The Economic Collapse of the Soviet Union

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There were many economic problems for the Soviet Stalinist system. One very general problem was the the lack of incentives for productivity. As anonymous Soviet citizen said
They pretent to pay us and we pretend to work.
The Russian economist, Grigory Yavlinsky, who ultimately became an important advisor to Mikhail Gorbachev, became convinced to the need for reform when he investigated the low productivity in the Soviet mines. He found the miners were not working because they had no incentives to work. Said Yavlinsky
The Soviet system is not working because the workers are not working.

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In the 1970's and 1980's the Soviet Union seemed to be one of the most stable political units in the world. In international politics the Soviet Union was very strong and seemed only to be getting stronger. It was, for example, securing political client states in Africa. The Western powers believed this image was valid. But in the Soviet Union few things were really what they seemed to be.

Leonid Brezvev

In 1974 there was a power summit meeting near Vladivostok, U.S.S.R. between President Gerald Ford of the U.S. and Leonid Breznev of the Soviet Union. After the meeting Breznev went to his waiting train. The train however did not depart. The journalist and others who traveling on the train with Breznev were not told the reason for the delay even though the delay extended through the night. The next day they were told that Brezvev had suffered a stroke. Breznev's personal physician, Mikhail Kosarev, said the problem was an overdose of his sleeping medication rather than a stroke. The symptoms were similar, slurred speech and muscle weakness. Kosareve said that if effect Breznev was a drug addict during this period and had merely miscalculated his dosage. It was no uncommon for the top leadership in totalitarian states to be addicted to sleeping potions. Mao and the top leadership of the Communist Party in China had been addicted to sleeping pills by the time of the Long March. Totalitarian leaders have a hard time relaxing and getting to sleep.


There were many economic problems for the Soviet Stalinist system. One very general problem was the the lack of incentives for productivity. As anonymous Soviet citizen said

They pretent to pay us and we pretend to work.

The Russian economist, Grigory Yavlinsky, who ultimately became an important advisor to Mikhail Gorbachev, became convinced to the need for reform when he investigated the low productivity in the Soviet mines. He found the miners were not working because they had no incentives to work. Said Yavlinsky

The Soviet system is not working because the workers are not working.

But there were more immediate causes for the collapse. In the middle 1980's about seventy percent of the industrial output of the Soviet Union was going to the military. Oleg Gordievsky, a KGB official who defected to Britain, asserted that at least one third of the total output was going to the military. British intelligence could not believe such a high figure but later Western intelligence sources estimated that it was at least fifty percent. One can only imagine what a severe shortages of industrial goods there were for the rest of the economy.

In the U.S. the Reagan Administration increased the budget for the military and presented the possibility that it would implement a Star Wars antiballistic missile system. To maintain a parity with the U.S. under those developments would have required an even larger share of industrial ouput going to the military. The planners and decision-makers had to face the fact that it was economically impossible for the Soviet Union to increase the share of its output going to the military. The Soviet authorities then ended the arms race and called off the Cold War. When the justification of an external threat was removed there was no reason for the Russian public to toleratel the totalitarian regime and the political system fell apart.

The agreement between Ford and Breznev led on to the Statregic Arms Limitation Talks (SALT). While Soviet negotiators were talking detente with the West in Helsinki, Finland the Soviet military were installing medium range nuclear missiles, the SS20's. Only the inner circle of the military-industrial complex knew about those missiles. The SALT negotiators did not know; even the higher levels of the KGB intelligence staff did not know. The negotiators and the KGB only found out about the SS20's when Western sources publicized their siting. The U.S. and western Europe reacted to the SS20's by installing Pershing and Cruise missiles in western Europe. The Soviet reacted to those sitings by starting a peace movement in western Europe to protest the siting of the Pershing and Cruise missiles. Elena Bonner, a human rights advocate in the Soviet Union and the wife of Andrei Sakharov, characterized the peace movement as a movement of Soviet Con Artists. She also characterized the SALT agreements, which the West was proud of, as an agreement in which 300 million people who were living in the Soviet Union and eastern Europe were handled over forever to totalitarianism. What the West got for the Stategic Arms Limitation was a Soviet agreement to honor a set of human rights measures, the so-called Third Basket. From documents that were later found after the fall of the Soviet Union is that the Soviet leaders had no intention of honoring those agreements concerning human rights.

The Soviet leaders concentrated on amassing military power. By 1970 the Soviet Union had achieved parity with the United States in military power. They managed to do this even though their military budget was supposedly on one half or one third of that of the U.S. But achieving parity with the U.S. was not an end to the arms buildup. Soviet leader Andropov suggested that the Soviet Union should strive for parity with the combined forces of the North Atlantic Treaty Organization (NATO) plus China.

Part of the military buildup of the Soviet Union was in tens of thousands of tanks. They had 25 thousand in East Germany alone. They were very pleased and confident with this vast superiority in tanks. This confidence held up until President Jimmy Carter announced that he was considering the development of a neutron bomb. The neutron bomb would produce armor-piercing radiation which would kill the crews of tanks but leave the tanks unharmed. This would have made the tank force of the Soviet Union not only ineffective but a danger since enemies could take over the tanks after the crews had been killed and use them against the Soviet Union. The Soviets organized an international peace campaign against the neutron bomb. It was run by the KGB office near Moscow. It was effective enough to get Jimmy Carter to cancel the development of the neutron bomb only a year after he announced its consideration.

Ronald Reagan was elected president in 1980 and he never believed detente with the Soviet Union was feasible or desirable. In July of 1983 he made a speech in which he labeled the Soviet Union a evil empire. The Soviet Union the leaders of the military-industrial complex were overjoyed. They immediately received and increase in budget.

The budget increase for the military came at the expense of investment in the rest of the economy. Nikolai Leonov, a general in the KGB, described the result as follows:

First there was a visible decline in the rate of growth, then its complete stagnation. There was a drawnout, deepening and almost insurmountable crisis in agriculture. It was a frightening and truly terrifying sign of crisis. It was these factors that were crucial in the transition to perestroika.

The Reagan Administration justifiably gets credit for destroying the Evil Empire, but the irony of it is that the successful strategy arose as a result of a blunder rather than rational decision. David Stockman tells us that the dramatic increase in the defense budget arose as a result of a mistake. David Stockman was the head of the Office of Management and the Budget (OMB). The OMB practice in putting together a budget was first to make forecasts of the budget figures assuming no change in price levels; i.e., no inflation. An estimate was made of the rate of price increase and the constant price projections would be multiplied by an appropriate factor for inflation. Stockman says that in one year the inflation-adjusted figure for the Defense Department budget was mistakenly reported as the constant price figure. The mistaken figures were released before the mistake was caught. When OMB discovered the mistake the Reagan Administration tried to tell the Pentagon that a correction would have to be made. The Pentagon people said, in effect, "No way! If you adjust that published figure we will tell people that you are cutting the Defense budget."

The political fallout would have been too great so the Reagan Administration sanctioned the accceptance of the published figure and made a second inflation adjustment. This was why there was such a big increase in the Defense budget.

Many scientist doubted that the Star Wars anti-missile system would work. The Soviet strategic planners had to presume that it would work.

Gorbachev's Glasnost and Perestroika

When Mikhail Gorbachev was assured of gaining control of the Communist Party and the government of the Soviet Union he sought out Aleksandr Yakoblev, a specialist in North American affairs, to be one of his closest political advisors. Gorbachev and Yakoblev did not intend to dismantle the communist system. Instead they intended to make it work.

Years after the fall of the Soviet Union, Yakoblev said in an interview

It seemed to us that all we had to do was to remove some prohibitions, some brakes. Free everything up and it would start to work. It would work. There is a good engine there. It has got a bit old and rusty. It needs oil. Then just press the starter and it will set off down the track. And we went along under this illusion for one and half to two years.

But as soon as we began to make really radical reforms, in foreign policy say, we immediately came up against the resistance of the system, that is the military-industrial complex, the central core of the system. It began to resist.

And that is when we began to understand that if we wanted radical reform we would inevitably come up against the resistance of the system. And that is what happened. And from that moment on people began to say that the system is unreformable and the Party is unreformable. Although there did remain some illusions, some hopes, that it could all be done without major conflicts.

Andrei Grachev, the Deputy Head of the Intelligence Department of the Central Committee, summed up the denouement of the downfall quite cogently:

Gorbachev actually put the sort of final blow to the resistance of the Soviet Union by killing the fear of the people. It was still that this country was governed and kept together, as a structure, as a government structure, by the fear from Stalinist times.

The other thing that was keeping this country together wa the invented outside threat. So Gorbachev's foreign policy [which] confirmed to the people that there was no danger from the outside, actually played a bad or a good joke with his country because then it did not have any particular reason to keep the structure of this camp. And then it fell apart.

But there was a more immediate explanation for the collapse of the Soviet Union provided by Yegor Gaidar, who had been acting prime minister of Russia from June of 1992 to December of 1992 and a key figure in the transformation of the Russian economy. In his last work,

Collapse of an Empire: Lessons for Modern Russia, published in 2007 Gaidar provides a powerful explanation for the collapse of the Soviet Union. Soviet agriculture had stagnated in the 1980's but the demand for grain in the cities was increasing. It was necessary to buy grain in the international market. While the price of petroleum was high it was feasible to finance the purchase of grain from internal sources. When the price of petroleum fell in the last 1980's the Soviet Union needed to borrow the funds from Western banks to purchase the needed grain. This severely restricted the international activities of the Soviet Union. It could not send in Soviet troops to put down the rebellions against communism in Eastern Europe because such an action would have resulted in a refusal of Western sources to lend the money needed. Likewise the attempted coup d'état was doomed to failure because the coup leaders would not have been able to borrow the funds needed to stave off starvation in the major cities.

Although Gaidar's book does not delve into the reason for the decline in petroleum prices in the late 1980's there is evidence that this occurred because of a conspiracy between the American Central Intelligence Agency (C.I.A.) the leaders of Saudi Arabia to punish the Soviet Union for its invasion of Afghanistan. Saudi Arabia increased its production of petroleum drastically and consequently the price of petroleum fell.

The supposedly progressive system of socialism actually was a replication of feudalism in that was the absence of personal freedom of the common people and also in that the core of structure was an elite oriented toward militarism. The common people, the workers, were treated like serfs and slaves: they were given the necessities of food, shelter, clothing, transportation and medical care but little else. This is the same regime that prevailed under slavery.

(To be continued.)

  The Economy of Great Britain


            Little more than a century ago, Britain was 'the workshop of  the world'. It had as many merchant ships as the rest of the world put  together  and  it  led  the  world  in   most   manufacturing

      industries.  This  did  not  last  long.  By  1885  one   analysis

      reported, "We have come to occupy a position In which  we  are  no

      longer progressing,  but  even  falling  bock....  We  find  other

      nations able to compete with us to such an extent as we have never

      before experienced." Early in the twentieth  century  Britain  was

      overtaken economically by the United States and Germany. After two

      world. wars and the rapid loss of its  empire,  Britain  found  it

      increasingly difficult to maintain its position even in Europe.

            Britain struggled  to  find  a  balance  between  government

      intervention in the economy and an almost  completely  free-market

      economy such as existed  in  the  United  States.  Neither  system

      seemed to fit  Britain's  needs.  The  former  seemed  compromised

      between two different objectives: planned economic prosperity  and

      the means of ensuring full employment, while the  latter  promised

      greater  economic  prosperity  at  the   cost   of   poverty   and

      unemployment for the less able in society. Neither Labour nor  the

      Conservatives doubted the  need  to  find  a  system  that  suited

      Britain's needs,  but  neither  seemed  able  to  break  from  the

      consensus based on Keynesian economics .

            People seemed complacent about Britain's decline,  reluctant

      to make the painful adjustments that might be necessary to reverse

      it. Prosperity Increased during the late 1950s and in  the  1960s,

      diverting attention from Britain's decline relative  to  its  main

      competitors. In 1973" the Conservative Prime Minister Edward Heath

      warned, "The alternative to expansion is not, as some occasionally

      seem to suppose, an England of quiet market towns linked  only  by

      steam trains puffing slowly and peacefully through green  meadows.

      The alternative is slums, dangerous roads, old factories,  cramped

      schools, stunted lives." But in the years of world-wide recession,

      1974-79, Britain seemed unable to improve its performance.

            By the mid 1970s both  Labour  and  Conservative  economists

      were beginning to recognise the need to move away  from  Keynesian

      economics, based upon stimulating demand by Injecting  money  into

      the economy. But, as described in the  Introduction,  it  was  the

      Conservatives who decided to break with the old  economic  formula

      completely. Returning to power in 1979, they  were  determined  to

      lower taxes as an  incentive  to  individuals  and  businesses  to

      Increase productivity; to  leave  the  labour  force  to  regulate

      itself either by pricing itself out of employment  or  by  working

      within the amount of money employers could afford;  and,  finally,

      to limit government spending levels  and  use  money  supply  (the

      amount of money in circulation at  any  one  time)  as  a  way  of

      controlling inflation. As Prime Minister Margaret Thatcher  argued

      in the Commons, "If our objective is  to  have  a  prosperous  and

      expanding economy, we must recognise that high public spending, as

      a proportion of GNP gross national product;,  very  quic


kly  kills

      growth.... We have to remember that governments have no  money  at

      all. Every penny they take is from the productive  sector  of  the

      economy in order to transfer it to the unproductive part  of  it."

      She had a point: between 1961 and 1975 employment outside Industry

      increased by over 40 per cent relative to employment in industry.

                       During the 1980s the Conservatives put their  new

      ideas into practice, income tax was reduced from a basic  rate  of

      33 pet cent  to  25  per  cent.  (For  higher  income  groups  the

      reduction was greater, at the top rate from S3 per cent to 40  per

      cent.) This did not lead to any loss  in  revenue,  since  at  the

      lower rates fewer people tried to avoid tax.  At  the  same  time,

      however, the government doubled Value Added Tax (VAT) on goods and

      services to 15 per cent.

              The  most  notable  success  of  'Thatcherism'   was   the

      privatisation of  previously  wholly  or  partly  government-owned

      enterprises. Indeed, other countries, for example Canada,  France,

      Italy, Japan, Malaysia and  West  Germany,  followed  the  British

      example. The government believed that privatisation would increase

      efficiency,  reduce  government   borrowing,   increase   economic

      freedom, and encourage wide share ownership. By 1990 20  per  cent

      of the adult population were share  owners,  a  higher  proportion

      than in any other Western industrialised  country.  There  was  no

      question of taking these enterprises back into  public  ownership,

      even by a Labour government.

            Despite such changes, however, by  1990  Britain's  economic

      problems seemed as difficult as ever. The  government  found  that

      reducing public expenditure was far harder than expected and  that

      by 1990 it still consumed about the same proportion of the GNP  as

      it had ten years earlier. Inflation, temporarily controlled,  rose

      to over 10 per cent and was only checked from  rising  further  by

      high interest rotes which also had the side effect of discouraging

      economic growth. In spite of  reducing  the  power  or  the  trade

      unions, wage demands (most  notably  senior  management  salaries)

      rose faster than prices, indicating that a free labour market  did

      not necessarily solve the wages problem. By 1990 the manufacturing

      Industry had barely recovered from  the  major  shrinkage  in  the

      early 1980s. It was more efficient. but in the meantime  Britain's

      share of world trade In manufactured goods had shrunk from  8  per

      cent in 1979 to 6.5 per cent ten years later. Britain's balance of

      payments was unhealthy too. In 1985 it had enjoyed a small surplus

      of Ј3.5 billion, but in 1990 this had  changed  to  a  deficit  of

      Ј20.4 billion.

             Many small businesses fail to survive, mainly as  a  result

      of poor management, but also because, compared with  almost  every

      other  European  Community  member,  Britain  offers   the   least

      encouraging conditions. But such small  businesses  are  important

      not only because large businesses grow from small ones,  hut  also

      because over half the new jobs in Britain  are  created  by  firms

      employing fewer than 100 staff.

            It is not as if Britain is without industrial  strength.  It

      is one of the world leaders in the production of  microprocessors.

      Without greater investment  and  government  encouragement  it  is

      doubtful whether Britain will hold on to its lead  in  this  area.

      However,  it  has  already  led  to  the  creation  of   'hi-tech'

      industries in three main  areas,  west  of  London  along  the  M4

      motorway or 'Golden Corridor', the lowlands between Edinburgh  and

      Dundee, nicknamed 'Silicon Glen', and the area between London  and

      Cambridge. In the mid 1980s Silicon Glen was producing 70 per cent

      of British silicon wafers containing the microchips essential  for

      the  new  information  technology-  The  Cambridge  Science  Park,

      symbolised by its Modernist Schlumberger Building, is the flagship

      of hi-tech Britain. Beginning in 1969, by 1


986 the Park  contained

      322  hi-tech  companies.  In  the  words  of  a  consultant,  "The

      Cambridge phenomenon... represents one of the very few spontaneous

      growth centres in a national economy that has been  depressed  for

      all of a decade."

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