Soviet Union Economy
Soviet Union: Rise and Fall of an Empire.
The failure of a Command Economy.
by David Chee
Bachelor of Economics(Eco155)
Microeconomics(Eco155)
Tutor: Ms. Sharina Silvaraj
Help University
Department of Business
12th August 2013
” It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages. ” This particular quote by Adam Smith, in his book The Wealth of Nations depicts the human nature, and in a wider perspective, the essence of a capitalistic market in which self-interest is the only incentive that matters and …show more content…
that will ultimately benefit not only an individual, but the entire society. Considering we inhabit a planet of approximately 7 billion people and we are beings driven by self-interest, the market system is an economic system which is inevitable, varying only in terms of how free a market is. Even the mighty former Soviet Union could not solely depend on a command economic system and inevitably adopted a mixed economic system before it finally collapsed in the December of 1991.(Cold War Museum, n.d.) With that said, the aim of this paper is to discuss the economic system of the Soviet Union and how it’s command economic system became one of the major cause of the inexorable disbandment of the entire Soviet Union into the individual countries we know today.
According to McConnell, Brue and Flynn(2012), an economic system is a mechanism in response to various economic problems. However, there are plenty of variations of economic systems in the world in the present as well as the past, namely the traditional economy system, the command economy system, the market economy system as well the mixed economy. Economic systems like the traditional economy has been around for as long as ancient civilizations of our world, and like the civilizations themselves evolved into a more developed, that of the market economy and the command economy. (Shmoop Editorial Team, 2008). The Soviet Union, a formidable superpower of its time on a global scale, practiced a command economic system, also known as a socialist economy. This system was practiced until the reforms by the last leader of the Soviet Union, Mikhail Gorbachev transformed the Soviet economy into a mixed economy before its final collapse. A command economy is an economy in which all economic decisions are centrally planned by a government much like how the brain controls and regulate the human body rather than the way symbiotic organisms live off each other, such as that of a market economic system. The planned economic system meant that the state had ownership of the way the country produced its goods and services, all economic activities, mainly farming and agriculture, the manufacturing of industrial products as well as complete and centralized control over all macroeconomic decisions. (Economic help, 2013)
Theoretically, the advantages of having a command economy are numerous, of which the government are in complete control of the use of the land, the labour force, as well as capital to achieve targets that are set by the state. Economic growth can also be ensured in a desired time span and pattern. This is due to the fact that the amount of consumer goods produced can be controlled and cut down to increase the amount of capital goods. Because of this, the government is able to achieve massive industrial growth rapidly in underdeveloped countries, like the Soviet Union at its time. An example of this in the Soviet Union would be the introduction of the 5 year plans by Joseph Stalin which was continually carried out by the government body known as the Gosplan SSSR, the state planning committee of the Soviet Union (Gregory, 2004). The 5 year plans, in essence, were various economic plans that spanned 5 years with the aim of achieving certain economic targets or goals. One could say the result of it was an astounding success. The first 5 year plan which was from 1928 to 1932 was aimed at industrializing the entire country with importance being placed in heavy industry. The result was a substantial increase in the production of industrial goods. A few examples of this increase would be the production of coal, from 35 million tons(mt) in 1927 to 64 million tons in 1932; oil, from 12mt(1927) to 21mt(1932); iron ore, from 5mt(1927) to 12mt(1932); and pig iron, with an increase from 3mt(1927) to 6mt(1932) (Trueman, 2000). The many 5 year plans that followed the first had also managed to vastly and rapidly increase production in the Soviet Union which quickly transformed it into a major world class industrial country. However, this success is not without a severe trade off which ultimately contributed to the downfall of the entire Soviet Union. The centralized planning and the unrealistically high targets set for capital goods had many implications. In a command economy like that of the Soviet Union, firms are not driven by profits but rather targets set by the government. Due to the pressures exerted by the governments to achieve those targets, it was common for the quality of products to be less than satisfactory and production figures to be exaggerated in fears of being punished. At the time of Stalin’s rule, a factory manager could be considered an enemy of the state and executed if targets were not achieved. The workers of the various firms in the Soviet Union had to work long hours with little pay due to once again, centralized planning that gave way to the abuse of power by the government (Trueman, 2000). On top of that, with the Soviet Union being a communist country practicing the command economy, all wages were equal regardless of the quality or variety of the output, hence taking away the incentive to produce innovative or high quality goods, this led to low quality consumer goods which further lowered the standard of living (Kvint, 2009). This was made worse with the fact that so much emphasis was put on capital goods that consumer goods were hardly being produced. The truth behind the high figures of production was that the people of the Soviet Union were being forced into a life of hardship by the government and the economic system.
In the many years that followed Joseph Stalin’s initial action plan for the Soviet Union, in the late 1960s and early 1970s, the economy was in a worse shape than ever.
This was caused by multiple factors, but the core of the problem was the command economy system itself. Centralized planning of the government that led to its glory could no longer be sustained, as the Soviet Union had grown so large in size that the planners simply could not come out with effective economic policies anymore, it had proven to be too much for a central government to handle. (Worldology, n.d.) Under the rule of Leonid Brezhnev, growth was in a steep declined starting from the ninth 5-year plan (1970-1975) with a growth rate of 3% approximately and 1-1.9% and 0.6-1.8% in the subsequent 10th and 11th 5 year plans. The factors that caused the Soviet economy to go into stagnation was further intensified by the war waged on Afghanistan and the arms race with the United States during the cold war era. With almost one third of Soviet’s gross national product dedicated to military expenses, and the depletion of various national resources like oil and natural gas, the Soviet Union was placed in a very tight spot economically speaking. Considering that it was the natural resources that was the Soviet’s last safety net keeping it afloat in the 1970s, the fore-mentioned two factors became too much for the economy to recover from. (Baucom, 1992) This led up to the last leader of the Soviet Union, Mikhail …show more content…
Gorbachev. With such a daunting economic problem in his hands, he had to also come up with a solution as extreme as the problem was. Gorbachev had envisioned a never before change in the system of the Soviet Union, a radical two tier reformation policy unthinkable by leader of a communist country. His solution was named Glasnost, which meant freedom of speech and Perestroika, an economic reform which carried the meaning of rebuilding. (Cold War Museum, n.d.) Under the newly implemented Perestroika, Gorbachev first targeted his efforts to increase the quality of the labour force of the Soviet Union. His first step was to cut down the production and sale of alcohol. He also started leasing state-owned land to farmers, allowed factories that were not performing well to go bankrupt and also allowed private firms to start running business to open up. Aside from that, one of the most promising effort however, was to reduce the expenditure of the state that went to military funding considering it constituted a third of the country’s GNP. The economy was beginning to transform into that of a mixed economy (McGuire, 1991). Logically, all these new measures should have turned the economy around, but there were a few flaws in the plan itself. First of all would be the implementation of Glasnost. Under normal circumstances, freedom of speech would be a good measure in transforming the country for the better, but the Soviets were people who have been oppressed for decades under the Stalin rule. Freedom of speech at that time would only function to expose the oppression and ultimately lead to the bottled up frustrations and anger of the people to erupt. The curbing of alcohol also was not something the Soviets happily accepted, considering most of them were alcoholics, further adding to the dissatisfaction. Ultimately, the plan had the potential to turn things around, but it was not a plan comprehensive enough to overcome the deeply rooted problems already faced by the economy. All the factors mentioned, paired with political problems of faced finally lead to the dissolution of the great Soviet Union in 1991. (Brown, 1997)
The Soviet Union is a perfect experiment and example of how a command economy would fair in the modern capitalistic world. While the idea of command economy and equality among all citizens of a country sounds like utopia, it is but an idealistic dream that cannot be carried out in reality. For in reality, it is an economic system that cannot fully satisfy the needs of an economy and is not sustainable, leading its citizens to a lower standard of living rather than an equal and great standard it promises.
References
C.R.
McConnell, S.L. Brue, S.M. Flynn, 2012. Macroeconomics. McGraw-Hill. New York..
Cold War Museum. Fall of the Soviet Union. Available at:http://www.coldwar.org/articles/90s/fall_of_the_soviet_union.asp. [Accessed 5 August 2013].
4 types of economy(2nd paragraph) Shmoop Editorial Team. (November 11, 2008).Types of Economic Systems. Retrieved August 3, 2013, from http://www.shmoop.com/economic-systems/types.html
Command Economy | Economics Help.org. 2013. Command Economy | Economics Help.org. Available at:http://www.economicshelp.org/dictionary/c/command-economy.html. [Accessed 3 August 2013].
GREGORY, PAUL R.. "Gosplan." Encyclopedia of Russian History. 2004. Retrieved August 5, 2013 from Encyclopedia.com: http://www.encyclopedia.com/doc/1G2-3404100517.html
Trueman, C. 2013. Stalin. Available at:http://www.historylearningsite.co.uk/Stalin.htm. [Accessed 6 August 2013].
Mongabay, 1986-90 . Soviet Union-The Twelfth Five-Year Plan, 1986-90 . Available at:http://www.mongabay.com/history/soviet_union/soviet_union-the_twelfth_five-year_plan,_1986-90_12327.html. [Accessed 8 August 2013].
Kvint, V, 2009. The Global Emerging Market: Strategic Management and Economics. 1st ed.
Routledge.
World.ology. Causes of the Collapse of the Soviet Union. Available at:http://www.worldology.com/Europe/Europe_Articles/causes_soviet_collapse.htm. [Accessed 10 August 2013].
Baucom, Donald. The Origins of SDI. Lawrence, KS: University Press of Kansas, 1992.
McGuire, Michael. Perestroika and Soviet National Security. Washington, D.C.: Brookings Institute, 1991.
Brown, Archie. The Gorbachev Factor. Oxford: Oxford University Press, 1997.
The failure of a Command Economy.
by David Chee
Bachelor of Economics(Eco155)
Microeconomics(Eco155)
Tutor: Ms. Sharina Silvaraj
Help University
Department of Business
12th August 2013
” It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages. ” This particular quote by Adam Smith, in his book The Wealth of Nations depicts the human nature, and in a wider perspective, the essence of a capitalistic market in which self-interest is the only incentive that matters and …show more content…
that will ultimately benefit not only an individual, but the entire society. Considering we inhabit a planet of approximately 7 billion people and we are beings driven by self-interest, the market system is an economic system which is inevitable, varying only in terms of how free a market is. Even the mighty former Soviet Union could not solely depend on a command economic system and inevitably adopted a mixed economic system before it finally collapsed in the December of 1991.(Cold War Museum, n.d.) With that said, the aim of this paper is to discuss the economic system of the Soviet Union and how it’s command economic system became one of the major cause of the inexorable disbandment of the entire Soviet Union into the individual countries we know today.
According to McConnell, Brue and Flynn(2012), an economic system is a mechanism in response to various economic problems. However, there are plenty of variations of economic systems in the world in the present as well as the past, namely the traditional economy system, the command economy system, the market economy system as well the mixed economy. Economic systems like the traditional economy has been around for as long as ancient civilizations of our world, and like the civilizations themselves evolved into a more developed, that of the market economy and the command economy. (Shmoop Editorial Team, 2008). The Soviet Union, a formidable superpower of its time on a global scale, practiced a command economic system, also known as a socialist economy. This system was practiced until the reforms by the last leader of the Soviet Union, Mikhail Gorbachev transformed the Soviet economy into a mixed economy before its final collapse. A command economy is an economy in which all economic decisions are centrally planned by a government much like how the brain controls and regulate the human body rather than the way symbiotic organisms live off each other, such as that of a market economic system. The planned economic system meant that the state had ownership of the way the country produced its goods and services, all economic activities, mainly farming and agriculture, the manufacturing of industrial products as well as complete and centralized control over all macroeconomic decisions. (Economic help, 2013)
Theoretically, the advantages of having a command economy are numerous, of which the government are in complete control of the use of the land, the labour force, as well as capital to achieve targets that are set by the state. Economic growth can also be ensured in a desired time span and pattern. This is due to the fact that the amount of consumer goods produced can be controlled and cut down to increase the amount of capital goods. Because of this, the government is able to achieve massive industrial growth rapidly in underdeveloped countries, like the Soviet Union at its time. An example of this in the Soviet Union would be the introduction of the 5 year plans by Joseph Stalin which was continually carried out by the government body known as the Gosplan SSSR, the state planning committee of the Soviet Union (Gregory, 2004). The 5 year plans, in essence, were various economic plans that spanned 5 years with the aim of achieving certain economic targets or goals. One could say the result of it was an astounding success. The first 5 year plan which was from 1928 to 1932 was aimed at industrializing the entire country with importance being placed in heavy industry. The result was a substantial increase in the production of industrial goods. A few examples of this increase would be the production of coal, from 35 million tons(mt) in 1927 to 64 million tons in 1932; oil, from 12mt(1927) to 21mt(1932); iron ore, from 5mt(1927) to 12mt(1932); and pig iron, with an increase from 3mt(1927) to 6mt(1932) (Trueman, 2000). The many 5 year plans that followed the first had also managed to vastly and rapidly increase production in the Soviet Union which quickly transformed it into a major world class industrial country. However, this success is not without a severe trade off which ultimately contributed to the downfall of the entire Soviet Union. The centralized planning and the unrealistically high targets set for capital goods had many implications. In a command economy like that of the Soviet Union, firms are not driven by profits but rather targets set by the government. Due to the pressures exerted by the governments to achieve those targets, it was common for the quality of products to be less than satisfactory and production figures to be exaggerated in fears of being punished. At the time of Stalin’s rule, a factory manager could be considered an enemy of the state and executed if targets were not achieved. The workers of the various firms in the Soviet Union had to work long hours with little pay due to once again, centralized planning that gave way to the abuse of power by the government (Trueman, 2000). On top of that, with the Soviet Union being a communist country practicing the command economy, all wages were equal regardless of the quality or variety of the output, hence taking away the incentive to produce innovative or high quality goods, this led to low quality consumer goods which further lowered the standard of living (Kvint, 2009). This was made worse with the fact that so much emphasis was put on capital goods that consumer goods were hardly being produced. The truth behind the high figures of production was that the people of the Soviet Union were being forced into a life of hardship by the government and the economic system.
In the many years that followed Joseph Stalin’s initial action plan for the Soviet Union, in the late 1960s and early 1970s, the economy was in a worse shape than ever.
This was caused by multiple factors, but the core of the problem was the command economy system itself. Centralized planning of the government that led to its glory could no longer be sustained, as the Soviet Union had grown so large in size that the planners simply could not come out with effective economic policies anymore, it had proven to be too much for a central government to handle. (Worldology, n.d.) Under the rule of Leonid Brezhnev, growth was in a steep declined starting from the ninth 5-year plan (1970-1975) with a growth rate of 3% approximately and 1-1.9% and 0.6-1.8% in the subsequent 10th and 11th 5 year plans. The factors that caused the Soviet economy to go into stagnation was further intensified by the war waged on Afghanistan and the arms race with the United States during the cold war era. With almost one third of Soviet’s gross national product dedicated to military expenses, and the depletion of various national resources like oil and natural gas, the Soviet Union was placed in a very tight spot economically speaking. Considering that it was the natural resources that was the Soviet’s last safety net keeping it afloat in the 1970s, the fore-mentioned two factors became too much for the economy to recover from. (Baucom, 1992) This led up to the last leader of the Soviet Union, Mikhail …show more content…
Gorbachev. With such a daunting economic problem in his hands, he had to also come up with a solution as extreme as the problem was. Gorbachev had envisioned a never before change in the system of the Soviet Union, a radical two tier reformation policy unthinkable by leader of a communist country. His solution was named Glasnost, which meant freedom of speech and Perestroika, an economic reform which carried the meaning of rebuilding. (Cold War Museum, n.d.) Under the newly implemented Perestroika, Gorbachev first targeted his efforts to increase the quality of the labour force of the Soviet Union. His first step was to cut down the production and sale of alcohol. He also started leasing state-owned land to farmers, allowed factories that were not performing well to go bankrupt and also allowed private firms to start running business to open up. Aside from that, one of the most promising effort however, was to reduce the expenditure of the state that went to military funding considering it constituted a third of the country’s GNP. The economy was beginning to transform into that of a mixed economy (McGuire, 1991). Logically, all these new measures should have turned the economy around, but there were a few flaws in the plan itself. First of all would be the implementation of Glasnost. Under normal circumstances, freedom of speech would be a good measure in transforming the country for the better, but the Soviets were people who have been oppressed for decades under the Stalin rule. Freedom of speech at that time would only function to expose the oppression and ultimately lead to the bottled up frustrations and anger of the people to erupt. The curbing of alcohol also was not something the Soviets happily accepted, considering most of them were alcoholics, further adding to the dissatisfaction. Ultimately, the plan had the potential to turn things around, but it was not a plan comprehensive enough to overcome the deeply rooted problems already faced by the economy. All the factors mentioned, paired with political problems of faced finally lead to the dissolution of the great Soviet Union in 1991. (Brown, 1997)
The Soviet Union is a perfect experiment and example of how a command economy would fair in the modern capitalistic world. While the idea of command economy and equality among all citizens of a country sounds like utopia, it is but an idealistic dream that cannot be carried out in reality. For in reality, it is an economic system that cannot fully satisfy the needs of an economy and is not sustainable, leading its citizens to a lower standard of living rather than an equal and great standard it promises.
References
C.R.
McConnell, S.L. Brue, S.M. Flynn, 2012. Macroeconomics. McGraw-Hill. New York..
Cold War Museum. Fall of the Soviet Union. Available at:http://www.coldwar.org/articles/90s/fall_of_the_soviet_union.asp. [Accessed 5 August 2013].
4 types of economy(2nd paragraph) Shmoop Editorial Team. (November 11, 2008).Types of Economic Systems. Retrieved August 3, 2013, from http://www.shmoop.com/economic-systems/types.html
Command Economy | Economics Help.org. 2013. Command Economy | Economics Help.org. Available at:http://www.economicshelp.org/dictionary/c/command-economy.html. [Accessed 3 August 2013].
GREGORY, PAUL R.. "Gosplan." Encyclopedia of Russian History. 2004. Retrieved August 5, 2013 from Encyclopedia.com: http://www.encyclopedia.com/doc/1G2-3404100517.html
Trueman, C. 2013. Stalin. Available at:http://www.historylearningsite.co.uk/Stalin.htm. [Accessed 6 August 2013].
Mongabay, 1986-90 . Soviet Union-The Twelfth Five-Year Plan, 1986-90 . Available at:http://www.mongabay.com/history/soviet_union/soviet_union-the_twelfth_five-year_plan,_1986-90_12327.html. [Accessed 8 August 2013].
Kvint, V, 2009. The Global Emerging Market: Strategic Management and Economics. 1st ed.
Routledge.
World.ology. Causes of the Collapse of the Soviet Union. Available at:http://www.worldology.com/Europe/Europe_Articles/causes_soviet_collapse.htm. [Accessed 10 August 2013].
Baucom, Donald. The Origins of SDI. Lawrence, KS: University Press of Kansas, 1992.
McGuire, Michael. Perestroika and Soviet National Security. Washington, D.C.: Brookings Institute, 1991.
Brown, Archie. The Gorbachev Factor. Oxford: Oxford University Press, 1997.