Lessons of the socialist planned (Soviet) economy

Econ 4313

A long time ago the chancellor of Germany, Bismarck, said the following after reading the “Communist Manifesto” by Marx and Engels, “This is very interesting. But now we have to find a country that we wouldn’t pity to do an experiment on”. Russia was to be the country that this experiment would take place in.

The main part of the experiment consisted of running a Socialist planned economy which is defined as the state of economy, where all production sections are governed and owned by government institutions. Before the country could implement the planned economy it had to adapt some policies.

First the country had to start industrializing, or as some economists call it the “big push” (industry-first strategy). The growth of the industrial sector was the ultimate goal.

But since Russian economy was so backward it required a transitional period that was called state capitalism. In stated capitalism, through nationalization, the state would control major sectors of the economy and use this control to influence the remaining private sectors. Nationalization gave the state not only the control of the means of production, but it also insured the control over the output

Another policy that had to be adapted was the collectivization. After 1927, when the voluntary grain output fell below government target, Stalin ordered the collectivization of agriculture by forcibly establishing collective farms. Millions of peasants who resisted collectivization were arrested, and then executed or deported. Even in the post-Soviet era, the collectivization of agriculture was Soviet economy’s sore spot; it never achieved its economic goals.

To hold all this together there had to be an organization big enough to balance what had now been known as the input-output economy. In 1922, Gosplan was created to exclusively and explicitly deal with planning. In the early stages Gosplan delivered the control figures and planed targets. In 1925 Gosplan assumed responsibility for drawing up Five Year Plans. The Five Year Plan called for industrialization at a maximum pace with a conception that some major construction projects had to be done. By the end of 1930s the nationalization was completed, agriculture collectivized, and the national planning mechanism established.

The Soviet economic system was one of the most complex organizational arrangements, especially among the different layers of organizations. The parts of the organization differ from one another, but they all share basic similarities. Gosplan planed, or composed documents in which were specified the economic objectives with explanation on how to achieve them. Once the plan was implemented the Gosplan then monitored the progress. So, in a way the planed economy worked like a big multilevel corporation. Specific branches of the planning organs monitored specific industries.

And as we looked at a two firm model in the class, Planned Economy if worked would be a more efficient economy, but in reality it didn’t work this way.

First, as Marx pointed out in his theory, a state can achieve communism only after it achieved other stages of development. State has to go from Feudalism to Capitalism, then due t the struggle between worker and the capitalist a revolution would take place and the state would go to a Socialist system. Then through Socialism one can achieve Communism. Problem with Russia is that it really never reached the Capitalist state of development. The country basically had an underdeveloped market economy, it was not industrialized, and it only abolished the ownership of serves some 50 years earlier.

Later, once the Planned Economy was employed the cracks in its structure started to come out. The flow of information and control figures between each division of the Central Planning Committee to other sectors was very time consuming, and trying to cover the whole national economy is a complex and burdensome task. This type of planning requires the “knowledge about the economic capacity, as determined by production technology and resource constraints, and to develop a set of output targets that relate to that capacity.”(103). In the Soviet planning the Gosplan was limited to a relatively small number of commodities, the complex production functions were simplified (such as linear relationships that did not change with scale of output), and the planning process did not begin over each year.

What are some of the strengths of Planned economy? Well as we saw in class on