Russia (the USSR)

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1) A quick description of Russia (the USSR) in the 20th century

a) National income was rising before WWI at a reasonable pace
b) WWI had a bad effect but true collapse came during the civil
war
c) Recovery was slow but the USSR had returned to trend by WWII
d) As in Western Europe recovery after the war was relatively quick
i) Quick productivity growth
ii) A golden age?
e) After 1970, the USSR’s growth slows
f) Perestroika in the late 1980s fails
g) The ending of communism is accompanied by a deep
depression
h) Recovery is based largely on natural resources is underway by
2000
i) Throughout the century population growth is slow be world
standards
2) Russia became an important model for Asia
a) Proved that economic development could occur outside the
West
i) Japan also proves this, but Japan seemed a special case
ii) The USSR advertised that its methods could bring success to
every economy
b) Communism is a Western “heresy”
i) It had the prestige of the West
ii) But also criticized the imperialist West
c) In Asian colonies bourgeois success depended on getting along
with imperialists
i) After independence rich Asian businessmen were thus
somewhat discredited
 ii) It was easy to link capitalism to imperialism
d) The USSR offered a method of overthrowing a ruling class that
had proven successful
i) This method could be used against imperialists
ii) The USSR also offered a short-cut to scale economies
3) Before communism
a) Russia had a traditional class structure
i) At the top
(1) A small aristocracy (1%)
(2) A small clergy (0.5%)
(3) A small officer corps (1.5%)
ii) Below this a growing number of townspeople (12%)
(1) These groups had little political power
(2) Many of the middle-class were outsiders
(a) Old Believers
(b) Jews
(c) Germans
(3) The urban proletariat was quite small
iii) Peasants were 85% of the population
(1) Russian peasants much more traditional than most
Chinese peasants
(2) Peasants were ex-serfs who had only been liberated in the
1860s
(a) They had belonged to masters like American slaves did
(b) But they were less likely to be sold & could disappear
easier
(3) Upon freedom, peasant villages were given communal
land
(a) This had to be gradually purchased
(b) Until 1906 peasants were legally attached to their
villages
(c) In 1906, gained the right to withdraw
(i) A small number gained private land & farmed as a
business
 (ii) But rural entrepreneurship was still quite limited
(4) Agriculture remained poor & backward
iv) Russian classes were subject to different rules & different
taxes
(1) Legal inequality made Russia somewhat similar to the
Ottoman Empire
(2) But income inequality was no worse than in the West
(a) On the one hand, the poor had few rights
(b) On the other hand, the abundance of land made labor
very valuable
b) Industrialization
i) Workers in manufacturing were about 10% of the labor force
(1) Factories were often located in rural areas
(2) They made use of peasant labor
(3) The government may have wanted to keep peasants out
of the cities
ii) Factories were both Russian & foreign owned
(1) Western Europeans often owned the producer goods
factories
(a) These required more capital
(b) They often used foreign technicians
(2) Russian businessmen ran consumer goods factories
(3) Most manufacturing industries depended on tariff
protection
iii) Massive foreign borrowing paid for by wheat exports, etc.
iv) Was Russia catching up or was its growth artificial?
4) Why was there a Marxist Revolution?
a) Marx had believed that revolution would begin in the
developed world
i) Revolution is tied to growing capital intensity
ii) Russian revolutionaries also had believed this
b) The Russo-Japanese War had already brought revolution
i) War led to inflation and strikes
ii) Losing the war brought about mutinies
 iii) Revolution was largely an urban affair
iv) Democratic concessions had ended the Revolution
v) This set a precedent for WWI
c) WWI was the direct cause of the Revolution
i) Casualties & damage were relatively low
ii) But the government really messed up the economy
(1) Price controls on food meant the farmers ate the food
(2) Inflation & shortages of all types plagued the cities
iii) Supplies often did not reach the armies
iv) Patriotism soon began wearing out
v) The first “moderate” revolution tried to:
(1) Fix the economy
(2) Create a new patriotism and win the war
(3) Soldiers began to take control of their units & they chose
not to fight
vi) Communists were the one group that advocated immediate
surrender
(1) They opposed the capitalist war & nationalism generally
(2) They believed they were on the brink of world revolution
vii)The cities offered little resistance when the Communists
decided to take over
d) Communists seemed to be filling a vacuum
i) There was no widely recognized legitimate government to
overthrow
ii) The Communists were weak but held the “center” &
opposition was slow to organize
e) Massive destruction & death are brought by Civil War
i) Aristocrats organize de-mobilized soldiers
ii) Reds, Whites & Greens
iii) 10% of the population dies
iv) How much destruction was due to fighting and how much to
misrule is unclear
5) The creation of economic planning
a) “War Communism”
 i) Was this just an impromptu means of muddling through a
civil war?
ii) Or was this meant as a leap to the ideal communist society?
iii) Policy during the civil war
(1) Nationalize finance, trade, large enterprises & landlord-
held land
(a) As of yet, there is little planning or central direction
(b) Worker committees are supposed to run production
units
(2) Ration consumer goods
(3) Requisition food & labor
(4) Attach workers to their workplaces
(5) Generally move away from the use of money
iv) The civil war is won, but this economic policy is seen as a
failure
b) The New Economic Policy (NEP)
i) Finance, international trade & large enterprise stay
nationalized
ii) Smaller nationalized factories are leased to entrepreneurs
iii) Taxes replace requisition
(1) Villages left to produce food to exchange on the market
(2) Private retail & services
iv) Toward the end of the NEP period, inflation becomes a
problem
(1) The government prints money for its needs
(2) Price controls are used to try to stop the inflation
(a) Cities are at the front of the queue and get cheap
goods
(b) Goods do not reach the rural areas
(c) Farmers keep their crops since there is nothing to
exchange it for
v) An argument develops in the government as to what can be
done
 (1) Looking back, some see giving up the NEP as a tragic
choice
(2) But Marx had promised Communism would lead to
something better than NEP
(3) The Right-Left debate
(a) The Right (losers)
(i) Growth based on agriculture which is Russia’s
comparative advantage
(ii) Support the peasants
(iii) Industry should focus first on food processing
(iv) Agricultural surplus will gradually lead to
industrialization
(v) This plan makes some sense, but it isn’t really
Marxist
(b) The Left (losers)
(i) Immediately work on quickly industrializing
(ii) Focus on heavy large-scale industry
(iii) “Scissors” the peasants to get resources
1. The peasants have refused to supply food and
need to be dealt with
2. The Ukraine can be used as an “internal colony”
3. Cheap food will allow cheap wages & quick
growth in manufacturing
(iv) Marx thought heavy industry would precede
revolution
1. The leftists are trying to get back on the Marxist
track
2. There plan makes no allowance for comparative
advantage
(c) Stalin (winner)
(i) Stalin attacks the left from the right
(ii) Then attacks the right from the left
(iii) He ends up with a stolen leftist program
c) The First Five Year Plan (1928-1932)
i) Scissoring the peasants
(1) This is where much of the resources comes from
(2) Independent farmers can eat their crops if prices are set
too low
(3) Communes are created
(a) They can control how much grain is sent to the city
(b) They allow better political control
(c) They allow scale economies (which prove to work
poorly)
(4) To gain control richer or less cooperative peasants
“kulaks” are exiled
(5) Severe famine follows
(a) About 5 million Ukrainians starve
(b) Genocide? Deliberate punishment?
ii) The creation of the 5-year plan
(1) Basic goals are first established by the central government
(2) Ministries focus on creating industry-level plans
(3) The Central Planning Commission coordinates plans
(a) Material balances are used to see that production
meets needs
(b) Prices, wages & value calculations are not used
iii) The nature of the five-year plan
(1) Plans are always too ambitious
(2) Projects are glued together by informal markets & fixers
(3) Large-scale projects are emphasized
(a) In the first plan two important projects
(i) The White Sea Canal
1. Built using prison labor
2. Poorly designed and not very useful
(ii) Magnitogorsk, the new steel city
1. Built near the Urals to take advantage of
extremely rich ore
2. More successful and still Russia’s biggest steel
producer
 3. Peasant workers, partly directed by U.S. &
German exports
(b) Why so many large scale producer goods projects?
(i) Propaganda value
(ii) Planning is simplified since there are fewer total
projects
(iii) Planned fast growth means many producer
goods needed in the future
(iv) National strength is the goal rather than
consumer welfare
(4) Technology is also emphasized
(a) Lenin: “Communism is Soviet power plus
electrification”
(b) Many technical schools are established
(i) Peasant boys dream of being radio technicians
(ii) Technical magazines & sicence fiction tales
d) How efficient can planning be?
i) Theoretical economics shows accurate plans are possible
with good information
(1) Start with an income distribution & time preference
(2) Estimate prices by calculation or historical data
(3) Command each production unit to minimize cost
(4) Adjust plan as shortages or surpluses appear
ii) Austrian-school economists pointed out the difficulties
(1) Capital goods magnify the problems since production is
layered & intertwined
(2) How does one create proper incentives for managers?
(3) How does one discover new goods & processes without
entrepreneurs?
(4) Can adjustment for shortages & surpluses keep up with
change?
iii) Actual problems encountered
(1) Unusable inventory
 (a) Fulfilling the plan meant producing a certain number
of goods
(b) Whether the goods could be used was someone else’s
problem
(2) Underpricing of necessities which causes constant
shortages
(3) Frequent arbitrary changes to hide costs
(a) Production units always wanted more resources
(b) Planners already knew how many resources a known
product required
(c) Getting more resources required changing the product
(4) Rent & interest costs were never dealt with rationally
(a) Marx used the classical economic labor theory of value
(b) This meant time was not considered a factor of
production
(c) Land was wasted
(5) Lack of services
(a) Marx & Smith both spoke of productive and non-
productive labor
(b) Services were recognized as necessary, but non-
productive
(c) Maximizing production meant minimizing services
(6) Factories cared little about investing for post-plan
production
(7) Land was seldom recycled since this produced nothing
(a) Ring cities were created
(b) Placement of production facilities was often irrational
(8) Siberia was overpopulated
(a) Communists liked Siberia since it was huge and
required technology
(b) It was also safer in times of war
e) The results of Soviet planning
i) These looked pretty impressive to Westerners suffering
through the Depression
 ii) Capital, labor, technology, scale & productivity all increased
until the 1960s
(1) Caveats
(a) This was all catch-up growth based on copying
Western methods
(b) Capital & labor increases were forced savings &
sometimes forced labor
(c) Consumer goods always lagged behind
(2) The key to success was probably secure property rights
(a) Under the Czar, corruption, etc., made large capital
investments risky
(b) Under Stalin, Stalin “owned” everything (and everyone)
(i) He used terror to protect his property
(ii) He was willing to invest heavily in physical & human
capital
iii) Productivity began to fall by 1970
(1) The technology gap was closing which made copying
harder
(2) The “terror” regime was greatly softened leading to more:
(a) Shirking & stealing on the part of workers
(b) Bureaucracy & conservatism on the part of
management
(3) Monopolies decline over the long run due to lack of
learning from competition
(4) The growing burden of empire and the Cold War
iv) Increased investment kept the economy growing for a while
v) By the 1980s, the slow down was being recognized as a crisis
(1) During this period large U.S. corporations were also
having problems
(2) The Soviets never adapt to computers which would seem
key to good planning
6) Collapse & Restoration
a) Gorbachev may have been influenced by China’s new approach
after 1978
b) Glasnost (openness) and Perestroika (restructuring)
i) In some ways, a return to the NEP approach
(1) Markets are allowed
(2) Small private companies can be established
ii) State firms are given more freedom but this works out very
poorly
(1) Soft budget constraints
(a) The government is not willing to let companies fail
(b) State firms seldom have to pay for mistakes
(2) Monopolistic relationships
(a) Under planning, many items are made by only one
company
(b) Also, under planning, producer items often just have
one buyer
(c) There is no competition, only bargaining
(d) Oliver Williamson has shown that merger is the
solution to this problem
(i) But state firms are already seen as too large
iii) The economy continues its decline
c) Yeltsin overthrows the Communists after a left-wing coup fails
i) He introduces shock therapy
(1) Things are done quickly (& sloppily)
(2) The goal is to wipe out Communist power quickly before
it can recover
ii) Prices are largely freed
iii) Privatization through vouchers and other sales
(1) Markets created before property rights established
(2) A crony-capitalist “oligarchy” is created
iv) Tax receipts collapse
(1) Government goes into debt and prints money
(2) Inflation make the newly freed prices soar
v) Government services inefficient since the Communist Party
was half of government
d) Results look very bad in the short run
 i) Not just a fall in GDP but a large rise in deaths
(1) GDP down 40%
(2) Suicides, violent deaths, alcohol poisoning all up
ii) An illegitimate business elite
iii) A wide assortment of mafias running protection rackets
e) In the long-run?
i) By 2000, Russia is recovering based on exploiting natural
resources like oil
ii) Putin has replaced an earlier group of crony capitalists with
KGB cronies
iii) There seems to be a return to state capitalism
(1) State-owned firms use state funds & threats to merge
private businesses
iv) Things may now change due to the fall in natural resource
prices
f) Compared to China
i) Russia is seen as less successful now
ii) But Russia is probably still richer (depending on oil prices)
iii) Russia may also have more income equality