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Economics Essay Sample: Soviet enterprise managers and central planners

The Soviet Union economy was based on a structure of state ownership as well as administrative planning. Similar to other Communist states forming part of the earlier Warsaw Pact, the Soviet Union faked a centrally planned economy. Since the suspension of the Soviet Union in the year 1991, all 15 former Soviet republics have given up their Soviet style of governing economies. On the basis of a method of state ownership, it was through Gosplan or the State Planning Commission the Soviet, Gosbank or the State Bank and the Gossnab or the State Commission for Materials and Equipment Supply, that the economy was managed. Starting in 1928, the economy was engaged by a string of five-year plans, with a short effort at seven-year planning. For every enterprise it was the planning ministries (also known as the fondoderzhateli) which lay out the mix of economic inputs including labour as well as raw materials, an agenda for completion, along with almost all wholesale prices/retail prices. Industry was since long concerted after the year 1928 on the manufacturing of capital goods with the help of metallurgy, machine manufacture, as well as chemical industry. In the terminology used by the Soviet, the capital goods were called as group A goods, or actually means of production. This prominence was based on the apparent necessity for a very rapid industrialisation along with modernisation of the entire Soviet Union. After the end of Stalin in the year 1953, consumer goods or the so called group B goods started receiving more emphasis (Aslund, 2001).

In the period of StalinIosif, a complicated system of planning activities had developed since the commencement of the first five year plan in the year 1928. Until almost the late 1980s to early 1990s, at the time when economic reforms supported by Soviet leader Mikhail Gorbachev started important changes in the conventional system the allotment of resources was directed by a planning tools instead of through the interplay of market forces. Right from the era of Stalin up till the later years of 1980, the five year plan incorporated short term planning into a much longer timeframe. It described the primary thrust of the country’s economic development as well as specified the methods through which the economy could possibly fulfil the desired aims of the Communist Party. Even though the five year plan was ratified into law, it included a series of guiding principle instead of a set of direct orders. Time periods covered by the five year plans corresponded with those enclosed by the gatherings of the CPSU Party Congress. At every CPSU Congress, the party leadership laid out the targets for the coming five-year plan. Hence, each plan received the approval of the highly authoritative body of Soviet’s leading political institution. The Central Committee of the CPSU and, more particularly, its Politburo, laid out fundamental guidelines for the procedure of planning. The Politburo ascertained the broad direction of the economy though control figures including preliminary plan targets, the chief investment projects, as well as the general economic policies. These guiding principles were given to the Central Committee to the Congress of the CPSU to receive approval there. Post the approval as given by the congress, the list of main concerns for the five year plan was acted upon by the Council of Ministers, which formed the government of the USSR. The Council of Ministers included important industrial ministers, the chairmen of different state committees along with chairmen of agencies having ministerial status. This committee stood at the zenith of the vasteconomic administration. The Council of Ministers detailed on Politburo planned aims and sent them further to Gosplan, which collected data on plan fulfilment (Smith, 1983).

In the dearth of free exchange as well as private enterprise involvement, economic decisions were taken directly from the centre, as part of the political authority of Gosplan and other communist party tools. These political decisions were mostly free of economic considerations. Hence, it can be said that the complete process represented the victory of politics over economics. Historically the entire planning procedure has moved around indices of gross output, with alleged success or failure depending on to what degree the plan has been either under fulfilled or over fulfilled (Turnock, 1997). This actually means how much the different quantitative projections including tonnes of steel or grain to be manufactured have been fulfilled. However, in the context of the Soviet Union’s planned economy this almost unavoidably leads to manufacturing of products of low quality due to two reasons. Firstly, with an aim to deliver the quantity which has been demanded of them from above, managers of the plants and factories resort to lowering the quality standards of the output or tend to fall back on producing from the variety of output products at their discretion, usually those which are simpler to produce the most of, not considering whether their industrial clients actually need these specific goods or not. Secondly, while exchange relations are not independent but imposed from the centre, the recipient of these poor quality or useless goods have no alternative but to accept them, and this leads to even poorer results as chain of production proceeds downwards.

Directly connected to the quantitative nature of the complete planning process is the dearth of innovation, which many believe is one of the most significant weaknesses of the Soviet economy. Opportunity costs that can be effortlessly acknowledged in a free market scenario are likely to be overlooked in the Soviet economy due to many reasons, most significantly, the distance both geographically and hierarchically of the planners from the actual site of manufacturing and the very core of the planning process, whose aims are likely to be set from what has come to be known as the ‘accomplished level’. Alternatively, the central planners, not having any lucid idea of where to lead the economy, choose the most apparent path of blunt economic growth. The output levels that were accomplished in the earlier plan are apparently within the limits of the economy, and with some rise in economic inputs and possibly greater pressure on plant managers, the output levels can be somewhat increased. While this strategy of planning has helped to make the Soviet Union a powerhouse in the manufacturing of items including steel and chemicals, it inexorably fossilizes the manufacturing process and hampers technological progress (Kornai, 1992). There was no innovation or technological advancement as the managers taking care of these facilities were interested primarily in executing planed targets for the present planning period. Even if there was a possibility of any innovation leading to rise in production, the inherent risk of time gap while the technology was being mastered, and resultant disturbance to manufacturing schedules, would militate against any such move towards advancement.

When Soviet producers tried to expand some industries, so that a large amount of new goods and more refined forms of old ones started to be manufactured, the steep rise in demands on management started too great pose a burden for the slow moving bureaucratic hierarchy. The move away from industries which were based on economies of scale towards ones based on innovation as well as flexibility could be expected to have exactly such results and the only startling thing is that they were not predicted in advance. It is also fascinating to note that the technology imports that were believed to outwit the anti-innovative bias of Soviet were of no help here. Conversely, the new and greater quality standards of goods manufactured under foreign licences put an extra load on domestic provider of inputs for these goods. They also needed extra imports, creating additional commands/reports and blocking information channels even more.

It can thus be seen how the state created pressure on the internal economy in order to make the economy grow quickly to support its military goals in as less a time frame as possible. This association between military dealings and economic growth was the reason behind the sporadic nature of economic development seen in Soviet economic history. When the military requirements of the Soviet state were demanding, the economy was forced into hasty growth. When a level of power parity was attained, the requirement for additional quick growth subsided, and this along with the leader related with the growth policy exiting from the scene, caused the state eliminating its pressure for growth. As so much growth was condensed into such short periods, the load of sacrifice tolerated by the people living in Soviet during those years was huge. To exact this whole sacrifice, enormously oppressive ways as well as institutions were used. The augment of pressure along with the exaction of sacrifice were many a times so extreme that they caused the exhaustion of the interior population; as a result, a period of fast growth was followed by time of almost no growth.

The bureaucratisation of the whole economy under central planning increased the burden of information on decision makers, escalating the utilisation of routines to a very large scale. Such a bureaucratized atmosphere is not favourable for innovation paving the way for technical change, in fact as seen above, it principally inhibits organizational innovation. In these circumstances, the designers of the Soviet economic system should actually have introduced a managerial incentive system that helped to counteract the bureaucratic hurdles to innovation. Instead they developed an incentive system that further added to these barriers. The foundation of the Soviet structure of central planning was the creation by planners of mandatory production targets for Soviet organisations, and the disbursal of monetary bonuses to managers for the fulfilment of these laid out targets. There was also demotion from managerial position for inability to meet the targets. Hence, the demand for an organisation’s goods was not laid out directly by its consumers but rather by disinterested central planners. Both managerial rewards as well as punishments were a function of performance relative to targets, and were not directly impacted by competition from other manufacturers of similar products (Gros & Steinherr, 2004).

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