What caused the shortages of goods in the later days of the Soviet Union?

Question

What caused the shortages of goods in the later days of the Soviet Union?

In: Economics

Answer 1

At its most basic, it was because the Soviet Union was a command economy, rather than a market-based economy.

This meant that production was determined by political directive, rather than the market incentive of profit.

The Soviet Union tried to develop state economic planning into an economic science, and had huge institutions dedicated to this task, like the famous Gosplan. It was a failure. https://en.m.wikipedia.org/wiki/Gosplan

Profit fulfils a couple of critical functions in an economy.

Firstly, it acts to transfer information on demand and supply balances between all the many millions of economic agents in a country. This creates rapid and crucially *decentralised* feedback within the economy; you quickly get more production of what is profitable (ultimately reducing prices) and less production of what is not profitable.

You can imagine an economy full of freely trading agents as a hugely distributed computer with far more ability to process economic information than any planning institution.

The other thing profit does is that it provides the *incentive* to actually respond to economic signals.

The Soviet Union, over time, cumulatively misallocated vast amounts of capital due to this economic model, institutionalised black and grey markets into the fabric of society (because mismatched demand and supply inevitably give rise to these things), and also state corruption (as resources could only be obtained through administrative dictat rather than fair trade).

By the end, Gosplan was even running a system of ‘shadow prices’ to try to mimic a market economy without actually letting it be a market economy. Still didn’t work.

I would strongly recommend you read this well-known blog article ‘In the Soviet Union, Optimization Problem Solves You’ which is a slightly more technical discussion of the computational problem of economic optimization under central planning. (That’s not an endorsement of every single thing in the article by the way, but it is interesting)

https://crookedtimber.org/2012/05/30/in-soviet-union-optimization-problem-solves-you/

I can also recommend the book ‘Red Plenty’ that it refers to. It’s a novel, but it brings how these ideas were thought of at the time to life.