Planning and its complexities

Informational Monument to the Five Year Plan

The system of planning in the Soviet Union was unique in both its scope and complexity  and it would be no exaggeration to call it a grand experiment, one which has given us an entirely unusual data point in the space of economic systems.

It was a system which was born in great part by a blind stumbling as much as conscious direction. It lurched forward in starts and fits and not as the unfolding of a single process.

The Bolsheviks came late to the realisation of the difficulty of changing the fundamental economics of a society. It was driven by a number of different confluent factors each causing confusion amongst the theorists of the party as to which way to proceed.

A major factor was the misfortune to have found themselves in a revolutionary situation in one of the most backward countries of Europe, one which was not transitioning, as Marx had envisioned, from a developed capitalist society, but which had barely ventured one toe into the waters of industrial production under the tsar.

However, even the most committed stagists, such as Martov found it impossible to ignore the fact of the total disorganisation of the state, first the aristocratic state, in the form of the Tsarist regime, then later in the bourgeois state in the form of the Provisional government which turned out to be as incompetent and lacking support as the Tsarist regime itself. Left with the reality of a power vacuum it would have been irresponsible to simply do nothing. However, inheriting the state at this point meant inheriting a ship headed for disaster. Not only was it a state which was still at war, the backwards agrarian nature of the economy meant that industrialisation was going to be a very difficult task regardless of approach and even in the best of circumstances, which war, obviously, never is.

The second factor was the inheritance of the social democratic theories regarding socialisation which focused a great deal of theory on the nationalisation of finance and industry. In 1917 the Bolsheviks had arranged to make a transfer of the “commanding heights of industry” to the state. The primary model of socialisation followed on from theorists in the Social Democratic Party (SPD) of Germany. Hilferding and Kautsky of the SPD and other socialist theorists at the time that saw the task as one of transferring the bulk of production to the state for administration.

The Bolsheviks were quite willing to be pragmatic on the method and did not foresee an immediate and total takeover of the economy (and indeed this was not countenanced by Kautsky or Hilferding). The expropriation of industry was to be focused on the largest heavy industry primarily. The Bolsheviks even planned to issue state bonds which could be used to give some compensation to directors of these industries to encourage them in assisting the transfer to the state ¹.

It was not simply in industry where this go slowly approach was theoretically evident. Lenin had also written about the seizure of banking industry. The programme was to be implemented in three stages, the first being merely supervision of payments, ensuring that banks did not make funds available to counter-revolutionaries and to stop capital flight. The second measures would be to insist on access to credit to state enterprises. Only after a period would the banks be fully taken into state administration, once suitably sympathetic and competent bankers could be identified.

In terms of agriculture again, the transitional measures proposed involved going via capitalist development in the countryside via individual peasant landholdings. The organisation of Obshchina were such that Lenin deemed it impossible to move directly to collectivisation and retain popular support. This perhaps politically realistic opportunism was to have powerful consequences later, when the newly produced petty bourgeois peasants would be expropriated and forced to collectivise.

The amount of production on larger yeoman-like peasant farms was quite small accounting for 38% of land and 34% of total production ². The idea was that state banks would make funds available for the establishment and mechanisation of cooperatives which would enable them to be the more attractive for peasants as it would increase living standards for those that voluntarily joined them.

Lastly, there was a strongly held belief that Russian revolution would not be isolated. Lenin, Trotsky and others continued to hold to the idea that the proletarian revolution would break out at any time. This lead to a consistent tendency to err towards the notion that the economy would not be isolated. Whatever its viability given slightly different courses of events, it is a fact of history that this proletarian world revolution, which was especially to have taken place in the economically mature western states, never occurred.

Perhaps because of this belief that the proletarian revolution would spread through Europe rapidly, the Bolsheviks decided quite early on that they would go it alone as a political party. At every point where a socialist coalition was proposed, either in the form of the Constituent Assembly or in the Sovnarkom. They took the view that those who wouldn’t subordinate themselves to the orientation of the Bolsheviks would have to leave. Shortly after the overthrow of the provisional government, Martov made a speech before a soviet whose majority consisted of Bolsheviks, Left SRs, Internationalist Mensheviks and United Social Democratic Internationalists in the majority and the remainder mainly of Mensheviks and SRs. He suggested that the most important policy decision at that juncture should be an agreement on a democratic government which would be acceptable to all sides – a measure necessary to stop the sectarian warfare which had already begun in the streets. Unfortunately for Martov, the SRs and Mensheviks proceeded to denounce the Bolsheviks for overthrowing the Provisional government. Trotsky took advantage of the situation to wave Martov away and exclaimed³:

A rising of the masses needs no justification… Go where you belong, into the dustbin of history.

The Bolsheviks would be able to rely on the Left SRs for less than a year after this and nearly all support from other socialists was lost. The result was an isolated Bolshevik Party in the midst of a civil war. The programme of transition which was derived from the social democrats was not to be tested at all as it became impossible to implement. Instead all policies were devoted to a completely ad hoc strategy which pushed itself to the fore because of the civil war. What had been envisages as a slow transition turned to lightning expropriation. The bankers refused to cooperate and so the Bolsheviks found themselves seizing the banks ahead of schedule. Major enterprises were taken into state direction immediately. The peasants took their land holdings from the estates, and consonant with their incredibly low productivity of individual holdings (in 1913 peasant production was on 50% of land and contributed only 14% of grain) the food production situation moved even further towards disaster.

By 1921 the Bolsheviks had prevailed in the Civil War but couldn’t rest easy. There were continuing peasant unrest and a revolt in the previously loyal Kronstadt Naval Base. Moreover, the economy was on the verge of total collapse. Between 1920 production in 1913 terms was 1.6% for iron, 5.8% for sugar and grain production was disastrously close to half. Further, at the end of the civil war money itself ceased to function to such an extent that in the state directed enterprises paid only 7% of worker income in money wages, the rest being payment in kind, usually whatever was the good being produced. We will see this same sort of event occur once again in the collapse of the USSR.

Lenin changed tack and, in an ironic twist, given his regular denunciation of Menshevism, proceeded to borrow liberally from his rival’s programme and sanction a prolonged period of capitalist development in a strategy called the New Economic Policy (NEP).

Capitalism

First it’s useful to understand what constitutes capitalism in order that we can understand how the USSR is unlike this system. Capitalism is characterised by a number of features, all of which must be present to obtain the essential qualities that make it a dynamic system. First, we need the use of a universal unit of exchange which we will call M – for money. Further, M must circulate in an investment cycle which we call “the circuit of capital”. This circuit involves the use of money to produce commodities (C) which are then sold at some total value M’ greater than the original M. We can write this process of investment schematically as M-C-M’, interpreting the dashes meaning that there is a process by which we use money (M) to get more money (M’) through the production of commodities (C). The capitalist class, is the class that obtains the bulk of their remuneration through M’, that is, they make profits and use this profit to reinvest in the circuit as M, and some of which they use for consumption. Further, as part of the production process workers, who are divorced from the means of subsistence are paid a money wage with which they purchase commodities for themselves and their families.

The USSR by contrast developed organisations of trade which were state administrations. Production was organised by allocation of raw materials and direction to produce commodities. Though there was a fair amount of use of money as a unit of account in the organisations much of the allocation could not be obtained with this money as it was planned through material balances.

There were no groups which controlled M in a way that they could use it for their own consumption. Instead all investments, which were often in kind, were simply administrated. The administration of investment could not be liquidated and used for conspicuous consumption as with a capitalist class. There were no capitalists.

Further, the administration of production did not require the expansion of M’ from M. M might not even exist at all for any given producer of goods. The main driving influences of production during the 1930s was industrialisation and the increase in tradeable goods which would obtain currency on the international market which could then be used for further industrialisation through the purchase of advanced technology or the hiring of overseas technical advisors. The increase in productive capacity was the driving influence and it was directed consciously (however competently or incompetently) and not with the intention of profits.

The USSR used rationing for many of the commodities that workers were to obtain into the late 20s when the state bodies of trade were functioning well enough that commodities could be sold at a price. However the use of money wages in rubles is in many ways an illusion. The price of a good did not yield the good as a commodity because simply having the ruble amount could not guarantee access to the commodity. Workers in one employment (not just region) might be able to access a commodity at a price, whilst other workers could not. The ruble in fact was not a universal unit of account in any real sense for workers.

None of this is to bolster the idea of the desirability of the USSR as a system, but simply to dispel any analysis which seeks to paint it as capitalist, since we really would have no hope of understanding the real dynamics of the USSR economy from such a standpoint. In some ways the USSR did resemble a single massive corporation. However, this is partially because internally corporations are not actually capitalist – they make use extensively of planning and it is their goal of M’ which defines their behaviour. Further, what is quantitative can become qualitative – so it is when the number of firms in a system is reduced to one, it is systemically completely unlike when there are thousands.

Planning

The development of a rational system of planning was therefore developed in a politically complex environment and, as it happened, without much foresight. Even the greatest proponent of planning, Otto Neurath, who waxed philosophical about the failure of social democrats to sufficiently understand the world they hoped to erect ⁴ was unable to articulate a plausible system which could easily be adopted. Despite the widely held idea amongst socialists that a rational economic system would be more desirable than capitalism, very little in the way of practical proposals had actually been developed.

It is in this context of theoretical impoverishment, de facto total nationalisation, and productive collapse that the groping search for a practical planning system took place.

The initial planning system was very crude. The first five year plan looked at bulk targets for the production of a number of raw materials: iron, steel, coal, wheat, etc. These bulk targets would then be systematically allocated to each of the productive entities in the economy. The real outputs would then be compared to the target outputs, and the differences where then propagated through the plan. This was known as the method of material balances. Since all of this planning took place on paper with humans checking the calculations, the calculations were inherently limited, and the demand for labour power in the pursuit was high.

The great marginalist economist Walras suggested that equilibrium in the market is through a process of tâtonnement (French for “groping”), which is a “hill climbing” algorithm. That is, a method of obtaining optimisation by moving upwards along a gradient. It is basically taking the steepest ascent in a landscape. Following on this idea, Oscar Lange (one of the few marginalist socialists) stated that, the market was “a computer, sui generis, which serves to solve a system of simultaneous equations.”

So if the market itself is a computer, it should be possible to make the economy function not on a basis of price signaling, but rather on the basis of rational allocation. But what should this rational allocation consist of?

The NEP

Communism is soviet power plus electrification of the whole country!

The development of planning organs had started already during the civil war with the SEC (Central Planning Organisation or Tsentra) which sought to do a barter trade of state controlled resource monopolies. However in reality the SEC was responsible for thousands of small enterprises and had absolutely no clue what was actually occuring. All plans were entirely notional, and the producers would often simply produce commodities for local barter which they knew were in demand and fail to meet the planning targets entirely.

After the civil war the Bolsheviks attempted to consolidate control over the economy and. with an aim of regaining support of sections of society, especially the peasants who were well tired of grain requisitions, they decided to adopt a period of limited capitalism. In fact they did not intend to allow general trade but had hoped to keep an inter-city planning system which would conduct barter, but as soon as the flood gates of the market were loosened it became clear that it was impossible to pretend that the inter-city planning would be anything other than notional.

We have enough political power, we also have sufficient economic resources at our disposal… All we want is skill and this we lack – Lenin

Lenin sought to find methods to effectively circumscribe the new markets and to keep them from unleashing forces which the state would not be able to control. For this reason the period of the NEP was a contentious one within the party. The oddity of a socialist government re-introducing capitalism was lost on no-one, and its supporters such as Bukharin pushed it based primarily on pragmatism.

All industries with machinery and over 5 workers, or over 10 workers with no machinery had been nationalised by decree during the civil war. However in 1921 cooperatives were divorced from state control. The cooperatives were given private control of all formerly state property in their industry. They were also, at least in principle, given access to capital, however the real access to credit was very limited. For this reason, combined with the large scale destruction of productive machinery which had occured during the civil war meant that growth in cooperatives was slow.

At the same time that this private cooperative market was being developed the state was developing trade organisations in two forms, syndicates and ‘Torgi’. Syndicates were essentially productive trusts, large state monopolies, which prevented competition between firms in a given industry. Further they acted as wholesale trade organisations for industry. ‘Torgi’ were bodies which organised trade for local industries and cooperatives.

Shortly after market forces were unleashed, the Bolsheviks found themselves faced with the ‘scissors crisis’ which comprised of rapidly falling prices in agriculture and upward spiralling costs of industrial products. This presented a conundrum since price controls on industrial products would limit the redevelopment of industry, but peasants were beginning to revert to subsistence farming due to their inability to avail of industrial production as it became too expensive to purchase. This greatly exacerbated the intra-party feuds as various proposals to escape the ‘scissors’ were contemplated.

In 1924 the party decided that the question must be resolved by controlling the price of industrial products. This would require greater state control of cooperative and state trade. Industry would have to be subsidised through investment directly rather than via profits. Further, agricultural trade would have to be centralised in the state as well to ensure control of prices was possible, and private traders would have to be expelled from the agricultural market.

By 1926 virtually all agricultural trading was based on planned purchases by the state. This was enabled by disallowing train transport of any agricultural product which was not being traded by a state trade organ. However, by 1928 this policy was beginning to deteriorate as peasants refused to make arranged deliveries and methods of compulsary confiscation from the richer peasants was implemented.

The apparent failure of the approach to controlling agricultural prices provided ammunition for the advocates of a more directly planned approach and a state directed collectivisation of agriculture. There is no question that the smaller peasant holdings were disastrously bad for productivity. While peasant land holdings accounted for around 50% of total grain producing farmland, it produced only about 15% of marketable grain. Since the cooperatives were not rapidly acquiring this land, it was felt that some measure of collectivisation would be vital to obtain the agricultural surplus which could be sold on the international market to help enable further industrialisation.

The Five Year Plan

From the crucible of the party struggle with market forces was born the five year plan. This was a truly radical attempt to completely restructure the economy from its foundations. The first draft of the plan itself comprised some 960 pages and touched on every aspect of the economy. While the main thrust of the plan was the development and modernisation of heavy industry, it also earmarked funds for production of agriculture which actually received the largest portion, electrification, education, home trade, municipal services and housing.

The plan detailed planning targets as had been given to the SEC during the period of war communism. However, this time the plan only assumed concrete detail of production targets and allocation in the productive industries of which the SEC had properly adopted real administrative control over. This relaxation from the more ambitious goals of total planning meant that planning could actually be achieved at least in some measure.

Rationing was broadly implemented in this period though there were plans to relax rationing. The fact of rationing and state monopoly allocation meant that the market did not operate at all in the resources which the SEC controlled. Though there was still a market in commodity production, but since these required basic resources they were strongly influenced by planning indirectly.

The planning process also produced a powerful rivalry within the Party, with Trotsky being expelled on the left, and Rykov and Bukharin on the right. Political repression spread to the “Old Bolsheviks” and eventually produced a toxic environment which made it very difficult to point out errors of judgement.

As time went on, and subsequent five year plans adopted, the system became ever more unitary in its control. Though there were periods of partial decentralisation (e.g. the Kosygin reforms of the 1960s) there were also periods of recentralisation (ninth FYP). The number of goods which planning dealt with went from tens and hundreds, to millions. This meant a great expansion in the number of people involved in planning, though this was alleviated somewhat by the introduction of computers to assist management in 1969.

Problems of Planning

ES-EVM ES-1035

The planning system was in fact an entirely different mode of production from capitalism with its own peculiarities. It did not function on the basis of profit, though there was a strong compulsion to “socialist accumulation” ⁵ especially in the lead up to WWII.

As was pointed out by Martin Cave ⁶ the Soviet system could not make greatly effective use of computers for planning because it actually never defined any objective function whatsoever. This meant that while computers could assist in administrative tasks and book keeping, a proper computational optimisation was completely beyond reach. Instead, planning was conducted on a mixed basis of ideology, whim and political expediency, all subject to the constraints of the enormous complexity of centrally administrating an economy. These combined to make a quite haphazard system which demonstrated enormous inefficiencies.

Aside from these global problems of mismanagement, the system itself was structured in such a way that it gave rise to further problems at the local production level.

The relatively limited ability of the central planners to quickly adapt to conditions meant that planning periods were relatively large. The 5 year plan was divided into further 1 year increments which was further divided into sub-year planning periods. Because of this relatively long cycle, many industries developed a tendency towards idleness followed by frenetic activity to meet the planning targets, a process known as shturmovshchina or “storming”. This was both destructive to the workers and the quality of items produced.

Quality control was another serious problem. Because deliveries were planned and goods were not sourced individually by enterprises, the input goods of the commodity being produced could be entirely substandard or unusable leading to a cascading failure in the supply chain. These supply chain collapses were so frequent that industries would routinely overestimate the needs of input goods and stock-pile them in order to deal with the poor quality. Further, they would sometimes even produce goods internally that were nominally delivered so as to meet planning targets that could not be met with the inferior input products.

This also lead to a wide system of “fixers”, which were nominally illegal, but tolerated traders which operated in parallel to the planning system and would source appropriate input goods to meet planning targets for enterprises which would not otherwise be possible, in exchange for some type of barter. These fixers, we will see, were an important feature of the economy even after the USSR collapsed.

The system of fixers, hoarding of inputs, parallel and in-house production and the low quality of outputs provided an assurance that even if the plan had been optimal in some sense, it would not have been real. This combined with the relatively arbitrary nature of planning process itself conspired to produce a lumbering juggernaut. This process was sufficiently dynamic to bring the USSRs economy from agrarian production into an industrialised society, but once industrialisation had become widespread it stagnated.

The lingering political repression of the Stalinist era complicated scientific development with works of scientists, even leftists ones, being censored on ideological grounds ⁷. Though in the 1960s there was a period where cybernetics and mathematical economic methods looked like they might find application, in the end they were not widely adopted and instead things muddled on largely as they had before, though with a larger and more complex economy. It is certainly an interesting question if the problems of planning might have been overcome, had different paths been chosen ⁸. However, this was not to be, and instead the USSR collapsed.

In the next part we will explore the lingering effects of planning on the Russian economy.

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