Success and slowdown

The conceptual case for a system of social ownership combined with planning was transformed into a reality in the Soviet Union and proved immensely successful in many senses. However, these advances could not be sustained when all labour resources had been absorbed and growth entered the intensive phase after the 1950s.

Leningrad, 1924: Soviet-made semi-automatic textile machinery being assembled at the Karl Marx factory.

A CENTURY after the Russian revolution, its transformative role in one area that is often forgotten is that it made “planning” a reality. Before that revolution transformed the Soviet Union, the “market mechanism” was the dominant organising principle in economies, both developed and underdeveloped.

However, the prerequisites for the working of this “decentralised” mechanism, viz., commodity production in a world of private ownership of the means of production, were by no means the essential elements of all social formations in history. Yet the presumption of those declaring that there was no alternative to the market mechanism was that, whether those prerequisites had always existed or not, it was here to stay. In the view of these advocates, the specifically capitalist form these features had taken since the 17th century marked the end of history.

The Russian Revolution challenged this ideology in two ways. First, it established over time social or state ownership of the means of production in large parts of the economy. Second, it altered the structure of the economy, providing a major role for centralised decisions. As a result, the economy’s operations and the trajectory they generated were no more determined by unpredictable production and consumption adjustments to surpluses or shortages that demand and supply responses to prices elicited. Rather, clear objectives were to be set in advance and investment allocations determined to ensure growth along the lines desired.

Needless to say, the transition to a planned system of this kind took time and followed the special periods of “war communism” (1918-20) and the “new economic policy” (1921-28). Planning began with the First Five Year Plan in 1928. Once put in place, it marked a major transformation in the design and operation of economic systems, liberating them from the needs of feeding the profits of capitalists at the expense of all else and making them meet the needs of society as perceived by the political leadership and the planners. As the Soviet economist and planning theorist S. Strumilin argued in 1927, “targets and advanced directives are the central focus of any plan”, and the process must be based on “what can be indicated in advance, by positing it as a goal”. This proactive stance was controversial in the Soviet Union, with many arguing that what was sought to be done must take account of the limits set by circumstances. But in the end the big planners won, pushing the system to (and some would say beyond) its limits, with extremely high investment rates that not only built a large and strong industrial sector but ensured that the available surplus labour was absorbed into employment by the time of the Second World War and that a minimum access to education and health was available to all.

Central to the Soviet planned development model was the decision to raise the investment rate and allocate a larger share of investment to the machinery-producing sector. This allowed the system to produce the machines needed to employ the available surplus labour force. In time, it also allowed for the deployment of machines in the consumption goods sector, with increased productivity providing the basis for an increase in consumption after a lag. The adoption of this strategy resulted in high rates of growth of gross domestic product (GDP), at around 5.3 per cent per annum, and of industrial output, at 11 per cent per annum, during 1928-40. And if we exclude the War years, growth stood at between 5 and 6 per cent during 1928-70. The GDP per person in the USSR in 1990 US dollars rose from $1,370 in 1928 to $2,144 in 1940, $5,569 in 1970 and $7,078 in 1989. This implied that after Japan during 1928 to 1970 and Japan, South Korea and Taiwan during 1928 to 1989, Russia was the other underdeveloped country that managed to close the gap with the erstwhile advanced economies, making it the second global superpower during the Cold War years. In 1928, the GDP per person in Western Europe was 3.1 times that in the USSR. That ratio fell to below two times by 1970. This Soviet success inspired many post-War leaders in the underdeveloped world, including Jawaharlal Nehru in India, to opt for some form of planning as the means to overcome economic backwardness.

Conceptual debate The Soviet success also set off a conceptual debate about the relative merits of the “market mechanism” and the “planning principle”. Those advocating the merits of the market mechanism tend to underplay the fact that market economies are socially wasteful in multiple ways. To start with, the source and nature of appropriation of profits made the system prone to crises. The capitalist, Marx argued, employs labour by paying the labourer the cost of reproducing labour power, but receives in return the use value of labour power in production, which contributes more to the produced commodity than its own exchange value. When the commodity so produced is sold, the capitalist realises the surplus value as profit.

Once this circuit is in place, the dominant objective of the capitalist becomes the production of commodities and services that yield surplus value, which is deployed again to generate and appropriate more surplus value. This requires enlarging the surplus embodied in commodities relative to the wages paid to workers, resulting in the constant expansion of production at a rate faster than the growth of workers’ consumption. The process renders the system prone to crises of overproduction or underconsumption. On the other hand, if the expansion of production is accompanied by a substantial increase in employment of workers, the shortage of labour could lead to a rise in wages that squeezes profits and cuts off accumulation and growth. In sum, the antagonistic nature of a system based on private property, reflected in the antagonism between profits and wages, perpetually generates a reserve army of unemployed workers and makes the system prone to crises. Crises result, in turn, in unemployment and waste.

The second reason capitalism was prone to crises was the anarchy associated with the atomistic decision-making characteristic of systems based on private property. In such systems, to quote the economist Maurice Dobb, the level and allocation of investment gets determined by the “guesses or expectations of a large number of independent decision-takers (entrepreneurs), in the long run ‘revised’ by ex post movements of market prices”. Since investments embodied in fixed capital are not reversible, decision errors are costly in individual and social terms. Such errors are bound to occur since private investment decisions must be based on estimates of prices, costs and profits that would prevail over the lifetime of the project in which the investment is made. However, those values are difficult to forecast since existing prices cannot be a guide to future prices. The independent, individual investment decisions made on the basis of the prevailing prices together influence subsequent movements in prices, which cannot be predicted. Without an anchor, there is no reason to expect that expectations of entrepreneurs will actually be realised, leading to overinvestment, unutilised capacity and closure.

The case for economic planning had emerged out of this critique of capitalism . The critique suggested that a system that seeks to address the crises and social waste characteristic of capitalism must both do away with private ownership of the means of production and use the anchor of social ownership to coordinate investment and arrive at a priori decisions on the total volume of investment, its allocation to sectors and particular projects and the technical forms in which it would be embodied.

The benefits from such coordination were twofold. First, by overcoming the uncertainty inherent in a regime where investment was based on atomistic decisions, it reduced the waste and unemployment characteristic of capitalism. Second, by ensuring the incorporation of appropriate inter-temporal judgments in the choice of the investment ratio, the allocation of investment and the technical forms in which it was embodied, it permitted the realisation of a priori objectives such as rising growth and determining how the benefits of growth were shared.

This conceptual case for a system of social ownership combined with planning was transformed into a reality in the Soviet Union and proved to be immensely successful in many senses. The system registered rapid growth with full employment and access to basic services such as education and health. It also accelerated technological change in crucial areas ranging from defence to medicine. In the process, it created the material basis for the Soviet Union to become the force that ensured the final defeat of fascism, albeit at the cost of a huge number of lives. It is indeed ironic that the country that saved capitalism from the monster it had created was socialist in character.

Growth after the 1950s However, these advances made by the Soviet Union under its planned system, during the period of extensive growth, could not be sustained in practice when all labour resources had been absorbed and growth entered the intensive phase after the 1950s when it was dependent on increases in productivity. One reason was that despite much sacrifice of consumption, productive outcomes were limited by the fact that a large part of the surplus was dissipated in expenditures on defence, given the fact of “socialism in one country” and the reality of capitalist encirclement. But there were other factors which ensured that, the logical case for coordinated investment decision-making notwithstanding, the area of control of the state was limited even in a society with extensive social ownership of the means of production, leading to distortions.

First, while coordinated investment decision-making had an element of logical elegance in theory, its operation required full access of the planners to the required information on production, capacity utilisation and costs to plan investments and set prices. Inasmuch as the chain of communication that transmitted this information to the planners included agents who could privilege their own interests over societal ones, the purely formal organisational structure of the system did ensure the near-perfect transmission of relatively correct information. Needless to say, in an interdependent system which is sought to be operated taut through a priori planning, any error arising out of wrong or incomplete information would transmit itself across the system in ways that are not always predictable.

Second, the centralised system, while successful with innovation in some areas, ran into difficulties when dealing with uncertainties about the likely evolution of consumer preferences and product and process innovations. Since socialism was a system in which investment in R&D and in capacity was coordinated and planned a priori over a relatively long period, these kinds of uncertainties were implicitly being treated as predictable. The unexpected innovative dynamism of capitalism after the Second World War and the inability of socialist regimes to insulate their populations from the “needs” generated by that dynamism rendered this assumption of the predictability of trends in consumer preferences and technological requirements wrong. This not only affected productivity increases adversely in some sectors but resulted in distortions in consumer markets.

For example, if wage differentials between occupations needed to ensure an appropriate allocation of the available labour force across them were to be meaningful, those money incomes had to be translatable into real purchases based on preferences. With a substantial share of investment pre-empted by essential or priority sectors, such as heavy industry or defence, finding the resources to meet varied consumption demands generated by those incomes could prove difficult. Since prices are not market determined and flexible enough to wipe out any excess demands that supply shortages may result in, the result was “suppressed markets” with shortages and queues. In practice, the gap between consumption aspirations and actualities proved difficult to bridge.

The responses to these problems in the form of a dilution of planning created new problems. To address these difficulties, the government opted for a degree of interdependence and reduced insularity vis-a-vis the external, non-socialist world. But, the system found it extremely difficult to compete in international markets to earn the foreign exchange needed to finance enhanced imports. This did increase dependence on foreign finance, whose confidence in the economy in part determined the extent of growth and investment that could be sustained. That is, as these economies responded to the problem of limitations on the area of control of the state by opting for a degree of “liberalisation”, they undermined that area of control even further.

There is one implication that can be read from these propositions. Command economy structures could fail not only because of the constraints set by the economic and military “encirclement” by capitalism but also because they are based on assumptions about the area of control of the state that may be difficult to ensure in practice. When ambitious plans for societal transformation are sought to be implemented without taking into full account the constraints set by circumstances, errors and distortions could be the result. For example, when the revolution comes to a still backward economy like that of the “encircled” Soviet Union, the ability to ensure adequate agricultural production could be one such constraint. The expectations that productivity increases that follow forced collectivisation can resolve the supply constraints set by agricultural production on proactive plans may not be fully realised.

Resolving these difficulties takes some learning. An alternative often proposed is a system that is more flexible or is run in a manner that makes it less taut and centralised than the command economy in the Soviet Union was. Both theory and the experience with socialism in practice suggest that the assumption of the possibility of an omniscient state underlying the “planning principle” is extreme. Once we do away with that assumption, however, we are left with an ambiguous structure of functioning institutions, in societies with social ownership. That is, the design of a flexible system based on the planning principle must specify the set of decisions that are centrally planned, the institutions that would make decentralised decisions and the fallout of central decisions on the operational functioning of lower units of command. This must be done without subjecting the system to the instability and waste of capitalism. That is a call that can only be taken in practice. As Maurice Dobb argued, “no clear-cut logically defined frontier can be drawn between the province of centralised and of decentralised decisions”, and “only experience can decide the expedient extent of the one and the other”.