Merchants and Mechanics

Based on Chris Miller, The Struggle to Save the Soviet Economy (University of North Carolina Press, 2016); Stephen Kotkin, Armageddon Averted: The Soviet Collapse 1970-2000 (Oxford 2008); and Wisla Suraska, How the Soviet Union Disappeared (Duke University Press, 1998)

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”We are firmly of the opinion that in the course of peaceful competition the peoples will be able to satisfy themselves as to which social system secures them a higher standard of living, greater assurance for the future, freer access to education and culture, more perfect forms of democracy and personal freedom. We have no doubt that in such competition communism will win.” — Nikita Khrushchev, 1961

Ideologues aren’t hampered by doubt, but that doesn’t mean that they are right. By 1985, the year that Mikhail Gorbachev came to power, communism’s command economy had been decisively outperformed by market economies, and for Soviet citizens, democracy and personal freedom were mere abstractions. Perhaps the Soviet Union offered freer access to culture, so long as culture meant the Bolshoi Ballet and not jazz or blues or rock and roll.

Gorbachev’s policies, had they been successful, would have strengthened the Soviet economy, expanded personal freedom, and introduced elements of democracy. But they were not successful: Gorbachev’s reforms hit roadblocks at every turn. Fatefully, Gorbachev’s attempts to work around these roadblocks led him to undermine the communist party, the institution that had held the country together for decades. The Soviet Union soon collapsed, its political power usurped by its former republics.

Gorbachev’s Inheritance

It is tempting to imagine that Gorbachev, as the leader of an authoritarian government, could implement whatever policies he saw fit. In reality he was constrained in two fundamental ways: by the weakness of the Soviet economy, and by the weakness of Soviet governance.

The Economy

The long-term stagnancy of the Soviet economy is apparent in the graph below, which compares output per capita in the Soviet Union with output per capita in two of its regional rivals, Japan and China. The graph is log-linear, so rates of growth are proportional to slopes: steeper slopes imply faster growth.

Between 1950 and 1985, output per capita rose by a factor of 8.0 in Japan, a factor of 3.3 in China, and a factor of only 2.4 in the Soviet Union. The comparison between China and the Soviet Union is much more dramatic between 1978 (when China reoriented its economic policy) and 1985: output per capita grew by 50% in China and by 2% in the Soviet Union.

The Soviet Union’s low productivity was partly caused by old capital equipment embodying old technology. Many of the Soviet factories had been built in the 1930s and the 1940s. New capital investment tended to extend existing production lines, rather than replace old systems with more modern systems. Also, during the Great Patriotic War, factories and refineries had been built to the east of the Ural Mountains to keep them safe from the German invaders. The expansion of this industrial footprint after the war contributed to the Soviet Union’s low productivity.

Factories and their workers were spread across the far reaches of Siberia, hundreds of miles from other cities, sharing limited transport links and suffering from brutal winter cold. Siberia boomed as the USSR industrialized. Between 1926 and 1959, the population of Chelyabinsk increased from 59,000 to 689,000, Norilsk from zero to 118,000, and Yakutsk from 11,000 to 74,000. Yet a sizeable portion of this apparent growth actually destroyed wealth. Because costs in Siberia were up to 50 percent higher than in other parts of the USSR, workers and factories would not have moved there on such a large scale were it not for government diktat.¹

That Soviet industry was “an enormous energy-consuming, value-subtracting burden”² was just one aspect of a greater problem. Communism was built upon the conceit that the economy would better serve the people if it did not rely on market incentives. But eliminating market incentives doesn’t eliminate incentives, it just re-routes them. Communism would only succeed if it replaced market incentives with better incentives, and the Stalinist command system didn’t come close to doing so (here).

The basic problem with the command economy is that the planners have neither the information nor the computing power needed to set out a complete plan. The incompleteness of the plan allows managers to manipulate the system in their favour. Here is one example — multiply it a thousand fold to get a sense of the Soviet economy.

By the 1980s, Soviet manufacturers used more than one million sizes and shapes of rolled steel. Since it was impossible to predict the proportions of each size or shape to be needed by each firm, the planners provided a range to producers. But since every plant’s performance was measured by the weight of its output, a producer got more “credit” for heavier strip. There was, however, a greater need for the thinner varieties. With no choice, companies took the thicker strip. Perhaps they could barter it on the vast internal black market among companies. If not, they would machine it down to the desired thickness. Perversely, the sheared-off metal counted in the Soviet GDP, even though it was discarded and made the production of finished goods more costly. Furthermore, although manufacturers were forced to shave off a significant portion of metal they received, Soviet machines, cars, and refrigerators were far heavier than Western counterparts. Durable-goods factories were also rewarded not for profits but for output tonnage. In short, the logic of the planned economy was devastatingly simple: quantity ruled. ³

In this example the managers took advantage of a sketchy command, but they were still responding to a command. In other cases the managers took advantage of the planners’ incomplete information to negotiate a better deal for themselves and their associates. They sought a greater tranche of raw materials, or a smaller production quota, or an expanded labour force, or additional investment. There is no reason to expect such bargains to be efficient.

The command economy also struggled with technological progress. The “creative destruction” inherent in market economies pushes firms to adopt new technologies as they become profitable. No such pressure exists in a command economy, where an inefficient factory is always better than no factory.

The oil crisis of the 1970s illustrates the impact of these differing incentives. The price of a barrel of crude oil quadrupled between 1970 and 1974. The industrialized countries of the West were driven into recession, as thousands of factories that relied on oil-guzzling technologies went bankrupt. The term “rust belt” was coined to describe regions devastated by the loss of their industry. Factory workers who had thought that they had a job for life wondered whether they would ever work again. But, very slowly, factories retooled. They adopted new technologies that used less oil and less labour than the old ones, and that embodied more flexible production techniques. These factories set a new standard for efficiency.

The Soviet Union initially benefited from the oil crisis. The discovery of oil in Siberia had allowed the Soviet Union to become a net exporter of oil by the time of the crisis. The quadrupling of the oil price was a huge windfall.

What to do with all that cash? The Soviet leadership used its oil revenues to cushion the impact of the oil shock on its East European satellites. Oil money also paid for a huge Soviet military buildup that, incredibly, enabled the country to reach rough parity with the United States. And it helped defray the costs of the war in Afghanistan, launched in the late 1970s. Oil money also went into higher salaries and better perks for the ever-expanding Soviet elite. And oil financed the acquisition of Western technology for making cars, synthetic fibers, and other products for consumers as well as Western feed for Soviet livestock.⁴

Within the Soviet Union itself, the price of oil was held well below the world price. Soviet factories did not experience the same carnage as Western factories, so there was no pressure for them to adopt new technologies. But the windfall did not last: Soviet oil production began to decline in the early 1980s, and the price of oil fell by two-thirds in 1986. Soviet industry, its technology having fallen still farther behind that of the West, was left ruinously uncompetitive.

Even deliberate attempts to foster technological progress sometimes failed, as was the case with the digital revolution.

The Kremlin decided in the 1970s to pursue the computerization of production and planning, and to import Western technology. To overcome a cold-war ban on technology transfers, the KGB set up foreign front companies and conducted remarkably successful industrial espionage, but few of their acquisitions paid off. Soviet factories proved unwilling or unable to introduce the new technologies, particularly information systems. By the 1980s the entire Soviet Union had just 200,000 microcomputers, leaving aside their quality, while the United States already had twenty-five million, and that number was about to skyrocket.⁵

The Soviets were able to maintain technological parity with the West in only one area — weapons development — and Vladimir Kantorovich attributes this success to “stealing, reverse engineering, ingenious domestic adaptations and shortcuts, and massive allocation of resources.”⁶

The Party and the State

The Soviet Union had two parallel administrations, the party and the state, almost from its inception.

During the Civil War (1918–21), when the former Russian empire territories were reconquered, tsarist officers were recruited to the Red Army, and “political commissars” were introduced alongside the military experts to guarantee their loyalty. Such, haphazardly, became the model for the whole country: in every institution, from schools to ministries, party members, or commissars, were called upon to act as guarantors of loyalty and correct politics. But soon Soviet army officers, bureaucrats, teachers, and engineers ceased to be holdovers from the tsarist period. The country trained its own “Red,” or party-member, experts, yet the separate party organizations shadowing the experts were not removed. On the contrary, the bureaucracy of the party continued to grow alongside the bureaucracy of the state, and both performed essentially the same functions: management of society and the economy.⁷

The functions of the party and the state were similar, but the party had the whip hand. The Soviet Union’s most powerful governing bodies were the politburo and the central committee secretariat, both party organizations, and its leader was the general secretary of the communist party.

Western governments are served by “impersonal, rule-implementing, and specialized” civil services, but in the Soviet Union, the dominance of the party prevented the development of such an apparatus. Stalin had used the Great Terror to ensure the obedience of his subordinates, but for every subsequent leader, policy implementation required give and take.

The failure to develop a neutral civil service weakened the power of the center in three ways. First, the size and complexity of the Soviet Union made it necessary for the national leaders to delegate power to regional secretaries of the communist party. Each secretary had control over major appointments in his region. He was also the intermediary through which local enterprises dealt with the higher levels of government. These functions allowed him to assemble a patronage network that enhanced his own power. The national leaders were reluctant to yield power to their subordinates but could not do otherwise. Moreover, the national leaders understood that allowing their subordinates some leeway facilitated the subordinates’ absorption into the leaders’ own patronage networks, and these networks were essential to their advancement. Suraska refers to these patronage networks as the “privatization of the state.”

Second, the KGB and the military formed elites of their own, and members of these elites also formed personal networks. Andropov could not have become general secretary without the support of his network. When Gorbachev succeeded Andropov, his advisors and officials were initially drawn from the same network.

Andropov’s network, inherited by Gorbachev, consisted of at least two different groups. The first one came from the party apparatus and the KGB/MVD ranks, with men such as Vladimir Kruchkov, Yegor Ligachev, Eduard Shevardnadze, Nikolai Ryzhkov, Geidar Aliyev, etc. These officials were all experienced operators of the Brezhnev machinery of power for whom perestroika meant their turn at the wheel. The second group consisted of the party intellectuals, such as Alexander Yakovlev, Yuri Afanasyev, Georgy Shakhnazarov, Georgy Arbatov, Fedor Burlatsky, Bovin, Gerasimov, and others, whose task it was to provide the ideological framework of perestroika.⁸

Gorbachev could have done worse and he could have done better. Shevardnadze became an outstanding foreign minister. Ligachev attempted to oust Gorbachev; Kruchkov organized the 1991 coup against him. Ryzhkov advocated economic reform but was too conservative for Gorbachev’s purposes. Gorbachev was comfortable with the liberal intellectuals.

Third, empire-building occurred in the bureaucracies that controlled the agro-industrial, fuel-energy, and military-industrial complexes.

Each of these groups represented its own microcosm of the Soviet economy; each was governed by its own bureaucracy, and personnel usually spent their entire career within a single industrial complex, creating interconnected webs of relationships, favors, and loyalty. Officials who moved from one of the complexes to another part of the Soviet bureaucracy, were believed — usually correctly — to be representing in their new organization the interests of the complex that previously employed them.⁹

Long-serving officials in Soviet industrial ministries developed power bases and patronage networks that let them implement policies independently of, and sometimes in contradiction to, the party leadership’s wishes.¹⁰

In the Soviet Union, reform that didn’t threaten anyone’s livelihood or status could be implemented, but deep reform — reform that threatened entrenched interests — was more difficult. Gorbachev’s attempts to restructure the economy would threaten many interests at once.

The Chinese Example

The Soviet Union’s leaders and analysts were aware of the underperformance of the command economy, but on the whole, they believed that the right regulations, if only they could be found, would make it work. Kantorovich explains:

Economic reform was part of the everyday functioning of the Soviet system. Central planning itself was created in the blizzard of reforms in the late 1920s and early 1930s. Having designed the economy from scratch, the rulers retained the exclusive right to organizational changes. Institutions could not simply evolve with the changing economy; any change had to be introduced as a reform from above…

Reforms reflected confidence in the strength of the system and its potential for improvement, and the revealing expression “further perfecting” was a standard part of reform decree titles.¹¹

Soviet leaders tended to think of the economy’s underperformance as a persistent problem but not an urgent one. Even Gorbachev thought this way. His initial economic reforms were unremarkable.

The leaders’ complacency was shaken by successful economic development in East Asia. Soviet leaders were conscious of Japan’s extraordinary economic growth. They were also concerned by it, because the Soviet Union and Japan had a history of rivalry.¹² The impact of the Japanese example was muted only by the two countries’ ideological differences — the Soviets were committed socialists and intended to remain so. China was a more pertinent example. The Chinese, under Deng Xiaoping’s leadership, were experimenting with alternatives to the command economy. Russian analysts paid careful attention to these experiments and publicized their success. Fedor Burlatsky, one of Gorbachev’s hand-me-down intellectuals, was one of these analysts. He travelled to China in 1985 and reported on his interactions with independent farmers and manufacturers, and with the scholars who studied China’s reforms. He found that two major reforms — the introduction of the household responsibility system, and the expansion of the town and village enterprises — had brought prosperity to the countryside. The Chinese acknowledged without dismay that this prosperity brought with it greater income inequality.

In fact, Burlatsky’s interviews showed, many Chinese scholars completely rejected traditional Marxist-Leninist interpretations of economic growth. In a situation of de facto private ownership in the countryside, some peasants became richer than others. In the 1930s, the Soviet Union solved this problem by liquidating the richer peasants — the kulaks — as a class. The Chinese scholars rejected the notion that private ownership or wealth differentials were inherently exploitative; inequality was fine, they argued, so long as everyone was getting better off. Rich peasants represented 11-13 percent of all rural residents, the scholars told Burlatsky. They earned their money: “Their successes are the result of their own labor, economic initiative, and application of scientific achievements. You have seen for yourselves the construction boom in our countryside. The clay huts with straw roofs are increasingly replaced by new brick houses with tiled roofs…Many families have not one but several bicycles.” The Chinese scholars embraced the new rural elite, and the prosperity that they were spearheading, because the benefits of economic growth would eventually spread widely, and “the middle peasants will rise to the level of the rich, while the poor will rise to the middle level.”¹³

Burlatsky saw similar prosperity appearing in the city, where factory managers had been empowered to make major decisions without consulting the planners. Burlatsky explained that the policymakers’ goal was “the expansion of the independence of enterprises right to the point of their transformation into independent producers.”¹⁴

For such a system to work, enterprises needed to benefit from profits and suffer from losses. The Chinese bureaucrats told Burlatsky that this was their goal: “Previously, the entire profit was in fact expropriated by the state [which]…compensated enterprises for all their losses. Now we are shifting to a system of taxation relations, with a considerable proportion of the profits being left to the enterprises.”…[The ensuing] income inequality did not lead to social tension. “Let me repeat,” Burlatsky quoted them as saying, “we have not encountered the problem of the rich growing richer and the poor growing poorer.”¹⁵

Interest in the Chinese economy was not confined to intellectuals. In the early 1980s a number of Soviet officials and policymakers visited China, all believing that they could learn from its experience with economic reform.

Perestroika

Given the success of the Chinese economic reforms, it is not surprising that Gorbachev attempted to enact similar ones. He encountered two obstacles. The first was opposition from entrenched interests, as discussed above. The second was the growth of the budget deficit: it was 2% of GDP in 1985 but 10% by 1990. Revenue declined, both because the price of oil had collapsed, and because a campaign against drunkenness had halved the state’s sales of heavily taxed alcohol. The reduction in revenue could not be balanced by a reduction in expenditure. Military spending was a large part of total spending, and it was sacrosanct. As well, some very large subsidies (including food subsidies) could not be removed without losing the support of the public. Unable to substantially increase revenue or reduce spending, the government was forced to finance the deficit by printing money, an inflationary policy. Since the government controlled many prices, the inflationary pressure was realized as widespread shortages of goods and as skyrocketing prices in the black markets. Queuing became a fixture of Soviet life, and a drain on the energies of its workers.¹⁶ The unsustainable deficit gave economic reform an urgency that it had not had before.

Industrial Reform

There were several aspects of China’s new industrial policies that the Soviet reformers found appealing. China had shifted its development efforts away from capital-intensive heavy industry and toward enterprises that were smaller and less capital intensive. The new firms were neither owned by the state nor directed by the planners. Many of them were formed under the auspices of a township or village but were effectively privately owned. Other firms were owned and operated by a single family, with the assistance of up to eight outside workers. The new firms were not regulated by the planners, but were instead subject to market forces. The planners made room for these firms by capping the absolute amount of resources that they controlled. As the economy’s resources grew over time, the economy would “grow out of” the plan.¹⁷ The planners also instituted individual contracting with state-owned enterprises. Each enterprise’s contract specified the resources that the enterprise would receive from the state and the goods that it would deliver to the state. It could produce additional output, but only if it purchased the raw materials and sold the finished goods on free markets. The enterprise would retain most of the profits that it earned from its free-market production, and would be responsible for most of the losses that it incurred. These contracts allowed the enterprise managers to experiment with profit-oriented business. Since the inframarginal units of output were fully contracted, they also stabilized the markets.

Gorbachev attempted to implement similar reforms, but had much less success.

Some kinds of private labour were explicitly allowed under the Soviet Union’s 1977 constitution. Private handicrafts, agriculture, and consumer services were all allowed. Private manufacturing was explicitly banned, as was employing anyone outside of the family. Gorbachev wanted to expand the scope of private labour, because many people were looking for work, and because the state was routinely failing to supply basic consumer goods and services. This shortfall was an opening for black market operators: they provided “50 percent of shoe repairs, 45 percent of house repairs, and 40 percent of car repairs.”¹⁸ Bringing their operations within the scope of the law would limit their ability to engage in corrupt or unscrupulous behaviour. These considerations led Gorbachev to propose the Law on Individual Labour Activity in 1986. It met with considerable opposition within the politburo. Many of its members — including Ligachev, who was Gorbachev’s second in command — objected to the expansion of capitalism. Some members argued that private labour produced “unearned income,” which was prohibited by law despite having no clear definition. (Recall that the Chinese policymakers argued the opposite, that private labourers earned the full value of their incomes.) Gorbachev was eventually able to overcome the opposition and the Law was passed. It allowed private labour for individuals not employed by the state, including “housewives, pensioners, invalids, students” — groups that represented a fifth of the Soviet population. The Law also clarified and mildly extended the sectors in which private labour was allowed. Employing anyone outside the family continued to be illegal.

The Law on State Enterprises was also proposed in 1986. Its main purpose was to clarify the managers’ incentives.

The central planners in Moscow gave each enterprise a series of targets — often dozens of targets — measuring output, quality, and the cost of inputs. Many of these indicators were vague or contradictory.¹⁹

The Law would replace these targets with full cost accounting — the managers would become profit-seekers, like their Chinese counterparts. This law, too, met with strong opposition. Many politburo members opposed it. So did the bureaucrats, who did not want to give up their authority. Both groups preferred to retain the Stalinist command system. Gorbachev lectured them on the impossibility of this system ever working: “The economy is about 250 million points of mutual exchange. It’s not possible to regulate this from the center. No computer could manage.”²⁰ The Law passed after more than a year of wrangling. It had the potential to radically change the operation of state enterprises.

The legislation modified Soviet enterprises in three ways, each of which mirrored China’s policy. First, the law transferred control over enterprises from the state to workers. Now, at least in theory, workers were empowered to elect management as well as a work council. Second, commands — the traditional way that the center controlled enterprises — were replaced by “state orders” (or “state purchases”), which covered production that was considered essential. Finally, enterprises moved toward self-financing, as the number of indicators by which enterprises were measured was sharply reduced, with revenue or profit often becoming the most important indicator. This gave enterprises coherent incentives. Self-financing meant that enterprises would have to be profitable to survive. Indeed, the law included provisions by which enterprises could close if they consistently lost money — a socialist version of bankruptcy.²¹

The planners, reluctant to give up control, obstructed the Law’s implementation. They sometimes entered an order for the entire output of an enterprise, freezing it out of the competitive market. As well, profits were taxed at rates that could be as high as 90%, so the enterprise managers often had little incentive to explore market opportunities.

The Law on Cooperatives was passed in 1988. A cooperative was a business jointly owned by a group of people. The Law gave extensive rights to the cooperatives, including the rights to issue shares and hire or fire workers. The cooperatives largely escaped the influence of the bureaucrats, and were immediately successful. The first year of the Law saw the creation of 133,000 cooperatives employing 2.93 million people.²²

The bureaucrats tolerated these reforms mostly because they were accompanied by large capital spending that the state could not actually afford and that had no sustained impact on productivity. This capital spending, known as the “acceleration program,” was effectively a bribe to ensure their cooperation.

The power of these entrenched interests meant that the price of their consent was enormous. Capital investment averaged less than 170 billion rubles per year from 1981-85; but under the acceleration program, which was needed to retain industrial support, capital spending reached 206 billion rubles in 1987 and surpassed 218 rubles in 1988. The increase in capital spending was equivalent to over 5 percent of GDP — an extravagant spending hike in a time when the budget was already careening out of control.²³

But the bureaucrats’ self-dealing wasn’t the biggest problem with these reforms. The new laws were so poorly formulated that they led to the pillage of state resources. The Law on State Enterprises authorized the workers to elect their own managers, and they did so. The managers quickly became “quasi-owners” of their enterprises.

After a couple of years, the managers assumed supreme control over “their” state enterprises and were not accountable to anybody. They possessed the cash-flow rights but not the control rights, which meant that they could tap money from the enterprise but not sell it.²⁴

The Law on Cooperatives facilitated the managers’ extraction of cash from the enterprises.

Managers established private cooperatives on a mass scale and attached them to “their” state enterprises to transfer dead enterprise money into their own pockets. They sold attractive goods at low state prices to their private cooperatives, which accumulated the profit. Soon, they passed on the profit to offshore companies to keep it safe abroad. This management theft mechanism was fully established by mid-1988. From that moment, it was only a matter of time before the economic system would collapse.²⁵

Agricultural Reform

Gorbachev intended to return the control of the land and the responsibility for farming it to individual families. There were both Chinese and Soviet precedents for this kind of policy.

The Chinese precedent was the “household responsibility system,” under which peasant families entered into individual contracts with their collectives. Each family received control of a plot of land and was required to deliver to the collective a specified quantity of agricultural produce. Everything that a family produced in excess of this quota was their own: they could consume it or sell it in local markets. The household responsibility system had first appeared during the famine that occurred in the years around 1960. Mao had condemned it as capitalist and it had been abandoned. Then, in 1978, at the beginning of China’s economic reforms, the collectives were given more control over their own organization. The household responsibility system was revived in the provinces of Anhui and Sichuan. It was so successful there that it spread throughout the country. By the end of 1982, more than 90% of China’s farmers operated under it.

The Soviet counterpart to this system was the “autonomous link,” which was a response to the famines of the early 1930s.

Unlike in most collective farms, where workers were grouped into brigades of dozens of workers, an “autonomous link” was a much smaller group, between five and twelve people, who were often family members. In a brigade laborers were paid by the amount of work they completed rather than the size of their harvest, a system that provided no incentive to increase harvests…By contrast, workers under the autonomous link system were given land from a collective farm, and were tasked with managing it like a private business. Such workers rented equipment from the collective farm, purchased supplies, and determined their own production processes. They were paid based on output, not work: better harvests meant higher pay.²⁶

Autonomous links were common until the 1960s. Their decline was caused in part by the belief that they harmed the collectives — an ideologically unacceptable outcome — and in part by the desire of planners, industrial managers, and bureaucrats to gain more control over agriculture.

Gorbachev, aware of the successes of both of these systems, attempted to resurrect the autonomous link. In 1986 he announced the introduction of production contracting at the “brigade, link, and family” level. Some powerful groups would be harmed by such a reform.

Local party leaders benefitted from patronage networks that reached from the top of the Politburo down to collective farms. Managers of industries that produced tractors, fertilizer, and irrigation works depended on high levels of agricultural investment for political power and economic well-being.²⁷

Just as he had with the industrial reforms, Gorbachev offered a bribe — higher farm subsidies — to overcome resistance to the new policy. Even then, production contracting spread slowly. The managers of collective farms held back the land. The local party leaders, who were responsible for implementing the new policy, did not pressure the managers to release it.

China moved from collectivized farming to individual farming in the years around 1980, and only a few years later, the Soviet Union tried to do the same. The implementation of these policies was radically different. In China the farmers themselves adopted the household responsibility system, and the cadres and the leaders above them embraced the system because it was successful. In the Soviet Union, Gorbachev had to fight to get the politburo to accept production contracting, and once it had, he had to deal with resistance right down to the level of the collective farm. The difference in implementation stems from an underlying difference in institutions.

The Chinese collectives, on Mao’s insistence, were largely self-sufficient. Each collective delivered a quota of agricultural produce to the state, and everything beyond the quota went to the running of the collective. The farmers and their families had to be fed, of course, but the collective also provided education and health care to its members, and operated small enterprises that produced basic manufactured goods and agricultural inputs for local use. Under this system, the benefits of the household responsibility system stayed within the collective. The farmers’ incomes rose. The farmers used some of their extra income to buy basic goods such as fans and bicycles, and the local enterprises expanded to provide these goods. The enterprises’ extra profits accrued to the collective, allowing it to provide more services to the community. As with all of Deng Xiaoping’s early reforms, there were winners but no losers.

The Soviet collectives, by contrast, survived on an unending stream of subsidies. The goal of agricultural reform was to eliminate these subsidies, so a winners-without-losers policy was not possible.

Throughout the postwar era, Soviet farms were cosseted with immense subsidies…Some of this was justified by the need to raise farmers’ incomes, but a substantial portion of the resources transferred to farms was simply wasted, often on unnecessary investment in tractors and fertilizer. This inefficiency dragged down the Soviet economy, but the most problematic consequences were political. The gravy train of patronage and corruption created by Soviet farm spending gave rise to a huge political infrastructure dedicated to preserving subsidies, a network that stretched from the lowliest farmers up to top Politburo figures such as Yegor Ligachev. Defenders of collective and state farms couched their arguments in terms of ideology — a “main road” of socialism, Ligachev insisted — but the glue that held together the Soviet farm lobby was part socialism, part subsidies.²⁸

In the end, the only way to defeat the agricultural interests was to remove them from the line of command. Gorbachev started to advocate the complete elimination of the collective farms. By 1989 he had cobbled together a politburo coalition supporting this kind of reform. New laws shifted control of farming away from Moscow and towards the republics and local authorities. Family farms were fully legalized in 1990. The land that they received was held for life, and could be inherited, but it could not be sold. An income gap soon emerged between private farmers and collective farmers, creating an incentive for farmers to abandon the collectives and become lessees.

The Collapse of the Soviet Union

“The Soviet Union resembled a chocolate bar: it was creased with the furrowed lines of future division, as if for the convenience of its consumers.” — Nikolai Leonov, KGB analyst²⁹

Three factors led to the collapse of the Soviet Union, with each acting upon the others: the rise of nationalism in the Soviet Union’s constituent republics, the further deterioration of the economy, and the perverse effects of Gorbachev’s attempts to consolidate power.

In the aftermath of World War II, the Soviet Union had engineered communist takeovers in a number of East European countries. These countries — East Germany, Poland, Czechoslovakia, Hungary, Romania, Bulgaria and Albania — became the Eastern Bloc. Formed under compulsion, the Bloc was an uneasy alliance. There were revolts in East Germany in 1953, Poland and Hungary in 1956, Czechoslovakia in 1968, Poland again in 1976. After 1968 the Bloc was held together by the Brezhnev Doctrine, which mandated the use of the Soviet military to prevent defections. Gorbachev abandoned this doctrine in 1985, and distanced himself from the internal politics of the Eastern Bloc countries. The Bloc soon unravelled. Solidarity took control of the Polish government in June 1989; Hungary opened its border with Austria in September 1989; crowds broke through the Berlin Wall in November 1989.

The defection of the Eastern Bloc countries undoubtedly had a “demonstration effect” within the Soviet Union. Each of its fifteen republics was identified with a distinct ethnic group (such as Armenian or Ukrainian), and the Baltic republics — Estonia, Latvia, and Lithuania — had been independent states before World War II. Each of the republics retained a distinct identity even after its incorporation into the Soviet Union, having “a state border, constitution, parliament, and (after 1944) a ministry of foreign affairs,”³⁰ as well as a constitutional right to withdraw from the union. The peoples of the republics recognized that Eastern Europe’s new freedoms could also be their freedoms.

What held the Soviet Union together was the “pyramid-like hierarchy of the Communist Party.”³¹ The top of the hierarchy was in Moscow, the bottom was on a factory floor in some remote republic, and there was a single chain of command throughout. The communist party ensured that the Soviet Union acted with a single purpose even though it was structured as a loose federation.

Gorbachev’s dilemma was that the communist party, riddled as it was with entrenched interests, stood in the way of deep reform, but also held the country together. Gorbachev eventually chose to curtail the party’s power, an act that Anders Åslund likened to cutting through the bough upon which he sat.

There were two parts to Gorbachev’s strategy. The first part was the democratization of government. The old Supreme Soviet, a “bogus parliament,” was replaced by a Congress of People’s Deputies, whose members were (mostly) chosen in open elections. The Congress then elected a new Supreme Soviet, which became the legislative parliament. This reform meant that party members would not have power by right — they would have to win their mandate from the people. The second part of the strategy shifted power away from the most senior members of the communist party and towards Gorbachev himself. In 1988,

…the once powerful Central Committee Secretariat, that is, the de facto Soviet government for the preceding quarter-century, was turned into a talking shop. The full-time staff of the Secretariat was cut by 30 percent, and the status of its departments changed from permanent working organs into occasionally assembling commissions. The Politburo started to meet irregularly, once a month or so, and then only to consider party matters.³²

The Council of Ministers was then “practically the only all-union institution left with powers extending to the republican governments.”³³ Gorbachev disbanded it as well, replacing it with a Presidential Cabinet consisting of his own advisors. This last decision might well have doomed the Soviet Union. The ties between the center and the republics became so frayed that, from the perspective of the republics, the national institutions were unnecessary baggage.

Meanwhile, the economy was falling apart. The budget deficit reached 10% of GDP by 1988; it might have reached 30% of GDP in 1991.³⁴ Revenues fell sharply due to lower oil prices and smaller alcohol tax revenue. On the expenditure side, military spending was still untouchable. Subsidies on consumer goods — the difference between what the government paid their producers and what it received from consumers — amounted to 15% of GDP.³⁵ The “wasteful but politically potent” spending in the industrial and agricultural sectors was also very substantial.

The budget deficit surprised no-one.

Soviet leaders always knew that perestroika’s economic reforms could lead to crisis. They embraced perestroika as a necessary gamble, though policymakers with different ideological perspectives — and those with ties to different interest groups — saw the gamble differently. For farms and industries, perestroika promised new investment spending, benefitting the workers and managers of those sectors. These groups did not want a budget crisis, but they hoped that other parts of Soviet society — the USSR’s beleaguered consumers above all — would bear the costs of new spending programs. Gorbachev faced a different gamble: he saw higher levels of capital investment as all but inevitable given the industrial lobbies’ strength. He hoped, however, that his market reforms would spark enough growth to let him plug the deficit in the medium term while sidestepping debilitating political clashes about budget cuts.³⁶

The government, with little ability to borrow either at home or abroad, was forced to finance the deficit by printing money, as shown in the chart below.³⁷

The excessive money creation led to goods shortages in official markets and huge prices increases in black markets. Shortages of food were especially severe.

By April 1991, only 12 percent of survey respondents reported seeing sausage openly sold in markets, while only 8 percent saw butter, 7 percent saw fish, and 7 percent saw flour. Of those surveyed, 48 percent reported that they didn’t see anything available for open sale.³⁸

The food shortages were symptomatic of the breakdown of the national market. The economic reforms had reduced the authority of the planners, and the political reforms had broken the links between the republics and the center. As the republics edged toward greater (or even full) independence, they took control of state assets.

Local officials sought to seize control of factories and resources before someone else did. Soon there were few resources left. Regional governments, especially those in ethnic minority regions, used their new autonomy to remit fewer taxes to the central government.³⁹

By 1990 the republics were demanding, and then unilaterally exercising, greater economic independence.

So, the unwinding of the Eastern Bloc awoke the possibility of statehood in the republics, the economy fell apart, and Gorbachev sabotaged critical political institutions. The Soviet Union’s demise was then inevitable. There was a great deal of political wrangling between the first declarations of independence (the Baltic states, early 1990) and the dissolution of the Soviet Union (December 1991), but the storyline was fairly simple. The Soviet Union was a sinking ship, the republics commandeered the lifeboats, and the captain went down with the ship.

1. Miller, The Struggle to Save the Soviet Economy, pp. 75-6. ↩
2. Kotkin, Armageddon Averted, p. 18. ↩
3. Kotkin, Armageddon Averted, p. 63. ↩
4. Kotkin, Armageddon Averted, p. 16. ↩
5. Kotkin, Armageddon Averted, p. 63. ↩
6. Vladimir Kantorovich, “The Economic Fallacy,” The National Interest (1993), p. 44. ↩
7. Kotkin, Armageddon Averted, p. 78. ↩
8. Suraska, How the Soviet Union Disappeared, p. 78. ↩
9. Miller, The Struggle to Save the Soviet Economy, p. 58. ↩
10. Miller, The Struggle to Save the Soviet Economy, p. 57. ↩
11. Vladimir Kantorovich, “The Economic Fallacy,” The National Interest (1993), p. 39-40. ↩
12. Both countries wanted control of Manchurian territory, which gave rise to war in 1904-5, continuing conflict in 1932-9, and another war in 1945. ↩
13. Miller, The Struggle to Save the Soviet Economy, p. 48. ↩
14. Burlatsky, quoted by Miller, The Struggle to Save the Soviet Economy, p. 49 ↩
15. Miller, The Struggle to Save the Soviet Economy, pp. 49-50. ↩
16. A Soviet joke of the era has a man entering a shop. He looks at the empty shelves, then says to the clerk, “You don’t have any meat?” The clerk says, “No, here we don’t have any fish. The shop that doesn’t have any meat is across the street.” ↩
17. Planning was ended entirely in 1993. ↩
18. Miller, The Struggle to Save the Soviet Economy, p. 89. ↩
19. Miller, The Struggle to Save the Soviet Economy, p. 92. ↩
20. Gorbachev, quoted by Miller, The Struggle to Save the Soviet Economy, p. 93. ↩
21. Miller, The Struggle to Save the Soviet Economy, p. 95. ↩
22. Miller, The Struggle to Save the Soviet Economy, p. 99. ↩
23. Miller, The Struggle to Save the Soviet Economy, p. 100. ↩
24. Anders Åslund, Russia’s Capitalist Revolution (Peterson Institute for International Economics, 2007), p. 56. ↩
25. Anders Åslund, Russia’s Capitalist Revolution (Peterson Institute for International Economics, 2007), p. 57. The managers’ cooperatives made their profits by buying goods from the state enterprise at an artificially low price and re-selling them at market prices. ↩
26. Miller, The Struggle to Save the Soviet Economy, pp. 121-2. ↩
27. Miller, The Struggle to Save the Soviet Economy, p. 126. ↩
28. Miller, The Struggle to Save the Soviet Economy, p. 143. ↩
29. Quoted by Kotkin, Armageddon Averted, p. 86 ↩
30. Kotkin, Armageddon Averted, p. 77. ↩
31. Kotkin, Armageddon Averted, p. 78. ↩
32. Suraska, How the Soviet Union Disappeared, p. 44. ↩
33. Suraska, How the Soviet Union Disappeared, p. 52. ↩
34. Miller, The Struggle to Save the Soviet Economy, p. 151. ↩
35. Miller, The Struggle to Save the Soviet Economy, p. 151. ↩
36. Miller, The Struggle to Save the Soviet Economy, pp. 149-50. ↩
37. I have taken this chart from Miller’s book, but the original source is Byung-Yeon Kim, “Causes of Repressed Inflation on the Soviet Consumer Market, 1965-89,” Economic History Review (2002). ↩
38. Miller, The Struggle to Save the Soviet Economy, p. 155. ↩
39. Miller, The Struggle to Save the Soviet Economy, p. 156. ↩