A command economy is one in which the co-ordination of economic activity is controlled and undertaken through administrative means rather than through the market mechanism (Ericson, 2005). Many aspects of the Soviet economy fit this description such as its organisational structure, the methods by which aims and directives were carried out and its lack of a use of pricing within its financial mechanisms, thus it can be argued that the term command economy is an accurate description. However there are another of other aspects to consider such as the use of bargaining to develop a second ‘economy of agreement’ and the use of economic incentives to achieve targets that seriously undermine the description of the Soviet Economy as a command economy. This essay will discuss the points above and show that despite some factors such as the existence of a second economy there can be no other way to describe the Soviet Economy as many economists would agree as the best example of a ‘command economy’ there has ever been. The institutional structure of the Soviet Economy certainly suggests that it was in fact a Command Economy.
The Communist Party of the Soviet Union (CPSU) was the ruling power in government and played a central role in planning the economy as a whole. The state was responsible for over 88 percent of final agricultural product in 1986; 75 percent of urban housing and 98 percent of retail trade (Narkhoz, 1987), with such an extensive stake in so many markets, a vast and complex organisational hierarchy was needed to gather information, manage inter and intra industry communications as well as to ensure effective targets were set and met accordingly (Ericson, 1991). What could be considered the zenith of this hierarchy was known as the Council of Ministers which consisted of a number of ministries or central planning agencies and was responsible for translating the aims and objectives of the CPSU into viable plans and instructions for those lower down in the hierarchy to implement. This meant that the council of ministers was essentially responsible for deciding the path and progress the economy would experience.
Before Gorbachev took power in 1985 there were over 20 of these ministries responsible for planning the economy, which included the Gosplan (ministry of planning); Gossnab (ministry of materials and equipment supply) and the Gosbank (the state bank). The Gosplan was probably the most imperative ministry as it devised plans and targets for the other ministries to implement and allocate goods and raw materials accordingly and effectively. At the base of this hierarchical structure lay the organisations responsible for transforming the macroeconomic objectives into microeconomic outcomes, these associations and enterprises answered to local administrative branches which were all closely watched and controlled by state establishments (Gregory & Stuart, 2001). For a command economy to function properly there needs to be in existence some form of and large use of monitoring and regulating organisations (Ericson, 2005), such as the political party, a police force and banks. These bodies are needed to prevent and iron out any illegalities whilst also ensuring that all microeconomic organisations were performing well.
These organisations were also responsible for ensuring that the aims and objectives of the CPSU were being carried out sufficiently at all levels of the hierarchy, as well as to guarantee that agents did not exploit such problems at the expense of the principle’s aims and targets. An example of such multi-layer, multi-stage monitoring bodies was the Gosarbitrah (State Arbitration), which was a quasi-legal system that was responsible for resolving plan implementation issues between different enterprises on the same hierarchical level. Another such monitoring body was the People’s Control, an administration put in place to engender the popular observation and monitoring of planned activity (Adams, 1967). Such an extensive system of monitoring organisations ensured that the Soviet Economy could be adequately controlled by the state (Harrison, 2005). One way to ease the effort of implementing and achieving an effective command equilibrium was to attempt to influence the agent to aspire to the same outcomes as the party (Harrison, 2005).
Through the use of media and schooling the CPSU invested heavily in indoctrinating the populace to adopt a collective mentality that coincided with party aims and objectives. The use of humiliating rituals to punish those that did not conform to party ideals such as the ‘boards of shame’, helped to brand bad citizens as such and loyal behaviour was also rewarded by offers of promotion. However there was not always a match for the number of loyal aspiring individuals when compared to the number of retiring persons. This problem was overcome by Stalin by creating new leading positions by implementing numerous purges and the concurrent creation of ministerial subsectors that increased the amount of leading positions drastically. This tactic however was not sustainable in the long run as such changes to the ministerial structure was costly and meant the system was eventually threatened with bankruptcy (Lazarev, 2005). Within a command economy there is always an incentive for domestic economic agents to negotiate with foreign bodies to earn better outcomes, for example trading raw materials to achieve lower costs in the production process.
In order to reduce the ability of domestic agents to do this, the Soviet Economy invested heavily in the defence industry and ensured that defence producers were well paid. This had a twofold result; it discouraged the interaction of foreign and domestic integration through the fear of being caught performing any illegal private transactions, as well as increasing the opportunity cost of collaboration with foreign bodies through a higher wage (Ericson, 2005). This vast array of enforcement mechanisms helped to control the problem of command in the Soviet economy. A combination of promotions, side payments and severe penalties helped to inhibit the fruitfulness of disloyal agents’ trading at the expense of the principal. These methods did all have their different costs which meant that in the long run they ceased to be viable methods of keeping the populace loyal (Harrison, 2005). For a command economy to function properly the State needs to be able to restrict the ability of agents to perform tasks and pursue objectives outside the scope of the plan.
Having perfect plans for efficient resource allocation would all prove useless if there was no restriction put on consumers to purchase or utilise state production or provisions (Ericson, 2005). In order for the Soviet economy to achieve this, labour mobility was severely restricted with people working where they were told to, and prices were kept passive merely in place to appease those responsible for accounting and measurement. Prices had no reflection on the allocation of good or services and nor did they reflect any growth or economic development with prices and wages generally being predetermined within the plan and often remaining unchanged for long periods of time and often without economic motivation (Nuti, 1986). The role of money in the Soviet economy was merely to reveal and measure the flow of commanded activity and as such money did not play the same role as it would in a market economy as a measurement of setting and accomplishing social objectives.
The market was also most fully replaced in the efficient allocation of good and services, as there was no price mechanism with which to determine supply or consumption levels (Bornstein, 1962). This aspect of the Soviet economy was where the Party could have the most influence and control over agents at the lowest points in the hierarchy. Mobilisation of resources occurred in direct response to differing shocks and crises as they occurred. This method of distribution also helped to ensure that agents had no ability to operate outside of the plan, if there was a shortage in 100 tonnes of a specific resource in one industry’s production process then this industry would then be supplied with the required 100 tonnes and nothing more. Thus the idea of profit as an incentive for work was essentially eliminated, ensuring that agents worked only in accordance with the plan as there would be no benefit of not doing so.
This meant that as profit was not a motivational factor for businesses to acknowledge, firms often sacrificed important considerations such as quality, variety and innovation in order to produce the large amounts required by the plan (Freris, 1984). Firms operated within a premise of having one state supplier and most likely would end up delivering to one user of their products and thus firms were insulated from the idea of price or product competition both from foreign and domestic firms. Such difficulties meant that firms were often inefficient in their production processes and sometimes found they could not reach targets set by the plan (Granick, 1954). With the above problems of firms being unable to meet the demand placed upon them by the plan, the Soviet economy witnessed the emergence of a flourishing new market, we now call the ‘Second economy’ or better known as the black market (Sampson, 1987). Maresse, 1981 describes the ‘Second Economy’ as “all of the non-regulated (legal and illegal) aspect of economic activities in state and co-operative organisations, plus all unreported activity, plus all forms of private (legal, semi-legal and illegal) economic activity”.
This market seriously undermined the Soviet systems effectiveness and ultimately led it to collapse as the costs of maintaining such a system whilst the second economy existed grew too costly. The stringent regulations placed on firms to try and encourage them to meet the targets all but encouraged managers to try and work outside of the system and negotiate between different industries to try and meet the current year targets. This could take the form of trading between firms for raw materials that were in demand or were in excess supply in exchange for resources that each firm needed respectively. Poor planning and the use of fiscal stimulus to motivate people to stay loyal to the Soviet union via promotions and increased pay coupled with repressed inflation led to large amounts of ‘loose cash’ circulating within the economy, led to an ignition of a ‘profit motive’ within the economy and thus also helped to fuel this second economy as some people now had money to purchase more goods for their families (Ericson, 2005, 1982).
The second economy provided for consumers in a way that the Soviet plan could not. Consumers now could purchase goods that they wanted rather than what the plan had decided they would be allowed to. It gave consumers new access to certain goods and services they would never gain under the Soviet Plan. As the Soviet economy grew as did scarcity and shortage and thus fuelled the Second economy even more and dealt with the allocative issues the Soviet Economy created. The Second economy acted as a sometime temporary pressure valve to the real economy as it repaired mistakes or oversights made by planners and central managers and thus counterbalanced the fact that several aspects of it undermined the Soviet economy (Ericson, 2005).
Despite the existence of this second economy there can be no confusion as to whether or not the Soviet Economy was a command economy. It shared many of the same characteristics of what defines a Command Economy, including the lack of market mechanisms to determine prices and the organisational and command structure. Despite the fact that there was a significant second economy that existed alongside the Soviet Economy it is not substantial enough to dispute the definition of the Soviet Economy as a command economy.
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