17 The Operation of the Soviet Planned Economy
Because the economic and political systems of the Soviet Union were so closely interwoven, understanding the operation of the economy and the planning system requires some knowledge of the institutional makeup of the Soviet state.
The Communist Party of the Soviet Union
The dominant force in Soviet society was the Communist Party of the Soviet Union (CPSU). All important strategic decisions relevant to the operation of the economy were ultimately made by the party. The most powerful figure in the country was therefore the general secretary of the Communist Party, the post occupied by Stalin, Khrushchev, Brezhnev, and Gorbachev. The general secretary of the CPSU was ex officio leader of the politburo, the governing body of the party, whose other members represented the major regional party organizations, the officials responsible for foreign affairs, the organs of state security, and the major ministries. Although to the outside world the Soviet Union seemed to be a one-man dictatorship, in reality, at least for most of the post-Stalin period, a great deal of power resided with the other members of the politburo. They had the power to remove the general secretary from his post when his personal policy preferences deviated from those of the party; in the case of Khrushchev that was exactly what they did.
The Legislature
Viewed through Western eyes, the legislature of the Soviet Union seemed very weak. It was composed of two chambers: the Supreme Soviet and the Praesidium. The 370 members of the Supreme Soviet were nominally elected by popular vote, but in effect they were appointed by the party, which retained tight control over the slate of candidates. The Supreme Soviet met twice a year, when its members, who served part-time and had other jobs, would assemble in Moscow essentially to rubber-stamp the legislative changes and the appointment of officials determined by the party bureaucracy. The Praesidium, which might be regarded as the upper house, was more compact and enjoyed more responsibility. Its members were mainly government officials, and it met twice monthly under the leadership of a chairman, who performed the function of head of state.
The Judiciary
The judicial branch in the Soviet state was even weaker than the legislature. It had little independence from the political process, a fact reflected by Nikita Khrushchev’s now infamous remark “who is the Boss, us or the Law: we are the masters over the Law, not the Law over us.”1 This was true at two levels. In most developed market economies, particularly in the United States, a constitution, guarded by an independent judiciary, has ultimate authority over the political system and constrains the type of laws that the legislature might pass. This was not in practice in the Soviet Union. Although a written constitution existed in the Soviet Union (in fact, it closely resembled that of the United States), in effect it was inoperative, because there was no independent judiciary to enforce it. Moreover, the structure of power led to capricious and politically determined implementation of whatever laws were on the books. Thus the Soviet Union was characterized by what John Litwack has called an absence of legality, in which “Legality is associated with rule by law as opposed to the discretion of leaders.”2
This absence of legality was especially important in economic matters, as Litwack points out:
Recent research in economic history has emphasized the importance of the replacement of legal for discretionary rule in explaining the rapid economic development of the western world, as well as the disparities in wealth between the advanced capitalist and underdeveloped countries.... [The Soviet system] contains particular mechanisms of coordination, incentives, and distribution that function in the virtual absence of economic legality. The fundamental features that explain how the system actually works are the discretionary power of bureaucrats over subordinates, enforced by the political dictatorship of the Communist Party, and the reputation effects from personal, often informal, long-run ties.
THE INSTITUTIONS OF THE SOVIETSTATE
The politburo and the party determined the basic direction in which the economy was to move and the policies to be followed. Thus the fundamental economic questions of what, how, and for whom were all answered by the political leadership. The broad directives of the party were embodied in the plan by the bureaucrats of the State Planning Commission, Gosplan, which although only one of more than 20 state committees, had the preeminent role in economic planning. Other committees with an economic function were Gosbank (the state bank), Gosstroi (the state committee for construction), Gosten (the state committee on prices), Gossnab (the state committee for material and technical supply), Goskomstat (the statistical service), and MinFin (the Ministry of Finance).
The Time Frame of the Planning Process
Early in the planning year, Gosplan collected information on the performance in the previous year from the various actors in the economic system, with most information coming from the production side of the economy since Soviet planners gave little weight to the opinions of consumers.3 Even if there were a desire to cater to consumers’ demands to a greater degree, there was very little that could be done about quantifying consumers’ concerns. In a supply-deficit economy with fixed prices like that of the Soviet Union, most goods found some buyer, even
if it were an unhappy one. Goods in high demand were actively sought through bribery or queuing, symptoms that could not be expressed quantitatively to Gosplan. Thus at best any estimation of demand from consumers was likely to be highly anecdotal.
After analyzing this information, Gosplan reported to its political masters in the Praesidium of the party’s central committee, which studied both the achievements and the problems experienced in the previous year and then set down broad directives for the following year. These were general statements like “raise housing construction” or “increase the quantity of clothing available.” For example, in April1985 the plenary meeting of the CPSU central committee determined that
it is planned to increase the national income used for consumption and accumulation by 19–22 percent. Ensure that the entire increase in the national income is reached
by enhancing social labor productivity. Reduce its inputs of materials by 4–5 percent, power by 7–9 percent and metals by 13–15 percent.4
Gosplan took note of such party directives and during the summer drafted a preliminary planning balance for the economy, a first attempt at accounting for all sources and uses of the principal products produced or required in the economy. This was an exhaustive and time-consuming operation covering at the height of central planning some 30,000 different commodities; for each one, production sources and users were identified and quantified. This tabulation constituted the material balances for the economy. As an illustrative tool, Table 17.1 shows this kind of initial tabulation giving a hypothetical listing of the sources and uses of steel. It is highly simplified; in reality many different types of steel (construction, sheet, pipe, etc.) had to be planned for. Such a table had to be prepared for each major commodity, and it was vital that the supply and use must balance. The need of all the other industrial sectors for any commodity had to match its production, net import, and inventory change.
Demands and uses of commodities are interdependent, and the next task for the planners was reconciliation of the tables. If it was found that the projected needs for steel were greater than planned supply, the output of the steel had to be raised accordingly. This required the increased use of other inputs—steel itself, iron ore, coal, limestone, and so forth—so the output in all these other industries had to be raised, requiring yet a further adjustment in steel output.
Soviet planners were helped in this iterative reconciliation by input/output tables, which required the preparation of a matrix of the general form illustrated by Table 17.2. Resolving this system requires the solution of a system of simultaneous equations. Each product group is represented by a row, with the possible sources represented on the left-hand side and the uses on the right. The right-hand side can be separated into intermediate uses (where the product is an input for the production of some other good) and final uses (where it is destined for consumption, use in investment, or for export). The columns represent the demands for intermediate goods that must be supplied by other industries to achieve the indicated level of production, according to the norms of the planners. For example, if product 1 is steel and products 2 and 3 are coal and electricity, then the attainment of an output level of X1 of steel requires a11X1 of steel, a21X2 of coal, a31X3 of electricity, and so forth.
The coefficients used to estimate the amount of input required are calculated by the planners using fixed-proportion production functions, based on the average “good practice” needs of industry. A matrix of this kind was maintained by the Soviet planners for about 250 of the most important product groups, which potentially required establishing 6,250 coefficients. In actuality, a substantial proportion of the coefficients would be zero, since many goods are not demanded as inputs by other industries. For example, fertilizers are not directly required by the mining industry, nor cereals by aluminum smelters. Thus the matrices can be solved in many cases by separating them into subsystems. Nevertheless, the task of compilation was huge, and many of the problems of the planners were technical. Data management and computer systems in the Soviet Union during this period were not highly advanced, and this handicapped the operation of the planning system. However, the bigger problem was getting reliable information to the center, a topic to which we will return.
At the height of its coverage and complexity, Soviet planning embraced some 30,000 commodities and thus a complete input-output matrix would have some 900 million cells, clearly an impossible task. Industrial groups were planned using the materials balance sheets like that in Table 17.1. These could be less aggregated than the I-O matrices and did not have to rely on assumptions of fixed input proportions and the absence of economies of scale.
The Draft Plan
These preliminary estimates of both target outputs and planned inputs were called control figures, and in the next step Gosplan disseminated them to the lower levels of the planning bureaucracies: the ministries and the regional planning centers. From there they were further disaggregated, and these tentative targets were passed down to the enterprise level—the units that were actually responsible for the work—in the form of a draft plan. The breakdown among enterprises was, by and large, based on past performance, the level previously achieved.
This introduces an important feature of central planning. Senior enterprise management in the Soviet system received a large part of their total remuneration in the form of bonuses paid to reward the achievement of plan targets. Senior management could receive bonuses of as much as 50 percent of their basic salary for meeting their plan target and up to 4 percent more for each percentage point by which the plan was overachieved. Thus any effort expended by managers in lobbying the planners to hold the output targets low, while receiving a high allocation of inputs, was probably well spent in terms of the likely outcome on managerial salaries. However, although the bonuses paid for overfulfillment of plan targets were substantial, management in many cases chose to be cautious in determining by just how much to exceed their targets. This is because if output is exceeded by a large margin in the current year, planners would likely raise output targets for successive years, because they based targets “from the level previously achieved.” Overperformance with respect to one year’s target might be praised at the time, and might lead to a big bonus in that year, but it is likely to lead to problems for the enterprise managers in the succeeding year because the output target will be ratcheted up. Thus the incentive to overachieve was limited. David Dyker, an authority on Soviet planning, called this the Micawber principle, after the Dickens character whose maxim was “Income one pound, expenses nineteen shillings and sixpence, result happiness. Income one pound, expenditure twenty shillings and sixpence, result misery.” There is considerable evidence that a wise manager tried to meet the target and overachieve a little, but did not exert himself to achieve dramatic growth because of the consequences of having to achieve an elevated target the year after.
After the enterprises received their targets for the following year and their allotment of inputs, the direction of planning reversed. Enterprises turned to their immediate bureaucratic superiors and disputed their ability to meet the targets with the inputs that they had been allotted, arguing with all of the influence at their disposal for lower output targets and greater inputs. It is important to recognize that this part of the planning exercise was very personal and was really an intense bargaining exercise. One way of describing this is as “struggle,” but it was generally a polite affair in which the participants sought to capitalize on their contacts, influence, and reserve of favors.
When some form of resolution was arrived at, the draft plan was then passed back up the hierarchy and was appropriately modified until it arrived at Gosplan again. At every point, the planners attempted to reach a reconciliation, or compromise, between the higher authorities (who tried to preserve compliance to the original draft plan, which represented conformity with Gosplan’s control figures) and the lower authorities, who had the responsibility for meeting the targets. This process of reconciliation coincided with the “tightening” of the plan as production responsibilities became more and more precisely defined. On occasion, of course, all the loose ends could not be tied up and Gosplan had to resolve the basic structure of the plan in order to take account of the problems.
Making the Plan into Law
Those at the lower levels of the planning process knew that during this period they had to make their own production targets as realistic (in fact, as minimal) as possible. Once the final balance was struck, the politburo approved the plan and the Praesidium turned it into law. It was a punishable offense to fail to meet the plan target, while substantial bonuses were paid to enterprise management for plan achievement and overachievement. After enactment into law, the plan was then passed down the hierarchy of ministries and regional councils with the degree of detail being increased at each level. Ultimately each enterprise entered into contractual arrangements with suppliers and major customers.
THE MECHANISM OF PLANNING
Up to this point the planning process was concerned exclusively with physical units of commodities, whether outputs or inputs. Prices were determined quite separately and fulfilled a different function from the role that they serve in a market economy. They were set primarily by the bureaucracy, were altered as infrequently as possible, and did not aspire to reflect either resource cost or demand. Price changes are a nuisance, incur “menu costs,” and have little point if the base levels do not reflect scarcity to begin with. Moreover, it was a point of ideological pride that socialism was immune from capitalism’s worst diseases, inflation and unemployment. Under Soviet central planning there were three main types of prices for goods: wholesale industrial prices, agricultural prices, and retail prices.5
Wholesale Industrial Prices
These were the prices at which firms sold goods to each other and were determined by a combination of pragmatism, opportunism, and ideology. The underlying principle was that prices should represent the average cost of production of a good across all the enterprises in the relevant industry group. Recall from chapter 3 that it is marginal cost, not average cost, that reflects scarcity, and therefore the role that prices played in the efficient rationing of scarce resources within the
Soviet system was slight. Moreover, cost to the Soviet planners conformed to a Marxian conception and was defined as consisting of labor costs, raw material costs, and depreciation, with no allowance made for the opportunity cost of capital (interest) or land (rent). After arriving at an estimate of average cost for each firm, the planners would exclude obvious outliers in the calculation of the industry average; any enterprises with abnormally high costs were not considered, although they remained in production and therefore required subsidy.
Adjusted average costs of production were then modified to yield the prices for the plan year, a small amount being deducted to reflect lower costs due to technological change or productivity increase, and a small margin added for profit. Prices arrived at in such a way could never, except by the most unlikely coincidence, reflect relative scarcities and were not a crucial factor in determining enterprise behavior. In a market economy, a firm’s revenue is determined by the product of volume and sales price, and that represents a hard budget constraint to the firm. In the long run the firm cannot spend more than its revenues. Under centrally planned socialism, if revenue is less than cost, some way would frequently be found to raise revenues through price changes or subsidies or to reduce costs by lowering administered input prices or taxes. These soft budget constraints had a profound effect on Soviet performance, an important fact that we will return to later.