The Economy of the Soviet Union The Economy

The Economy of the Soviet Union

The Economy of the Soviet Union Was Good • From a period from about 1930 to about the 1980 s 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 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 90 s, 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—info is continually flowing up and down – Tons of bargaining—firms would ask for very low quotas and many resources

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 1970 s and 1980 s—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