Faulty Foundations: Soviet Economic Policies, 1928-1940

Faulty Foundations: Soviet Economic Policies, 1928-1940

by Holland Hunter, Janusz M. Szyrmer


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ISBN-13: 9780691600802
Publisher: Princeton University Press
Publication date: 07/14/2014
Series: Princeton Legacy Library , #196
Pages: 356
Product dimensions: 7.00(w) x 9.90(h) x 0.90(d)

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Faculty Foundations

Soviet Economic Policies, 1928â?"1940

By Holland Hunter, Janusz M. Szyrmer


Copyright © 1992 Princeton University Press
All rights reserved.
ISBN: 978-0-691-04281-7



This is a study in economic history, designed to identify the economic policies and practices, launched at the end of the 1920s, that have gradually brought the USSR to its present unenviable state. The policies and practices appeared very successful for a while, but since the 1960s, Soviet economic performance has become less and less impressive, especially in comparison with that of other major powers. What has gone wrong?

Our reading of the record suggests that faulty foundations were laid in the early years, and that the basic defects of the contemporary Soviet economy can be accounted for and explained as growing out of the first decade of forced industrialization. The economic system that developed in the 1930s persisted through the 1940s and 1950s, and although parts of it were modified in the 1960s and 1970s, its central features withstood reform efforts in the 1980s. Thus what might appear to be analysis of a bygone era will in fact involve examination of the foundations of a long-standing structure in need of basic repairs.

On the eve of the period we will be examining, the USSR had a broad range of economic, political, and cultural goals, and sympathetic observers in the West saw the Soviet experiment mainly in terms of its progressive potentials. As events developed, however, the period from 1928 through 1940 was dominated by a convulsive effort to transform the economy in preparation for World War II, and many of the idealistic intentions of the regime were put aside. The drive for structural transformation laid heavy burdens on the peoples of the USSR, but Soviet success in repelling the Nazi invasion has long been seen by the regime as justifying the sacrifices made and validating the procedures used.

Our study does not attempt to evaluate the political and military aspects of the preparatory effort, although we recognize their significance. We limit ourselves to asking whether feasible alternative economic policies might have prepared the economy for the war more effectively. Our study does not extend into the postwar period either, but it does have some obvious implications for present efforts to remake the economy. We hope that exposing the faulty foundations laid in the 1930s can contribute to the efforts to build new foundations in the 1990s.

The issues here are political and cultural as well as economic, and a fully adequate review would result in a multivolume study produced by a team of specialists. It may be useful, nonetheless, to shed light on the economic aspects, leaving political and cultural issues to others. As economists, we feel most comfortable limiting our analysis to measurable economic developments. We draw mainly on quantitative evidence covering, for example, annual outputs and capital stocks, rather than on government decrees, major policy statements, or interactions among political leaders. The statistics are assembled and/or estimated in order to trace quantitative associations among the parts of a large and growing economy undergoing rapid transformation. Even this narrowly focused and deliberately selective approach has required an extensive analysis.

We are able, six decades after the fact, to appraise this statistical record with the benefit of hindsight, knowing in a general way what happened during the period leading up to the outbreak of World War II in 1939. This gives us, of course, a huge advantage over the Soviet policymakers who, at any point between 1917 and 1939, could only speculate about the impact of the alternative policies that lay before them. We can now trace the outcome of their actual decisions, and we do so in Part II of the study.

Moreover, our modeling approach enables us to examine alternatives—economic policies not chosen, or economic trends not observed. In Part III, the heart of the study, we conduct some modest experiments, holding everything constant except for a single significant policy variable and calculating the impact on the whole economy of a limited change in that variable. This kind of quantitative economic history, if persuasively conducted, can substantially enrich a mere reconstruction of the statistical record. We can gain at least a roughly accurate impression of the economy's sensitivity to variations in its basic features, and thus send a flashlight beam a short way down some of the roads not taken.

The focus here is on growth of the economy's stock of fixed capital plant and equipment. Most economic activity is concerned with the production and consumption of current goods and services, but both Adam Smith and Karl Marx stressed the need for investment (accumulation) to offset depreciation and enlarge capital stocks so that an economy could produce more current output and support continuous growth of the national income. Growth requires investment under both capitalism and communism. The Bolsheviks, as we shall see, were especially concerned with building capital stocks quickly, in spite of the competing claims of household consumption and other final uses on each year's limited national income.

Our study is policy-oriented, although it may appear to be mainly a statistical exercise. The central issue here is whether the Soviet growth potential was effectively utilized, whether the policies and practices employed by the Bolsheviks were well matched to the available opportunities. Was the economy's growth potential fully realized? Was the drive for output expansion pressed too strenuously?

In concrete terms, we ask whether the stock of fixed capital that had been built in the USSR by January 1, 1941, was, in its size and composition, the best one possible, given the prevailing welfare objectives and the trade-offs among them. With different policies, could the stock have been larger? With a different composition, could it have been more effective in defending the USSR against Nazi invasion? Could its growth have been accompanied by more household consumption? The strenuous efforts during the period 1929–40 to build capital stocks involved great sacrifices and hardships—were all of them necessary? These are the human issues underlying the numbers we will be examining.

Our first task is to reconstruct the main trends in the Soviet economy over the years from 1928 through 1940. We take 1928 as a starting point because it was the last year before the era of Five-Year Plans began (actually the first Five-Year Plan period officially began on October 1, 1928). We take 1940 as a terminal year because it was the last year before the Nazi invasion of the USSR (which actually was launched on June 22, 1941). For the intervening years we develop annual time series for twelve producing sectors, covering their outputs, capital stocks, and labor forces, together with annual data covering six types of final demand, including rural and urban consumption, collective consumption, investment, defense outlays, and commodity exports.

Our purpose is to study structural changes evolving as part of a process of output expansion. As output expanded, how did the economy's structure change? How did structural change itself contribute to the expansion? Framing our questions this way, we are led to examine annual flows among a group of producing sectors, together with associated changes in their fixed capital stocks. We need quantitative data, therefore, on output flows and capital stocks, not just for the economy as a whole, but broken down into a computationally manageable number of sectors and stated in standardized terms. Assembling them has proved to be a major task.

The Nature of Our Evidence

We have been guided in establishing the economy's overall economic dimensions by the benchmarks laid down in Abram Bergson's 1961 study, The Real National Income of Soviet Russia Since 1928. For 1928, 1937, 1940, 1944, 1950, and 1955, he provides estimates of the Soviet Gross National Product (GNP) and its components in constant prices—estimates that are securely grounded in economic theory and make careful use of the available primary evidence. We have tried to trace developments during the intervening prewar years, 1929–36 and 1938–39, and make sector-of-origin estimates for the whole period, drawing on the work of numerous Western scholars. We have also derived sectoral capital stock series consistent with the evidence on other final uses.

For detailed information on capital stocks, sectoral value added, and a variety of other matters, we have drawn heavily on The Soviet Capital Stock, 1928–1962, by Richard Moorsteen and Raymond P. Powell, a 1966 treatise that uses sound economic theory and meticulous statistical craftsmanship to build annual output estimates for the years 1928–41 and 1944–62. In developing their series for the fixed capital stock, they started with the 1928 stock and added annual investments to obtain cumulative aggregates, subject of course to depreciation, covering four major subdivisions of the economy.

But the evidence we have compiled from these and other Western scholars, when fitted into our intersectoral and intertemporal analytic framework, appears to demonstrate that estimates of prewar capital growth compiled in early year prices exaggerate capital growth rates. Our model shows that Soviet data for annual investment outlays, even when compiled in constant prices, cannot be fitted into the record of overall resource use when the capital stock figures are in 1928 prices. We have therefore derived a new and lower series. Fortunately, and fortuitously, it shows almost exactly the same growth rate, 1928–40, as shown by the Moorsteen-Powell series in 1937 prices and the official Soviet series in 1956 prices (for details, see appendix B and chapter 12).

Our accounting framework imposes intersectoral consistency on all the detailed data for individual producing sectors. The underlying theory comes from Wassily W. Leontief and Simon S. Kuznets, both of whom were born in Russia, carried out most of their scholarly work in the United States, and were elected Nobel laureates on the basis of their contributions to economic science.

As defined by Kuznets and others, an economy's total gross national income and product can be subdivided into various kinds of goods and services on the product side, while the same total can be subdivided into various forms of income and other charges on the income side. These are two sides of the same coin. It is inherent in the definitions of output and income that the sum of the year's outputs must equal the sum of the year's incomes. Thus for the economy as a whole, after any given year has ended, an ex post reconstruction of all the output components ought to add up to the same total as a reconstruction built up from all the income components. Statisticians assembling detailed evidence for all the components on each side of the accounts are regularly forced to create estimates, sometimes quite heroic, of the size of components that are not well documented. Ultimately, however, they arrange for the necessary logical equality by entering an amount (a very small one, they hope) as a "statistical discrepancy," just large enough to fill any remaining gap on one side of that year's accounts.

The Soviet income and product estimates that we have assembled for our benchmark years fit within this conceptual framework. The approximate nature of much of our evidence has forced us to make many fairly heroic estimates, but they have all been held within bounds by this strict logical framework and in the end have proved to fit within an internally consistent whole. Furthermore, our historical input-output tables place additional rigid requirements on all production activities.

An economywide table shows the flows of inputs and outputs among all the producing sectors that are called into being as producers purchase material inputs, combine them with labor and capital within the enterprise, and deliver the resulting output to other producers and to the various categories of final demand. Here, too, ruble estimates for every production and consumption activity must be supplied, so that every niche in the economy is accounted for. It is a fact of economic life that the parts of the economy are directly and indirectly dependent on each other; none is free to vary without drawing on, and having some influence on, the surrounding economy. Thus an empirical framework embodying these connections gives us a powerful tool for tracing policy impacts, whether actual or potential, as they spread throughout the economy.

In addition, the model we use for computing alternative expansion paths imposes intertemporal consistency on the estimates for each individual year. This is because each year's expansion depends on the investments that have been made in earlier years. For an example specific to this study, this means that output in a year such as, say, 1935 cannot exceed what that year's capital stock is capable of producing, and that the 1935 capital stock cannot be larger than what prior years' net investment has added to the capital stock that has survived since the start of the period we are examining. Since the amounts of investment in each earlier year had to fit within that year's final-demand claims, and all intersectoral requirements that year also had to be met, we will be developing estimates that link sectors and years together in a tightly interlocked system of mutually reinforcing numbers.

Our approach goes well beyond mere comparative statics, comparing 1940 with 1928 to see how much each separate sector of the economy has grown. Static comparison of beginning and ending values for a variety of economic phenomena tends to imply smooth, continuous changes in each component, acting on its own, independent of surrounding activities. Moreover, looking only at end points tells us very little about the processes at work during the intervening years. Our structural model, by contrast, is able to provide at least a simplified empirical reconstruction of the complex dynamic process by which interacting sectoral components of the Soviet economy brought the whole economy forward from 1928 to 1940.

Finally, since the margins of error around many specific pieces of evidence are quite wide, this approach has made it possible to narrow the range of uncertainty surrounding individual details in the actual record by imposing a strict framework that sets upper and lower bounds on the values that can be mutually consistent with each other. After experimentation and adjustment, our estimates for the economy's output, sector by sector and year by year, appear roughly consistent with Bergson's benchmark GNP estimates and the other Western reconstructions of sector performance that we have used.

Our capital stock estimates, in addition, throw important new light on the growth of the fixed capital stock, a central feature of the Soviet growth record. We find that annual investment outlays during 1929–40 did not lead to usable and operational buildings and equipment on the scale estimated in the West. The measurement issues are complex and our findings are tentative, but the evidence is laid out in chapter 12.

Our work shows also that an interindustry approach to structural transformation can be a useful tool for identifying and correcting a defective intersectoral price structure. We use it to demonstrate disequilibrium in the 1928 Soviet economy and to provide a basis for an internally consistent record of the 1929–40 process of output expansion.

The Structure of the Book

The next two chapters identify the principal economic policy alternatives facing the USSR in the 1920s and summarize the main trends of 1928–40 sectoral output expansion. We turn in Part II to an examination of the ways major economic policies were implemented. We draw on the quantitative estimates that others have developed for key economic sectors, fitting them into our overall economic record. In Part III we go on to apply an economywide model called KAPROST (short for "capital growth" in Russian) in order to obtain quantitative estimates of the impact that alternative economic policies might have had on this same economy.


Excerpted from Faculty Foundations by Holland Hunter, Janusz M. Szyrmer. Copyright © 1992 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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Table of Contents

List of Figures

List of Tables


Pt. I Introductory Background

Ch. 1 The Nature of Our Work

Ch. 2 Soviet Economic Policy Alternatives in the 1920s

Ch. 3 Overall ends in Output and Final Use, Capital, Labor, and Population

Pt. II The Charge of the New Bolsheviks

Ch. 4 Operational Issues in Administering Rapid Output Expansion

Ch. 5 New-Bolshevik Policies outside Agriculture

Ch. 6 New-Bolshevik Agricultural Policy and an Alternative

Ch. 7 Foreign Trade Developments

Ch. 8 Identifying the Role of Defense Outlays

Ch. 9 Keeping Track of Capital Growth

Ch. 10 An Appraisal of New-Bolshevik Economic Policies

Pt. III Testing Alternative Economic Policies

Ch. 11 The KAPROST Model: Logic and Structure

Ch. 12 Insights Derived from the KAPROST Model

Ch. 13 Tracing the Consequences of Alternative Policies

Ch. 14 Lessons from Soviet Economic Experience

Appendix A: Statistical Foundations for Our Analysis

Appendix B: Dealing with the Index Number Problem

Appendix C: Model Equations



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