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The Collapse of the Soviet Union

The collapse was as rapid as unexpected.

The collapse was as rapid as unexpected.

Some called the invasion of Ukraine by the Russia of Vladimir Putin an attempt to restore the Soviet Union. Putin, in a previous speech, did not hide his feelings about the fall of the Soviet Union either, he called it the greatest geopolitical catastrophe of the century. The collapse of the Soviet Union was without a shadow of a doubt the biggest political development of the last decades. The collapse of the Union ended the previously bipolar world order that emerged after the end of WWII and left the United States as the sole superpower of the globe. Yet despite the significance of the event, in my experience, people have a rather limited, superficial or almost non-existent knowledge of the reasons why the global superpower fell.

In his resignation speech, the last leader of the Soviet Union, Mikhail Gorbachev said:” We had a lot of everything — land, oil and gas, other natural resources — and there was intellect and talent in abundance. However, we were living much worse than people in the industrialized countries were living and we were increasingly lagging behind them.

The reason was obvious even then. This country was suffocating in the shackles of the bureaucratic command system. Doomed to cater to ideology, and suffer and carry the onerous burden of the arms race, it found itself at the breaking point. All the half-hearted reforms — and there have been a lot of them — fell through, one after another. This country was going nowhere and we couldn’t possibly live the way we did. We had to change everything radically.”

All that Gorbachev said was true, and in his effort to solve these issues in the end he caused the downfall of the structure he wanted to reform. In the following, I will try to explain why was the Soviet Union incapable of matching the living standards of the West and why the good-intentioned reforms of Gorbachev led to its fall.

Inefficient economy

The first thing that I need to establish here is that the starting points of the West and the Soviet Union were very different. The Soviet Union was created on the remnants of the fallen Russian Empire, after WWII and the civil war, a state that was always lagging behind the West in terms of economical development.

Nonetheless, the gap between the West and the Soviet Union increased during the lifespan of the Union, so it is equally untrue to put down the struggles of the Soviets to their bad starting point. Especially considering the rise of states like Japan or South Korea which were in a similar position at the end of WWII, and far surpassed the economical efficiency and living standards of the Soviet Union.

The differences between the economy of the Soviet Union and the West and all the states that modelled their economy on that model were huge, one can even say that the two models were exact opposites.

Ludwig von Mise was highly critical of the socialist economic model that Marx and the followers of his ideology propagated: „Mises’s claim that rational economic calculation under socialism is impossible. Mises begins his argument by taking socialists at their word, assuming that socialism will substitute conscious planning for the “anarchy of production” (to use Karl Marx’s term) of the marketplace. That means that rather than relying on prices and profits to tell us what we should produce and how we should produce it, socialism would abolish private property, exchange, markets, prices, and profits and substitute collective ownership and decision-making to answer those questions.

In his 1920 article, and at greater length in the book, Mises asks whether it is possible to know what people want and how best to produce it in the absence of markets and private property in the means of production. While there might be a number of technologically feasible ways of producing a particular good, only one of those ways uses the least valuable resources possible and is therefore the most economically efficient. The challenge of rational economic calculation is having a process for figuring out which of the technologically feasible options is the least wasteful one. For a society to answer that question, it must have some means of comparison. Mises offers a variety of reasons why using a measure of labor time, as the Marxists suggested, will not work, including the differences in quality of labor. What needs to be determined is how much alternative inputs are valued, and after the marginalist revolution of the 1870s, economic theory treated economic value as based on the subjective valuations of individual choosers. So how best to access and aggregate those valuations in a form that allowed for comparisons among alternatives? Mises argues that only market prices can perform that function adequately, if imperfectly.”


For each question, choose the best answer. The answer key is below.

  1. Under whose leadershid did the terminal decline of the Soviet Union started?
    • Stalin
    • Brezhnev
    • Khruschev

Answer Key

  1. Brezhnev

Hindsight, in my opinion, proved Mise completely right. The two main factors people attributed for the inefficiency of the Soviet state-run economy were the following: first slacking lazy workers who lacked interest and initiative; second the illogical distribution of resources.

This is just my opinion but the first of these problems is very much present in a capitalist economy also. I might offend some people, but I honestly don’t care, I will write it down anyways. In my experience, even in a market economy, most people spend an increasing time at their workplace slacking and not doing much. It depends on the type of work of course, and this sort of generalisations are not always fair, but the myth of the hard-working capitalist worker can be squashed by simply doing a visit to those workplaces.

The other reason, however, is much more relevant to our discussion. In a free-market economy, most of the actors of the market are privately owned, while in the Soviet Union the state-owned the assets and means of production.

This different ownership approach led to key differences. In a free market, the private owners were putting in their hard work with the hopes of achieving profit, and if they wanted to achieve it needed to check a few boxes. First of all the products/services they produced needed to reach a certain quality that convinced the consumers to buy these and not the goods of their competition. Second and more importantly, the demand of the consumers determined which goods/services are needed, and so forth are worth pouring both the material and labour resources into. Although a free market economy is not perfect by any means, the will to make a profit, or sometimes simple greed of the key actors of the market streamline the allocation of resources to the production of the goods/services that are in demand and cause the least waste to produce. Of course, the free market can be hacked by giant corporations forming cartels, or protective state interventions(like tariffs), however, despite these present faults and shortcomings the quality of the goods, the relative economic growth and efficiency of the west in comparison to the Soviet Union still leave no doubt which system was superior.

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In comparison to the free market model, the Soviet model relied on the state to determine which goods were worth producing and in what quantity based on quotas. In ex-Soviet countries there are running jokes about how factories achieved their quotas, there are small differences but the general pattern of these jokes is always like this: state wanted x goods, factory-produced x-10, the manager told its superiors they produced x-5, and by the time the reports arrived at the centre the number was x+10, the plan was achieved and the economy was booming, on paper anyway.

The second big problem of this system was not that it changed the simple market metric of supply and demand with plans from the centre, but how the centre reacted to underperforming sectors. In this video, Economics explained compared the Soviet reaction to failed plans to the Mythbusters TV show, where the creators when the scientific experiment did not get the result they wanted just poured the material into the experiment until it achieved the result they wanted( usually a big explosion). This was a disaster for the Soviet economy, which basically meant that both manpower and material were poured into bigging up underperforming sectors just because they did not achieve their plan, whether this sector deserved the resources or not.

Another big problem with the Soviet model was the person who ran the economy. Greedy capitalists have a bad reputation, but one thing these people most often are is capable, they experiment and experiment their way to success, and know what they are doing. In a Soviet model in the place of greedy capitalists, we had party members, who most likely got their job thanks to their relations, hardly a recipe for success is it?

As a result of all these above-mentioned things the population of the Soviet Union fell far behind their Western counterparts, the GDP/capita of the USA in 1990 was 23k $, in Japan 17k $, in Western Europe 15,8k $, while in the Soviet Union only 6,8k $. To make this comparison even worse, during the 1940s Japan was behind the Soviet Union in this stat and the gap between the US/Western Europe and the Soviet Union was far smaller.

Failed Reforms of Gorbachev

In 1985 entered the picture, Gorbachev. Fed up and disgusted by the stagnation of the past decades he was determined to turn the Soviet Union into the state it was meant to become. His reformist policies affected both the economy(Perestroika) and the end of heavy repression(Glasnost).

His Glasnost policies partially ended the heavy-handed censorship of the previous decades and somewhat resembling freedom of speech and press was reestablished. Gorbachev believed that constructive criticism was crucial to reform the decaying Soviet Union. Although well-intentioned he may have been, his reforms allowed the people of the state to realize just how corrupt their state was and the heavy criticism the Soviet Union received, especially after Chernobyl strengthened greatly those who wanted to end the system rather than reform it.

Gorbachev’s economical reforms intended to turn the Soviet economy into a mixed state-planned and market economy. As a result of this policy partial private ownership of the previously state-owned economy was allowed. The state still issued certain quotas of production, but the new owners were allowed more private initiative to decide to own their initiative what goods and services were in demand and what was not. The state-mandated prices were also scrapped, and the actors on the market were finally able to establish their prices.

It sounded like a good plan, but it turned out to be a disaster. The lack of direction inevitable led to bad investments, mistakes and as a result shortages, which led to a further deterioration of the living standards of the people.

Gorbachev wanted to attract foreign capital into Russia, to achieve this he tried to improve the strained relationships with the West by withdrawing Soviet troops from abroad, ending the nuclear arms race with the USA and allowing the satellite states of the Soviet Union to dissolve the Warsaw Pact. In might ask why did the people of Hungary, just to give an example, failed to achieve their independence in 1956 and succeeded in 1989. The answer is simple, in 1956 Soviet troops marched into Hungary and crushed the revolt, while in 1989 the Soviets quietly let the Hungarians peacefully dismantle communism.

Thanks to the passivity of the Soviet leadership, all the satellite states in Eastern Europe overthrew their communist governments and the Warsaw Pact ceased to exist.

When Gorbachev allowed a multi-party election in the Soviet Union itself non-communists gained power for the first time, a few of the non-communist governments even declared their independence. Once again, the Red Army remained passive and did not crush the independence movement. A referendum was held in August 1991 to ask the people if they are behind the restructuring of the Soviet Union into a Union of Sovereign States. This was too much for some of the old guard, who tried a coup to turn back time, end the freedoms granted by Gorbachev, including political pluralism.

The coup failed in a spectacular fashion and led to the declaration of independence of all the remaining member states of the Union between August and December 1991. As all the members became independent the Union ceased to exist and was finally dissolved on December 26, 1991.


Postwar: A History of Europe Since 1945

Ludwig von Mises: Socialism: An Economic and Sociological Analysis

This content reflects the personal opinions of the author. It is accurate and true to the best of the author’s knowledge and should not be substituted for impartial fact or advice in legal, political, or personal matters.

© 2022 Andrew Szekler

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