Profits from Power: The Soviet Economy as a Mercantilist State


Gary M. anderson is a professor of economics at California State University, Northridge.

Austrian economics has achieved at least one clear and unambiguous victory in the battle of ideas in this century—the Austrian critique of the possibility of socialist calculation handily won the debate in the 1930s and 1940s (see Karen Vanghn’s 1980 article for a recent assessment of this intellectual triumph). Mises’ classic 1920 statement, later supplemented and expanded by F. A. Hayek (1948), Lionel Robbins (1934), and Ludwig von Mises himself (1949, and elsewhere), argued that rational economic calculation under socialism is impossible. Rational allocation of scarce resources requires market exchange in the context of money prices; socialist planners cannot hope to replace the price system with a central planning organization while retaining coordination in the complex structure of production of a modern economy. Mises stated his critique unequivocally:

Without calculation, economic activity is impossible. Since under Socialism economic calculation is impossible, under Socialism there can be no economic activity in our sense of the word. In small and insignificant things rational action might still persist. But, for the most part, it would no longer be possible to speak of rational production. In the absence of criteria of rationality, production could not be consciously economical. (1936, p. 119)

But while there remains little doubt that the Austrians vanquished their socialist opponents on the battlefield of ideas, the fruits of that victory have been few, for a simple reason. Orthodox comparative systems economists have long rejected the Misesian critique as clever but ultimately irrelevant, because it seemed obviously refuted by a historical counter-example—the real-world experience of the Soviet Union, not to mention China, Cuba, and numerous other Soviet-style economies, which, despite major endemic inefficiencies, appear to generate high levels of complex output by way of comprehensive central planning. In other words, the Austrians won the battle but lost the war because “socialist economies” must be possible (regardless of the Austrian critique), demonstrated by the fact that they actually exist.

The intention of the present article is to suggest an alternative analysis, one which is more consistent with the straightforward and uncompromising critique of socialist planning originally propounded by Mises. We will argue that the Soviet Union—and by extension, Soviet-style economies elsewhere—are not examples of socialism but rather modern examples of mercantilism. Such economies are “rent-seeking societies,” in which the government controls, described as “central planning,” in reality provide monopoly profits for a privileged minority at the expense of consumers in general. The ideological claims made by the beneficiaries of such policies may play a significant role in maintaining the stability of the system, but do not necessarily reflect the actual economic motivations of those beneficiaries. In short, Mises was right, whereas the usual account of the “facts” involving the Soviet economy is confused and misleading.

Is the Soviet System a Planned Economy?

In The State and Revolution (1917), Lenin wrote:

The whole of society will have become a single office and a single factory with equality of work and equality of pay . . . . we have a right to say with the fullest confidence that the expropriation of the capitalists will inevitably result in an enormous development of the productive forces of human society. (quoted in Polanyi, 1940, p. 27)

Lenin’s conception of the Soviet-style economy as “one big factory” is generally shared by Western economists and Sovietolo-gists. The Soviet economy is frequently referred to as the “U.S.S.R., Inc.” Robert Campbell, a leading economic analyst of comparative systems, describes the Soviet-style socialist economy as “a kind of supercorporation charged with running the economy under unified management and for a centrally determined purpose.”

The conventional analysis of the functioning of the Soviet economy can be briefly summarized. In the Soviet economy, official prices are not determined by the free play of market forces, but by bureaucratic fiat, and tend to be very inflexible over time. According to the Soviet government, prices are merely a bureaucratic accounting tool in an economy based on comprehensive “quantity adjustment” rather than the price adjustment typical in market economies. Most Western analysts take this assertion at face value. Furthermore, the “U.S.S.R., Inc.” is supposedly insulated from the competitive constraints characteristic of market economies. Input suppliers are assigned to producers, and the planning board, not the consumer, is sovereign. As Svetozar Pejovich describes the system:

The Soviet government allocates resources and assigns productive targets to all industries and firms in the economy. All decisions concerning the level and character of the economy flow from the top leadership through various bureaucratic channels down to productive units. The sum total of these administrative orders is the economic plan. The plan is a law of the land; and individuals who are caught interfering with the plan might be taken to court. (1976, p. 98)

The planning process supposedly works in the following manner. The party leadership sets objectives for the economy (specific levels of military output, consumer goods, etc.). The central planning agency (Gosplan) creates an economic plan designed to achieve these objectives for a five-year period, and assigns plan targets to industries and firms. One of the most pressing problems the planners face is the need to establish “material balances’ ‘—i.e., demonstrate that the plan’s targets are consistent with existing productive capacity and resources. Balances are drawn up for all products; the balance for each input shows its sources and uses. Allocation of inputs to individual enterprises is determined on the basis of material balances and production targets (see ibid., pp. 99-100, for a good summary of this argument).

This is what the Soviet regime says the planning agencies are doing, but there are reasons to doubt that the planning process actually works this way. In fact, there is a recurring debate in the comparative systems literature about whether the Soviet economy is “really” centrally planned. There is considerable evidence that much, if not most, of the supposedly “planned” sector is not planned at all, or at most “planned” after the fact. For example, Alec Nove (1977, p. 110), writes: “[in] practice, enterprises order material and equipment for next year in April-June of the current year, that is, 6-8 months before next year’s plan be comes known.” According to Birman (quoted in Wilhelm, 1980, p. 270): “[it] is correction of the plan during the process of its fulfillment that makes good the mistakes and miscalculations of the planners and averts many disagreeable consequences.” The same author adds in a footnote: “[the] secret behind plan fulfillment by nearly all branches and republics of the annual plan for gross output is, in principle, that at the Very end of the year the plan is changed to expected fulfillment.” The annual plans are apparently amended quite frequently in order to “better fit the conditions of particular enterprises.” According to a sample survey covering 95 enterprises in the Novosibirsk area reported by Pravda on November 12, 1973 (cited by Nove, 1977, p. 103), in an average year these enterprises received a total of 1554 amendments to the annual production plan. As Nove notes, “the non-stability of norms is notorious.” Elsewhere, Nove explains:

[the essential point] is that in most instances the centre does not know just what it is that needs doing, in disaggregated detail, while the management in its situation cannot know what it is that society needs unless the centre informs it. Despite all the talk about reform and direct links, the fact remains that in a basically non-market model the centre must discover what needs doing, and the centre cannot do this in micro-detail. (1977, p. 105; italics in original)

Problems of this sort have caused some comparative systems analysts to insist that the Soviet “centrally planned economy” is not literally centrally planned in a complete sense, but rather that the central planning authorities set a broad agenda for economic production which permits much initiative on the part of management of actual productive units. Thus, Nove (1975, p. 136) argues that while the “centrally planned” economy may not be literally planned in detail from the center, the term is still useful, just as the term “absolute monarchy” is useful and descriptive in reference to the ancien ré-gime, however literally inaccurate. In other words, the term “central planning” is most commonly used among experts on the Soviet economy as basically a figure of speech.[1]

This is clear in discussions of the so-called “ratchet principle.” Briefly stated, this means that the plan issued to any given enterprise from Gosplan (the central planning board) via the relevant ministry will instruct the enterprise to produce at least as much of whatever it produces as it produced last period. The past year’s output becomes a baseline for determining next year’s planned output. There is extensive discussion in the comparative systems literature about the problems associated with this method (e.g., perverse incentives confronting managers; see Berliner 1976, pp. 65-67, and Pejovich 1976, pp. 99-102). A more fundamental point is usually neglected. A method of “planning” which is based on simply directing enterprise managers to maintain output at previous levels is equivalent to planning after the fact, and bears little relationship to the stylized models of central planning offered in many comparative systems textbooks.

So, we are left in a quandary. Mises and Hayek demonstrated that a centrally planned economic system is impossible. Furthermore, the conventional wisdom among students of the modern Soviet economy is that comprehensive central planning—the point at issue in the socialist calculation debate—is not practiced in the Soviet Union (and, by implication, in the numerous nations which have adopted the “Soviet model” in whole or in part). Yet the Soviet economy is alive (if not well), and the Soviet economic model is widespread and popular among dictatorships throughout the world. The remainder of the present article will attempt to articulate an alternative theory of the “socialist” economy which is both consistent with the known facts and with the Misesian critique of the impossibility of central planning.

The Soviet Economy as a Mercantilist System

As we have seen, the Soviet economy is clearly not centrally planned in the strict sense. Even among Western experts in comparative economic systems, the notion of “planning” applied to the Soviet economy is extremely murky. The consensus judgment seems to be that the Soviet economy is characterized by a very high level of government intervention, but that at best only a relatively small portion of the overall economy is centrally planned in any detail. It is unclear how this situation can be economically distinguished from a case where the government in a country with a market economy controls a large “nationalized” sector.

Also, scholars of the Soviet economy widely recognize that “central planning” is, practically speaking, observed mostly in the breach. Nevertheless, it is commonly asserted that virtually the entire Soviet economy is centrally planned (e.g., see Kaiser, 1984, p. 344). Presumably, this means that central planning—whatever it is in practice—is technically applied to the entire economy. But in fact, there is a substantial private sector in the Soviet economy. This is a segment of the economy which is not, even in the loosest sense of the term, “planned.” The comparative systems literature often mentions the importance of private agriculture (on small, privately owned agricultural plots) in overall agricultural output. However, this is only the tip of the iceberg. The “parallel” or “second” economy, comprising economic activities which are illegal or quasi- legal, may be very large. Various estimates of its size range from 10 per cent to 40 per cent of GNP. This is in addition to the legal private economy (e.g., private farm plots) which probably contributes between 10 and 20 per cent of GNP. A recent RAND Corporation report prepared for the Department of Defense, which probably understates the level of activity in the “second economy,” estimates that, on average, 11.5 per cent of total household income in the U.S.S.R. came from private sources. This study also estimates the average share of family expenditures made in the “second economy” to he 18 per cent. One scholar estimates the share of the “second economy” throughout the U.S.S.R. as 25 per cent for alcohol distillation, 80 per cent for fur production, 61 per cent for domestically consumed fish, and (in Moscow) 70 per cent for home repairs and decorations (see O’Hearn, p. 226). The second economy is relatively more important in certain areas of the Soviet Union. For example, in Kazakhstan, an estimated 80 per cent of petrol and lubricants was supplied outside of “official” channels; in Georgia, at least 98 per cent of house repairs and 97 per cent of appliance repairs are supplied by the second economy.

But in an important sense, it would be false to claim that this “private sector” can be sharply distinguished from the “planned sector.” Much of “second economy” activity is based on evasion of legal entry restrictions.

Legal monopolies in the form of entry restrictions are pervasive in the Soviet economy. According to Berliner (1957, p. 408): “The central planning system, with its ministerial or-ganizational structure drawn on industry lines, has tended to erect barriers against invasion. If the same barriers prevail . . . the possibility of invasion would continue to be remote. Producers would be expected to restrict their horizons and not poach on the markets of others.”

Nove (1977, p. 116) elaborates further: “A key factor [in the Soviet economy] . . . is the sellers’ market plus monopoly. In an economy of shortage, the supplier is powerful. He can insist on his own terms . . . [the] monopoly element is provided not merely by the fact that the state owns all of industry, since without state ownership one would still have a competitive situation, but particularly because the customer . . . is not allowed to go elsewhere.”

Legal Controls on Price Competition

The most important restrictions are the legal controls on price competition. This is generally considered the hallmark of a socialist economy: market economies may have very large public sectors, but can only become socialist when they abolish the free market price system.

Of course, according to the conventional wisdom, the central planning authorities use a sort of price system, but one in which all prices are set by the planners. Prices are strictly an accounting tool, and are not designed to reflect relative scarcity of resources. Some economists have described the Soviet economy as not monetary but “documonetary,” in which money serves an accounting function, but cannot actually command resources—documents issued by the central planning authorities are necessary to do so. According to Berliner (1976, pp. 88-89), the producer is forbidden by law from selling a commodity to a purchaser who does not possess an allocation certificate; allocation certificates are issued by the supply planning agencies and are needed for most important purchases.

However, in the Soviet-style economy (as in Western economies during periodic episodes of governmental price control) official prices do not necessarily correspond to effective prices in actual exchange. As was the case in the United States during World War II and in other historical examples of governmental price controls, effective prices (i.e., “black market prices”) appear to be flexible, despite the fixity of official prices.

In economics, monopoly is analytically significant only in those cases where there are associated monopoly rents (profits accruing from a monopoly). But while many comparative systems analysts recognize the existence of extensive monopolistic restrictions in the Soviet economy, they overwhelmingly eschew the next logical step in the analysis: what happens to the monopoly profits we expect to find associated with such restrictions on competition?

The simple answer appears to be that monopoly profits flow to those officials in the fortunate position to transfer resources from consumers to themselves. Simis (1977, p. 149) reports that the deputy director of the supervisory board of the Ministry for the Automobile Industry and his close associates countersigned requisition notes for the supply of vehicle parts at a rate of 1,000 rubles per requisition (i.e., about three months’ official pay for the average Soviet worker); moreover, their regular clients rented a flat in Moscow for the Ministry officials to hold parties and orgies in. In another incident, the deputy director and chief engineer of a construction trust supplying state farms with building materials received between 20,000 and 40,000 rubles from each farm the trust had dealings with, in order to expedite deliveries. In another case, an official in the No-volipetsk Metallurgical Combine took large bribes for many years (which included such items as cases of champagne and a complete kitchen range) for releasing supplies of metal against dispatch notes.

In 1964, a KGB investigation revealed that the entire leadership of the government and Communist Party in Kirghizia, headed by the First Secretary of its Central Committee and the Chairman of its Council of Ministers, had been in the pay of a gang of underworld racketeers for a number of years. The latter allegedly had set up an extensive network of dozens of clandestine factories, collective farms, and planta tions of opium and cannabis, the income from the sale of which was split with the officials. Interestingly, in this case only the underworld gang and one junior deputy minister were eventually brought to trial (ibid., p. 146).

Voslensky (1984, p. 191) reports that in the early seventies, the President of the Supreme Soviet of the Soviet Republic of Azerbaijan sold pardons to convicted felons, and charged 100,000 rubles in cases involving long imprisonment. In the same period, the Azerbaijani Communist Party allegedly sold appointments to various positions in government for large sums: 30,000 rubles for District Public Prosecutor, 50,000 for Chief of the District Militia, 80,000 for manager of a Sovkhoz collective farm, and 200,000 for appointment as First Secretary of the Party District Committee.[2]

Paying the “Price” of Admission

According to Grossman (1977a, pp. 32-33), admission to academic institutions in the Soviet Union is often accomplished by way of bribery. The “price” of admission varies with the quality of the institution, and also varies across republics. The scale of bribes necessary to secure admission to the universities in Moscow and Leningrad varied between 1,000 and 3,000 rubles, but admission to the medical institute in Georgia cost 15,000, and in Azerbaijan, 30,000 rubles.

There seems to be no way of accurately estimating the magnitude and extent of such activity in the entire Soviet system. We recognize that these examples, and many others we could add, must in each individual case be treated cautiously, because they are derived from reports in the official Soviet press. Ostensibly such activities are illegal, and the official press publicizes such examples to deter potential wrong-doers. In reality, a number of observers have noted that high officials accused of corruption normally go unpunished. The individuals whose corruption becomes the subject of articles in Pravda may be only those who have somehow acquired enemies more powerful than themselves. By the same token, stories of corruption reported in the Soviet press may sometimes be entirely concocted by the KGB at the behest of Soviet rulers, and may only represent a glimpse into a secret power-struggle.[3] The examples are not intended as empirical evidence—which may be unobtainable even in principle for obvious reasons—but simply as illustrations of rent-seeking (the pursuit of monopoly profits) that we would predict is probably widespread.

A plethora of similar examples could easily be added.[4] Officials in command of particular entry barriers in the U.S.S.R. are in a position to obtain profits resulting from the exercise of coercive restrictions on competition in the form of bribes, which are sometimes of enormous size. In the Soviet system, entry into competition is technically prohibited, but can be achieved—but only by “paying off” the enforcers of the restrictions. The extensive and elaborate system of “fixed (official) prices” represents opportunities for profits from actual bribery, and also from artificially increased prices creating gains in the form of legal monopoly revenue increases to favored producers. The examples listed above involve monetary bribes, but bribes in the form of transfers of goods and services (and “favors”) are probably more important and more widespread, because they are inherently more difficult to trace. Grossman (1977b, p. 841) argues that simple bribery is relatively uncommon, but regular tribute is normally paid to those in positions of bureaucratic power by those subject to that power, and that this in-kind tribute is easier to conceal.

The system of officially “fixed” prices offers numerous opportunities for blatant profiteering on the part of officials who are assigned to administer the economic controls. The officials in charge of issuing the necessary documents to command resources can potentially gain a significant increase in their income by marketing these documents to the highest bidder. An example of this kind of market evasion of price controls which has received a notable amount of attention in the Western press is the illicit marketing of above-minimal quality medical care to patients by doctors, in the context of ostensibly “free” hospital services.[5]

This system, dominated by the pursuit of monopoly profit on the part of privileged producers and officials (the beneficiaries of the extensive economic controls and regulations), bears little resemblance to the idealized vision of a centrally planned economy (which in any event Mises and Hayek proved to be impossible). Instead, it closely resembles a real-world economic system which has received much attention from historians: the mercantilist economy of France under Louis XIV. Under the mercantilist regime, most production of marketable output was extensively regulated by the central government, and regulations were enforced by paid civil servants called intendants. These regulations were overtly designed to enforce barriers against competitive entry, and the monarchy openly sold regulations as cartel enforcement services. According to Eke-lund and Tollison (1981, p. 88), revenues from the sale of these regulatory entry barriers were the chief source of revenue to the monarchy.

Of course, the regime which imposed this detailed system of controls on the economy in France was the same regime that built the opulent palace of Versailles and maintained by far the largest standing army in Europe. Mercantilism in pre-revolutionary France was established on frankly venal grounds, and was not overlaid with any significant ideological facade. It was simply a means by which the monarch raised revenue.

Mercantilist France and the Modern Soviet Economy

Many scholars argue that this system of extensive and detailed mercantilist controls suffocated the incipient industrial revolution in France (see North and Thomas, 1973). Heckscher argues that the major difference between England and France that helps to explain why the Industrial Revolution took place much earlier in England was that England had a relatively weak and poorly enforced system of mercantile regulations, while those in France were very strong and robust. (Ekelund and Tol-lison, 1981, Chapters 3 and 4, make this argument in much more detail.)

There are a number of important differences between the system of mercantilist regulation in France and the modern Soviet-style economy. There was no central planning bureaucracy, or anything remotely resembling it, in seven-teenth-century France. The Soviet Union employs an army of special troops to seal its borders to potential emigrants, whereas the government of France made no such effort.

The French monarch sold legal monopolies and many positions of regulatory power to the highest bidder. In the Soviet Union, positions of significant regulatory authority and control of legal monopolies ostensibly are assigned by the Communist Party on the basis of loyalty and merit. Managers of enterprises, officials in the Party and the central planning apparatus, as well as almost all other official positions—those which potentially provide access to significant income in the form of bribery and other forms of corruption—are selected from approved lists (nomenklatura) that are drawn up by the Communist Party and the KGB.

We know very little about the process by which the membership in the nomenklatura is determined. Voslensky (1984, p. 76) argues that loyalty to the Communist Party and political reliability are critical factors in the criteria for selection of candidates. It would be very surprising if the Soviet regime did not act to ensure that those in positions of economic power were not threats to the regime. Given the widespread benefits, pecuniary and non-pecu-niary, associated with membership in the no-menklatura which several writers have detailed (ranging from permission to shop in stores carrying high quality goods to actual bribes, or blat), we would predict that potential members would bid competitively for such opportunities. Unfortunately, we have little recourse to informed speculation concerning this process. Non-pecuniary bribery is evidently a common route into the ranks of the nomenklatura, and there is some evidence that membership is increasingly becoming a de facto hereditary privilege, with parents insuring that their children also become members (ibid., pp. 100-102).

In the case of mercantilist France, the “purchase price” of a monopoly restriction or official office would ultimately flow to the monarch; the intendant-enforcers were simply the paid agents of the autocrat. The situation is unlikely to be so simple in the U.S.S.R. It seems unlikely that a successful candidate for man ager of a tractor factory sends an envelope full of cash to the General Secretary of the Communist Party.[6] There are reasons to believe that there may be several competing power centers in the Soviet state (the Soviet regime is sometimes described as a “troika” composed of the Communist Party, the KGB, and the military),which would make the system of Soviet “mercantilism” inherently much more complex than that of pre-revolutionary France. But the basic similarity remains.

The nomenklatura may play an important role in perpetuating the system in the face of massive economic inefficiency generated by the extensive restrictions on market exchange. The nomenklatura functions as a large, powerful, highly organized and cohesive interest group whose members benefit significantly from the present system, which they basically control. The Soviet consumers are greatly harmed, but face extremely high organization costs (e.g., the KGB). The often-reported continuing struggle of the KGB against “dissidents” can be interpreted as the (successful) efforts by the interest group composed of the nomenklatura to prevent the effective organization of consumer interests.

Two Types of “Second Economy” Activity

In this context, it is necessary to distinguish between two types of “second economy” activity. That which represents the exploitation of monopoly positions by the officially appointed holders, or franchisees, is the form in which monopoly profit (or rent) is extracted from consumers. For example, the monopolist shoe producer cannot raise the official price of shoes, but he can extract surpluses from consumers by requiring “extra” unofficial payments, or bribes, from them. The other major form of underground exchange involves the attempts by outsiders illegally to enter into competition with established monopolists, e.g., the private shoe producer who competes with the State shoe factory. This second category also would include cases of agent-principal problems, where the employees of State monopolists divert rents to themselves illicitly (e.g., a clerk at the Univermag department store who restricts the sale of high-quality items to “special” customers who pay him or her a bribe on the side). Both types of activity indicate the degree to which market exchange, without even the pretense of “planning,” characterizes the Soviet economy in practice, even though only the first type is relevant to understanding the purpose of the system from the perspective of the Soviet leadership.

it is widely recognized (cf. Andrle, 1976, Conyngham, 1973, and Hough, 1969) that the Communist Party plays a very active role in the Soviet economic system. The Party maintains a large supervisionary apparatus which oversees the operation of enterprises, and is chiefly responsible for the selection of managers.[7] Andrle (1976, p. 102) explains that Party “industrial instructors” monitor closely, and actually participate in, enterprise decision-making.[8]

What has not been recognized is the high degree of similarity between this set of Party functions and the function of the intendants in the French mercantilist system around the time of Colbert. Any system of monopoly restrictions requires enforcement to prevent illicit competition from dissipating the monopoly rents and rendering the monopoly rights worthless. In mercantilist France, the intendants system was designed to accomplish just that. Intendants were detailed to monitor markets in local areas and sanction illicit competition (see Ekelund and Tollison, 1981, pp. 85-91).

Illicit competition may tend to take another form—official enterprises may begin to compete with one another, improving consumer welfare but at the same time lowering the profits which the state-sponsored cartels can earn in the long run. A system of intendants could help to solve this “problem” as well. A system of industrial inspectors (“snoopers”) may help to prevent firms from undercutting the official cartels by offering lower priced goods, producing more or different goods than assigned by the relevant ministry, and in general behaving competitively.

In fact, this may be the basic function of the “central planning apparatus”—the army of bureaucrats and officials who purportedly administer the economy from the center in excruciating detail. The socialist calculation debate aside, as we saw previously, there is ample evidence that the central planning bureaucracy only “plans” after the fact anyway. However, this suggests an alternative possibility. The central planning bureaucracy may be simply an enormous system designed to coordinate the activities of numerous cartels of producers in the economy. As we have seen, much of theeconomy is organized by the state in the form of producer cartels, and the central administrators of the regime face a peculiar problem: how can the various different cartels be prevented from competing with one another? Even if competition can be effectively controlled among the enterprises within a particular cartel, it might still be possible for various cartels to compete with other cartels by offering competing products and services. The “central planning” system may be only a device designed to detect and control such illicit competitive behavior on the industrial level; perhaps preventing the Metallurgy Cartel from competing with the Plastics Cartel, or the Chemical Cartel from competing with the Textile Cartel. Thus, the vaunted “central planning” bureaucracy may only represent something extremely mundane, albeit economically understandable: the central office of an elaborate system of interconnected industrial cartels in the economy.

Summary and Conclusion

This article has argued that the Soviet-style economic system is in actuality not a “socialist” economy at all, but a highly restricted market in which state intervention is almost completely unrestrained by force of law, constitution, or concern for electoral support. Like the mercantilist system in seventeenth-century France, the Soviet economy is characterized by widespread restrictions on competition designed to provide monopoly rents to a favored few. The name of the game is not “rational economic planning,” but rent- seeking. The alleged “central planning system” appears to function as a monitor and enforcer of compul sory cartel agreements engineered by the state; the “planning” apparatus functions to protect the holders of monopolistic privileges from the competition of outsiders and also to defend and maintain the monopoly rights from encroachment by other monopolists. In this sense only does the “planning system” perform a kind of planning function: it coordinates among different monopolistic enterprises in the sense that it minimizes competitive conflict among them.[9]

Numerous observers of the Soviet system have declared that the ideology of Communism plays no important role today, whether or not it ever did.[10] The argument presented here might seem to imply this—but only in relation to those wielding effective political power in the Soviet regime. Ideological commitment to the goals of Marxian socialism may play an important role in bolstering the control of the regime over the general population, as well as protecting a system of mercantilism, which greatly harms the welfare of consumers, from a rebellion by those consumers. Certainly, the regime invests enormous resources in the production and distribution of domestic propaganda; Heller and Nekrich (1986, p. 656) maintain that “the ideological army”—the bureaucracy devoted to propaganda—“surpasses the army, navy, and air force in number.” Even if the ideology of socialism is not a primary motivating factor behind the existence of the Soviet economy, it undoubtedly plays an important role in maintaining and perpetuating that regime.

However, we need not assume that the present system is organized by those in power based solely on some fervent commitment to socialistic ideals, without regard to the reality of socialist economic performance. The “ruling class” in the Soviet system are the beneficiaries of a system which generates enormous profits for the few in charge by means of massive governmental restrictions on the process of free competition. []


1.   In his recent study of the Soviet economy during the Stalin era, Eugene Zaleski notes that this has been the case since the early 1930S- He writes: “[this] study shows that the existence of. – . a central national plan, coherent and perfect, to be subdivided and implemented at all levels, is only a myth. What actually exists, as in any centrally administered economy, is an endless number of plans. constantly evolving, that are coordinated ex post ‘after they have been put in operation. The unification of these innumerable plans into a single national plan, supposedly coherent, takes place rarely . . . furthurmore, the attempt at unification is only a projection of observed tendencies resulting from extrapolating trends based on natural forces.” (1980, p. 484)

      He goes on to describe the nature of the plans as “changing and often ephemeral” (ibid..),

2.   Willis (1985) explains: “High office is often a passport to riches in the three republics of the Caucasus and the five in Central Asia- Large bribes have been reported given to Party officials to extract important nomenklatura appointments: the job of Party leader in a district committee had been secured by the payment of between 150,000 and 200,000 rubles to a republican Central Committee functionary in Georgia and Azerbaijan. The position has cost 100,000 rubles, and the job of minister for trade, who controls all retail shops, went for 250,000 rubles.” (p. 308)

3.   For example, on December 16, 1986, the Chairman of the Communist Party of the Soviet Republic of Kazakhstan, Dinmuk-hamed Kanaev, was replaced by Gennadi Kolbin following pub-licity concerning Kunaev’s alleged corruption (e.g., private herds of sheep, cattle, and horses on state farms kept for members of the top Kazakhstan leadership, and large sums supposedly taken from state coffers to equip private hunting lodges with saunas, billiard halls and crystal candelabra). This replacement was touted as part of Gorbachev’s “anti-corruption” campaign. However, it is also the case that the unfortunate Kunaev was a friend and follower of the late Leonid Brezhnev, and that the luckier Kolbin is a friend and follower of Mikhail Gorbachev. It seems a reasonable guess that if Kolbin had been Party Chairman and had pursued Kunaev’s interest in cows and billiards, the Gorbachev campaign against “corruption” probably would have looked somewhere else. See Bohlen (1987, p. 1).

4.   Harris (1986, pp• 24-30) lists numerous examples of “socialist graft” (extraction of monopoly rent by those in official positions) in the People’s Republic of China, which are generally similar in nature to the examples from the Soviet Union cited above.

5.   In practice, enterprises in the Soviet economy normally depend on the services of second economy operatives, known as tolkachi (literally, “dealers”) who overcome supply problems by the use of bribery and/or blat (non-pecuniary bribes such as favors, presents, ete.). The tolkach of the enterprise in effect markets its output and purchases the output of other finns “under the table.” Although the magnitude of this activity is impossible to measure precisely, the tolkachi seem to play an extremely important role in the economy. Berliner (1957, p. 224) quotes the head of a food-processing combine he interviewed as declaring of the tolkach that “[he is] irreplaceable. We live with him as if in Christ’s burro.” For discus sions of the tolkaehi and their importance, see Beliner (1957, pp. 220-231; 1976, pp. 73-76), Kaiser (1984), and Nove (1977).

6.   However, it apparently is the case that the top leadership not only retains ultimate authority over the selection of personnel for both governmental and industrial posts (managers, etc.) but sometimes even makes the actual selections. For instance, Stalin is known to have often directly selected relatively low level personnel. See Goldman (1983, p. 22).

7.   The Communist Party excercises control over managerial appointments in a number of ways. Every Communist who changes his job can do so only with the approval of his “raikom” (Party district committee). In the Soviet Union the majority of enterprise managers are members of the Party; it is highly unusual for a manager of any but the smallest enterprises not to be. Every Party organization is responsible for creating a “managerial reserve,” that is, a list of people who ate potentially “suitable” for managerial ca reers; and Party organs have the right of veto over all appointments made to posts listed in the nomenklatura. See Hough (1969, Chapters 1 and 2), and Voslensky (1984, Chapter 3).

8.   Andrle (1976, p. 102) quotes a 1968 Soviet official publication’s description of the activity of industrial “instructors” of the Communist Party: “Preparing reports for the bureau and the plenum, sending tracks to a harvest, organizing city celebrations and improving city amenities, procuring supplies for enterprises – - . and hundreds of other problems have to be dealt with without delay. One plant needs help with the overhaul of a motor because it has no suitable workshop; another needs a big boiler transported, but the necessary cranes and vehicles are in the possession and intensive use of building organizations . . . [etc., etc.]”

9.   This is consistent with Voslensky’s interpretation of the Soviet system. Arguing that the Soviet economy is a “syndicate,” or an “ultramonopoly” created by State coereion, he writes: “The no-menklatura class exercises unlimited sway over the huge syndicate of which the Soviet economy consists. That is the principal feature of the country’s economic organization. Nevertheless, the outside worm goes on believing that its chief characteristic is economic planning.” (1984, pp. 127-128; italics added)

10.   For example, Nove (1977, p. 10) writes: “Probably most analysts would agree that ideology (i.e., Marxism-Leninism) is not a powerful force in the Soviet Union today.”


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December 1988

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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