A Brief History of the Soviet Economy - Part 2

An Empire of Rusting Steel and Rotting Corpses

This is the second in a three-part series exploring the history of the Soviet economy and its modern revival.

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Part 2 – An Empire of Rusting Steel and Rotting Corpses

Introduction

Much of the modern Left’s critique of the Soviet Union focuses on the Stalinist period from 1928 to 1953, which they often cite as the epitome of so-called “state socialism.” Then again, what fully-fledged socialism looks like without an authoritarian state remains largely theoretical. Indeed, it is rare to find any socialist today, besides those few entrenched in the Tankie corners of X, who would openly defend the Great Purges of the 1930s or the socially regressive policies of Stalin’s regime. In the words of Marxist academic Terry Eagleton (2011: p.15): Stalinism ‘made the very idea of socialism stink in the nostrils of many.’

Yet, despite the near-universal condemnation of Stalin’s brutality, there is always one notable caveat offered by many on the Left that implies some degree of admiration for Stalin’s despotic regime. Namely, their exaltation of the “impressive industrialisation” achieved by the proverbial Man of Steel, which transformed the Soviet Union from an underdeveloped agrarian economy into a military superpower, replete with massive steelworks and sprawling factories. Once again, in the words of Eagleton (ibid: p.13): ‘the Soviet Union dragged their citizens out of economic backwardness into the modern industrial world.’

However, behind this façade of fetishised smokestacks and industrial might lay something far more sinister: an empire of rusting steel and rotting corpses. This radical transformation of the Soviet Union was ultimately built upon mass coercion, starvation, and economic irrationality; outcomes that are inseparable from the anti-market dogmas of Marxist theory which are still championed by many on the Left today.

Therefore, in this instalment of the article series, I aim to draw on economic theory to demonstrate how the economic policies implemented under Stalin were not only deeply inefficient but also produced little more than a hollow façade of industrialisation and development. As a result, this illusion of progress should serve as a warning to modern Leftists and policymakers alike, who should be wary of trying to mimic such models to bolster our laggard economies today.

Stalin – A True Marxist

When Joseph Vissarionovich Stalin emerged as the Soviet Union’s de facto leader in 1928, following a brutal succession struggle after Lenin’s death in 1924, his detractors, including the much-revered Trotsky, dismissed him as nothing more than a ‘crude’ ‘creature of the bureaucracy’ who spoke Russian with a thick Georgian accent (Fitzpatrick, 2022: p.68). This perception that Stalin was not a genuine Marxist intellectual continues to dominate Leftist discourse on the dictator today. In reality, Stalin was a keen reader of both Marx and Lenin (Roberts, 2022), and although his shifting positions during the succession struggle suggest blatant political opportunism, the stance he ultimately adopted was not devoid of Marxist-Leninist theory.

As discussed in the previous article, Stalin’s chosen path of rapid industrialisation, funded through the expropriation of the peasantry and enacted using a command economy, was a programme urged upon by Lenin and fast becoming the consensus among the more doctrinaire Marxists within the Communist party. Moreover, Stalin came across as a realist, recognising that the dream of international revolution was becoming an increasingly distant prospect, and that the only course left was to build ‘socialism in one country.’ Therefore, Stalin was not merely a brute; he was a brute who was to fulfil the economic revolution that Lenin desired and Marxist doctrine necessitated.

It was no surprise, then, that in echoing Lenin’s civil war cry for ‘ruthless war against the kulaks’ – the mildly prosperous peasants of the countryside – Stalin’s first course of action was to call for the ‘liquidation of the kulaks as a class.’ This violent policy of ‘dekulakisation,’ which resulted in the death or exile of an estimated five to six million peasants, was a part of a broader campaign to forcibly consolidate private plots into collective farms known as kolkhozes (Fitzpatrick, 2022: pp.74-5). These collective farms were not only intended to enable tighter state control over grain distribution with the resumption of forced grain requisitioning, but also expected to deliver the increased productivity that Marxist theory claimed would result from collective ownership and planning.

However, rather predictably, the removal of the most innovative and productive peasants, combined with the forced collectivisation of agriculture, led to a substantial decline in both agricultural output and the peasants’ standard of living. Although, Stalin briefly retreated from the policy in 1930, blaming overzealous party officials for being ‘dizzy with success,’ the policy would be completed in full earnest during the first half of 1930s.

As a result of these disastrous policies, a wave of famines would plague the Soviet countryside, with Ukraine – the fertile heartland of the Soviet Union – being one of the worst hit regions during the 1932-33 famine. Known today as the Holodomor, this man-made disaster claimed the lives of an estimated 3.3 million Ukrainians. Only socialism, it seems, could turn the breadbasket of Europe into a wasteland of starving farmers.

It soon became apparent that the capital that had supposedly resided among the peasantry was not forthcoming. Therefore, the resources needed for the country’s industrialisation had to be sourced from elsewhere: namely, the squeezing of consumer consumption.

The Command Economy

The origins of the Soviet command economy can be traced back to the first months following the October Revolution. Lenin, inspired by the state-directed wartime economy of Germany during the First World War, sought to emulate this model by creating the Supreme Council of National Economy (VSNKh), which was tasked with centrally planning and budgeting for the newly nationalised “commanding heights” of the economy. It was this early framework that contributed to the underproduction of industrial goods during the NEP period, ultimately leading to the “scissors crisis” of 1923 discussed in the previous article.

Rather than abandoning this flawed system, in 1928, Stalin expanded central planning across the entire economy through the introduction of Five-Year Plans drawn up by the State Planning Committee, or Gosplan – another body set up by Lenin in 1921. Contrary to popular belief, these plans were not highly detailed blueprints. Instead, they set out general output targets and allocated inputs to key industrial ministries like Heavy Industry, Coal, and Electronics. These ministries, and their sub-departments, were then tasked with developing annual plans for the enterprises under their control. As a result, day-to-day operations were left to enterprise managers, who were expected to fulfil the centrally determined targets within a strict time frame.

However, the origins of this system were not solely rooted in Lenin’s admiration for wartime economic models; the command economy also had its foundations in Marxist doctrine. While Marx wrote little on the practicalities of a socialist economy, he offered indications that pointed towards a centrally planned economy. For Marx, a socialist society was to be governed by a “dictatorship of the proletariat,” in which the means of production are publicly owned. This meant the abolition of private ownership and market forces, as Marx viewed them as inherently exploitative, chaotic, and responsible for recurring economic crises. Therefore, it was only natural that under a socialist economy, ‘administrative allocation’ under so-called proletarian rule ‘would replace market allocation’ (Gregory, 1990: p.19).

Marx envisioned the purpose of any socialist economy as the accumulation of material abundance to enable the transition to communism, whereby the state would wither away, and society would be governed by the principle: ‘from each according to his ability, to each according to his need.’ Therefore, it was no surprise that outside observers of the Soviet Union had long believed that Stalin’s primary objective for the command economy was the production of higher output levels deemed necessary for achieving material abundance.

However, it was only after the opening of Soviet archives in the 1990s that historians discovered that Stalin’s primary measure of interest was, in fact, investment levels rather than levels of physical output (Gregory & Harrison, 2005: p.730-31). In essence, Stalin was more concerned with capital accumulation than with higher output. What could possibly explain this bizarre obsession that makes the Man of Steel appear more like a bourgeois capitalist than a committed socialist?

Stalin – A True Capital-ist

For Marx, capital accumulation – the continuous reinvestment of surplus product back into the economy to generate ever greater returns – is at the heart of exploitation in a capitalist economy. This is rooted in his belief of a labour theory of value, which states that the true value of a product derives from the amount of labour required to produce it. However, under capitalism, products are not exchanged at this supposed “real” value. Instead, they are sold at higher prices that also include a surplus-value: the profit extracted by capitalists from workers by paying them less than the value they produce. Therefore, capital accumulation is viewed by Marx as the systematic extraction of surplus-value, whereby labour is continuously exploited to generate profit, which is then reinvested to expand the process.

Therefore, if capital accumulation is central to capitalist exploitation, why did Stalin prioritise its expansion? Granted, this capital was no longer accumulated for profit, but it was still generated for large-scale reinvestments into the economy. And with no capital forthcoming from the countryside, it was largely extracted through low wages for workers and the suppression of consumption (Gregory & Harrison, 2005: p.730).

The explanation for this apparent contradiction can be traced back to a deeper paradox within Marx’s writings. While Marx dismisses capital in his theory of value, he simultaneously acknowledges the important role capital plays in increasing productivity and driving technological innovation. After all, it is capital accumulation, and more specifically the profit motive, that incentivises capitalists to continuously improve the efficiency of production.

This paradox stems from Marx’s unwise commitment to the labour theory of value, which was already being openly challenged at the time of his writings. In fact, the labour theory of value is not a uniquely Marxist concept but instead was formulated by classical economist David Ricardo in 1817. A major flaw in this theory is its failure to account for the role of capital in determining the value of a product. In particular, it overlooks the significance of capital investment, like machinery, as well as the entrepreneurial risk involved in production. Surely, the decision to purchase advanced equipment and take on the financial risks of creating something like the latest iPhone must be reflected in the final value of a product?

However, it was neo-classical economists such as William Stanley Jevons and Alfred Marshall who, in the late-19^th century, would provide the most compelling alternative to this outdated theory. They recognised that the key problem with any theory of value based solely on labour, or even capital, was its failure to take into account the forces of supply and demand. In essence, a product only has value if people actually want it, and its value is then mediated by the scarcity of that product. In other words, the value of a product is not determined exclusively by the inputs used in its production, but at the point where its supply meets its demand – the market equilibrium. This concept, which Marx never came to terms with, is now being taught in every introductory economics textbook today.

In summary, Stalin’s commitment to capital accumulation reflected an implicit recognition of capital’s important role in production beyond its association with capitalist exploitation. However, it would be the Soviet’s disregard of the forces of supply and demand that would cause the most significant problems for their centrally planned economy. These issues can be broken down into three main problems: information asymmetries, soft-budget constraints, and the principal-agent problem.

Information Asymmetries

In a free market economy, goods are allocated through voluntary exchange between buyers and sellers. Prices act like signals, providing everyone with information about what is scarce, what is in demand, and what needs to be produced more, or less, of.

In contrast, under the Soviet command economy, goods were allocated by central planners. This meant decisions on what to produce, how much of it to produce, and at what price, were not determined by market forces, but by agencies like Gosplan and the industrial ministries. Central planners set production targets, controlled the flow of raw materials, and fixed prices, all without any reference to supply and demand forces in the economy. Therefore, the goods produced by the command economy often failed to meet the needs of consumers and inter-related industries, leading to widespread shortages and waste.

Moreover, the inefficiency of the command economy was made even worse by the Communist Party’s obsession with heavy industry, fuelled by both Stalin’s drive for military power and a Marxist fetishisation of heavy machinery. This fixation gave rise to the ‘priority principle,’ under which heavy industry goods, such as steel, coal, and machinery, were prioritised over light industry and consumer goods, such as food, clothing, and household products. As a result, economist Paul Gregory (1990) describes the Soviet command economy as being a ‘dictatorship of the supplier,’ where producers dictated what was available, and what was available rarely met consumer demand.

But what if the Soviet command economy hadn’t abided by the priority principle? Is it possible to imagine a scenario where a centrally planned economy maximises consumer welfare while also avoiding the boom-and-bust volatility associated with market economies? Economists like Oskar Lange and Abba Lerner certainly believed so. Writing in the early 20^th century, they argued that central planners could simulate a functioning market by setting prices and production targets based on available data, rather than relying on profit motives and competition.

Lange argued that if planners constantly adjusted prices in response to shortages or surpluses, they could mimic the efficiency of the market and ensure supply and demand are at equilibrium. Lerner went even further, suggesting that central planners could outperform a market economy by also taking into account social costs into the production process. In theory, the command economy could both allocate resources efficiently as well as ensure socially responsible production without the chaos of market forces.

But what if the available data wasn’t enough to capture all the information on supply and demand in the economy? This was the central critique offered by seminal free-market economists Ludwig von Mises and Friedrich Hayek. In response to Lange and Lerner’s musings, they argued that the ultimate problem for a command economy was its inherent incapacity to gather and process the vast amount of dispersed information embedded throughout the economy. No matter how intelligent or well-intentioned, central planners could never truly have their finger on the pulse of local, real-time information on the supply and demand of goods. There are simply too many actors within the economy, with constantly changing circumstances and preferences, that can’t be anticipated or appreciated by a set of central planners in a distant capital.

In his groundbreaking 1945 essay The Use of Knowledge in Society, Hayek states:

‘The peculiar character of the problem of rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.’

In essence, only a decentralised free market economy could ensure the free flow of information necessary for the efficient allocation of goods. Prices, rather than reflecting some exploitative process as suggested by Marx, are vital signals conveying information of scarcity and consumer preferences without the need for full knowledge of the economy. To put it plainly: the free market works not because anyone is in charge, but because no one is.

This was the fundamental problem for the Soviet command economy constructed under Stalin, as the inability and unwillingness of central planners to collect and respond to information on supply and demand in the economy made the economy deeply inefficient. As a result, the economy was plagued by information problems, whereby vital knowledge on consumer preferences, the productive capacity of enterprises, and the availability of raw materials, were fragmented, siloed, and entirely inaccessible to those who needed it. Therefore, mismatches in supply and demand were prevalent and the people suffered under pervasive goods shortages.

Soft Budget Constraints

Another major flaw with Stalin’s command economy was how the priority principle ensured the prevalence of soft budget constraints in the Soviet economy. Developed by Hungarian economist János Kornai in 1980, soft budget constraint refers to how, under a command economy, capital is often allocated to enterprises that are inefficient and that would otherwise shut down without government support. In contrast, under a market economy governed by hard budget constraints, firms that failed to remain profitable would be forced to either shut down or restructure, allowing for capital to be reallocated toward more productive uses.

Therefore, soft budget constraints lead to a classic case of moral hazard, whereby firms who know they will be bailed out regardless of their productivity, have little incentive to innovate, cut costs, or improve productivity. As a result, resources that would be best placed in the hands of more efficient enterprises, are instead directed toward failing industries, exacerbating economic inefficiency and ensuring that valuable goods consumers actually want are kept off store shelves (Gregroy & Harrison, 2005: p.743).

Under the Soviet priority principle, soft budget constraints manifested through the repeated diversion of capital away from potentially more efficient uses in consumer goods production toward heavy industries plagued by low productivity and chronic inefficiency. This problem was further entrenched by the use of a material-balance system, which meant that any shortfalls in resources needed by heavy industries would have to be made up by reallocating resources away from low-priority sectors (Gregory, 1990: p.21). Therefore, investment was routinely redirected from industries with high consumer demand to underperforming industries absent of innovation.

Principal-Agent Problem

Economic efficiency was also undermined in the Soviet Union by widespread principal-agent problems that had taken root in the relationship between Gosplan and the industrial ministries, ministries and enterprises, and even factory managers and workers. A principal-agent problem can be defined as a situation whereby the principal (the actor who sets a task) and its agent (the actor expected to execute that task) ‘have different goals and the cost of monitoring the agent is high’ (Gregory, 1990: p.23). In the Soviet context, these problems manifested in a panoply of activities aimed at evading directives, shirking responsibilities, and manipulating production figures.

The reason for this situation was because there was no real incentive for Soviet citizens to either fulfil central plans to their fullest extent or increase economic efficiency through productivity gains or innovation. Although Stalin introduced greater wage differentials in 1931 to motivate the labour force, chronic shortages of consumer goods meant that most wages were left to accumulate in unusable savings accounts (Harrison, 2005: pp.305, 744).

Moreover, because production targets were based not on consumer demand or inter-industry needs, but instead on previous production figures, with planners assuming a constant year-on-year increase in production, there was a perverse incentive to underproduce and resist innovation. The reason for this distortion was that if factories did meet or exceed the plan, they risked even higher targets the following year. Failure to meet these new quotas would then result in severe punishment. Therefore, the fear of this “ratcheting up effect” incentivised managers and workers to deliberately produce under full capacity to create a safety cushion for future targets. And if output was still insufficient, then creative accounting and false reporting were employed to ensure planners were satisfied.

Under this system, improvements in efficiency were dangerous, as major gains in productivity one year could result in your survival being jeopardised the next year, disincentivising innovation and honest reporting. As a result, the archetype of the Soviet self-assuring man was born, spending as much time covering his back and concealing information from his superiors as he did performing his job.

This phenomenon also explains the failure of public mobilisation campaigns intended to increase the productivity of Soviet workers, like the Stakhanovite movement of the 1930s. Inspired by the largely fabricated tale of the muscular and headstrong Comrade Alexei Stakhanov mining 227 tonnes of coal in one shift in 1935, Stalin hoped to ignite a wave of heroic overproduction. But the personal risk that came with overperformance meant that the campaign was largely unsuccessful, for becoming a true Stakhanovite today could result in you becoming a dead Stakhanovite tomorrow. Stalin also abandoned the campaign as it led to increased wage demands from workers, threatening inflation that would wipe out the regime’s stockpile of capital (Gregory & Harrison, 2005: p.734).

Stalin’s regime was not unaware of these issues of false reporting and mounting inefficiency in the Soviet economy, characteristically turning to the solution that the Soviets knew best: coercion. For example, in 1940, the Soviet government criminalised absenteeism, meaning that 20 minutes of unauthorised absence or idleness could result in six months of corrective labour (Gregory & Harrison, 2005: p.736). And you thought your boss was bad. But, of course, it was the creation of the infamous Gulags that signified the coercive nature of the Soviet economy, with an estimated 2.5 million penal labourers in 1953 forced to work in industries like forestry, mining, and construction (Gregory & Harrison, 2005: p.736).

However, pervasive information asymmetries and the astronomical cost of monitoring millions of workers meant that this coercion often became random. Many innocents were punished, the guilty were often left unpunished, and the relationship between true effort and punishment became unpredictable. What’s worse is that Stalin’s regime was aware of these systematic errors, with notorious NKVD chief Nikolai Yezhov famously stating during the Great Terror (Montefiore, 2003: p.194; Gregory & Harrison, 2005: p.739): ‘Better that ten innocent people suffer that one spy get away. When you chop wood, chips fly.’ As a result, workers reasoned they might as well shirk without fear, since their fate was determined less by performance and more on bad luck, further depressing worker productivity (Gregory & Harrison, 2005: pp.739-40).

What’s even more bizarre is that Stalin’s regime actively worsened information asymmetries, making accurate punishment even more difficult by imposing mandatory concealment of information out of fear of some imagined fifth column. For example, from 1930 to 1941, while around 4,000 government decrees were made public, over 28,000 were kept secret, of which over 5,000 were top secret. To make matters even more absurd, many of the rules governing secrecy were themselves kept secret, further crippling the ability of officials to enforce decisions correctly (Gregory & Harrison, 2005: p.726).

While very few mainstream Leftists today seek a return to these disastrous policies of coercion and self-defeating government secrecy, the principal-agent problem highlights a deeper truth about the kinds of socialist societies they strive for. Ultimately, it is harder to motivate someone to work hard for some vague notion of the “greater good” than it is for them to pursue their own personal interests. Only under a market economy can we see the interests of workers seeking a decent wage truly align with the interests of competing industries willing to pay those wages in return for hard work. Leftists today may dream of a world where people willingly sacrifice their hard-earned wealth, flights to Majorca, and meaty burgers for a higher moral cause, but history shows, without personal incentives, people will always sidestep the rules, hide information, and pursue their own personal fulfilment, no matter how tightly they are controlled.

An Empire of Rusting Steel and Rotting Corpses

While the perverse incentives and information asymmetries associated with Stalin’s command economy means that we will never have truly accurate figures on the levels of output in the Soviet Union, there is no doubt that there were substantial increases in production. From the previously agrarian Russian soil, rose a conglomeration of hydroelectric dams, industrial complexes, railways, and canals. But to what end?

While an economy geared toward the inefficient, full-throttle production of heavy industry goods like coal, iron, steel, and oil might win you a war – as it did for the Soviet Union during the Second World War, helped along by substantial American aid – it doesn’t necessarily guarantee you a prosperous and happy society. Britain’s industrialisation during the eighteenth and nineteenth century achieved much of the same impressive transformation, but with considerably less blood being spilt and producing considerably more goods that people actually wanted. Herein lies the deeper conceptual flaw of the Soviet economy: because there was no guarantee that what was produced matched what was in demand, or even usable, much of it amounted to nothing more than a hollow shell of economic development.

The White Sea Canal prevails as a memorial to this perverted system, completed in 1933 at the cost of an estimated 25,000 forced labourers’ lives, it proved too shallow for effective use (Gregory & Harrison, 2005: pp.749-50). Hence, it stands as a fitting reminder of how shallow the Soviet economy truly was, with nothing concealed behind its imposing concreate walls other than an empire of rusting steel and rotting corpses.

Socialists often assume there is more to economic production other than meeting the demands of the population, believing the market can be supressed in pursuit of collectivism and communist utopia. In reality, most people simply want the consumer goods that will raise their standard of living, not ideological glory, and it is market economies that best achieve this most basic of human needs.

In my next article, I will explore how the continuation of Stalin’s command economy, stripped of his brutal coercion, during the late Soviet period, led to an intensifying bond between self-expression and an ever-expanding hunger for consumer goods that ultimately brought about the collapse of the Soviet Union. In the end, the downfall of socialism did not come at the hand of lofty ideals, but from its most formidable foe: the indomitable power of the washing machine.

Aymen Aulaiwi is a DPhil student at Lincoln College, Oxford

Watch his second interview on the IEA podcast here

References

Eagleton, T. (2011). Why Marx was right. Yale University Press.

Fitzpatrick, S. (2022). The shortest history of the Soviet Union. Old Street Publishing Ltd.

Gregory, P. R. (1990). The Stalinist Command Economy. The Annals of the American Academy of Political and Social Science, 507(1), pp.18–25.

Gregory, P., & Harrison, M. (2005). Allocation under dictatorship: research in Stalin’s archives. Journal of Economic Literature, XLIII(3), pp.721–761.

Harrison, M. (2005). The Fundamental Problem of Command: Plan and Compliance in a Partially Centralised Economy. Comparative Economic Studies, 47(2), pp.296–314.

Hayek, F. A. (1945). The use of knowledge in society. The American economic review, 35(4), pp.519–530.

Montefiore, S. (2003). Stalin: the court of the Red Tsar. Weidenfeld & Nicolson.

Roberts, G. (2022). Stalin’s Library: a dictator and his books. Yale University Press.

Sharma, R. (2024). What went wrong with capitalism. Simon & Schuster.