[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

calculations of this kind allowed it to determine how much of every good should
be produced. It then worked backward, figuring out how much each plant in
the country should produce. Factory managers were given production quotas—
they should produce so many tons of steel, or so many nails. Factory managers also
were allocated inputs with which to produce the output. This system was called
central planning.
The Failures of Communism The central planners decided on wage levels
and prices as well. Consumers did get to choose what to buy, but many commodities
were rationed. For example, each individual was allowed to buy only so many
pounds of sugar a month. Unfortunately, everything did not go according to plan.
Often there were shortages, especially for consumer goods. People had to wait in
line for hours to get the food they wanted every day, and they endured month-long
waits for consumer durables or a car. Factories also faced shortages: they often
could not get the inputs they needed. Deliveries did not occur on time, and when
the materials arrived they often were of poor quality. Factories that had been told
to produce nails produced nails, but they paid little attention to whether the nails were
too brittle or too soft to be used. They had incentives to meet the numerical quotas
set by the central planners, but no incentives to produce what others wanted. They
figured out ways of getting around the system; if they had to obtain more steel to
meet their quotas, they would find some firm that had been delivered more steel
than it needed and make a trade. Managers traded favors with each other—various
forms of barter occurred. Thus, an underground market developed.
The shortage of consumer goods was partly caused by an emphasis on development.
In 1917, at the time of the Soviet revolution, Russia was a relatively backward
country. In the 1930s, Stalin wanted to push the country forward quickly. He
saw the road to success as heavy industrialization and pushed the building of steel
mills and the like. The hostility throughout the world toward the Soviet Union’s communist
system led the country to adopt an inward-looking economic policy; the
communist countries largely traded with each other. They wanted to be self-reliant.
For a while these strategies worked. The Soviet Union grew so rapidly that
after World War II it became one of the world’s two superpowers. It developed missiles
and nuclear weapons and even sent the first man into space. By 1956, Nikita
Khrushchev, then the Soviet Union’s leader, could boast that his country, with communism,
would bury the West, with its capitalism. Western textbooks described a
trade-off between growth and freedom; they granted that the Soviet Union might
be able to grow faster, but they asked whether the price, the sacrifice in freedom,
was worth it.
But the Soviet Union’s achievements masked growing problems in its economy:
in particular, an agricultural sector that was stagnating and an industrial
sector that, outside the military, could not keep up with the rapid pace of innovation
in the West. The gap between living standards grew. Mikhail Gorbachev, who
became the Soviet Union’s leader in 1985, began a process of political and economic
reforms, called perestroika, but events escaped his control. In 1991, popular
protests stopped an attempted military coup, followed soon after by the breakup
of the Soviet Union; each of the so-called republics that had constituted it became
an independent state.
ECONOMIES IN TRANSITION ∂ 809