Unit Conclusion

1. It is time to evaluate our initial proposition and revisit our organizational analogy.
   • Using principles of economic analysis and relying on the explanatory power of concepts like opportunity cost, markets, prices, incentives, property rights, and transaction costs, we have shown that weakness in the economic leg of the Soviet “3-legged table” was inherent in the system from the beginning.
   • During the years that the system reached maturity, the late 1970s and 80s, the problems grew and became manifest.
   • The economy was running out of steam and was less and less able to meet the technological and managerial challenges of the modern era.
   • The Chernobyl disaster in 1986 demonstrated the lack of technological quality and control.
   • The Soviet army, believed to be the most powerful in the world, took a serious beating in Afghanistan.
   • President Reagan’s Star Wars challenge made Soviet leadership realize that the economy was not powerful enough to enable it to stay in the race for technological supremacy.
   • The inadequacies of the health care system were inflicting huge costs:
   • there were acute shortages of medical supplies;
   • in 1990, fewer than one-half of draft age men were fit for military duty;
   • illness kept an average of 4,000,000 workers from their jobs each day (as opposed to 287,000 in the US);
   • and infant mortality rates had risen from 22.9 deaths per thousand in 1971 to 33 deaths per thousand in 1989;
   • in rural areas, where one-third of Soviets lived, half the hospitals had no sewer connections, and eighty percent had no hot water.
2. Added to these difficulties was the fact that another leg – the moral-cultural structure of Soviet society – had begun to wobble.
   • The Soviet populace no longer was sustained in its willingness to bear collective opportunity costs by the revolutionary enthusiasm that had marked the 1930s, World War II, and the triumphant years of the Cold War.
   • The level of education of Soviet citizens had increased to the point where people could spot the contradictions of official propaganda.
   • Coupled with this higher level of education was a growing awareness of the lies and atrocities of the Soviet past, and with awareness came a growing rejection of all aspects of the Soviet system.
   • Advanced and increasingly available telecommunications offered access to alternative sources of (worldwide) information and points of view.
3. The economic system experienced decades of increasing dysfunction, but it was only when this weakness was coupled with upheaval in the moral-cultural structures that the political and social upheaval of the late 1980s brought the Soviet system to an end after 70 years.

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Glossary

Capital Goods – Goods used in the production of other goods and services, e.g. buildings, machines, and tools.

Capitalism – Often used to describe market-based economies where prices are set and goods allocated through market interactions of producers and consumers. The right to private property is an essential feature of capitalism.

Centrally-directed economy – An economy in which the basic economic questions (WHAT to produce, HOW to produce it, and FOR WHOM?) are answered by government.

Collectivization (of agriculture) – The practice of organizing production, ownership and work in a group process in which everyone has an equal share.

Command economy – see “centrally directed” economy

Consumer Goods – Goods and services purchased by consumers for their use (as opposed to use in production of other goods and services).

Demand – The relationship between prices and the corresponding quantities of a good or service buyers are willing and able to purchase at any given point in time.

Entrepreneur – One who is willing to risk loss in the attempt to make a profit from reorganizing market resources from low-valued to high valued uses. Entrepreneurs undertake the task of coordinating the employment of land, labor, and capital to produce goods and services. As a result, they claim the residual – profit or loss – and are therefore sometimes referred to as “residual claimants.”

GOSPLAN – The central planning body that set industry goals for the Soviet Union.

Incentives – Rewards or punishments for actions.

Income – Rent, wages, interest, and profit; payment received by the owners of productive resources, including labor.

Innovation – The application of new processes, methods or organization, and technology to production, usually undertaken to reduce costs of production and/or to improve the quality of goods produced.

Investment – Expenditures on capital goods (factories, office buildings, machinery, equipment, inventories, etc.) used to produce other goods and services. The opportunity cost of investment spending is lower consumer spending. For a nation, the opportunity cost of investment spending is lower consumer spending.

Kolkhoz – (plural, kolkhozy) Soviet collective farms.

Market – A network of buyers and sellers exchanging goods and services.

Na levo – The Russian terms for the practice of buying scarce goods and services through privately arranged, illegal exchanges, often with goods stolen from government enterprises. The literal translation is “on the left, ” but the has the connotations of “under the table.”

Opportunity Cost – The most highly valued sacrificed alternative; the value of the “next-best” choice.

Price – The amount of money (or other things) that must be given up to buy a good, service or resource.

Productivity – The measure of output per unit of input. Labor productivity is most frequently reported as output per worker.

Profit – The difference between total revenue and total cost. The residual revenue left after all costs of production and doing business have been paid.

Property rights – The conditions of ownership, including the rights and restrictions regarding use, ownership, and sale.

Residual Claimant – see “Entrepreneur.”

Scarcity – Scarcity means that people cannot obtain as much of something as they want, without making a sacrifice or bearing a cost. Scarcity defines a relationship – between the amount of something we want and the amount that is available.

Supply – The relationship of prices to the quantities of a good or service sellers are willing and able to offer for sale, at any given point in time.

Tolkach – (plural tolkachi) People who used their created personal networks that enabled them to locate items needed by factory managers. These unofficial but necessary procurers often had huge expense accounts that allowed them to bribe and to access the black market in stolen state goods and resources. Although illegal, their activities were largely ignored in face of common recognition that production could not go on without them.

Tragedy of the Commons – Describes the phenomenon of overuse of resources held in common (i.e. by the “public” or by government). The overuse occurs because the failure to adequately define property rights means that no one has an incentive to conserve or maintain the resource and all have an incentive to use the resource before others do.

Transaction Costs – Non-monetary costs such as time and search costs that may not be reflected in the money price of a good or service.

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Short Bibliography of Suggested Reading

Berliner, Joseph S. The Innovation Decision in Soviet Industry. Cambridge, MA: The MIT Press, 1976. chapter 17 – “Strengths, Weaknesses, and Prospects”

Bornstein, M. ed. The Soviet Economy: Continuity and Change. Boulder, Colorado: Westview Press, 1991. chapter 1 – R.W. Davies. “Economic Planning in the USSR”

Boycko, Maxim, Andrei Shleifer and Robert Vishny. Privatizing Russia. Cambridge, MA: The MIT Press, 1995. chapter 2 – “Political Control of Economic Activity”

Desai, Padma, ed. Maarsixm, Central Planning and the Soviet Economy. Cambridge, MA: MIT Press, 1983. chapter 12 – “Economics of Virtuous Haste: A View of Soviet Industrialization and Institutions”

Gregory P., and R. Stuart. Comparative Economic Systems. Boston, MA: Houghton Mifflin, 1980. chapter 12 – “Performance of Economic Systems”

Gregory, P. and R. Stuart. Soviet Economic Structure and Performance. New York: Harper Collins Publishers, 1986. chapter 4 – “The Soviet Industrialization Debate (1924-1928)”

Gros, Daniel and Steinherr, Alfred. Winds of Change, Economic Transition in Central and Easter Europe. London: Longman, 1995.

Hewett, Edward. Reforming the Soviet Economy. Washington D.C.: The Brookings Institute, 1988. chapter 4 – “The Soviet Economic System As It Actually Operates”

Kornai, Janós. The Socialist System – The Political Economy of Communism. Princeton, NJ: Princeton University Press, 1992. chapter 5 – “Property”

Kotkin, Stephen. Steeltown, USSR – Soviet Society in the Gorbachev Era. Berkeley, CA: University of California Press, 1991. chapter 4 – “’Is Life Going to Go on like This Forever?’ Hopes Raised, Then Lowered”

Remnick, David. Lenin’s Tomb – the Last Days of the Soviet Empire. New York: Vintage Books, 1994.

Roberts, Paul Craig and Karen LaFollette. Meltdown – Inside the Soviet Economy. Washington, D.C.: The Cato Institute, 1990.

Smith, Hedrick. The Russians. New York: Quadrangle / The New York Times Book Co., 1976