The Russian Economy — Its Origins and Players Part One

The Origins of the System

The U.S.S.R. was fortunate to begin when it did. Starting with the Russian Revolution in 1917, its leaders capitalized on a national discontent with the Russian monarchy to institute a political system which was supposed to be more responsive to the people. In essentially removing private enterprise, people were to be equals, with no classes to keep people down while allowing others to accumulate wealth.

Farms and factories were collectivized, with the idea being the individual would work for the common good. The problem was that the Russian system (which was exported as the U.S.S.R. expanded) was a top-down one where the workers had no emotional investment or ownership over their work and therefore little resonating incentive to produce. This would lead to problems in the ensuing decades.

The U.S.S.R. also benefited from World War II in the sense that it was a gift for their highly-industrialized economy. Factory production soared and workers were kept busy.

With the world’s focus on central and Western Europe, Joseph Stalin was left on his own to create a brutally oppressive regime, one that hardly looked like the one people hoped for earlier in the century.

The West needed Stalin’s help in the war effort and in return it was hoped his aspirations would be contained. Your opinion may vary depending on which side of the Iron Curtain you were looking at, but Communism’s influence was kept from reaching further west at the expense of the eastern countries it gobbled up.

In the years after World War II, the Cold War heated up. The Korean War and Vietnam, along with a Cuban near miss, attracted an America that was opposed to the spread of Communism. That gave both sides an enemy to focus on, which came in handy when the economy was not performing so well.

But when there was no enemy and the economy is tanking, things do not look so good. During his period of leadership Mikhail Gorbachev saw that the Soviet economy was in trouble, so he rushed a series of reforms including Glasnost (openness), Perestroika (restructuring), Demokratizatsiya (democratization) and Uskoreniye (increased pace of economic development). Gorbachev saw the Soviet Union falling behind the West in productivity, innovation, per capita outputs and other measure which together show the economic health of a country. It made more sense to partner with the West as that would be the U.S.S.R.’s fastest path to a healthier economy.

In hindsight it is easy to see why the Soviet Union failed when one looks through the lens of common human motivation and behavior. When he assumed leadership in 1929, Joseph Stalin stated his country would have a decade to overcome a century’s worth of ineptitude if it hoped to survive.

Stalin placed Russia on a path of rapid industrialization with an intensive focus on capital outputs which would benefit the military at the expense of consumer goods and housing which hurt the average person. To make this work the central government had to exert tight control over most industries, including their personnel moves. People quickly learned that the safest path to job security meant not questioning orders, and keeping one’s creativity and ingenuity to one’s self.

Industrial managers had their performance assessed by how well they met targets laid out in the Five Year Plans. Meeting targets for production meant significant bonuses for managers. Exceeding them meant trouble, for the subsequent target would be that much higher while not meeting them eventually meant dismissal. To make sure targets would not be exceeded; managers would deliberately slow production for a significant portion of the assessment period before picking it up, hopefully, just in time to meet the targets. Innovation was a gamble whether it succeeded or failed, because failure meant unmet targets while success equated to more pressure from higher targets in the next period.

These were only a few of the circumstances which conspired to create a weakened Soviet economy in the late twentieth century. There were many more. Managers regularly asked for drastically overinflated and unrealistic budgets which led to the central government allowing massive overproduction and purchasing more than it could afford. Factories also grew large and inefficient. When the government had to pull back, they stopped cold turkey and left half-completed projects all over the place, some never to be completed.

Government administration made it worse. There were targets and plans for everything starting at the top. At each level, they were continually broken down until a production and resource allocation target was in place for up to 60,000 products, with a one-year plan stretching to 12,000 pages. Everything was forecast, with nothing left to chance, including normal market fluctuations and geopolitics.