Chronologically, the history of the Soviet economy between the Revolutions (that is, the October Revolution and the Stalinisation of the country) is: state capitalism until 1918, an attempt to instigate full-blown Communism that falls down in 1921 (War Communism), then a gradual retreat under the New Economic Policy. The latter was increasingly attacked from 1926, by which time the economy had recovered, because it was believed it would lead to the re-emergence of full-blown capitalism. Stalin's forced collectivisation of Soviet agriculture began in 1929.

The following is a discussion of how the state sector performed vis-a-vis the free market during the 1920s.

Did Soviet economic policy in the period 1917-30 demonstrate the strength of a market economy over one controlled by the state?

Soviet economic policy underwent two large transformations in the period under discussion. The first was the imposition of the measures that were retrospectively known as War Communism in the period after the October Revolution and before 1921. The second was the retreat that characterised the years after 1921, when the market was allowed to function to a greater extent than during the War Communism years. Whether War Communism was embarked upon for ideological or practical reasons, it was hoped that it would raise productivity and reinvigorate the economy. The measures were continued after the Civil War had ended, and by the spring of 1921 they had demonstrably failed to achieve their goals and contributed to the national crisis of 1920 – 21, most notably the famine and the workers’ strikes. By 1920, overall large-scale industrial production was 18% of the 1913 level and the productivity of the average worker was at 26% of the 1913 level. Although the First World War had taken its toll, most of the decline had occurred since 1917.

After the New Economic Policy was adopted the trend was quickly reversed, and industry was returned to its pre-war levels by 1925/26. The NEP demonstrated that a market economy was the only way to stimulate production and marketing of grain as it allowed the peasants to respond directly to demand and hence increase the amount of grain they marketed because they got a better return. The free movement of food into the cities allowed wealth to be created there by industry and standards of living to improve. In many ways the Bolsheviks had been handed a fait accompli, as workers had been mostly staying alive off the market during the War Communism years anyway.

Russia was not the only belligerent country in World War I in which a grain monopoly existed, and production had not been deterred too much by 1917. The Provisional Government had compensated the peasants in rapidly-decreasing rubles for their surplus, and hence production did drop as the peasants saw little point in sowing crops that would not bring them much economic gain. The other related problem was one of marketing – peasants didn’t have an incentive to market the produce they grew, because they would not receive economic compensation, either in increasingly worthless money or consumer goods, of which there were few available. The peasant communities began to turn inwards and resort to cottage industry to obtain their manufactures.

Faced with the intransigent peasant, the Bolsheviks felt they had to dispense with the niceties of state capitalism and resort to violent requisitioning. By declaring all surplus grain to be state property they destroyed the incentive for the peasants to produce any surplus at all. This was an inherent problem in establishing a planned economy in Russia at the time. Deprived of their property rights, the peasants were hardly likely to produce grain for the intrusive state out of goodwill. The opportunity cost of growing grain was too high, and it made more sense for peasants to produce other crops that could be sold on the black market at a higher price.

As the peasants were understandably reluctant to part with their property for a state they felt estranged from, the Bolsheviks found it necessary to employ coercion in extracting the grain from the villages. This was not inherent in the concept of state planning, but it was believed to be unavoidable in light of the circumstances at the time. With the former proletariat rapidly fleeing back to the countryside away from the starving cities, fast action was needed to keep the Bolsheviks' social base intact. Economic growth and capital accumulation was only possible in the cities if workers could be kept fed. But War Communism proved itself inimical to this goal, and the amount of food reaching the cities decreased every year. The regime found itself locked in a cycle of coercion, evasion, then more coercion. It was in an apparently unsolvable situation – without industrial production it had nothing to trade with the peasants, but without grain there could be no industrial production.

By 1921 it was blatant that continued state coercion was not the way to solve the problem – there was simply no more grain to take. State planning need not necessarily have failed, but the Bolsheviks had run into two problems that often confront state planners: inefficiency and incompetence. Incompetence because very few of the officials in charge of the various state planning bureaucracies had experience with economics, and inefficient because of the bloated staff that filled them. These agencies were a huge drain on resources, absorbing 78.5% of the budget by 1921, but achieving little.

Even under War Communism, as the state infrastructure was increasingly failing to deliver the goods, the market proved its strength. It was impossible to live off the official state ration for most of the period, and the majority of food came from the black market. After the Civil War was won and the grain-rich areas of the Caucasus and the Ukraine were captured, it was assumed the food crisis could be solved and the markets in the cities were cracked down upon thoroughly. However, by further decimating the apparatus of the free market, the state contributed to the famine crisis that followed and the massive unrest that swept the country as a result. Even nationalised industry had come to rely on the free market for its goods and raw materials, as state infrastructure was simply incapable of delivering the fuel and goods needed. Piece rates had also been brought back into use in some state concerns. Piece rates make it economically rational for a worker to increase his productivity for his own gain, and are thus a capitalist mode of remuneration. Rationing does not stimulate productivity because a worker will receive the same amount of remuneration whatever his output. Absenteeism soared and productivity declined as workers decided it was more economically rational to produce goods for the black market than for the state sector, again proving the vitality of the market.

However hard the state tried, it could not stamp out the market. The nature of capitalism is that it needs no particular sanction to spring up; it simply needs people to be left to their own devices. Soviet control of the country was not sufficient to stamp out the market, and nor could they really do without it – a planned economy must be exceptionally competent to replace the market. When the NEP declared the imposition of a tax-in-kind to replace the grain seizures and allowed the peasants to dispose of the surplus as they wished, it was really only retrospectively recognising the reality. The hunger in the cities made the legalisation of free trade necessary, too. There was now a real motive for peasants to produce more grain and for people to supply this grain to the cities – they would themselves grow rich by doing so. Rational economic planning is only possible in a relatively stable environment, and the peasants now found themselves in one – they knew their market and could attune themselves to it without risking losing everything through confiscation by the state.

By 1926 grain production was at pre-war levels, and the production of industrial crops had reached pre-war levels in 1925. By this time three quarters of all trading was controlled by the 'Nepmen' – private entrepreneurs. The state remained in control of large-scale industry, which had declined the most during the War Communism years. It was able to turn itself around because small-scale industry and the production of industrial crops were reinvigorated by the return to the free market, and hence able to supply the larger concerns. The state was not able to find a substitute for low-level entrepreneurship, and even when it had declared itself the owner of small-scale industry de jure it was never in effective control.

A stable currency is an important aspect of a market economy, but socialist theorists have speculated that it would be possible to run a planned economy without money at all. Hence at first the Bolsheviks heralded the hyperinflation of the ruble as a victory. Yet by 1924 they had reinstated a money tax on the peasantry and made stabilising the currency as one of the major goals of NEP. Although bartering had become common during the period when the currency was worthless, the advantage of money is that it allows value to be measured in discrete common units and so makes the calculation of revenue and costs much easier. Private trade flourished much better with a stable currency, as it allowed people to weigh up the pros and cons of their economic decisions. In doing so they aimed to maximise profit and hence stimulated the generation of wealth and the growth of the economy. It also allowed the Soviet state to finally balance its budget, which allowed it to engage in rational long-term planning. Once a certain degree of stability was attained it was decided that further capital accumulation would require the collectivisation of agriculture, but it would not have been feasible to contemplate this ‘revolution in the countryside’ without the stability provided by the workings of the market.

In the latter years of the 1920s NEP ran into difficulties, but these can be blamed more on state interference than the market. As the state controlled the railway network and large industry, it was able to squeeze the smaller manufacturers by increasing the prices it charged for essential goods like fuel, or by increasing the surcharges for transporting goods. As a major procurer of grain, the state also paid the peasants prices which bore no relation whatsoever to market forces. Although the peasants knew they were guaranteed a return on grain sales to the state, they preferred to turn elsewhere. They would sell the grain on the free market instead, or turn it into fodder for livestock because meat and dairy products fetched a high price. The state sector was once again been confounded by the market because the latter did not respect market forces nor seek to accommodate them. There was again a procurement crisis, to which Stalin responded with coercion.

Although collectivisation was not announced until 1929, NEP experienced a downward spiral after 1926. The Bolsheviks were faced with two choices. They could either seek to crush the petty-bourgeois spirit of the kulak which they believed caused them procurement difficulties; or they could deregulate further to encourage the market to stimulate grain marketing. The latter option was not compatible with building socialism, and so pressure was increasingly put on the market and private traders were squeezed. Industrialisation and urbanisation would require the peasantry to be squeezed and collectivised into larger blocks than the twenty million individual households they were currently in – clearly, with this goal in mind, the state was not likely to countenance the continuation of the free sector of the economy.

The strength of a market economy was amply demonstrated by the speed with which it returned Russia to pre-war levels of output in both agriculture and industry in the early 1920s. If there were problems of marketing then private traders could go some way to solving this problem, but the state could have played a more constructive role. By having a monopoly over long-distance infrastructure the state was able to charge what it wanted for private traders to transport goods, and by having a control over the 'commanding heights' of industry it was able to decide the fate of small manufacturing concerns by determining prices of important commodities. Had the Bolsheviks not distrusted market forces on principle they might have recognised that a relatively benign state capitalism which dealt in prices responsive to the market was the best way to ensure capital accumulation and economic growth.

When massive growth did finally come from the state sector of the economy it was through the re-application of the methods of War Communism – coercion and forced labour. Unlike in the War Communism period, the state this time proved strong enough to pull it off, but with great human cost.


Richard Pipes, The Russian Revolution: 1899 – 1919 (1990)
Alec Nove, An Economic History of the USSR (1976)
L.H. Siegelbaum, Soviet State and Society Between the Revolutions, 1918 – 1929 (1992)
R.W. Davies, M. Harrison, S.G. Wheatcroft (eds.), The Economic Transformation of the Soviet Union (1994)
S. Fitzpatrick, The Russian Revolution 1917-32 (1994)
R. Suny, The Soviet Experiment (1998)
Orlando Figes, A People's Tragedy (1996)

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