How Socialism Failed: The Soviet Union Experience

Paul Craig Roberts gives a good account of this. [source:American Conservative] (bold emphasis mine)

The Soviet economy failed because it used more valuable inputs to produce less valuable outputs. The outputs would be measured as statistical product, but the values of the outputs were less than the values of the inputs. In other words, instead of producing value, the Soviet system was destroying value.

This was the result of ideological aversion to using prices and profits to allocate resources and investments. Instead of profit serving as a manager’s success indicator, managers were judged according to whether they fulfilled a plan measured in gross physical output, such as weight, number, square meters.

For example, the success indicator for the construction industry was the number of projects under construction. Consequently, Moscow was littered with unfinished projects because all activity was concentrated in starting new ones. The plan produced a housing shortage because the incentive was to start new constructions not to complete ones already underway.

If a shoe factory’s gross output indicator was a specified number of pairs of shoes, there would be plenty of baby shoes, but none for large feet, because the same amount of material could be used to produce one large pair or several small pairs.

If nails were specified in number, there would be small nails but no large ones. If specified in terms of weight, there would be assortments weighted heavily with large sizes. A famous Soviet cartoon shows the manager of a nail factory being awarded Hero of the Soviet Union for over-fulfilling his quota. In the factory yard are two giant cranes holding one giant nail.

If light fixtures were specified in number, they would be small. If in weight, they would be heavy. Nikita Khrushchev complained of chandeliers so heavy that “they pull the ceilings down on our heads.”

An abundance of natural resources with low extraction costs and the minimal allocation of resources to consumer needs permitted the Soviet economy to continue despite its enormous waste of resources in terms of consumer satisfaction and economic efficiency. But it couldn’t go on forever.

I am reminded of the great Ludwig von Mises who presciently augured for the demise of the Soviet Union’s socialism/communism:

A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings.

Prof von Mises actually predicated his forecast based on the lack of property rights which resulted to the economic calculation problem that has been visibly demonstrated by the above narrative from Mr. Roberts.