Meltdown: Inside the Soviet Economy, by Paul Craig Roberts and Karen LaFollette, Washington: Cato Institute, 152 pages, $19.95/$9.95 paper
Empty shelves at state grocery stores and a mad rush to send food aid from the West as the harsh Soviet winter set in dramatized the grave condition of the Soviet economy. Soviet leader Mikhail Gorbachev last fall first embraced, but quickly distanced himself from, a reform plan offered by Kremlin economic adviser Stanislav Shatalin which called for the establishment of private property, privatization of state-owned industries, creation of a stock market, and other radical reforms—all within 500 days.
The result: almost complete economic breakdown. Ordinary Soviets stockpiled even the notoriously awful canned "Tourist's Breakfast" soup in anticipation of a food crisis whose severity has not been seen since World War II.
The failure of central planning is obvious, yet as recently as April 1988, U.S. intelligence agencies told Congress that the Soviet economy was growing steadily at 2 percent a year. This optimistic assessment, as Paul Craig Roberts and Karen LaFollette report in Meltdown, was not even shared by the Soviets. In fact, the authors note, had Gorbachev only two months previously told the Central Committee of the Communist Party that, with the exceptions of vodka and crude oil sales, the Soviet economy had not grown in 20 years.
Roberts and LaFollette argue that inaccurate analyses left many in the West unprepared for the Soviet economy's failure, a failure they document well in a highly readable survey based primarily on reports in the glasnost-era Soviet press. The authors also deliver an economic reform outline and a devastating critique of Western Sovietologists and journalists who for too long ignored evidence of human rights abuses and a failed economic system.
With Western complicity, "the failure of Soviet socialism was hidden for decades by the availability of vast quantities of easily accessible resources, and by a vast landscape, large seas, lakes, and fabled rivers to serve as reservoirs for industrial pollution." A semi-controlled economy, requiring two and one-half times as many inputs per unit of output as the U.S. economy does, has squandered these resources and caused environmental destruction linked to public health problems and rising mortality rates.
The communists succeeded in remaking the Soviet economy into a "centrally directed administrative system of products exchange," the authors state. "They were unable to do away with money.…[ T]he centralized supply distribution systems, cornerstone of their efforts, is a notorious failure. They did succeed in suppressing rationality, however, by abolishing price and profit signals and the incentive of private property. The result is a system that is more or less organized like a market but without the rational criteria of markets."
This is the authors' central insight. Instead of responding to consumer demand or profit and loss, Soviet managers operate in a market of government-set gross output targets, where prices have little or no relation to market value. When output goals conflict, managers must choose which ones to meet based on available supplies and potential political fallout from quotas left unmet. To fill supply gaps, factory managers hire tolkachi, independent brokers who work for more than one company at a time; their fees are, of course, hidden by accounting trickery.
Managers will sometimes meet output goals in bizarre fashion, as Roberts and LaFollette illustrate with numerous entertaining examples. A shoe factory made 100,000 pairs of boys' shoes, instead of a range of men's sizes, "because it could chum out many more pairs of the smaller boys' shoes from its limited supply of shoe leather." In the oil industry, managers are rewarded according to meters drilled per month. Thus they tend to drill many shallow, unproductive wells instead of a few deeper, productive ones, because drilling slows at greater depths.
In order to rebuild the wrecked Soviet economy, the authors suggest reforms that are strikingly similar to Shatalin's "500 Days Plan," an encouraging sign in itself. But if reform efforts are to succeed, they say, profit incentives must be substituted for output targets and "private property must become a reality," changes the nomenklatura surely will resist.