Soviet Style Economics Was Insane and Here’s Why

Summary

This script explores the rise and fall of the Soviet economy, from its opulent 1920s growth to the Great Depression resilience, and the subsequent stagnation under Stalin's command economy. It delves into the inefficiencies of a centrally planned system, lack of incentives, and innovation, culminating in the Soviet Union's collapse due to unsustainable economic practices and resistance to change by the ruling elite.

Takeaways

• 📈 The 1920s were a period of economic boom, particularly in the US, driven by industrial growth and mass production, which saw a 42% increase in the US economy from 1920 to 1929.
• 💔 The global economy suffered a massive downturn with the Market Crash of 1929 and the subsequent Great Depression, leading to a 47% drop in US industrial production and soaring unemployment rates.
• 🏭 The Soviet Union was uniquely positioned to thrive during the Great Depression due to its isolation from global banking and trade, and its ability to maintain industrial output growth and near-zero unemployment.
• 🔄 The Soviet Union's economic success drew praise from some Western economists, who contrasted its performance with the struggling capitalist economies and even suggested the superiority of communism.
• 🌏 The Soviet Union's rapid ascent to superpower status within 40 years was remarkable, transforming from an impoverished monarchy to a leader in technology and military might.
• 🏛 The roots of the Soviet economy can be traced back to the 14th century, with the feudal system and serfdom setting the stage for economic and political structures that would persist for centuries.
• ⚔️ The Black Death in 1346 significantly disrupted the feudal system by creating a labor shortage that increased the bargaining power of peasants, leading to changes in Western Europe but not in the East.
• 🛠️ The Industrial Revolution, which began in the 18th century, was a turning point for Western economies but faced resistance in Eastern Europe, including Russia, due to fears of creative destruction.
• 🛑 The Russian Empire's resistance to industrialization and the oppressive conditions of its citizens led to widespread discontent and, eventually, revolution, culminating in the abdication of Tsar Nicholas II.
• 🔄 The Bolsheviks, under Lenin and later Stalin, implemented War Communism and later the New Economic Policy (NEP), which saw mixed results and set the stage for the highly centralized economic planning of the Soviet Union.
• 📉 The Soviet economic system was characterized by a lack of incentives for workers, inefficiencies in planning and production, and a stifling of innovation, which ultimately contributed to its collapse.

Q & A

What was the economic situation like during the Roaring 20’s?

The Roaring 20’s was a decade of economic boom in almost every major economy, characterized by opulence, opportunity, and hope for the future. The US economy, in particular, grew by 42% from 1920 to 1929, driven by mass production and the introduction of electricity.

How did the end of World War 1 impact the global economy?

The end of World War 1 in 1917 supercharged the global economy, with the US leading in industrial growth and contributing to almost half of the world's total output.

What was the impact of the Market crash of 1929 on the US economy?

The Market crash of 1929 led to the Great Depression, causing US industrial production to plummet by 47% and unemployment to soar to 20%, effectively erasing the growth of the previous decade.

Why was the Soviet Union the only major economy to thrive during the Great Depression?

The Soviet Union thrived during the Great Depression because it was largely cut off from global economic banking and trade, and was not subject to demand shocks. Its economy increased its total industrial output by 50% between 1929 and 1934 while maintaining effectively zero unemployment.

How did the Soviet Union's economic system differ from Western capitalism during the early 20th century?

The Soviet Union operated under a communist system where the state controlled all aspects of the economy, leading some Western economists to praise its system and even claim its superiority over Western capitalism during the Great Depression.

What were the origins of the extractive economic and political systems in Russia?

The origins of Russia's extractive systems can be traced back to the 14th century with the feudal system, where a king owned all land and distributed it to lords in exchange for military service, leading to serfdom and exploitation of the peasantry.

How did the bubonic plague, or Black Death, affect the feudal system in Europe?

The bubonic plague led to a massive loss of life, particularly among the peasant population, which in turn increased the value of peasant labor and their bargaining power, eventually leading to the near abolishment of unpaid labor and improved living conditions for peasants in Western Europe.

What was the difference in economic development between Western and Eastern Europe after the Black Death?

Western Europe experienced a more inclusive labor market and economic development, while Eastern Europe, including Russia, maintained a more extractive system with increased control over peasants and less freedom, leading to a significant divide in wealth and power.

Why did the Russian Empire resist industrialization during the 18th and 19th centuries?

The Russian Empire resisted industrialization because the Tsar and the elite class feared the creative destruction it would bring, potentially leading to the rise of a middle class that could challenge their power and control.

What were the consequences of the Soviet Union's 'War Communism' policy during the Civil War?

War Communism led to the nationalization of all industries and the seizure of food and grain from peasants to support the Red Army, which resulted in dramatically reduced agricultural output and negative public opinion, ultimately leading to the introduction of the New Economic Policy (NEP).

How did the Soviet Union's first Five Year Plan differ from the New Economic Policy?

The first Five Year Plan re-nationalized all production and was a top-down approach to rapidly grow heavy industry, in contrast to the NEP, which allowed for private agriculture and small businesses to stabilize the food supply and recover from economic collapse.

What were the main issues with the Soviet economic system that hindered its long-term growth?

The main issues included a lack of incentives for workers, limited information for effective planning, inefficiencies due to enterprise managers' focus on meeting targets rather than cost-effectiveness, and a lack of innovation due to the absence of property rights and fear of repercussions.

Why did the Soviet Union's economy eventually collapse?

The Soviet economy collapsed due to unsustainable growth, inefficiencies, lack of innovation, and the inability to adapt to changing economic conditions. The system was also burdened by a tyrannical government focused on self-preservation rather than the welfare of its citizens.

Outlines

00:00

📈 The Roaring Twenties and the Soviet Union's Unique Growth

This paragraph sets the stage for the 1920s economic boom, highlighting the US's significant industrial growth and the global economic rebound post-World War 1. However, it shifts focus to the dramatic economic collapse following the 1929 market crash and the Great Depression. The Soviet Union's contrasting experience is underscored, as it thrived during the depression with a 50% increase in industrial output and zero unemployment, leading some to question the superiority of communism over capitalism. The paragraph concludes by posing questions about the Soviet Union's rapid rise and eventual collapse, setting the stage for an exploration of its economic history.

05:01

🏰 From Feudalism to the Plague: Europe's Economic Shift

The second paragraph delves into the historical roots of the Soviet economy, starting with the feudal system in 14th century Europe. It explains how the feudal system, an extractive economic and political structure, was disrupted by the Black Death, which led to a scarcity of labor and increased bargaining power for peasants. The response to this crisis varied between Western and Eastern Europe, with Western Europe gradually moving towards a more inclusive labor market, while Eastern Europe, including Russia, saw lords tightening control over peasants, exacerbating wealth and power disparities.

10:01

🛠️ The Industrial Revolution and Russia's Stagnation

This section contrasts the industrial revolution's impact on Western Europe with Russia's resistance to industrialization due to its feudal system and Tsarist control. The fear of creative destruction by the Russian elite led to the suppression of industrial growth, resulting in a poor and backward state. The abolition of serfdom in 1861 did not significantly improve living conditions, and by the early 20th century, Russia was far behind in industrial and military capabilities. The Crimean War and subsequent conflicts exposed Russia's vulnerabilities, culminating in widespread revolts and the eventual rise of the Bolsheviks.

15:06

🔄 Stalin's Five-Year Plans and the Soviet Economic Model

The paragraph discusses the radical economic changes under Stalin, including the implementation of the first Five-Year Plan, which aimed to rapidly industrialize the Soviet Union by emphasizing heavy industry and military production. The plan was executed through the collectivization of agriculture, which forcibly moved peasants to state-run farms, leading to a catastrophic loss of life. The paragraph also touches on the New Economic Policy (NEP), which temporarily allowed private agriculture and small businesses to stabilize food supply, and the shift back to state control with the Five-Year Plan.

20:10

📉 Inefficiencies and Lack of Incentives in the Soviet Economy

This section highlights the systemic issues within the Soviet economy, including the lack of incentives for workers due to fixed wages and the absence of a relationship between output and price. It discusses the inefficiencies caused by enterprise managers' focus on meeting targets rather than cost-effectiveness, leading to over-allocation of inputs and underutilization of resources. The paragraph also points out the challenges of integrating new technologies and the impact on productivity, emphasizing the broader issues of limited information and the absence of innovation in the Soviet economic model.

💔 The Collapse of the Soviet Economy and its Lasting Impact

The final paragraph examines the ultimate collapse of the Soviet Union, attributing it to the unsustainable growth model and inefficiencies inherent in the Soviet economic system. It points out the lack of innovation, the reliance on imported technology, and the economic stagnation that followed the oil price shocks of the 1970s. The paragraph concludes by reflecting on the tyrannical nature of the Soviet government and its resistance to change, which prevented the necessary economic reforms and led to the system's irreversible decline.

Keywords

💡Roaring 20’s

The 'Roaring 20’s' refers to the 1920s, a decade characterized by economic prosperity, cultural dynamism, and significant social change in the United States and many other parts of the world. In the video, this term is used to contrast the booming economy of the 1920s with the subsequent crash and the Great Depression, highlighting the dramatic shift in economic conditions.

💡Industrial Growth

Industrial growth denotes the expansion of industries, often associated with increased production, technological advancements, and economic development. The script mentions American industrial growth as a key driver of the global economy during the 1920s, emphasizing its role in propelling the US economy to account for nearly half of the world's total output.

💡Great Depression

The Great Depression was a severe worldwide economic downturn that took place mostly during the 1930s, beginning in 1929. The term in the script is used to describe the catastrophic economic collapse that followed the stock market crash of 1929, leading to widespread unemployment and a significant reduction in industrial production.

💡Soviet Union

The Soviet Union, officially known as the Union of Soviet Socialist Republics (USSR), was a socialist state that existed from 1922 to 1991. The script highlights the Soviet Union as a unique case that not only survived but thrived during the Great Depression, expanding its industrial output and maintaining zero unemployment, which was in stark contrast to the economic hardships faced by Western countries.

💡Extractive Economic System

An extractive economic system is one where the economy is structured to benefit a select few at the expense of the many, often through exploitation and without regard for sustainable growth. The script uses this term to describe the feudal system in medieval Europe and later in Tsarist Russia, where wealth was concentrated among the elite at the cost of the peasantry.

💡Bubonic Plague

The bubonic plague, also known as the Black Death, was one of the most devastating pandemics in human history, peaking in Europe in the 14th century. The script discusses the plague's impact on the feudal system by causing a significant labor shortage, which in turn led to increased bargaining power for the surviving peasantry and contributed to the eventual decline of serfdom.

💡Inclusive Economic System

An inclusive economic system is one that distributes benefits more broadly across society, allowing for greater participation and opportunity. The script contrasts this with the extractive system, illustrating how Western Europe transitioned to a more inclusive system post-Black Death, which eventually led to the establishment of property rights and the Industrial Revolution.

💡Collectivization

Collectivization in the Soviet context refers to the forced consolidation of individual peasant farms into larger, state-controlled farms. The script describes how this policy, implemented by Stalin, led to the deaths of millions and was a key factor in the inefficiencies and hardships of Soviet agriculture.

💡Five-Year Plans

The Five-Year Plans were a series of national economic plans implemented by the Soviet Union to promote rapid industrialization by setting production targets and goals. The script explains how these plans centralized economic control and led to forced allocation of resources, prioritizing heavy industry at the expense of other sectors.

💡Innovation

Innovation refers to the creation of new ideas, products, or methods that bring significant improvements or the creation of new markets. The script points out the lack of innovation in the Soviet Union as a critical failure, as the centrally planned economy did not provide incentives for individuals to create new inventions or processes, hindering long-term economic growth.

💡Economic Stagnation

Economic stagnation is a period of slowed or halted economic growth, often characterized by high unemployment and low productivity. The script uses this term to describe the final years of the Soviet Union, where the inability to innovate and the inefficiencies of the planned economy led to a decline in growth and ultimately contributed to the collapse of the Soviet system.

Highlights

The Roaring 20’s was a decade of economic boom and optimism, led by American industrial growth and widespread adoption of mass production and electricity.

The global economy was severely impacted by the Market crash of 1929 and the subsequent Great Depression, with US industrial production plummeting by 47% and unemployment soaring to 20%.

The Soviet Union was uniquely positioned to thrive during the Great Depression, increasing its industrial output by 50% between 1929 and 1934 and maintaining zero unemployment.

Western economists praised the Soviet economic system for its ability to withstand the Great Depression, with some claiming its superiority over Western capitalism.

The Soviet Union transformed from a backward agricultural monarchy to a superpower with the largest military and the second-largest economy within 40 years.

The Soviet Union's collapse was a result of its crumbling economy, leaving a significant impact on human history.

Feudalism and serfdom in Europe were disrupted by the Black Death, leading to a shift in power and an increase in peasant bargaining power.

The aftermath of the Black Death led to the development of a more inclusive labor market in Western Europe, in contrast to Eastern Europe where feudal systems persisted.

The Russian Empire resisted industrialization, maintaining an extractive economic and political system that kept the population poor and oppressed.

Serfdom in Russia was abolished in 1861 but was replaced with a system that continued many of the same oppressions.

The Russian Revolution of 1917 led to the abdication of Tsar Nicholas II and the rise of the Bolsheviks, who established the Soviet Union.

The Soviet economy under Stalin was characterized by a centrally planned system that dictated every aspect of production and pricing.

Stalin's Five-Year Plans prioritized heavy industry and military manufacturing, leading to rapid but inefficient economic growth.

Collectivization of agriculture in the Soviet Union led to the deaths of approximately 12 million people and persistent inefficiencies in the farming sector.

The Soviet economy suffered from a lack of incentives for workers, leading to low productivity and inefficiencies.

Limited information and poor planning led to unproductive industries persisting in the Soviet economy, with no market-driven incentives for efficiency.

The Soviet Union's lack of innovation, coupled with inefficiencies in farming and heavy industry, contributed to its economic stagnation and eventual collapse.

The Soviet Union's economy was unsustainable due to its focus on protecting those in power rather than improving living standards for its people.

Transcripts

It's the 1920’s and almost  every major economy is booming.  

The Roaring 20’s was a Decade defined  by its opulent, opportunity and hope  

for the future. With the end of World War 1  in 1917 the global economy was supercharged,  

and led by American industrial growth, which  then boasted almost half of the world's total  

output. From 1920 to 1929 the US economy  grew by a massive 42% spurred on by the  

widespread adoption of mass production and the  introduction of electricity. The UK and France  

rebuilt and maintained their powerful colonial  empires and Even Germany was starting to see  

a major economic rebound by 1923. However the  economic Euphoria came to a screeching halt.  

The Market crash of 1929 and subsequent great  depression steam rolled the global economy.  

US industrial production plummeted by  47% and unemployment soared to 20%,  

decimating the growth of the prior decade.  Every major economy experienced incredible  

contractions to their outputs, incomes  and workforce’s. Well except one.  

Largely cut off from global economic banking  and trade as well as not being subject to demand  

shocks, The Soviet Union was the single country  that didn't just get through the great depression  

but thrived. Rather than contracting,  the Soviet economy continued its dramatic  

economic and industrial boom, increasing  its total industrial output between 1929  

and 1934 by a whopping 50 percent all while  maintaining effectively zero unemployment.  

In light of such a major economic downturn in  contrast, some western economists praised the  

Soviets communist system with some going as far as  to claim its superiority over western capitalism.  

In just a span of 40 years the Soviet union went  from being a backwards impoverished agricultural  

monarchy to being the defeater of Facism, the  first to launch a Satellite and Man into orbit,  

and the largest sole proprietor of weapons of  mass destruction ever. The Soviet Union catapulted  

itself onto the world stage as just one of the  remaining two superpowers, yielding the largest  

military and second largest economy. However as  quickly as it arose the Soviet Union collapsed as  

a result of its crumbling economy. But, why?, How  was the once envied soviet economy now in ruins,  

only to have left a bloodied print on human  history? This is the story of the Soviet Economy.  

To truly understand the Soviet economy  and the path it ultimately took,  

we need to understand the fundamental forces and  conditions that caused it to arise in Russia in  

the first place. To do this we have to travel  all the way back to the 14th century. Following  

the fall of the Roman empire, the dominant form  of European governments was feudalism. Feudalism  

was a system in which a king would personally  own all the land in the country. To maintain  

control and security, the king would then divide  up the land and distribute it to a class of lords.  

In return for the land, the lords would provide  a military for the king when needed. The lords  

would then make use of their holdings by forcing  the vast peasant population to pay for living and  

working on the land by paying heavy taxes and  performing extensive unpaid labour. This was  

called serfdom and the peasants, known as serfs,  were tied to the land, meaning they were not  

allowed to move away without the lord's consent. This system was designed to exploit the vast lower  

class and have the small amounts of wealth  produced to trickle upwards to the elites.  

A system that acts this way is known as an  extractive economic system, and it is held  

in place by an extractive political system.  The political system in this case was simple.  

The only people with control to change things  in the country were the small group of lords  

and the king, therefore it was nearly impossible  for the peasants' situation to improve since  

the elites had a vested interest for things to  stay the same, and for a long time they did.  

However in the year 1346 in the port city of Tana  where the Don river meets the black sea in modern  

day Russia, the first known European case of  the bubonic plague or (black death) appeared.  

Having been spread from China via the  Silk road, The plague quickly swept  

across Europe killing nearly fifty percent of  the population anywhere it went. The extreme  

loss of life of the peasant population shook the  foundations of the feudal system to its core.  

With a new massive scarcity of labor, Suddenly  the value of peasant labour had skyrocketed and  

thus their power to bargain. Faced with a shortage  of workers, desperate lords across Europe started  

to try and steal one anothers peasants by  promising to require no extensive labor,  

and or reduce taxes. This resulted eventually in a  near or in some places total abolishment of unpaid  

labour, significantly increasing peasants  living conditions, wealth and eventually  

power to demand further changes. By 1351 The  English government in an attempt to maintain  

the power and wealth of the elites instituted a  statute that punished peasants with prison time,  

if they moved from their current lord's land.  This would have had the effect of fixing wages and  

unpaid labour requirements to pre plague levels.  Not willing to see their newfound freedoms go away  

this culminated in the 1381 peasant rebellion  in England which saw the rebels taking  

london. Eventually the rebellion was put down  by the king however there was never another  

attempt to enforce the statute. This happened  all over Western Europe effectively creating  

a new more inclusive labor market. Opposite to an  extractive economic system, an inclusive one does  

not rely on the desires of the upper class but on  the equilibrium of markets. Therefore wages cannot  

be artificially lowered but rather workers are  paid based on their value to their employer. While  

in the case of western European peasants after  the plague, the system was by no means inclusive,  

however it was importantly less extractative than  before. This small gain in wealth caused a small  

gain in power to act and organize in the future.  Over time this compounded until, when the time  

was right, a broad coalition of the workers,  soldiers,businessmen etc could then rise up to  

make demands or even remake the system to be more  inclusive. When a coalition is sufficiently broad  

it makes it so no single group is able to make a  power grab to cement themselves as the new elite,  

becoming equally as tyrannical as the old ones.  Eventually this led to secure property rights,  

a crucially important foundational element for  the industrial revolution which supercharged  

national economies and the living standards of  all that lived in them. This was the story of  

economic development in Western Europe however  it contrasted drastically with Eastern Europe.  

Unlike their western counterparts, the Peasants  in the east were more spread out, lived in smaller  

villages, were less organized while their lords  controlled larger and more powerful swaths of  

land. In response to the labour scarcity caused  by the bubonic plague, the eastern lords snapped  

up more lands and added to their holdings while  also clamping down on the peasant populations even  

more harshly. Since the Eastern peasants were less  powerful, their rebellion either didn't happen or  

failed miserably. They didn't see any new freedoms  afforded to them, but rather had more taken from  

them. This was further exacerbated by the 16th  century when western demand for agricultural  

products like livestock and wheat produced in the  east grew rapidly. With this increased demand the  

lords saw that it was in their best interest to  place tighter controls on the peasants, demand  

more unpaid labour and levie even more taxes.  The gap in wealth, power and freedoms between  

the Peasants in the west and the east grew large.  This fundamental divide in Europe compounded  

over the centuries. While in the west the lower  classes were able to eventually overthrow absolute  

monarchies and replace them with much more  inclusive constitutional ones or even republics  

the Eastern kingdoms stayed almost exactly  the same or even became more extractative.  

First in the British isles, then in the  US, and later in western continental Europe  

the industrial revolution began in the mid 18th  century. Spurred on by fairer legal systems and  

property rights on intellectual property,  people could now profit off of discovering  

new inventions and processes without fear  of someone robbing them of their ideas.  

This caused an explosion of new patents,  inventions and systems which dramatically  

increased the productivity and efficiencies of  industries and economies. For the first time  

in history sustained economic growth  occurred and the living standards of  

all increased exponentially. By the turn of the  20th century powerful industrial manufacturing  

bases were established in Britain, France,  Germany and the United states. However the  

industrial revolution was faced with staunch  opposition in the eastern countries that still  

maintained absolute monarchies and extractatice  systems like that of the Russian empire.  

In the year 1850 Russia comprised 1/7th of the  entire earth's land mass stretching from Germany  

all the way to Canada yet its total economy was  relatively small and its citizens still poor.  

This was not for without good reason. Russia  was still based on the feudal system of the  

14th century meaning the king, known as Tsar,  had near total control over his population,  

and the small nobility class exploited the  poor by being in charge of the old traditional  

industries. The king and the elites feared  the creative destruction that was brought on  

by industrialization. Creative destruction refers  to the process of new inventions or systems that  

upend old industries and replace them with more  efficient and productive ones, thereby taking  

wealth and resources away from the established  elite class while also building a more powerful  

middle class that would be able to challenge the  current system. Therefore to keep control the Tsar  

actively stopped industrialization, effectively  curtailing economic growth during the 18th,  

19th, and early 20th century. As a result the  Russian empire was an extremely backwards,  

impoverished state which had very little in the  way of freedom for the population. . Serfdom  

was finally abolished in 1861 however it was  replaced with a system that keeped many of the  

same oppressions with little increase in quality  of life. By this point Russia was also woefully  

behind the others in terms of heavy industry and  military. Before 1853 the entire Russian empire  

had only a single railway. This only changed when  the decisive defeat of the Crimean war showed that  

their lack of rail was a major security threat  against their much more industrialized neighbours.  

By 1914 the Russian society, outraged from  centuries of oppression under a tyrannical  

monarchy, had been repeatedly revolting,  unsuccessful, in an effort to gain the freedoms  

those in the west had enjoyed. Coupled with a  Tsar that was particularly incopetent, Nicolas II,  

and an embarrassing defeat against the Japanese  in 1905, the seeds of revolution had been sown  

and the entire system had grown unstable. Then on  August 1st 1914 Germany, because of obligations  

to defend Austria Hungary after its invasion  of Serbia declared war on Russia. By 1917,  

Russia was losing badly to the Germans, its people  were starving, its economy had collapsed and Tsar  

Nicolas had made some terrible political decisions  like, placing himself as the commander of the  

military while leaving his German wife in charge  of the country. Protests erupted in Petrograd,  

soldiers began to mutanied and Vladamire Lenin,  the exiled head of the Communist bolshevik party  

was smuggled into the country by the Germans, who  had hoped would cause further internal conflict,  

which it did. Under enormous pressure, Tsar  Nicholas the II abdicated the throne which had  

been held by his family for over 300 years. The country quickly became divided between the  

Provisional government held by less radical  revolutionaries and the much more organized  

and radical Communist Bolsheviks. Eventually  the country broke into a bloody and grueling  

three year long civil war. By the end  Russia was in ruins and the Communists,  

under the command of Lenin had taken and cemented  control of the country, formally creating the  

Soviet Union shortly after. The ideology of the  Communists were based on the ideas of the German  

Philosopher Karl Marx. He believed a constant  battle between capitalism and the workers would  

ultimately result in a revolution for which the  Working class would seize the means of production  

and build a classless society where private  property would be abolished and everyone would  

work for the common good. The Russian revolution,  which was originally based on these ideas, was to  

replace the old extractive Tsarist government  with a more equal sociallist one. However, the  

party that took control, the Bolsheviks, were not  a broad coalition of the working and lower class  

like the western revolutions, but rather a small  group of highly racialized and organized Marxists.  

Therefore there was no built in mechanism to  stop them from becoming tyrannical themselves,  

like there had been in the West. The first thing  the bolsheviks did was make themselves into a  

new class of political Elites much the same as  the ones they had destroyed in the revolution.  

They disallowed anyone who disagreed with them  from joining the party and sought to institute  

their socialist utopia through force. In 1918,  during the Civil war, the first real display of  

the communist economy was put into place called  War Communism. All industries were nationalized,  

and all economic processes were to be controlled  by the state. Because of the desperate state of  

the economy, the Bolshebik’s red army was unable  to get the weapons and food needed to win the war.  

Food and grain was seized from the Rural  peasants and all industry was allocated toward  

military manufacturing. By 1921 The New economic  policy was instituted because war communism had  

dramatically reduced agricultural output and  peasant public opinion. The NEP From 1921 to  

1928 made agriculture and small businesses  private again to stabilize food supply.  

The economy began to recover mostly as a  result of rebuilding after complete collapse.  

In 1924 Lenin died of a stroke and shortly after  Stalin took control as the head of communist  

party. In 1928 The first of the “five year  plans” was set in motion which nationalized all  

production once again. By this point the entire  Soviet economy was entirely commanded from above,  

meaning that every input and every output for  every factory, every farm, every enterprise,  

every store, every price, All aspects of the  soviet economy was dictated by the government.  

Stalin and the innermost party officials  in the politburo would decide the general  

direction of the economy, then through a series  of government agencies an extremely intricate  

and detailed plan would be laid out. After a  series of minor negotiations with managers of  

the individual farms and factories, the five year  Plan was put into law. The first major initiative  

of Stalin was to radically grow the heavy industry  which included Steel and military manufacturing in  

a desperate attempt to catch up economically to  the other European powers. Stalin deeply feared  

that another war would come, and that being so  behind in industrial development, the Soviet Union  

wouldn't be able to stand a chance. In an  amazingly accurate and chilling speech given  

by Stalin at the first workers conference in 1931  he stated “We are fifty or a hundred years behind  

the advanced countries. We must make up this gap  in ten years. Either we do it or they will crush  

us." It would be exactly 10 years later when the  Germans launched the largest land invasion in  

history into the Soviet Union. The way in which  this plan of rapid industrialization was to be  

carried out was to dramatically tax agriculture  and ship massive amounts of food, labour and  

supplies to the factories in the cities. In 1928  roughly 85% of the entire Soviet population was  

rural peasants who’s backward traditional way  of doing things caused farming output to be very  

unproductive. Taxation of these small scattered  village communes was also notoriously inefficient.  

Stalin's way to deal with these problems was  to force all these peasant farmers onto state  

run or communal farms which lumped hundreds or  thousands together to work for the state. This  

process was known as collectivization and it would  directly lead to the deaths of approximately 12  

million people. Almost all the food produced was  shipped to the cities to aid in the main goal of  

industrializing the heavy industries. Taxation  and the redistribution of food became easier,  

however the inefficiencies were further  exacerbated by the lack of incentives  

since farmers output had no bearing on how  much they were paid. The agricultural sector  

continued to be a serious thorn in the  Soviet economy for the rest of its history  

and it highlights the first major problem with  the Soviet economic system. That of incentives.  

In a capitalist society you have total freedom  to change your job and work anywhere else that  

will hire you. If you work smarter, or harder,  or longer you provide extra benefits to your  

employer. Not wanting to risk losing you to  another employer, they will reward you with  

increased pay or benefits, and thus there is a  built- in incentive toward doing more of your job  

or better. In the Communist Soviet union there was  little if any incentive to do so since your wage  

was almost always locked to a specific rate. Even  when later attempts to provide more incentives  

were rolled out by the government the extra money  workers would receive would be of little use.  

Since the soviet Economy was dictated from above,  to keep the population content, prices were fixed  

and kept low. Output and prices were therefore  not correlated with one another like they are in  

capitalist societies. This ment that the demands  for goods at the prices set were much greater than  

the actual production of those items. This meant  that items were almost always out of stock and  

when they weren't they would quickly sell out .  This along with the fact that the heavy industry  

was persistently emphasized more than consumer  goods manufacturing, and what you are left with  

is the inability to make use of any extra money  afforded to you for doing a better job, thus  

incentives in the Soviet Union did not function  well and per person productivity suffered.  

Despite this the Economy keeped on steaming ahead.  Between the time period of Stalin's first five  

year plan in 1928 and the start of WW2 (Visual  1928-1940) for the soviet union the economy grew  

by 5.8% per year almost doubling in size during  a time in which western economies stagnated. This  

was done by forcing the allocation of people from  less productive industries toward more productive  

ones. By utilizing the massive peasant population  working in highly inefficient village farms  

and moving them to highly productive Heavy  industry and construction, massive gains in  

economic activity were accomplished. Even if  workers themselves were not very productive,  

increased output could be accomplished simply  by dramatically increasing inputs. How do  

you make more steel, you just make more steel  factories and give each more Iron and workers.  

The Soviet economy grew rapidly however the  quality of that growth was very poor. This its  

shown precisely by the actions of the enterprise  managers who were the ones who were the actual  

managers of individual factories and farms. When a five year plan was being created the  

last step included negotiation between heads  of industries and the enterprise managers about  

how much input was needed for the planned output.  Since the enterprise managers' only concern was to  

reach the planned output, they did not care about  being cost effective and thus always asked for as  

many inputs as they could get away with. One way  the Soviet planners tried to increase productivity  

was to then demand more output this year than the  last with the same amount of inputs. The way they  

incentivized managers to do this was by making  managers pay based on meeting the target output  

and giving a bonus for going over. However the  managers were smart and almost always the actual  

outputs were either directly above the target or  much below. This was for one major reason, while  

the managers would receive a bonus for producing  more they were also concerned about next years  

pay. By producing well over the target this year,  the planners would then just make that output the  

target for next year, making the ability to get  next year's pay that much harder. So if the target  

was achievable the managers would stop producing  when they reached it, or if it was out of reach,  

there was no reason to work for nothing so they  produced as little as they could get away with,  

hoping next year targets would be lowered. Inputs  for a factory also included the total number of  

employees. Supply chains were also notoriously  unreliable and sporadic. This meant that for much  

of the time there were way too many workers  with little to no work to be done. However  

when supplies came the excess labour was needed to  pull through quotas. Therefore enterprise managers  

ask for as many employees as possible, never  wanting to fire any workers, and even if they  

did it was often difficult to do so since jobs  were legally guaranteed in the soviet economy.  

This meant that the average factory in the  Soviet Union would have as many as twice  

the amount of workers as a comparatively similar  one in the United States. So while unemployment  

was effectively Zero which is better than any  capitalist society then and now, it was because  

of law and inefficiencies rather than a byproduct  of a more productive system. To make matters worse  

for productivity, when given new equipment  that would eventually make the factory more  

productive, it would often end up being unused.  This again was because of a lack of incentive by  

the enterprise manager to increase productivity.  He would not profit from this and he would risk  

not reaching target outputs that year since time  would be needed to retrain and integrate the new  

equipment into the manufacturing line. Therefore  productivity gains were slow and stunted.  

Most of these incentive issues stemmed from  another key issue, that of limited information.  

When planning out, in its entirety an  economy of an industrialized nation,  

what is needed to run things as efficiently as a  market economy is complete and total information,  

for which the Soviet planners did not have.  Unproductive and wasteful industries persisted  

as incentives were unable to be utilized  by the planners to increase efficiency.  

The last and arguably most important failure of  the Soviet Economy was a lack of innovation. In  

the capitalist world, ever since property rights  were established and maintained, there was an  

immense incentive to create a new invention or  more productive manufacturing process because you  

could patent the idea and make a lot of money.  Again in the Soviet Union, with fixed wages,  

limited range of items to buy, and the fear of  this in some way or another coming back to harm  

you, there lacked general incentive for Soviets  to innovate. Innovation is what drives growth  

in developed economies, and so without organic  innovation, the Soviet Union attempted to import  

innovation by buying advanced machinery to  be utilized and to copy. This included the  

purchase of an entire factory, when the soviets  contracted Fiat to build a high tech peoples  

car factory for them. However this cost a lot  and the Soviet Union did not like relying on  

the West for anything, especially innovation. Coupled with a inefficient farming sector which  

caused the need for mass food importation, and  the costs piled up quickly. Luckily the Soviet  

Union was blessed with immense natural resources,  specifically oil. So when Oil prices skyrocketed  

in the 1970s they could offset a lot of this  importation cost by exporting oil. However as oil  

reserves in the western Russia started to dry up  and oil prices returned to normal, the importation  

costs again mounted and the economy stagnated. It  was also at this time when the Soviet Union could  

no longer keep dramatically increasing inputs as  most of the population had now been moved from  

low productive industries to highly productive  industries, which ultimately was the main source  

of economic growth for the Soviet Union. Growth  had by this point slowed to just 2%, lower than  

that of the developed west. The only significant  gains came from allocating massive amounts of  

capital toward the Military. However this was  not enough and the gap between the Soviet economy  

and those of Nato started to grow once again. the  growth that kept citizens content about having  

little freedoms started to wane, and the massively  overweight political system of the Soviet  

Union put it on an irreversible track toward  Economic stagnation and eventually collapse.  

However the seeds of the Soviet economic  collapse had been planted before the nation  

even existed. Unlike the revolutions in Western  Europe and the United states and their slow match  

toward greater rights and freedoms, the bolsheviks  that took control were not a broad coalition and  

thus they became tyrannical. Left with unchecked  power they did not form new inclusive systems but  

rather made new extractive ones with themselves  at the top. By the 1960’s when the ability to  

just dramatically increase inputs for growth  had ceased, and it was time for the government  

and economy to change so to allow for innovation  and productivity gains, the change never happened  

because those in charge never allowed it to  happen. Just like how the elites of the Russian  

Empire resisted the creative destruction of  industrialization. The elites of the communist  

partys resisted giving up any political or  economic power that would have enabled these  

positive changes. This was because they knew  doing so would have reduced their personal power,  

wealth and potentially their lives if it  would have triggered another revolution. By  

the time Mikhail Gorbachav instituted real  democratic reforms it was already too late,  

the system was already cracking at the  seams because of economic instability,  

and by letting go of some political power  the system collapsed in on itself and the  

Soviet Union ceased to exist. The story of the  Soviet Union was ultimately one of its economy.  

The unprecedented and rapid growth that stunned  the world was ultimately unsustainable, riddled  

with too many inefficiencies. But ultimately the  story of the soviet economic system was one that  

warns against the perils of tyrannical governments  that only care about self preservation.  

The incredible growth of the soviet union early  on was not about increasing the living standards  

of its people but rather to protect those in  power. This is what topped the Soviet Economy.