The Soviet Union initially experienced high rates of economic growth, but then headed inexorably toward economic collapse. How did the Soviet economy manage to grow at first, and why did it ultimately fail?
The Soviet command economy undertook extensive resource mobilization to put people, raw materials, and machines to work; the Soviets were especially able to mobilize heavy industry and increase production of industrial machinery-though often without any consideration for such machinery’s use in satisfying the needs of consumers.
The Soviet government engaged in forced saving by compelling workers to consume less than they wanted to; workers were paid as little as possible so that the government might invest as much as possible into heavy industry. Workers were often told that they needed to make sacrifices today in order to achieve a glorious utopian future. During Stalin’s collectivization of agriculture, this reached an extreme, as peasants had their last stockpiles of grain confiscated from them in order for the government to export it abroad and use the proceeds to fund industrial expansion.
The Soviet economy was not a purely centrally planned system-and there existed many official and unofficial capital markets. Firms would often illegally trade inputs among each other, and sometimes government planners would explicitly encourage firms to maximize profits-albeit at non-market prices negotiated between the firms and the central planners.
Even after the economic decline began in the 1970s, high oil prices helped stave off the collapse for another decade-as the USSR was then the world’s top oil exporter.
But numerous factors led to the ultimate collapse of the Soviet economy-whose growth could not be maintained indefinitely.
State-owned enterprises faced great disincentives against adopting new and more efficient technologies, because such adoption would only mean that the firms would be required to produce much more in the future. Resource mobilization could only go so far before suffering from a diminishing marginal product of labor: output per worker fell as the amount of capital increased. The Soviet command economy had virtually no incentives for technological progress or entrepreneurial discovery-despite some of the best educational institutions in the world.
Physical measures of output were often used as indicators of success in evaluating firms’ performance-but without regard to the quality of the goods produced. Firms sometimes made many unusable nails or shoes all in one size. Agricultural production was evaluated based on the amount of inputs used-which encouraged agricultural collective enterprises to waste fuel and fertilizer.
Nobody was capable of defining all the feasible economic plans-and therefore it was impossible to choose the optimal plan based on any sort of rational calculation. Rather, decisions were made arbitrarily and often with heavily political considerations in mind. Some institutions-such as the military-were greatly favored over others, while consumers were often put at a disadvantage by the system.
Firms had strong incentives to deliberately misinform the central planners by requesting many more resources than they would need to meet their production targets. Since firms often did not get the full amount they requested, requesting too much made them more likely to get enough materials; but this also meant that the central planners seldom had an accurate idea of the actual state of the economy.
The Soviet economy had none of the free-market mechanisms that could eliminate economic malinvestments; it lacked recessions, bankruptcies, or layoffs for the purpose of cost-cutting-and thus there was no built-in economic mechanism to correct for unprofitable or unwise use of resources.
Terror and government-induced starvation of millions of peasants-especially during the Stalin era-destroyed immense amounts of potential labor and human capital that could otherwise have contributed to a more prosperous economy. After wasting enormous amounts of resources and human lives, the Soviet experiment collapsed. At an immense cost, the Russian people learned of the unsustainable and undesirable nature of centralized economic planning.
