Soviet-type economic planning
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Soviet-type economic planning (STP) is the specific model of economic planning employed by Marxist-Leninist socialist states modeled on the economy of the Soviet Union. 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.
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.
The major institutions of Soviet-type planning in the Soviet Union 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.
Material balance planning was the major function of Gosplan in the Soviet Union. 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.
Analysis of Soviet-type planning
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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. In contrast to this approach, scholars like Pawel Dembinski argue that neo-classical tools are somewhat inappropriate for evaluating Soviet-type planning because they attempt to quantify and measure phenomena specific to capitalist-based economies. 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 neo-classical analysis will distort the actual effects of STP. These other scholars proceed along a different course, trying to engage with STP on its own terms, investigating the philosophical, historical, and political influences that gave rise to STP, and evaluating its economic successes and failures (theoretical and actual) with reference to those contexts.
Both approaches yield similar results: the disadvantages of STP far outweigh its advantages, whether the goal in view is to create an efficient economic system - the goal of Western countries and the neoclassical analysis standard - or to move a society along the path to achieving an advanced communist economy - the stated goal of the USSR and the Dembinskian analysis standard.
The USSR practiced some form of economic planning beginning in 1918 with War Communism until it collapsed 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. A distinction must be made: Soviet-type planning (STP) is not the same as economic planning in general - 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.
From a neoclassical perspective, the advantages of STP are quite limited. One advantage of STP is the theoretical possibility to avoid inflation. Complete price stability is achievable, not only because the state plans all prices and quantities, but also because the state has complete control over money supply via the wages it pays as the sole employer. Therefore, 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, where P represents the general retail price level, Q accounts for the quantity of consumer goods and services, Y is total household income (wages paid), TP is transfer payments, S is household saving, and T is direct household taxes:
However, the USSR arguably never realized this theoretical possibility. 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. Since the state is effectively the sole business proprietor and controls banking, it theoretically avoids classic financial frictions and consumer confidence challenges. Also, 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, although critics argue that sometimes certain segments of Soviet labor exhibited zero productivity, meaning that though workers were on employment rolls, they essentially sat idle because of capital deficiencies; i.e., there was employed unemployment.
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. Another is the total capture of value obtained in STP which is neglected in market economies. 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. But, 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 framework), it is argued that STP as implemented by the USSR failed to achieve these theoretical possibilities.
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. 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. This system introduced a strong bias towards underproduction, resulting in the great scarcity of consumer goods that plagued the USSR for most of its existence. 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. Therefore, there was always a Pareto superior alternative available to the USSR rather than full employment, specifically, the option to close some enterprises and make transfer payments to the unemployed.
The microeconomic disadvantages from a neoclassical perspective include:
- 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) which was the hurry to complete the plan at the end of a planning cycle resulting in poor production quality
- "Scattering" of resources (excessive spread, raspylenie sredstv), where too many projects (esp. 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. Without exhaustive knowledge of those things, planning would (and did) systemically misappropriate resources. Also, STP’s use of coercive techniques (e.g. ratchet effect, labor camps, etc.), 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. And 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. Enterprises themselves under STP still made a variety of economic decisions autonomously.
As can be seen from both scholarly perspectives, STP as an economic system must be considered inferior to market-based economies. For the neoclassical economist, it is inferior to a system that relies primarily on market forces and allows prices to carry information about consumer preferences. For those trying to engage with STP on its own terms, it is inferior in that it failed to move socialist countries any closer to fully developed socialism for which they had been striving, and indeed, STP contained internal contradictions that would have prevented these countries from ever achieving socialism-proper.
- Eastern Bloc economies
- Economic planning
- Economy of the Soviet Union
- Five-Year Plans for the National Economy of the Soviet Union
- Material balance planning
- Planned economy
- Socialist calculation debate
- Socialist economics
- Comparing Economic Systems in the Twenty-First Century, 2003, by Gregory and Stuart. ISBN 0-618-26181-8. "Material Balance Planning", (P.127)
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- Dembinski, Pawel H. (1991). The Logic of the Planned Economy: The Seeds of the Collapse. Oxford: Clarendon Press. pp. 1–2.
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