloc countries taking loans on their
own account.[14][15]

Widespread shortage of goods and failures of supply chain were presented as "temporary difficulties" by
official propaganda but numerous scholars in the Eastern bloc argued that these are systemic flaws of the
Marxian economy. János Kornai coined a term "economy of shortage" to describe the state of the Soviet
economy.[16] Leszek Kołakowski presented the political and economic state of Eastern bloc
authoritarianism as logical consequence of Marxism-Leninism, rather than a "deviation".[17] Nikolay
Shmelyov described the state of Soviet economy in 80's with large-scale systemic inefficiencies and
unbalanced outputs, with one goods being constantly in shortage, while others were constantly in
surplus and wasted.[18] These issues were naturally observed by Soviet economists but any proposals to
change the basic operating paradigms of the economic planning in response to observed inefficiencies
were however blocked by ideological hardliners, who perceived them as an unacceptable deviation from
Marxism-Leninism, an economic model which they perceived to be "scientifically" proven to be
superior.[8]

New Economic Policy (1921-1928) was a short period of economic pragmatism in the Soviet economics,
introduced by Lenin in response to widely observed shortcomings of the War Communism following the
1917 revolution. NEP was however criticized as reactionary and reversed by Stalin, who returned to total
economic planning.

Falsification of statistics and "output juggling" of factories in order to satisfy central plans became a
widespread phenomenon, leading to discrepancies between "reality of the plan" and the actual
availability of goods as observed on the ground by consumers. Plan failures, when it was no longer
possible to hide them, were blamed on sabotage and "wrecking". Shortages and poor living conditions
led to industrial actions and protests, usually violently suppressed by the military and security forces
(Novocherkassk massacre).

Performance in the Eastern Bloc

During the 1950s, the economic alliance between members of the Eastern bloc and the state monopoly
acted as a safety net in the face of Western sanctions being imposed. As a result, the Eastern Bloc
countries started to develop autarkic tendencies which would last until the Soviet Union’s dissolution.[19]
Trade was also able to grow, not just between member states but within them as well,[5] and the agrarian
states of the eastern bloc began to industrialize. The Soviet Union also gave Eastern bloc countries
subsidies in the form of raw materials at prices lower than those offered in the global market. However,
despite these efforts, varying degrees of development still remained between the industrialized countries
and the more agrarian ones, which would contribute to the Bloc’s economic stagnation in later decades.

The Council began to lose its credibility from the 1960s onwards, because disagreements between
member countries over the necessity of various reforms led to the slowing of economic growth. In order
to encourage economic integration and maintain soviet economic planning, the International Bank for
Economic Cooperation was established in Moscow in 1963, and the ‘transferable ruble’ was
introduced.[5] The integration failed to materialize for a number of reasons. Firstly, the new currency
was separated from foreign trade as is characteristic of centralized planned economies, and so was not
able to perform the various functions of money outside of being a unit of account [20] Additionally,
integration failed due to a general lack of interest, as well as the implementation of ‘market
liberalization’ policies within several member states throughout the decade.[5] Hence, the CMEA
switched gears in the second half of the 1960s, and instead a reform was proposed which encouraged
countries to pursue their own specialized industrialization projects without the needed participation of
all other member states.[21] East Germany, Poland, Hungary, and Czechoslovakia agreed to these terms,
however Bulgaria and Romania did not, and many political officials throughout the Eastern bloc
prevented the ‘market liberalization’ policies from being implemented at the CMEA level.[5] The inability
for member countries to reach a consensus about economic reforms coupled with the desire to create
‘dynamics of dissent’ within the Council against the USSR contributed to a lack of planning coordination
by the CMEA throughout the decade.[21]
In the 1970s, the CMEA adopted a few initiatives in order to continue economic growth and to
modernize the economy. Firstly, the Eastern bloc heavily imported technology from the West in order to
modernize, increasing the debt of the Eastern Bloc to the West dramatically.[5] In 1971, the CMEA
introduced the ‘complex program’, designed to promote further trade integration. This integration plan
heavily relied on countries specializing in the production of certain goods and services, and parallel
initiatives were discouraged and to be avoided. For instance, Hungary specialized in the manufacturing
of buses for local and long-distance transport, which encouraged other member countries to trade with
Hungary in order to acquire them.[5]

However, the economic problems of the Eastern bloc continued to increase as reforms failed to pass and
specialization efforts failed to incentivize states to improve their products. This resulted in economic
growth which paled in comparison to that of the West. In a study assessing the technical efficiency of
three Eastern bloc countries (Hungary, Poland, and Yugoslavia) from the 1970s to the 1980s and
comparing it to that of developed and developing countries, it was found that the three European
socialist countries were less efficient than both developed and developing countries, and this efficiency
gap had only widened in the years of analysis.[22] Additionally, among those three countries, Yugoslavia
was consistently the most efficient throughout the period of study, followed by Hungary, then Poland.[22]
The raw material subsidies that the Soviet Union had provided since the 1950s were drastically reduced
to the point of insignificance by the end of the 1980s, due to Eastern bloc countries having to buy
industrial goods at a higher price than what was offered on the global market.[5] The lack of support
from the USSR as well as the lack of political consensus over reforms only hastened the decline of the
CMEA.

Advantages

From a neoclassical perspective, the advantages of STP are quite limited. One advantage of STP is the
theoretical possibility to avoid inflation.[23] Complete price stability is achievable, not only because the
state plans all prices and quantities, but also because the state has complete control over the money
supply via the wages it pays as the sole employer. To maintain a fixed currency value, all the state must
do is balance the total value of goods available during a given planning period with the amount of wages
it pays according to the following equation,[24] where represents the general retail price level,
accounts for the quantity of consumer goods and services, is total household income (wages paid),
is transfer payments, is household saving, and is direct household taxes:

However, the USSR arguably never realized this theoretical possibility.[25] It suffered from both open
and repressed inflation throughout much of its history because of failure to balance the above equation.

Another advantage of economic planning from the neoclassical perspective is the ability to eliminate
unemployment (with the exception of frictional unemployment) and business cycles.[26] Since the state
is effectively the sole business proprietor and controls banking, it theoretically avoids classic financial
frictions and consumer confidence challenges. Because the state makes labor compulsory and can run
enterprises at a loss, full employment is a theoretical possibility even when capital stocks are too low to
justify it in a market system. This was an advantage that the USSR arguably realized by 1930,[26]
although critics argue that sometimes certain segments of Soviet labor exhibited zero productivity,
meaning that although workers were on employment rolls, they essentially sat idle because of capital
deficiencies, i.e. there was employed unemployment.[27]
Those scholars who reject the neoclassical viewpoint consider the benefits of STP that the USSR itself
adduced. One is the ability to control for externalities directly in the pricing mechanism.[28] Another is
the total capture of value obtained in STP which is neglected in market economies.[29] By this, it is meant
that while a worker might put in a certain amount of work to produce a good, a market might value that
good at less than the cost of labor the worker put in, effectively negating the value of the work done.
Because in STP prices are set by the state, STP avoids this pitfall by never pricing an item below its labor
value. While these do seem to be valid theoretical advantages to STP (especially under a Marxist–
Leninist framework), it has been argued by some that STP as implemented by the USSR failed to achieve
these theoretical possibilities.[28]

Disadvantages

From a neoclassical perspective, there were many disadvantages to STP. They can be divided into two
categories: macroeconomic and microeconomic.

Macroeconomic disadvantages included systemic undersupply, the pursuit of full employment at a steep
cost, price fixing's devastating effect on agricultural incentives and the loss of the advantages of money
because STP eschews money's classic role.[30] Systemic undersupply was caused in STP because of the
use of material balances (plans for the balanced production and consumption of goods and productive
inputs) which are theoretically possible, but practically impossible to produce because planners cannot
acquire enough information to craft them accurately. Additionally, planners had to aggregate many types
of goods and inputs into a single material balance because it was impossible to create an individual
balance for each of the approximately 24 million items produced and consumed in the USSR.[31] This
system introduced a strong bias towards underproduction, resulting in a scarcity of consumer goods.
Another disadvantage is that while STP does allow for the theoretically possibility of full employment,
the USSR often achieved full employment by operating enterprises at a loss or leaving workers idle.
There was always a Pareto superior alternative available to the USSR rather than full employment,
specifically with the option to close some enterprises and make transfer payments to the unemployed.[32]

The microeconomic disadvantages from a neoclassical perspective include the following:[33]

Encouragement of black-market activity because of fixed resource allocation.

Low quality of Soviet goods induced by shielding them from world markets.
The neglect of consumer need because of the challenge in measuring good quality.
The tendency of enterprise-level Soviet managers to understate productive capacity in fear of the
ratchet effect. This effect resulted from an enterprise overproducing in a given plan cycle. They
would have to match their new level of higher production in the next cycle as the plan was adjusted
to fit the new data.
An anti-innovation bias (also from fear of the ratchet effect).
Storming (shturmovshchina), i.e. the hurry to complete the plan at the end of a planning cycle
resulting in poor production quality.
Scattering of resources, i.e. excessive spread (raspylenie sredstv), where too many projects
(especially construction) would have been started simultaneously and it took much longer to
complete because of a lack of available inputs on time

Scholars who reject the neoclassical approach produce a shorter list of disadvantages, but because these
disadvantages are valid even from the Soviet perspective, they are perhaps even more damning of STP
than those listed above. These scholars consider STP's inability to predict things like weather, trade and
technological advancement as an insurmountable drawback to the planning procedure.[34] Without
exhaustive knowledge of those things, planning would systemically misappropriate resources. STP's use
of coercive techniques such as the ratchet effect and labor camps which are argued to be inherent to STP
on the one hand ensured the system's survival and on the other hand resulted in the distorted
information that made effective planning challenging if not impossible.[35] Lastly, these scholars argue
that the semantic limitations of language made it impossible for STP planners to communicate their
desires to enterprises in sufficient detail for planning to fully direct economic outcomes.[36] Enterprises
themselves under STP still made a variety of economic decisions autonomously.

After the collapse of the USSR, other scholars have argued that a central deficiency of Soviet economic
planning was that it was not premised on final consumer demand and that such a system would be
increasingly feasible with advances in information technology.[37][38]

See also
Eastern Bloc economies Planned economy
Economic planning Project Cybersyn
Economy of the Soviet Union Socialist calculation debate
Five-year plans for the national economy of the Socialist economics
Soviet Union State capitalism
Material balance planning

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