Socialism and the Centrally Economy: The Command Economy

The Command Economy Although the Soviet economy is changing, over most of its existence it has been characterized as a command economy because resource allocation decisions have been determined largely by the central planning authorities who set production goals. A command economy differs from a market economy in two important ways: 1. In a command economy the state owns productive resources, including natural resources, land, factories, financial institutions, retail stores, and the bulk of the housing stock. Thus, in the Soviet Union, government enterprise and ownership of resources are the rule rather than the exception. An enterprise is the basic productive unit in the Soviet economy, analogous to a business firm in a capitalistic nation. Each enterprise is run by a professional manager, but it must fill state orders for output handed down to it by an official ministry. The government and its many enterprises pay wages to their employees, but freedom of choice on jobs and occupations is not as extensive as in the United States and other democratic nations. Much of the farmland is state owned. However, many large farms are cooperatives in which individual farmers have extensive rights in using land and may choose to set aside land for personal use. Citizens of the Soviet Union own personal property such as cars, furniture, clothing, and tools, but the majority of the population lives in governmentprovided housing. 2. In the command economy, authoritarian methods are used to determine resource use and prices. The Soviet Union has been a centrally planned economy, one in which politically appointed committees plan production by setting target outputs for factory and enterprise managers, and generally manage the economy to achieve political objectives. Gosplan, the central planning board for the Soviet Union, drafts a five-year economic plan detailing production targets, methods of production, labor use, and investment in new plants and other capital projects for the thousands of enterprises run by the government. Each year separate enterprises receive detailed instructions on the way to meet short-run production objectives. The planning authorities of Gosplan, in conjunction with other government agencies, in the past have set prices to achieve their targeted objectives. Restructuring the Soviet Command Economy: Perestroika and the Reform of the 1980s There will be less reliance on planning in the Soviet Union in the 1990s than there has been in the past. On January 1, 1988, about 60 percent of Soviet enterprises were put on a self-financing basis. Managers of these enterprises under the reform decide what to produce and how to produce it. Enterprises that fail to earn a profit (yes, profit!) will be forced to cease operations. Some Soviet workers may therefore face the grim prospect of unemployment if their managers cannot operate at a profit. The restructuring will sharply reduce the role of Gosplan in the Soviet economy. The new system will allow competition among government-run enterprises, and many prices will be set in markets rather than through the central plan. Among the first workers to face unemployment under perestroika are likely to be thousands of Gosplan employees who will be forced to learn new skills! Under the restructuring, the central plan will simply set guidelines on production goals. Individual factories will have to compete to meet the goals. The rights and obligations of state enterprises have been set forth in the Law of State Enterprise of 1987. Individual enterprises now have the right to select their output mixes as their obligation to meet compulsory targets is reduced. They are also allowed to trade goods among themselves to help use resources more efficiently. Enterprises that earn profits under the new rules will be allowed to use those profits to reward managers and workers, and to make investments. Those enterprises that cannot cover their costs will close. There has been strong opposition to perestroika by members of the entrenched bureaucracy, who resent losing their powers of control over the economy. Workers who are likely to lose their jobs have also opposed its implementation. Finally there are widespread fears in the Soviet Union that perestroika will raise prices for consumer goods, especially food, at a more rapid rate than worker income increases. The Law on Cooperatives of 1987 was passed to legalize private and cooperative businesses including restaurants, auto-repair services, taxi services, retail sales, and small scale manufacturing. However, it really legalized many operations that were already in existence in a vast underground economy. However, there were so many restrictions in the law that true capitalistic industry could not develop. For example, only retired people and those who lacked jobs could form cooperative production facilities. Other employees of Soviet enterprises and ministries could only work in these cooperatives in their off-hours. Unfortunately the law also subjected income from cooperatives to very high tax rates, thereby decreasing the incentive to develop these ventures. It also prohibited cooperatives from hiring workers. The Law on Cooperatives was revised in 1988. The new law allowed cooperatives to engage in such activities as banking and foreign trade. It did not limit the size of the cooperatives or their earnings, which could be distributed to their members according to their share of investment and work effort. The 1988 law allowed cooperatives to hire full-time employees and set prices for their products and services, although many limits on the hiring of labor still remain in effect. The law also allowed cooperatives to sell shares and engage in joint ventures with foreign com-panies. In July of 1988, under great political pressure from cooperatives and others who wanted to purchase goods and services produced by these organizations, the Presidium of the Supreme Soviet abolished the law subjecting the income from cooperative ventures from the extremely high taxes that prevailed under the 1987 law. The Law on Cooperatives and its subsequent liberalization marked the beginning of private enterprise in the Soviet Union for the first time since the 1920s. However, as of the early 1990s, the Soviet Union remained a heavily planned economy. Although perestroika has reduced reliance on planning, many observers noted that economic activity remained overadministered and over-regulated with disastrous effects on economic incentives and economic performance. To understand the way the Soviet Union operates today and the sources of its economic problems we must therefore examine the way the planning process worked through the 1980s.