recently i watched a video by a popular
youtube channel about the economy of the
soviet union
i have long been interested in how
soviet society worked but sadly that
particular video failed to scratch the
itch
it felt a bit watered down so i figured
i would make my own
for generations the soviet union grew
faster than every other developing
country except one
but once that strategy ran its course
the soviets failed to adapt and things
fell apart
it's a challenge that every country has
to face at one time or another in the
process of its development
in this video i want to look at the rise
and decline of the soviet economy
but first i want to talk a bit about the
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thanks and on with the show now before
we get started i want to know
this is not a video about the breakup of
the soviet union the two topics are
somewhat linked but it would take
another video to go through all the
political observations and theory from
historians
not to mention that the chinese have
their own theories on the matter too
it's a whole rabbit hole
this video is going to be long enough as
it is so let's just talk about the money
before we can talk about the economy of
the soviet union we need to look at the
economy of the country that came before
it
the russian empire in 1913 the russian
empire was the world's biggest country
and ranked third in population after
china and india
but that was pretty much all that
distinguished russia from everyone else
economically at least the country's
population was mostly poor and
agricultural like the rest of the world
average
their incomes were on par with the
japanese and latin americans
above those living in africa india and
china but far behind the rest of europe
then came world war 1 an all-consuming
total war that drained even the riches
of europe's empires
the united kingdom spent 40 percent of
its gdp on the war
france 50 and germany 60
and more than just being the biggest
market buyer governments intervened to
control resources and output so that
producers can guarantee supply to the
war effort
this was the command economy before the
command economy ever existed
as a concept the war devastated the
russian empire national income fell
80 percent from what it had been before
the war the government had a hard time
feeding its 9 million soldiers
because drafting men and horses to the
front meant that they were not at the
farm's farming
shortages forced the russians to borrow
foreign currency and print money so to
import supplies from abroad
when real production cannot keep up with
the growing monetary supply
inflation happens inflation rose to 6
percent a month from
1916 to 1917. that sounds bad
and it was but truth of the matter is
that things sucked quite badly for
everyone back then
at the time of the bolshevik takeover in
1917 the economic situation was dire but
was not notably worse than what everyone
else was going through
the first year after the assumption of
power the bolshevik government attempted
to establish a command economy in line
with its ideological goals
they confiscated surplus food supply
nationalized industry and seized the
estates of both the church and
aristocracy
but in the second half of 1918 a group
of anti-revolutionary forces
called the whites banded together in an
uprising against the government
whose army we will call the reds various
foreign countries intervened on both
sides worsening the conflict
what happened was a brutal civil war
that lasted for over 5
years and killed millions of people
coming so soon after world war 1 the
russian civil war annihilated
infrastructure
transportation networks and industry
incomes fell back to levels not seen
since the pre-modern era
around 600 in today's dollars
famine and government failure abounded
in 1921 linen announced a new economic
policy that sought to restore farmers
incentives to produce agriculture
amongst other things it replaced the
seizing of all surplus goods with a
progressive tax
lenin was essentially backing off his
attempt to create a command economy
this policy shift spurred relief things
got off to a bumpy start
there was yet another harvest failure
and yet another famine
but after a year farms were producing
again small businesses and markets were
sprouting up in the countryside
the economy began to recover from the
devastating effects of the two wars
by 1928 stalin had defeated his enemies
on the left and was working to establish
himself as the undisputed party central
that year he discarded lenin's new
economic policy and tried for the second
time to establish the command economy
with the first five-year plan
at this time you can describe the soviet
union's economy as being starved of
capital like infrastructure and
industrial factories
but with plenty of labor stalin set into
motion the defining strategy that would
drive soviet growth for a generation
heavy capital investment to build up
capital
these capital investments would go into
the production of producing goods
machinery factories power stations
railways and other items of heavy
industry
things that help make other things these
goods eventually help produce more steel
electricity and machinery which were
reinvested into yet even more steel
electricity and machinery a feedback
loop
another major reason the soviet union
tried again to institute the command
economy was that it was heavily
militarized
the soviets faced hostility from foreign
nations from the very beginning of its
existence
the allied nations actively intervened
in the russian civil war on the side of
the white army
the soviets did not trust the west and
that pushed their economy in a certain
direction
the soviet military's outsized influence
in the soviet union will have
significant consequences
it forced the soviet economy to build
tanks guns aircraft explosives and other
items of militarized heavy industry
this permanent war economy threw a veal
of state secrecy over
economic central planning and prevented
open transparent discussion
and like a guy who only lifts with his
right arm it sucked away resources from
the rest of the economy
stalin's drive pushed the investment
rate from eight percent in 1928 to 20
in the mid 1930s massive government
investment became a cornerstone of the
country's economy
the whole country was oriented toward
this goal the productivity
of this investment however varies some
of it was genuinely helpful but there
was a lot of wasteful
unproductive and impractical
infrastructure built building the
biggest dams in the world for the sake
of economic output while the people go
hungry due to a lack of food production
has questionable value
one major event throughout this time
period was collectivization the
replacement of individual peasant farms
with collective ones
peasants lost their land grain and
livestock those who resisted were exiled
or executed
famines broke out in ukraine kazakhstan
and siberia
it sucked the significant human impact
and loss demands that we at least
briefly mention it here
collectivization and the famines that
resulted from it cost the lives of
millions
yet i would argue had little impact on
the soviet union's economic outcomes
it did spur people to migrate from the
countryside into the city to take jobs
in the industrial sector
which fueled the investment drive but i
can't really say that that outweighs the
famines oppression
and whatnot it is more likely than not
that collectivization damaged the
economy's other growth engines the ones
that were actually working
that's the cruelty of the whole thing my
personal view
is that the economy of the soviet union
would have been better off without
collectivization
after all look at china's urbanization
drive in the 1990s
but both sides continue to debate the
issue and it remains controversial
back to the numbers as best as we might
have them from 1928 to 1970 gross
national product rose in excess of five
percent a year
a big portion of this can be attributed
to the accumulation of capital
the most critical growth engine but
agriculture and overall productivity
rose too
out of all the countries in its starting
peer group only japan would grow faster
and get richer
than the soviet union world war ii and
the decades that followed would see the
peak of the heavy industrial
quote-unquote producer goods
production cycle but as the country
moved into the 1960s the government
sought to reorient the economy towards
the production of consumer goods
nikita khrushchev declared in 1956
now that we possess a powerful heavy
industry developed in every respect we
are in the position to promote rapidly
the production of both the means of
production
and consumer goods the soviet high
leadership knew that their right arm was
way too overworked and they needed to
pump with their left
that is for several reasons first the
engines that drove the soviet economy
for so long were starting to sputter
when stalin began his drive there was
substantial unemployment in the
agricultural sector a shortage of
capital and a surplus of labor
simply by moving these unemployed people
and later women into the industrial
workforce
they became more productive and the
economy grew but sometime in the 1950s
that agricultural unemployment situation
ended all the laborers had been moved
out of the farms into the factories
and virtually all the women have been
moved into the workforce 51
of the soviet workforce in 1973 were
women
the old heavy industry growth model
stopped working and the soviet union
realized that they had little to replace
it to drive future growth
except for one thing but we will get to
it later
out in the agricultural space the farms
were now underperforming from under
investment and bad management
yields were worse than in any other
european country this had forced the
soviet union to invest capital resources
into mechanization drives and other
modernizations to try and produce enough
food to feed the burgeoning urban
populations
furthermore it's a bit ironic to say
this but the soviet union the biggest
country in the world had relatively
little farmable land
this is especially in comparison to
united states breadbasket
the government attempted to create new
fertile farmlands but this effect was
limited and had horrible environmental
consequences
in fact it was a huge waste short-term
thinking to meet your term output goals
the most infamous example would be the
draining of the aral sea a lake shared
by kazakhstan and uzbekistan to grow
cotton
once the fourth largest body of water
the seed shrank and died from
inefficient irrigation
overuse of fertilizer and a lack of
intelligent agricultural methods
the llc is today an environmental
disaster
in the industrial factories soviet
equipment was far behind the cutting
edge and was getting older by the second
the soviets were great at putting new
capital equipment into the factories
they were not as good as retiring and
replacing it
in 1970 28 of all equipment was older
than 10 years
by 1980 that number would be 34 the
average piece of equipment was 8 to 9
years old
there were a couple reasons for this
first was that doing so would often
require a work stoppage
for plant managers that risk the
potential of missing a production quota
a difficult prospect and when they did
risk it they often tried to refurbish
the existing equipment rather than
starting from scratch
a major drive in the 1960s to refurbish
everything was a disastrous waste japan
would take the other path when building
up their steel industry after the war
starting over from scratch it worked by
1985 the country was the most efficient
steel-making country in the world
the second reason why the soviets never
upgraded their equipment
nothing more technologically advanced
was made available to them the soviet
union implied fantastic minds and
pioneered incredible sciences and
technologies
i want to do a future video about their
advancements in computer chips
and they landed on venus for pete's sake
one does not simply land on the surface
of venus
the problem was that almost all of these
advancements happened within the
military government sector
that meant that it was a state secret
and did not see the light of day in the
civilian sector until after many years
one of the better things about the
american military industry complex
was the technology spillover effect new
technologies and ideas came out of the
government
and are released to private entities who
do something cool with it
gps and the internet are famous examples
this never happened in the soviet union
being an economy centered on military
capacity buildup the military only
tightened its grip on the economy has
foreign tensions rose throughout the
1980s
with afghanistan and the rise of reagan
it is why a massive
technological gap opened up between the
u.s and the ussr civilian sectors
despite the ussr's seemingly advanced
science capabilities
when soviet urbanites wanted to buy and
experience nice things
food technology whatever they imported
it from the west
this meant they needed to get their
hands on hard currency from where
such a thing can be found so with the
agricultural industrial consumption
goods sectors all struggling the
government turned to the only thing that
really seemed to have worked
natural resources the soviet union in
his final years fell into a deep
resource trap
the country was blessed with amazing
amounts of natural resources
massive oil and gas fields rich iron ore
and coal mines
but by the 1970s the aurora mines were
aging
the government dependent on the hard
capital these exports brought to them
threw good money after bad to dig deeper
and get more of these dying mines
in the case of the oil and gas fields
external forces delayed the reckoning a
bit
in 1973 the organization of arab
petroleum exporting countries
launched an oil embargo of countries
believed to support israel
oil went from three dollars to twelve
dollars a barrel that actually mattered
back then i'm just just letting you know
the soviet union lucked out into being
one of the few big oil suppliers still
able to sell to the embargo countries
they had switched to using natural gas
so that they may have the opportunity to
export its oil for hard currency
soviet exports to the west grew 26
percent from 1970 to 1980 and a big
portion of that
was oil but by then those oil fields
were already losing their productivity
from 1975 to 1985 oil investment costs
went from 28
to 39 of the total soviet investment
budget
employment likewise soared by 25 yet the
actual output of oil
fell by 21 this was a disaster
again same with the ore mines the soviet
economy found itself trapped
it used the hard currency it got from
selling oil to fund its imports of food
and consumer goods
this was not sustainable and everyone
knew it yet
the oil was costing so much money to get
out of the ground that it sucked away
resources that could have been used to
improve the agricultural and domestic
consumer industries
but as long as oil prices stayed high
then the economy can limp on
if prices in fact went higher then there
might be enough savings to invest and
actually escape the trap if oil prices
crashed though then all bets were off
which is what exactly happened a few
years later when the saudis decided to
end the embargo and return to the oil
market
kicking off the 1980s oil blood the glut
and a mini recession together would
crash the price of oil from a high of 40
in 1979 to under 10 this would spell the
beginning of the end for the soviet
economy
without sufficient foreign currency
income to fund its operations
the economy essentially went bankrupt
the 20-minute video that i watched on
the soviet economy framed it as a flawed
contradictory system that did not
understand proper economic principles
i find that a bit facetious after all
the soviet union survived for 75 years
what was happening when the soviets were
fighting germany or facing down the
united states and cuba
the reality is that the soviet union
built up its economy on a series of
well-grounded economic principles
similar to those followed by other
developing countries around the world
like japan south korea
and taiwan i have discussed other
similar situations in my videos on
economic development
unlike those asian economies when the
soviet engine first started to sputter
due to fundamental demographic issues
policymakers found themselves unable to
swap out their one-trick pony and anchor
against external shocks
but up until then it really did grow
quite well
people argued that the soviet union
should not be given credit for its
economic successes because it came with
brutal political repression horrible
famines and an emphasis on heavy
industry without care for other parts of
the economy
fair arguments all of them and i'm very
sympathetic to it
i certainly would not have wanted to be
born in the soviet union during those
times
i once read a book by anne applebaum on
the soviet takeover of eastern europe
and east germany
iron curtain and it was a depressing
book with a sad outcome
an economy is more than a sum of numbers
and outputs it's a representation of the
life and livelihood of its inhabitants
soviet union had 300 million people at
its peak
its economy failed to give them the
growth and livelihood that those people
deserved
that failure should serve as a lesson
for us all and we should study it
earnestly and honestly
rather than simply slapping a sticker on
it and calling it
a dud all right everyone that's it for
tonight
hope you all guys take care of
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all right until next time i'll see you
guys later