Socialism and the Centrally Economy: Socialism and The Soviet Economic System

Socialism and The Soviet Economic System Marx's ideas spawned revolutionary activity throughout Europe in the late nineteenth century. The threat of revolution and social unrest induced politicians to support social reform. In Germany during the late 1800s the first system of social insurance was enacted with the support of Chancellor Bismarck. Other nations passed similar legislation to use government power to improve working conditions and alleviate poverty. The Union of Soviet Socialist Republics came into existence as the first socialist state with the Bolshevik revolution of 1917. Although Czarist Russia was relatively less industrialized compared to nations such as Great Britain or the United States, industrialization had already begun at the time of the revolution. The gap between per capita income in Czarist Russia and the relatively prosperous states of Western Europe at the time was nowhere near as great as the gap today between less developed countries and the developed nations. One estimate puts per capita income in Russia in 1914 at 22 percent to 40 percent of the richest nations in Western Europe.' The communist leadership of the Soviet Union implemented a system of centrally planned socialism that industrialized the nation. The system functioned without a profit motive and without private ownership of capital and land. Under the socialist system, the Soviet Union was transformed into a major industrial power in the relatively short time between 1917 and 1937. Despite the incredible destruction of human and physical resources that occurred during World War II, the Soviet Union recovered substantially to become the second largest economic power in the post-war era. By the late 1980s, the Soviet economic system began to crumble as growth rates declined and inflation accelerated. Under the leadership of Mikhail Gorbachev, the Soviet Union began a major new program, called perestroika, to restructure its economy. The new plan sought to rely less on central government direction of the economy. By the beginning of the 1990s, however, it was becoming clear that perestroika was not working well. Perhaps as an inevitable result of the transition to free markets, the official consumer goods distribution system began to break down. As of late 1990 Soviet citizens found it almost impossible to find basic consumer goods in the state-run stores where prices were heavily subsidized. Many scholars have begun to reassess the economic performance of the Soviet system. 2 During the era of Stalin's leadership growth was squeezed out of the system by patriotism and an oppressive dictatorial regime. In the post war era the Soviet Union overexploited its wealth of raw materials and fueled growth by export of products such as petroleum. In the late 1990s the Soviet petroleum reserves were severely depleted and the Soviet Union lacked the resources and technology to explore for and develop new reserves. The cumbersome system of central planning was breaking down. As of 1990 there was much dissatisfaction in the Soviet Union with the process of perestroika. Confidence in the ruble deteriorated, and Soviet citizens preferred to sell their services for dollars. Some factions in the nation wanted to move more rapidly to transform the Soviet economy to a free market system. Decrees to change the system were issued regularly. As the 21st century approaches there will be more foreign ownership of Soviet enterprises, more land will be privately owned, prices will be decontrolled, and the state will sell off its ownership of productive resources to private interests. However, the transition from central planning to free markets will be very painful to many workers and consumers who will see their living standards drop in the short run so that the economy can be rebuilt. To understand what is going on today in the Soviet Union, we must first examine how central planning worked (or failed to work) in an economy like the Soviet Union where productive resources are owned by the state.