Why was central planning abandoned in Eastern Europe and the USSR?
“If a universal mind existed, of the kind that projected itself into the scientific fancy of Laplace – a mind that could register simultaneously all the processes of nature and society, that could measure the dynamics of their motion, that could forecast the results of their inter-reactions – such a mind, of course, could a priori draw up a faultless and exhaustive economic plan. The bureaucracy often imagines that just such a mind is at its disposal; that is why it so easily frees itself from the control of the market and of Soviet democracy.”
The words of Leon Trotsky, said decades before the ...view middle of the document...
Specifically, the traditional soviet economy had distinct characteristics such as a hierachal structure, commitment to maximal resource utilization, formal rationing, price control, lack of liquidity and incentives for meeting plans of superiors.
The practical implementation of this system was relatively simple for such a complex undertaking. At the heart of the economy were the enterprises. These were legal entities, generally engaged in production, distribution and providing services to the citizens. These enterprises would create a tekhpromfinplan for a year’s production, including plans for production, sales, investment, supply, labour, costs and planned profits. In parallel to this, another tekhpromfinplan would be suggested by the governments planning committee who would identify, using statistical analysis, what the enterprise plans ought to be. Both plans would be received by the government ministry who would have the final say on the resource allocation and production forecasts for the enterprise. Prices were also determined by the government ministries. Through the overseeing of production, resource allocation and prices the government could gear the economy towards socially desirable outcomes. In some instances this was the case and central planning succeeded in short term projects.
Central planning’s main strengths was its ability to mobilize resources and focusing on clear, well defined objectives. The soviets took advantage of this in the building of major heavy industrial capacities, post-war reconstructions, military expansion, space exploration and the collectivization of agriculture. However, although successful in the short term, it is arguable whether these endeavors had a long lasting positive effect. Allen (2006) argues that the Soviet Union was only successful as long as it could release labour from agriculture, as in Lewis's model of growth with surplus labour. When that supply dried up around 1970, the USSR failed to transform its economy into one where technical change drives growth. Resource allocation was not a problem when the immediate goals were not particularly complex, but in the peacetime economy where basic needs had been largely fulfilled, the negative impact of reduced resource mobilization was exacerbated by resource misallocation. Others have suggested that the soviets only exploited what Gerschenkron (1962) called the “advantages of backwardness”, in other words, growth was as a result of coming from such a poor base. Nevertheless, Soviet economic growth had drastically slowed by the 1970s, and the governments were beginning to realise that they could not hide from the weaknesses of central planning any more.
Productivity is defined as the ratio of output to input for a production situation. Productivity changes can be caused by either movements in the ‘best practice’ production technology, or a change in the level of efficiency. Although all economies struggle to achieve...