Forty Centuries of Wage and Price Controls

10

The Soviet Union

The Soviet Union today presents the best example of a mature and long-lived total wage and price control policy in operation. Its planned economy has been almost totally rigid in its opposition to any form of price structure ever since the end of Lenin’s “New Economic Policy” in the 1920s.

Stalin’s place in history as one of the most ruthless leaders of all time was partly due to the measures he took to regulate the economy. Because the Soviet Union is a totally planned economy, the policy goals are whatever the planners say they are since ultimately the power of the state is always sufficient and ready to infringe any individual right and inflict any amount of coercion on citizens to ensure that the central plan is fulfilled. Some idea of the nature of the task of regulating the Soviet economy can be gleaned from the fact that there are over ten million separate prices in the Soviet plan. Whereas the success of a Western economy would naturally be judged on its ability to satisfy consumer wants, in the Soviet Union, as in any centrally planned economy, low marks would be gained by this test since the purpose of central planning is not to satisfy consumer desires. It can only fulfill itself in terms of its own prescribed parameters (that is, the goals of the planners).

A. S. Shkurko,1 Deputy Director of the Labor Research Institute, has provided a very lucid account of the current Soviet wage system and the historical circumstances that led to it. The Soviet state fixes wages in two ways. In the first place, it sets for each enterprise the total wage bill for the year. Secondly, it sets the national weekly wages for every kind of job. Factory or office managers have some flexibility since they have included in their wage fund a sum for bonus payments and there is evidence that this is used to create a more realistic wage structure than the central planners originally designed. Every factory has an output target allotted to it by the planning authority; in theory this should rise at the same rate as the long-term rise in productivity to keep wages constant. In practice, in order to obtain sufficient skilled labor, the target will be increased less than estimated productivity so that workers find it easier to “over-fulfill” plans. For this “glorious socialist achievement” they are entitled to bonus payments and hence their effective earnings are somewhat above the state’s official level.2

IS THERE A SOVIET LABOR MARKET?

One question that has been contested in the West is whether there is a labor market of any sort in the U.S.S.R.

Brittan and Lilley point out that Stalin’s strict anti-mobility laws of the 1940s were relaxed in 1956 and that new workers are, within a limited field, allowed to change their jobs.

Peter Wiles3 has stated that the Soviet factory manager faces a competitive labor market, perhaps the only “official” competitive market in the Soviet Union; managers were given the power to hire, fire, and reallocate the wage fund in 1965. Thus, in practice, managers have, in the absence of free trade unions, enormous power to get rid of unskilled or otherwise unsatisfactory workers and to pay semi-disguised perks to better workers. However, Wiles qualifies this statement by adding that this power has in fact been used only rarely and kept under the strictest Party control.

If Wiles’ original assertion is correct, then the ironical result is that labor is the official “residual’’ that is forced to adjust to the State’s other goals and not (as advocates of workers’ states would have it) the other way around.

If his latter quasi-retraction is correct, then a skeptic of the virtues of Soviet communism would conclude that in practice, labor is the “residual.”

Returning to the central features of central planning in the macroeconomic sense, the output of various commodities is decided upon on the basis of previous outputs and stock figures at the time a new plan is drawn up. This naturally leads to a fundamental question in the debate between pricing and planning generally: is there repressed inflation in the Soviet Union? In other words, do price controls eliminate inflation in the Soviet Union or are they a failure there also?

Michael Jefferson notes, in Inflation, that the cost of living of the Soviet urban industrial worker seems to have gone up by 65 percent between 1927 and 1937 while real wages went down by about 50 percent. These price rises occurred despite the price falls promised in several successive Five Year Plans; they seem to have been due to a large increase in short-term credit and currency provided by the State Bank in the decade of the 1930s. The currency expanded about eight times in the period 1929–1941.4

Advocates of the repressed inflation position point to the continued existence of widespread queuing5 and a whole “parallel economy” of backhanders, illegal trading, smuggling, theft, and so on, which has existed for a long period of time and become institutionalized to the extent that virtually every single Soviet citizen is involved.6

THE BLACK MARKET

Many Westerners think that the black market is limited to higher quality Western clothing. However, Simes shows that this is only one minor part of a whole parallel market. In fact, for automobile service, high quality foods, repairs on apartments arid virtually any personal service, extra payments are the way to ensure prompt and efficient attention. For retailers, regular deliveries of the best stock can only be assured by backhanders to suppliers and at the production stage hidden additional wages are provided to retain good workers.

The attitude of the authorities to this is that it is formally illegal and punishable by heavy penalties but in practice it is recognized as an essential, indeed inevitable, practice to keeping the economy running smoothly. If the intentions of a parallel economy “deal” are to allow production and employment to continue normally and to further the fulfillment of the state plan then the authorities will turn a blind eye.7

A second argument used by the believers in repressed inflation is the existence of large and growing savings deposits held by the general public. These suggest that much money cannot be spent and so is saved for security or large scale bulk purchase “deals” when the opportunity arises.8

NET INCREASES IN SAVINGS DEPOSITS

Opponents of the repressed inflation thesis argue that the presence of queues is not a symptom of inflation since other goods are in adequate or excess supply. On the contrary, they argue that they are evidence of planning misallocations and distortions which must inevitably occur when consumers are given money rather than ration cards in a centrally planned economy. They say that queues would have to become steadily longer to prove the repressed inflation argument and that black market prices would have to continue to rise.

The final resolution rests on the money supply figures of the Soviet economy, but the Soviet government does not publish these (which is perhaps circumstantial evidence for the repressed inflation thesis). Our own view is that the Soviet Union is constantly in a state of repressed inflation, but the plans are miscoordinated as well; in other words, both sides are right to a point. The first situation, we would suggest, is explicitly used by policymakers as a means of ensuring that all or virtually all of the output of a plan can be sold to consumers regardless of whether it is the kind of product that they really want. And the second is the inevitable result of employing the hybridity of a centrally planned economy (which produces according to a planned scheme) and money, the Western device to lower transaction costs that has the by-product of permitting consumers to indulge their preferences.

There is thus no possibility of this situation changing to any extent in the near future, because the solution to the problem is a general situation of chronic over-supply, which is not likely to occur soon. Recent liberalization of imports from advanced market economies cannot, in our opinion, go very far to resolve the problem, because the Soviets have little that they want to sell to the West and that we wish to buy that could offset the massive balance of payments deficit that would arise from such a policy.

FOOTNOTES

1. In A. S. Shkurko, “The Industrial Wage System in the USSR,” International Labor Review, November 1964.

2. Samuel Brittan and Peter Lilley, The Delusion of Incomes Policy (London: Temple Smith, 1977) p. 106. “. . . In 1950 the average industrial worker over-fulfilled his norm by 39 percent, by 1956 over-fulfillment was 55 percent. The rate of overfulfillments had reached 96 percent in the electro-technical industry, 92 percent in heavy machinery and 82 percent in the automobile industry.”

3. P. J. D. Wiles, Economic Institutions Compared (Oxford: Basil Blackwell, 1977) p. 372.

4. Michael Jefferson, Inflation (London: John Calder, 1977).

5. The anecdotes about queues in communist countries (and other “planned economies”) are endless, but here are two examples. “What’s fifty yards long and eats potatoes? Answer: Russians in line to buy meat.” Or, “A disgruntled Russian, irritated by endless lines to buy food declares that he is fed up and is off to assassinate the local Party Leader. He returns after two hours only to announce that there was a line there too.”

6. The best description of the scope and nature of this market we have come across is Dimitri K. Simes, “The Parallel Market,” Survey, Vol. 21, November 3, 1975.

7. “Samizdat” sources have put the proportion of personal net disposable income spent on the parallel economy at between 10 and 30 percent.

8. From Keith Bush, Soviet Inflation, NATO Colloquium on Banking, Money and Credits in Eastern Europe, 1973.