My Time with Soviet Economics

Published on VDARE.com – October 29, 2002

(Published in

The Independent Review,
v.VII, n.2, Fall
2002,pp. 259– 264.)

The academic study of the Soviet
economy was unsuccessful. Several widely held
misconceptions contributed to the lack of success.
Western economists assumed that economic growth was
assured because the central planning authority
controlled the rate of investment. They assumed that the
Soviet economy was planned centrally because it had a
central planning agency. They assumed, as

Alexander Gerschenkron
put it in his December 1968

Ely Lecture
at the eighty-first annual meeting of
the

American Economic Association
, “that hardly anything
in the momentous story of Soviet economic policies
needs, or suffers, explanations in terms of its
derivation from Karl Marx`s economic theories” (1969,
16). All of these assumptions were false. Western
scholars (and intelligence agencies) consequently were
unprepared for the sudden collapse of the Soviet Union.
Their subject simply disappeared before they ever
understood it. In this article, I discuss each of the
erroneous assumptions in turn.

In April 1988, the Central
Intelligence Agency and the Defense Intelligence Agency
told the Joint Economic Committee of Congress that the
Soviet economy had grown by approximately 2 percent
yearly from 1981 to 1985, by 2.2 percent yearly from
1976 to 1980, by 3.1 percent yearly from 1971 to 1975,
and by 5 percent yearly from 1966 to 1970 (U.S. Central
Intelligence Agency 1988, 61). These estimates were
given to Congress even though two months earlier Mikhail
Gorbachev had told the Central Committee of the
Communist Party that, except for vodka sales and the
higher prices paid for Soviet oil, the Soviet economy
had not grown for twenty years (“Communiqué” 1988, 1;
see also Bergson 1988 and Franklin 1988).

In 1962, G. Warren Nutter tried to
bring some reality into the estimation of Soviet
economic performance with his book The Growth of
Industrial Production in the Soviet Union,
published
by Princeton University Press for the National Bureau of
Economic Research. Nutter had little success in curbing
exaggerated estimates of Soviet economic growth. In the
end, even his own estimates proved to be on the high
side.

As late as 1979, economists still
ascribed a remarkable growth potency to central
planning. In that year a World Bank report, Romania:
The Industrialization of an Agrarian Economy under
Socialist Planning,
credited central planning with
achieving a 9.8 annual rate of economic growth over the
quarter century from 1950 to 1975. Remarkably, the World
Bank economists did not realize that using these lofty
growth rates to project backward the World Bank`s
estimate of Romanian income per capita produced a figure
too low to sustain life. This mistake provoked the
Wall Street Journal
observation: “We have heard
exaggerated claims made for central economic planning,
but never that it resurrected a whole nation from the
dead” (“Resurrection of the Dead” 1979).

Economists could make such errors
with impunity without any adverse effect on their
careers because a positive attitude toward central
planning was considered a sign of sophistication. It was
more important not to be considered anticommunist than
to know what one was talking about. Even as late as
1989, Paul Samuelson delivered the obligatory paean to
the Soviet economy in his economics textbook (Samuelson
and Nordhaus 1989, 837).

The emphasis on growth rates was
one way of avoiding the question of what the growth
rates were measuring. Much of Soviet output related very
poorly to use. Inputs often were combined to create
outputs worth less than the inputs. It is not genuine
industrialization to construct capacity embodying
production functions that produce outputs worth less
than the inputs. The pitiful income per capita in Russia
today reflects seventy-five years of wasting resources.

The Soviet Union wasted its
resources because the success indicator for Soviet
managers allowed them to be successful even though their
output was poorly related to the needs of users. Soviet
output basically satisfied no one but the statistician
measuring it.

The Soviet manager`s success
indicator was a measure of gross output, such as weight,
quantity, square feet, or surface area. Gross output
indicators played havoc with assortments, sizes,
quality, and so on. Nikita Khrushchev complained of
chandeliers so heavy “that they pull the ceilings down
on our heads” (qtd. in Roberts and LaFollette 1990, 8).
A famous Soviet cartoon depicted the manager of a nail
factory being given the Order of Lenin for exceeding his
tonnage. Two giant cranes were pictured holding up one
giant nail.

If weight was the plan indicator
for nails, the assortment would be heavily weighted with
large nails; if the plan indicator was quantity, small
sizes would predominate. The Soviets experimented by
adding other indicators, but in the end a gross output
indicator always determined the manager`s success or
failure. When I first examined this system, it was clear
to me that signals interpreted by managers constituted
the main difference between the Soviet economy and a
normal market economy (Roberts 1968b, 1969, 1971a). In a
normal market, managers organize production by
interpreting price and profit signals. In the Soviet
economy, managers interpreted gross output indicators.
The critical difference is that gross output indicators
are irrational from the standpoint of economic
efficiency.

Soviet managers were as autonomous
as their market counterparts. They set their own plan
targets by disguising their productive capacity and
overstating their resource needs. Soviet planners served
primarily as supply agents for enterprises, endeavoring
to supply the enterprises with sufficient inputs to
fulfill their gross output targets. The system of
material supply could seldom perform this task, and
Soviet factory managers made barter arrangements with
one another and produced their own inputs. This activity
led me to the conclusion that the Soviet economy, like a
market, was organized polycentrically and not
hierarchically as a planning system. The “central plan”
was little more than the summation of the factory
managers` individual plans.

My conclusion was buttressed by
the absence of a theory of central planning. Despite
many years of observing the Soviet economy, no one could
explain how planners derived the structure of output.
Jan Drewnowski of the Central School of Planning and
Statistics in Warsaw noticed this problem. In a 1961
article, he tried to use the concept of revealed
planners` preferences to explain how central plans are
derived. Given a production possibilities curve and a
state indifference curve or preference function, the
point of tangency would indicate the coordinates of the
plan. Generalizing this procedure reveals a “whole
system of rates of substitution” that “may be looked
upon as relative shadow prices” or “state preference
prices” (348–49). The problem was that Drewnowski did
not have the state indifference curve. So how was the
point of tangency determined? In his theory, the plan or
output targets are given exogenously. The planners`
preferred point on the production frontier is found
before the planners` indifference curve is found. The
state preference prices depend on the slopes of the
arbitrarily drawn segments of indifference curves.
Because the plan is a given, the laboriously revealed
state preference function is superfluous (Roberts 1968a,
1972).

When Drewnowski`s theory exploded,
some economists fell back on Oskar Lange`s (1938) theory
of socialist planning. Lange`s “theory” is market
simulation disguised in socialist vocabulary that
creates the illusion of planning. His model depicts the
market with public ownership and therefore embodies all
the exchange relationships of commodity production. The
purpose of central planning, however, was to eliminate
the market, not to simulate it. Lange took the concept
of socialist planning out of its historical context and
obscured it. He turned the debate about socialist
planning into a discussion of the logical consistency of
models of market simulation —-their determinacy,
stability, and convergence toward equilibrium. It was
easy to show that his “theory” permitted no planner to
derive a central plan (Roberts 1971b, 1973b).

Economists fell for Lange`s
“theory” because they were unfamiliar with Marxist
aspirations. Marx attributed the alienation of man to
commodity production—that is, to an economic system that
organized production for sale on the market. Economic
crises and all the evils that Marx attributed to
capitalism followed from the structure of commodity
production (Roberts and Stephenson 1968, 1973, 1983).
The purpose of socialist planning was to eliminate
market exchange and organize production for society`s
direct use. The economy would be organized as a single
factory, and everything produced would have a
predetermined aim, as on a self-sufficient feudal manor
or family farm.

Unfamiliar with the aspirations of
planning, Sovietologists never understood Soviet
economic history. When Lenin and the Bolsheviks seized
power, those revolutionaries undertook a direct
transition to socialism. They were unable to organize
the Russian economy to produce for the direct use of
society. They did succeed, however, in disrupting all
economic relationships, causing famine and widespread
rebellion. Looking back on “five years of the Russian
Revolution,” Lenin acknowledged the “grave political
crisis” in 1921. “The reason for it,” he said,

was
that in our economic offensive we had run too far ahead,
that we had not provided ourselves with adequate
resources, that the masses sensed what we ourselves were
not then able to formulate consciously but what we
admitted soon after, a few weeks later, namely, that the
direct transition to purely socialist forms, to purely
socialist distribution, was beyond our available
strength, and that if we were unable to effect a retreat
so as to confine ourselves to easier tasks, we would
face disaster. (1960–68, 421–22)

Despite unequivocal and
overwhelming evidence, Sovietologists and historians
misinterpreted the Bolsheviks` efforts to eliminate
market exchange as ad hoc measures to deal with civil
war and inflation. Western academics placed a
non-Marxian interpretation on Soviet economic history
that permanently blinded them to the ideological
intentions of Soviet planning. Collectivization of
agriculture and the Soviet institution of material
supply were never understood as part of the communist
assault on commodity production.

In my account, Soviet economic
history is a product of the interaction of utopian
intentions with a refractory reality, an interaction
that ended in the abandonment of the original aims of
the revolution (Roberts 1970, 1971a, 1971c, 1971d,
1973a, 1990; Roberts and LaFollette 1990). In my
account, economic and historical necessities have to
make room for speculative excess as a force in history.
The powerful socialist symbols of the twentieth century
were expressions of passion for conviviality. They
represented inordinate aspirations and caused Soviet
history to be shaped by aims that did not comport with
reality.

References

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March 25.

Communiqué on the Plenary Session
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Drewnowski, Jan. 1961. The
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(August): 341–54.

Franklin, Daniel. 1988. The Soviet
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Lange, Oskar. 1938. On the
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———. 1968b. Oskar Lange,
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