Soviet Union Private Enterprises and Economics

When we talk about the Soviet Union, many of us imagine a largely monolithic structure, in which most of the processes were controlled from the centre, with very little initiative from the side of common people. This stereotype is especially strong regarding the economy. After all, it was officially called “planned,” which suggested that all production was owned and regulated by the state. However, it may come as a surprise that during the first half of the USSR’s life, private enterprise played a large role in everyday life of Soviet citizens. Furthermore, during the birth and development of Soviet Union, non-government owned companies completely legally produced a large variety of consumer goods. Most of these were small-size individual entrepreneurships and cooperatives, as opposed to large industrial complexes operated by the state. That small-scale private production supported the government-owned heavy industry, and was largely beneficial for the country and the people of USSR. It provided many goods and services to the people which the state-owned companies couldn’t provide. Surprisingly, private entrepreneurship has always been a part of Soviet economy, and furthermore, it provided a substantial part of foodstuffs and consumer goods to the society.

The first topic to be discussed is the period that begins at the end of the civil war, when the Soviet system was finally dominant and its leaders had to commence post-war restoration. The economy of this period was largely characterized by the NEP – New Economic Policy. It primarily influenced agriculture, replacing “War Communism,” which involved direct food requisitioning, with food tax. Moreover, individuals were allowed to operate small private companies, while heavy industry and financial institutions remained under the state rule. The state economy, guided by the directive principles of War Communism, was unable to meet the demand for goods, especially agricultural ones, which was proven by the famine of 1921, during which six million people died. As a result, food requisitioning ended, and private business had to be allowed, which helped to alleviate economic hardship for many people. An objection may be raised that the policy was highly controversial both with the people and the government, and that it met resistance in higher circles. Furthermore, it gave birth to a new class of nouveau-riche “nepmen,” owners of small companies, who were seen by most people as little more than capitalists against whom they have been fighting all that time. The Party was indeed discontent with the development, seeing it as an abandonment of the principles of Socialism – according to the History Learning Site (2014), not only it meant abandoning planned economy, it also presented a threat of eventual restoration of full-scale capitalism (par. 9, 10). However, the argument here is not whether the policy corresponded with the ideological principles, but whether it was efficient or not. And the answer here is definitely yes – the NEP was very successful, allowing agriculture to restore itself to 75% of the pre-revolution level and staving off the fear of famine. It also contributed to the development of the light industry, stimulating the demand for consumer goods (par. 12). This shows that during that period, private production contributed significantly to the wellbeing of population. Lenin has famously said on NEP “we are taking one step backwards to later take two steps forward,” and called War Communism “a grievous error,” which shows that he could modify the theory based on real-world experience, and understood the necessity of having private production, even if it was small-scale.

The next stage went on from 1930 to 1960, and encompassed industrialization, Second World War, and postwar restoration. While NEP was cancelled, it did not mean that private initiative was restricted. Surprisingly, Stalin allowed much leeway for independent producers – many of them existed in a “gray area”, viewed with suspicion by authorities, but not restricted. The manufacturing and service sector remained relatively free, and people were allowed to have their own plots of land to grow food on, which they later would sell on peasants’ markets. According to Jan S. Prybyla (1961), “In 1956 the individual plots accounted for 67% of the gross output of potatoes, 87% of the output of eggs, 57% of the milk production, 55% of the output of meat, and about 42% of the production of vegetables.”(p. 218) And according to Frederick A. Leedy (1957), in 1954 independent cooperatives “manufactured 35% of furniture, 56% of iron dishes, 22% of metal beds, 45% of primus stoves, and 31% of felt boots. (p. 1067) Small businesses, such as barbershops and seamstresses, were also legal, as well as cooperatively-owned larger companies, which provided the majority of consumer goods, such as furniture and clothes. Julie Hessler (1998) asserts that many cooperatives were in fact covers for private entrepreneurs, who made massive profits from the activities. In 1948, most of them were arrested, or had their licenses revoked, however. (p. 539) Despite that, during Stalin’s era, independent production and trade were strongly developed, and Soviet people “spent between one-third and one-half of their incomes on the legal free market in all but few years of Stalin’s rule.” (p. 516) Even during the war that practice continued, with local authorities largely tolerating small-scale trade. (p. 523) This proves that, during this stage, independent production and free trade did play a large role in the lives of Soviet citizens. It can be argued, however, that the contribution of private producers to the economy was very small, and did not influence it in any significant way. After all, the individual producers constituted a very small share of total labour force – 1-2 million out of 60-80 million. (Leedy, p. 1066) This, however, ignores the fact that in regard to consumer goods and foodstuffs, independent producers accounted for a large share of production – from 22% to as high as 87%, as stated earlier. Possible explanation for this is that most people employed by the government worked in heavy industry sector, while in the light industry sector, share of independent producers was higher. Thus, private production did have significant influence on the economy.

The third stage, however, which started from the 1960s, was characterized by the restriction of almost all private initiative, and nationalization of all non-government companies and land. That, in turn, gave birth to a widespread deficit of consumer goods, stagnation of the system, which could not develop without initiative, rising discontent, and, eventually, collapse. However, just because private enterprise was outlawed, doesn’t mean that it disappeared. Because state-owned companies produced consumer goods in insufficient quantity and inferior quality, people started looking for foreign goods to satisfy their needs. That period was characterized by increasing size of black and gray economy, with people semi-legally or illegally trying to acquire goods which they couldn’t find in stores. Eventually, as deficit for consumer goods became more prevalent, black market and informal economy have turned into a daily feature of Soviet life. At that point, a counterargument may be raised that the deficit was caused primarily by technological development and by increasing demand for more sophisticated goods, and not by restriction of private entrepreneurship. As standards of living increased, along with technology level, people started demanding more advanced goods in large amounts, which the economy couldn’t have provided even if private production had been left unrestricted. However, it doesn’t explain the deficit for foodstuffs, or for basic goods, such as furniture and clothing, from one-third to one-half of which were provided by independent producers in the 50s with no noticeable deficit (Leedy, p. 1067). Thus, it still means that Soviet economy of that period was inadequate to the task of providing basic consumer goods that were demanded. So naturally, people turned to black market. Due to its secretive nature, it is almost impossible to accurately calculate its penetration, and only a rough approximation can be given. As Lucille Beaudry and Luc Duhamel explain (1984), by the 80s the black market has “completely integrated in Soviet system,” and it would not have been possible to curb it except by liberalizing the economy (p. 102). This proves that, even when the economy was under total control of the State, people still participated massively in independent trade. But the restriction of commerce had even further-reaching consequences. The shadow economy which arose as a result of private entrepreneurship being made illegal carried numerous problems: not only was it hard to combat, but it also degraded the respect for the system by common people, who had to engage in illegal activities just to satisfy their basic necessities. That, in turn, was one of the reasons that led to the eventual collapse of Soviet Union and replacement of its state-controlled economy by a free-market one.

The first periods in life of Soviet Union were more repressive, but also, paradoxically, more economically free. Small-scale private production, like aforementioned barbershops and personal plots of land, allowed the system to develop more vigorously than it would have been possible otherwise. Along with political liberalization in the 50s, the economy was centralized, which eventually caused its demise. While this is an unexpected development, it also provides something to think about. On one hand, on the basis of these findings, it can be argued that market is important for any country, even the ones with planned economy, and that it is simply impossible to regulate all production from one center. Fate of other socialist countries seems to reinforce that conclusion – especially China, which, since the adoption of free market, demonstrates incredible rates of growth. Even in North Korea, the most restrictive country in the world, the government tolerates small-scale trade and private production. But on the other hand, it tells us something about effectiveness of government control in certain spheres of economy. After all, Soviet heavy industry was remarkably successful, and large-scale projects, such as nuclear power plants, hydroelectric stations, and spaceports, were built by the state. It should be noted that nuclear energetics and space exploration are the spheres which are still predominantly under the control of governments, even in such economically liberalized countries as the United States. In any case, we should study the history of Soviet Union carefully and without any bias, if we want to understand its experience and apply that knowledge to our current problems.

Sources:

Jan S. Prybyla, “Private Enterprise in Soviet Union”. South African Journal of Economics, Volume 29, Issue 3, page 218, September 1961.

“New Economic Policy”. HistoryLearningSite.co.uk. 2014. Web.

Lucille Beaudry, Luc Duhamel, “The Causes of the Black Market Phenomenon in the U.S.S.R.”. Studies in Political Economy, Volume 13, page 102, 1984.

Julie Hessler, “A Postwar Perestroika? Toward a History of Private Enterprise in the USSR”. Slavic Review, Vol. 57, No. 3, autumn 1998.

Frederick A. Leedy, “Producers’ cooperatives in the Soviet Union”. Monthly Labor Review, Vol. 80, No. 9, September 1957.