Do Publicly Owned, Planned Economies Work?

As humanity struggles to survive and transcend capitalism, this question becomes more and more pertinent.

By Stephen Gowans, What’s Left

The Soviet Union was a concrete example of what a publicly owned, planned economy could produce: full employment, guaranteed pensions, paid maternity leave, limits on working hours, free healthcare and education (including higher education), subsidized vacations, inexpensive housing, low-cost childcare, subsidized public transportation, and rough income equality. Most of us want these benefits. However, are they achievable permanently? It is widely believed that while the Soviet Union may have produced these benefits, in the end, Soviet public ownership and planning proved to be unworkable. Otherwise, how to account for the country’s demise? Yet, when the Soviet economy was publicly owned and planned, from 1928 to 1989, it reliably expanded from year to year, except during the war years. To be clear, while capitalist economies plunged into a major depression and reliably lapsed into recessions every few years, the Soviet economy just as unfailingly did not, expanding unremittingly and always providing jobs for all.

Far from being unworkable, the Soviet Union’s publicly owned and planned economy succeeded remarkably well. What was unworkable was capitalism, with its occasional depressions, regular recessions, mass unemployment, and extremes of wealth and poverty, all the more evident today as capitalist economies contract or limp along, condemning numberless people to forced idleness. What eventually led to the Soviet Union’s demise was the accumulated toll on the Soviet economy of the West’s efforts to bring it down, the Reagan administration’s intensification of the Cold War, and the Soviet leadership’s inability to find a way out of the predicament these developments occasioned.

By the 1980s, the USSR was showing the strains of the Cold War. Its economy was growing, but at slower pace than it had in the past. Military competition with its ideological competitor, the United States, had slowed growth in multiple ways. First, R&D resources were being monopolized by the military, starving the civilian economy of the best scientists, engineers, and machine tools. Second, military spending had increased to meet the Reagan administration’s abandonment of detente in favour of a renewed arms race that was explicitly targeted at crippling the Soviet economy. To deter US aggression, the Soviets spent a punishingly large percentage of GDP on the military while the Americans, with a larger economy, spent more in absolute terms but at a lower and more manageable share of national income. Third, to protect itself from the dangers of relying on foreign imports of important raw materials that could be cut off to bring the country to its knees, the Soviet Union chose to extract raw materials from its own vast territory. While making the USSR self-sufficient, internal sourcing ensnared the country in a Ricardian trap. The costs of producing raw materials increased, as new and more difficult-to-reach sources needed to be tapped as the older, easy-to-reach ones were exhausted. Fourth, in order to better defend the country, the Soviets sought allies in Eastern Europe and the Third World. However, because the USSR was richer than the countries and movements it allied with, it became the anchor and banker to other socialist countries, liberation movements, and states seeking to free themselves from despoliation by Western powers. As the number of its allies increased, and Washington manoeuvred to arm, finance, and support anti-communist insurgencies in an attempt to put added strain on the Soviet treasury, the costs to Moscow of supporting its allies mounted. These factors—corollaries of the need to provide for the Soviet Union’s defence—combined to push costs to the point where they seriously impeded Soviet economic growth.

With growth slowing, and the costs of defending the country increasing, it appeared as if it was only a matter of time before the USSR would find itself between the Scylla of an untenable military position and the Charybdis of arms race-driven bankruptcy. Mikhail Gorbachev, the country’s last leader, faced a dilemma: he could either bankrupt the economy by trying to keep pace with the Americans on arms spending or withdraw from the race altogether. Gorbachev chose the latter. He moved to end the Cold War, withdrawing military support from allies, and pledging cooperation with the United States. On the economic front, he set out to transform the Soviet Union into a Western-style social democracy. However, rather than rescuing the country from a future of ever slowing economic growth, Gorbachev’s capitulations on foreign and economic policy led to disaster. With the restraining hand of the Soviet Union lifted, the United States embarked on a series of aggressions around the world, beginning with Iraq, proceeding to Yugoslavia, Afghanistan, Iraq again, and then Libya, with numerous smaller interventions in between. Gorbachev’s abandonment of economic planning and efforts to clear the way for the implementation of a market economy pushed the country into crisis. Within five years, Russia was an economic basket case. Unemployment, homelessness, economic insecurity and social parasitism (living off the labour of others) returned with a vengeance.

On Christmas Day, 1991, the day the USSR officially ended, Gorbachev said, “We live in a new world. The Cold War is finished. The arms race and the mad militarization of states, which deformed our economy, society and values, have been stopped. The threat of world war has been lifted” (Roberts, 1999). This made Gorbachev wildly popular in the West. Russians were less enthusiastic. Contained within Gorbachev’s words was the truth about why the world’s first conscious attempt to build an alternative to capitalism had been brought to a close. It was not because the Soviet economic system had proved unworkable. On the contrary, it had worked better than capitalism. The real reason for the USSR’s demise was that its leadership capitulated to an American foe, which, from the end of World War II, and with growing vigour during the Reagan years, sought to arms race to death the Soviet economy. This was an economy that worked for the bottom 99 percent, and therefore, if allowed to thrive, would have discredited the privately owned, market-regulated economies that the top one percent favoured and benefited from. It was this model of free enterprise and market regulation which made vast wealth, security and comfort the prerogatives of captains of industry and titans of finance, and unemployment, poverty, hunger, economic insecurity, and indignity—the necessary conditions of the top one percent’s riches—the lot of everyone else.

The 21 years since the defeat of the USSR have not been kind. Stalin, under whose tutelage the world’s first publicly owned, planned economy was built, once issued a prophetic warning: “What would happen if capitalism succeeded in smashing the Republic of Soviets? There would set in an era of the blackest reaction in all the capitalist and colonial countries. The working class and the oppressed peoples would be seized by the throat, the positions of international communism would be lost” (Stalin, 1954). And just as Stalin had accurately prophesied 10 years before Operation Barbarossa, the Nazi invasion of the USSR, that his country had only 10 years to prepare for an attack, so too did he accurately foresee the consequences of the Soviet Union’s falling to the forces of capitalism. An era of the blackest reaction has, indeed, set in. Washington now has more latitude to use its muscular military to pursue its reactionary agenda around the world. Public ownership and planning hang on in Cuba and North Korea, but the United States and its allies use sanctions, diplomatic isolation and military harassment to sabotage the economies of the hold-outs (as they did the Soviet economy), so that the consequences can be falsely hung on what are alleged to be the deficiencies of public ownership and planning. They are in reality the consequences of a methodical program of low-level warfare. Encouraged to believe that the Soviet economic system had failed, many people, including both communist supporters and detractors of the Soviet Union, concluded that a system of public ownership and planning is inherently flawed. Communists abandoned communist parties for social democratic ones, or abandoned radical politics altogether. Social democrats shifted right, eschewing reform, and embracing neo-liberalism. In addition, Western governments, no longer needing to blunt the appeal of public ownership and planning, abandoned the public policy goal of full employment and declared robust public services to be no longer affordable (Kotz, 2001). At the same time, privatization in the former Soviet Union and formerly communist countries of Eastern Europe expanded the global supply of wage-labour, with predictable consequences for wage levels worldwide. The Soviet Union’s defeat has ushered in a heyday for capital. For the rest of us, our throats, as Stalin warned, have been seized.

The world’s largest capitalist economies have been in crisis since 2008. Some are trapped in an austerity death-spiral, some in the grips of recession, most growing slowly at best. Austerity—in reality the gutting of public services—is the prescribed pseudo-remedy. There is no end in sight. In some parts of Europe, official unemployment reaches well into the double-digits, youth unemployment higher still. In Greece, a country of 11 million, there are only 3.7 million employed (Walker and Kakaounaki, 2012). Moreover, the crisis can in no way be traced to an outside power systematically working to bring about capitalism’s demise, as the United States and its allies systematically worked to bring about the end of public ownership and planning in the USSR. Yet, free to develop without the encumbrance of an organized effort to sabotage it, capitalism is not working. Few point this out. By contrast, the Soviet model of public ownership and planning—which, from its inception was the target of a concerted effort to undermine it—never once, except during the extraordinary years of World War II, stumbled into recession, nor failed to provide full employment. Yet it is understood, including by some former supporters of the Soviet Union, to have been unworkable. Contrary to a widely held misconception, the experience of the Soviet Union did not demonstrate that an inherent weakness existed within its publicly owned, planned economy that doomed it to failure. It demonstrated, instead, the very opposite—that public ownership and planning could do what capitalism could not do: produce unremitting economic growth, full employment, an extensive array of free and nearly free public services, and a fairly egalitarian distribution of income. Moreover, it could do so year after year and continued to do so until the Soviet leadership pulled the plug. It also demonstrated that the top one percent would defend private ownership by using military, economic, and ideological means to crush a system that worked against them but worked splendidly for the bottom 99 percent (an effort that carries on today against Cuba and North Korea.)

The defeat of the Soviet Union has, indeed, ushered in a period of dark reaction. The way out remains, as ever, public ownership and planning—which the Soviet experience from 1928 to 1989 demonstrates works remarkably well—and struggle against those who would discredit, degrade or destroy it.

What Soviet public ownership and planning did for ordinary citizens of the USSR

The benefits of the Soviet economic system were found in the elimination of the ills of capitalism—an end to unemployment, inflation, depressions and recessions, and extremes of wealth and poverty; an end to exploitation, which is to say, the practice of living off the labour of others; and the provision of a wide array of free and virtually free public services.

Among the most important accomplishments of the Soviet economy was the abolition of unemployment. Not only did the Soviet Union provide jobs for all, work was considered a social obligation, of such importance that it was enshrined in the constitution. The 1936 constitution stipulated that “citizens of the USSR have the right to work, that is, are guaranteed the right to employment and payment for their work in accordance with quantity and quality.” On the other hand, making a living through means other than work was prohibited. Hence, deriving an income from rent, profits, speculation or the black market – social parasitism – was illegal (Szymanski, 1984). Finding a job was easy, because labour was typically in short supply. Consequently, employees had a high degree of bargaining power on the job, with obvious benefits in job security, and management paying close attention to employee satisfaction (Kotz, 2003).

Article 41 of the 1977 constitution capped the workweek at 41 hours. Workers on night shift worked seven hours but received full (eight-hour) shift pay. Workers employed at dangerous jobs (e.g., mining) or where sustained alertness was critical (e.g. physicians) worked six or seven-hour shifts, but received fulltime pay. Overtime work was prohibited except under special circumstances (Szymanski, 1984).

From the 1960s, employees received an average of one month of vacation (Keeran and Kenny, 2004; Szymanski, 1984) which could be taken at subsidized resorts (Kotz, 2003).

All Soviet citizens were provided a retirement income, men at the age of 60, and women at the age of 55 (Lerouge, 2010). The right to a pension (as well as disability benefits) was guaranteed by the Soviet constitution (Article 43, 1977), rather than being revocable and subject to the momentary whims of politicians, as is the case in capitalist countries.

Women were granted maternity leave from their jobs with full pay as early as 1936 and this, too, along with many other benefits, was guaranteed in the Soviet constitution (Article 122, 1936). At the same time, the 1936 constitution made provision for a wide network of maternity homes, nurseries and kindergartens, while the revised 1977 constitution obligated the state to help “the family by providing and developing a broad system of childcare…by paying grants on the birth of a child, by providing children’s allowances and benefits for large families” (Article 53). The Soviet Union was the first country to develop public childcare (Szymanski, 1984).

Women in the USSR were accorded equal rights with men in all spheres of economic, state, cultural, social and political life (Article 122, 1936), including the equal right with men to employment, rest and leisure, social insurance and education. Among its many firsts, the USSR was the first country to legalize abortions, which were available at no cost (Sherman, 1969). It was also the first country to bring women into top government positions. An intense campaign was undertaken in Soviet Central Asia to liberate women from the misogynist oppression of conservative Islam. This produced a radical transformation of the condition of women’s lives in these areas (Szymanski, 1984).

The right to housing was guaranteed under a 1977 constitutional provision (Article 44). Urban housing space, however, was cramped, about half of what it was per capita in Austria and West Germany. The reasons were inadequate building in Tsarist times, the massive destruction of housing during World War II, and Soviet emphasis on heavy industry. Prior to the October Revolution, inadequate urban housing was built for ordinary people. After the revolution, new housing was built, but the housing stock remained insufficient. Housing draws heavily on capital, which the government needed urgently for the construction of industry. In addition, Nazi invaders destroyed one-third to one-half of Soviet dwellings during the Second World War (Sherman, 1969).

City-dwellers typically lived in apartment buildings owned by the enterprise in which they worked or by the local government. Rents were dirt cheap by law, about two to three percent of the family budget, while utilities were four to five percent (Szymanski, 1984; Keeran and Kenny, 2004). This differed sharply with the United States, where rents consumed a significant share of the average family budget (Szymanski, 1984), and still do.

Food staples and other necessities were subsidized, while luxury items were sold well above their costs.

Public transportation was efficient, extensive, and practically free. Subway fare was about eight cents in the 1970s, unchanged from the 1930s (Szymanski, 1984). Nothing comparable has ever existed in capitalist countries. This is because efficient, affordable and extensive public transportation would severely limit the profit-making opportunities of automobile manufacturers, petroleum companies, and civil engineering firms. In order to safeguard their profits, these firms use their wealth, connections and influence to stymie development of extensive, efficient and inexpensive public alternatives to private transportation. Governments, which need to keep private industry happy so that it continues to provide jobs, are constrained to play along. The only way to alter this is to bring capital under public control, in order to use it to meet public policy goals set out in a consciously constructed plan.

The Soviet Union placed greater stress on healthcare than their capitalist competitors did. No other country had more physicians per capita or more hospital beds per capita than the USSR. In 1977, the Soviet Union had 35 doctors and 212 hospital beds per 10,000 compared to 18 doctors and 63 hospital beds in the United States (Szymanski, 1984). Most important, healthcare was free. That US citizens had to pay for their healthcare was considered extremely barbaric in the Soviet Union, and Soviet citizens “often questioned US tourists quite incredulously on this point” (Sherman, 1969).

Education through university was also free, and stipends were available for post-secondary students, adequate to pay for textbooks, room and board, and other expenses (Sherman, 1969; Szymanski, 1984).

Income inequality in the Soviet Union was mild compared to capitalist countries. The difference between the highest income and the average wage was equivalent to the difference between the income of a physician in the United States and an average worker, about 8 to 10 times higher (Szymanski, 1984). The elite’s higher incomes afforded privileges no greater than being able to acquire a modest house and car (Kotz, 2000). By comparison, in 2010, Canada’s top-paid 100 CEOs received incomes 155 times higher than the average full-time wage. The average full-time wage was $43,000 (Canadian Centre for Policy Alternatives, 2011). An income 10 times larger would be $430,000—about what members of the capitalist elite make in a single week. A factor that mitigated the modest degree of Soviet income inequality was the access all Soviet citizens had to essential services at no, or virtually, no cost. Accordingly, the degree of material inequality was even smaller than the degree of income inequality (Szymanski, 1984).

Soviet leaders did not live in the opulent mansions that are the commonplace residences of presidents, prime ministers and monarchs in most of the world’s capitals (Parenti, 1997). Gorbachev, for example, lived in a four-family apartment building. Leningrad’s top construction official lived in a one-bedroom apartment, while the top political official in Minsk, his wife, daughter and son-in-law inhabited a two-bedroom apartment (Kotz and Weir, 1997). Critics of the Soviet Union accused the elite of being an exploiting ruling class, but the elite’s modest incomes and humble material circumstances raise serious doubt about this assessment. If it was indeed an exploiting ruling class, it was the oddest one in human history.

The Soviet economy’s record of growth under public ownership and planning

From the moment in 1928 that the Soviet economy became publicly owned and planned, to the point in 1989 that the economy was pushed in a free market direction, Soviet GDP per capita growth exceeded that of all other countries but Japan, South Korea and Taiwan. GDP per person grew by a factor of 5.2, compared to 4.0 for Western Europe and 3.3 for the Western European offshoots (the USA, Canada, Australia and New Zealand) (Allen, 2003). In other words, over the period in which its publicly owned, planned economy was in place, the USSR‘s record in raising incomes was better than that of the major industrialized capitalist countries. The Soviet Union’s robust growth over this period is all the more impressive considering that the period includes the war years when a major assault by Nazi Germany left a trail of utter destruction in its wake. The German invaders destroyed over 1,500 cities and towns, along with 70,000 villages, 31,000 factories, and nearly 100 million head of livestock (Leffler, 1994). Growth was highest to 1970, at which point expansion of the Soviet economy began to slow. However, even during this so-called (and misnamed) post-1970 period of stagnation, GDP per capita grew 27 percent (Allen, 2003).

While Soviet GDP per capita growth rates compare favorably with those of the major capitalist economies, a more relevant comparison is with the rest of the world. In 1928, the Soviet Union was still largely an agrarian country, and most people worked in agriculture, compared to a minority in Western Europe and North America. Hence, the economy of the USSR at the point of its transition to public ownership and planning was very different from that of the industrialized Western capitalist countries. On the other hand, the rest of the world resembled the Soviet Union in also being largely agrarian (Allen, 2003). It is therefore the rest of the world, not the United States and other advanced industrialized countries, with which the USSR should be compared. From 1928 to 1989, Soviet GDP per capita not only exceeded growth in the rich countries but exceeded growth in all other regions of the world combined, and to a greater degree. Hence, not only did the publicly owned, planned economy of the Soviet Union outpace the economies of richer capitalist economies, it grew even faster than the economies of countries that were most like the USSR in 1928. For example, outside its southern core, Latin America’s GDP per capita was $1,332 (1990 US dollars), almost equal to the USSR’s $1,370. By 1989, the Latin American figure had reached $4,886, but average income in the Soviet Union had climbed far higher, to $7,078 (Allen, 2003). Public ownership and planning had raised living standards to a higher level than capitalism had in Latin America, despite an equal starting point. Moreover, while the Soviet peacetime economy unfailingly expanded, the Latin American economy grew in fits and starts, with enterprises regularly shuttering their doors and laying off employees.

Perhaps the best illustration of how public ownership and planning performed better at raising living standards comes from a comparison of incomes in Soviet Central Asia with those of neighboring countries in the Middle East and South Asia. In 1928, these areas were in a pristinely pre-industrial state. Under public ownership and planning, incomes grew in Soviet Central Asia to $5,257 per annum by 1989, 32 percent higher than in neighboring capitalist Turkey, 44 percent higher than in neighboring capitalist Iran, and 241 percent higher than in neighboring capitalist Pakistan (Allen, 2003). For Central Asians, it was clear on which side of the Soviet Union’s border standards of living were highest.

US emulation of Soviet public funding of R&D

Advocates of a free enterprise economy would have you believe that public ownership and planning stifle innovation, while free enterprise encourages it. If that is the case, how do we explain:

•    That the Soviet Union beat the United States into space in the 1950s, piling up a record of firsts in space exploration, and consequently setting off a panic in Washington?
•    Most of the innovations in the United States, from the internet to Google’s search engine algorithm to advanced drugs and the i-Phone, are based, not on private investment, but government funding?

In fact, the truth about innovation is the exact opposite of what free-enterprise promoters would have us believe. It is not free enterprise, but planning and public funds, that drive it.

Soviet accomplishments in space, considered in light of the mistaken view that the USSR was always a poor second-best to the supposedly more dynamic United States, is truly startling. Soviet achievements include the first satellite, first animal in orbit, first human in orbit, first woman in orbit, first spacewalk, first moon impact, first image of the far side of the moon, first unmanned lunar soft landing, first space rover, first space station and first interplanetary probe. The panic created in Washington after the allegedly innovation-stifling Soviet economy allowed the USSR to beat its much richer ideological rival into space galvanized the United States to take a leaf from the Soviet book. Just as the Soviets were doing, Washington would use public funds to power research into innovations. This would be done through the Defense Advanced Research Projects Agency. The DARPA would channel public money to scientists and engineers for military, space and other research. Many of the innovations to come out of the DARPA pipeline would eventually make their way to private investors, who would use them for private profit (Mazzucato, 2011). In this way, private investors were spared the trouble of risking their own capital, as free enterprise mythology would have us believe they do. In this myth, far-seeing and bold capitalists reap handsome profits as a reward for risking their capital on research that might never pay-off. Except this is not how it works. It is far better for investors to invest their capital in ventures with less risk and quicker returns, while allowing the public to shoulder the burden of funding R&D with its many risks and uncertainties. Using their wealth, influence and connections, investors have successfully pressed politicians into putting this pleasing arrangement in place. Free enterprise reality, then, is based on the sucker system: Risk is “socialized” (i.e., borne by the public, the suckers) while benefits are “privatized” (by investors who have manipulated politicians into shifting to the public the burden of funding R&D.)

A study by Block and Keller (2008) found that between 1971 and 2006, 77 out of R&D Magazine’s top 88 innovations had been fully funded by the US government. Summarizing research by economist Mariana Mazzucato, Guardian columnist Seumas Milne (2012) points out that the

[a]lgorithms that underpinned Google’s success were funded by the public sector. The technology in the Apple iPhone was invented in the public sector. In both the US and Britain it was the state, not big pharma, that funded most groundbreaking ‘new molecular entity’ drugs, with the private sector then developing slight variations. And in Finland, it was the public sector that funded the early development of Nokia – and made a return on its investment.

Nuclear power, satellite and rocket technology, and the internet are other examples of innovations that were produced with public money, and have since been used for private profit. US president Barack Obama acknowledged the nature of the swindle in his 2011 State of the Nation Address. “Our free-enterprise system,” began the president, “is what drives innovation.” However, he immediately contradicted himself by saying, “But because it’s not always profitable for companies to invest in basic research, throughout history our government has provided cutting-edge scientists and inventors with the support that they need.”

All of this points to two important facts. (1) The United States kick-started innovation in its economy by emulating the Soviet model of state-directed research because free enterprise was not up to the task. (2) Rather than emulate the Soviet model for public benefit, the United States channels public money into R&D for private profit. From the second point can be inferred a third: The fact that the Soviets socialized the benefits that flow from socialized risk, while the United States privatizes them, reflects the antagonistic nature of the two societies: One, a mass-oriented society organized to benefit the masses; the other, a business society organized to benefit a minority of business owners. Capitalism, as the US president acknowledges, does not promote innovation, because “it is not always profitable for companies to invest in basic research.” On the other hand, state-directed funding is the source of innovation. Clearly, then, a political agenda has nurtured two myths: (a) That a system of public ownership and planning stifles innovation; (b) That the profit system stimulates it.

Why growth slowed

While the Soviet economy grew rapidly from 1928 to 1989 it never surpassed the economies of North America, Western Europe and Japan. Consequently, the USSR’s per capita income was always less than that of the industrialized capitalist economies. The comparative disadvantage in incomes and living standards was falsely attributed to the alleged inefficiencies of public ownership and planning, rather than to the reality that, having started further back than the rich capitalist countries, the Soviet Union had more ground to cover. When the race began in 1928, the Soviet Union was still a largely agrarian country while the United States was industrialized. Hence, the Soviet Union had to cover ground the United States had already covered when Russia was under the stifling rule of Tsarist tyranny. Moreover, it had to do so without riches extracted from other countries, as the United States, Britain, France and Japan had based part of their prosperity on exploiting their own formal and informal empires (Murphy, 2000). True, the USSR did have an empire of sorts—countries in Eastern Europe over which it exercised hegemony, but, except in the early post-WWII years, these countries were never exploited economically by the Soviet Union. If anything, the Soviets, who exported raw materials to Eastern Europe in return for manufactured goods, came out on the losing end of its trade relationship with its satellites. So long as they remained part of the Warsaw Pact—a defensive alliance formed after and in response to the creation of NATO—and maintained some semblance of public ownership and planning, Moscow allowed its Eastern European allies to chart their own course. Soviet hegemony, then, was limited to enforcing these two conditions (Szymanski, 1979).

By the mid-1970s there was serious concern in Washington that the Soviet economy was on a course to overtake that of the United States. Since Washington always pointed to the United States’ greater average income and higher living standards to mobilize the allegiance of its population to the free enterprise system, a Soviet lead would deal a mortal blow to the legitimacy of US capitalism. Careful estimates prepared in the United States showed that Soviet gross national product was gaining on that of the United States. In 1950, the Soviet economy was only one-third the size of the US economy but had grown to almost one-half only eight years later (Sherman, 1969). From the perspective of planners in Washington in the late 1950s, the danger loomed that at current rates of growth, the Soviet economy would overtake the US economy by 1982. At that point, the entire foundation of the US population’s belief in the legitimacy of free enterprise—that it produced higher living standards than public ownership and planning—would crumble. Something had to be done.

By 1975, the CIA estimated that the Soviet economy was 60 percent as large as the US economy (Kotz and Weir, 1997). However, Soviet economic growth was starting to slow. According to figures provided by Allen (2003), Soviet GDP per capita grew at an annual rate of 3.4 percent from 1928 to 1970, but at less than half that rate, 1.3 percent, from 1970 to 1989. Had the United States, alarmed at being beaten into space, and agitated by what seemed to be the very real prospect of being overtaken economically by the USSR, set out to sabotage Soviet economic progress?

The Cold War was never going to be kind to Soviet growth prospects. Soviet leaders recognized that a planned, publicly owned economy was an anathema to the captains of industry and titans of finance who use their wealth and connections to dominate policy in capitalist countries. The USSR had been invaded multiple times, and on two occasions by aggressive capitalist powers with the objective of wiping the Soviet system off the map. In order to deter future aggressions, it was necessary to keep pace militarily. Therefore, the Soviet Union struggled as best as it could to achieve a rough military parity to maintain a peaceful coexistence with its capitalist neighbours (Szymanski, 1979).

However, the smaller size of the Soviet economy relative to that of its ideological competitors created problems. The necessity of maintaining a rough military parity would mean spending a far higher percentage of GDP on the military compared to what the United States and other NATO countries spent on their armed forces. Resources that could otherwise have been deployed to industrial expansion to help the country catch up economically had instead to be channelled into self-defence (Murphy, 2000). From the 1950s through the 1970s, the Soviets spent 12 to 14 percent of their GDP on the military (Szymanski, 1984; Allen, 2003), a figure that would grow even higher later, when the Reagan administration hiked US military spending, anticipating a Soviet effort to keep up that would harm the USSR’s economy.

Another constraint imposed on the Soviet economy by the need to deter military aggression was the monopolization of R&D resources by the military. Keeping pace militarily involved an unceasing battle to catch up to US military innovations. When the United States exploded the first atom bomb in 1945, the Soviet Union raced to match the United States’ grim scientific feat, which it did four years later. The US introduction of the hydrogen bomb in 1952 was quickly followed by the Soviets exploding their own hydrogen bomb a year later. A US first in submarine-launched nuclear missiles was matched by the USSR a few years after. No major weapon was developed by the USSR first, with a single exception—the ICBM. Unlike the United States, the USSR had no military bases ringing its ideological rival, and therefore needed a way of delivering nuclear warheads over long distances. However, the aim was self-defence, and that the Soviet Union was usually in catch-up mode on weapons systems demonstrated that the United States was spurring the Cold War forward, not the USSR. For the Soviets, the Cold War was economic poison. For the Americans, the Cold War was a way to ruin the Soviet economy.

Because self-defence was a priority, the USSR’s best scientists and engineers were channelled into the military sector (Sherman, 1969). Soviet consumer goods were often said to have been of low quality, but no one ever said the same about Soviet military equipment. The reason why is clear: the military got first dibs on the best minds and best equipment and was never short of funding. There is a subsidiary point: high-quality Soviet arms were produced by a system of public ownership and planning, despite the myth that such a system is incapable of producing high-quality goods (Kotz, 2008). The necessity of channelling the bulk of, and best, R&D resources to the military meant that other sectors suffered, and GDP growth was impeded. For example, the Soviets floundered in their efforts to increase petroleum production because the metals, machinery, scientists and engineers needed to boost oil output were detailed to the military sector (Allen, 2003). Half of the machine tools produced and at least half of the R&D expenditures were going to the defence industry (Schweizer, 1994).

Another reason for the post-1975 slowdown in the Soviet economy was that the USSR had become ensnared in a Ricardian trap (Allen, 2003). The Soviet Union had an abundant supply of all the raw materials an industrial economy needed, and at first, they were easy to reach and therefore could be obtained at low cost. For example, in the early years of the USSR’s industrialization, open pit mines were dug near industrial centres. Minerals were close to the surface and could be transported over short distances to nearby factories. Therefore, production and transportation costs were minimal. However, over time, the minerals that were close to the surface were scooped out and pits became deeper and narrower. At deeper depths, the quantity of minerals that could be extracted diminished and the costs of reaching them increased. Eventually, the mines were exhausted, and new mines had to be opened, but at greater distances from industrial centres, which meant higher costs to transport raw materials to factories. The Soviet petroleum industry was equally caught in a Ricardian trap. In the early 1970s, the USSR was spending $4.6 billion per year to maintain its oil industry. As oil became more difficult to reach, the Soviets had to drill deeper and through harder rocks. Costs increased, reaching $6.0 billion by the end of the decade. By the early 1980s, costs had climbed to $9.0 billion a year (Schweizer, 1994). The Soviets could have escaped the Ricardian trap by shopping around for less expensive imports. However, that would have left them vulnerable to supply disruptions. The United States and its allies—who would always be hostile to the USSR, except when expediency dictated temporary alliances or easing of tension—could interdict raw materials heading to the USSR to bring the Soviet economy to its knees or extort concessions. In other words, given the very high likelihood that the United States would exploit opportunities to place the Soviet Union at a disadvantage, shopping around for cheap imports, rather than implementing a policy of resource self-sufficiency, was not a realistic option.

Another reason the Soviet economy slowed was that the costs to the USSR to support its allies began to mount to unsustainable levels. One way to bolster self-defence is to find friends who share the same enemy, and the Soviet Union set out to expand its alliance of friends by providing economic and military assistance to countries and movements hostile to the forces of reaction. In doing so, it became the banker for national liberation movements, Eastern European socialist countries, and various Third World countries seeking to escape and remain free from domination by powerful capitalist states. By 1981, the Soviet Union and its Eastern European allies had 96,000 economic advisers in 75 countries and 16,000 military advisers in 34 countries, together with a contingent of 39,000 Cuban troops in Africa, an army for which Moscow was ultimately footing the bill. At the same time, the Soviets were picking up the tab for 72,000 Third World students enrolled in Soviet and East European universities (Miliband, 1989). By 1980, Moscow was spending $44 billion a year on its allies (Keeran and Kenny, 2004). It gave $4.5 billion in aid to Warsaw from August 1980 to August 1981 alone to help contain the US-supported Solidarity movement (Schweizer, 1994). Meanwhile, the war in Afghanistan was draining the Soviet treasury to the tune of $3 to $4 billion per year. In other words, the costs of sustaining allies had grown enormous, raw material costs were mounting, the best scientists, engineers and machine tools were being monopolized by the military, and military expenditures were consuming a punishingly large percentage of national income.

A large part of the predicament the Soviets found themselves in was due to a decision the Reagan administration had taken to try to cripple the Soviet economy. In October 1983, US president Ronald Reagan unveiled what would become known as the Reagan Doctrine. “The goal of the free world must no longer be stated in the negative, that is, resistance to Soviet expansionism,” announced the US president. Instead, the “goal of the free world must instead be stated in the affirmative. We must go on the offensive with a forward strategy of freedom” (Roberts, 1999). This was a declaration of the end of détente. The gloves were off.

More formally, the Reagan Doctrine was spelled out in a series of national security decision directives, or NSDDs. NSDD-66 announced that it would be US policy to disrupt the Soviet economy, while NSDD-75 committed the United States to trying to drive up costs in the Soviet economy in order to plunge the USSR into a crisis. The Soviet economy was to be squeezed, and one of the ways was to induce Moscow to increase its defence budget (Schweizer, 1994). A hi-tech arms race would be the key. It would not only force Moscow to divert more resources to the military, but would channel even more of the USSR’s scientists, engineers, machine tools, and budget into military R&D, reducing productive investments and hobbling the civilian economy even more than the Cold War already had. The aim was to force the USSR “to expend precious lifeblood to run a race against a more athletic foe” (Schweizer, 1994), a foe which had a larger economy and more resources to last the race because it had started at a higher level of development and was plundering various countries around the world of their riches.

Over the first six years of his presidency, Reagan more than doubled US military expenditures, buying 3,000 warplanes, 3,700 strategic missiles, and close to 10,000 tanks (Schweizer, 1994). To keep up, Soviet military spending, previously at 12 to 14 percent of GDP, started to climb. Already twice as large as the United States’ as a percentage of national income (Silber, 1994) the defence budget grew larger still. Military expenditures increased by 45 percent in five years, considerably outpacing growth in the Soviet economy. By 1990, the Soviets were spending more than 20 percent of the country’s GDP on defence (Englund, 2011). At the same time, Moscow increased its military R&D spending nearly two-fold. In the spring of 1984, Soviet leader Konstantin Chernenko announced that ‘the complex international situation has forced us to divert a great deal of resources to strengthening the security of our country” (Schweizer, 1994).

Meanwhile, the Reagan administration had taken a page out of Che Guevara’s book. The Argentine revolutionary had called for not one, not two, but three Vietnams, to drain the US treasury. Turning Che’s doctrine against communism, CIA Director Bill Casey called for not one, not two, but a half a dozen Afghanistans. To bog down the Soviets in “their own Vietnam,” the Afghan mujahedeen were showered with money and arms. In Poland, financial, intelligence, and logistical support was poured into the Solidarity movement, forcing Moscow to increase support to the Polish government (Schweizer, 1994).

The Soviet media complained that the United States wanted to impose “an even more ruinous arms race,” adding that Washington hoped the Soviet economy would be exhausted (Izvestiya, 1986). Soviet foreign secretary Andrei Gromyko complained that the United States’ military build-up was aimed at exhausting the USSR’s material resources and forcing Moscow to surrender. Gorbachev echoed Gromyko, telling Soviet citizens that,

The US wants to exhaust the Soviet Union economically through a race in the most up-to-date and expensive space weapons. It wants to create various kinds of difficulties for the Soviet leadership, to wreck its plans, including in the social sphere, in the sphere of improving the standard of living of our people, thus arousing dissatisfaction among the people with their leadership (Schweizer, 1994).

Capitulation

By the mid-1980s, it was clear in both Washington and Moscow that the Soviet Union was in trouble. It was not that the system of public ownership and planning was not working. On the contrary, recognizing the advantages of the Soviet system, the United States itself had emulated it to stimulate innovation in its own economy. Moreover, the Soviet economy was still reliably expanding, as it had done every year in peacetime since Stalin had brought it under public control in 1928. However, defending the country in the face of a stepped up Cold War was threatening to choke off economic growth altogether. It was clear that Moscow’s prospects for keeping pace with the United States militarily, while at the same time propping up allies under attack by US-fuelled anti-communist insurgencies and overthrow movements, were far from sanguine. The United States had manoeuvred the Soviet Union into a trap. If Moscow continued to try to match the United States militarily, it would eventually bankrupt itself, in which case its ability to deter US aggression would be lost. If it did not try to keep pace, it could no longer deter US aggression. No matter which way Moscow turned, the outcome would be the same. The only difference was how long it would take the inevitable to play out.

Gorbachev chose to meet the inevitable sooner rather than later. His foreign affairs adviser, Anatoly Chernayaev, recalls that it was “an imperative for Gorbachev that we had to put an end to the Cold War, that we had to reduce our military budget significantly, that we had to limit our military industrial complex in some way” (Schweizer, 1994). The necessity of reining in the defence budget was echoed by another Gorbachev adviser, Aleksandr Yokovlev, who would later recall that “It was clear that our military spending was enormous and we had to reduce it” (Blum, 1995). Gorbachev therefore withdrew support from allies and pledged cooperation with the United States. This was a surrender. The capitulation was hidden behind honeyed phrases about promoting international cooperation and fostering universal human values, but the rhetoric did not hide the fact that Gorbachev was throwing in the towel. He described the surrender as a victory for humanity, declaring that he had averted “the threat of nuclear war,” ended the “nuclear arms race,” reduced “conventional armed forces,” settled “numerous regional conflicts involving the Soviet Union and the United States,” and replaced “the division of the European continent into hostile camps with … a common European home” (Gorbachev, 2011). In reducing the threat of a global nuclear conflagration, Gorbachev had indeed achieved a victory for humanity. However, the victory was brought about by caving in to the United States, which was now free to run roughshod over countries that were too weak to refuse US demands that they yield to US political, military and economic domination.

On domestic matters, Gorbachev—who identified himself with the virtually social democratic position of the Italian Communist Party (Hobsbawm, 1994)—tried to turn the Soviet Union into a Western-style social democracy (Roberts, 1999). He cited the need to reverse the slowdown in the Soviet economy as his rationale for the transition (Gorbachev, 1988). Economic growth had certainly slowed, and there was indeed a danger that continued slow growth would threaten the country’s position vis-à-vis its capitalist rivals. However, Gorbachev’s solution amounted to, “If you can’t beat ‘em, join ‘em.” The planning apparatus, which had unfailingly charted a course for unremitting growth during peacetime, was dismantled, in order to move the economy toward regulation by market forces. Rather than boosting economic growth, as Gorbachev hoped, the abandonment of planning did the very opposite. The economy tumbled headlong into an abyss, from which the USSR’s successor countries would not emerge for years. As one wag put it, “Stalin found the Soviet Union a wreck and left it a superpower; Gorbachev found it a superpower and left it a wreck.” Gorbachev is still widely admired in the West, but his popularity stops at the Russian border. A March 2011 poll found that only one in 20 Russians admire the Soviet Union’s last leader, and that “perestroika,” the name for Gorbachev’s move toward a market economy, “has almost purely negative connotations” (Applebaum, 2011).

The superior system

With few exceptions, what passes for serious discussion of the USSR is shot through with prejudice, distortion, and misconception. Locked in battle with the Soviet Union for decades, Washington deliberately fostered misunderstandings of its ideological foe. The aim was to make the USSR appear bleak, brutal, repressive, economically sluggish and inefficient—not the kind of place anyone of sound mind would want to emulate or live in. Today, scholars, journalists, politicians, state officials, and even some communists repeat old Cold War propaganda. The Soviet economy, in their view, never worked particularly well. However, the truth of the matter is that it worked very well. It grew faster over the period it was publicly owned and planned than did the supposedly dynamic US economy, to say nothing of the economies of countries that were as undeveloped as the USSR was in 1928, when the Soviet economy was brought under public control. The Soviet economy was innovative enough to allow the USSR to beat the United States into space, despite the United States’ greater resources, an event that inspired the Americans to mimic the Soviet Union’s public support for R&D. Moreover, the Soviet system of public ownership and planning efficiently employed all its capital and human resources, rather than maintaining armies of unemployed workers and inefficiently running below capacity, as capitalist economies regularly do. Every year, from 1928 to 1989, except during the war years, the Soviet economy reliably expanded, providing jobs, shelter, and a wide array of low- and no-cost public services to all, while capitalist economies regularly sank into recession and had to continually struggle out of them on the wreckage of human lives.

The US National Intelligence Council warns ominously that a crisis-prone world economy could produce chaos and distress on an even greater scale than the last crisis (Shanker, 2012). Offering a “grim prognosis” on the world economy, the UN warns of “a new global recession that mires many countries in a cycle of austerity and unemployment for years” (Gladstone, 2012). Yet at the same time, we are told that the Soviet economy never worked, and that capitalism, with its regular crises, and failure to provide employment, food, clothing and shelter to all, is both the only game in town and the superior system. Clearly, it is neither superior—on the contrary, it is clearly inferior—nor it is the only choice. Not only can we do better, we have done better. It is time to tear down the wall of politically engineered misconceptions about public ownership and planning. For too long, the wall has kept us from seeing a viable alternative model to capitalism whose track record of unequalled success points to a realistic and possible future for the bottom 99 percent—a future free from unemployment, recessions, extremes of wealth and poverty, and where essential goods and services are available at no cost to all.
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ABOUT THE AUTHOR
Stephen Gowans is a Canadian political analyst and founder of What’s Left.

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