In 1956, Nikita Khrushchev, First Secretary of the Communist Party of the Soviet Union, CPSU, famously boasted to a room of outraged NATO diplomats, “Whether you like it or not, history is on our side. We will bury you!”. The following year, the launch of Sputnik, the first space satellite, seemed to confirm that the USSR would not only catch up, but could even overtake, its American rival. Over the next two decades, the Soviet Union approached strategic, nuclear parity with the US and its influence advanced across the world; South-east Asia, Africa, Central America, the Middle East, while the US retreated in tatters from the Vietnam débâcle. History, it seemed, had proved Leon Trotsky utterly wrong in his prediction of the future of the Soviet Union, “Either the bureaucracy, becoming ever more the organ of the world bourgeoisie in the workers’ state, will overthrow the new forms of property and plunge the country back to capitalism; or the working class will crush the bureaucracy and open the way to socialism.”. Yet, 15 years after the high point of its power the Soviet Union had completely collapsed and it was forces within the bureaucracy that brought it down.
Trotsky’s prediction was rooted in his understanding that the political regime established by the Stalin faction would be incapable of developing the full potential of economic planning. While registering the great advances made in some spheres of the first two Five Year Plans, he nonetheless recognised that there were fundamental political problems that would prevent that progress being sustained and extended to the point where the Soviet economy would be more productive and therefore qualitatively superior to the advanced capitalist powers. That being the case, if the Soviet Union remained Stalinist, it would, in time, be defeated by the more advanced society.
The fundamental political problem, for Trotsky, was that effective planning of the socialised property required the fullest possible involvement of the workers themselves, both as the direct producers and as the consumers of production. Only they could provide the necessary degree of supervision of the entire economy that would be superior to the capitalist system in which millions of individual choices and decisions were blindly aggregated through the market. Under the bureaucratic dictatorship in the Soviet Union, the lack of workers’ democracy and participation in
planning blocked any vitality and accountability in the system.
For the vast majority of workers, “planning” was a deeply oppressive institution, one of the key channels by which the bureaucracy imposed its diktat and reinforced its daily rule. The resulting alienation and hostility bred by bureaucratic planning were central to the low productivity that plagued the economies of the degenerate workers’ states to their end, expressed in the well-known saying of Soviet workers, “they pretend to pay us, we pretend to work”. The destructive consequences of this were to be seen in the fact that, by the 1970s, growing urbanisation and rising education levels, instead of leading to rising living standards and higher cultural levels actually resulted in rising levels of alcoholism and falling life expenctancies for male workers.
Trotsky did not leave his analysis at the level of abstract generalisations. He also warned of the new planning problems which industrial development creates, and which were to grow in importance after postwar reconstruction. Such as the problems of quality, technological innovation and the growing complexity of production:
“While the growth of industry and the bringing of agriculture into the sphere of state planning vastly complicates the tasks of leadership, bringing to the front the problem of quality, bureaucratism destroys the creative initiativeand the feeling of responsibility without which there is not, and cannot be, qualitative progress…
It is possible to build gigantic factories according to a ready made Western pattern by bureaucratic command- although, to be sure, at triple the normal cost. But the farther you go, the more the economy runs into the problem of quality, which slips out of the hands of a bureaucracy like a shadow. The Soviet products are as though branded with the grey label of indifference. Under a nationalised economy, quality demands a democracy of producers and consumers, freedom of criticism and initiative – conditions incompatible with a totalitarian regime of fear, lies and flattery… No new values can be created where a free conflict of ideas is impossible.
… Soviet democracy is not the demand of an abstract policy, still less an abstract moral. It has become a life-and-death need of the country.”
In the 1920s, Trotsky and the Left Opposition argued for a high tempo of industrialisation as a priority and for an overall plan integrating finance, industry and agriculture as soon as materially possible, in order to subordinate and manipulate the market. However, he consistently argued for workers’ democracy in consumption and planning as the only way to improve quality and monitor efficiency of production. In addition, he insisted on the need for the workers’ state to use “inherited economic categories” from capitalism, such as a stable currency, in order to rationally measure and allocate goods within the economy, using world prices as a yardstick for advance. Without this, bureaucratic distortions, privilege, and waste warped planning and increasingly negated its advantages.
The Stalinist policy of Socialism in One Country, with its reactionary goal of economic autarky and its corresponding international strategy of peaceful coexistence with imperialism, was already an obstacle to progress in the Twenties. After the Second World War, despite the postwar bureaucratic overturns in Eastern Europe and Asia, the same doctrine was to prove a fatal weakness. Failure to spread revolution abroad allowed imperialism to retain its grip over the great bulk of the world’s productive forces and resources, renewing its profitability and power by developing further the exploitative division of labour between imperialism and different tiers of semi-colonies. In time, the “newly industrialising countries” provided sites for low-wage production for the imperialist multinationals enabling the profitable development of new technologies such as computers and proving crucial to undermining the economies of the Degenerate Workers’ States (DWS).
The information problem: complexity as a planning constraint
The neoliberal anti-communist economist F. A Hayek has claimed that, at each higher stage of economic development, a technical problem of control arises for planning, what he called the ‘information problem’. There is an element of truth in this, but its causes are rooted in the social relationships embedded in bureaucratic central planning.
It is true that, as industry develops and the economy modernises, the number of enterprises, inputs and products leaps by orders of magnitude, while the relations and connections between them multiply exponentially, making the task of planning ever more complex. Unable to achieve the necessary levels of either information or technique, Soviet planners had to use all sorts of short-cuts to develop the yearly plans, and were constantly forced to divert and reorder supplies in mid-plan to take account of unforeseen developments.
It is also true that for planners this increasingly meant a trade-off between achieving the volume of accurate and reliable information required to set rational central targets and then “disaggregate” them down through layers of bureaucracy to the level of specific targets for each enterprise, and the huge diversion of resources to the planning apparatus that this would require. The number of Soviet state enterprises in the early 1920s numbered in the low thousands, by the 1950s it exceeded 200,000, and an even greater growth occurred in the number of inputs and products. Diversification meant that, in 1939, the Soviet government recognised 39 official branches of the economy, this rose to 162 by 1971. Goskomtsen, the State Price Committee, regulated 200 million prices by the 1980s, with 200,000 new prices added each year. The result was a growing number of apparatchiks trying to coordinate all this economic data on the basis of a flood of millions of reports, of varying degrees of accuracy.
As the economy expanded and the division of labour became more complex, the lines of control between the top planning bodies, with their priorities set by the party politburo, and the enterprises at the base of the economy, where production took place, became ever longer and more stretched. Plan targets were refracted and distorted as they passed through every level of bureaucracy, each with its own narrow self-interests, before being disaggregated into a set of concrete targets and indicators for the enterprise. The input-output equations might all add up at the top, but by the time they had been transmitted down to the level of production they constituted crude and arbitrary, even conflicting, targets with a multitude of dimensions left undetermined.
At any given time, the party leadership could put the spotlight on high priority sectors to ensure better quality or innovation, for instance in armaments, but this simply left such pressures on the rest of production relatively loose, particularly for consumer goods which were the lowest priority. The result was that fulfilment of the plan’s quantitative output targets (so many tons of steel, so many miles of textiles) overshadowed all other aspects of production such as efficiency, quality and innovation. Given that the workers, either as producers or as consumers, could exercise no influence on this entire system, indeed, would have risked their lives had they been heard even making a comment, planning remained “blind”, with no means of self correction.
To counter the problem of complexity and scale, the bureaucracy aggregated farms and factories into ever larger units, trusts and associations, under the aegis of powerful industrial ministries that were given a relatively small number of targets by central planners and then themselves oversaw production. By 1983, the central planning agency, Gosplan, was responsible for the planning of 6,000 inputs and products while ministries oversaw some 24,000,000! This led to turf wars and empire building, so-called “departmentalism”, at the expense of rational production.
An increasingly complex system of overlapping bodies and chains of command presented enterprises with criss-crossing, often conflicting, sets of directives from different ministries. Within this chaos, managements at all levels were able to exercise their own initiative to the advantage of “their” unit and, no doubt, to enrich and empower themselves. For instance, seventy Soviet industrial ministries and departments were involved in the production of sawn timber, sixty for building materials, while the ministries nominally in charge of plastics and construction materials only controlled 32 and 37% of the output of these materials, the rest falling to other departments.
Of course, modern Information Technology and the internet greatly weaken Hayek’s argument, but the Stalinist states never achieved the advances in computer technology to put it to the test. Yet, even the most extensive, detailed plan could not encompass the myriad dimensions of production without the widest, active participation of the millions of workers in the hundreds of thousands of enterprises. Elected workplace committees and secondment to intermediate planning bodies, coupled to modern IT, would allow a rich web of information and feedback to function in a living, up-to-the-minute manner. Democratically planned production, as centralised as necessary and de-centralised as possible, along with a workers’ inspectorate and elected consumer bodies, would be far more responsive to consumer needs than any market.
At root, it was not a lack of technology or technique that undermined planning but the contradiction in the social relations of bureaucratic planning, in the immediate sense, between the party leadership and the enterprise managers certainly but, much more fundamentally, between the workers and the dictatorial bureaucracy and between the immanent need for the international division of labour and the limits of national boundaries.
Planning control versus managerial initiative
Within bureaucratic “command” planning, rather than central planners and enterprise managers having identical interests, they have opposite interests in production. In general, managers want the lowest increase in targets and the greatest increase in labour, inputs and investment to maximise their bonuses and avoid the penalties (quite brutal in Stalin’s time) of failure. The only way central planners could counteract this, and crudely mimic capitalism’s productivity growth, was by means of the “ratchet principle”, mechanically hiking up targets year on year by an often-arbitrary percentage of the previous year’s output level. Quality and innovation were casualties of this bureaucratic struggle.
The looseness of planning’s precision at the base left room for enterprise managers to manipulate production to maximise their bonuses and careers, at the expense of the wider economy. Widespread misreporting of output and hoarding of labour, materials, and products to prepare for the inevitable bottlenecks, also clogged up the arteries of production. The creativity of enterprise managers went into exploiting loopholes and inconsistencies in the plan, manipulating the different targets on inputs, outputs, prices, types of goods to produce (and later, with market reform, profit, innovation) to fulfil those that maximised their bonuses, even if what they produced was not what was needed by other industries or consumers. If targets were given in weights, extra heavy goods were produced, a chronic Soviet problem with extra-heavy chandeliers or extra-long sofas, whilst targets given in profit would see the most expensive models being made, whether they were needed or not.
All too often, it was a web of informal contacts and barter between enterprises and other lower-level bodies that allowed the plan to lurch forward when central coordination failed. Such short term and local crisis-management, which became crucial as early as the First Five Year Plan, established a specialised stratum of “fixers”, the tolkachi, throughout industry whose methods had negative consequences of their own. Local deals not only allowed rampant embezzlement and theft but established de facto “prices” that deviated away from plan prices, adding to the fog in which central planners operated and creating disproportions that should not have existed according to the annual and five year plans.
The only counterbalance to these tendencies, terror from the commanding heights of the party as under Stalin, could at most contain, not abolish, these centrifugal, wayward forces at the base of the plan. In the post-war economy, they became institutionalised with the tolkachi recognised as the essential initiators of semi-legal swaps that kept production going. Thus, bureaucratic command planning continually generated what we could call proto-market forces that maintained it in the short term but undermined it both materially and ideologically over the longer term.
Planning’s problem of enterprise control was one that market reformers wanted to resolve in favour of the enterprise, unleashing these local and often more dynamic forces but under the discipline of a real market, rather than any plan. Ultimately, the Gorbachev reforms would do just this, transforming managerial manipulation of targets to maximise the bonus into a straightforward struggle for profits, often in an outright speculative arbitrage between currencies and commodity prices, taking advantage of the economic chaos of the Perestroika years leading up to the restoration of capitalism and after.
The inherent tendency for managers and officials at every level to cover up both failures and corruption went unchecked. If the law of value is suppressed, as it was in the Stalinist states, then the only way to measure and check the success of the economy is through clear and honest accounting, which was rendered impossible by the managers of the production facilities themselves. Bureaucratic privilege (not to mention corruption) not only siphoned vast amounts of wealth from the plan at every level, it positively militated against economic transparency, as bonuses and other perks were obscured by accounting procedures to hide them from workers. This issue of cover-ups and falsification about the true results of production, the inter-ministerial rivalries and lack of cooperation, all show that the bureaucracy was a disorganising factor and a burden on the system of the planned economy. It also meant that real prices of production, a precondition to raising productivity, were impossible to establish, and hence encouraged a turn to market mechanisms to re-establish this basic dimension of rational, economic functioning.
Secrecy at the top about the true state of the economy, and the need to maintain a public pretence of growing prosperity and the superiority of the “socialist system”, meant that when all these deceptions and distortions were discovered by planners, inevitably after the fact, it was impossible to adjust the publicly released figures (already with a heavy propaganda value) or expose these core problems. Only when corruption had become so endemic and well-known, in the later Brezhnev years, did public campaigns against it begin in order to restore some legitimacy. However, these never really touched the long-established economic practices, in part because they were objectively necessary to overcome the deficiencies of planning and to fulfil its targets.
Under a statised economy, quality demands a democracy of producers and consumers, freedom of criticism and initiative, conditions incompatible with a totalitarian regime of fear, lies and flattery. Importantly, the bureaucrats received no benefit for producing quality goods as against sheer quantity, their job was to meet the plan’s targets and the further away production was from top priorities, the more improvements in quality were seen as additional costs on production with no measurable benefit to the producing unit.
The problems of complexity, control of production and quality which are solved spontaneously by the market under capitalism by means of competing capitals and blind market exchanges and, it should not be forgotten, occasional crises and the destruction of capital, would be solved under workers’ democracy by means of the participation of the millions of producers. Under a healthy workers’ state this would be achieved with much less waste and corruption than the market, and without its accompanying exploitation and inequality. The huge expansion of education, training and leisure time would produce a creative, collective mental labour far beyond the vitality of the most well-funded capitalist firm’s R&D department. However, these problems were insoluble for the bureaucracy and worsened as the economy grew in complexity and the bureaucracy settled down under Brezhnev to stability, corruption and building its fiefdoms, after Stalin’s terror and Khrushchev’s chaotic reorganisations.
Stalinism’s well-known, even notorious, dysfunctional economic dynamics mostly flow from this contradiction between central planners and managerial control of production. In the 1930s, hoping to guarantee their survival under Stalin, bureaucrats vied to over-fulfil their plan, that is, exceed the key output target and this led to over-investment and disproportion.
On the other hand, an empirical study by Janos Kornai in Hungary provides evidence that the opposite was true in the less brutal conditions of the post-Stalin decades; managers took two different strategies to maximise future bonuses in the face of the ratchet principle, either in their actual output or in their reported output. Those that were going to miss their targets anyway (and get no bonus) ended up substantially under-fulfilling the plan in order to lower their future targets and thus make a bonus possible next year. A second group reported only a slight over-fulfilment to keep next year’s target down and establish a reserve of products in case of unexpected shortages in future. Misreporting was effectively encouraged because bonus levels were not proportionate to plan over-fulfilment, so there were diminishing returns for greater over-fulfilrnent. The literature is divided on whether there was an overall tendency to over-fulfil or under-fulfil the plan, but what is clear is that the strategies of managers, seeking to benefit from the specific structure of bonuses, took precedence over the needs of the wider economy.
Either over or under-fulfilment, of course, produced disproportions in the economy, as did the focus on priorities such as military production to the detriment of other sectors. Bottlenecks and the practice of storming, throwing everything into the breach to fulfil the plan in its last year, led to managers chronically stockpiling inputs and labour. Anything that slowed down production, such as the introduction of new technology or other innovations with their inevitable teething problems and risks of failure, was punished by the system and this disincentive was never eliminated, despite bonus overhauls under Khrushchev and Brezhnev. The tendency to focus on the production of key priority goods, without any focus on supplementary yet crucial sectors such as spare parts, meant shortages, stoppages and huge extra costs as enterprises resorted to manufacturing them on the spot or even ordered whole new machines to cannibalise them for parts. For engineering, 50-70% of spares had to be manufactured in this way in the Fifties, rising to 80% in the oil industry. The voluntaristic, impossible targets of the Stalin and Khrushchev years may have subsided in the grey Brezhnev years, when the emphasis was on overcoming stagnation rather than making leaps into a communist future, but the frenetic competition of ministries, industries and enterprises for inputs and raw materials did not, creating a grotesque bureaucratic parody of the waste and competition of the capitalist market that official Soviet propaganda constantly denounced.
From disproportion to chronic debt
The bureaucratic system showed an “insatiable investment hunger” as enterprises and ministries built empires and sought to offset the ratchet principle with more investment. The push to complete the plan, combined with disproportions and bottlenecks, saw the rise of unofficial bribes, swaps and barters to fill the gap, a web of unofficial transactions that never broke the bounds set by the plan but functioned within their loosening hold, not only a sign of the limits and illegitimacy of bureaucratic planning but also a further destabilising factor.
The Five Year Plan system itself produced a cycle due to these bureaucratic deficiencies, with disproportions and bottlenecks opening in the middle of the plan, a huge concentration of resources and labour as managers “stormed the plan” to hit the targets in the last year, and a host of unfinished projects was left in their wake, This was a particularly common and wasteful outcome since, even if a railway, dam or pipeline is 90% complete, it is still completely unusable.
The next five year plan would then have to accommodate resources and time for the completion of these stranded projects whose operation was integral to the subsequent targets. As falling growth and increasing subsidies for consumption, agriculture and the military put a squeeze on investment in the late Seventies and Eighties, the number of uncompleted projects grew enormously, acting as a further drag on the economy.
While political manipulation of prices meant that some industries were in effect planned to run at a loss, and accordingly subsidised, the drive to complete the plan at any cost meant enterprises racking up debts. With falling productivity in the later decades of the Soviet Union, this tendency increased and became chronic. However, the ultimate penalty of failure under capitalism, the closure of the firm or factory, was blocked despite the blatant inefficiencies under the plan, as industrial ministers generally bailed out bankrupt factories, wrote off debts, or pressured the central banks into extending credits or the authorities to forgive tax obligations.
Kornai described it thus, “because this system has only bureaucrats and no real owners, there is an almost total lack of internal, self-imposed restraint that might resist this drive”. He dubbed this institutionalised dynamic in the centrally planned economies a “soft budget constraint” system, which resulted in obsolescent machinery and factories piling up, dragging down the productivity of industry overall, there being no ultimate penalty for mismanagement or waste. While a soft budget constraint is a feature of capitalist economies to different degrees, nowhere has it been as systemic as it was in the Stalinist states. In Hungary, this reached its apogee in the Eighties, when 84% of state-owned enterprise profit came from subsidies by 1983. Ballooning enterprise debt was the price-tag for the bureaucratic plan’s inability to direct production, with the resulting debts built up by managers reverberating back up into the wider economy.
Without accurate information, and without the penalties of bankruptcy and closure, reforms to try to ensure rational prices and economic behaviour were doomed to fail, as were any attempts to create incentives for profit, efficiency or innovation. The Soviet economist Liberman himself, when putting forward his market reforms that were to become the basis for the 1960s Soviet reforms, recognised the soft budget constraint system by not even including price reforms in his proposals. He explicitly noted as fact that an enterprise could include any price in its budget costs, no matter how high the supplier raised it, because the state budget or banks would always cover the resulting losses. The fact that there was also no charge for fixed capital meant that finance was simply not a binding constraint on enterprises, the physical availability of resources to complete the plan was paramount.
While the five year plan cycle, chronic over-investment and even the secular falling productivity of the later decades superficially resemble some aspects of capitalism, with its business cycle, over accumulation and falling rate of profit, these phenomena were fundamentally different in their origins and dynamic. The five year cycle was simply set by the structure of bureaucratic diktat, not the capitalist market and its cycle of over-accumulation, financial speculation and falling profitability.
Similarly, over-investment was related to the distortions of plan fulfilment, bonuses and careers (or terror under Stalin) a response to stagnation rather than its cause, as investment funds were stuffed into agriculture, in particular, to try to raise output in the face of falling productivity. In reality, the chronic investment hunger of the Soviet bureaucracy is the opposite of capitalist overaccumulation, in which capitalists have too many investment funds to profitably invest.
In a degenerate workers’ state, this tendency is chronic, equal at every level of development, is driven by bureaucratic privilege seeking not profit and is based on demand for investment resources (in the form of material allocations rather than money capital) that do not physically exist. While there is a tendency to falling productivity as capitalist economies develop too, often related to the same drawing down of labour reserves and accessible resources, this was hugely compounded in the Stalinist states by the chronic dysfunctions laid out above, and progressively growing as central planning’s control mechanisms fell behind the expanding, diversifying economy. However, as Marx proved theoretically, and as the last four decades of capitalist development have shown in practice, even with rising productivity, capitalism exhibits a tendency towards growing over-accumulation of capital and falling profit rates in production.
Of course, the Stalinist ruling caste systematically prioritised heavy industry and military production to the detriment of consumption, above and beyond what a healthy workers’ state would be forced to do, since substantially more troops and tanks were required for repression both at home and abroad in Eastern Europe. Soviet military spending rose from an estimated 2% of GDP in 1928 at Stalin’s victory over the anti-bureaucratic opposition to 15-16% by 1980. Meanwhile, consumption’s share declined from 73% in 1928 to 64% in 1950, and then to 55% in 1980, “lower than in most countries, typically by at least ten GNP points”.
National limits and economic renewal
The first fundamental contradiction of planning is internal, that between central planners and managerial control of production. The second is between the limits of Stalinist national economy and the potential of supra-national integration. Both lead not only to stagnation but ultimately to these states falling behind, not catching up to, the imperialist, developed countries. National boundaries create an obstruction to planning just as they can block the efficient integration of world markets under capitalism. The various national bureaucracies, jealously guarding their prerogatives and privileges, besides creating wars between “socialist countries” such as Vietnam, China and Cambodia in 1978-9, also presented another fundamental obstacle to the integration of the planned economies, supranational planning, and hence their development.
From the 1950s onwards, the Soviet Union needed to shift from extensive development, the extension of the same techniques and production (that is, more of the same mines, steel foundries, railway lines) to intensive development, the development of technique that would allow the more intensive use of labour and raw materials, getting more from the same inputs by using technology to boost productivity.
Given the initial backwardness of the Eastern bloc industry, and the US-led Cocom embargo on many crucial technologies from 1949, the Stalinist states were already at a disadvantage. This became increasingly urgent as the migration of farm labour to the cities slowed, resources in the Volga-Ural region close to industry were exhausted, and backward methods stripped oilfields and mines of their most easily extractable resources. When the reservoirs of cheap labour and resources that helped fuel the high growth rates of early industrialisation dried up, technology to raise productivity became crucial.
The perceived inadequacies of planning were sharpened by developments in capitalism, the main spur forcing the bureaucracy to act. The need to “catch up” with the most advanced imperialist economies was a constant theme in Soviet politics. However, the USSR was at its military peak in the 1970s and US imperialism, defeated in Vietnam and faced with revolts from Central America to Africa and Iran, was not a direct threat. Equally important, in the later Brezhnev years, was the need to legitimise the regime to keep support among technocratic, pro-reform layers and to stave off working class revolt. In the Eighties, military parity and the strategic buffer of the Eastern European satellites would be sacrificed for this overriding, domestic goal.
Already in the early Sixties, Aleksei Kosygin, the future prime minister alongside Brezhnev, was warning of lagging technology, and this theme would develop into an official turn towards replicating the West’s “scientific and technological revolution”, the role of information technology in transforming production and its organisation. This was presented as a bland, almost automatic, evolution of both capitalist and an “advanced socialist society” (as Brezhnev’s regime declared itself). It also recognised growing social tensions by recognising for the first time the “non-antagonistic contradictions” developing in Soviet society, while underlining the leading role of the party as representative of the general interest, posed as a bureaucratic administrator rather than political leadership. The need to import technology from the West to fulfil this need was the main aim of the drive for détente in the Seventies by Soviet leaders.
No bureaucracy is inherently innovative or dynamic, of course, and the privileges of the intelligentsia in the centralised research and development institutes were no substitute for the incentive of profit. The possibilities of spontaneous manager-driven innovation at the enterprise level were blocked by the rigid targets set from above and the drive for plan fulfilment. Ultimately, generalised innovation and the production of increasingly more sophisticated, high quality goods could only come from the participation and revolutionary commitment of a working class in power. Without this, productivity could not be raised in a progressive manner, while capitalism’s negative methods, work discipline and ultimately the threat of unemployment, were also absent. The need to innovate to keep up with the West would see the degenerate workers’ states increasingly forced to import machinery and components from the West, with Soviet technology imports concentrated on the chemical and automotive sectors, oil and gas industry and forestry.
From 1949, with the setting up of Comecon, the USSR gained opportunities for regularised trade with the Eastern Bloc and the People’s Republic of China that it had been denied before the war. However, because all of these countries lacked currencies that were an objective measure of the value of goods, Comecon exchanges were essentially a series of planned, bilateral barter-trades between state monopolies using the non-convertible, “transferable rouble” system. Without a fully-developed currency, prices for different sectors; machine goods, food, oil, were set separately and using different methods. This necessarily prevented any transparency of accounting with regard to international transfers and, therefore, blocked integration through supra-national planning, except in a few marginal sectors. Both the programmatic norm of Socialism in One Country and the justified fears of Soviet domination on the part of the “junior partners” reinforced the national centredness of each of the ruling parties. Instead of integration and synergy, the Comecon countries embarked on a course of wasteful, duplicated industrialisation programmes.
Of course, the huge growth of per capita incomes even in the Stalinist block relative to the mass of semi-colonies was a tremendous achievement. However, genuine Socialist countries would make integration under supra-national planning a priority. A Socialist commonwealth or federation would not allow an international division of labour to develop in the unequal, parasitic manner of the imperialist-dominated world market, where capital is a monopoly of the big banks and technique remains patented and controlled by the industrial monopolies. The “synergy” of bourgeois economics textbooks is achieved as often as not in the parasitic complement of cheap super-exploited third world labour combined with imperialist marketing and distributive functions, while the mass of semi-colonial countries are blocked from developing in a sustainable, balanced manner. Recognising and utilising imbalances to ensure minimal duplication, which would otherwise slow overall development, would be accompanied by a programme of technological, educational and investment transfers to eliminate inequalities and replace them with an environmentally sustainable network of industry alongside progressive economic integration of the states involved.
The Stalinist states inevitably took the opposite course. The straitjacket of national economy meant falling further behind the world market, so that their manufactured goods or machine exports were not competitive and it was increasingly difficult to earn hard currency to pay for the imports needed to overcome technological backwardness, an endemic vicious circle made worse by the US-led blockade.
World prices did not directly affect these states’ domestic economies, because the monopoly of foreign trade insulated them from the international operation of the capitalist law of value. However, making good the deficit between (expensive) imports and (cheap) exports in their trade with “the West” was a constant drain on scarce resources. This led to a decline in the growth of these imports from the OECD countries to the Eastern Bloc in the Seventies, which became negative after 1980. Because of the importance of importing Western goods, particularly high-tech producer goods, the Eastern European states increasingly resorted to credits and loans from the imperialist governments and banks.
This is not to say that there were no technological advances made in the Soviet Union or its allies. Particularly in prioritised sectors such as armaments and energy production, Soviet engineers and scientists did generate world-class inventions. However, where this did occur, the Soviet Union was much slower at innovation, that is, the application to production. Only one out of four inventions was industrially developed within two years, compared to two-thirds in the USA and West Germany, while the number of prototypes produced fell steadily after 1971. The delay between the year of invention and its roll-out in industry was sometimes as much as ten years more for the USSR than the USA.
Fifty percent or more of research and development was devoted to military production but, unlike in the West, the split between the military and civilian industries blocked cooperation and the transfer of technologies from defence research, creating an additional obstruction. Bureaucratic fear of the dangers of personal computing and printing as a tool for dissidents meant restrictions on consumer purchases and limited the mass markets for these products, and hence their development.
Spiralling bureaucracy coupled with the centrifugal tendencies of growing managerial assertiveness; bureaucratic plundering of the economy, contrasted to an alienated, demoralised working class cut off from directing production; distorted planning directives leading to waste and inefficiency, debt and subsidy, hidden inflation and shortages; disincentives and lags in innovation, so that catching up with the West turned into falling further behind it; all of these tendencies became increasingly damaging as it became essential for the economy to shift from extensive to intensive, high-tech development. Instead, productivity and growth rates fell from the Sixties onwards in the Soviet Union, sounding the death knell of the system.
Khrushchev to Brezhnev
In the period immediately after 1945, the Soviet economy expanded quickly. Basic industrialisation and postwar reconstruction, the availability of untapped resources and a growing workforce as peasants became workers, all allowed growth rates much higher than most capitalist countries. One third of industry was destroyed in the Second World War, and the Fourth Five Year Plan (1946-1950) saw even faster economic growth than the first two plans (118.9% increase in national income, 116.9% increase in industrial production), and the successful restoration of pre-war production levels by 1950. Of course, planned growth was supplemented immensely by the plunder of Soviet-occupied Eastern Europe. High growth rates continued, averaging 7.8% for the 1950s compared to 2.9% in the United States. The USSR was qualitatively transformed from an agricultural country to the second biggest industrial economy in the world, with a mostly urban population by 1960.
However, from the 1950s onwards, the limits, the contradictions and dysfunctionalities of bureaucratic planning were already beginning to make their mark. Falling productivity due to backward technology, wasteful use of resources, the distortions caused by bureaucratic privilege and planning and worker alienation would see the economy having to consume increasing amounts of investment just to keep going forward.
After Stalin’s death, in March 1953, the newly-elected First Secretary of the CPSU, Nikita Khrushchev, quickly eliminated rivals (such as the reforming Prime Minister Malenkov in 1955) and reasserted the party’s leadership over the security services and bureaucracy at the same time. Part of this was an attack on the immense power of the chiefs of the industrial ministries, achieved by decentralising planning to the regional level, the sovnarkhozy. This reform, however, resulted in massive disruption and fragmentation, as localism and regional competition replaced the ministries’ rivalries. Nonetheless, the Khrushchev “thaw” also abolished many of the 1930s restrictions on labour, especially for kolkhoz workers, and loosened censorship and terror in social and cultural life, within the strict limits of an unchallenged party monopoly on power. A series of social reforms saw wages rise, the working week shorten and the extension of education, health and housing provision.
While debates among academic economists from the mid-Fifties on focused on how to make the plan more efficient, Khrushchev focused on reorganisations and extensive changes to Soviet agriculture, amalgamating the kholkhoz sector into bigger units while loosening restrictions on their workers, and introducing the voluntarist “Virgin Lands” programme that brought extensive areas, but mainly marginal land, under the plough. Agricultural reform to increase productivity, allow increased food consumption and provide sufficient resources for investment in both industry and consumption, was to prove an insoluble problem for both Khruschev and, later, Brezhnev.
The failure of Khrushchev’s policies ultimately led to his downfall. Agriculture did not grow fast enough, and price rises in 1962, met by demonstrations and strikes at Novocherkassk that were bloodily repressed, were a warning to the bureaucracy of the implications of failing to raise standards of living, and led to the first foreign grain purchases. These were to become a regular and growing burden on the Soviet economy. More generally, the annual growth rate of the Soviet economy peaked in 1958 at 5.3% per year, remaining there until 1964 after which growth rates began to decline. Khrushchev’s special seven-year economic plan (1959-65) had to be abandoned two years short of its completion. His attempts to overcome bureaucratic sclerosis in a second de-Stalinisation campaign, which involved splitting the party locally between industrial and agricultural wings, introducing term-limits and mandatory turnover rules to end nepotism and allow the “systematic renewal of cadres”, a weak bureaucratic imitation of Lenin’s rotation of positions, were the final straw for party officialdom at all levels.
The October 1964 Central Committee Plenum sacked Khrushchev without opposition and put in his place the bland duo of Leonid Brezhnev, First CPSU Secretary, and ex-Gosplan chief Kosygin, as Prime Minister and head of the state apparatus. They immediately set about reversing many of Khrushchev’s policies’ rejecting his “voluntarism” and “hare-brained schemes” in favour of a “scientific” and “objective” approach. The horizons of the Brezhnev era were lower, speeches about surpassing America and building communism disappeared, and the official aim became the building of a “developed socialist Society”. Brezhnev’s promise of “stability of cadres” and “care for cadres”, as opposed to Khrushchev’s erratic reorganisations or the bloody decimations of the Stalin era, meant jobs-for-life for the nomenklatura and would deliver an ageing, complacent, corrupt elite by the 1980s.
Kosygin’s technocratic, reforming urges (originating in his time as head of Gosplan) were to be cancelled out by Brezhnev, whose party-rooted conservatism cut with the grain of the interests of wider layers of the bureaucracy, allowing his power to grow over time at the expense of the reforming Kosygin and the Presidium. Brezhnev’s subsequent side-lining of Kosygin and rise to a bonapartist position above the bureaucracy, in fact, mirrored Khrushchev’s own initial rise.
It was the fate of the bureaucracy after Stalin’s death that it was riven by increasing factional warfare and disputes. The relaxation of the terror over the bureaucracy meant that it began to indulge its vices of greed and graft even more. “Stability” for the bureaucracy meant that the penalties for corruption fell, relative to the incentives, and opportunities, to increase their privileges.
This produced a reaction in the top echelons of the party, frightened at the popular anger over the corruption scandals and economic problems that were increasingly impossible to conceal. The result was the three year see-saw after Brezhnev’s death in 1982, with anti-corruption reformer and ex-KGB head Andropov coming to power, only to die in turn in 1984, to be succeeded by arch-Brezhnevite crony Chernenko. This tendency, seeking to renew and purge the bureaucracy in order to save it and the system from its own excesses and corruption, would ultimately give rise to Gorbachev. Of course, Gorbachev’s strategy was even more radical, as it aimed at economic and democratic reforms to rationalise the bureaucracy despite itself, to marketise the planned economy while retaining the political monopoly of the party. We shall return to this in the next chapter.
Failure of reform
The growing economy and the political thaw of the late Fifties and early Sixties allowed the crystallisation of a middle layer of technocrats, intellectuals and enterprise managers from within the bureaucratic caste as well as a layer of privileged specialists. This layer was increasingly rankled by the narrow pay differentials that limited pay for professionals, academics and others with skills or education. The limits of public discourse were sharply felt by technocratic sections, with scientists particularly assertive against the political limits on scientific discourse and access to Western research.
The onset of decline in the Sixties, which threatened bonuses, and the first slowdown in consumption growth, created pressure from these layers for reform – it is no coincidence that it was managers and economists, who often had a dim view of the unqualified party functionaries appointed over their heads, who were the first to champion “market reform” measures. The “stability of cadres” under Brezhnev produced an ageing, incumbent hierarchy, blocking the advance of newer, younger bureaucrats to the higher levels of the nomenklatura so that they became another constituency
for reform.
The discussion of reform in the USSR that took place behind closed doors and in academic circles from the late Fifties on, finally led to the Liberman proposals that were published in Pravda in 1962. However, this apparent official sanction did not lead to the implementation of any reforms under Khrushchev. Instead, the first Soviet attempt at dealing with the problems of the modern economy and stagnation was introduced under Kosygin. It allowed for more enterprise autonomy, gave managers more scope to take initiatives and reduced considerably the number of compulsory indicators set from above. The enterprise was now to relate its behaviour to the real results of its production; a capital charge would ensure efficient investment and prices were to be calculated on real enterprise costs, plus a percentage of the value of its capital assets, in other words, a crude, arbitrary formula mimicking profit. Profit and sales (to stop stockpiling) would be the two “bonus forming incentives”.
There were also plans for a future “trade in means of production” between enterprises that would replace the allocation of materials from above. However, these reforms were unrolled slowly and unevenly; “enterprises in general did not receive the leeway which the experimenting units had. In addition, the later an enterprise joined the experiment, the narrower was its autonomy” as the bureaucracy progressively undermined the reforms by reasserting its old practices.
From the highest level downwards, the Kosygin reforms were watered down or were negated by other measures in the interests of central control and apparatchik power. More directly, the reform rules and bonuses were changed frequently and arbitrarily and, while managerial bonuses were linked to profit-making and sales (to stop hoarding) the most lucrative bonuses remained linked to plan target fulfilment, so managers continued to pursue hitting these targets regardless. The profit formula, coupled with fewer material targets on type or quantity of output, encouraged managers to inflate prices or focus on making the most expensive products, regardless of need. The centre continued to set prices. By 1970, Kosygin’s reforms had disintegrated. Ironically, the administrative sabotage that meant they were not fully implemented in practice, also meant that (unlike elsewhere) they did little to destabilise the plan.
The bureaucracy’s response to continued decline in growth rates in the Seventies was towards even greater recentralisation. Kosygin’s reforms had already been accompanied by (and in part stifled by) a return to centralisation, with the abolition of Khrushchev’s sovnarkhozy and resurrection of the industrial and agricultural ministries, along with new centralised ministries to oversee supply (Gosnab) and planning (Gosplan) which had previously been dispersed among the ministries and separated between industry and agriculture. Now, a first package of reforms in 1974, and then another in 1979, saw a sharpening of the command model: increased centralisation, with more obligatory targets and indicators imposed, and inputs allocated from above.
A healthy workers’ state would also subsidise consumption, education, infrastructure or other priority projects to achieve its political goals such as decreasing inequality, as part of the transition to socialism. This represents one important dimension in which socialist planning breaks with the logic of the law of value and subordinates it. However, it is vital for any planning system to be able to establish and compare the real, labour-time costs of different products and processes so that it can weigh up the costs of alternative strategies for development. It was because bureaucratic planning could not do this that there had to be a turn to market mechanisms to re-establish this basic dimension of rational, economic functioning.
Stagnation: Bureaucratic planning reaches its limits
Sporadic protests by workers in the early Seventies led to promises to raise wages and pensions as well as to increase the availability of basic food items, clothes, refrigerators and televisions. These promises were largely honoured but it became increasingly difficult to maintain consumption levels against a background of slowing economic growth. However, while the bureaucracy could temporarily put off the explosion, in the longer term, the system was not sustainable.
By 1975, the Soviet economy was suffering severe slowdowns across most sectors of industry.
Real wages rose by 50% up to 1976 then began to fall. Average consumption per head increased 70%, with 96% of households owning televisions and 91% a refrigerator by 1984. However, the bulk of gains were made before the mid-Seventies and growth rates declined sharply thereafter. The state continued to subsidise consumption: the GDP-per-capita annual increase for 1973-1982 was 0.9%, while consumption-per-capita annual increase for the same period was twice as high, at 1.9%.
Productivity decline
The Brezhnev regime’s major focus concerning economic renewal, as under Khrushchev, was to reform backward, unproductive Soviet agriculture. Agricultural stagnation was particularly symbolic of the dilemmas of the regime. Investment in agriculture hugely increased, from 19.6% of total investment in 1961-5 to 26.2% in 1976-80, with similar investment (5-8%, same periods) in agro-industry such as fertilisers so that the sector as a whole took up nearly a third of all investment. Soviet agriculture grew by 3.4% annually from 1950-1975 so that by the Seventies the USSR was the biggest wheat producer in the world. Total meat production doubled, increasing meat consumption for consumers.
However, stuffing the sector with investment concealed an average fall in productivity of 4% per year throughout the Seventies. This was a classic consequence of bureaucratic planning. Despite the investment, agriculture, “still appears under-capitalised, due partly to unbalanced (nekompleksnyi) mechanisation, partly to low quality of machines, and also to poor maintenance so that equipment and vehicles wear out quickly”. The continuing inefficiency and backwardness of Soviet agriculture is revealed by comparison with the US which produced six times more with only 4.6% of the total labour force in agriculture, compared to 25.6% in the USSR. No country devoted such a high proportion of investment to agriculture.
Under Stalin, brutal repression saw agriculture subsidise industrialisation through starving the collectivised peasantry. Under Brezhnev, agriculture went from being a source of accumulation to receiving a large subsidy, draining funds from the rest of the economy. The procurement prices that the state paid to the farms for produce were raised again and again, while prices were kept artificially low for consumers. Outright subsidies were given to industry to provide the farm sector with goods at artificially low, state-set prices. So, for instance, procurement prices for livestock were raised repeatedly, yet meat prices were still set at 1962 levels, so that the state subsidies by the late 1970s had risen to 23 billion roubles a year!
The party literally bought temporary acceptance of its dictatorship with cheaper and more plentiful basic goods, such as food, but at a high, ever-increasing, price to itself. Soviet machinery imports from the West were to peak in the mid-Seventies as the authorities decided to focus on using precious hard currency on food and investing in the oil industry, the goose that laid the golden egg.
However, even then, the Stalinist states could not escape the consequences of declining growth, and the result was scarcity in the (cheaper) state shops, and a growing market with prices driven up by demand to more truly reflect the costs of production: prices in collective farmers’ markets, where private produce could be legally traded, rose steadily against those in state retail outlets until they were 2.2 times higher by 1984. The alternative to raising wages and consumption, was falling standards of living, unrest and revolt as periodic food protests would show.
However, even the lower growth figures (for example, 3.5% in the early Eighties) are widely regarded as inflated, leading some commentators, both Western and Soviet, to believe that growth stopped, or even went negative at times, in the 1980s. Even if the economy and income did continue to go forwards, the huge level of private savings shows that consumers found there was little to spend their money on, due to scarcity in the state shops and high prices in the farm and black markets.
Soviet national income 1950-1987
Both military spending and agriculture took larger proportions of GDP in the Seventies and Eighties. While overall investment doubled over the period 1950-1986, from 15% to over 30% of GDP, creating a real limit on workers’ consumption, this slowed down in the Seventies as agriculture and military priorities crowded out other investment. Gross fixed investment and net fixed investment growth rates declined sharply between 1970 and 1985, with the latter becoming negative after 1980. An IMF/OECD study states that this holding back on investment was due to consumption levels “having fallen toward the limit of what was felt politically sustainable”.
Fatally for the Stalinists, falling productivity meant that even this growing mass of investment became less and less effective over time, the bureaucracy had to invest more and more capital just to maintain production levels, as economy-wide capital-output (K/Y) ratios rose sharply after 1960, according to both Western and official estimates. In industry alone, this was lower (since agriculture contributed much to the wider figure) but shot up after 1970. Static efficiency of capital and labour was 34% of American levels, one third of the output of the US for the same inputs.
Competition with US imperialism, and the overriding political aim of maintaining social stability, dictated these policies to the bureaucracy, which faced a narrowing circle of options. Bureaucratic planning’s contradictions had released a dynamic it could not overcome, something recognised by wider and wider layers of the intelligentsia and bureaucrats themselves, from managers to the highest echelons of the nomenklatura. Unbearable pressures for reform built up beneath the ossified social fabric of Brezhnev.
Oil staves off a reckoning
The central factor in allowing the regime to remain stable for another decade into the mid-Eighties was the world capitalist crisis. This ensured that, even if Stalinism was bankrupt as a system and the Soviet economy was slowing, so was capitalism and particularly its main rival the United States, and so materially the gap between them did not radically open up at first. More concretely, the early Seventies saw two dynamics unleashed that favoured the Soviet Union, rising oil prices and rising gold prices. The Soviet Union was the world’s biggest producer of oil and second largest producer of gold. While world trade as a proportion of the Soviet Union’s economy remained low, the foreign currency earnings from its exports sky-rocketed, allowing it to continue to import grain and consumer goods and stave off a reckoning. For the Eastern European countries, the circle was squared by loans from the West, which then put them at the mercy of the imperialist bankers and interest rates and drove deepening crisis in the Seventies and Eighties.
However, after 1979, political events began to reverse the USSR’s temporary reprieve with the rise of the Second Cold War. The invasion of Afghanistan became a worsening quagmire, while the rise of hard line neoliberal and anti-communist regimes under Reagan and Thatcher in the two most powerful imperialist countries created mounting technological blockade and military competition, forcing increased military spending. The continued need for grain imports, coupled with the decline of the prices of gold and oil, and the collapse of the latter price in 1985-6, meant economically the game was up. The Soviet giant suddenly found itself in the same situation as its East European satellites and debt quickly increased, leading to outright crisis and collapse in 1989.
Economic decline had led to importing from the West what could not be provided by the bureaucratic planned system, in turn, this led to piling up debts to fund the trade gap, which were to prove a Trojan horse. Western bankers would call time on the Stalinist regimes one by one in the 1980s, pushing them into economic crisis and political meltdown.
Trotsky, in a prescient analysis, predicted both the form and nature this would take, and the inevitably conjoined overthrow of the party’s monopoly of power and with it the planned property relations:
“…Bourgeois society has in the course of its history displaced many political regimes and bureaucratic castes, without changing its social foundations … The state power has been able either to co-operate with capitalist development, or put brakes on it. But in general the productive forces, upon a basis of private property and competition, have been working out their own destiny. In contrast to this, the property relations which issued from the socialist revolution are indivisibly bound up with the new state as their repository. The predominance of socialist over petty bourgeois tendencies is guaranteed, not by the automatism of the economy – we are still far from that – but by political measures taken by the dictatorship. The character of the economy as a whole thus depends upon the character of the state power.
A collapse of the Soviet regime would lead inevitably to the collapse of the planned economy, and thus to the abolition of state property. The bond of compulsion between the trusts and the factories within them would fall away. The more successful enterprises would succeed in coming out on the road of independence. They might convert or they might find some other transitional form of property – one, for example, in which the workers should participate in the profits. The collective farms would disintegrate at the same time, and far more easily. The fall of the present bureaucratic dictatorship, if it were not replaced by a new socialist power, would thus mean a return to capitalist relations with a catastrophic decline of industry and culture.”