The Soviet economy: Born in death, part one

Reasoned economic analysis of the USSR’s command economy highlights a range of structural issues that fatally hindered the system, heavily contributing to the Soviet Union’s collapse in 1991. Tellingly, in its demise, the USSR turned to the market systems it had long since despised. The proof is often in the pudding, and the failure of Soviet state-oriented economics is a clear example: the result of foundational failures in understanding cyclical capital inefficiencies and fiscal behaviour.

Part one of this Boar Finance diptych will focus on the misconceptions underpinning the Soviets’ intentional dearth of competition, the cyclically deficient structure this elicited, and the barbarism of the command model.

Firstly, it is vital to distinguish state-oriented and state-underpinned approaches. The former links to Keynesianism, with state policy purposed to stimulate aggregate demand growth during hardship, kickstarting counter-cyclical growth and (full) employment. The latter is the creation of an economy intrinsically linked and dependent on state apparatus: an idealised counter to the (retrospectively inaccurate) theory of Marx. These ideals centred on bourgeois exploitation and economic coercion, encouraging the replacement of private ownership with its ‘collective’ equivalent. As outlined in my latest finance article for The Boar, which covered the topic of FDR’s New Deal, there is a responsibility for the state to manage a prosperous market system and to intervene when it fails in doing so, whether the result of mismanagement or a lack of effort. The state needs to create and oversee a considerate economy, but in equal measure, it needs to proactively avoid becoming the economy.

Initial prosperity depended on mass industrialisation that benefited the Soviet economy despite its inefficiencies. A weak system is still greater than no system at all

When the state becomes the economy, as was the case in the USSR, market dynamics are suffocated. These forces are replaced by state apparatus, which in turn determines prices, wages, and production quotas. This system, by design, merits no competition and instead works on the basis that members of the workforce will maximise utility for the common good. This (sort of) Marxist rendition of homo economicus befits the ideology, dispelling the notion of self-interest. However, such a belief is not only utopian but also objectively inaccurate.

The application of typical fiscal dynamics creates a narrative that accurately explains why the Soviet economy collapsed – no market drive due to a lack of competition, inducing chronic inefficiency due to a lack of incentive for the alternative. As a result, actual productivity would be far worse than projected productivity. A state centralised system, with little to no room for market expression and an innate top-down command structure, only has one viable counteraction: the “covering [of] these losses… by drawing on public funds”, meaning the collection of additional taxes, raising internal demand. To meet this demand, the output of a system still plagued with inefficiency must increase, deepening centrality and creating a self-strangulating fiscal loop. 

In effect, the foundational inefficiencies in the Soviet system prompted the state to call for increased outputs through those systems as a remedy to address the shortfall, leading to increased input. Those increased inputs merited similar shortfalls in expected output, representing an ouroboros-like downward spiral, as the USSR continued to feed off its own resources in a feeble attempt to secure self-sustainability, rather than growing external demand. This strategy was limited by its resource dependence, which relied on ever-increasing quantities of labour, capital, and raw materials to address shortcomings in efficiency. Call it Sisyphus’ economy.

The Soviet Union’s growth data support this critical hypothesis. Gross national product growth between 1928 and 1940 sat at 5.8%. Despite a mid-40s dip, this figure rebounded to 5.7% between 1950 and 1960. These numbers are undoubtedly impressive, but they are easily explainable when contextualised. Initial prosperity depended on mass industrialisation that benefited the Soviet economy, despite its inefficiencies, as a weak system is still greater than no system at all. Swiftly after these early productive sparks, however, reality came to reckoning, and the Soviets’ systematic failings plunged the nation into an economic crisis that, whilst certainly not the only factor, notably contributed to the USSR’s collapse and the subsequent rise of the capitalist Russian Federation.

The unquestionable horror of the command system lies in its need to be unquestioned, and the inhumane measures and consequences that inevitably follow

Talking in terms of solely economics, the Soviet system deserves plaudits for how swiftly Russia’s internal economy developed as a result, an effort which contributed to the onset of the Cold War. Without this rapid industrialisation, the idea of the USSR becoming a unipolar superpower would have been roundly dismissed on economic grounds. After assuming power in 1922, Soviet leader Joseph Stalin understood the need for swift and unrelenting industrialisation. He rightly ascertained that: “to slacken the pace of industrialisation would mean to lag behind, and those who lag behind are beaten… We are 50 to 100 years behind the advanced countries. We must make good this lag in ten years or they will crush us.” Broadening the scope beyond the development of the USSR’s industry, however, highlights the human cost on which ‘making good’ depended. 

The command model deployed by the Soviets depended on extreme authoritarianism; the periods of notable growth were the result of an iron-fisted state willing to plunge its own people into famine (which some scholars posit constitutes an intentional genocide) and persecute on a scale comparable to the Nazis. This was an economic system that demanded the acceptance of its authority and efficacy, yet in practice embodied the exact opposite of a considerate economy – despite its implications of operating for the vague ‘collective’. The unquestionable horror of the command system lies in its need to be unquestioned, and the inhumane measures and consequences that inevitably follow.

In part two, I intend to expand on the implications of Soviet competition with contemporary understandings of dynamic market forces, focusing on the reluctant embrace of capitalism and how that shift has impacted the modern-day Russian Federation. Such an embrace was an inevitability: as the USSR fell, it learnt how another Russia could live without its self-destructive centralised economic heart.