Centrally Planned Economy In The Former Ussr

Essay, Research Paper

The Centrally Planned Economy in the former Soviet Union


In October of 1917, the world saw Lenin and the Bolsheviks take power in Russia, Lenin did not however have exact economic plans for Russia since Marx never provided a blueprint for a communist state and its economy. Marx saw society progress naturally through various stages of development (i.e. primitive society, slavery, feudalism, capitalism, socialism and eventually communism). Marx essentially provided a critique of capitalism, but socialism was only vaguely defined. According to Marx there was to be the conscious social regulation of production (opposed to the anarchy of a free market), the common ownership of the means of production, distribution according to work (as opposed to need under communism).

Soon after Lenin and the Bolsheviks seized power, they proceeded to take over banks, foreign trade, and industries like iron and steel that were essential to industrialize the state. All land became state owned and the market system was substituted with a centrally planned economy (CPE) or a command economy. The Soviet Union planned on catching up and surpassing capitalist states, since it was the only socialist country in an area where capitalism was very present (that is to say that the White Army was being supplied by capitalist countries during 1918-1919). Stalin was well aware of the need to catch up to capitalists. In 1931, Stalin made a speech where he was quoted as saying: We are fifty or a hundred years behind the advanced countries. We must make good this distance in ten years. Either we do it, or we shall go under

Stalin s goals were to be reached by implementing a planned strategy and managing it within an institutional framework. Stalin believed that it was possible to achieve socialism in one country, even though Marx had stated that socialism could only work if all states were to become socialist, then, according to Marx, could the world move towards communism.

During the 1930 s the state used its allocative powers to devote the historically high figure of around a quarter of national output to investment. The government maintained a minimum of consumption to help maintain political stability and work incentives. Heavy industry received priority. Among heavy industry, top priority went to iron, steel, heavy engineering, mining, electric power generation and armaments. Foreign trade was not a priority but the Soviet Union was still able to import important capital goods that were a necessity to the mass industrialization planned for the future.

Command Planning

A problem that faces all economies in the world is who or what will receive what resources. This is difficult because resources are always limited. In the case of a CPE, the questions of who gets what, where and how much of it, is answered by the state. There is however a more complicated system present. A pyramid can be used to explain this system of how resources are allocated (Figure 1).


Ian Jeffries

State Planning Commission

The State Planning Commission (Gosplan,SPC for the sake of brevity) received instructions about basic economic goals from the Communist Party (CP) and the Politburo had been set. The instructions would then be relayed through the state bureaucracy downwards and information would then flow back up to the Politburo. The purpose was to create a plan that would achieve the Politburos goals. Dobb summarizes the above: Within the limits of directives and targets handed down to them, they had discretion as to what to produce and how much, and were free to enter into contracts with other bodies for sale and delivery of their output and for purchase and supply of various materials, fuels and components as inputs, as also for the employment of staff and personnel.

When the Politburo had its portfolio it would set goals for industries to meet. This system was the cause of much corruption in the Soviet Union. Since the goals would become more detailed as it moved down the pyramid, ministers, chief administers and enterprises would try to bargain for an easier goal. If a goal were reached by one factory for example, its staff would receive bonuses, if a factory would not reach its goals, its managers were in danger of losing their positions and their status in the CP. Since they had been placed there by Nomenklatura, they may very well be banished from the CP for incompetence.

Distribution of Consumer Goods and Rationing

The Russian people did have a choice of consumer goods. However the quality of such goods were often poor and food was often scarce. The state even allowed rationing and queues (lines of waiting) for food. The state did this so that they could distribute scarce food supplies evenly. The 1930 s for example, saw a great period of rationing. The end of the Soviet Union also saw a great period of rationing. In the late 1980 s, coupons were used to distribute meat, milk, butter and sugar among other goods.


Characteristics of the free market were present in how Russians were employed. Like in capitalist states, Russians would essentially look for a job. Through media however, the state would use propaganda to allocate Russians to industries that were in need of manpower. Russian pay was simply divided into two parts; the first being the basic wage that was guaranteed by the state according to industry, skill and region. The second part consisted of bonuses that were given if goals were attained or if the nature of the job was dangerous.

Initially, a basic rate (stavka), was set for a particular branch of industry. The stavka, would determine the wage of the least skilled and therefore the least paid worker. A scale would then be used to determine the wage of more highly skilled workers.

During the period of Stalin however, free market tactics were not the only method of obtaining a powerful labor-force. During collectivization, Stalin introduced the Soviet Union to forced labor camps that were used as a political tool to punish those that did not cooperate with the CP. It also served as a warning to others who might been acting outside of CP regulations.

Industrial Enterprise

Contrary to popular belief, there was actual private enterprise in the Soviet Union; however, these enterprises were extremely restricted in every aspect of their operations. For instance, agriculture and some goods were acceptable but selling goods made by others was not allowed. Employment of someone outside of your immediate family in the production of goods for sale was illegal and heavy direct taxes crippled entrepreneurs.

All these factors made private enterprise the exception and not the rule. Thus, the more common enterprise was the state-owned factory. It operated on the system of Nomenklatura, where all persons in positions of responsibility were appointed by the state or more commonly the CP.


Banking was a monopoly in the Soviet Union. Gosbank, the state bank, unlike banks in capitalist states, had no separation clear separation between the central bank and private commercial banks. Gosbank was responsible for the following functions: it issued cash, had a monopoly of gold and foreign exchange reserves as opposed to capitalist states where a separate bank would deal with foreign payments. It acted as a fiscal agent that collected revenue and distributed current expenditures and had a monopoly of short-term credits that was were used to pay working capital vital to the states plans. It also acted as a monitoring agency over plants and their quotas. Individual citizens used the Savings Bank, where the bank would simply act as a medium where citizens could obtain cash for buying goods, which would then help to fulfill the current state plan.


Although other bodies were allowed to use land, the Soviet Union owned all of it. The collective farm (kolkhoz) was the main producer in the area of agriculture and not the state farm (sovkhoz). During the 1930s under Stalin, collectivization was often bloody and brutal. Specifically in the case of the massacre of the Kolhaks, a bourgeoisie group of farmers who did not want to lose all earned capital to the state.

Due to the resentment of collectivization, peasants devoted so much time to state-allotted, private plots that a minimum of workdays had to be enforced by the state. These private plots provided much needed income in the form of fruits, vegetables and live stock. These goods could then be sold or bartered to other peasants in the community keeping its economy alive. If these goods were not sold, they would then be consumed in the household among family.

Collectivization did provide the rapidly increasing urban workforce with food at great cost to the state. In the short term there was a reduction in agricultural output because of the resentment to collectivization. Peasants even went to such extremes as to slaughter their own livestock on the eve of collectivization. Since the Soviet Union was based on industrialization whose workforce depended on the agricultural industry, agriculture became known as the Achilles Heel of the Russian economy because it was never able to support the workforce.

Agriculture was also subject to state plans and quotas. One of the disadvantages to subjecting agriculture to quotas and planning was that the SPC could never account for changing weather conditions. These conditions often had crippling effects on the workforce that depended on it. Farmers uncooperative attitudes towards the state, unpredictable weather factors and unreasonable quotas set by the SPC, never allowed the agrarian part of economy develop properly, efficiently or usefully.


By 1930, the Soviet Union was still a largely agrarian state despite an industrial boom in the latter part of the Tsarist era. After 1928, Stalin sought to match and surpass capitalist states in industrialization and military power by implementing plans through the centrally planned economy. The CP framework for institutions was highly centralized with free market methods used in distribution of goods and labor. The advantages of the Russian CPE allowed the Soviet Union to catch up to capitalist superpowers of the world while the disadvantages disintegrated the Russian economy and led to the collapse of communism in 1989 marked by the breaking of the Berlin Wall in Germany. By 1991 the Soviet Union had collapsed and most of its former republics including the head of the state, began the slow transition from a CPE to a free-market based economy.


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