This video is based on the writings of Robert C. Allen who wrote Farm to Factory: A Reinterpretation of the Soviet Industrial Revolution. The video’s purpose is to make understanding Soviet economics and the industrialisation simple to the lay person. Allen carried out extensive research into the Soviet economy. I highly recommend his book to anyone wishing to learn more about the real world application of Marxist economics.

Part 1: The Soviet Economy and its Detractors

Any investigation in the history or economy of a county is made subject to prejudices and production of propaganda. Given the history of the Soviet Union and Western-style capitalism, we should expect nothing less from bourgeois scholars. Such works have been terribly dishonest; some having gone so far as to claim that industrialisation never took place. Others claim that Stalin had never intended for people’s wellbeing to be a focus. They claim he was only out for personal glory and power in the world. Such nonsense can only be seen through the eyes of someone wholly intent upon disregarding facts in favour of prejudice.

There are six primary criticisms levelled at the Soviet Union, of various validity.

1. Soviet growth was not impressive compared to other countries.
2. The claim that the Russian economy was growing and would have been comparable to the west by the 1980s.
3. Increased output was limited to steel, machinery, and military equipment. Living standards grew at abnormal rates and were suppressed in the 1930s.
4. Collectivization of agriculture was a disaster. It squeezed investment out of agriculture which killed a hundred million people – according to some more extreme rightwing scholars.
5. Soviet socialism was irrational because dictators decided where resources were allocated and not the rationality of the market. This supposedly suppressed performance and increased payroll costs. Enterprises were judged by output instead of profits leading to a misallocation of resources.
6. The slowdown of growth in the 1970s showed the ultimate weakness. The claim is that it can handle smokestack industrialism, but not more technologically advanced for a post industrial society. Therefore it collapsed.

Often countries are compared to each other when looking at development. But, what is a fair way to do it with the Soviet Union? How well did the Soviets perform throughout the twentieth century? This is typically done via Gross Domestic Product (GDP) per person. Angus Maddison[i] has published the data pertaining to the fifty-six largest economies dating back to 1820. This data shows the evolution of the world economy. More importantly, it shows Russia’s place within it.

There has been an income divergence. Counties that were rich in 1820 tended to develop more quickly than countries which were poor.[ii] Because of this phenomenon, the gap between the rich and poor countries increased. The data showed that there were two trajectories that a country could take in the twentieth century: either they became an advanced industrial economy, or they became an underdeveloped economy. Which path, depended largely on a country’s starting point. Even though there has been growth almost everywhere, the ones that were rich in 1820 grew the fastest.

It is uncommon, but not unheard of, for countries to switch positions over time. Japan is an example of an underdeveloped country moving into the rich category. In Latin America – Chile, Argentina, and Uruguay have moved in the opposite direction. In the late nineteenth century, they were as rich as the advanced European countries, by virtue of being tied to the world market.  Afterwards, growth slowed and eventually the countries receded into the poor category.

When compared to other countries the Soviet Union grew rapidly. This is particularly true for the 1928-70 period when central planning was in full swing. It continues to seem well enough through the 1928-89 period as well.

GDP per Person around the world, 1820-1989 (1990 U.S. dollars)[iii]
	1820	1870	1900	1913	1928	1940	1950	1970	1989
USSR	751	1023	1218	1488	1370	2144	2874	5569	7078
W. Europe	1292	2110	3092	3704	4267	4901	5123	11080	16925
offshoots	1205	2440	4022	5237	6379	6813	9255	14372	21226
Mediterranean Periphery	1108	1436	1853	2263	2737	2866	2867	8273	13435
Northern Periphery	1000	1561	221	2652	3139	3925	5244	10214	15866
Eastern Europe	748	1041	1345	1694	1947	1997	2145	4338	5916
Latin America     Southern Core	–	–	2443	3439	3975	3923	4683	6710	6566
Latin America rest	723	725	899	1095	1332	1483	1883	3329	4886
China	523	523	652	688	779	778	614	1092	2649
Japan	704	741	1135	1334	1917	2765	1873	9448	17757
Taiwan & S. Korea	–	–	828	909	1174	1548	888	2360	8827
S.E. Asia	–	–	790	977	1197	1183	941	1411	2644
South Asia	531	558	626	661	664	646	589	852	1237
Middle East	–	–	–	759	719	963	1038	1725	2919
Black Africa	–	–	–	440	527	559	537	810	799

“This figure shows the relevant facts. The vertical axis shows the growth rate (the factor by which GDP per head grew from 1928 to 1970), and the horizontal axis shows 1928 income. The Organization for Economic Co-operation and Development (OECD) points lie to the right of the graph in view of their higher 1928 incomes. There is also a downward trend in the OECD points characteristics of income divergence (the poorer OECD countries in 1928 had a higher income growth factor). The trend line is the OECD “catch-up regression.” The non-OECD points are clustered in the lower left of the graph. These countries had low incomes in 1928 and low growth rates to 1970, so they failed to catch up with the leaders.

“The Soviet Union (with a 1928 income of $1370 and a growth factor of 4.1) was the non-OECD country that did the best in [the] figure… Its growth factor was also higher than that of all OECD countries except Japan. Soviet performance exceeded the OECD catch-up regression, which is a more stringent standard since its value is higher for poor countries than for rich. [The figure] shows that the USSR performed exceptionally well over the 1928-70 period if it is classified as a less developed country and also outperforms the average OECD country even allowing for catch-up.”[iv]

When we add the slower years of the 1970s-80s it skews the data tipping it into an unfavourable image of the Soviet Union. Despite this, the overall performance of the Soviet economy 1928-89 was still better than all of the non-OECD countries, with the exception of Taiwan and South Korea. Both of which were propped up by U.S. imperialism negating much the struggle to develop themselves.[v]

Looking at the Soviet Union compared to other countries we see two different experiences. If we subtract the World War Two period, we see that the GDP grew 5 to 6 percent per year from 1928 to 1970. Once in the 70-75 period, the GDP growth declined to 3.7 percent. 1975-80 it was 2.6 percent. Then it finally reached 2.0 percent in the 1980-85 period. This last period had almost no effect on a per capita basis. During this time there was an energy and Third World debt crisis that hurt many countries – but, the Soviet growth decrease was still unusually sharp. What is needed here, is an investigation into how the great growth before 1970 turned into a slowdown during the following 20 years.

Soviet detractors claim that Russia was already on a path to industrialisation before the revolution took place. Such a claim is simply nonsense but is still worth a quick look so as not to leave the claim unanswered.

In order for industrialisation to take place, a series of pre-requisites must be met. Private property must become an entrenched right. The feudal order’s idea of property ownership must be broken up in order for private investment and markets to function properly. Instead of achieving these, the pre-revolution Russian state sought to create substitutions for these prerequisites. By the end of the seventeenth century, Russia was already falling behind the advanced countries of Europe. Increasing agricultural productivity and the creation of world empires was driving extensive urbanisation and manufacturing growth. This was particularly so in England and the Netherlands.

Russia sought to mimic this development without allowing a market-based process of development. instead, Tsar Peter the Great began a state-directed program of importing Western technologies. Hundreds of factories were built, mostly dedicated to military products. While this took place in St. Petersburg, this modernization didn’t impact the structure of the economy which remained overwhelmingly agricultural. Peter the Great also decided to extend serfdom and even made it more rigorous rather than promoting a civil society capable of independent initiative. (In other words, allowing the market to function.)

This created a private sector unable to function on its own. The state was required to conduct promotion and direction.  Eventually, Tsar Alexander II abolished serfdom in 1860.Then in the late nineteenth century, the state promoted the creation of a national railway system and pursued a policy of developing iron, coal, and engineering industries to meet those needs. Because of this, there was some growth, but Allen claims that the groundwork for a rapid capitalist development was not met. If it had not been for the communist revolution and the Five-Year-Plans, Russia would have remained as backwards as much as Latin America or South Asia did.

Part 2: Developmental Problems in the 1920s

While the revolution took power on the 7th of November 1917, the first Five Year Plan did not take place until 1928. From 1918-1920 the Bolsheviks carried out what Lenin called “war communism.” This included the tail end of World War 1 and the civil war which followed after. Once their power was consolidated, the economy was destroyed by years of fighting. What followed after was the New Economic Policy (NEP) from 1921 – 1928.The goal of the NEP was to carry out an economic recovery and to appease the peasants with land reform.

The NEP has socialised production but left agriculture and most trade to be carried out privately. Markets at this point had a significant amount of power. During this time the government was communist, but political debate took on radical forms as party members looked for solutions to economic problems. While the NEP was successful at revitalising the economy, some wondered if it would have been better to keep it, instead of switching to the 5 Year Plans. Would the NEP have been best for industrialisation?

The Bolsheviks carried the slogan “peace, land and bread.” These were the primary desires of the Russian population. These desires were quickly pursued with mixed results.

Firstly, Lenin carried out a nationalisation of all land and gave its use to the peasants. Large landlords had their land seized and distributed to the peasants. A great equalisation was carried out. Large land holdings were broken up, and small holdings had been increased in size.  The peasants had gotten what they had yearned for such a long time: the elimination of nobles and unequal farms.

The hostilities did not end with the Russian withdrawal from World War One via the Brest-Litovsk treaty. War began again that summer as domestic and international enemies of the revolution launched their offenses against the Bolshevik victory.

The most difficult task was the “bread” of the slogan. Economic development proved quite tumultuous as policy was created and hardships appeared. The largest immediate obstacle was the fallout of the civil war which left the Bolshevik power concentrated in the immediate area around Moscow. Because of this, taxes could not be collected. The printing presses resorted to pumping out new money to finance the state – which resulted in hyperinflation. It was the Imperial government who first required the peasants to sell their surpluses, and rationed bread in the cities. The Bolsheviks continued this policy, but also formed a state monopoly on trade. During this difficult time, grain production significantly decreased, requiring troops to commandeer surpluses. When the drought struck the already devastated conditions, the 1921 famine took place that killed several million.

“The urban economy almost disappeared during war communism. Between 1917 and 1920, the output of cigarettes dropped by 78 percent, cotton yarn by 93 percent, pig iron by 96 percent, and horse-driven threshers by 99 percent. The industrial workforce fell from 2.6 million in 1917 to 1.2 million in 1920. In 1926 peasants made up 82 percent of the Russian population as compared to 72 percent in 1913.”[vi]

The Bolshevik government seized control of industry as it was failing. On November 27th, 1917 they handed power over the businesses to the workers’ councils. The railways were managed by the unions until March 1918.

It should be noted that Lenin opposed this move, he opposed labour management because he saw it as incompatible with national planning.  It wasn’t long after that nationalisation became the goal of the Bolsheviks. In November and December 1917 the banks were nationalised into a single People’s Bank.  The Supreme Council of National Economy (VSNKh) was created on the 15th of December the same year to manage state-owned enterprises. Unfortunately, by June 1918, a mere 487 firms had been nationalised, most of which was accomplished by local action.

In the year 1921, the Bolsheviks controlled most of the country but the economy was in ruin. “Grain output was 56 percent below its 1913 level, livestock production was down 73 percent, and industrial production had dropped 70 percent.”[vii] Because of this hardship, Lenin introduced the NEP to stimulate growth and to appease the peasants.

As the NEP took hold policies changed. Instead of requisitioning food, they levied moderate taxes. Factory production was placed on a commercial basis and organised as a profit-maximizing trust. Private trade was legalised and economic exchanges were conducted as market transactions. These measures were successful and returned output to pre-war levels by the late 1920s.

Could the NEP have been kept on permanently? No, because the Bolsheviks had three main goals:

1. Build socialism
2. Industrialization
3. Rapid increase in the standard of living

The construction of socialism was hindered by the very nature of the NEP. While large industry was held by the state, a good deal of trade and small industry were in private hands. This reality created a class of capitalists and merchants – known as Nepmen. This is antithetical to socialism. Agricultural land was owned by pre-capitalist-style communes. The problem of privately owned land was that it had a strong tendency to return to scale. Eventually each village fractured into a few capitalist farmers, and landless labourers. These capitalists were known as Kulaks. This is also antithetical to socialism. These new classes were enemies of socialism.

The goal of industrialization was hindered by peasant agriculture from a technical and economic point of view. During the mid-1920s, midsized farms were mostly self-sufficient and thus least likely to sell food to the cities. Trouble was anticipated if industry boomed causing demand for food to boom. Peasant farms needed transforming into large-scale, socialized food factories.

“…[T]he NEP failed to grasp the advantages that socialism offered a backward country trying to industrialize. NEP industry was state-owned but operated in the capitalist manner. As a result, there were two potential shortcomings. First, in deciding on investments, businesses looked only to their own profits and ignored the advantages their investments created for other firms in the economy. In such a case, socially profitable investments might not be undertaken. Planning could overcome that problem. Second, businesses hired workers only if they generated enough sales to cover their salaries, that is, if the presence of structural unemployment like that in the Soviet Union, output could be increased by hiring unemployed workers with a positive marginal product even if it was less than the wage. State-owned firms could do this, while private firms could not. Abandoning capitalist employment practices, consequently, could increase growth through employment expansion. The NEP was not well adapted to realize either of these possibilities. Both were realized by Stalin’s system of economic organization and proved highly productive.”[viii]

The third goal was to create a rapid increase in the standard of living. The plan was to have socialism increase it by increasing economic growth. This growth would create consumer goods for the public. A socialist society would also ensure that the gains from economic growth would reach the whole population by increasing employment beyond what capitalism was capable of, and by ending exploitation. This was accomplished by ending the profits of nobility and capitalists – which was seen as an illegitimate form of social welfare payment – not a return for performing labour. The workers instead would receive the income. This was opposite to the imperial patterns of growth, where output per worker grew but real wages remained constant.

“Was socialism really necessary to realized these goals? Sometimes, they have been achieved by capitalist economies, notably the OECD countries and, more recently, a few in East Asia. The demand problem can be met by the export of manufactures and by their sale to the farm population. The Depression of the 1930s mean that neither of these markets was buoyant for the USSR: the protectionism of the capitalist countries precluded exports of Soviet manufactures, and the collapse of agricultural prices reduced the potential purchasing power of the countryside. The weak rural demand would have been further hampered by the low labor productivity of Russian agriculture, which meant that disposable income was much less than in economically successful wheat-exporting countries like Canada. Slow growth would have precluded a rapid rise in the standard of living since labor markets would not have been tight. Rapid population growth would have compounded the problem. In theory, capitalist development can achieve rapid growth and rising real wages, and sometimes it has in practice, but the poor growth records of many countries… show that success depends on favourable conjunction of economic and social conditions that has not often been realized. The Soviet growth model sidestepped some of the factors that have prevented successful capitalist development in other times and places.”[ix]

Part 3: Preferences: Planners’ or Consumers’?

In mainstream economic thought, there is a common belief that a planners’ preference (command economy) is inherently anti-living standard because it focuses on the preferences of planners and not those of consumers. A consumer preference model is a standard by which capitalist economies function, a market economy, where what people want is placed as the priority. From this, it is deduced that a consumers’ preference is superior in delivering living standards.

The traditional anti-communist line is that the so-called totalitarian method used by the Soviets was intended to maintain power over economic and social life. Their economic strategy was to produce investment goods and military equipment, rather than consumer goods. Thus in their view, the Soviet Union couldn’t have been trying to raise living standards.

The question remains – did consumption rise or fall in the Soviet Union?

In order for the bourgeoisie to be correct, we must hold onto one primary premise: “…planners (in this case, Stalin and his associates) had an agenda that was different from that of consumers, and that only the market respected the latter.”[x] Despite this claim, there is a significant argument to make that planning can advance consumer objectives in a backwards country, and, therefore, the dichotomy between planners’ and consumers’ preferences may be false. They are not mutually exclusive. There are two important issues to consider.

Firstly, a market economy can become caught up in low equilibria from externalities of investment. Consumer demand may be too weak as there is not enough cash in the pre-industrial economy. Thus it is not profitable to create large-scale factories. With planning, you can build all the factories simultaneously and use the wages of the workers as cash to purchase the products of them all. If left to individual investors, the investment would never happen since each factory would be unprofitable on its own. Planning, on the other hand, can produce a self-sustaining “big push.”

Another important point is the interconnection of different industries. A national railway service wouldn’t be invested in by a capitalist because there is no demand for its use. If there are no customers, there is no profit. No profit means no investment. However, building one would be immensely beneficial to other industries in order to get them running. A national transportation infrastructure is a requisite for many industries to function.  Under these circumstances, having no railroad and no industry is an equilibrium for a capitalist economy. Planning allows for coordination in investment that can produce an equilibrium with industrialisation.

“Secondly, the future trajectory of consumption depends on the course of development and thus on the rate of investment. In a market economy, investment is determined by the “rate of time preference” of potential savers, according to standard theories. While these theories usually abstract from the distribution of income, it is important for the discussion at hand that most saving is done only by the well-to-do. In that case, the preferences of the overwhelming majority are irrelevant. In this respect, the term consumers’ preferences is misleading in that it suggests that everyone – as a consumer – plays an equal role in determining investment. While the society-wide balance of preferences may determine the production of ice cream versus chocolate bars, only a minority chooses between candy and machine tools.  Indeed, the majority might prefer a higher savings rate than the rich were willing to bear, in which case, planning could represent the majority – consumers, in the parlance at hand – more effectively than the market.”[xi]

When we look at the actual history of Soviet development we see that the standard of living rose from 1929 to 1940, as well as since the 1950s. The claim made of totalitarian (planners’) preferences, being unable to produce increasing living standards is absolutely false. The substitution of plan targets and soft budget constraints for profit maximisation proved to produce rapid growth in investment and living standards than would have been accomplished with convention capitalist employment relations.

Part 4: The Fel’dman Model

“G. A. Fel’dman was an economist in Gosplan. In 1928, he published a two-part article in the Gosplan journal Planove Khoziaistvo that developed a mathematical model of capital accumulation. Fel’dman’s model focused on internal sources of investment – exporting wheat to import machinery received scant consideration. Instead, Fel’dman analysed the situation in which growth requires a country to produce its own structures and equipment. The questions were: How could capital be accumulated? Was there a trade-off between rapid accumulation and the standard of living? The surprising answer was that you could have your cake and eat it too: by expanding the investment goods industries, high investment and rising consumption could be achieved together. This insight became the basis of socialist economic development.

“Fel’dman’s model elaborated Marx’s division of the economy into two sectors, consumer goods and producer goods. The former included food and clothing that sustained workers, while the latter included construction and machinery that could either be invested to expand the capital stock or be consumed as housing, hospitals, bicycles, or military equipment. The split of producer goods output between consumption and investment was the main issue explored by the model.

“To examine the implications of that division, Fel’dman specified highly simplified production functions in which output depended only on a sector’s capital stock:

 

where y^p_t is producer goods out at time t, k^p_t is the producer goods capital stock, and the superscript c in equations 2 indicate the corresponding variables for the consumer goods sector.  a and b are the input-output coefficients that relate production to capital.

“The key question was how producer goods output should be divided between consumer and producer goods. Let e be the fraction of producer goods output reinvested in that sector. In that case, investment I in the two sectors is the following.

“The point of the model is to see how different values of e affect the accumulation of capital the evolution of consumption. Output in each sector grows in proportion to its capital, and that evolution is governed by the following equations:

“In these equations, d is the depreciation rate of capital, so (1 – d)k is the amount of capital that survives from one year to the next. Adding investment I_t to that gives the new capital stock.

“Substituting equations 1-4 into 5 and 6 gives equations for the growth of capital stock in terms of earlier values:

“Since output is proportional to the capital stock, the growth of producer goods and consumer goods is also governed by these equations.

“What do they tell us about economic growth? Equation 7 shows that the producer goods at any time depend only on the capital stock in the preceding time period and the fraction of output reinvested in itself. Increasing e, that is, reinvesting more of the output of the producer goods industry in itself, increases the growth rate of the producer goods sector. But what happens to consumption? Do high levels of producer goods output exact a high price in terms of consumption?

“The surprising answer is no, as shown by equation 8. The first term indicates that the capital stock in consumer goods depends on the size of the stock in the preceding period, while the second term indicates that the capital stock in the consumer goods sector also depends on the capital stock in the producer goods sector in the preceding period. The second term creates the possibility of spillover: as the size of the producer goods sector gets larger, it permits a rapid growth in consumption. This is the economists’ rationale for building up heavy industry in the Five Year Plans.

“This figure shows simulations of these equations that illustrate the trade-off between consumption and investment. Parameter values are plausible ones for the Soviet Union, and the simulations extend over thirteen years, so they are suggestive as to what might have happened in the USSR between 1928 and 1941. There was always a trade-off between consumption and investment in the sense that higher values at the end of the thirteen-year period. What is most surprising, however, is that this trade-off does not necessarily imply a fall in consumption. For values of e and up to about one-half, consumption never drops below its initial value.

“The Fel’dman model opens up several intriguing possibilities – that capital can be accumulated entirely from indigenous sources, that the pace of accumulation is governed by the fraction of consumer goods output reinvested in the producer goods sector, and that an accumulation strategy based on an increase in e need not necessarily lower anyone’s standard of living. These ideas were key ones underlying Stalin’s industrial revolution, although their realization was far from perfect.”[xii]

Part 5: The Direction of Economic Activity by Central Plans

The Soviet industrial revolution began on October 1st, 1928 when the first Five Year Plan was initiated. Central planning was unique to the Five Year Plan. Never before had anyone tried to plan a whole economy. In the early 1020s firms were organised into trusts and function on the goal of maximising profits. The Gosplan which eventually directed the economy was created in 1921. The office carried out statically studies and compiled national income statics. By the end of the 1920s, Gosplan was publishing an annual work called Control Figures, which possessed projected future trends and guidelines. However, they did not include detailed plans.

The Five Year Plans were different from the NEP. The NEP gave guidelines, whereas the Five Year Plans directives. The plan was a sketch of growth they desired for the economy. By the 1930s, ministries were translating the plan into practice by setting annual output targets for sectors of the economy and assigning them to individual firms. While productivity, costs, and employment all had targets, output was considered the most important. What firms were given was “material balances”, an output that had to be produced – in order to assure consistency across firms. The goal was to match steel output with steel requirements in the plan. These plans were often hindered by firms unable to reach their targets.

This substitution output targets instead of profit objectives had tremendous implications for the firms. Significantly, it meant the end of cost controls for industry. Because prices no longer reflected scarcity or monopoly, a firm was able to engage in negative profits in order to meet plan targets. The result was a use of banking credits to keep a firm solvent. The soft budget constraints which tried to lower industrial prices to encourage agricultural marketing became a general feature of the Soviet industrial organisation.

Targets and Their Fulfillment: Heavy Industry[xiii] [xiv]
	1927-28	1932-33	1937	1940
Pig iron
Target	–	10.0	16.0	18.6
Result	3.3	6.2	14.5	14.9
Crude petroleum
Target	–	21.7	44.3	39.7
Result	11.7	21.4	28.5	31.1
Cement
Target	–	6271	7500	8308
Result	1849	3478	5454	5675
Electric power
Target	–	22000	38000	56014
Result	5050	13540	36173	48309
Coal
Target	–	75000	152500	188000
Result	35400	64360	127968	165923
Motor vehicles
Target	–	130.0	200.0	303.0
Result	0.7	23.9	199.9	145.4
Machine tools
Target	–	–	40000	54000
Result	2098	19720	36120	44000
Note: The target for 1932-33 is the “maximum goal.”

 

Targets and Their Fulfillment: Light Industry13 14
	1927-28	1932-33	1937	1940
Woolen fabrics
Target	–	270.0	220.0	145.4
Result	96.6	88.7	108.3	119.7
Cotton yarn
Target	–	620.0	611.0	675.0
Result	328.0	355.1	532.9	649.9
Leather shoes
Target	–	145.0	191.0	224.8
Result	103.0	89.9	182.9	189.5
Soap (40 percent fatty acid)
Target	–	–	1000.0	721.0
Result	360.0	357.2	495.0	700.0
Fish catch
Target	–	–	1800.0	1969.0
Result	840.0	1333.0	1609.0	1404.0
Note: The target for 1932-33 is the “maximum goal.”

As time progressed throughout a Five Year Plan, the targets were replaced with “optimal” targets and then by “maximal” targets that were more demanding. Higher and higher targets were set for later plans. These tables report targets and results for some important industries. What is significant to note here is that these targets were rarely met. These targets were placed at unattainable levels – “taut” planning – belies the claim that Soviet planning matched the production and utilisation of materials across the economy. These targets were used as motivational tools instead.

“In the short run the strategy may have worked. Consider the iron and steel industry, which was a priority. In 1927-28, the Soviet Union made 3.3 million tons of pig iron. The first version of the first plan called for 8.0 million tons to be smelted in 1932-33, the optimal version raised that to 10.0 million, and this was raised again in 1932 to 15 million tons. None of these targets was realized – 6.6 million tons were actually made in 1932 – but a doubling of production in little more than four years was no mean achievement. […]”[xv]

The drive to meet these targets had their impacts. Employment soared as more workers were taken on to meet the higher output demands. As they were increased, managers began looking for more inputs to keep up production. More workers helped so long as they had a positive effect on the marginal product, and the soft budgets allowed them to expand employment beyond the point where the marginal product equaled the wage. Strict targets forced firms to raise output, and the soft budgets meant that cost was not an issue.

When we compare these targets we notice something else about the Soviet target system: they were adjusted in the light of the performance of firms in the preceding plan. When output grew and reached the target, a new higher target was set.  If the output failed to reach the target, it was only slightly increased or even lowered. The downside to this was a realisation made by firm managers. If they met their targets, they were going to be given new higher ones in the future. Knowing that this was going to happen, managers began hoarding employment, equipment, and materials to meet the higher targets without difficulty. Doing this lowered productivity (output with respect to inputs), and contradicted the motivation that the targets were supposed to create. This incentive to hoard inputs had serious effects on aggregate performance in the later Soviet period.

Part 6: Capital Accumulation

The plan targets were created to accelerate economic development. While the plans included an increase in consumer consumption, the main focus in the 1930s was on building an industrial society. The accumulation of physical capital – structures and machinery – had to be made the priority. You need a means by which to produce consumer goods. Constant capital and labour produce commodities. This allocation of investment was the key to the industrialisation process of the 1930s. At the same time, human capital was being invested in as well, primarily education and training.

The Soviet Union was left with two means by which the industrial revolution could have even accomplished. One way would have been to export grain and light manufactures in exchange for capital equipment. The second way was to develop heavy industry to expand the capital stock of that sector. The first Five Year Plan in 1928 called for both measures to be utilised. An export of farm products and consumer goods were promoted initially. “Grain exports were increased from 200,000 tons in 1929 to 5 million in 1930 and 1931. However, the collapse in world commodity prices and the protectionism of Germany, Britain, and the United States made export-led growth infeasible.”[xvi]

Investment Allocation, 1929-34 (millions of rubles)[xvii]
	Average per year	Investment percentage
Agriculture	3243	0
Light industry	1252	0
Iron and steel	1854	70
Nonferrous metals	184	18
Machine building	1807	86
Construction materials	60	60
Chemicals	459	23
Wood	212	34
Paper	105	12
Electric power	498	9
Coal	353	16
Petroleum	558	4
Transportation	2969	11
Communications	171	2
Trade	294	0
Education	256	0
Health	172	0
Municipal services	533	0
Housing	357	0
Total	15617	23

This table shows the average distribution of income for the Soviet economy for the years 1929 to 1934. About one-fifth of investment went into agriculture. All remaining was prioritised to heavy industry – 56 percent of investment went to metals, machinery, construction materials, chemicals, and fuels. Only 6 percent was spent on housing and municipal services (this also includes the production of electrical distribution systems) despite the increase in cities. This lack of investment into the cities was a primary factor for the difficulty of city life. However, it was necessary in order to build up the necessary productive forces.

“An input-output table of the Soviet economy was used to allocate capital and labor between investment and consumption, and the fraction of investment in each industry imputable to economy-wide investment is also shown in the table. Investment required machinery, iron and steel, and construction materials (both directly and as inputs into requisite products). In the event, 70 percent of the iron and steel and 86 percent of the machinery were attributed to light industry were used for consumption. …[L]ittle electric power or petroleum was used in the accumulation process. Most of that was consumed as well. Likewise, most transportation involved shipping grain. The upshot was that 23 percent of investment, by this reckoning, went into producer goods and 77 percent into consumer goods despite the favored position of heavy industry in the investment plan.”[xviii]

This directing investment back into the industries that produce investment goods created a fast rate of capital accumulation, as it was predicted by the Fel’dman model. The investment rate rose from 8 percent in 1928 to 14 percent in 1932, but peaked at 17 percent in 1936.

“The investment rate did flag, however, with the approach of World War II. As metal, chemicals, and machinery were allocated to military production instead of further expansion of the capital stock, investment dropped back to 14 percent of the GDP. Soviet growth would have been more impressive had it not been for the war.”[xix]

Part 7:  Human Capital

The focus was not on just industrial capital but human capital was well. Options for education in 1917 were next to none, particularly in the countryside. Even though Russia did contain a few prestigious universities, a census from 1897 showed that only 21 percent of the adult population was literate.[xx] To be fair there was a marginal increase in primary school education just before the First World War, but even then, only 38 percent of adults were literate in 1918.

The Soviets conducted research on the economics of education. Their findings concluded that literate workers had higher incomes than illiterate workers at every age. This same study also demonstrated a high return to education. A procedure was developed to compare the social benefits and cost of increasing the years of schooling. The conclusion was that there was no greater investment to be made in the Soviet Union.

In 1929 the Gosplan called for investment in education to be considered of equal importance to industry. Raising the cultural level of the peasants and workers was considered a matter of extreme importance. This education would serve as a measure for building not only socialism but also job training as well. An industrial working class must have at least a basic level of education. This demand was also made by capitalist nations as well.

Planning called for primary and secondary education to be extended, adult literacy programs were given a high priority. When the 1926 census was done, 51 percent of the adult population could read and write. That number increased to 81 percent in 1939. The largest benefactor was women. In 1897 a man was three times as likely to be literate as a woman. By 1939, the differential had nearly disappeared.[xxi] These gains were not only in literacy, but in primary, secondary, technical, and university education as well.

Part 8: Collectivization of Agriculture

The agricultural revolution of the 1930s was a step take as a result of the marketing crises of the mid-1920s. Unfortunately, it was the least effective of all the Soviet’s modernization plans.

Stalin held the view that the size of a farm determined its propensity towards placing its goods on the market. This view held that extrarural sales decreased from the 1920s due to the breaking up of large landed gentry and Kulak farms after 1917 – and the expansion of medium-sized and self-sufficient peasant farms.  The only solution was the long-term plan to integrate the small and middle peasants into socialised production units, collectivised farms. Doing so would increase the propensity to place their goods on the market. Until this was carried out, the vast majority of marketed grain was coming from the Kulaks. The concentration of the productive forces (agricultural as well as industrial) creates a more efficient and productive output. This was the very basis for the evolution of feudalism into capitalism.

The potential grain surplus was in the hands of the most prosperous peasants. That made them the target of state policy. Stalin declared it that the struggle for socialism required “intensification of the class struggle” against the Kulaks. Starting from December 1927, the “Ural-Siberian” method of grain collection was implemented. This was usually just requisitioning food, but Huges (1996)[xxii] has suggested that the policy was much more subtle. Each village was taxed an amount of grain that was required to be handed over to the state, but the members of the community could decide who handed over how much.  The peasants who had lower than average incomes made the wealthy peasants pay the tax. This method of grain collection managed to combine collecting an agricultural surplus and advancing class struggle.

About a million people were members of collective farms by mid-1929. Many of these collectives were loosely organised with little official structure. By the end of the year, the central committee declared that a collectivization movement was already underway by the people’s own will and that they should support it. A campaign was laughed to facilitate the collectivization, but it was poorly done. The major problem was that there was no official policy on how a collective should function. One of the questions raised by Allen was: “where clothes to be shared as well as horses?”[xxiii]

“‘Excesses” occurred. By March 1930, almost 60 percent of the peasants had been herded in collectives. On 2 March 1930, Stalin published his famous letter “Dizzy with Success,” in which he condemned the zealots for going too far. Thousands of peasant households quit the collectives, and the fraction collectivized dropped below one-quarter by midsummer.[xxiv]“[xxv]

The collectivization process was combined with a class war on the Kulaks. The problem was the resistance to collectivization, such people were labelled “ideological Kulaks.” With the necessity of collectivization, those who opposed to the process were placed into one of three categories:  those sent to labour camps and have their families exiled to Siberia; being deported to remote areas with their families; the final group was allowed to remain but were given the worst land. The first two groups lost their property, but the latter kept items needed for farming.

Within three years most of the cultivators were brought back. In 1933, about two-thirds of the peasants were members of collectives who worked 85% of the land. By this time a standard model of collectivization had been established. Livestock, horses and most of the land had been given to the collective. Peasants were allowed to keep their homes, a cow and some pigs, and a small portion of land on which they could care for the animals and grow their own food. Any food grown on their own plots was allowed to be privately sold in “collective farm markets.”

The collective farms were given quotas for the production of meat and grain which were sold at state stores at a legislated price. Any excess was free to be sold by the peasants on the collective farm market. The net income of the collective was portioned out to the members according to the number of days they had worked. But, not all days were rated equally. Money received from the state accounted for half of the collective’s income, while the other half came from the farmers’ markets.

The problems began when peasant resistance began. They used many tactics including passive means. The wholesale slaughter of livestock was very common, as well as refusing to plant enough seeds to cause food shortages.[xxvi] [xxvii] The effects were devastating: Between 1929-1933 the horse population dropped by 15.3 million (47%), Cattle by 24.7 million (42%), sheep and goats by 69.8 million (65%), and pigs by 9.5 million (49%).[xxviii] This was seen as an act of war by Stalin: “The fact that the shortage was silent and apparently gentle (no blood was spilt) does not change the fact that the honourable cultivators in reality were making a ‘silent’ war against Soviet power. War by starvation…”[xxix] As a result of this act of terror (I call it terror, not Allen) grain production fell in 1931-33. However, the state maintained its delivery quotas. The result was famine in places like Ukraine where grain was the primary focus of the agriculture.

Eventually, the state simply nationalised most of the grain production. There were still many collective farms growing grain, but the ploughing (and then the harvesting) was mechanised. The mechanical equipment was owned by Machine Tractor Stations which were state enterprises, while the collective farms were contracted to cultivate the land.

The mechanisation of farming had significant effects on the family structure. The need for physical labour for growing grain decreased from 20.8 man-days per hectare in the 1920s to 10.6 days in 1937.[xxx] However, this still lagged behind the North American farms which required a quarter of the Soviet levels. The mechanisation of farming freed up labour which eventually moved into the cities to participate in the industrial revolution.

Labour Requirements for a Hectare of Grain (man-days per operation)
	Traditional implements	Modern machinery
1st plowing	2.0	.50
1st harrowing	0.625	.125
2nd plowing	2.0	–
2nd harrowing	0.625	–
Seeding	0.5	.14
3rd harrowing	0.625	–
Harvesting	4.0	.14
Carting	1.0	1.0
Threshing	8.0	.375
Total	19.375	2.28

Even with the information presented there, there are other major facts that contributed to the famine. Most importantly were the terrible weather conditions during certain years. This was most accurately noted by Stephen Wheatcroft:

“A further major factor in the poor harvests of 1931 and 1932 was the weather.  We have shown that the harvest of 1932 was probably harmed by the weather as much as the harvest in the drought year of 1931.

“The fluctuations in the annual level of temperature and rainfall on the territory of the USSR are greater than in major grain-producing areas elsewhere in the world. The weather pattern is highly continental, and is complicated by the frequent but irregular dry winds (sukhovei) which  blow  from  Central  Asia  across  the  Volga  region,  North Caucasus and Ukraine in the growing months of  late spring and early summer. Moreover, the critical insufficiency of humidity makes a large territory particularly susceptible to drought,   resulting in high temperatures and low rainfall. In normal times, changes in the weather are the main cause of the large annual fluctuations in yield per hectare.

“In addition to general drought factors, the weather at the time of the  flowering  of  the  grain  in  late  May  and  early  June  seems  to  be critical, and  in  this  regard  the  hot  weather  in  early  June  1932, followed by high rainfall, appears to have been particularly damaging.”[xxxi]

Part 9: Industrial Revolution

From 1928 to 1940 economic growth accelerated 5.3 percent year. This was accomplished by central planning, raising the rate of investment, and collectivising agriculture. This growth is extremely impressive, even compared to the “East Asian miracle.” However, it developed unequally, the cities faired far better than the countryside.

Machinery was the primary focus of production, otherwise known as producer goods. This concentration focused on the ability to produce, instead of producing consumer goods. This increased the productive forces eleven-fold. However, military equipment increased a factor of 70 during the period 1928 to 1940.

While the focus may have been on producer goods, services also increased three fold during the period 1928-40. A big part of the investment drive was construction, gained a large boost from 1928 to 1937. This however was scaled back when war preparations began.

A good majority of Soviet industry was dedicated to the materials sector: steel, coal, oil, chemicals, cement, and so on. It was even greater than machinery and munitions. This growth was also quite rapid. Ferrous metals were placed in priority. Pig iron grew from 3.3 million tonnes in 1927-28 to 14.9 million in 1940, and steel ingots increased from 4.3 million to 18.3 million.

The drastic increase in pig iron was achieved by building new and rebuilding old blast furnaces. The goal was to copy the most advanced techniques that were being used in the United States. They hired the Freyn Engineering firm of Chicago and the McKee firm of Cleveland, for technical guidance. With their know-how, the Soviets were able to design and produce 22 blast furnaces that were 930 cubic meters in the early 1930s. They next designed a 1200 cubic meter furnace and then a 1300 cubic meter furnace in 1937, only five of them were built. They were comparable to the leading American furnaces of the day.

A fourfold increase in the production of iron and steel was accomplished by rebuilding old mills, and by building entirely new works on “green field” sites. About one-third of the new iron smelting capacity came from the improvement and extension of blast furnaces at Ukrainian works dating back to the nineteenth century.

During the 1930s light industry was also boosted alongside heavy industry. However, the rate of expansion for consumer goods was well behind that of steel and machinery. Unfortunately, performance was not as great as what was planned. This went mostly for the first Five Year Plan, as the comparison of 1932 targets and output indicates.

The slow growth in producer goods during the first Five Year Plan was to be expected. A good reason why was that the machinery needed to produce the goods hadn’t been built yet. First, you have to develop the engineering works, then to make power looms and other stuff which allow the consumer goods industry to produce. Then you need to build the textile mills and factories where the machines will be put into use. To make it simple, five years wasn’t enough time for the Fel’dman strategy to pay off in consumer goods.

Another big problem for consumer goods was the collapse of agriculture. This decimated many of the inputs it required. The most common consumer goods were processed goods (sausage, bread) and textiles (mostly cotton and wool). Their production relied upon the supply of grain, meat and fibre.

“The handicraft sector was the greatest casualty. In 1913, kustar production amounted to 6.5 percent of the Russian economy and remained important in the 1920s. Roughly half of the wool, flax, and sheep hides were turned into textiles and leather goods by handicraft producers.”[xxxii]

Maintaining a wool supply was a problem throughout the 1930s. In 1928, half of it was produced by the peasants themselves and did not enter into the industrial sector. The 65 percent drop in the number of sheep between 1929 and 1933 drastically reduced the wool clip. It grew so bad that even the basic state requirements weren’t met. After 1933 enough sheep were produced to supply enough wool to fabric producers in the late 1930s. This is without adding cotton or other fibre. But, the supply allowed no scope for an increase.

“Cotton manufactures were also dependent on an agricultural raw material – but it was a plant, not an animal – and escaped the output collapse in European Russia. There was some check to growth in the raw cotton supply because imports were cut during the First Five Year Plan, but the irrigation of Uzbekistan yielded a rising supply, and yarn fabrics and knitwear rose accordingly.”[xxxiii]

Part 10: Conclusion

The development of the economy of the Soviet Union was a rocky road to travel down. It was fraught with difficulties and dangers. They didn’t have the benefit of a larger state to help them develop as the United States did with English trade. When compared to other capitalist countries it does fairly well. When you compare it to other countries that were at the same level of development, the Soviet Union does astronomically well. The industrialisation of the country is unrivalled by anything in history. It is only through central planning and control of the economy that this feat was possible.

---

Sources:

[i] Maddison, Angus. Monitoring the World Economy 1820 – 1992. Paris: Development Centre of the OECD, 1995. Print.

[ii] Pritchett, Lant. “Divergence, Big Time.” Journal of Economic Perspectives 11.3 (1997): 3-17. Web.

[iii] Maddison, Angus (1995). Monitoring the World Economy. Paris: OECD

[iv] Allen, Robert C. Farm to Factory: A Reinterpretation of the Soviet Industrial Revolution. Princeton, NJ: Princeton UP, 2003. 6-7. Print.

[v] This is an observation that I have made, not Allen. This statement should not be attributed to him.

[vi] Allen, 2003. pp. 48

[vii] Allen, 2003. pp. 49

[viii] Allen, 2003. pp. 50

[ix] Allen, 2003. pp. 51

[x] Allen, 2003. pp. 52

[xi] Allen, 2003. pp. 53

[xii] Allen, 2003. pp. 54-57

[xiii] Zaleski, Eugéne. (1980). Stalinist Planning for Economic Growth, 1933-1952. Trans. and ed. By

Marie-Christine MacAndrew and John H. Moore. Chapel Hill: University of North Carolina Press. (pp. 524-29).

[xiv] Zaleski, Eugéne. (1971). Planning for Economic Growth in the Soviet Union, 1918-1932. Chapel Hill: University of North Carolina Press. pp. 306-11).

[xv] Allen, 2003. pp. 93

[xvi] Allen, 2003. pp. 95

[xvii] USSR, Tsentalnoe Upravlenie Narodno-khoziaistvennogo Ucheta. Socialist Construction in the USSR. Moscow, 1936. p. 346

[xviii] Allen, 2003. pp. 95-96

[xix] Allen, 2003. pp. 96

[xx] Crisp, Olga (1987). “Labour and Industrialization in Russia.” In Peter Mathias and M.M. Postan, eds. The Cambridge Economic History of Europe, vol. VII, part 2. Cambridge: Cambridge University Press, pp.  389

[xxi] Russian Academy of Sciences (1992). Vsesoiuznai perepis’ naseleniia 1939 goda: osnovnye itogi. Moscow: Nauka Table 8

[xxii] Hughes, James. Stalinism in a Russian Province: A Study of Collectivization and Dekulakization in Siberia. New York: St. Martin’s in Association with the Centre for Russian and East European Studies, U of Birmingham, 1996. Print.

[xxiii] Allen, 2003. pp. 98

[xxiv] Nove, Alec. (1990). An Economic History of the U.S.S.R. London: Penguin Books. pp. 150-66, 408 n. 24

[xxv] Allen, 2003. pp. 99

[xxvi] Fitzpatrick Sheila. (1994) Stalin’s peasants: Resistance & Survival in the Russian Village After Collectivization. New York: Oxford University Press.

[xxvii] Viola, Lynne (1996). Peasant Rebels under Stalin: Collectivization and the Culture of Peasant Resistance. New York: Oxford University Press.

[xxviii] Davies, R.W., Harrison, Mark, and Wheatcroft, S.G. (1994). The Economic Transformation of the Soviet union, 1913-1945. Cambridge: Cambridge university Press. p. 289

[xxix] Nove, 1990, p. 166

[xxx] Johnson, D. Gale, and Kahan, Arcadius (1959). “Soviet Agriculture: Structure and Growth.” U.S. Congress, Joint Economic Committee, Subcommittee on Economic Statics, Papers, Comparisons of the United States and Soviet Economies, 86th Cong. 1st Sess., pt.1, pp. 214-15.

[xxxi] Davies, R. W., and S. G. Wheatcroft. The Years of Hunger: Soviet Agriculture, 1931-1933. New York: Palgrave Macmillan, 2004. Print. p. 439

[xxxii] Allen, 2003. pp. 105

[xxxiii] Allen, 2003. pp. 106