Soviet Style Economics Was Insane and Here’s Why

it's the 1920s and almost every major economy is booming [Music] the roaring 20s was a decade defined by its opulence opportunity and hope for the future with the end of the first world war in 1917 the global economy was supercharged and led by american industrial growth which then boasted almost half of the world's total output from 1920 to 1929 the us economy grew by a massive 42 percent spurred on by the widespread adoption of mass production and the introduction of electricity the uk and france rebuilt and maintained their powerful colonial empires and even germany was

starting to see a major economic rebound by 1923 however the economic euphoria came to a screeching halt it was panicked 16 and a half million shares of stock sold in a single day sold hopelessly desperate at any price the market crash of 1929 and subsequent great depression steamed rolled the global economy u.s industrial production plummeted by 47 and unemployment soared to 20 decimating the growth of the prior decade every major economy experienced incredible contractions to their outputs incomes and workforces well except for one [Music] largely cut off from global economic banking and trade as well

as not being subject to demand shocks the soviet union was a single country that didn't just get through the great depression but thrived rather than contracting the soviet economy continued its dramatic economic and industrial boom increasing its total industrial output between 1929 and 1934 by a whopping 50 all while maintaining effectively zero unemployment in light of such a major economic downturn in contrast some western economists praised the soviet communist system with some going as far as to claim its superiority over western capitalism in just a span of 40 years the soviet union went from being

a backwards impoverished agricultural monarchy to being the defeater of fascism the first to launch a satellite and man into orbit and the largest sole proprietor of weapons of mass destruction ever the soviet union catapulted itself onto the world stage is just one of the two remaining superpowers yielding the largest military and second largest economy however as quickly as it arose the soviet union collapsed as a result of its crumbling economy but why how was the once envied soviet economy now in ruins only to have left a bloodied print on human history this is the story

of the soviet economy to truly understand the soviet economy and the path it ultimately took we need to first understand the fundamental forces and conditions that caused it to arise in russia in the first place to do this we have to travel all the way back to the 14th century following the fall of the roman empire the dominant form of european governments was feudalism feudalism was a system in which a king would personally own all the land in the country to maintain control and security the king would then divide up the land and distribute it

to a class of lords in return for the land the lords would then provide military for the king when needed the lords would then make use of their holdings by forcing the vast peasant population to pay for living and working on the land by paying heavy taxes and performing extensive unpaid labor this was called serfdom and the peasants known as serves were tied to the land meaning they were not allowed to move away without the lord's consent this system was designed to exploit the vast lower class and have the small amounts of wealth produced to

trickle upwards to the elites a system that acts in this way is known as an extractive economic system and it is held in place by an extracted of political system the political system in this case was simple the only people with control that changed things in the country were the small group of lords and kings therefore it was nearly impossible for the peasant situation to improve since the elites had a vested interest for things to stay the same and for a long time they did however in the year 1346 in the port city of tana

where the don river meets the black sea in modern-day russia the first known european case of bubonic plague or black death appeared having been spread from china via the silk road the plague quickly swept across europe killing nearly 50 percent of the population anywhere it went the extreme loss of life of the peasant population shook the foundations of the feudal system to its core with a new massive scarcity of labor suddenly the value of peasant labor had skyrocketed and thus the power to bargain faced with a shortage of workers desperate lords across europe started to

try and steal one another's peasants by promising to require no extensive work and or reduce taxes this resulted eventually in a near or in some places total abolishment of unpaid labor significantly increasing peasants living conditions wealth and eventually power to demand further changes by 1351 the english government in a attempt to maintain the power and wealth of the elites instituted a statue that punished peasants with prison time if they moved from their current lord's land this would have the effect of fixing wages and unpaid labor requirements to pre-plague levels not willing to see their newfound

freedoms go away this culminated in the 1381 peasant rebellion in england which saw the rebels taking london eventually the rebellion was put down by the king however there was never another attempt to enforce the statue this happened all over western europe effectively creating a new more inclusive labor market opposite to an extractive economic system an inclusive one does not rely on the desires of the upper class but on the equilibrium of markets therefore wages cannot be artificially lowered but rather workers are paid based on their value to their employer while in the case of western

european peasants after the plague the system was by no means inclusive however it was importantly less extractive than before this small gain in wealth caused a small gain in power to act and organize in the future over time this compounded until when the time was right a broad coalition of workers soldiers businessmen etc could then rise up to make demands or even remake the system to be more inclusive when a coalition is sufficiently broad it makes it so no one single group is able to make a power grab to cement themselves as the new elite

becoming equally as tyrannical as the old ones eventually this led to secure property rights a crucially important foundational element for the industrial revolution which supercharged national economies and living standards for all that lived in them this was the story of economic development in western europe however it contrasted drastically with eastern europe unlike their western counterparts the peasants in the east were more spread out lived in smaller villages and were less organized while their lords controlled larger and more powerful swaths of land in response to the labor scarcity caused by the bubonic plague the eastern lord

snapped up more lands and added to their holdings while also clamping down on the peasant population even more harshly since the eastern peasants were less powerful their rebellions either didn't happen or failed miserably they didn't see any new freedoms afforded to them but rather had even more taken from them this was further exacerbated by the 16th century when western demand for agricultural products like livestock and wheat produced in the east grew rapidly with this increased demand the lord sought in their best interest to place even tighter controls on the peasants demanding more unpaid labor and

levying even more taxes the gap in wealth power and freedoms between the peasants in the west and east grew large this fundamental divide in europe compounded over the centuries while in the west the lower classes were eventually able to overthrow absolute monarchies and replace them with much more inclusive constitutional ones or even republics the eastern kingdom stayed almost exactly the same or even became more extractive first in the british isles then in the u.s and later in western continental europe the industrial revolution began in the mid 18th century spurred on by fair legal systems and

property rights on intellectual property people can now profit off of discovering new inventions and processes without fear of someone robbing them of their ideas this caused an explosion of new patents inventions and systems which dramatically increased the productivities and efficiencies of industries and economies for the first time in history sustained economic growth occurred and the living standards of all increased exponentially by the turn of the 20th century powerful industrial manufacturing bases were established in britain france germany and the united states however the industrial revolution was faced with staunch opposition in the eastern countries that still

maintained absolute monarchies and extractive systems like that of the russian empire in the year 1850 russia comprised one-seventh of the entire earth's landmass stretching from germany all the way to canada yet its total economy was relatively small and its citizens still poor this was not for without good reason russia was still based on the feudal system of the 14th century meaning the king known as azar had near total control over his population and the small nobility class exploited the poor by being in charge of the old traditional industries the king and the elites feared the

creative destruction that was brought on by industrialization creative destruction refers to the process of new inventions or systems that upend old industries and replace them with more efficient and productive ones thereby taking wealth and resources away from the established elite class while also building a more powerful middle class that would be able to challenge the current system therefore to keep control the tsar actively stopped industrialization effectively curtailing economic growth during the 18th 19th and early 20th century as a result the russian empire was an extremely backwards impoverished state which had very little in the way

of freedoms for the population serfdom was finally abolished in the russian empire in 1861 however it was replaced with a system that kept many of the same oppressions with little increase in quality of life by this point russia was woefully behind the others in terms of heavy industry and military before 1853 the entire russian empire had only a single railway this only changed when the decisive defeat of the crimean war showed that their lack of rail was a major security threat against their much more industrialized neighbors by 1914 the russian society outraged from centuries of

oppression under a tyrannical monarchy had been repeatedly revolting unsuccessfully in an attempt to gain the freedoms those in the west had enjoyed coupled with a czar that was particularly incompetent nicholas ii in an embarrassing defeat against the japanese in 1905 the seeds of revolution had been sown and the entire system had grown unstable then on august the 1st 1914 germany because of obligations to defend austria-hungary after its invasion of serbia declared war on russia by 1917 russia was losing badly to the germans its people were starving its economy had collapsed and its ruler nicholas ii

had made some pretty terrible political decisions like placing himself as the commander of the military while leaving his german wife in charge of the country protests erupted in petrograd soldiers began a mutiny and vladimir lenin the exiled head of the communist bolshevik party was smuggled into the country by the germans who had hoped would cause further internal conflict which he did under enormous pressure zhar nicholas ii abdicated the throne which had been held by his family for over 300 years the country quickly became divided between the provisional government held by the less radical revolutionaries and

the much more organized and radical communist bolsheviks eventually the country broke into a bloody and grueling three-year-long civil war by the end russia was in ruins and the communists under the command of lenin had taken and cemented control of the country formally creating the soviet union shortly after the ideology of the communists were based on the ideas of the german philosopher karl marx he believed a constant battle between capitalism and workers would ultimately result in a revolution for which the working class would seize the means of production and build a classless society where private property

would be abolished and everyone would work for the common good the russian revolution which was originally based on these ideas was to replace the old extracted of zaris government with a more equal socialist one however the party that took control the bolsheviks were not a broad coalition of the working and lower class like the western revolutions but rather a small group of highly radicalized and organized marxists therefore there was no built-in mechanism to stop them from becoming tyrannical themselves like there had been in the west the first thing the bolsheviks did was make themselves into

a new class of political elites much the same as the ones they had destroyed in the revolution they disallowed anyone who disagreed with them from joining the party and sought to institute their socialist utopia through force in 1918 during the civil war the first real display of the communist economy was put into place called war communism all industries were nationalized in all economic processes were to be controlled by the state because of the desperate state of the economy the bolshevik red army was unable to get the weapons and food needed to win the war food

and grain was seized from the rural peasants and all industry was allocated toward military manufacturing by 1921 the new economic policy was instituted because war communism had dramatically reduced agricultural output and peasant public opinion the nep from 1921 to 1928 made agriculture and small businesses private again to stabilize food supply the economy began to recover but mostly as a result of rebuilding after complete collapse in 1924 lenin died of a stroke and shortly after stalin took control as head of the communist party in 1928 the first of the five year plans was set into motion

which nationalized all production once again by this point the entire soviet economy was entirely commanded from above meaning that every input and every output from every factory every farm every enterprise every store every price all aspects of the soviet economy was dictated by the government stalin and the innermost party officials in the politburo would decide the general direction of the economy then through a series of government agencies an extremely intricate and detailed plan would be laid out after a series of minor negotiations with managers of the individual farms and factories the five-year plan was put

into law the first major initiative of stalin was to radically grow the heavy industry which included steel and military manufacturing in a desperate attempt to catch up economically to the other european powers stalin deeply feared that another war would come and that being so behind an industrial development the soviet union wouldn't be able to stand a chance in a amazingly accurate and chilling speech given by stalin at the first workers conference in 1931 he stated we are 50 or 100 years behind the advanced countries we must make up this gap in 10 years either we

do this or they will crush us it would be exactly 10 years later when the germans launched the largest land invasion in history into the soviet union the way in which this plan of rapid industrialization was to be carried out was to dramatically tax agriculture and ship massive amounts of food labor and supplies to the factories in the cities in 1928 roughly 85 of the entire soviet population was rural peasants whose backward traditional way of doing things caused farming output to be very unproductive taxation of these small scattered village communes was also notoriously inefficient stalin's

way to deal with these problems was to force all the peasant farmers onto state-run or communal farms which lumped hundreds or thousands together to work for the state this process was known as collectivization and it would directly lead to the deaths of approximately 12 million people almost all the food produced was shipped to the cities to aid in the main goal of industrializing the heavy industries taxation and the redistribution of food became easier however the inefficiencies were further exacerbated by the lack of incentives since farmers output had no bearing on how much they were paid

the agricultural sector continued to be a serious thorn in the soviet economy for the rest of its history and it highlights the first major problem with the soviet economic system that of incentives in a capitalist society you have total freedom to change your job and work anywhere else that will hire you if you work smarter or harder or longer you provide extra benefits to your employer not wanting to risk losing you to another employer they will reward you with increased pay or benefits thus there is a built-in incentive toward doing more of your job or

better in the communist soviet union there was little if any incentive to do so since your wage was almost always locked to a specific rate even when later attempts to provide more incentives were rolled out by the government the extra money workers would receive would be of little use since the soviet economy was dictated from above to keep the population content prices were fixed and kept low output and prices were therefore not correlated with one another like they are in capitalist societies that meant that the need for goods at prices set was much greater than

the actual production of those items this meant that items were almost always out of stock and when they weren't they would quickly sell out this along with the fact that the heavy industry was persistently emphasized more than the consumer goods manufacturing and what you're left with is the inability to make use of any of the extra money afforded to you for doing a better job thus incentives in the soviet union did not function well and per person productivity suffered despite this the economy kept on steaming ahead between the time period of stalin's first five-year plan

in 1928 and the start of world war ii the soviet economy grew by 5.8 per year almost doubling in size during a time in which western economies stagnated this was done by forcing the allocation of people from less productive industries toward more productive ones by utilizing the massive peasant population working in highly inefficient village farms and moving them to highly productive heavy industry and construction massive gains in economic activity were accomplished even if workers themselves were not very productive increased output could be accomplished simply by dramatically increasing inputs how do you make more steel you

just make more steel factories and give each more iron and workers the soviet economy grew rapidly however the quality of that growth was very poor this is shown precisely by the actions of the enterprise managers who are the ones that were actually managing the individual farms and factories when a five-year plan was being created the last step included negotiations between heads of industry and the enterprise managers about how much input was needed for the planned output since the enterprise manager's only concern was to reach the planned output they did not care about being cost effective

and thus always ask for as many inputs as they could get away with one way the soviet planners tried to increase productivity was to demand more output this year than last year with the same amount of inputs the way they incentivized managers to do this was by making managers pay based on meeting the target output and giving a bonus for going over however managers were smart and almost always the actual outputs were either directly above the target or much below this was for one major reason while the managers would receive a bonus for producing more

they were also concerned about next year's pay by producing well over the target this year the planners would just make that output the target for next year making the ability to get next year's pay that much harder so if the target was achievable the manager would stop producing when they reached it or if it was out of reach there was no reason to work for nothing so they produced as little as they could get away with hoping next year's target would be lowered inputs for a factory also included the total number of employees supply chains

were also notoriously unreliable and sporadic this meant that for much of the time there was way too many workers with little to no work to be done however when supplies came the excess labor was needed to pull through quotas therefore enterprise managers would ask for as many employees as possible never wanting to fire any workers and even if they did it was often difficult to do so since jobs were legally guaranteed in the soviet economy this meant that the average factory in the soviet union would have as many as twice the amount of workers as

a comparatively similar one in the united states so while unemployment was effectively zero which is better than any capitalist society then and now it was because of law and inefficiency rather than a byproduct of a more productive system to make matters worse for productivity when given new equipment that would eventually make the factory more productive it would often end up going unused this again was because of a lack of incentive by the enterprise managers to increase productivity the enterprise manager would not profit off of this increased productivity and he would personally risk not reaching target

outputs this year since time would be needed to retrain and integrate the new equipment into the manufacturing line therefore productivity gains were slow and stunted most of these incentive issues stemmed from another key issue that of limited information when planning out in its entirety an economy of an industrialized nation what is needed to run things as efficiently as a market economy is complete and total information for which the soviet planners did not have unproductive and wasteful industries persisted as incentives were unable to be utilized by the planners to increase efficiency the last and arguably most

important failure of the soviet economy was a lack of innovation in the capitalist world ever since property rights were established and maintained there was an immense incentive to create a new invention or more productive manufacturing process because you could patent the idea and make a lot of money again in the soviet union with fixed wages limited range of items to buy and the fear of this in some way or another coming back to harm you they're like general incentives for soviets to innovate innovation is what drives growth in developed economies and so without organic innovation

the soviet union attempted to import innovation by buying advanced machinery to be utilized and to copy this included the purchase of an entire factory when the soviets contracted fiat to build a high-tech people's car factory for them however this cost a lot and the soviets did not like relying on the west for anything especially innovation coupled with a inefficient farming sector which caused the need for mass food importation and the costs piled up quickly luckily the soviet union was blessed with immense natural resources specifically oil so when oil prices skyrocketed in the 1970s they could

offset a lot of this importation cost by just exporting oil however as oil reserves in western russia started to dry up and oil prices returned to normal the importation costs again mounted and the economy stagnated it was also at this point when the soviet union could no longer keep dramatically increasing inputs as most of the population had now been moved from low productive industries to high productive industries which ultimately was the main source of economic growth for the soviet union growth by the late 1970s slowed to just two percent lower than that of the developed

west the only significant gains came from allocating massive amounts of capital toward the military however this was not enough and the gap between the soviet economy and those of nato started to grow once again the growth that kept citizens content about having little freedom started to wane and the massively overweight political system of the soviet union put it on an irreversible track toward economic stagnation and eventually collapse however the seeds of the soviet economic collapse had been planted before the nation even existed unlike the revolutions in western europe and the united states and their slow

march toward greater rights and freedoms the bolsheviks that took control were not a broad coalition and thus they became tyrannical left with unchecked power they did not form new inclusive systems but rather made new extractive ones with themselves at the top by the 1960s when the ability to just dramatically increase inputs for growth had ceased and it was time for the government and economy to change so to allow for innovation and productivity gains the change never happened because those in charge never allowed it to happen just like how the elites of the russian empire resisted

the creative destruction of industrialization so too did the elites of the communist party as they resisted giving up any political or economic power that would have enabled these positive changes this was because they knew doing so would reduce their personal power wealth and potentially even their lives by the time mikhail gorbachev instituted real democratic reforms it was already too late the system was already cracking at the seams because of economic instability and by letting go of some political power the system collapsed in on itself and the soviet union ceased to exist the story of the

soviet union was ultimately one about its economy the unprecedented and rapid growth that stunned the world was ultimately unsustainable and riddled with too many inefficiencies but ultimately the story of the soviet economic system was one that warns against the perils of tyrannical governments that only care about self-preservation the incredible growth of the soviet union early on was not about increasing the living standards of its people but rather to protect those in power therefore the soviet union's collapse was determined before it even became an official country