Abstract
Opening of the archives confirmed that the Soviet Union was a hierarchical economy driven by planning, not a rent-seeking society. Rent-seeking could not govern the classical socialist society because lower-level officials could not trust their superiors to collaborate. Individual incentives would have favored widespread rent-seeking in the absence of punishment, therefore loosening of control during perestroika infused the system with rent-seeking and triggered the collapse of the planned economy. Rent-seeking drives decentralization of a hierarchical economy but centralization of a free economy, suggesting a tipping point between the two systems.
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Notes
For the purposes of this paper, ‘socialism’ means common ownership over the means of production, in practice state ownership, and when Soviet policy is discussed without further clarification it is the ‘classical socialist’ period of the Stalin era (Kornai, 1992). Although later Soviet leaders reduced terror and loosened some controls, this paper argues that central planning remained the mechanism by which the Soviet economy was organized until the collapse.
See, for example, Mises 1988[1922]; 2008[1949]; Hayek (1945) and Hoff (1949), for theoretical arguments, and Nove (1986) and Krylov (1979) for supporting evidence of socialism in practice.
This metaphor is borrowed from Steele (1992), who describes the Misesian economic calculation argument in the following way: ‘In much the same way, if we start a car in Chicago and make purely random movements with the steering wheel, we can be morally certain that the car will not arrive in Saint Louis. In order to assess whether the factory is a net benefit or a horrible waste we must put prices (or some substitute measure of cost) on the factory's outputs and inputs’ (Steele, 1992, p.19). Interestingly, at the 1922 Party Congress, the last that Lenin spoke at, he actually used this metaphor, although he used it with regard to the New Economic Policy, in which the state set many prices but allowed some private ownership: ‘The machine refused to obey the hand that guided it. It was like a car that was going not in the direction the driver desired, but in the direction someone else desired; as if it were being driven by some mysterious, lawless hand, God knows whose, perhaps of a profiteer, or of a private capitalist, or of both. Be that as it may, the car is not going quite in the direction the man at the wheel imagines, and often it goes in an altogether different direction’ (Lenin, 1965[1922]).
Although Kassof (1964) describes the Soviet Union as ‘administered’, his description is very much of a planned economy. His primary distinction is between a totalitarianism involving mass terror and repression, and one that can allow for some relaxation of social controls and terror tactics.
Vitaly Naishul describes it this way: ‘The typical pattern of administrative market interaction in the Brezhnev era was as follows. Enterprises made requests for resources, which accumulated as they moved up the administrative ladder until they reached an agency authorized to assign production tasks to producers. Then, tasks were distributed among manufacturing enterprises, which responded with new requests for necessary supplies, so that the planning cycle repeated itself over and over again. Brezhnev-era economic planning started from the bottom up, not from the top down as under Stalin; its nature was not directive but iterative or cyclical. The “upward” movement of each request for materials and the “downward” movement of reach production task was accompanied by furious bargaining between superiors and subordinates trying to achieve maximum resource allocation and minimal production tasks. Since the organizational capacity of the vertical bargaining system was inadequate. the social system was forced to tolerate legal, management-legalized, or simply illegal horizontal exchanges whose importance constantly increased as the economy grew more complex’ (Naishul, 1992).
Interestingly, Soviet state economists (eg, those on the Gosplan staff) and other Marxist economists continued to debate this question throughout the Soviet period. For example, Ota Sik explored the theoretical question of whether, according to Marxist theory, all exchange could cease before the arrival of pure communism. The question rested on whether socialist exchange – that exchange between purely socialist firms – was the same in kind to commodity exchange. A few schools of thought emerged during the Soviet period. Stalin argued that it was different in kind, while the left argued that all commodity exchange must eventually cease altogether (Sik, 1967). While Stalin's argument may have been based in expediency, it is surely true that bartering and exchange between two government entities with fixed output and fixed input requirements is hardly the kind of market exchange that can efficiently drive the economy.
To some extent, budgets were a constraint, especially on lower-priority firms, because planners provided different accounts to firms for different kinds of purchases. However, price was still not the primary consideration in purchases, because allocation orders were required for each purchase and this consideration tended to dominate. If an allocation order could be acquired, the cost would be covered by the state regardless of the price demanded (Berliner (1957)).
Belova and Gregory (2002) also discuss rent-seeking by high-level ministers. Although they conclude that Stalin fought against this kind of rent-seeking, but allowed some, and later dictators were unable to prevent this sort of rent-seeking, their definition of rent-seeking differs somewhat from that used here. The rent-seeking they cite is not a driving force of the economy, because the plan is driving these ministers and is still primarily handed down from above, and the rents shared with these top officials are given to them by the dictator (or ‘Team Stalin’, meaning the Politburo) to ensure their loyalty: ‘Stalin insisted on an encompassing view of economic decisions and railed against narrow rent-seeking activities, particularly by Team Stalin's own members. Stalin explicitly warned not to tolerate the ‘selfish’ efforts of the minister of heavy industry (and fellow Team Stalin member, Ordzhonikidze) to turn the Politburo ‘from the leading organ into a body subordinate to the needs of a particular commissariat’. …Despite its stated intent to take an encompassing view, Team Stalin did succumb at times to political motives. Lazarev and Gregory (2002) conclude from a case study that [Team Stalin] allocated its reserve of vehicles to build political support rather than to achieve economic goals. A case study of the Urals region shows that Team Stalin supported large regional investment proposals ‘not based on especially sound economic logic’ but to capture the political support of regional leaders.’
Berliner (1957, p. 22), on the basis of interviews, as well as published materials, makes the case that ‘The allocation order is one of the most crucial documents in the life of the firm’, and ‘much of the activity of the management focuses on this document’.
The idea that shortage is due to this self-fulfilling cycle is also supported by the parallel shortage in the labor market. There is no reason to suspect that managers wanted an artificial shortage of labor, yet there was an incessant problem of excess demand for labor, which is easily explained by the soft budget constraint and labor hoarding (Nove, 1986, p. 224; Gregory and Collier (1988); Berliner (1957)).
Consumer production became a higher priority according to official sources in the 1960s, but Western researchers observed a trend toward even higher prioritization of military investment occurring at the same time. It is not clear that the prioritization described by Berliner actually changed very much in the later years.
Berliner points to some other problems that may have exacerbated shortage by interrupting the production process. For example, subcontracts, a key part of the inter-firm supply process, also offered lower premiums for fulfillment.
For the most powerful firms, the principal is the minister himself, for others it will be a subordinate of the minister, or an equivalent, but there will always be a principal in the hierarchy. ‘Thus, for every enterprise there is one man who acts as the steward of the state and who, for all practical purposes, is the director's “boss”’ Berliner (1957, p. 17).
There is a literature that says Gosplan was a truth telling agent (Gregory and Harrison, 2005) and was therefore not subject to rewards based on enterprise performance. Although this means that Gosplan officials might not have had the same plan-fulfillment incentive that others lower in the hierarchy had, as truth tellers their faithfulness to the plan would be even more closely monitored.
Huge resources were expended to monitor each ministry and report deviations from the plan. It is unlikely that any orders not agreed to by the dictator would have been allowed by this apparatus, so collaboration through the hierarchy would probably have been required (Harrison (2008)). The Party hierarchy acted as a parallel hierarchy that would watch over and helps ensure the primary hierarchy of the command structure (Hazard (1968)). Managers, especially of larger firms, would also have had to worry about this danger. Party officials assigned to firms were personally responsible for the plan fulfillment of the firm and had the associated incentives. They might turn a blind eye to gray market activity that helped to fill the plan, but not to collaboration that would go against the plan set by the hierarchy. Large and priority enterprises also had a ‘special section’ of the firm, staffed with agents of the state security service (eg, KGB), which was there to enforce Communist Party directives, and maintain the hierarchy of the system; it would not only ensure plan fulfillment, but also report upon illegal activities and any activities of which the Party may disapprove, including ‘anti-Party’ speech, whether they helped to fulfill the plan or not (Berliner (1957); Harasymiw (1969)).
Although the leadership of the Soviet economy changed many times over the course of the classical socialist period, for the purposes of analyzing the system it is helpful to consider whether they all responded similarly as they headed the planned economy. If the system itself cannot function unless the dictator acts in a certain manner, then all leaders can be modeled as the generic ‘dictator’.
There is a literature that argues that this role of the dictator is central to totalitarianism. This model depicts ‘the all-powerful dictator as essentially a chief executive whose role is to bind the totalitarian system together into a unity and, by assuming blanket responsibility for everything done in the name of the regime, to relieve all the lesser functionaries of any sense of individual responsibility for their actions’ (Tucker, 1965).
Lazarev (2005) spoke about the giving of these privileges to officials for compliance, and explains how Stalin would split existing positions in order to pay for compliance from more officials in the hierarchy until positions had been split so much, and bureaucracy so extended, as to have nothing left to offer. Periodic purges allowed Stalin to create new positions for ascending bureaucrats. Perhaps this helps to explain the frequent purges of government to which Anderson and Boettke (1993) point.
Berliner (1957) documents official acknowledgment of the importance of premiums (eg, p. 39), despite ideological preference for ‘socialist competition’. He also presents extensive evidence from manager interviews, and concludes that premiums were the central consideration in decision making by firm managers.
There is some popular confusion around this point, which is confounded by the limitations on freedom of the press during Gorbachev's tenure. One interesting source is the 1989 five part series by Juris Podnieks originally titled Hello, Can You Hear Us? which includes an interview with future-president Boris Yeltsin. His position was extremely tenuous at that time; after calling for the elimination of special privileges for top Party members he was removed from his position as Moscow Party Secretary and from the Politburo. It was announced that he was ‘not elected to the Supreme Soviet’, and he lost his seat there, which he only recovered when, despite protest from Gorbachev, a liberal law professor gave up his own seat to Yeltsin (see also Parks, 1989). Gorbachev also ordered the army to suppress popular protests in the non-Russian Soviet states, as Yeltsin later did in Chechnya.
‘The earliest organizational reforms in the Gorbachev period affected the economy and were intended to transfer decision-making power from central planners to firm-level managers, in part to alleviate problems of hidden information. The 1987 Law on State Enterprises began the shift from mandatory central planning to a less comprehensive system of state orders, by introducing self-financing for firms and other organizational units. …In practice, however, the reduced role of the State Planning Agency (Gosplan) translated into a sharply reduced capacity for monitoring agents’ activities at all levels of the centrally planned hierarchy, since the planning system acted simultaneously as the state management information system. …[This led to] “spontaneous privatization”, …the de facto expropriation by managers and ministerial bureaucrats of many assets belonging to state enterprises. In many cases these spontaneously privatized concerns collaborated with state bureaucrats eager to “privatize” the functions of the ministries themselves’. Solnick also mentions other opportunities that probably opened for factory managers, such as expropriating hoarded assets.
As Mark Harrison (2001) summarizes, ‘The first shock to which the Soviet economy was exposed was not economic but political: the dismantling of the command system. The old transactions mechanism was destroyed, and nothing took its place’.
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Nell, G. Rent-Seeking, Hierarchy and Centralization: Why the Soviet Union Collapsed So Fast and What it Means for Market Economies. Comp Econ Stud 53, 597–620 (2011). https://doi.org/10.1057/ces.2011.17
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DOI: https://doi.org/10.1057/ces.2011.17