“If a universal mind existed, of the kind that projected itself into the scientific fancy of Laplace – a mind that could register simultaneously all the processes of nature and society, that could measure the dynamics of their motion, that could forecast the results of their inter-reactions – such a mind, of course, could a priori draw up a faultless and exhaustive economic plan. The bureaucracy often imagines that just such a mind is at its disposal; that is why it so easily frees itself from the control of the market and of Soviet democracy.” Thesis statement
The words of Leon Trotsky, said decades before the eventual demise of central planning, highlight the underlying flaw of the planned economic system; lack of information. The central planner’s realized that the information and signaling required for any modern economy could be found more effectively in a market based system and consequentially central planning was abandoned. The systemic failure of central planning due to poor information was most prevalent in Eastern Europe and the USSR, as evidenced by their economy’s productive inefficiencies, allocative inefficiencies and pricing difficulties. This essay will classify the traditional soviet economy and examine the production, allocation and pricing difficulties which caused its end. The Soviet Model
Ericson describes the traditional soviet system as “one of centralized planning, implemented administratively through the issuing of direct commands and extensive, detailed coordinating instructions.” After World War II much of Eastern Europe had adopted the soviet system and had distanced themselves from the Western world, so much so that Winston Churchill had referred to their isolation as an living behind an” iron curtain.” A centrally planned economy relied on government agencies to make economic choices, as opposed to the capitalist economies of the west which relied on the market. Specifically, the traditional soviet economy had distinct characteristics such as a hierachal structure, commitment to maximal resource utilization, formal rationing, price control, lack of liquidity and incentives for meeting plans of superiors.
The practical implementation of this system was relatively simple for such a complex undertaking. At the heart of the economy were the enterprises. These were legal entities, generally engaged in production, distribution and providing services to the citizens. These enterprises would create a tekhpromfinplan for a year’s production, including plans for production, sales, investment, supply, labour, costs and planned profits. In parallel to this, another tekhpromfinplan would be suggested by the governments planning committee who would identify, using statistical analysis, what the enterprise plans ought to be. Both plans would be received by the government ministry who would have the final say on the resource allocation and production forecasts for the enterprise. Prices were also determined by the government ministries. Through the overseeing of production, resource allocation and prices the government could gear the economy towards socially desirable outcomes. In some instances this was the case and central planning succeeded in short term projects.
Central planning’s main strengths was its ability to mobilize resources and focusing on clear, well defined objectives. The soviets took advantage of this in the building of major heavy industrial capacities, post-war reconstructions, military expansion, space exploration and the collectivization of agriculture. However, although successful in the short term, it is arguable whether these endeavors had a long lasting positive effect. Allen (2006) argues that the Soviet Union was only successful as long as it could release labour from agriculture, as in Lewis's model of growth with surplus labour. When that supply dried up around 1970, the USSR failed to...