For most of its seven decades in existence, the Soviet Union was a socialist country with a command economy. Government administrators decided which goods to produce to meet the needs of the population. Markets played only a minor role in determining how society’s resources would be distributed.
In some ways, Soviet citizens had advantages over their counterparts in Western Europe: the government guaranteed them full employment, free education, and generous vacation and retirement conditions. However, there were also frequent shortages of the most desirable consumer goods.
- The Soviet Union was a socialist country with a command economy. The government owned most businesses, set prices, and decided what to produce.
- Without price signals, Soviet planners had difficulty responding to shifts in consumer demand, resulting in frequent shortages.
- Many people resorted to informal markets for consumer goods, especially foreign imports.
- The system collapsed in 1991 after the market reforms introduced by Mikhail Gorbachev.
Understanding the Soviet Economic System
Following the revolutions of 1917, Russian workers led by the Bolshevik faction took over the country’s factories, mines, and railroads, with the goal of eventually transitioning towards communism. Later, they would also seize farmland, with agriculture managed through large collective or state-owned farms.
In 1921, the Soviet government established the State Planning Committee, or Gosplan, to manage the country’s economy. Instead of having private businesses produce goods in pursuit of profit, Gosplan was responsible for deciding where factories would be built, what goods they would produce, and what prices would be charged.
Starting with the first five-year plan in 1928, the Soviet government began to push for rapid industrialization: resources were directed towards producing capital goods such as factories, tractors, and industrial machinery. Investment in consumer goods, like clothing, shoes, cars, and household appliances increased after World War II, although military and heavy industry would remain the country’s top priorities.
The system was focused on providing the most basic needs of the population. Foodstuffs like bread and cabbage were heavily subsidized, and Soviet citizens received free education, healthcare, and generous retirement and vacation benefits. By the end of the 1980s, about a quarter of Soviet families had holiday homes.
But the quality of Soviet manufacturing was generally lower than goods produced abroad, and imports were hard to come by. Soviet citizens had to wait in long queues, and many resorted to bribery or family connections to acquire scarce goods. Foreign-made watches, cassette players, and blue jeans became prestige items.
Agriculture was notoriously inefficient in the Soviet Union, which relied on large collective farms. Small plots were given to farmers to cultivate for private sale; these accounted for only 3% of the country’s cultivated land but 25% of its output.
Defense was Top Priority
Military readiness was a top priority for Soviet planners, due to the perceived threat of foreign invasion. During the Russian Civil War, the country had been invaded by over a dozen foreign powers, including British, French, and American expeditionary forces. Later, the U.S.S.R. suffered enormous human and economic costs during World War II.
After the war the Soviet government continued to direct resources into military production at the expense of consumer goods. During most of the Cold War, the United States and the Soviet Union spent roughly similar amounts on defense, but this accounted for a larger share of the U.S.S.R.’s relatively smaller economy.
Defense spending was estimated to be between 10% and 20% of the Soviet economy, leaving the country with fewer resources to invest in discretionary goods for the public.
Consumer Goods Shortages in the Soviet Union
Central planning made it difficult for administrators to respond to the country’s shifting economic needs. Without market price signals, administrators could not predict which goods had the greatest demand, resulting in overproduction (causing waste) or underproduction (shortages).
Moreover, government-owned firms lacked market discipline and profit motives, meaning that there was little consequence for producing unwanted goods. For example, in the 1970s the Soviet Union produced 800 million shoes every year—enough to provide every citizen with three new pairs. But the quality, design, and fit were often so poor that many residents had to spend hours looking for a perfect pair, or buy imported shoes at vastly higher prices.
Market Activity in the Soviet Economy
Private trade persisted for most of the Soviet period, both in state-sanctioned markets and informal trades. Collective farmers were allowed to cultivate small plots of land and sell surplus produce in private markets. These private plots, though only about 3% of all farmland, produced a quarter of the country’s agricultural output.
There was also a sizeable underground economy, as consumers bartered and traded for scarce consumer goods. In addition to goods smuggled from abroad, many people used family connections or bribery to skip the line at state-run stores. This “second economy” was estimated to account for up to 10% of the country’s GDP.
Example of Soviet Consumer Goods
An interesting example of these economic issues is demonstrated in the Soviet car market. During the 1960s, the Soviet Union began mass-producing consumer cars, both for export and domestic consumption. Before that point, the Soviet auto industry had been dominated by trucks and other industrial vehicles.
One of the most popular models was the Lada, introduced in 1970 through a licensing deal with Fiat. With its boxy shape and unpretentious design, the Lada was affordable, easy to repair, and remained popular even after the Soviet period ended.
However, Soviet cars were priced well below demand, resulting in years-long queues. During the 1980s, the average wait time reached seven years, and some drivers waited as much as ten. Demand was so great that the resale value of a used car was well above the original purchase price.
Since there was no competition, manufacturers had little incentive to improve on the existing designs. Although production tripled between 1970 and 1988, new models were nearly identical to the original Lada.
The number of cars produced in the Soviet Union in 1988.
Perestroika and the End of the Soviet Union
Although living standards improved, consumer shortages persisted until Mikhail Gorbachev assumed leadership and introduced perestroika, a series of economic reforms that introduced market discipline and required state-owned companies to become financially self-sufficient.
These reforms wreaked havoc with the existing distribution system, causing severe shortages and inflation. Many state-owned enterprises had been working at a loss to provide basic goods, which now became even more unobtainable. The changes lasted only a few years before the Soviet system collapsed.
What Were the Economic Factors in the Soviet Collapse?
There were many economic faults that contributed to the decline of the Soviet economic system. Mismanagement and inefficiency in state-owned enterprises led to recurrent shortages of many consumer goods, especially agricultural products. In addition, the ongoing cold war with the United States and costly intervention in Afghanistan required the country to spend heavily on the military at the expense of domestic consumption.
What Were the Positive and Negative Features of the Soviet Economic System?
There were some benefits to the Soviet economic system. Soviet citizens enjoyed free education, health care, and generous retirement and vacation benefits. However, there were serious shortages of consumer goods, especially during the stagnation of the late 1980s. Many consumers resorted to bribery or black markets to access scarce goods, which contributed to a sense of indifference when the system collapsed in 1991.
What Are the Advantages and Disadvantages of a Socialist Economic System?
Marxist economists believe that a socialist system can mobilize society’s resources towards goals that would be unprofitable for private companies, such as creating large public works projects. They can also provide a more equitable distribution of wealth and reduce poverty. Classical economists believe that a market mechanism is necessary to have an efficient economy.
The Bottom Line
The Soviet Union was a socialist country where the government decided what to produce and how much to charge. This system worked to provide for many basic needs of the population but was unable to adapt to rapid changes in consumer demand. Without market-based price signals or profit motives, there were frequent shortages of consumer goods.