Soviet Style Economics Was Insane and Here’s Why

It's the 1920s and almost every major economy is booming. The Roaring '20s were a decade defined by its opulence, opportunity, and hope for the future. With the end of World War I in 1917, the global economy became supercharged and led by the then boasted American industrial growth. Almost half of total world production between 1920 and 1929 the American economy grew a whopping 42 percent driven by the widespread adoption of mass production and the introduction of electricity the United Kingdom and France rebuilt and maintained their powerful colonial empires and Even Germany was beginning to see a major economic rebound in 1923, however, the economic euphoria came to an abrupt halt, panicked. 16 and a half million shares sold in a single day desperately sold at any price, the market crash of 1929 and the subsequent great depression accelerated.

The global economy US industrial production plummeted by 47 and unemployment soared to 20 decimating the growth of the previous decade every major economy experienced incredible contractions in their output, income and workforce except one largely isolated from global economic banking and trade, as well as not Being subject to demand shocks, the Soviet Union was a unique country that not only overcame the great depression but prospered rather than contracted. The Soviet economy continued its dramatic economic and industrial boom, increasing its total industrial output between 1929 and 1934 by a whopping 50%, all while effectively maintaining zero unemployment in light of such a major economic recession.

In contrast, some Western economists praised the Soviet communist system and some went so far as to assert its superiority over Western capitalism. In just a span of 40 years, the Soviet Union went from being an impoverished and backward agricultural monarchy to being the victor of fascism, the first to put a satellite and a man into orbit, and the largest single owner of weapons of mass destruction since The Soviet Union catapulted onto the world stage is only one of two remaining superpowers ceding the largest military and second largest economy, yet as quickly as it emerged, the Soviet Union collapsed as a result of its crumbling economy, but Why is the once envied Soviet economy now in ruins only to have left a bloody mark on human history?

This is the story. of the Soviet Economy To truly understand the Soviet economy and the path it ultimately took, we must first understand the fundamental forces and conditions that caused its emergence in Russia in the first place, to do this we have to travel back to the beginning of the 14th century, after the fall of the Roman Empire, the dominant form of European government was feudalism. Feudalism was a system in which a king would personally own all the land in the country to maintain control and security; then the king would divide the land and distribute it. to a class of lords in exchange for the land, the lords would provide military forces for the king when necessary, the lords would then make use of their property forcing the vast peasant population to pay to live and work on the land by paying heavy taxes and performing extensive unpaid work, this was called serfdom and the peasants known as servitors were tied to the land, meaning they were not allowed to move without the consent of the lord.

This system was designed to exploit the large lower class and have small amounts of wealth produced to trickle down to the elites. A system that acts in this way is known as an extractive economic system and is kept in place thanks to an extracted political system. Political in this case was simple, the only people with control who changed things in the country were the small group of lords and kings, t

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fore, it was almost impossible for the peasant situation to improve since the elites had a great interest in the Things remained the same and for a long time they did, however, in the year 1346 in the port city of Tana.

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here

the Don River meets the Black Sea in modern-day Russia, the first known European case of bubonic plague or black death appeared, spreading from China via the Silk Road. The plague spread quickly across Europe, killing nearly 50 percent of the population wherever it went. The extreme loss of life of the peasant population shook the foundations of the feudal system to its foundations with a new massive labor shortage. Suddenly, the value of peasant labor had skyrocketed, and therefore the bargaining power in the face of a shortage of workers, desperate lords across Europe. began to try to rob the peasants from each other by promising not to require extensive labor or reduce taxes, which eventually resulted in a complete or almost complete abolition of unpaid labor, which significantly increased the living conditions of the peasants, wealth and finally the power to demand further changes in 1351.

The English government, in an attempt to maintain the power and wealth of the elites, instituted a statute that punished peasants with prison terms if they moved from the lands of his current lord. This would have the effect of fixing wages and unpaid labor requirements at pre-plague levels. seeing their new freedoms disappear, this culminated in the Peasants' Rebellion of 1381 in England, in which the rebels took London. The rebellion was eventually put down by the king, however there was never another attempt to enforce the statue. This happened throughout Western Europe, effectively creating a new, more inclusive labor market, as opposed to an extractive economic system, an inclusive one does not depend on the desires of the upper class but on the balance of markets, therefore wages cannot be reduced artificially, but workers are paid based on the value they have to their employers while they are in In the case of Western European peasants after the plague, the system was by no means inclusive; however, it was significantly less extractive than before.

This small gain in wealth caused a small gain in power to act and organize in the future. Over time, this worsened until the time came. was right, a broad coalition of workers, soldiers, businessmen, etc. could then rise up to make demands or even remake the system to be more inclusive when a coalition is broad enough that no one group can take power to consolidate. As the new elite became as tyrannical as the old ones, this eventually led to securing property rights, a fundamental element of crucial importance to the industrial revolution that supercharged national economies and the living standards of all who lived in they.

This was the history of economic development in the West. However, in Europe contrasted drastically with Eastern Europe, unlike their Western counterparts, Eastern peasants were more dispersed, lived in smaller villages, and were less organized, while their lords controlled larger, more powerful swaths of land in response to the labor shortage caused by the bubonic crisis. plague, the lord of the east seized more land and increased his possessions, at the same time he clamped down on the peasant population even more harshly, since the peasants of the east were less powerful, their rebellions did not occur or failed miserably, no They saw new freedoms granted to them. but even more was taken from them, this was further exacerbated in the 16th century, when Western demand for agricultural products such as cattle and wheat produced in the East grew rapidly.

With this increased demand, the lord sought in his best interest to impose even stricter controls. on the peasants who demanded more unpaid labor and collected even more taxes the gap in wealth, power and freedoms between the peasants of the west and the east became great this fundamental division in Europe worsened over the centuries, while in In the west the lower classes were eventually able to overthrow absolute monarchies and replace them with much more inclusive constitutional monarchies or even republics, the eastern kingdom stayed almost exactly the same or even became more extractive first in the British Isles, then in the US and later in western continental Europe.

The industrial revolution began in the mid-18th century. century driven by fair legal systems and intellectual property rights, people can now benefit from the discovery of new inventions and processes without fear of someone stealing their ideas. This sparked an explosion of new patents, inventions and systems that dramatically increased productivities and efficiencies. of industries and economies for the first time in history sustained economic growth occurred and living standards for all increased exponentially in the early 20th century powerful industrial manufacturing bases were established in Britain, France, Germany and the United States, however , the industrial revolution faced staunch opposition in eastern countries that still maintained absolute monarchies and extractive systems such as that of the Russian Empire in the year 1850 Russia comprised one-seventh of the entire land mass on Earth, stretching from Germany to Canada, but its overall economy was relatively small and its citizens were still poor, this was not without reason, Russia was still based on the feudal system of the 14th century, meaning that the king known as Hazard had almost complete control over Its population and the small noble class exploited the poor by being in charge of the old traditional industries, the king and the elites feared the creative destruction caused by industrialization.

Creative destruction refers to the process of new inventions or systems that tear down old industries and replace them with more efficient and productive ones, thus taking away wealth and resources from the established elite class and at the same time building a more powerful middle class that would be able to challenge the current system, therefore, to maintain control, the tsar actively stopped industrialization, effectively restricting economic growth during the 18th, 19th, and early 20th centuries. As a result, the Russian Empire was an extremely impoverished and backward state that had very few freedoms for the population. Serfdom was finally abolished in the Russian Empire in 1861, however, it was replaced by a system that maintained many of the same oppressions with little increase in the quality of life at the time.

It was woefully behind the others in terms of heavy industry and military. Before 1853, the entire Russian Empire had only one railway. This only changed when the decisive defeat of the Crimean War demonstrated that their lack of railways was a major security threat against their much more industrialized countries. By 1914, the neighbors, Russian society, outraged by centuries of oppression under a tyrannical monarchy, had repeatedly and unsuccessfully rebelled in an attempt to gain the freedoms that Westerners had enjoyed, along with a particularly incompetent tsar, Nicholas II. , in an embarrassing defeat against the Japanese. In 1905 the seeds of revolution had been sown and the entire system had become unstable;

Then on August 1, 1914, Germany, due to its obligations to defend Austria-Hungary after its invasion of Serbia, declared war on Russia in 1917, Russia was losing badly to the Germans. People were starving, their economy had collapsed and their ruler Nicholas II had made some pretty terrible political decisions like putting himself as army commander while leaving his German wife in charge of the country. Protests broke out in Petrograd. Soldiers began. a mutiny and Vladimir Lenin the exiled leader of the Bolshevik Communist Party was smuggled into the country by the Germans who hoped to cause more internal conflict, which he did under enormous pressure.

Zhar Nicholas II abdicated the throne that his family had occupied for more than 300 years. The country quickly became divided between the provisional government supported by the less radical revolutionaries and the much more organized and radical communist Bolsheviks, eventually the country erupted into a bloody and exhausting three-year civil war; In the end, Russia was in ruins and the communists under Lenin had taken and consolidated control of the country by formally creating the Soviet Union shortly after the ideology of the communists was based on the ideas of German philosopher Karl Marx. He believed that a constant battle between capitalism and workers would ultimately result in a revolution in which the working class would seize the means of production and build a classless society where private property would be abolished and everyone would work for the good. common.

The Russian Revolution, which was originally based on these ideas, was to replace the old government drawn from Zaris with a more egalitarian government. socialist, however, the party that took thecontrol, the Bolsheviks, was not a broad coalition of the working and lower classes like Western revolutions, but rather a small group of highly radicalized and organized Marxists, so there was no built-in mechanism to prevent them from becoming tyrannical. As they had done in the West, the first thing the Bolsheviks did was to become a new class of political elites very similar to those they had destroyed in the revolution.

They did not allow anyone who did not agree with them to join the party and sought to institute their socialist utopia through force in 1918 during the civil war the first real demonstration of communist

economics

called war communism was launched all the time. Industries were nationalized in all economic processes had to be controlled by the state due to the desperate state of the economy the Bolshevik Red Army could not obtain the weapons and food necessary to win the war. Food and grain were confiscated from rural peasants and all industry was devoted to military manufacturing. In 1921 the new economic policy was instituted because war communism had drastically reduced agricultural production. and peasant public opinion the nep from 1921 to 1928 made agriculture and small businesses private again to stabilize the food supply the economy began to recover, but mainly as a result of reconstruction after the total collapse in 1924 lenin died of a stroke and shortly after Stalin took control as head of the communist party in 1928 the first of the five-year plans was launched which nationalized all production once again, at which time the entire Soviet economy was completely controlled from above, which which means that every input and every output of every factory, every farm, every company, every store, every price, every aspect of the Soviet economy was dictated by Stalin's government and the innermost party officials in the politburo would decide the general direction of the economy then through a series of government agencies an extremely intricate and detailed plan would be designed after a series of minor negotiations with the managers of individual farms and factories the five-year plan became law the first major initiative of Stalin was to radically grow heavy industry including steel and military manufacturing in a desperate attempt to catch up economically with the other European powers, Stalin deeply feared that another war would break out and that, being so far behind in industrial development, the union In Stalin's surprisingly precise and chilling speech at the first workers' conference in 1931, he stated that we are 50 or 100 years behind the advanced countries, we must cover this gap in 10 years, or We do this or we will be crushed, it would be exactly 10.

Years later, when the Germans launched the largest land invasion in history into the Soviet Union, the way this plan for rapid industrialization was to be carried out was to drastically tax agriculture and send massive amounts of food, labor and supplies to factories in cities. In 1928, approximately 85% of the entire Soviet population were rural peasants whose traditional, backward way of doing things made agricultural production very unproductive. Taxes on these small, dispersed village communes were also notoriously inefficient. farmers on state or communal farms that grouped hundreds or thousands of people to work for the state. This process became known as collectivization and would directly lead to the deaths of approximately 12 million people.

Almost all of the food produced was sent to the cities to help. In the main goal of industrializing heavy industries, taxation and food redistribution became easier, however, inefficiencies were further exacerbated by the lack of incentives, as farmers' production did not influence how much were paid, the agricultural sector remained a serious thorn in the side. the Soviet economy for the rest of its history and highlights the first major problem of the Soviet economic system: incentives in a capitalist society, you have complete freedom to change jobs and work anywhere else that will hire you if you work smarter or harder . or more, you provide additional benefits to your employer, not wanting to risk losing you to another employer, they will reward you with a higher salary or benefits, so there is a built-in incentive to do more of your job or better in the

soviet

union communist there was.

Little to no incentive to do so, as their salary was almost always set at a specific rate, even when the government implemented later attempts to provide more incentives, the additional money workers would receive would be of little use as the Soviet economy was dictated above to maintain population content, prices were fixed and kept production low and therefore prices were not correlated with each other as they are in capitalist societies, which meant that the need for goods to the established prices was much higher than the actual production of those items. that items were almost always out of stock and when they were not they sold out quickly, this coupled with the fact that heavy industry was persistently emphasized more than the manufacturing of consumer goods and what remains is the inability to make use of it. of the extra money given for doing a better job, so the incentives in the Soviet Union did not work well and productivity per person suffered.

Despite this, the economy continued to advance between the period of Stalin's first five-year plan in 1928 and the beginning of World War II, the Soviet economy grew at a rate of 5.8 per year, almost doubling its size during a time when Western economies stagnated. This was done by forcing the allocation of people from less productive industries to more productive ones by utilizing the huge peasant population. By working on highly inefficient rural farms and moving them into highly productive heavy industry and construction massive gains in economic activity were achieved even if the workers themselves were not very productive an increase in production could be achieved simply by dramatically increasing inputs how manufacture more steel than was just produced? more steel factories and giving everyone more iron and workers, the Soviet economy grew rapidly, however, the quality of that growth was very poor, this is demonstrated precisely by the actions of the managers of the companies, who are the ones who They actually managed the individual farms and factories when a five-year plan was being created, the last step included negotiations between industry bosses and company managers over how many inputs were needed for the planned outcome, since the only concern of the manager of the company was to achieve the planned result, they did not care if it was profitable. and therefore they always asked for as many inputs as they could.

One way Soviet planners tried to increase productivity was to demand more output this year than last year with the same amount of inputs. The way they incentivized managers to do this was by making Managers pay based on meeting the production target and give a bonus for exceeding it; However, the managers were smart and almost always the actual results were directly above the target or well below it, for an important reason, while the managers would receive a bonus for producing more. were also worried about next year's salary by producing well above the target this year, the planners would simply make that production the target for next year, which would make next year's salary much more difficult to obtain, so if the goal was achievable, the manager would stop producing. when they reached it or if it was out of their reach there was no reason to work for anything, so they produced the least they could in the hope that the next year's goal was to reduce inputs for a factory and also included the total number of employees in supply chains.

They were also notoriously unreliable and sporadic, this meant that for much of the time there were too many workers with little or no work to do; However, when supplies arrived, surplus labor was needed to meet quotas, so company managers asked for as many employees as possible. As far as possible they never wanted to lay off any workers and even if they did it was often difficult to do so as jobs were legally guaranteed in the Soviet economy, this meant that the average factory in the Soviet Union would have up to twice as many workers as a comparatively similar one in the United States, so while unemployment was effectively zero, which is better than any capitalist society then and now, it was due to law and inefficiency rather than a byproduct of a more productive system that will make things worse for productivity when they are provided with new equipment. that would eventually make the factory more productive it would often end up unused this again was due to a lack of incentive on the part of the company managers to increase productivity the company manager would not benefit from this increase in productivity and personally would risk missing the production target this year, as it would take time to retrain and integrate the new equipment into the manufacturing line, so productivity gains were slow and stunted.

Most of these incentive problems arose from another key issue: the limited information in fully planning an economy of an industrialized nation. What is needed to run things as efficiently as a market economy is complete and total information for the economy. which Soviet planners did not have unproductive and wasteful industries persisted as incentives could not be used by planners to increase efficiency, the last and possibly most A major failure of the Soviet economy was the lack of innovation in the capitalist world. Since property rights were established and maintained, there was an immense incentive to create a new invention or a more productive manufacturing process because you could patent the idea and make a lot of money. again in the

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union with fixed salaries, a limited range of items to buy and the fear that this will one way or another come back to hurt you, are like general incentives for the Soviets to innovate.

Innovation is what drives growth in developed economies and therefore without organic innovation the Soviet Union attempted to import innovation by purchasing advanced machinery to be used and copying this included purchasing an entire factory when the Soviets hired fiat to build a popular high-tech automobile factory for them, however this cost a lot and the Soviets did not like to depend on the West for anything, especially for innovation, along with an inefficient agricultural sector which caused the need for massive import of food and the costs piled up quickly. Fortunately, the Soviet Union was blessed with immense natural resources, specifically oil, so when oil prices skyrocketed in the 1970s they could offset much of this import cost by simply exporting oil;

However, when oil reserves in Western Russia began to run out and oil prices returned to normal, import costs rose again and the economy stagnated. It was also at this point that the Soviet Union could no longer continue to dramatically increase inputs, as the majority of the population had been moved from low-productivity industries to high-productivity industries, which were ultimately the main source of economic growth for the Soviet Union. Growth in the late 1970s slowed to just two percent less than In the case of the developed West, the only significant gains came from the allocation of huge amounts of capital to the military, however, this was not enough and The gap between the Soviet and NATO economies began to grow once again, a growth that kept citizens content with having little freedom.

It began to decline and the Soviet Union's enormously overweight political system put it on an irreversible path toward economic stagnation and eventual collapse; However, the seeds of Soviet economic collapse had been planted before the nation existed, unlike the revolutions in Western Europe and the United States. states and their slow march towards greater rights and freedoms the Bolsheviks who took control were not a broad coalition and therefore wereThey became a tyrannical left with unchecked power they did not form new inclusive systems but created new extractive systems with themselves at the top in the 1960s when the ability to dramatically increase inputs to growth had ceased and the time came for government and the economy changed to allow for innovation and productivity gains, the change never came because those in charge never allowed it to happen, just as the elites of The Russian Empire resisted the creative destruction of industrialization, as did the elites of the Communist Party, who refused to give up any political or economic power that would have allowed these positive changes.

This was because they knew that doing so would reduce their wealth of personal power and potentially even their lives. By the time Mikhail Gorbachev instituted real democratic reforms it was too late. The system was already breaking down due to economic instability and by letting go of some political power the system It collapsed in on itself and the Soviet Union ceased to exist. The story of the Soviet Union was ultimately a story about its economy. The rapid, unprecedented growth that shocked the world was ultimately unsustainable and plagued by too many problems. inefficiencies, but ultimately the story of the Soviet economic system was one that warned against the dangers of tyrannical governments that only cared about self-preservation.

The incredible growth of the Soviet Union from the beginning was not about raising living standards. of its people but rather to protect those in power, therefore the collapse of the Soviet Union was determined even before it became an official country