The Economy of the Soviet Union

The Economy of the Soviet Union Was Good

• From a period from about 1930 to about the 1980s many talked about the Soviet economy with some admiration

Union of Soviet Sosialist Republics

• Now when we look back we pretend that we never said those thing

• They were not growing just doing a good job at acting for the world

USSR

• The old Soviet Union was by far the largest country in the world– Covered nearly 1/6 of the worlds land– From the Baltic Sea, bordered Finland and

Sweden, all the way to the islands in the Bering Strait near Alaska. From Central Asia to the Artic. 11 time zones in all

– Even when the USSR disbanded in the early 90s, the Russian Federation is still the largest at twice the size of Canada

More Than Just a Big Country

•

What was really happening?

• Few got a chance to visit and even fewer got a chance to see the truth

• Visitor were generally confined to a few cities like Moscow

• Nobody got a chance to see how the real population lived—nobody was allowed into the rural areas

Average People

• Many did not have running water and therefore did not have toilets

• Many did not have electricity• Many did not have phones• Many did not have cars

We Were Fooled

• Paul Samuelson, Nobel Laureate

Failed Model

• We knew that there was not much political freedom

• In the old days we often justified this by talking about our inequalities, problems in our prison and justice system, problems with racial prejudice, non-universal healthcare, long-term unemployment

• Many just stated it as though they selected this tradeoff

How Soviet Economic Planning Worked

• The Soviet government owned the resources and the companies in the country– Land, minerals, factories, machinery, all

companies– What is left—a few private homes, some small

family-size agricultural plots, and some personal and professional services

Soviet Planning Agencies

• Gosplan—national economic planning• Gossnab—materials and equipment supply• Gosstroi—construction• Goskomtsen—prices• Goskomtrud—labor issues– All were at the national level and most were

duplicated at the 15 regional levels

What the bureaucrats did • They made a plan for how much every

enterprise would produce• A detailed investment plan

• Other committees would determine all of the prices

Money and Credit

• These were not part of the major plan• Just a medium of exchange• Just one bank—Gosbank

Gov Had a Monopoly on Foreign Trade

• All imports and exports had to go through a specific state agency– Council for Mutual Economic Assistance• COMECON

• Goal was to do large scale production of one good in one place

Little Trade Outside the Bloc

Sum Up the Bureaucratic Problem

• In an age of weak computing power you are trying to plan the total economy of this huge country– Plans plans plans—info is continually flowing up

and down– Tons of bargaining—firms would ask for very low

quotas and many resources

Promises promises promises

• Regional authorities would often promise to meet quotas

Taut Planning

• We are going to ask you to do something that according to our calculation you will not be able to do given your resources

• Why? The government thinks that the firms are lying about what they have and are capable of doing

Prices are Fixed

• With all of the chaos and poor planning, prices stay fixed for long periods

• Try to set the correct price, but quantity and price are not related nor are they related to the consumer—they are just made up numbers

Planning From the Achieved Level

• Planning was often just

• This results in freezing existing patterns in place. In some ways the command economy degenerated into a traditional economy

Why Did This Central Economic Planning Seem So Attractive

War Had an Effect Also

• During both WWI and WWII the US government, as well as several governments across Europe, intervened heavily

All Good?

Great Depression

The Demonstrable Failure of the Overly Planned Economy

• Failure in the macroeconomic statistics• Failure in its ability to function well• Failed at the basic task of providing goods and

services that the consumers want

Productivity = Output / Person

• All those decade of good news and the Soviet economy was growing so fast

• By 1990, the Soviet Union had a per capita GDP comparable to countries like Turkey or Brazil

Quantities, Prices, Quality

• Quantities were made up• Prices were made up• Quality was unknown

• Growth must have been very slow in the 1970s and 1980s—probably about 0

The Soviet Union Invested About 25% of GDP

• This is considerably above US levels• Yet they had zero growth

Failure on the Micro Side

• The emphasis was on quantity over quality• Distribution was never correct and long lines

always formed• Not to mention environment degradation

Quotas

Quotas

• For a while they boasted that they were leading the world in television production

Quotas

• 600 million watches per year• Every person can have 2 or 3 new watches

every year

Widespread Shortages

• Soviet women used to spend hours every week just standing in lines

• The old joke is that if you see a line go stand in it because there is something that has worth

Planned System

• Lack of incentives and flexibility

• We pretend to work and they pretend to pay us

Externalities

• Rarely took environmental issues into account

• They had awful environment poisoning!

Norilsk

• An industrial town north of the artic circle• The snow turns black, the air is yellow with

sulfur, and over 60% of the population have serious respiratory problems

Inland Sea

People Were Not Happy

• Lousy quality• Long lines• No incentives to advance• Environment Destruction• Planners can not just wave a wand at these

problems and make them disappear

Potemkin Economy

Potemkin

What was the Nationality of Adam and Eve

Two Ways Out of the Russian Economic Crisis

• The natural way and the miraculous way