The Paradox of Marxist Economics: Dogmas and Reality 3031362896, 9783031362897

Table of contents :
Preface
Contents
1 Socialism Collapsed Regardless of How Long the Progressive Society “Built” It!
1.1 Before the Occurrence of Marxism… “Sheep Devoured Men!”
2 Marxist Perspective on the Capitalist Economy
2.1 From “Utopia” to “Science” The Evolution of Marxist Economic Theory
2.2 Main Economic Statements of Marxist Theory
2.3 Where Does Surplus Value Come From?
2.4 The Economic Concept of Capital
2.5 Business Cycles—A Result of Capitalism’s Economy, Causing Economic Chaos
2.6 A Marxist Perspective on Business Cycles and Their Emergence
2.7 Methods Proposed by Marxist Theory to Eliminate the Causes of Industrial Crises
3 Capitalism’s Contradictions and Reasons of Its Collapse
3.1 The Main Reason for the Capitalism’s Collapse
3.2 Capital Accumulation and Second Reason for the Capitalism’s Collapse
3.3 Decrease of Profit Rate and the Third Reason for the Capitalism’s Collapse
3.4 Preconditions for the Emergence of Socialism
3.4.1 The State’s Role in Socialism
3.4.2 Political Actions Taken by Proletariat During the Formation of Socialism
3.4.3 The Global Nature of the Proletarian Revolution
4 Theoretical Socialism or the First Phase of Communism
4.1 Economic Principles of the New State
4.2 Realisation of a Distributed Surplus Product
4.3 Socialist Commodity-Monetary Relations
4.4 Socialist Money
4.5 Law of Value in Socialism
4.6 Peculiarities of the Planned Economy
5 Communism as the Higher Phase of Communist Society
5.1 Marxism and Theories of Marginal Productivity and Utility
5.2 Principles of Communist Society
5.2.1 “To Each According to His Needs”
5.2.2 Economic Basis for the Principle of Distribution “According to One’s Needs”
5.2.3 The Theory of Scientific Communism
5.2.4 “Disposable Time” as the Basis of Communist Society
6 Economic Contradictions of Socialism
6.1 First Economic Contradiction of Socialism
6.1.1 The Concept of Labour Exploitation in Socialism
6.1.2 Distribution of the Surplus Product in Socialist Enterprises
6.1.3 Part of the Surplus Product for Capitalisation (mk)
6.1.4 Consumption Funds of a Socialist Enterprise (ma)
6.1.5 Wages in a Socialist Enterprise (v)
6.1.6 The Link Between Labour Exploitation and the Level of the Societal Development
6.1.7 Responsible Servants of Society
6.1.8 Universal Labour Duty—The Basis of Economic Degradation
6.2 Second Economic Contradiction of Socialism
6.2.1 Consequences of the Production Monopoly
6.2.2 Ratio of Productive Forces to Aggregate Demand
7 Socialist System in the Twentieth Century
7.1 Marxist Theory and Practice of Socialism
7.2 Soviet Model of Socialism
7.2.1 The Socialist Concept of the State
7.2.2 Iron discipline—the Basis for the Functioning of the Socialist State
7.2.3 The Role of the Communist Party
7.2.4 Constitutional Consolidation of Leadership
7.2.5 The New Class of “Nomenklatura”
7.2.6 Legalisation of the New Class of “Nomenklatura” or Its Transformation into a “Working Intelligentsia”
7.3 The Power Vertical System
7.3.1 Leader and Nomenklatura
7.3.2 Administrative Negotiations
7.3.3 Administrative Market
8 Administrative Cycles in the Soviet Union
8.1 The First Administrative Cycle
8.1.1 Policy of War Communism
8.1.2 The End of “War Communism” Policy. The New Economic Policy
8.2 The Second Administrative Cycle
8.2.1 The End of the New Economic Policy (NEP)
8.2.2 Course to Industrialisation Through Collectivisation
8.2.3 “Stalin’s Economy” as a Big Corporation
8.2.4 Main Principles and Peculiarities of Stalin’s Economic Model (MPE)
8.2.5 “Khrushchev Thaw”
8.2.6 Economic Characteristics of “the Thaw”
8.2.7 The New Economic Incentive System of the Country
8.3 The Third Administrative Cycle
8.3.1 The End of Khrushchev’s Economic Reforms
8.3.2 Betrayal of Nomenklatura
8.3.3 Kosygin’s Economic Reform
8.3.4 “Suppression” of Kosygin’s Reform
8.3.5 L. Brezhnev’s “Economic Stagnation”
8.3.6 Prevalence of Economic Inequality
9 Disadvantages of Soviet Economic Model
9.1 Causes of Stagnation
9.2 Peculiarities of Foreign Trade
9.3 Formation of the “Second Economy”
9.4 Has Competition Disappeared Completely?
10 Socialism with Chinese Characteristics
10.1 Historical Role of the Peasantry
10.2 Economic Situation of China on the Eve of the Second Five-Year Period
10.3 The Hundred Flowers Campaign
10.4 The First Administrative Cycle in China: “The Great Leap Forward”
10.4.1 The People’s Communes: The Most Important Form of Self-Government
10.4.2 “Groups of Armed Workers”
10.4.3 Disadvantages Turning into Advantages
10.4.4 The Mass Line
10.4.5 “Everyone Does Everything”
10.4.6 “Ants Gnawing at a Bone”
10.4.7 Steelmaking Campaign
10.4.8 Material Incentive: A Capitalist Relic
10.4.9 The Finale of the “Great Leap Forward” or the End of the First Administrative Cycle of China
10.5 The Second Administrative Cycle: The Cultural Revolution
10.6 The Beginning of a New Administrative Cycle
10.7 Similarities and Differences Between Administrative Cycles
11 Back to the Future
11.1 Is Socialism a Step Forward or a Step Back?
11.2 The Serfdom’s Shadow
11.2.1 Why Do People Agree to Become Serfs?
11.2.2 “Vassals” of the State
11.3 Where Should We Go Next?
11.4 Egoism: The Engine of Society’s Development
12 Transformation of Socialist Countries. Market Socialism in China
12.1 The Chinese Economic Reform
12.2 Two Leaders—Two Approaches
12.3 Plan and Market
12.4 Chinese Socialism and Economic Theory of Marxism
12.5 State-Owned Enterprises in China and Their Significance
12.6 Practical Implementation of Market Socialism
13 The Economic Transformation of the USSR
13.1 The End of the Third Administrative Cycle. The Crisis of “Middle Class” Society
13.2 What “Transformations” Were Required?
13.3 Exogenous Factors of Economic Degradation and Their Impact
13.3.1 Falling of Global Oil Prices
13.3.2 The Cold War
13.3.3 The Chernobyl Disaster
13.4 Endogenous Factors and Their Impact on the Economy
13.4.1 Anti-Alcohol Campaign
13.4.2 Publicity and Democracy
13.4.3 Prohibit It or Allow It! What Will Be the Choice? the End of the Planned Economy.
13.4.4 “Finances Sing Romances!”
14 The Dissolution of the Soviet Union
14.1 Boris, You Are Wrong!
14.2 The End of Gorbachev Era
14.3 An Attempt to Stop the Dissolution of the USSR and Begin the Fourth Administrative Cycle
14.3.1 The Novo-Ogaryovo Process
14.3.2 August Coup
14.4 The Belovezha Accords. The Fall of the USSR
14.4.1 Causes and Lessons of the Collapse of the USSR
15 Wrecks of Socialism
15.1 The Modern Oligarchs
15.1.1 The Immortal “Power Vertical”
16 Conclusion
References

Citation preview

Springer Studies in Alternative Economics

Vladislavas Petraškevičius

The Paradox of Marxist Economics Dogmas and Reality

Springer Studies in Alternative Economics

This book series offers an outlet for cutting-edge research in alternative, heterodox and pluralist economics. It features scholarly studies on various schools of thought beyond the neo-classical orthodoxy, including Austrian, Post Keynesian, Sraffian, Marxian, Georgist, Institutional-evolutionary, as well as feminist, radical, social, green, and ecological economics. It aims to promote pluralism of economic ideas, methodological approaches, and topics. The series also welcomes works that seek to develop alternative visions of the economy, economic structures and new approaches that aim to serve society, for example by embedding the economy within the ecosystem, or to enrich economic thought by advancing diversity, gender, race, and social equality. All titles in this series are peer-reviewed.

Vladislavas Petraškeviˇcius

The Paradox of Marxist Economics Dogmas and Reality

Vladislavas Petraškeviˇcius Vilnius Gediminas Technical University Vilnius, Lithuania

ISSN 2731-5908 ISSN 2731-5916 (electronic) Springer Studies in Alternative Economics ISBN 978-3-031-36289-7 ISBN 978-3-031-36290-3 (eBook) https://doi.org/10.1007/978-3-031-36290-3 Translation from the Lithuanian language edition: “Marksizmo ekonomin˙e teorija. Dogmos ir realyb˙e.” by Vladislavas Petraškeviˇcius, © 2021. Published by Vilnius Gediminas technical university. Leidykla (Publisher) “Technika”. All Rights Reserved. © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

“You can’t solve a problem? Well, get down and investigate the present facts and its past history! When you have investigated the problem thoroughly, you will know how to solve it. Conclusions invariably come after investigation, and not before. Only a blockhead cudgels his brains on his own, or together with a group, to “find solution” or “evolve an idea” without making any investigation. It must be stressed that this cannot possibly lead to any effective solution or any good idea”. Mao Zedong. Oppose Book Worship (May 1930), 1st pocket ed., p. 2, cited in Quotations from Chairman Mao Zedong: The Little Red Book. Peking Foreign Languages Press, 1966. Print I dedicate this book to my father and Teacher Otto

Preface

I frequently hear various assessments of Marxist economic theory in Lithuania and abroad. Historians and economic analysts frequently disagree about why the global socialist system collapsed, while countries that bravely marched with their heads held high on the path of socialism and communism for decades abruptly shifted their economic development towards capitalism. They disagree on a variety of issues. However, it must be admitted that many apologists for socialism and communism still believe that the economic theory of Marxism in its original version, i.e., in the form provided by K. Marx and F. Engels and later developed by V. Lenin, is fundamentally correct. According to them, the theory’s implementation in practice resulted in a variety of difficulties, both internal and external, which led to the failure of the theory’s practical outcome. If the practice had been carried out exactly as written, socialist societies would not have been affected. One of the historians, Stasys Gerv˙e, stated in the newspaper “Kibirkštis” that “Both zoological anti-communists and other bourgeois apologists like to claim that the dissolution of the Soviet Union and the counter-revolution of the 1990s, which “denied” Marxism-Leninism by demonstrating that its provisions do not correspond to real-world practice. In fact, this historical fact merely illustrates the internal rot of the Communist Party of the former Soviet Union (hereinafter—CPSU) and the establishment of bureaucracy and careerism because the centre of counter-revolution within the socialist society consisted of the party’s heads, namely, the privileged party nomenklatura, a part of which was no longer content with its relatively modest situation and craved the status of true bourgeoisie. Meanwhile, the formation and eventual establishment of such nomenklatura were undoubtedly caused not only by political errors, but also by internal contradictions of the actually existing socialism itself, which were attempted to be resolved after “de-Stalinization initiated by Khrushchev” by using capitalistic rather than socialistic methods. The socialist society itself, which had to become the object of constructive Marxist criticism, became the sacred cow, preventing positive resolution of such contradictions” (Gerv˙e, 2017). These statements can be accepted in part, but you must clearly understand the causes and consequences of these individual phenomena, which occurred in real vii

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Preface

life. These authors, who attempt to prove “the internal rot” of the CPSU or the establishment of “bureaucracy and careerism”, see it as one of the causes that led to the dissolution of the Soviet Union. However, the main question is whether this could have happened in reality otherwise. Can practical socialism, which gave rise to party nomenklatura, bureaucracy, and careerism, overcome these phenomena using the same socialistic methods that caused them? Most likely not. Therefore, I would like to demonstrate in this book that the economic theory of Marxism was doomed to fail from the start. However, only a deeper analysis and more detailed presentation of the theory of socialism makes it possible to comprehend the possible outcome of its implementation. Although the economic theory of Marxism is quite “attractive” because it sets out the aspirations of social equality and social justice, which are difficult to disagree with, the methods provided in the theory for implementing these aspirations, contradict economic logic and the fundamental aspirations of human individualism. The analysis and comprehension of this theory are still relevant today, particularly in communication with the younger generation. There is a noticeable lack of knowledge and superficial understanding of Marxism and its economic theory. Most literary sources raise questions about the economic theory of Marxism in an episodic manner; therefore, there is a lack of a systematic and critical approach to theoretical statements and their practical implementation. Modern literature gives the impression that this theory appears to be false, but it is unclear where its true flaws and errors lie. The economic theory of Marxism is an important part of the history of postcommunist countries. However, the future is just as important. In the absence of a critical and detailed understanding of Marxist economic theory, it is assumed that these errors may be repeated in future generations. Vilnius, Lithuania

Vladislavas Petraškeviˇcius

Contents

1

2

3

Socialism Collapsed Regardless of How Long the Progressive Society “Built” It! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Before the Occurrence of Marxism… “Sheep Devoured Men!” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marxist Perspective on the Capitalist Economy . . . . . . . . . . . . . . . . . . 2.1 From “Utopia” to “Science” The Evolution of Marxist Economic Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Main Economic Statements of Marxist Theory . . . . . . . . . . . . . . . 2.3 Where Does Surplus Value Come From? . . . . . . . . . . . . . . . . . . . . . 2.4 The Economic Concept of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Business Cycles—A Result of Capitalism’s Economy, Causing Economic Chaos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 A Marxist Perspective on Business Cycles and Their Emergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 Methods Proposed by Marxist Theory to Eliminate the Causes of Industrial Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalism’s Contradictions and Reasons of Its Collapse . . . . . . . . . . 3.1 The Main Reason for the Capitalism’s Collapse . . . . . . . . . . . . . . . 3.2 Capital Accumulation and Second Reason for the Capitalism’s Collapse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Decrease of Profit Rate and the Third Reason for the Capitalism’s Collapse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Preconditions for the Emergence of Socialism . . . . . . . . . . . . . . . . 3.4.1 The State’s Role in Socialism . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 Political Actions Taken by Proletariat During the Formation of Socialism . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.3 The Global Nature of the Proletarian Revolution . . . . . .

1 3 7 7 9 11 11 17 23 25 29 29 31 33 36 36 38 40

ix

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4

Theoretical Socialism or the First Phase of Communism . . . . . . . . . . 4.1 Economic Principles of the New State . . . . . . . . . . . . . . . . . . . . . . . 4.2 Realisation of a Distributed Surplus Product . . . . . . . . . . . . . . . . . . 4.3 Socialist Commodity-Monetary Relations . . . . . . . . . . . . . . . . . . . . 4.4 Socialist Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Law of Value in Socialism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 Peculiarities of the Planned Economy . . . . . . . . . . . . . . . . . . . . . . .

43 43 51 53 56 57 65

5

Communism as the Higher Phase of Communist Society . . . . . . . . . . 5.1 Marxism and Theories of Marginal Productivity and Utility . . . . 5.2 Principles of Communist Society . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 “To Each According to His Needs” . . . . . . . . . . . . . . . . . . 5.2.2 Economic Basis for the Principle of Distribution “According to One’s Needs” . . . . . . . . . . . . . . . . . . . . . . . . 5.2.3 The Theory of Scientific Communism . . . . . . . . . . . . . . . 5.2.4 “Disposable Time” as the Basis of Communist Society . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69 69 75 75

Economic Contradictions of Socialism . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 First Economic Contradiction of Socialism . . . . . . . . . . . . . . . . . . . 6.1.1 The Concept of Labour Exploitation in Socialism . . . . . 6.1.2 Distribution of the Surplus Product in Socialist Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.3 Part of the Surplus Product for Capitalisation (m k ) . . . . . 6.1.4 Consumption Funds of a Socialist Enterprise (m a ) . . . . . 6.1.5 Wages in a Socialist Enterprise (v) . . . . . . . . . . . . . . . . . . 6.1.6 The Link Between Labour Exploitation and the Level of the Societal Development . . . . . . . . . . . 6.1.7 Responsible Servants of Society . . . . . . . . . . . . . . . . . . . . 6.1.8 Universal Labour Duty—The Basis of Economic Degradation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Second Economic Contradiction of Socialism . . . . . . . . . . . . . . . . 6.2.1 Consequences of the Production Monopoly . . . . . . . . . . . 6.2.2 Ratio of Productive Forces to Aggregate Demand . . . . . .

89 90 90

6

7

Socialist System in the Twentieth Century . . . . . . . . . . . . . . . . . . . . . . . 7.1 Marxist Theory and Practice of Socialism . . . . . . . . . . . . . . . . . . . . 7.2 Soviet Model of Socialism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.1 The Socialist Concept of the State . . . . . . . . . . . . . . . . . . . 7.2.2 Iron discipline—the Basis for the Functioning of the Socialist State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.3 The Role of the Communist Party . . . . . . . . . . . . . . . . . . . 7.2.4 Constitutional Consolidation of Leadership . . . . . . . . . . . 7.2.5 The New Class of “Nomenklatura” . . . . . . . . . . . . . . . . . .

82 83 86

94 95 98 100 101 103 105 106 106 109 111 112 117 117 121 127 131 132

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7.2.6

7.3

8

Legalisation of the New Class of “Nomenklatura” or Its Transformation into a “Working Intelligentsia” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Power Vertical System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 Leader and Nomenklatura . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.2 Administrative Negotiations . . . . . . . . . . . . . . . . . . . . . . . . 7.3.3 Administrative Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

134 136 136 136 140

Administrative Cycles in the Soviet Union . . . . . . . . . . . . . . . . . . . . . . . 8.1 The First Administrative Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.1 Policy of War Communism . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.2 The End of “War Communism” Policy. The New Economic Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 The Second Administrative Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.1 The End of the New Economic Policy (NEP) . . . . . . . . . 8.2.2 Course to Industrialisation Through Collectivisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.3 “Stalin’s Economy” as a Big Corporation . . . . . . . . . . . . . 8.2.4 Main Principles and Peculiarities of Stalin’s Economic Model (MPE) . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.5 “Khrushchev Thaw” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.6 Economic Characteristics of “the Thaw” . . . . . . . . . . . . . 8.2.7 The New Economic Incentive System of the Country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 The Third Administrative Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.1 The End of Khrushchev’s Economic Reforms . . . . . . . . . 8.3.2 Betrayal of Nomenklatura . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.3 Kosygin’s Economic Reform . . . . . . . . . . . . . . . . . . . . . . . 8.3.4 “Suppression” of Kosygin’s Reform . . . . . . . . . . . . . . . . . 8.3.5 L. Brezhnev’s “Economic Stagnation” . . . . . . . . . . . . . . . 8.3.6 Prevalence of Economic Inequality . . . . . . . . . . . . . . . . . .

145 148 148

Disadvantages of Soviet Economic Model . . . . . . . . . . . . . . . . . . . . . . . . 9.1 Causes of Stagnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 Peculiarities of Foreign Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 Formation of the “Second Economy” . . . . . . . . . . . . . . . . . . . . . . . . 9.4 Has Competition Disappeared Completely? . . . . . . . . . . . . . . . . . .

197 197 203 206 216

10 Socialism with Chinese Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 Historical Role of the Peasantry . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 Economic Situation of China on the Eve of the Second Five-Year Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 The Hundred Flowers Campaign . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4 The First Administrative Cycle in China: “The Great Leap Forward” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

219 219

9

151 155 155 157 162 164 169 171 173 177 177 182 183 184 187 190

221 222 225

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10.4.1 The People’s Communes: The Most Important Form of Self-Government . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.2 “Groups of Armed Workers” . . . . . . . . . . . . . . . . . . . . . . . 10.4.3 Disadvantages Turning into Advantages . . . . . . . . . . . . . . 10.4.4 The Mass Line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.5 “Everyone Does Everything” . . . . . . . . . . . . . . . . . . . . . . . 10.4.6 “Ants Gnawing at a Bone” . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.7 Steelmaking Campaign . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.8 Material Incentive: A Capitalist Relic . . . . . . . . . . . . . . . . 10.4.9 The Finale of the “Great Leap Forward” or the End of the First Administrative Cycle of China . . . . . . . . . . . . 10.5 The Second Administrative Cycle: The Cultural Revolution . . . . 10.6 The Beginning of a New Administrative Cycle . . . . . . . . . . . . . . . 10.7 Similarities and Differences Between Administrative Cycles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

228 232 234 235 238 240 242 244 246 249 254 255

11 Back to the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 Is Socialism a Step Forward or a Step Back? . . . . . . . . . . . . . . . . . 11.2 The Serfdom’s Shadow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2.1 Why Do People Agree to Become Serfs? . . . . . . . . . . . . . 11.2.2 “Vassals” of the State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 Where Should We Go Next? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4 Egoism: The Engine of Society’s Development . . . . . . . . . . . . . . .

259 259 260 263 265 266 269

12 Transformation of Socialist Countries. Market Socialism in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 The Chinese Economic Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2 Two Leaders—Two Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3 Plan and Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 Chinese Socialism and Economic Theory of Marxism . . . . . . . . . 12.5 State-Owned Enterprises in China and Their Significance . . . . . . 12.6 Practical Implementation of Market Socialism . . . . . . . . . . . . . . . .

273 274 277 279 281 283 285

13 The Economic Transformation of the USSR . . . . . . . . . . . . . . . . . . . . . 13.1 The End of the Third Administrative Cycle. The Crisis of “Middle Class” Society . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2 What “Transformations” Were Required? . . . . . . . . . . . . . . . . . . . . 13.3 Exogenous Factors of Economic Degradation and Their Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3.1 Falling of Global Oil Prices . . . . . . . . . . . . . . . . . . . . . . . . 13.3.2 The Cold War . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3.3 The Chernobyl Disaster . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 Endogenous Factors and Their Impact on the Economy . . . . . . . . 13.4.1 Anti-Alcohol Campaign . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4.2 Publicity and Democracy . . . . . . . . . . . . . . . . . . . . . . . . . .

291 291 292 297 297 299 304 306 306 310

Contents

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13.4.3 Prohibit It or Allow It! What Will Be the Choice? the End of the Planned Economy. . . . . . . . . . . . . . . . . . . . 312 13.4.4 “Finances Sing Romances!” . . . . . . . . . . . . . . . . . . . . . . . . 314 14 The Dissolution of the Soviet Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1 Boris, You Are Wrong! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2 The End of Gorbachev Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3 An Attempt to Stop the Dissolution of the USSR and Begin the Fourth Administrative Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3.1 The Novo-Ogaryovo Process . . . . . . . . . . . . . . . . . . . . . . . 14.3.2 August Coup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.4 The Belovezha Accords. The Fall of the USSR . . . . . . . . . . . . . . . 14.4.1 Causes and Lessons of the Collapse of the USSR . . . . . .

319 319 321 324 324 325 327 328

15 Wrecks of Socialism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 15.1 The Modern Oligarchs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 15.1.1 The Immortal “Power Vertical” . . . . . . . . . . . . . . . . . . . . . 332 16 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339

Chapter 1

Socialism Collapsed Regardless of How Long the Progressive Society “Built” It!

The Japanese engineer was officially invited to a large industrial enterprise in the USSR to assist in installation of a new automatic production line that had recently been purchased in foreign currency. He stayed in the USSR for a long time before he returned home to Japan after completing his assignment. He met with his friends, who began asking him how he liked visiting the Soviet Union, what his daily life was like, and what the peculiarities of life in this country and its economics were. The engineer described the Soviet people with kindness, but he admitted that the seven wonders of this socialist society surprised him the most. Furthermore, the following wonders are more similar to the specific paradoxes of the socialist system: 1st wonder—there is no unemployment in the Soviet Union, which is not the case in all capitalist countries; 2nd wonder—although there’s no unemployment in this country, no-one works for some reason; 3rd wonder—although nobody works here, everybody in every enterprise and organisation meets and exceeds their plans and production goals; 4th wonder—although everyone meets and exceeds the plans, there’s never anything to buy at the store; 5th wonder—although there’s never anything to buy, they can see and find everything their hearts desire when they come to visit the locals; 6th wonder—although the locals have enough various products at home, everyone is dissatisfied for some reason; 7th wonder—although nobody is satisfied, somehow everyone votes for the Soviet government and the socialist system! This anecdote, which was quite popular in the former Soviet Union, graphically depicts the national situation that arose following the establishment of a socialist system. Economic stagnation demonstrated the achievements of a wealthy country that “built” its economy according to the economic theory of Marxism. How long can a situation like this exist in the state? Stagnation is not a metaphor, it is the actual state of a country, the basic principle of which may be described as © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_1

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follows: “We pretend we to work, they pretend to pay us”. The socialist state gradually transforms into a simulated organisation. During this period, cynicism becomes the norm in society, while the “great projects for the development of socialism” turn into slogans and cease to gather people to support the regime. Nobody likes stagnation, and while people can tolerate it for a while and even “vote for the Soviet government”, they gradually begin to express the increasing dissatisfaction! However, based on the previous statement, it appears that in this society, the vast majority of local residents have an abundance of various products in their homes, with only a few of them starving! Nonetheless, they are dissatisfied for some reason! Why? Perhaps because, despite having money, they are unable to purchase all of these items simply by going to the store! Nevertheless, they are forced to waste their time by searching for influential friends who could help them to obtain something they desire. They complain about the government and the current order in their kitchens or among trusted friends, but they cannot figure out why the government does not solve all of these problems. They make jokes about their leaders, but the leaders do not seem to hear them… So, the leaders feel good! All of this is referred to as a socialist reality, which appeared in some strange way—perhaps someone created it in order to help people! However, it led to some sort of misunderstanding! The question then is, were those who devised such an economic system completely foolish? Haven’t they considered the potential consequences of their project to the society? What if they had a completely different perspective on this project? Was it possible that their vision of a new socialist society remained the dogma of socialist system? Perhaps those in charge of implementing this project made so many fatal errors and deviations that the latter project eventually became virtually unrecognisable. All of this raises the following questions, which must be addressed: 1. How did the concept of communism emerge as the concept of a new economic system for society? Who were the authors of the economic theories of socialism and communism? 2. Why, in its authors’ opinion, is capitalist economy bad, and why does it develop in cycles? Why should it fail? What caused the emergence of socialism? 3. What should socialism look like in theory, and what are its advantages over capitalism? Why is communism better than socialism? 4. What did the authors of this concept overlook? Why should we blame the classics of communism? 5. How did the practical implementation of the socialist system correspond to its theoretical model? Did its developers strictly adhere to the instructions of its authors during the project’s implementation? Why should we not blame the classics? 6. Have they succeeded in eradicating class antagonism following the establishment of socialism and the liquidation of the bourgeoisie as a class, as predicted by the classics of Marxism?

1.1 Before the Occurrence of Marxism… “Sheep Devoured Men!”

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7. Why did the socialist economy continue to evolve cyclically? Why was it stagnating during each cycle? 8. Why did the communism project fail? Was it the fault of its authors, or was it the fault of those who carried out the project? 9. Has this system completely failed, or have some of its individual elements survived? Because all of these questions are quite complex, they cannot be answered in a straightforward and unambiguous manner. Therefore, I will try to answer all of them gradually in this book, based on the statements and thoughts made by the project’s authors or those who implemented it, while also discussing the practical implementation of these concepts and thoughts. I will also attempt to assess each of those individuals’ contributions to the practical implementation of the theory of socialist economy, as well as the consequences of this process for both the political life of society and the economy of the entire socialist country.

1.1 Before the Occurrence of Marxism… “Sheep Devoured Men!” In medieval society, there was small-scale production, which was primarily intended for individual consumption. The manufacturing equipment was respectively primitive, small, and had a low capacity. The products were created with the intention of being consumed immediately by the producer, his family members, or his feudal lord. Only when there is excess production is it allocated for exchange or sold. It could be described as the emergence of free competition in classical economic theory. Adam Smith (1723–1790), a Scottish economist and philosopher, developed the first version of political economy, which was essentially a classic application of the principle of utilitarianism, i.e., the belief that the true goal of virtue is universal good and happiness. His theory demonstrated that the division of labour and exchange reconcile individuals’ selfish actions. The exchange was primarily interpreted as a trade of difficulties (hard work) for pleasure. The efforts made during the production of things measures the value of things, allowing such value to be defined mathematically and providing an accurate foundation for the scientific interpretation of economic phenomena. A. Smith emphasised the benefits of division of labour and specialisation, and he described how the market mechanism works. He argued that if producers can make a profit by producing goods and providing services, then invisible market forces will ensure the conditions for the production of the necessary goods and services. If the state will not regulate the markets, competition will direct production in ways that will improve the well-being of society in this environment (Smith, 1776). However, it is necessary to describe the period during which A. Smith lived in detail. In the first half of the eighteenth century, the new era of Britain began. This era strengthened the classic compromise between the noble landowners and the

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bourgeoisie. The interests of both classes of society intertwined and grew together. The landed nobility evolved into the bourgeoisie, and the bourgeoisie evolved into landowners. A political system was formed that has basically survived to the present day and has served as the ideal of bourgeois democracy for the past two centuries. It was a parliamentary monarchy in which the king reigned but did not rule; it was run by two parties that sometimes replaced each other; there was personal liberty and freedom of the press and speech that was unprecedented in Europe at the time, and which was actually available only to the privileged and rich classes of society. The British Empire expanded quickly. Colonies were established and colonised in North America, sugar cane and tobacco plantations flourished in West India, and India and Canada were conquered. England’s wars were mostly successful. It became the world’s first maritime and trading state. English merchants controlled nearly the entire slave trade and transported thousands of slaves to America each year. All of these processes were based on economic changes in England. The countryside was changing alongside England’s agriculture, which continued to produce roughly three times as much as industry in the middle of the century. However, as time passed, the industry demanded more and more agricultural raw materials. The British Empire’s conquests were all carried out with the assistance of a large national army. One of its most important tasks was army equipage, particularly with broadcloth, from which the army’s uniforms were sewn. As a result, there was a high demand for sheep wool, which required the expansion of pasture areas for sheep rearing. The landowners then calculated that keeping peasants on their lands was completely unprofitable, because their income from agricultural production was less than that from sheep rearing. This led to a massive expulsion of peasants from their land, also known as “setting free of the labour power”. Peasants who lost their land began to commit robberies, but this did not help them solve their problems, so the majority of them moved to cities, where the “freely hired class of workers”, also known as the “proletariat”, began to form, consisting of workers who had no land or other property. This class was also formed by peasants who were losing land or long-standing semi-feudal rental rights. It grew rapidly over time. This period is vividly described by Thomas More in his book “Utopia”, where he says: “Your sheep that were won’t to be so meek and tame, and so small eaters, now, as I hear say, be become so great devourers and so wild, that they eat up, and swallow down the very men themselves. They consume, destroy, and devour whole fields, houses, and cities. For look in what parts of the realm doth grow the finest and therefore dearest wool, there noblemen and gentlemen […] leave no ground for tillage, they inclose all into pastures; they throw down houses; they pluck down towns, and leave nothing standing, but only the church to be made a sheep-house”. And then “they must needs depart away, poor, silly, wretched souls […] Away they trudge, I say, out of their known and accustomed houses, finding no place to rest in” (More, 1891). On the other side, the class of industrial capitalists grew. It was supplemented by enriched workshop masters, owners, merchants, and planters who brought their money to England. Capitalists first entered home businesses as buyers and suppliers of raw materials, then set up craft workshops and, later, factories. Craft productions began to emerge. K. Marx noted that “the bourgeoisie, at its rise, wants and uses the

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power of the state to “regulate” wages, i.e., to force them within the limits suitable for surplus value making, to lengthen the working day and to keep the labourer himself in the normal degree of dependence. This is an essential element of the so-called primitive accumulation” (Marx, 1887, p. 659). F. Engels noted that “the introduction of free competition is thus public declaration that from now on the members of society are unequal only to the extent that their capitals are unequal, that capital is the decisive power, and that therefore the capitalists, the bourgeoisie, have become the first class in society” (Engels, 1969). Along with the division of labour, it was the end of the era of manufacturing based on individual labour. The period of greatest inventions began with the ongoing industrial revolution. Credits were required by everyone: industrialists for their own businesses, merchants for overseas trade, and the government for colonial wars. Banks and joint-stock companies that accumulated monetary capital were established and grew rapidly. The amount of public debt increased. Securities and the stock exchange have become commonplace. Commodity-monetary relations have permeated every aspect of nation’s life. Trade and production have become capitalist. The formation of objective categories such as capital, profit, interest, ground rent, and salaries resulted from the massive repetition of social phenomena. It could already become the subject of observation and scientific analysis. At the time, the bourgeoisie was still the most advanced social class. It has yet to face its most important foe within the growing working class. The class conflict was still in its early stages. This led to the development of classical bourgeois political economy in England. A. Smith’s proposed economy, which led to social sustainability, was supplemented and somewhat disturbed by another English economist. It occurred following the publication of David Ricardo’s (1772–1823) book “Principles of Political Economy” in 1817. The value problem, which served as the foundation for the exchange of various goods, served as the starting point for D. Ricardo’s economy. D. Ricardo’s (1817) theory of value stated that the value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour. The amount of labour put into producing a commodity increases or decreases its exchangeable value. It is the most important doctrine of political economy. However, D. Ricardo made this theory of value, based on the assumption of labour put, more specific by further developing it. It was discovered that not only the labour applied immediately to commodities affect their value, but the labour also which is bestowed on the complements, tools, and buildings, with which much labour is assisted. Finally, after conducting an analysis of the role of capital in the overall process of production, D. Ricardo was forced to modify his initial theory of value, based on the amount of labour, even further.

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1 Socialism Collapsed Regardless of How Long the Progressive Society … Our first question was how did the concept of communism emerge as the concept of a new economic system for society? Who were the authors of the economic theories of socialism and communism?

Chapter 2

Marxist Perspective on the Capitalist Economy

2.1 From “Utopia” to “Science” The Evolution of Marxist Economic Theory In the middle of the nineteenth century, Marxism emerged as a logical continuation of the teachings of A. Smith and D. Ricardo. Karl Marx (1818–1883), the founder of Marxism, was born in Trier, a town in West Germany’s Rhineland-Pfalz region that is considered to be Germany’s oldest city. He grew up in a lawyer’s family, graduated from the Faculty of Law of the University of Berlin, and earned a PhD in philosophy. His friend and comrade F. Engels described Marx’s main work of life “Capital”, which made him one of the three most influential economists in the world, as “the Bible of the working class”. The “Capital” consists of four volumes. Describing the famous quote of T. More, K. Marx noted that “sheep devoured men”; therefore, “the process of forcible expropriation of the people received in the sixteenth century a new and frightful impulse from the Reformation, and from the consequent colossal spoliation of the church property. The Catholic church was, at the time of the Reformation, feudal proprietor of a great part of the English land. The suppression of the monasteries, 8c., hurled their inmates into the proletariat” (Marx, 1887, p. 644). According to Marxist political economy, the anarchy of social production is gradually emerging in this stage because goods are manufactured chaotically for the market and the amount of produced goods is not regulated by anyone. However, because the small individual producers of the goods had no market influence, the consequences of the anarchy of this production were not more pronounced. The capitalist revolution sparked an industrial revolution, which began with simple cooperation and then spread to craft productions. Thus, capital goods that had previously been distributed among individual producers began to concentrate in large workshops, transforming individual capital goods into public capital goods. This transformation had no effect on the form of exchange, which remained unchanged. Then a capitalist appeared who, as the owner of capital goods, misappropriated the produced products and converted them into goods. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_2

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While investigating the division of the outcomes of economic activities, i.e., the distribution of income among capitalists, landowners, and workers, D. Ricardo proclaimed antagonism of these classes. A capitalist who invests his savings in businesses is a true driver of progress in social well-being. By increasing the national production capacity, he creates wider and better opportunities to increase wages. Improved working conditions not only reduce child mortality, but also increase population growth in general. Landowners, who experienced higher demand for food products and their rising prices, started cultivating soils with lower yields. Workers can no longer be satisfied with their wages because of rising prices for exclusive necessities and, most importantly, bread. Higher wages reduce capitalist profits. Reduced capital accumulation begins to halt further progress of economic activities. Landowners are the only ones who benefit from this process, as they receive higher rent for the best rental lands (Ricardo, 1817). It should be noted that at the time, England had limited corn imports with relatively high customs duties. In the meantime, workers had to be content with wages that could only cover their basic physical subsistence. They might be able to improve their life if they could reduce the growth of the labour power. It is no surprise that Ricardo’s initial theory of value based solely on the amount of work and the poor analytical conclusions of income growth served as very useful prerequisites for K. Marx’s criticism of the capitalist economic system. Using D. Ricardo’s earlier assumptions on the labour theory of value, K. Marx argued that the value ratios of commodities exchanged were determined by the total amount of socially necessary labour required to produce them. He defined the concept of the law of value. When products are produced as goods, the cost of public labour inevitably takes the form of value. The production of goods requires to exchange them on the basis of the amount of public work used to produce them, i.e., on the basis of the total working time that is socially necessary to produce them. Goods must be exchanged in accordance with their public value. Those producers whose individual labour costs for the production of a specific product are lower win, while those whose costs are higher than what is necessary for society lose. The essence of the law is that all goods must be exchanged based on their public value and follow that the costs of a particular enterprise would not exceed the socially necessary average costs that are typical of the entire specific industry. If the actual market prices of goods deviate from the law of value in individual cases, it indicates that the production of those goods is temporarily not in line with the prevailing trends in the supply and demand for those goods. When the supply and demand for those goods equalise as a result of the competition effect, the prices revert to the amount of work put into them. “Whatever the manner in which the prices of various commodities are first mutually fixed or regulated, their movements are always governed by the law of value. If the labour time required for their production happens to shrink, prices fall; if it increases, prices rise, provided other conditions remain the same” (Marx, 1894).

2.2 Main Economic Statements of Marxist Theory

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2.2 Main Economic Statements of Marxist Theory Prior to the emergence of capitalist production, i.e., during the Middle Ages, smallscale production, which basis was private ownership of capital goods, was prevalent everywhere. Because capital goods were intended for the production of individual consumer products, they were primitive, small, and had a low capacity. The products were made for personal use or for the use of a feudal lord. Only a small portion of the production, which was produced in excess of what could be consumed, was intended for sales and exchanges. A simple (pure) competition was established in which “the anarchy of social production exists in its most primitive form” (Engels, 1958, p. 244). According to economic theory of Marxism, the materialistic understanding of history is based on the statement that production and exchange form the foundation of every social system. The distribution of products as well as the classification of society into social classes or ranks depends on who produces what and how products are exchanged. Thus, “the ultimate causes of all social and political revolutions must be sought not in people’s heads or their growing awareness of eternal truth and justice, but in changes in production and exchange methods; they must be sought not in the era’s philosophy, but in the economy” (Engels, 1958, p. 229). The industrial revolution sparked a revolution in industry, which transformed individual capital goods into public capital goods through simple cooperation and craft production. In the past, a worker who made a product could declare: “This is my product!” Now that the development of such a product has been distributed across many production chains and a large number of people have been involved in the process, only a few people can claim to have created a product. They used to say: “This is our product!” Meanwhile, the method of exchange has remained unchanged. A capitalist appeared as the owner of the capital goods. As the owner of the instruments, he misappropriates products produced by them and converts them into goods. Therefore, despite the fact that production has become more public, exchange has remained private or has been used as a transaction between private individuals. This phenomenon is described as the main contradiction of capitalism in Marx’s economic theory, from which all other contradictions, particularly in large industry, arise. Let us define the terms used in economic theory of Marxism (political economy): Commodity refers to two things: first, an item that satisfies human needs of whatever kind, and second, an item that can be exchanged for something else. The usefulness of an item demonstrates its use value. An exchange value (or simply a value) is a ratio or proportion of exchanged certain number of use values of one type to a certain number of use values of another type. Therefore, each individual product represents only a small portion of the socially necessary labour time, and its value is determined by the amount of socially necessary labour or labour time required by society to produce a given commodity or create a given use value. “Regarded as exchange-values all commodities are merely definite quantities of congealed labour time” (Marx & Engels, 1959, p. 16).

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Money. Marx undertakes to analyse form of value and money. Here, the main objective of Marx is to examine the origins of the monetary form of value, as well as the historical process of exchange development. Money, as the highest product of the development of exchange and commodity production, hides and conceals the public nature of private works, as well as the social relationship between individual producers bound by the market. The various forms of money, such as a simple equivalent of goods or medium of circulation, or a means of payment, treasure, and global money, represent very different tiers of the social production process when viewed from the perspective of the different scope of application of one or another function or comparative dominance of one of them” (Marksas, 1957, p. 156). Surplus value. At a certain point in the development of commodity production, money turns into capital. The formula for circulation of commodities was: C (commodity)–M (money)–C (commodity), which means that one commodity was sold in order to buy another commodity. The general formula of capital is, on the contrary, M–C–M’, which means that commodity was bought in order to sell it (with profit). K. Marx defines surplus value as the originally advanced value of money put into circulation. The fact of such “increment” of money in capitalist circulation is well known to everyone. This “increment” turns money into capital, which is a unique, historically defined social ratio of production. Meanwhile, people who have money and convert it into capital are called capitalists. Buying goods for sale with the intention of making a profit, on the other hand, is not a new phenomenon. It can be found in almost all forms of society, including ancient societies, beginning with the slave-owning system. Various profiteers have always purchased goods for sale and later sold them for a profit, in other words, they earned money by selling goods at a higher price than they paid for them. So, what is the distinction between a capitalist and a profiteer? Why can’t profiteers generate surplus value? K. Marx responded to these questions as follows: the profiteer earns his money through the circulation of goods. However, the surplus value cannot come from the circulation of goods because the sphere of circulation is limited to the exchange of equivalents, nor can it come from price increment because losses and gains between buyers and sellers would be equalised. In other words, if we treat exchanges as individual specific transactions, we will see that, in some cases, one party of the transaction wins as a seller and, in other cases, loses as a buyer. And vice versa, the other party to the transaction loses as a buyer in one case but wins as a seller in the other case. When we talk about all of these transactions in general, i.e., not as individual, but as a frequent, average, social phenomenon, we will see that there is no surplus value in the outcome.

2.4 The Economic Concept of Capital

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2.3 Where Does Surplus Value Come From? The owner of capital goods exploits the manufacturer by misappropriating his surplus labour in any antagonistic society; however, the capital is formed only in a capitalist society. The historical premise for it to occur is that, first, given the relatively high level of development of commercial production, a certain amount of money accumulates in the hands of individual “capitalists”, and, secondly, a worker, also known as a “proletarian”, who is free of various restrictions or limitations on the sale of labour power and free of land and, in general, capital goods but does not own a farm, has no means of subsistence without selling labour power. To obtain surplus value, the capitalist or “money-owner must find such commodity on the market whose intrinsic value would have the original characteristic to be a source of value” (Marksas, 1957, p. 153), i.e., such a commodity whose consumption process together would be a value-creation process. In other words, this commodity must have a unique characteristic in order to create value that will no longer be its equivalent because it will be greater than its value. And there is such a commodity. It is a human labour power. Its consumption is labour and labour creates value. The money-owner purchases labour power based on its value, which is determined, like the value of any other commodity, by the socially necessary labour time required to produce it (i.e., the costs for the sustenance of the worker and his family). After purchasing labour power, moneyowner has the right to use it, i.e., to force it to work all day, for example, for 12 h. Meanwhile, a worker produces a product that pays for his maintenance in 6 h (“necessary labour time”), and unpaid “surplus product” or surplus value to the capitalist in the following 6 h (“surplus labour time”).

2.4 The Economic Concept of Capital Now, let us return to the definition of capital used in classical economic theory. Such physiocrats and classics of political economy as A. Smith and D. Ricardo examined capital circulation going in circles as a form of production and identified it with capital goods and stock of tangible goods (machinery, tools, raw materials, clothing, food, money, etc.). They examined capital as an object or material, and combined circulation of capital into a simple movement or circulation of capital goods. In explaining essence of the capital, D. Ricardo argued that capital was linked to the accumulated labour power which was a part of it. After all, before the goods enter the goods market, first of all, circulating capital is required to buy-in raw materials and pay wages, as well as fixed capital of various degrees of durability, invested in manufacturing machinery, tools, and buildings. Essentially, in Ricardo’s theory of value, capital, like labour, is becoming a separate factor of production. A. Smith also based his ideas on the benefits of the market economy, claiming that its “invisible hand” directs private interests towards the public’s well-being. In fact, he has allocated to capital only that portion of the resources that has already been

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allocated to any sector of material production that is not only intended for further production but also generates income. He, like the physiocrats, argued that the land can create value itself. Unlike A. Smith, D. Ricardo recognised that capital does not create value and that only labour can transfer the value of capital to a new product. D. Ricardo defined circulating capital as the portion of capital that consisted of the labour power. From the point of view of D. Ricardo, “capital is accumulated labour or everything that is related to production” (Ricardo, 1817). According to François Quesnay, founder of the Physiocratic school, “Capital is not money, but capital goods that can be bought with money” (Quesnay, 1758). The main focus of physiocracy is that land is the only source of a nation’s wealth that generates value; meanwhile, the main objective of a wise economic policy is to not impede agricultural development. John Stuart Mill understood the capital as a stock, previously accumulated, of the products of former labour. What capital does for production is, to afford the shelter, protection, tools, and materials which the work requires, and to feed and otherwise maintain the labourers during the process. S. Mill defined capital as a portion of a businessman’s (producer’s) assets, which forms the fund for the introduction of new production. He wrote: “Capital is a previously accumulated materialised labour product advanced for the purchase of capital goods and labour power” (Mill, 1848). However, S. Mill, who was particularly fond of political freedom, predicted that in capitalism, people would become passive and boring wage slaves. He wished for more people to work in cooperatives. Modern economic theory divides capital, which is intended to be invested in the development of goods or services, into constant and variable capital (Samuelson, 1948). These two concepts are usually associated with production costs. Capital is defined here as the cost of production factors, which are classified into two types: fixed and variable costs: Total costs (T C) = total fixed costs (TFC) + total variable costs (TVC)

(2.1)

The constant capital or total fixed costs do not depend on the size of the production results. Part of the costs associated with a fixed part of capital do not change in the short term, regardless of how many pieces of a product are produced. Because constant capital (fixed costs) does not depend on production volume, it must be owned, acquired, or leased prior to the start of any production. It transfers its total value into the final product during the production process through rent or amortisation in specific parts until it needs to be replaced or renewed as a result. Variable capital or total variable costs, in their most basic form, are the costs associated with the cost of a variable factor in the production process. Variable costs combine raw materials, fuel, and all other consumables, as well as labour power. They depend on the production volume because they transfer their entire value to the final product. The greater the scale of production, the more variable capital or variable costs must be used. If no production occurs, constant capital costs remain, but there

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is no need for additional raw materials, electricity, or labour power. Therefore, they can be calculated by multiplying the variable factor’s costs by its price. K. Marx defined capital as an expression of production relations between classes and, for the first time in the history of scientific economy, demonstrated capital circulation as a change in expressions of these relationships between classes. Capital is a social relationship, not an object. This term is frequently used as a substitute for the capital-labour relations. K. Marx referred to the unity of all three types of capital (money-capital, productive-capital, and commodity-capital) and examined their circulation. In his theory, he distinguished the different stages through which capital moves. K. Marx defined the capital, forming the unity of money-capital, productive-capital, and commodity-capital, as industrial capital. K. Marx also distinguishes two types of capital from the standpoint of the production process: constant capital and capital used for capital goods (machinery, work tools, raw materials, etc.) the value of which (in whole or in part) is transferred to the finished product. Here, the raw materials and other materials are classified as fixed capital rather than variable capital, even though they depend on production volume. He bases his argument on the fact that during the production process, raw materials and other materials are fully transferred to a new product while their value remains unchanged. They simply take the form of a new product at the same value and price as before it was produced. Only the labour value as a value of variable capital remains constant, but it increases during the labour process and generates surplus value. Constant capital differs from variable capital in that constant capital is both bought and sold by the capitalist, while variable capital is sold by the worker and bought by a capitalist. Marx argued that the surplus value is not created during the exchange between capitalists (because the price of the product reflects the actual value of that product). However, it should be noted that, despite this, he allocated raw materials, as a part of constant capital, to circulating capital and only buildings, machinery, and equipment to fixed capital. See an illustration in Table 2.1. He “refined” labour power by classifying it as variable capital, i.e., separating it from everything that, in his opinion, did not create added value. As a result, the worker creates value equal to the amount of variable capital, and surplus value during the work process. The amount of newly created value can be expressed in the formula v + m where v is the reproduced value of labour power and m is the surplus value. Table 2.1 Capital structure Marxist economic theory

Values under consideration

Modern economic theory

Constant capital

Value of factory buildings, equipment, tools, etc

Fixed capital

Value of raw materials, fuel, auxiliary materials, etc

Variable capital

Variable capital

Value of labour power

Source Created by the author

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K. Marx provides the following formula for the value of commodities produced (W) by capitalist enterprises: W = c + v + m. According to him, this value reflects the capitalist exploitation of the hired workers. The Rate of Surplus Value. As previously stated, constant capital, which consists of production machinery and raw materials, only transfers its value to the product but does not generate any additional value. Therefore, in order to indicate the degree to which capital exploits labour power, the surplus value must be compared to variable capital rather than total capital. However, if we divide the capitalist’s unpaid “surplus product” produced by using labour power in 6 h (“surplus labour time”) by the necessary product produced in the first 6 h (“necessary labour time”), which pays for the worker’s maintenance, we will get the ratio. K. Marx refers to this ratio as the rate of surplus value. m' = m / v = sur pl us l abour/necessar y l abour, which in our example will be, for example, 6/6, i.e., 100%

(2.2)

The ratio of surplus value with variable capital m/v denotes the degree to which capitalists exploit the hired workers. There are two main ways to increase the surplus value: by extending the working day (“absolute surplus value”) and by increasing labour productivity, thus reducing the labour time necessary to produce a product (“relative surplus value”). By analysing the first method, K. Marx reveals a grandiose picture of how the working class fought to shorten the working day and how the state government intervened to prolong it (between the fourteenth and seventeenth centuries) or shorten it (the laws on factories of the nineteenth century). Later, with the publication of “Capital”, the history of workers’ movement in all civilised countries of the world revealed thousands of new facts illustrating this picture. The absolute surplus value is generated not only by extending the working day. It is possible to increase the intensity of labour, which can compensate for the reduction of the working day at the workers’ request. As a result of increased labour intensity, a worker consumes more vital energy; however, he also generates a higher surplus value over the same period of time. By analysing the second method, K. Marx stated that the necessary labour time is reduced by lowering the value of labour power. If, as a result of increased productivity of labour, workers require less time to generate the value necessary to restore their value as labour power, then the relative surplus value misappropriated by the capitalist increases. Let us assume that a working day is 10 h long, with 5 h being necessary labour time and the remaining 5 h being surplus labour time. In this case, the degree of exploitation is 5/5, i.e., 100%. By introducing more efficient production technology, it is possible to reduce the necessary labour time by 1 h, resulting in a total of 4 h. It does not imply that the entire working day will be shortened because it will remain unchanged. However, the surplus labour time will then be increased to 6 h, resulting in a corresponding increase in the surplus value. When the ratio between necessary

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labour time and surplus labour time is changed, the degree of exploitation increases to 6/4, or 150%. In this case, the value of labour power decreases as a worker’s wage decreases relatively (he earns less per piece of product produced per working day), but the mass of surplus value increases. An increase in relative surplus value in individual industries may also result in the creation of extra surplus value. Let us assume that a worker produces 10 pieces of goods in 10 h at an average level of public labour productivity. The value of capital goods used in the production of each piece during the necessary labour time will be $1. The value created during the surplus labour time is also $1. Therefore, the total value of a product is $2 per piece. If labour productivity at this enterprise were to double and a worker could produce 20 pieces, he would still create a new value of $10 in the same amount of time. The only difference is that it is now distributed across a larger number of goods, with 1/20 of each piece of goods instead of 1/10. Previously, it took 1 h for a worker to produce one piece of products; now, it takes only 0.5 h. Therefore, the individual product value in this factory has decreased in comparison with its public value for which the capitalist sells his product. By selling a product for a public value, the capitalist will realise an extra surplus value of $0.5. However, when a large number of enterprises in that sector begin to use technological advancements, the extra surplus value disappears. By examining relative and extra surplus values historically, it is possible to conclude that both of them may rise not only when the value of labour power decreases. They may also increase and will increase even when the value of labour power increases. However, this growth must be relative. It can be illustrated by a couple of examples. Let us take a look at one of them: Imagine the South African coal mine in the first half of the twenty century. At the time, the level of work automation in African mines was very low due to the dominance of manual labour. Coal was mined primarily by using simple manual tools in mines and transported by wheelbarrows from the mine to the outside, where it was manually unloaded and then stored. In the mine, one ton of coal cost $10. After being transported by wheelbarrows from the mine to the storage site and unloaded, it already cost $12. One worker was able to bring out and unload up to 20 wheelbarrows of coal per long working day, which lasted 10 h. The work was very dirty, and the worker was paid $20 per day. With this wage, he and his family members could barely survive and pay for their poor housing. However, the overall result of his working day was just $40, from which he received $20. Thus, his generated surplus value (mass of surplus value) was $20, or half of the total newly created value, which the capitalist freely misappropriated. In this case, the rate of surplus value m’ was as follows: m’ = m/v = 20/20; meanwhile, the rate of exploitation was 100% (see example a in Fig. 2.1. Let us analyse the second example: Imagine an automotive and machinery factory in Detroit, Michigan, in the second half of the twenty century. The car body press shop is one of the enterprise’s most important divisions, which is almost entirely automated. It is equipped with a massive car body press machine capable of forming up to 50 car bodies from large metal sheets in a single shift (8 working hours).

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Fig. 2.1 The degree of exploitation in capitalist production. Source Created by the author

Following that, the car bodies are transported to the preparation, painting, and assembly shops. After being delivered to the car body press shop, one metal sheet will be worth $200. A car body made from this metal sheet will be worth $350 after a press machine stamps it. The stamping shop employs one specialist—operator, who has his own office and primarily monitors the production process on the screens. If necessary, he goes to the production shop to inspect and adjust the devices, turn them on, etc. This specialist, who is always well-dressed and uplifted, earns a good salary of $120 per day (shift). However, the total result of his working day is 50 × 150 = $7500, of which he receives only $120. Thus, his created surplus value (mass of surplus value) is $7380, which the capitalist freely misappropriates. In this case, the rate of surplus value m’ is as follows: m’ = m/v = 7380/120; meanwhile, degree of exploitation is 6150%. As a result, we can see that the current value of labour power has increased significantly, and worker labour conditions have improved significantly compared to the first case we examined previously, but the relative surplus value and capitalist degree of exploitation have increased even more (see example b in Fig. 2.1). In conclusion, K. Marx’s theory of surplus value states that the more developed a capitalist society becomes in the future, the greater the extent of capitalist exploitation will be, i.e., its degree will increase. However, if the working people take capital goods into their hands (remove private property) and nationalise them, the rising surplus value will fall into the hands of the same workers who created it. However, in this context, the question is what would happen if the only worker, as described in our second example, i.e., the production master-operator, was replaced by a machine, or by a robot, which would perform exactly the same functions as the current workshop master using artificial intelligence? There would be no workers or anyone else in the production shop who could be exploited in general. Then the press shop would actually produce exactly the same final production, but who would create the surplus value? After all, machines and other intelligent capital goods cannot

2.5 Business Cycles—A Result of Capitalism’s Economy, Causing …

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be exploited theoretically! Could machines create surplus value and profit? These questions were raised by the then-popular theory of “capital productivity”, which the Marxists criticised as a “vulgar concept of profit “. It is understandable that this “concept” contradicts Marxist statements because it states that a new product can also be developed without human intervention at the expense of capital’s “production capacity” only. This theory, according to Marxists, is incorrect because it equates capital with capital goods. Physiocrats followed this concept. However, capital is not capital goods. They only become capital in a “bourgeois society”. According to them, capital goods are merely an instrumental factor in the working process and do not create value or surplus value. We can look at it from a different angle. Let us say that machines and artificial intelligence could theoretically completely replace workers in the entire commodity production process. Then capitalist exploitation in manufacturing enterprises would most likely cease, but what would people do? Perhaps then, all members of society would have to work in the field of service or in state-owned public utility enterprises. However, even in this case, private ownership of capital goods would remain and these goods would create new value. There will be one of the major problems: Who will create and improve machines and “artificial intelligence” then? Those are likely to be people working in enterprises that service fully automated and “intelligent” manufacturing enterprises that develop new products. If the entire process of machine development and improvement is left to “artificial intelligence”, the machines will create new machines, which will be more similar to the apocalyptic scenario of “Terminator”! We certainly do not believe that similar opportunities deserve further discussion, so it must be acknowledged that in the future, we will not be able to replace a human who works, develops products, and creates surplus value all at the same time in a capitalist society. Why, according to K. Marx, is capitalist economy bad, and why does it develop in cycles?

2.5 Business Cycles—A Result of Capitalism’s Economy, Causing Economic Chaos According to a classical economic approach, the volume of national product is constantly changing. Over a long period of time, such change is portrayed as the growth of a national product, and in the short term, its scope sometimes increases and sometimes decreases. There are three types of changes that can be distinguished: A long-term trend. It describes a gradual change that becomes apparent over time. For example, if the national product and other indicators of social production volume

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tend to grow and increase, then unemployment figures, which give no reason to doubt the direction of this trend, tend to rise or fall. Despite temporary fluctuations, we can confidently state that the national product has changed positively since the mid-nineteenth century. Seasonal fluctuations. Many economic processes are seasonal; for example, the scope of work in agriculture is greater in the summer than in the winter. Fishing and tourism are also characterised by distinct seasonality. It affects other economic indicators, such as employment and circulation of goods. Seasonality must be considered when analysing short-term economic processes. In such cases, the indicator is typically adjusted in accordance with seasonality: deviation caused by seasonal peculiarities is eliminated by employing a scheme of seasonal fluctuations from previous periods. Cyclical fluctuations. If seasonal fluctuations are not typical of any of the processes (or if they are eliminated), the process will not develop evenly based on its long-term trend. The parameters of most processes are constantly changing, but the overall trend remains. These changes are not accidental or irregular. They transform into a systematic and regular movement of repetitive configuration. The year of economic recovery is interrupted by a relative and absolute deterioration of the overall economic situation. Then it is usually followed by a new rise in economic activity. These are known as cyclical fluctuations. The constant rises and falls in national product production and consumption in its long-term trend, after removing seasonal manifestations, are referred to as business cycles. The term “business cycle” refers to the overall dynamics of all key economic indicators. Every economic process and its indicators have their own characteristics of cyclical development. The cycles vary from cycle to cycle. There are several types of cycles, which are classified according to their duration. The main type of the cycle is the business cycle (which is called the industrial cycle in the economic theory of Marxism). It lasts between 7 and 10 years. A much shorter cycle, lasting about 40 months, has been discovered. It is known as the cycle of “production stock”. There are also cycles that last 15–20 years and are associated with periodic fluctuations in the scope of construction works. The discovered cycle is linked to the state’s periodic general elections (political business cycle). N. Kondratiev, a Russian economist, identified cyclic recurrence in economic activities every 40 to 50 years and named it “long waves” ( Kondratiev & Oparin, 1928). However, we are more interested in the so-called industrial business cycles and their causes. In fact, the business cycles began in the early nineteenth century, when capitalist production and the corresponding production relations based on freely hired labour power, began to form. The industrial revolution and the use of machinery enabled the widespread use of emerging available labour power and, as a result, the transition from craft production to factories and the establishment of a large-scale industry based on the continuous development of large-scale machine manufacture.

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The so-called market economy, which was and is still based on private ownership of capital goods and the exploitation of wage labour, began to emerge. Increasing efficiency of work enabled to start producing large volumes of production, which turned into goods and entered the market. In general, the nature of business cycles is not usually limited to the framework of a separate national economy. Business cycles take place simultaneously in many countries, and their impact on individual economies of various countries is heavily dependent on their development, and nowadays, on the use of economic stabilisation instruments. Therefore, the economic recovery in many countries typically begins around the same time. In general, the main macroeconomic indicators appear to be very positive at this stage of the production upturn: enterprise activities are profitable, production is expanding, inflation is slowly increasing, capacity utilisation is increasing, and salaries are typically rising. Furthermore, the general mood of all market participants is positive at this stage: consumer confidence is rising, financial advisors are emphasising the fact that the economy is recovering, stock prices are rising, and as a result, money is “shifting” from bonds to shares. In fact, consumers in all countries experiencing economic recovery are beginning to consume more, which raises investor expectations. New long-term projects are emerging, such as residential house construction, investments in new technologies, and their implementation in industry. It stimulates the production of goods even more. Product manufacturers are attempting to produce as many products as possible with little regard for coordinating the volume of such production with one another. However, one very important factor must be noted here—the increase in the number of consumers. This number has a finite expression in each country. Despite the fact that consumers tend to consume more and more, their numbers do not always increase and can even begin to decline (due to migration, low birth rates, etc.). However, under market conditions, production is rapidly increasing and pays little attention to these factors. This primarily applies to long-term projects that require more than one or two years to complete. Therefore, with a finite number of consumers, an increasing number of consumers are able to purchase a residential house, a vehicle, or other costly long-term property during the economic recovery. However, in the long run, the number of consumers who have not yet been able to do so will inevitably decline as they all gradually acquire long-term property and, more importantly, have already spent their savings. It should be noted that rising inflation helps to support the population’s decline in savings during the recovery stage. However, the aforementioned phenomena do not prevent further growth in the production of goods and, in particular, the implementation of long-term construction projects. Most of them were started at the beginning of the economic recovery or halfway through it, so they are now successfully entering the market and waiting for their customers. However, it turns out that the number of customers is decreasing and that the aggregate demand is gradually shrinking. When this phenomenon has just begun, it was best to reduce production to meet declining demand, but it was not an easy task. It is difficult to suspend or completely halt long-term projects because most investments have already been made. Bank loans have already been obtained for the implementation of these projects. In addition, these investments were made

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at high raw material and labour prices because the latter had been corrected by inflation during an upturn. As a result, in the face of a gradual decline in aggregate demand, new residential houses, industrial objects, and other long-term products are constantly emerging, which are relatively expensive in terms of their cost, while becoming less and less appealing to the market. It causes production chaos because too many goods are produced without an assessment of the purchasing power on the market. Later, it evolves into an economic recession or an industrial crisis. Most people in the development stage believe that such a good life will last forever. However, the reality is that a slowdown will occur sooner or later after the development stage. The strangest thing is that, at this point, the main macroeconomic indicators still appear to be rather positive—the level of production and capacity utilisation is high, salaries are rising, and it appears that this “fairy tale” will continue endlessly. However, it is important to remember that at this stage of development, when everything appears to be going well, the first warning signs of inflation appear. When analysing the policies of central banks, the latter are typically neutral at this stage—interest rates remain unchanged, long-term interest rates are higher than short-term interest rates, i.e., we still see the normal curve of interest rates. The first warning signs can be seen in the markets: inflation is causing great concern, and while financial advisors continue to emphasise the upturn, warnings (often from central banks) regarding the overheating of the economy occur; meanwhile, stock prices have stopped growing for some time or even begin to fall. When it comes to monetary policy, central banks, seeing the risks posed by inflation, are beginning to “cool off” the economy in its slowdown phase—short-term interest rates are rising, and long-term interest rates are becoming lower than shortterm interest rates, causing the interest rate curve to become slightly “inverted “. The latter phenomenon frequently signals the inevitable onset of a serious economic crisis. When it comes to economic recession, it is important to note that when it begins, it sets off a chain reaction that gradually changes the behaviour of all economic participants and has its own specific economic consequences. To begin with, when consumer demand falls, any desire to increase production and launch new long-term projects, including new construction works, fades. It in turn leads to the need to reduce the number of workers by firing them and to significantly reduce salaries for the remaining workers. Many enterprises are forced to close during this time due to a sharp drop in demand for their products. The decline in production inevitably leads to difficulties in the extraction and realisation of raw materials—lower prices for industrial raw materials and fuel. Deflationary processes begin in the economy, further impeding investments. Seeing the falling prices of industrial products and long-term property, as well as other durable goods, residents are hesitant to spend their remaining savings, hoping that they will be able to purchase the desired goods even cheaper later. Money is becoming increasingly expensive, and banks are hesitant to disburse it in the form of loans due to increased borrowing risk. Thus, the economy is slowing until the recession becomes a depression, with particularly high unemployment rates and falling prices for goods and raw materials, including labour power.

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Here, it is important to remember that, while production and trade are shrinking significantly during the recession, consumption is decreasing and the number of consumers is changing slightly. Because this number is not directly affected by the cyclic recurrence of the economy, it may increase or decrease for other reasons. Because of the small change in the number of consumers, overall consumption cannot fall below the critical threshold, because consumers will simply “die out”. Consumption can gradually decrease while maintaining the necessary minimum level of public consumption, taking into account the purchasing power. All of this, however, does not imply that during times of recession and, later, during the depression, production shrinks in relation to the necessary level of production required for society’s survival. It can also shrink much further until the national economy’s volume of production is less than the bare minimum required by society. The public must objectively consume the necessary minimum quantity of production. At the beginning of the economic recession, there is a surplus of consumer goods, long-term construction and industrial objects, and products, which is gradually consumed in combination with the decreased production volume of new products. However, this surplus vanishes in the long run, and society feels the need to continue consumption, despite the fact that the available resources “from the past” are no longer available because they have run out! Therefore, consumers begin to demand that the national economy increases production in order to meet the necessary level of public consumption. Then come the first signs of economic recovery: aggregate demand begins to rise, encouraging industry, agriculture, and other economic sectors to develop and produce more products for public consumption. Producers who are the first to notice these signs and respond to them are usually the winners. For a while, they may benefit from favourable competition conditions in their sector, as well as higher circulation of goods or services and good prices, until all remaining producers respond to the economic recovery, and increased competition eventually equalises production conditions and product prices on the market. There are currently various approaches to the causes of “industrial” or “economic” crises. The total experience related to investigation of economic processes has yet to provide a definitive answer to the question of what or when causes or what will cause fluctuations in the scope and intensity of economic activities in the future. At best, specific explanations about the origin of specific cycles are provided. According to classical theory of economy (i.e., views prior to the Great Depression between 1929 and 1933), the economic fluctuations occur due to a temporary imbalance in the labour market—the level of wages rises too high; therefore, supply of labour power exceeds demand, resulting in increased unemployment (Hobson, 1891, p. 133). Unemployment causes wage changes, and when demand for labour power rises, production begins to grow again, and balance returns. It was believed that wage flexibility guarantees permanent, full employment that is only interrupted for a short period of time. Such perception was shattered by the Great Depression. However, according to the modern neoclassical theory of real business cycles, the most important sources of business cycles are innovations and technological shocks, which are capable of freeing up a large portion of unnecessary labour power but require highly

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skilled workers while increasing their wages at the same time (Kydland & Prescott, 1982; Long & Plosser, 1983). According to J. Keynes (1883–1946) and his followers, the primary cause of economic instability is the level of investments in private equity and its fluctuations. The dynamics of investments are shaped by societal expectations; therefore, it depends on the structure of aggregate demand and changes in its elements (Keynes, 1936). The views of monetarists play an important role in explaining the causes of the cycles. According to them, the amount of money in circulation determines the change in the dynamics of economic processes. Their most notable representatives were Milton Friedman (1912–2006), who said that “I would substitute a computer for the Federal Reserve, not a central bank (of the USA)” (Friedman, 1962). It was supported by Friedrich August von Hayek (1899–1992), the pioneer of the Austrian business cycle theory. He claimed that this process was heavily influenced by the government. Its expansionary fiscal policy measures, which are related to the state’s excessive direct participation in economic activity, increase the amount of money in the economy. Then consumer demand surges, and the economy quickly exceeds the limit of full employment. As a result, prices begin to rise, and inflation quickly stops the real growth of national product and eventually causes it to decline. So, the underlying cause of economic instability is instability of monetary economics. The Central Bank regulates the amount of money in the national economy. During an economic recovery, this amount usually rises steadily as businesses increase production and need to borrow more and more money. The Central Bank artificially lowers interest rates consciously, and “easy money” artificially creates aggregate demand. The Central Bank’s issuance of credit, in which additional monetary resources are constantly available to the market in the form of credit, causes cyclical fluctuations in business. Commercial banks lend these resources to entrepreneurs. Because of the lower interest rates, loans may also be granted to those who would not have been eligible in the past, as well as those whose project payback is in doubt. Credit issuance leads to erroneous investment. The increase in credit issuance will continue until more credits enter the market. However, credit issuance cannot be infinite because it leads to high inflation and all of its negative consequences (Hayek, 1931, 1944). Ludwig von Mises (1881–1973), a proponent of economic liberalism, also discussed these processes in his works. He argued that the free market economy not only goes beyond any government-planned system, but also is ultimately the cornerstone of civilisation itself. It investigates the value of money, how it can be measured, and the impact of credit and monetary policy at the national level (Mises, 1949, 2013). All of the positions presented are distinguished by methodological principles as well as numerous specific arguments and conclusions. At the same time, they all share one feature that is prevalent in today’s economic concept: the primary cause of economic fluctuations is a change in aggregate demand. Changes in aggregate supply may be the cause of national product deviations only in individual and specific cases.

2.6 A Marxist Perspective on Business Cycles and Their Emergence

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2.6 A Marxist Perspective on Business Cycles and Their Emergence K. Marx generally agreed with the classical economic theory perspective that fluctuations in the economy are caused by labour-market imbalances—when wage levels rise too high, labour power supply exceeds its demand, resulting in an industrial reserve army of unemployed workers. However, unlike classical economists, he denied the existence of a tendency to equilibrium and argued that the capitalist economy is characterised by overproduction of some goods. According to K. Marx, the cyclical process begins with a rise caused by the growth for the accumulation of aggregate demand in order to maximise capitalist profit. It is the true cause of the cycle’s occurrence. However, the cycle eventually ends in recession because the growing demand for work during the recovery exceeds the real supply, resulting in wage increases and the abolition of unemployment. Meanwhile, wage increases result in a decrease in profit rate and a slowing of accumulation (K. Marx, 1884). However, the question is whether the cost of labour or wages alone causes a slowdown in accumulation. There is no mention of real aggregate demand and the possibility of its decrease. After all, the number of potential consumers is limited, as is the population, which number is a threshold. The number of workers varies in proportion to the total population, i.e., the total number of consumers who make up aggregate demand. If, as K. Marx stated, increasing capital accumulation increases the demand for workers, including wages, then wages are likely to rise as a result of the gradual shortage of workers, which leads to an increase in their wage. However, K. Marx explains it differently: wage growth has limits due to increased labour power demand. First of all, they are not the result of a general decrease in purchasing power of consumers. If wages rise to the point where they reduce the capitalist’s misappropriated mass of surplus value, capital accumulation falls, and so does demand for labour power. Following that, wages are also declining. K. Marx then concludes that wages never go beyond the limits within which the basis of capitalist exploitation not only remains intact but are also wider reproduced. In fact, the question is, “Where is the cause, and where is the consequence?” Why does wage growth of workers stop increasing when it reaches a point where it begins to reduce the mass of surplus value? It is most likely due to the fact that competition gradually equates all individual values of goods to public values, which tend to decrease together with the prices of these goods. But when do the prices of goods start to fall? Probably when the number of consumers or the purchasing power of the society! It is not the fault of workers and their rising wages that the mass of surplus value is decreasing; rather, it is the purchasing power of consumers that reduces the surplus value first—this is a reason that begins to reduce capitalist accumulation. This reason is forcing capitalists who want to maintain such levels of accumulation to lower worker wages, and this is the consequence! If there is a shortage of workers during an economic recovery and growth in the purchasing power of consumers, how can there not be a general shortage of consumers or customers? One of the most important factors contributing to a decline in production is consumers’ needs, desires,

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and ability to purchase new goods, i.e., the purchasing power. Otherwise, according to this logic, if capitalists agreed not to raise wages, it would be possible to produce goods indefinitely—the profit rate would not decrease, and society would continue to buy as much as it is produced. However, this does not occur in practice; thus, economic crises are frequently referred to as “overproduction” crises. The decline or recession is the period in which capitalists gradually begin to produce “insufficient” number of products after production and accumulation have decreased. Reserve resources are used during this process, and once they are depleted, an ordinary economic cycle begins, during which a new economic restructuring occurs, accompanied by investments and the creation of new workplaces. Finally, the accumulation process is dominated by trends such as declining profit rate and depreciation of capital value, as well as an increase in the reserve army of labour power, and decrease of wages. Then another crisis situation occurs. Because capitalism’s origin results in a contradiction between its ability to produce goods and consumers’ ability to buy them, the constant disproportion between production and consumption, which exists due to market “anarchy”, causes depressions and economic fluctuations. Here, K. Marx argues that it is the first and most important reason why the capitalist system will be doomed to fail. K. Marx was one of the first economists to assess primary economic irregularity and uncertainty—the causes of the economic cycle—at the same time. The great influence of his cycles and crisis theory in the late 1930s was noted by W. Leontief (1906–1999). He emphasised: “It is probably not an exaggeration to say that the three volumes of “Capital” contributed more than any other work to bringing this issue to the forefront of economic debates” (Leontiev, 1938). In his theory, K. Marx points out that at the end of feudal production, a producer of goods or a farmer who lost his land or other property became free from the capital goods, or a “proletarian”. He was, however, condemned to perform wage labour at the same time, which meant that he could only sell himself or his own labour power. A capitalist or bourgeois who possesses capital goods does not permit a worker to use the fruits of his labour by unilaterally misappropriating them. Here, the antagonism develops between these classes. With the advancement of machinery and an increase in labour productivity, production can be expanded indefinitely and more and more products are produced. Because capitalists do not coordinate each other’s scope of production, a massive supply of goods is formed in the long run, resulting in overproduction. On the other hand, as labour efficiency improves and production automation increases, the number of workers decreases, resulting in a relative surplus of workers. However, increased supplies of goods and workers cannot be combined because the capitalist form of commercial production does not allow increased production capacity to realise (appropriate) increased supplies of goods without first converting these goods into capital. In other words, the goods produced must first be purchased, but the occurred significant surplus prevents this from happening. Workers may be able and willing to purchase these goods, but they (particularly unemployed workers) lack the necessary funds because they are completely separated from capital. It causes significant problems for the bourgeois because, as the owner of these goods, it cannot create preconditions for their transformation into capital. “This contradiction evolves into nonsense: the mode of production is in rebellion against the mode of exchange.

2.7 Methods Proposed by Marxist Theory to Eliminate the Causes …

25

The bourgeoisie have lost control over its own social productive forces” (Engels, 1958, p. 245). This situation is described even more concisely in the “Manifesto of the Communist Party”. It is distinguished by a theory that explains how the development of society is dependent on the development of economic productive forces (dialectic and economic determinism). “Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. For many a decade past the history of industry and commerce is but the history of the revolt of modern productive forces against modern conditions of production, against the property relations that are the conditions for the existence of the bourgeois and of its rule” (Marx & Engels, 1848). The proletariat is capitalism’s gravedigger. That is where K. Marx saw the historical mission of the proletariat. In other words, the struggle between workers and bourgeoisie leads to a dictatorship of the proletariat.

2.7 Methods Proposed by Marxist Theory to Eliminate the Causes of Industrial Crises In their works, K. Marx and F. Engels a rather radical way to eliminate economic crises and create a new system that would qualitatively change the existing capitalist relations of production, in other words, it will eliminate the existing and everincreasing contradiction between constantly evolving productive forces and outdated capitalist relations of production. They have placed particular emphasis on the role of large-scale industries, particularly in causing economic crises. F. Engels defined it as follows: “So long as big industry remains on its present footing, it can be maintained only at the cost of general chaos every seven years, each time threatening the whole of civilisation and not only plunging the proletarians into misery but also ruining large sections of the bourgeoisie” (Engels, 1969). Therefore, it is critical to manage the large-scale industry in such a way that it does not cause economic or “general chaos” in the future. He further concludes: “Hence, either that big industry must itself be given up, which is an absolute impossibility, or that it makes unavoidably necessary an entirely new organisation of society in which production is no longer directed by mutually competing individual industrialists but rather by the whole society operating according to a definite plan and taking account of the needs of all” (Engels, 1969). The main idea here is that competition creates production chaos, it cannot be eliminated under capitalism, although it would seem more rational for everyone to start working according to a unified plan, avoiding chaos and not wasting resources. The answer is simple—it is necessary to give up or nationalise these capital goods or the entire large-scale industry, in other words, to socialise it. But who will do it, and will it be possible to do it peacefully? F. Engels answers this question as follows: “It would be desirable if this could happen, and the communists would certainly be the

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2 Marxist Perspective on the Capitalist Economy

last to oppose it. Communists know only too well that all conspiracies are not only useless, but even harmful”. But at the same time, it must be acknowledged that “They also see that the development of the proletariat in nearly all civilised countries has been violently suppressed, and that in this way the opponents of communism have been working towards a revolution with all their strength. If the oppressed proletariat is finally driven to revolution, then we communists will defend the interests of the proletarians with deeds as we now defend them with words” (Engels, 1969). The nationalisation of capital goods creates a completely new system of society. As noted in “The Principles of Communism” by F. Engels, above all, “It will have to take the control of industry and of all sectors of production out of the hands of mutually competing individuals, and instead institute a system in which all of these sectors of production are operated by society as a whole – that is, for the common account, according to a common plan, and with the participation of all members of society. It will, in other words, abolish competition and replace it with association”. What will happen to private property then? The answer is: “Private property must, therefore, be abolished and in its place must come the common utilisation of all instruments of production and the distribution of all products according to common agreement – in a word, what is called the communal ownership of goods” (Engels, 1969). To summarise, we may claim that in order to eliminate the existing economic chaos caused by the economic, industrial, and trade crises, competition between individual members—industrialists—must be abolished first, not by convincing them to stop competing (which is pointless), but rather by nationalising their property. However, it may have to be done forcibly. Such property will later be transferred for the operation of society in accordance with “a common plan”, i.e., rationally taking into account society’s needs, “a plan based on the availability of resources and the needs of the whole society. Thus, most important of all, the evil consequences which are now associated with the conduct of big industry will be abolished … There will be no more crises; the expanded production, which for the present order of society is overproduction and hence a prevailing cause of misery, will then be insufficient and in need of being expanded much further. Instead of generating misery, overproduction will reach beyond the elementary requirements of society to assure the satisfaction of the needs of all; it will create new needs and, at the same time, the means of satisfying them. It will become the condition of, and the stimulus to, new progress, which will no longer throw the whole social order into confusion, as progress has always done in the past” (Engels, 1969). It is a sufficiently detailed explanation of how the new economic system is imagined, which is created in order to eliminate economic, industrial, and trade crises, as well as their causes. Because the entire economy will be transferred into the hands of a single person (member of society), this society will be able to see it as a whole, as well as assess its capacity and relationship to changing aggregate demand. Thus, when the public sees how much demand for individual types of production grows or decreases, it will learn how much goods must be produced to meet this changing demand. With all capital goods at its disposal, the public will conclude a common

2.7 Methods Proposed by Marxist Theory to Eliminate the Causes …

27

production plan and begin producing only as many goods as this demand requires, no more or less. After Marx’s death in 1883, Engels served as the premier international authority on Marx and Marxism. In addition to his own intellectual and political work and other promotional activities on behalf of Marxism, he completed volumes 2 and 3 of Das Kapital (1885 and 1894), working from Marx’s notes and incomplete manuscripts (Brown & Fee, 2003). Thus, it can be argued that in their works, K. Marx and F. Engels laid the groundwork for the development of the planned economy, which was later put into practice by V. Lenin. The purpose of the planned economy was to avoid economic crises and the chaos they caused, as well as unnecessary waste of public property manifested as overproduction of goods. What Are the Main Causes of Capitalism’s Collapse According to K. Marx?

• The capitalist economy evolves in a cyclical fashion. • It is characterised by economic recessions and crises; meanwhile, the outcomes of this entire process are as follows: • unemployment and a reserve labour army occur, which is very beneficial to capitalists because: • labour power exploitation is increasing, as is antagonism between opposing classes, such as workers and capitalists, because: • as capitalism progresses, the amount of necessary labour time required to restore the value of labour power decreases; as a result, • the amount of labour time required to increase capitalist wealth rises, which leads to the fact that: • workers become relatively poorer, while capitalists become relatively richer, so: • as capitalists become richer, capital concentration rises, allowing for even more exploitation, but profitability falls, resulting in: • less need for investment and a slowing of economic development.

Chapter 3

Capitalism’s Contradictions and Reasons of Its Collapse

3.1 The Main Reason for the Capitalism’s Collapse According to K. Marx, the main scenario of the collapse of capitalism is that “In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity – the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence” (Marx & Engels, 1848). K. Marx is not interested in the arguments of classical political economists that the market economy has “inherent” self-regulation abilities and that industry is always returning from the crisis to the recovery stage, etc. He simply states that the capitalist mode of production is the only one that causes industrial crises, which are extremely painful for society, particularly for the majority of it—the proletariat—and that actions must be taken to eliminate them. Historical materialism is a sociological theory of the historical development of society developed by K. Marx in his work “A Contribution to the Critique of Political Economy” (Marx, 1859). It is regarded as the most enduring and fruitful aspect of his intellectual legacy. His “historical materialism” has been the inspiration for some of the best historical writing in the works of scholars such as Eric Hobsbawm (1975), Edward Palmer Thompson (1963), Ellen Meiksins Wood (1999), Rodney Hilton (1983), Robert Brenner (2006), and Stephen Henry Rigby (1998). This theory suggests that all social, cultural, and political are determined by a well-established mode of production. According to K. Marx, the foundation of society is the economic infrastructure (base), which consists of productive forces (energy sources, scientific and technical knowledge, production machinery, labour power), and relations of production within a specific society that emerge during the process of producing material goods, distributing, exchanging, and consuming them. Productive forces and relations of production form a certain social ideology known as a political superstructure, which governs society’s political, cultural, social, and spiritual life and © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_3

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practically legitimises the prevailing relations of production. The primary function of the political superstructure is to maintain the existing economic structure on which society’s customs, living standards, and laws are based; thus, all aspects of life reflect the current mode of production. The latter determines a certain social consciousness (forming a worldview corresponding to a particular mode of production). There is a dialectical link between the base and the political superstructure. The mode of production of material goods, and, in particular, the productive forces, determine the development of society. Their level of development and dynamics determine the change in mode of production, which results in changes in economic relations and, as a result, the entire political superstructure. Changes in the economic base determine changes in societal development. When productive forces begin to conflict with existing relations of production at a certain stage of development, the latter begin to hinder the introduction of new scientific developments, new technological inventions, and other elements of industrial progress. When there are discrepancies between productive forces and relations of production, some members of society begin to realise that these relations of production are actually impeding the development of new modes of production that would benefit them. Therefore, this part of society begins to fight against the class that governs and maintains the old relations of production (class conflict arises), resulting in a revolution. Historical materialism suggests that the feudal system, which was more progressive than slavery (because the slaves were not interested in the effectiveness of their work), changed it during the Middle Ages. However, it was eventually forced to surrender to the capitalist system. The latter was far more progressive than the feudal because it was based on freely hired labour, resulting in a faster development of productive forces, compared to the feudal serfs. They were bound to their land and feudal lord, so they were ineffective. As a result, many countries have experienced bourgeois revolutions, such as the French Revolution and others that established capitalist relations of production. In the long run, as capitalism develops, outdated relations of production begin to impede the further development of productive forces; thus, this system must be replaced by a new system that eliminates this antagonism and the resulting economic “industrial crises”. “Industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented” (Marx & Engels, 1848).

3.2 Capital Accumulation and Second Reason for the Capitalism’s Collapse

31

K. Marx predicted that crises would develop and become increasingly unbearable, endangering the existence of bourgeois society by recurring until the suffering proletariat would eventually revolt against the system, which would be the main cause of capitalism’s collapse. It should be noted here that it is still impossible to completely eliminate the causes of economic crises. Private ownership of capital goods does not create preconditions for it because individual producers of goods and services are separate and independent or slightly dependent economic entities that individually decide on production volume while also being responsible for selling or otherwise realising the goods produced as a result of such production. They hire workers, determine their number, assign production tasks to each of them, and, if necessary, dismiss them, especially if the latter are no longer needed. However, in a market economy, there is no such force that would suddenly appear and tell all producers of goods and services at the same time: “Dear gentlemen, perhaps you should stop producing these specific goods and services because if you continue to produce them, you will have a lot of problems selling them in the future!”. Yes, such power does not exist, and even if it did, it does not imply that everyone would always listen to it, because every man is the architect of his own fortune and does not require any instructions from anyone! Each producer of goods plans his own production volumes, decides when and what to produce, and follows his own knowledge and logic; as a result, he can be relatively flexible, taking into account the various nuances of style, fashion, or design in his sector. However, he finds it extremely difficult to see the current and future production volumes of all producers in the entire sector as a whole, allowing him to compare them with the aggregate demand for these goods and, as a result, make production solutions that accurately correspond to future fluctuations in this demand. Therefore, industrial crises occur on a regular basis and will continue to do so as long as private ownership of capital goods exists and individual independent product manufacturers represent it.

3.2 Capital Accumulation and Second Reason for the Capitalism’s Collapse The second reason for the collapse of capitalism is based on the law of capital accumulation. Competition in the industry becomes unrestrained because individual capitalists do not control it. Therefore, there is a clear contradiction between public labour organisation in each individual factory and public anarchy in the entire industry. The driving force behind capitalism is profit-making, which influences profit accumulation and investments. Capitalist systems force market participants to compete constantly, to seek out more advanced production methods, and to continuously increase efficiency and investments. Otherwise, there is a risk of collapse. K. Marx defined the technical composition of capital as a ratio between the mass of capital goods and the number of workers who launched them. However, in terms of

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value, capital is classified as either constant or variable (Marksas, 1957, p. 195). The ratio of fixed to variable capital c / v represents the value-composition of capital is referred to as the organic composition of capital. “Capitalist production, combined with a continual relative decrease of the variable capital vis-a-vis the constant capital, results in a progressively higher organic composition of total capital” (Marksas, 1959, p. 195). This amount is primarily influenced by the technical composition of capital, which is related only to the quantity and quality of the capital goods. Therefore, if changes in the value-composition of capital are caused by the use of more expensive raw materials and temporary fluctuations in labour power and raw-material prices rather than the introduction of new technologies, then the organic composition of capital remains unchanged. At the same time, it should be noted that as capitalism develops, the part of capital used for the improvement of productive-capital and machinery grows. It means that the technical composition of capital is increasing by constantly increasing the organic composition of capital. But how does a capitalist increase the organic composition of capital? K. Marx identified several methods for increasing it. First, capital growth is greatly influenced by the reproduction of capital. The following formula for the value of goods (W) produced by capitalist enterprises is implemented by simple reproduction of capital: W = c + v + m. It means that the entire surplus value created by hired workers is transferred for capitalists’ personal consumption, and that the production process is always restored to the same extent. However, for capitalism, whose primary objective is the production of surplus value, it is not enough. It is more characterised by expanded reproduction of capital. V. Lenin wrote that, under the conditions of capitalism, “there can be no simple reproduction, both because the production of the whole of society cannot remain on the previous scale every year, and because accumulation is a law of the capitalist system” (Lenin, Vol. I, p. 63). Where there is expanded reproduction, only part of the surplus value is consumed by the capitalists for their personal needs, the other part being divided into an accumulation fund and a capitalist’s consumption fund. According to K. Marx, “one portion of the surplus value is consumed by the capitalist as revenue, and the other is employed as capital or is accumulated” (Marksas, 1957, p. 528). Thus, the capitalist’s portion set aside for accumulation is used to purchase additional capital goods and hire additional labour power. In such a case, the organic composition of capital remains unchanged; only the mass of capital increases by supplementing parts of constant and variable capital proportionally. However, historically, capitalists cannot carry out expanded reproduction without changing the organic composition of capital. Increased competition and constant technological and technological breakthroughs, as well as a growing machine industry in which economies of scale could be used to reduce the individual value of newly developed goods in separate enterprises or industries, force individual capitalists to change, i.e., to increase the organic composition of capital, while ensuring extra surplus value at the same time. Thus, the mass of living-labour used by capital is gradually decreasing in comparison with the mass of capital goods. This decline expands the “reserve army of labour” by allowing the creation of the same or even higher value and the mass of surplus value with less labour power. “The production

3.3 Decrease of Profit Rate and the Third Reason for the Capitalism’s Collapse

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of a relative surplus population, or the setting free of labourers, goes on therefore yet more rapidly than the technical revolution of the process of production that accompanies, and is accelerated by, the advance of accumulation; and more rapidly than the corresponding diminution of the variable part of capital as compared with the constant” (Marx, 1887, p. 567). Overall, the total public capital rises as a result of the rise in individual capitals, which is achieved by capitalising the ever-increasing surplus value. These individual capitals become highly competitive by producing extra surplus value because, if necessary, they can offer their goods at prices that are even lower than their public value. Thus, by seizing their competitors’ capital, they force them to go bankrupt. Individual capitals can be merged or merge together by forming joint-stock companies; thus, becoming even more powerful. Concentration of capital is developing and its increase in individual production sectors could be referred to as reproduction of capital on a large scale. Every individual capital is the result of concentrating capital goods in the hands of one owner and expropriating capital goods from many other owners, who eventually become hired workers. Therefore, as capitalism develops, the concentration of capital in the hands of the proactively acting minority grows, while the majority becomes even poorer. The impoverished petite bourgeoisie is constantly supplementing the ranks of the poor majority; as a result, the army of unemployed workers grows, eventually leading to revolutions, which will be the second reason behind the collapse of capitalism.

3.3 Decrease of Profit Rate and the Third Reason for the Capitalism’s Collapse The core of Marxist criticism of capitalism is the assertion that, while an individual capitalist is intelligent, the capitalist system as a whole is irrational. The fall of the average profit rate is caused by an increase in the organic composition of public capital, which is expressed as (c + v). With the same rate of surplus value m/v and increasing organic composition of capital, the mass of capital grows faster than wage (competition forces to improve machinery and equipment, making them more expensive), while the mass of profit grows at the same time. However, the rate of profit p’ = m/(c + v) × 100 (%) tends to decrease. We can see how the rate of profit and mass change at a rate of surplus value of 100% and a constant increase in the organic composition of capital (c/v) (Table 3.1): K. Marx wrote, “The progressive tendency of the general rate of profit to fall is, therefore, just an expression peculiar to the capitalist mode of production of the progressive development of the social productivity of labour” (Marksas, 1959, p. 196). The growing portion of fixed capital usually results in an increase in the share of variable capital (increasing the number of workers or their wages) and, at the same time, increases the mass of profits. Market competition forces people to save, invest, and accumulate. The desire for profit is the fuel of capitalism, investments are its engine, and accumulation is

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3 Capitalism’s Contradictions and Reasons of Its Collapse

Table 3.1 The composition of capital Constant capital c

Variable capital v

Organic composition of capital

Surplusvalue m

Rate of profit p’ (%)

Profit mass

200

100

2: 1

100

33

100

400

150

2.7: 1

150

27

150

800

250

3.2: 1

250

24

250

1600

400

4: 1

400

20

400

the result. On the other hand, capital accumulation leads to a loss of periodic overproduction of goods, capital surplus, and investment stimuli. Profitability declines relatively during the capital accumulation process, and thus the willingness to invest declines as well. Although economists were aware of this possibility, they believed that the problem could be solved by exporting the accumulated capital or the product produced. K. Marx, on the other hand, believed that a fall in the rate of profit was inevitable because increased competition forces capitalists to increase efficiency and productivity by reducing the proportion of labour power in the organic composition of capital and using more efficient technology, which will increase unemployment. Over time, the growing and deepening recession will eventually force workers to revolt and destroy the capitalist economic system. As long-term economic stagnation worsens, the proletariat will be forced to use revolutionary violence to overthrow capitalism. Thus, the inevitable contradiction of capitalism is that, as capital accumulates, capitalism sows the seeds of its own collapse. K. Marx’s interpretation, on the other hand, greatly simplified his capital development model and held that the rate of surplus value m / v remains unchanged over time. In this model, it is always 100%. In practice, however, an increase in the organic composition of capital (improvement of machinery, implementation of production automation) has a decisive impact on the growth of labour productivity; it is greatly encouraged and creates a massive new value v + m. In this section, K. Marx ignores the high unemployment rate, which he refers to as a “reserve army of unemployed workers”, and thus underestimates the highly likely fact that wages will not rise at the same rate as labour productivity. In such a case, the proportion of wages v in the value structure of newly created product v + m will rise slightly. It will, however, accelerate the growth of the surplus value m, i.e., the mass of surplus value, which is the most important to the capitalist, as a result of which he improves (mechanises and automates) the entire production process. The rate of surplus value is then forced to change by increasing the degree of exploitation of workers; however, it also increases the rate of profit p’. In fact, partly aware of that fact, but without overestimating it, K. Marx called it the law of the tendency of the rate of profit to fall, but admitted that this “law only acts as a tendency whose influence occurs only under certain conditions and over a long period of time” (Marx, 1959, p. 219). According to him, the average rate of profit does not fall as much as the organic composition of capital does; it falls only in “certain frames”, depending on the degree of capitalist exploitation. At

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35

the same time, he observed that lowering wages below the value of labour power allowed capitalists to misappropriate the difference between the value of labour power and wages, generating “extra profit” with lower advanced variable capital. The formation of a “relative surplus population” should also be noted. With the increase in “professional excellence” or production capacity of workers in the field of improving production, the demand for workers decreases over time, resulting in a relative surplus population, which, according to K. Marx, lowers the rate of profit. The resulting “reservation army of labour” works in two ways: on the one hand, it lowers the cost of labour power and thus prevents the introduction of new progressive and, at the same time, expensive technologies in the field of production. After all, it is possible to have the same rate of profit then without investing additional capital, but allowing to produce additional profit. The organic composition of capital will begin to decline in most sectors and “Since the general rate of profit is formed by levelling the rates of profit in the individual sectors of production, however, the same factor which brings about the tendency in the rate of profit to fall, again produces a counterbalance to this tendency and more or less paralyses its effects” (Marksas, 1959, p. 217). In other words, according to K. Marx, the “relative surplus population” reduces the rate of profit by forming a “reserve army of labour”; however, the same “army” is stopping the decline in the rate of profit because it increases the degree of exploitation. Nevertheless, some of Marx’s later remarks about the political structure re-state the conclusions he had drawn in 1843 from his early confrontation with Hegel’s political theory. This relationship is particularly evident in his treatment of the dialectical relations between economics and politics. In his later writings, as in his Critique, the political never appears as a mere mechanistic or automatic reflection of the economic (Avineri, 1968). K. Marx also mentioned additional factors that impede the downward trend in the rate of profit, such as the cheapening of elements of constant capital, as rising labour productivity in the sectors of capital goods development significantly reduces their value, or growing foreign trade, which allows for the importation of cheaper raw materials from abroad. However, in general, K. Marx believed that all of the abovementioned factors only decrease, but do not eliminate the “tendency” itself, so the law of the tendency of the rate of profit to fall (as it was later named by followers of K. Marx) deepens the contradictions of capitalism and reflects the historical narrowness of the capitalist mode. It was stated in the “Capital” when describing this “law” (though K. Marx did not call it so) that “The real barrier of capitalist production is capital itself” (Marksas, 1959, p. 229). It reflects the contradiction between the objective of capitalist production—profit growth—and the means to achieve it, and it will be the third reason for the collapse of capitalism as a system. The practice has shown that historically, throughout the entire period of capitalism’s development, and especially in the recent period, since the second half of the twenty century, the rate of capital profit has not only declined, but has increased significantly. The developing industry has significantly reduced the amount of labour power in traditional industries; however, new industries have begun to emerge in developed capitalist countries, which have absorbed the “free” labour power or

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“reserve army of labour” and reduced the unemployment rate to the “natural rate of unemployment”.

3.4 Preconditions for the Emergence of Socialism 3.4.1 The State’s Role in Socialism There are complex public authorities of the bourgeois state, or institutes, such as the tsar, or the king (if it is a monarchy), a parliament (if it is a parliamentary republic), or both authorities, issuing laws and orders (decrees) in capitalist states. There is also a bourgeois government that enforces these laws, as well as courts that use “bourgeois law” to enforce justice throughout the country through special coercive authorities (such as police, prisons). According to Marxists, the main issue is the people who are elected to work at all of these public authorities, as well as the those whom the state and all of these institutions represent. In fact, they are all defending private property, which is concentrated in the hands of a social minority (i.e., capitalists). But why does it not defend the proletariat or the majority’s interests? Because electing representatives to the bourgeois parliament requires significant financial resources, which workers lack. Capitalists have them by concentrating capital goods in their hands, while surplus value created by workers is used to organise their election campaigns. In addition, bourgeois law requires knowledge and education from representatives of the authorities, which only the bourgeoisie can provide to their children for a significant amount of funds. Therefore, parliamentarians, judges, heads of towns and regions, or other officials are typically elected by the bourgeoisie and, of course, represent its interests in all institutions. Thus, a vicious circle is formed in which the proletariat generates surplus value for capitalists, which capitalists then use to establish their own public authorities, and the interests of the proletariat are later suppressed by the hands of these institutions. So, why does the proletariat need such state and all of its institutions? It is most likely one of the most important conclusions of K. Marx and F. Engels’ economic theory. It justifies a proletarian revolution—the need to break the vicious circle by force and to liquidate the bourgeoisie as a class by expropriating and nationalising its assets, i.e., by making them a nationwide property. When, as a result of development, distinctions between classes are eliminated and all production is concentrated in the hands of an association of individuals, public authority will lose its political nature. After all, every political authority, in its true sense, is an organised coercion used by one class to suppress the other. Therefore, a proletarian fighting against the bourgeoisie unavoidably joins a class that becomes the ruling class after the proletarian revolution. Thus, dictatorship of the proletariat is established. Here, as V. Lenin later claimed, the understanding of democracy is fundamentally changing here, shifting from capitalist minoritarian democracy

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to majoritarian democracy. “Democracy for the vast majority of the people, and suppression by force, i.e., exclusion from democracy, of the exploiters and oppressors of the people – this is the change democracy undergoes during the transition from capitalism to communism”. As a result, the proletariat eliminates the old relations of production and, with them, the classes as well. “Only in communist society, when the resistance of the capitalists has disappeared, when there are no classes (i.e., when there is no distinction between the members of society as regards their relation to the social means of production), only then “the state ceases to exist”, and “it becomes possible to speak of freedom” (Lenin, 1917). The old bourgeois society with its classes and class opposites is being replaced by an association or a community in which everyone’s free development is a prerequisite for the free development of all members of society. It should be understood here that after taking political power into its hands, the proletariat liquidates all previous antagonistic classes, including itself as a class. Later, democratic transformations began, granting suffrage to all public authorities and, most likely, the establishment of a new “classless” parliament. However, the classics of Marxism viewed “proletarian democracy” in a completely different light than traditional parliamentary democracy: According to K. Marx, “The Commune was to be a working, not a parliamentary body, executive and legislative at the same time…” or “The Commune was to be the political form of even the smallest country hamlet… Instead of deciding once in three or six years which member of the ruling class was to misrepresent (ver und zertreten) the people in Parliament, universal suffrage was to serve the people, constituted in Communes, as individual suffrage serves every other employer in the search for the workmen and managers in his business. And it is well-known that enterprises, like individuals, in matters of real business generally know how to put the right man in the right place, and, if they for once make a mistake, to redress it promptly” (Marksas & Engelsas, 1949, p. 451). V. Lenin admires such attitudes of K. Marx by saying that: “Owing to the prevalence of social chauvinism and opportunism, this remarkable criticism of parliamentarism, made in 1871, also belongs now to the “forgotten words” of Marxism” (Lenin, 1917). But how can a country be governed without a parliament? Lenin answers this question as follows: “The way out of parliamentarism is not, of course, the abolition of representative institutions and the elective principle, but the conversion of the representative institutions from talking shops into “working” bodies”, and continues on: “The Commune was to be a working, not a parliamentary, body, executive and legislative at the same time” (Lenin, 1917). Here, he repeats K. Marx’s words, which describe the future “proletarian” or perhaps “classless” democracy at the time! Later, V. Lenin elaborated on the leadership of the Commune or communist selfgovernment in more detail: “The Commune substitutes for the venal and rotten parliamentarism of bourgeois society institutions in which freedom of opinion and discussion does not degenerate into deception, for the parliamentarians themselves have to work, have to execute their own laws, have themselves to test the results achieved in reality, and to account directly to their constituents. Representative institutions remain, but there

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is no parliamentarism here as a special system, as the division of labour between the legislative and the executive, as a privileged position for the deputies. We cannot imagine democracy, even proletarian democracy, without representative institutions, but we can and must imagine democracy without parliamentarism” (Lenin, 1917). Speaking of the state matter, K. Marx wrote: “As therefore the ‘state’ is only a transitional institution which is used in the struggle, in the revolution, in order to hold down one’s adversaries by force, it is pure nonsense to talk of a ‘free people’s state’; so long as the proletariat still uses the state, it does not use it in the interests of freedom but in order to hold down its adversaries, and as soon as it becomes possible of speak of freedom, the state, as such, ceases to exist. I would, therefore, propose to replace the word ‘state’ everywhere by the word Gemeinwesen [community], a good old German word, which can very well represent the French word ‘commune’” (Marx, 1970, p. 29–30).

3.4.2 Political Actions Taken by Proletariat During the Formation of Socialism The “Communist League” (1847–1852) was the first international communist organisation in history, created and led by K. Marx and F. Engels. It was founded in 1847 (istorijai.lt, 2020) through the merger of the “League of the Just”. K. Marx and F. Engels fought to free this secret organisation of German political emigrants from the followers of “real socialism”, i.e., “Weitlingism” (see W. Weitling), “Blanquism” and the influence of other forms of utopian socialism, in order to move this league to the positions of “scientific socialism “. The First Congress of the “League of the Just” (held in June 1847 in London) was the turning point. The congress approved the draft charter, which indicated the transformation of the league—the introduction of democratic, centrist, and electoral principles. However, the draft contained separate points which had to be clarified. The “League of the Just” was renamed the “Communist League” on the initiative of F. Engels, who attended the congress as a representative of the communities in Paris (K. Marx was unable to attend the congress). The previous slogan, “All Men Are Brothers”, was replaced by K. Marx and F. Engels’ slogan, “Proletarians of All Countries, Unite!”. The headquarters of the Central Committee were established in London. The second congress of the “Communist League” (held between 29 November and 8 December 1847 in London) was attended by representatives from Germany, France, Belgium, Great Britain, Switzerland, and Poland. K. Marx was the representative of communities in Brussels and F. Engels was the representative of communities in Paris. The congress adopted an improved charter of the “Communist League”. The first clause of the charter, which previously stated that “The aim of the League is the liberation of mankind by disseminating the theory of public property and its possible practical application”, was partially amended.

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It was adopted with the following wording during the second congress of the “Communist League”: “The aim of the League is the overthrow of the bourgeoisie, the rule of the proletariat, the abolition of the old bourgeois society which rests on the antagonism of classes, and the foundation of a new society without classes and without private property” (Mapkc i Cngelbc, 1959). The congress tasked K. Marx and F. Engels with developing a programme for the “Communist League”. This programme was later renamed the “Manifesto of the Communist Party”. According to the first section, “Bourgeois and Proletarians”, “The history of all hitherto existing society is the history of class struggles”. It is the primary driving force of history. The entire history of mankind has been a struggle between those who have assets and those who do not—between the ruling and oppressed classes. Workers are exploited and abused in capitalist industrial society, but it is a necessary step towards a global communist society in which everyone works within their abilities and receives goods based on reasonable needs. To achieve it, working men of all countries must unite, regardless of national borders, and be determined to carry out a revolution that will destroy bourgeois society. “The working men have no country. We cannot take from them what they have not got. Since the proletariat must first of all acquire political supremacy, must rise to be the leading class of the nation, must constitute itself the nation” (Marx & Engels, 1969, p. 8). The proletariat will use its political power to gradually take away all capital from the bourgeoisie, to centralise all production tools in the hands of the state, and to raise the level of development of industrial forces as soon as possible. Understandably, it can happen only with drastic intervention in property rights and bourgeois relations of production, i.e., by employing means that appear economically insufficient and unsustainable, but which, during the movement, subsequently evolve themselves and become unavoidable as measures used to implement revolution of the entire mode of production. These measures will, of course, vary from country to country. However, in the most advanced countries, it will be possible to apply the following measures almost everywhere: • Abolition (expropriation) of property in land and application of all rents of land to public purposes; • Implementation of heavy progressive taxes; • The abolition of all rights of inheritance through heirs of inheritors; • Confiscation of the property of all emigrants and rebels against the majority of the people1 ; • Centralisation of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly;

1

Later, F. Engels explained that the following steps must be taken first: “Limitation of private property through progressive taxation, heavy inheritance taxes, abolition of inheritance through collateral lines (brothers, nephews, etc.) forced loans, etc.”. Simultaneously, “Gradual expropriation of landowners, industrialists, railroad magnates and shipowners, partly through competition by state industry, partly directly through compensation in the form of bonds” must be implemented (Engels, 1969).

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• Centralisation of the means of communication and transport in the hands of the state; • Increase of number of factories and means of production, reclamation of virgin lands, and the improvement of the soil in accordance with a general plan; • Equal labour duties of everyone, and establishment of industrial armies, especially for agriculture; • Combination of agriculture with manufacturing industries; gradual abolition of all the distinctions between town and country through all means available; • Free education for all children in public schools. Abolition of children’s factory labour in its present form. Combination of education with industrial production, etc. F. Engels agreed that it is impossible to carry out all of these measures at once. “But one will always bring others in its wake. Once the first radical attack on private property has been launched, the proletariat will find itself forced to go ever further, to concentrate increasingly in the hands of the state all capital, all agriculture, all transport, all trade” (Engels, 1969).

3.4.3 The Global Nature of the Proletarian Revolution According to the manifesto, a revolution led by the Communists must take place simultaneously in all European countries. Thus, it will spread globally. When asked if the revolution could be carried out independently in one country, F. Engels firmly replied that it couldn’t because: The communist revolution will not merely be a national phenomenon but must take place simultaneously in all civilised countries – that is to say, at least in England, America, France, and Germany. It will develop in each of these countries more or less rapidly, according as one country or the other has a more developed industry, greater wealth, a more significant mass of productive forces. Hence, it will go slowest and will meet most obstacles in Germany, most rapidly and with the fewest difficulties in England. It will have a powerful impact on the other countries of the world, and will radically alter the course of development which they have followed up to now, while greatly stepping up its pace. It is a universal revolution and will, accordingly, have a universal range. (Engels, 1969)

Private property will be abolished, and wealth disparities will vanish. There will be no competition, poverty, or exploitation because proletarians will plan and manage their own production. The “Manifesto of the Communist Party” became one of the greatest revolutionary works of all time, explaining “all societies that existed until then” through the principle of class struggle. K. Marx insisted that the Communists are not a political party; they are “part of the working class, namely, it’s the most advanced, intelligent, and therefore most revolutionary part”, and this expression is a source clearly defining V. Lenin’s party. K. Marx believed that the bourgeois revolution in Germany was inevitable and that elite of revolutionaries with a specific programme and a clear understanding of

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the historical necessity of a social revolution could operate successfully. However, he appears to have quickly become convinced that these small bourgeois organisations were too powerful to be managed; meanwhile, following the failed revolution attempt in 1848, he stated that a long preparatory period would be required before an effective revolutionary working class could be created. He believed that a social revolution was inevitable, but that it could not occur until bourgeois society developed all of the potentials of the capitalist system. The strategy was as follows: the Socialist Party should strive for bourgeois reforms that would help to strengthen the working class while also focusing on the preservation of its own freedom. F. Engels wrote: “In Germany, finally, the decisive struggle now on the order of the day is that between the bourgeoisie and the absolute monarchy”. K. Marx proposed two strategic lines, each of which could be considered a typical conclusion of his philosophy. The first is based on the assertion that under the conditions of absolute monarchy, before bourgeois democracy has evolved to the appropriate level, the communists cannot enter upon the decisive struggle between themselves and the bourgeoisie until the bourgeoisie is in power. It follows that it is in the interest of the communists to help the bourgeoisie to power as soon as possible in order the sooner to be able to overthrow it. So, the communists must continually support the radical liberal party, taking care to avoid the self-deceptions of the bourgeoisie and not fall for the enticing promises of benefits which a victory for the bourgeoisie would allegedly bring to the proletariat. The sole advantages which the proletariat would derive from a bourgeois victory would consist in various concessions which would facilitate the unification of the proletariat into a closely knit, battle-worthy, and organised class. It will then be possible to begin implementing the second strategic line of K. Marx, i.e., “On the very day the absolute monarchies fall, the struggle between bourgeoisie and proletariat will start” (Engels, 1969). Only by abolishing absolutism will there be a good foundation for the emergence of bourgeois democracy, which will later allow for the implementation of socialist revolution and the introduction of proletarian dictatorship. As K. Marx wrote: “Between capitalist and communist society lies the period of the revolutionary transformation of the one into the other. Corresponding to this is also a political transition period in which the state can be nothing but the revolutionary dictatorship of the proletariat” (Marx, 1970, p. 13–30). Therefore, in his opinion, only bourgeois democracy is a prerequisite for the implementation of a socialist revolution. Only in the presence of a “democratic republic” will the Workers’ Party begin to radically change its course in relation to bourgeoisie. As F. Engels pointed out: “From that day on, the policy of the communists will be the same as it now is in the countries where the bourgeoisie is already in power” (Engels, 1969). Thus, communists must never assume shared political responsibility in cooperation with the bourgeois parties. The classics of Marxism relied on the assumption that if a revolution ever occurs, it will preserve all of the democratic political achievements inherent in bourgeois democracy.

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3 Capitalism’s Contradictions and Reasons of Its Collapse What should socialism look like, and what are its advantages over capitalism?

• Socialism is more advanced than capitalism because it evolves more evenly, it is not characterised by business cycles, it cannot experience economic recessions or crises, and unemployment cannot occur in it because: • Socialism is based on a planned economy, which allows for the estimation of how much and what is required to avoid overproduction of goods; therefore, • It must operate globally in order to rationally allocate existing resources and reject commodity-monetary relations by establishing a “global economy” in which: • The global economy as a whole would be planned and managed from the single centre; however, • To be able to listen to the centre, all economic entities (industrial enterprises, agricultural enterprises, etc.) must be independent of their non-subordinate private individuals; thus, • Private ownership of capital goods must be abolished and capital goods must be socialised.

Chapter 4

Theoretical Socialism or the First Phase of Communism

4.1 Economic Principles of the New State According to K. Marx’s theory, capitalists gratuitously misappropriate the added value created by workers under capitalist conditions. Part of this value is allocated by the capitalist to the renewal and accumulation of capital through the expanded reproduction. Regardless of enterprise subordination, relations with the state are founded on horizontal relations (see Fig. 4.1). Figure 4.1 illustrates the structure of the capitalist economy. It involves both private businessmen who do not use hired labour power (“profiteers” can also play their role), as well as private enterprises and public enterprises that use wage (capitalist) labour and generate surplus value. Public enterprises function similarly to private enterprises in this case; the only distinction is that the state (municipalities) owns a majority of the shares in public enterprises and thus has power over them through their appointed trustees. However, since they pay taxes to the government and receive public services, all enterprises and private individuals have parallel relationships with the government, which are realised by economic regulation and tax policies. All members of the community or workers of the socialist “syndicate” get a remuneration proportionate to their contribution to the final product of work as relations of production change and workers become actual owners of work equipment. This remuneration will constitute labour income of a worker. If we take, first of all, the words “proceeds of labour” in the sense of the product of labour; then the cooperative proceeds of labour are the total social product. At the congress of German workers’ organisations in Gotha (between 22 and 27 May 1875), some socialists-economists, such as Lassalle, argued that in the presence of socialism, a worker would receive “unreduced” or “total product of labour”. This product would cover both the necessary and surplus product under capitalist conditions. K. Marx sent a letter to the congress by criticising such an approach in his “Critique of the Gotha Programme” (Marx, 1970). He pointed out that such an

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_4

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Fig. 4.1 Diagram of the capitalist economy. Source Created by the author

assessment of socialist distribution is too superficial. The workers cannot misappropriate the surplus value and distribute it entirely for their own purposes. K. Marx also pointed out that “From this must now be deducted: first, cover for replacement of the means of production used up. Second, additional portion for expansion of production. Third, reserve or insurance funds to provide against accidents, dislocations caused by natural calamities, etc. These deductions from the “undiminished” proceeds of labour are an economic necessity, and their magnitude is to be determined according to available means and forces, and partly by computation of probabilities, but they are in no way calculable by equity” (ibid., p. 12). As you can see, under capitalist conditions, this portion would be deducted from the misappropriated surplus value i.e., the part linked to expanded reproduction. However, K. Marx later divides the surplus product, which remains in the hands of the capitalist under capitalist conditions. He states that “There remains the other part of the total product, intended to serve as means of consumption. Before this is divided among the individuals, there has to be deducted again, from it: first, the general costs of administration not belonging to production. This part will, from the outset, be very considerably restricted in comparison with present-day society, and it diminishes in proportion as the new society develops” (ibid.). K. Marx clearly refers to the new socialist community, which would have to be a “non-parliamentary, but working corporation, which simultaneously issues legislation and enforces laws…”. Since administration costs accounted for a large portion of the surplus value in a capitalist society, capitalists paid them to the state in the form of taxation, thus maintaining all “bourgeois institutions” such as parliament, government, courts, and police. Therefore, these costs were unlikely to decrease. However, in the case of socialism, K.

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Marx suggested to make the state administration “cheaper” by abolishing all of these institutions. Furthermore, no-one pays taxes in the new socialist society because the necessary funds are collected through public consumption funds. In this regard, K. Marx points out that: “Taxes are the economic basis of the government machinery and of nothing else. Income tax presupposes various sources of income of the various social classes, and hence capitalist society” (ibid., p. 23). All of this greatly simplifies not only state administration, but also the whole accounting of the “syndicate”, laying the groundwork for self-government of the new socialist community. As a result, all the costs of community administration will have to decrease significantly, eventually withering away, just as the state itself will. Meanwhile, K. Marx assesses another part which is deducted from the total product for the means of consumption differently, i.e., “That which is intended for the common satisfaction of needs, such as schools, health services, etc. From the outset, this part grows considerably in comparison with present-day society, and it grows in proportion as the new society develops” (ibid., p. 12). According to K. Marx, only under socialist conditions and at the expense of reducing the costs of state administration, it will be possible to significantly develop education and health care. Despite the fact that all of these institutions will administrate themselves, they will obtain significantly more money, i.e., their share of the newly generated total product will continue to increase. It is important to remember that under capitalist conditions, everything was funded from the workers’ wages, i.e., from a part of the total product produced during the necessary labour time. In this case, the workers had to pay for their education, just as they had to pay for their own medical expenses. Since workers’ income in a capitalist society was very limited, they did not have an opportunity to devote a large amount of money to these needs; therefore, the part of the social product dedicated to these needs was relatively small. According to K. Marx, the part of the total product intended for consumption consists of various “funds for those unable to work, etc., in short, for what is included under so-called official poor relief today” (ibid., p. 13). Again, in a capitalist society, these funds are generated by the government from taxes paid by the capitalists. In certain ways, the purpose and sources of funding are the same in both social formations; however, in capitalist society, they are paid by capitalists from misappropriated surplus value, while in socialism, these funds collect money directly during the socialist distribution process. K. Marx is only now starting to discuss the remaining part of the total product that is not covered by any funds, i.e., “ to the “distribution” which the programme, under Lassallean influence, alone has in view in its narrow fashion—namely, to that part of the means of consumption which is divided among the individual producers of the cooperative society. The “undiminished” proceeds of labour have already unnoticeably become converted into the “diminished” proceeds, although what the producer is deprived of in his capacity as a private individual benefits him directly or indirectly in his capacity as a member of society. Just as the phrase of the “undiminished” proceeds of labour has disappeared, so now does the phrase of the “proceeds of labour” disappear altogether” (ibid., p. 13). K. Marx appeals to the worker’s perception here, since in a new society he must consider himself a “member of society”

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rather than a “private individual” (as in capitalism—author’s comment)! Moreover, as a “member of society”, he receives indirectly, along with all other “members of society”, not only the remainder of the added value he has generated, but all of it, because “individual labour no longer exists in an indirect fashion but directly as a component part of total labour”. Therefore, he should forget the phrase “proceeds of labour” in the long run! Why “in the long run”? Because the communist society is still in its development. K. Marx points out the following in this regard: “What we have to deal with here is a communist society, not as it has developed on its own foundations, but, on the contrary, just as it emerges from capitalist society; which is thus in every respect, economically, morally, and intellectually, still stamped with the birthmarks of the old society from whose womb it emerges” (ibid., p. 13). Therefore, certain remains of “bourgeois law” remain in this “lower” phase of communism, allowing for unequal distribution of the social product among all members of society. “Every right is an application of an equal measure to different people who in fact are not alike, are not equal to one another; that is why “equal right” is really a violation of equality and an injustice. Indeed, every man, having performed as much social labour as another, receives an equal share of the social product (after the above-mentioned deductions)”. Later, K. Marx clarifies: “We must not think that having overthrown capitalism people will at once learn to work for society without any rules of law. Besides, the abolition of capitalism does not immediately create the economic prerequisites for such a change” (ibid., p. 13). Therefore, socialism, as a lower phase of communism, is not yet communism in the true sense of the term. Although all capital goods in it already belong to the people, it also contains the remains of the capitalist society, namely elements of the still-existing “bourgeois law”. For this reason, the following formula is valid in this phase: “From each according to his ability, to each according to his work!” (Shachtman, 1952), which ensures equal distribution of the produced social product to the working people while taking into account each individual’s contribution to the development of this product. Developing the idea, K. Marx attempts to explain the principles of socialist distribution in the context of “proceeds of labour” by using the economic terminology and style characteristic of the “Capital”: “Accordingly, the individual producer receives back from society – after the deductions have been made – exactly what he gives to it. What he has given to it is his individual quantum of labour. For example, the social working day consists of the sum of the individual hours of work; the individual labour time of the individual producer is the part of the social working day contributed by him, his share in it. He receives a certificate from society that he has furnished such-and-such an amount of labour (after deducting his labour for the public funds); and with this certificate, he draws from the social stock of means of consumption as much as the same amount of labour cost. The same amount of labour which he has given to society in one form, he receives back in another” (Marx, 1970, p. 13). In fact, it is very simple procedure for the distribution of the total product! We could agree that it could be an “equal” distribution based on work performed if we also

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acknowledged K. Marx’s other conditions for socialist production, namely the elimination of the distinction between manual and mental labour. In K. Marx’s socialist production corporation, “everyone does everything”, which means that depending on the situation, anyone can do any work, both manual and mental. By expanding those thoughts, V. Lenin later explained that with the development of heavy industry and the entire capitalist state, “the great majority of the functions of the old “state power” have become so simplified and can be reduced to such exceedingly simple operations of registration, filing, and checking that they can be easily performed by every literate person, can quite easily be performed for ordinary “workmen’s wages”, and that these functions can (and must) be stripped of every shadow of privilege, of every semblance of ‘official grandeur’” (Lenin, 1917). Figure 4.2 depicts a diagram for the creation of a socialistic total social product. This product can be compared to a large pie made by all members of society. Let us assume that a socialist worker created a product at the bottom of this pie and received “a certificate” labelled No. 1 in a circle. The size of this circle represents the worker’s contribution to the total product. According to this certificate, a worker may select any product from the public “pie”, for example, circle No. 2 above. The products will be different here, but the amount of work put in will be similar to the amount of work put in circle No. 1, so it will fully meet the condition “From each according to his ability, to each according to his work!” Therefore, all workers are free to select any part of the product that meets their needs, as long as their selection is consistent with their own contributions to the social product. However, each worker only receives a certificate for his necessary labour time, which is directly allocated to the restoration of his labour power. The surplus product is the other part of the product that is created during the surplus labour time. In a capitalist state, this product is gratuitously misappropriated by capitalists, but in the socialist community things are different. Because there are no capitalists here, the surplus product remains at the disposal of the workers and forms the public consumption funds. These funds are used by the same workers, but they are allocated based on their needs (as in the second phase of communism). They include free education, health care, housing, and rest in sanatoriums, among other things. It also includes public services and everything related to the administration and management of this process, i.e., the so-called remains of bourgeois law. It is, therefore, critical to understand that, in a capitalist system, a worker sells his labour power in exchange for “a certificate” or a wage paid by a capitalist for a necessary amount of labour spent. After selling his labour power, the worker loses all ownership rights to the remainder of his labour time, which is then transferred to the capitalist. In the socialist system, a worker does not lose ownership of the remainder of his labour time, but rather remains a joint owner of it. Therefore, labour power is no longer a commodity in socialism because no-one sells anything and no-one buys anything there. However, if we do not buy or sell anything, how can we evaluate the worker’s performance? To begin with, I can conclude that, according to K. Marx and later V. Lenin, both manual and mental work are evaluated in the same way, despite the fact that

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Fig. 4.2 The socialistic total social product. Source Created by the author

manual labour can be performed by almost anyone, whereas mental work requires prior preparation and specific knowledge. All of this takes a long time and a lot of money. To begin with, the natural question is why study and waste time when society still pays you the same amount of money for the work performed but based on the amount of time spent on your work? Secondly, the worker’s experience and skills are not assessed under these conditions. K. Marx relies on the assumption that “labour, to serve as a measure, must be defined by its duration or intensity, otherwise it ceases to be a standard of measurement” (Marx, 1970). Therefore, the duration and intensity of labour are only two factors on which K. Marx’s entire theory is based, explaining the value of each individual worker’s labour. In his theory, he “prescinds” (disassociates) from all other possible factors that could determine the value of this worker’s work and wage based on his work, deeming them insignificant. Therefore, if we evaluate the worker’s work from K. Marx’s perspective, we must only consider the worker’s skills related to the speed of operations performed or the intensity of the work itself. The more experienced the worker, the faster he will complete tasks than any other less experienced worker. The latter will then have to work longer hours to earn the same wage as the former. Here is all the difference between the amount of workers’ wages. But how can the value of simple and complex work embodied in a product be determined, for example, the difference between the work of a wheelbarrow carrier and an architect? K. Marx answers this question as follows:

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The value of goods is determined by mere human labour put in them, “which, on an average, apart from any special development, exists in the organism of every ordinary individual… Skilled labour counts only as simple labour intensified, or rather, as multiplied simple labour, a given quantity of skilled being considered equal to a greater quantity of simple labour. Experience shows that this reduction is constantly being made. A commodity may be the product of the most skilled labour, but its value, by equating it to the product of simple unskilled labour, represents a definite quantity of the latter labour alone. The different proportions in which different sorts of labour are reduced to unskilled labour as their standard, are established by a social process that goes on behind the backs of the producers, and, consequently, appear to be fixed by custom” (Engels, 1947). It’s a true example of qualitative assessment of labour power by using quantitative assessment methods! In this case, any most complex labour can be reduced to simple labour time that does not require any prior preparation by employing proportions that are “unknown to producers”! The value of the goods then depends only on the amount of simple labour time invested in their production, which will be increased “in certain proportions” depending on the degree of labour complexity. Later, an average will be struck, and the socially necessary amount of labour to produce a product on an industry-wide scale will be determined on this basis! But how can we evaluate such labour power qualities like genius, talent, and creativity, which are shared by only a small number of the population? The category of simple labour in its most primitive quantitative sense. Labour does not always consist solely of the number of operations performed or the time spent performing one or more operations. The worker’s creative abilities can also be important here. After all, how to explain the fact that different paintings created by different artists over the same period of time are usually treated differently? People differ greatly in terms of quality, i.e., they are distinct individuals with varying levels of creative potential. After all, brilliant ideas do not occur in the absence of these individual characteristics, but how can the value of the idea be determined? The idea may be worthless financially because its true value is revealed only during its practical realisation and its outcome born as a result of both complex and simple work. The ideas themselves may not be realised yet, but the work process would not be possible without them. How to put all of this into some kind of vague “proportions” related to simple labour? Therefore, K. Marx is probably correct in claiming that both producers and K. Marx himself know nothing about it, implying that these questions are apparently fixed by custom! A more experienced worker is not only more effective in real work situations, but he also makes less mistakes. Let us say that a worker is evaluated based on piece production rates (by the number of product units produced) rather than hourly rates (working hours). Then, as he produces more products, he can expect to earn a higher wage. But how to evaluate defective production made by a novice? He put in the same amount of effort to make it, but later it became clear that it could result in higher labour costs for other workers who will have to correct the novice’s mistakes and eliminate the defects.

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A working person contributes his abilities to society in a certain form by sacrificing them for the sake of society. These costs include labour time, work intensity, nervous tension, the nature of emotions, risks, and much more. Because these characteristics vary greatly between individuals, it is difficult to obtain sufficiently accurate measurements. A scientist, for example, may spend time in his office, but in the evenings and even at night, he may work from home. Those in positions of power are frequently nervous because they spend so much time in meetings and lack the time and energy to read books, go to theatres, and attend cultural events. In short, a specific study is required to assess the cost of each type of activity, compare values, and discover common values for various life situations in society and for society as a whole. We must not forget another crucial circumstance that was not addressed in Marxist theory. Let us say that the inventor has developed a completely new product that will be extremely beneficial to society. However, no-one can predict how beneficial the product will be or whether it will be beneficial at all in comparison with other products of such type. Only practice will reveal this. In capitalist countries, the usefulness of this product is typically determined by the market or by customers choosing it as the best alternative to all other products of this type. In such a case, the inventor will become extremely wealthy because he will be well rewarded for his work. However, if his invention is found to be unsuitable for the market, or if it is not sufficiently beneficial in comparison with other products of the same type, he may not receive anything! In this case, how should his labour time be assessed by transforming it into a simple labour time according to K. Marx? After all, according to K. Marx, simple working time is the basis that can only be increased “in certain proportions” depending on the degree of complexity of the labour and that forms socially necessary labour time and ultimately determines the value of any product! The inventor’s labour time assessed in this manner may have a very high value or lose it entirely if the market does not accept it. According to K. Marx, in this case, the inventor must still be rewarded on average based on the amount of his simple labour time spent on his invention, increased by the complexity of his labour. After all, the inventor spent the same amount of labour time in both cases! It means that you can create anything and get the same wage because there is no commodity market in a socialistic social product, and inventors are paid simply for spending a certain number of working hours! These questions are difficult to answer in K. Marx’s theory of the socialist “syndicate”. This theory only provides for the creation of average social product performed by an average worker and payment for his work, while taking little or no account of the workers’ individuality or their experienced “creative sufferings”.

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4.2 Realisation of a Distributed Surplus Product But let us return to the statement that every worker who works for society receives “a certificate” from it, and “with this certificate, he draws from the social stock of means of consumption as much as the same amount of labour cost” (Marx, 1970). It should be understood here that, when he mentioned the “certificate” of society, he was referring to the money of the socialist community that should be paid out to this worker, for which he could later obtain the entire amount of social stock he requires. Because the payment to a worker, or the amount of the “certificate” received, must correspond to the remainder of the added value created by the worker, the latter should become sufficiently wealthy, or at the very least be entitled to dispose of the funds available under this “certificate” on its own! In fact, K. Marx and F. Engels did not give much thought to how this distributed product would be realised later. It was most likely because they believed in the proletariat’s future “wiseness”, when all power would be transferred to responsible “servants of society” (Marx, 1871). He admired the Paris Commune, especially the formation of the new public bodies of the Commune, which were later refused to implement their ideas. K. Marx believed that the proletariat, which would receive all surplus product, would be able to properly use and distribute it to all members of society. After all, if the surplus product in a capitalist society is given to the capitalist free of charge and the capitalist treats it as he pleases, how can the proletariat be less deserving? On the contrary, if the capitalist who misappropriated the surplus value thinks only of himself and his own benefit, while the proletariat creates and uses this value, he will achieve “true” social justice! It should be noted that K. Marx was primarily a philosopher and scientist who was fascinated by capitalism and studied its regularities throughout his life; nevertheless, he saw the emergence of the foundation of a new society in the depths of the capitalist system. As an economist, Marx learned a great deal from Adam Smith, and their writings have in common the constant presence of irony, either right on the surface or just beneath it. But there is in Marx none of Smith’s patient, eighteen-century prolixity. The kinds of subtleties we find in Marx are likely to be missed not, as in Smith, because they are too softly stated, but instead they are drowned out by the brassiness of his theoretical assertion or the explosiveness of his indignation (Allen, 2004). Socialism, according to his theory, was the result of natural-historical development. “Communism is for us not a state of affairs”, K. Marx and F. Engels wrote in “The German Ideology”, “which is to be established, an ideal to which reality [will] have to adjust itself. We call communism the real movement which abolishes the present state of things” (Marx, 1932). As a result, K. Marx did not create, and in theory was unable to create a structural plan for the future society. According to him, “The working class have no ideals to realise, but to set free the elements of the new society with which old collapsing bourgeois society itself is pregnant” (Marx, 1871). Some contemporary philosophers such as Graham argues that Marx’s philosophy has contemporary relevance and survives the collapse of Leninism. It is a philosophy at once more extreme and more moderate than usually thought: more

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extreme in rejecting all forms of commodity or market society, but more moderate in its choice of the political methods employed for the transcending of capitalism (Grahm, 1992). Peter Osborne presents Marx’s thought as a developing investigation into what it means, concretely, for humans to be practical historical beings. Drawing upon passages from a wide range of Marx’s writings and showing the links between them, Osborne refutes the myth of Marx as a reductively economistic thinker. What Marx meant by ‘materialism’, ‘communism’ and the ‘critique of political economy’ was much richer and more original, philosophically, than is generally recognised (Osborne, 2005). Here, we can only assume that all classics of Marxist theory sincerely believed that the mere understanding that the surplus value would go to all working people rather than to some kind of “capitalists” had to encourage workers to work productively and continuously increase productivity and efficiency. It is difficult to find any original material incentive measures related to the encouragement of the socialist economy’s efficiency. This view is clearly reflected in the following thoughts of F. Engels: “How then are we to solve the whole important question of the higher wages paid for compound labour? In a society of private producers, private individuals or their families pay the costs of training the qualified worker; hence the higher price paid for qualified labour power accrues first of all to private individuals: the skilful slave is sold for a higher price, and the skilful wage-earner is paid higher wages. In a socialistically organised society, these costs are borne by society, and to it therefore belong the fruits, the greater values produced by compound labour. The worker himself has no claim to extra pay. And from this, incidentally, follows the moral that at times there is a drawback to the popular demand of the workers for ‘the full proceeds of labour’” (Engels, 1958, p. 172). This approach to social labour was later widely and thoroughly promoted in the concept of socialist emulation, which became a mode for developing a new society and communist education. Further development of socialist emulation was named as a movement for communist approach to work. He expresses workers’ concern for the general interests of the people and indicators of common work, as well as the development of the individual person and the increase of level of education and the improvement of overall moral qualities of human beings. By evaluating approaches and practices of Marxists, a prominent representative of the Lithuanian diaspora Vladas Jodeika concluded, “Marx condemned the state as a tool of capitalist violence used to defend private property and to memorialise their power and oppression. Instead of focusing on the essence, flaws, and abuses of the state, he advocated for its total abolition and the establishment of a free, stateless, and anarchic society. Instead of focusing on property flaws and how to eliminate them, he proposed to abolish the property itself… Marx made a fatal mistake” (Jodeika, 1978, p. 688).

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4.3 Socialist Commodity-Monetary Relations One of the most important reasons for such an approach to the socialist distribution of total product was the established understanding that in the society of socialist producers, all available resources of labour power are used in a planned manner as an entire labour power. When a product is transferred from one factory to another and from one producer to another, its ownership remains untransferred, i.e., it is not separated from its original owner. It only moves from one public representative to another within the same ownership framework. When questioning the very concept of commodity exchange under socialism conditions, K. Marx argued that in a public system based on the public ownership of capital goods, producers do not exchange their commodities because the public value of these products is expressed only as the amount of labour time spent to produce these products. The only difference is that it becomes a distinct feature embodied in these products because unlike the capitalist system, individual work directly becomes a part of the public labour rather than indirectly. It was also confirmed by F. Engels, who added that in socialism, the direct distribution of products leaves no room for commodity exchange. V. Lenin also supported these statements, saying that “So long as exchange remains, it is ridiculous to talk of socialism” (Lenin, 1968, p. 127). Therefore, all Marxists agreed that, at their final stage of development, planned modes production should be established in the product market for their benefit first, and then gradually eliminated. In contrast to commercial production, labour in social production is already seen as a form of exchange, which becomes a public labour directly. Then each person’s individual work, whatever specific useful properties it may have, becomes a public work from the beginning. But what about commodity-monetary relations in socialism? In this case, V. Lenin noted that “during the transition period, the ‘state product’ produced by the socialist factory is transformed into a product produced by a peasant, which is no longer regarded as a real commodity and, in any case, is no longer a commodity at all because it ceases to be ‘a commodity’” (Lenin, 1974b, p. 381). V. Lenin’s ideas were reflected in the programme of the Communist International organisation, which was adopted during its congress in 1928. According to it “capitalist economic forms and methods (balance sheet, monetary form of payment for labour, purchase and sale, credit, banks, etc.) that are externally related to market relations can be described as socialist revolution tools, because these tools are intended to serve socialist-type enterprises, i.e., the entire sector of the socialist economy”. Despite theoretical arguments about the inadequacy of “social product” or “social labour” to their commercial nature under socialism conditions, V. Lenin had to admit that there was no alternative to money at the time. According to him, “It is impossible to abolish money at one stroke… There must be very considerable technical and, what is much more difficult and much more important, organisational achievement before we can abolish money”. “To abolish money, you must organise the distribution of products for hundreds of millions of people, and this is something that must take many years” (Lenin, 1974a, pp. 329, 338). Therefore, he later returned to capitalist

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terms and product evaluation methods. However, it has been repeatedly emphasised that economic development in socialism by transitioning to communism no longer occurs in a revolutionary manner; therefore, only the content is immediately changed while forms remain unchanged, and thus changes occur only “gradually”. As a result, money loses its sense and political-economic significance under socialist conditions. It remains only as a tool or universal equivalent for evaluating individual items or services as a result of the social work embodied in them. Therefore, commodity production is not as widespread in socialist society as it was under capitalist conditions. Under socialist conditions, the sphere of commodity production and circulation is mainly limited to products for personal consumption. Labour is no longer regarded as a commodity in a socialist society. Land and its underground natural resources are the property of the state and may not be sold or leased. State-owned enterprises, such as factories, production plants, mines and power plants with the main production assets (implements, buildings, structures, etc.), cannot be sold and purchased, but may be transferred from one state-owned organisation to another only with a special permit; thus, they are no longer an object of purchase and sale. Thus, while commodity-monetary relations have “commercial properties”, Marxists believe they have more “social properties”; therefore, they should be regarded as a specific type of social relations, reflecting them in the commodity-monetary form. Such social relations (social in terms of their content and commercial in terms of their external characteristics) are defined by the term “socialist commodity-monetary relations”. Therefore, taking into account their new content, they must be constantly improved! J. Stalin explains Engels’ statement in his book “Anti-Dühring” in his own way. F. Engels says that “With the seizing of the means of production by society, production of commodities is done away with, and, simultaneously, the mastery of the product over the producer” (Engels, 1947). J. Stalin stated: “Let us examine Engels’ formula. Engels’ formula cannot be considered fully clear and precise, because it does not indicate whether it is referring to the seizure by society of all or only part of the means of production… Hence, this formula of Engels’ may be understood either way. Hence, in this formula Engels has in mind the nationalisation not of part, but of all the means of production, that is, the conversion into public property of the means of production not only of industry, but also of agriculture. It follows from this that Engels has in mind countries where capitalism and the concentration of production have advanced far enough both in industry and in agriculture to permit the expropriation of all the means of production in the country and their conversion into public property. Engels, consequently, considers that in such countries, parallel with the socialisation of all the means of production, commodity production should be put an end to. And that, of course, is correct. There was only one such country at the close of the last century, when Anti-Dühring was published – Britain. As to the other countries, notwithstanding the development of capitalism in the countryside, they still have a fairly large class of small and medium rural owner-producers, whose future would have to be decided if the proletariat should assume power. But here is a question: what are the proletariat and its party to do in countries, ours being a

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case in point, where the conditions are favourable for the assumption of power by the proletariat and the overthrow of capitalism, where capitalism has so concentrated the means of production in industry that they may be expropriated and made the property of society, but where agriculture, notwithstanding the growth of capitalism, is divided up among numerous small and medium owner-producers to such an extent as to make it impossible to consider the expropriation of these producers? To this question Engels’ formula does not furnish an answer. Incidentally, it was not supposed to furnish an answer, since the formula arose from another question, namely, what should be the fate of commodity production after all the means of production had been socialised. We cannot, of course, regard as an answer the opinion of certain half-baked Marxists who believe that under such conditions the thing to do is to refrain from taking power and to wait until capitalism has succeeded in ruining the millions of small and medium producers and converting them into farm labourers and in concentrating the means of production in agriculture, and that only after this would it be possible to consider the assumption of power by the proletariat and the socialisation of all the means of production. Naturally, this is a “solution” which Marxists cannot accept if they do not want to disgrace themselves completely. Nor can we regard as an answer the opinion of other half-baked Marxists, who think that the thing to do would be to assume power and to expropriate the small and medium rural producers and to socialise their means of production. Marxists cannot adopt this senseless and criminal course either, because it would destroy all chances of victory for the proletarian revolution, and would throw the peasantry into the camp of the enemies of the proletariat for a long time” (Stalin, 1972). The answers to these questions can be found in V. Lenin’s works. It may be briefly summed up as follows: a. Favourable conditions for the assumption of power should not be missed—the proletariat should assume power without waiting until capitalism has succeeded in ruining the millions of small and medium individual producers; b. The means of production in industry should be expropriated and converted into public property; c. As to the small and medium individual producers, they should be gradually united in producers’ cooperatives, i.e., in large agricultural enterprises, collective farms; d. Industry should be developed to the utmost and the collective farms should be placed on the modern technical basis of large-scale production, not expropriating them, but on the contrary generously supplying them with first-class tractors and other machines; e. In order to ensure an economic bond between town and country, between industry and agriculture, commodity production (exchange through purchase and sale) should be preserved for a certain period, it being the form of economic tie with the town which is alone acceptable to the peasants, and Soviet trade—state, cooperative, and collective farm—should be developed to the full and the capitalists of all types and descriptions ousted from trading activity.

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4.4 Socialist Money Is it theoretically possible to combine the planned socialist and capitalist market economies into a single unity and force them to cooperate? It turns out that it is not because “social money” is not at all “capitalist money”. As stated in the previous chapter, before I can answer the question of what socialist money is, I must first define socialism. Socialism is the same as communism, but at its lowest stage. We know that in capitalism, a product is created for the purpose of exchange; therefore, this product can be referred to as a commodity and can change its owner on the commodity market. Because the purpose of socialist production is not to produce a product for the market, i.e., for exchange, but rather to meet the needs of society as a whole, a “true” commodity-monetary relations no longer exist in socialism, i.e., the total social product does not lose its original owner, but only moves within the limits of one total social ownership. There is also no money in socialism, because money, by its classical nature, is the same commodity, only having its versatile qualities. This commodity can be freely exchanged for all other commodities available on the market on the basis of a free mutual agreement between market participants. Therefore, money in socialism has only a form of money, not the content. It is only necessary to carry out the accounting and control of a socialist product, as well as to fill in the paperwork for this product after it has left the manufacturing plant and has arrived at another location, such as product warehouses or elsewhere. So, money only serves as an “accounting unit” here. In the case of product distribution, money serves as “a certificate of public worker” as stated by K. Marx in his “Critique of the Gotha Programme”. According to this “certificate”, any member of society may only obtain as much social product as he has “contributed work” in the socialist labour distribution system, sorted by work. If each member of society wants to know how much he contributes to the system, he must divide his monthly pay by the total national wage paid out that month. Then he can take his part to a public warehouse, also known as “a store”, and choose a social product that he likes and that suits his part. Bear in mind, however, that not all of the newly developed total social product is paid in a form of wage. In fact, at least half of the total social product is distributed through various public funds in socialism. However, in this case, the product is distributed not “according to one’s contribution”, but rather “according to one’s needs”, as in true communism. Based on the calculated ratios, if the family has a large number of underage children, it has to get a larger residential area without paying anything. Or if a person needs to have a complex surgery, no-one asks him to pay anything, and the surgery is performed “free of charge”. This is, of course, an inaccurate description because individual members of society do not receive anything for free; instead, they simply consume a greater proportion of the social product produced by other individuals.

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All of these commodities or services are expensive in capitalism because they are not the object of distribution through social funds, but rather simple commodities for which people must pay the same price as any other commodity on the market. Therefore, even in official textbooks of political economy, the biggest and most common mistake is stating that socialist public production is the same thing as commodity production. It is mostly depicted in this context in the same way that capitalist commodity production is. However, it is not commodity production in its entirety because goods are produced for exchange, i.e., they are exchanged for other goods. Money must be a commodity in this case because all goods on the market are exchanged for it. However, if we follow this logic, members of society who are paid for their work must also have a commodity that could be exchanged for money. Only work can be this commodity, but according to Marxism, work is not a commodity under socialist conditions and cannot become it under any circumstances.

4.5 Law of Value in Socialism Does the law of value operate in socialism in general? After all, the planned economy operates in a completely different manner, and the value of goods does not always have to be linked to their price. Nevertheless, the law of value also functions in socialism. In this respect, J. Stalin stated that: “[…] the operation of the law of value is not confined to the sphere of commodity circulation. It also extends to production. True, the law of value has no regulating function in our socialist production, but it nevertheless influences production, and this fact cannot be ignored when directing production. As a matter of fact, consumer goods, which are needed to compensate the labour power expended in the process of production, are produced and realised in our country as commodities coming under the operation of the law of value. It is precisely here that the law of value exercises its influence on production. In this connection, such things as cost accounting and profitableness, production costs, prices, etc., are of actual importance in our enterprises; therefore, our enterprises cannot, and must not, function without taking the law of value into account” (Stalin, 1972). The economic system of socialism forces us to strictly limit the operation of the law of value. The operation of the law of value is also limited by the socialisation of means of production in urban and rural areas, the narrowing of the sphere of production and circulation of goods, the economic laws of socialism, their impact, and, most importantly, the law of planned national economic development. The scope of application of socialist law of value is also limited by annual and five-year plans, as well as, more broadly, all economic activities of the socialist state. As a result, the socialist law of value cannot operate as a social production regulator. If the law of value were to function as a social production regulator in socialism, the most profitable sectors and businesses would emerge first in the socialist society. Heavy industrial enterprises may be losing money temporarily, but they are too important to the national economy to be closed down. Therefore, in the beginning of

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the socialist state, unprofitable or loss-making enterprises that are necessary for the rapid development of the country’s economy are retained and maintained rather than closed down. Every effort shall be made to make them profitable at a later stage. The socialist state may permit temporary losses in certain sectors or enterprises at the expense of income generated by other sectors or enterprises. It ensures the quickest possible economic development by focusing on economies of scale, mass production, and paying little attention to the whims of individual consumers. The most important thing is to reach the maximum number of production units that correspond to and exceed the planned targets, ensuring that the majority of the population is adequately supplied with food, clothing, footwear, and other consumer goods or products. The socialist state establishes enterprises and creates entire sectors of production in accordance with the requirements of the basic economic law of socialism and the law on the planned national economic development, without seeking profit. The scope of application of socialist law of value begins with the circulation and exchange of goods (mainly personal belongings). The law of value retains a very limited role as a regulator in this area. The following main economic features and objectives could be used to characterise the essence of this model: • • • • • • • • • • • • •

public (socialist) ownership of capital goods; the essential and decisive role of the state in the economy; centralised management of economy or “power vertical”; planning of all economic decision-making and entire production; the entire economy is a single national economic complex (corporation); militarisation of the country’s government and mobilisation of the entire economy; maximum autonomy and self-sufficiency of industry and agricultural production (especially at a time when the socialist economic system has not yet emerged); primary focus on natural (physical) economic indicators (values serve only as a supplement); the nature of the commodity-monetary relationship is very limited; faster development of Group A (production of capital goods) in industry compared to Group B (production of consumer goods); a combination of material and moral measures to support labour; intolerance to the concentration of non-working income and surplus material values in the hands of individual citizens; ensuring that all members of society’s basic needs are met and that their standard of living is constantly improved.

The planned nature of economy should be given special consideration. After all, the term “administrative management system” refers, first and foremost, to the planning of the national economy as a whole, which contradicts the “market economy” that hides the economy oriented in profit and wealth. It is also a political issue in a socialist model, where the plan has a clearly defined legal status and is implemented on a mandatory basis. It differs from so-called indicative planning, which was used in Western Europe and Japan after World War II and took the form of recommendations and guidelines for economic actors. By the way, the legally

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formalised planning is not a unique feature of the socialist economy. It is used by the world’s largest multinational corporations, including IBM, British Petroleum, General Electric, and Siemens. At the start of the twenty-first century, there is a very strict administrative management system with no “democracy” impurities or worker’s involvement in management. After all, K. Marx’s proposed “socialist syndicate” or “a well-functioning corporation” must operate on the principles of a true capitalist corporation! Socialist property. Marxists argued that existing property relations are only considered human relations with things in capitalist societies with private ownership of capital goods. After all, anyone can run a business by owning it, or run a mine or a transportation enterprise by being a shareholder. However, it cannot happen in the socialist community. Because people do not own capital goods, there are no “commodities” associated with production that could sustain such relationship. As a result, in socialism, property is defined as the relationship between human beings rather than the relationship between human beings and commodities. Property refers to the public relationship that exists between people in relation to the misappropriation of capital goods and the product produced (Fig. 4.3). State nationwide property is the main form of socialist property. It is the property of all people, and it consists of land, underground natural resources, forests, water, factories and power plants, mines, rail, water, and air transport, banks and communications facilities, public utility enterprises, schools, hospitals, and so on; meanwhile, in agriculture, it consists of state-owned agricultural enterprises, land reclamation stations, and so on.

Fig. 4.3 Property forms in a socialist state. Source Created by the author

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Cooperative-collective property is another form of property. It is not a nationwide, but rather a group-wide property, unlike state-owned property. Collective capital goods are agricultural machinery, draught animals and productive livestock, production buildings, and other assets owned by members of a specific collective or collective farm. The state nationwide property is the main form of the two socialist property forms. A number of reasons explain it. Firstly, it implies a greater degree of socialisation of production. It encompasses the fundamental capital goods on which the entire development of the economy and the standard of living of all citizens depend. According to Marxists, all other forms of property eventually become state nationwide property. The small private labour property of individual peasants, domestic manufacturers, and craftsmen is also recognised at the start of the socialist community’s development. However, it has always been thought that through cooperation, it should gradually and voluntarily become socialist property here. Both private and collective cooperative forms of property must pay taxes to the public budget; thus, supplementing state nationwide ownership with monetary and product resources. They are paid for their products in accordance with public rates while also utilising the state social funds of nationwide property, which are the social expression of state public funds. It means that all funds available to the state and forming public funds are gradually transformed into social measures aimed at meeting the needs of all members of society. The truth is that there is a form of personal property, which means that an individual or a separate family has the right to appropriate one’s labour products for personal use. Socialism, by abolishing capitalist private property, only eliminates the possibility of exploiting wage labour and misappropriating its results. It does not abolish personal property, but rather changes its nature. In socialist society, the personal property of citizens is continuously linked to socialist property. Labour income is the source of the working people’s personal property. Wages and salaries of workers and servants, income from collective farms, and everything they buy with that income are the personal property of their members. They can use their property, give it as a gift, sell it, or pass it down as an inheritance. If an individual brings his personal property to a marketplace in order to sell it, this property does not become a private property because its primary purpose is to satisfy the needs of the owners. Meanwhile, when an auxiliary farm becomes the primary source of income from a secondary source of income, it no longer qualifies as an auxiliary farm. The capital goods used in it then become private property, and their owner becomes an individual farmer or domestic producer, i.e., a small producer of goods. In this case, he does not become a capitalist because he only employs labour of his own or his family members, rather than wage labour. However, small private farms will wither away, according to Marxists, when fully developed state social and collective-cooperative farms make them useless and unnecessary. To back up their claim, they provide a reason why no-one should consider keeping a cow if a sufficient amount of milk, butter, and meat can be purchased in any store at a lower cost than the cost in their auxiliary farm.

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Planned development of the economy. During the creation of socialism, it is necessary to put into practice K. Marx’s leadership model of the socialist “syndicate”. Then it will operate as a “smoothly operating mechanism”, with everyone knowing what to do and when to do it. This “syndicate” must be led by responsible servants of society—they must make and enforce their own laws. Therefore, these “servants” are embodied by the Party and its authorised representatives. Economic development plans are published on their initiative; in the meantime, the Party, which is in charge of implementing these plans, appoints its government to carry them out. This right and function of the Party are enshrined in the Constitution, the text of which the Party also proposes. Everything happens exactly as K. Marx predicted! The public property, whose government is led by the Party representing the country’s socialist society, combines all sectors into a single economic complex. Thousands of enterprises are obliged to develop a plan of the economy in a unified manner with the common goal of building communism and creating a wealth of material and spiritual goods. It requires to develop each sector of economy in a methodical manner. Production anarchy, crises, and unemployment, which are inherent in capitalism, must be completely eliminated. At the same time, opportunities must be provided for rationally distributing production as well as rationally dividing labour among various socialist countries. After all, any society requires proportionality in the development of various economic sectors. It is a universal economic law that applies in both capitalist and socialist societies. However, in a capitalist society, it is established spontaneously by constantly violating the proportions of sector development. They are changing by closing or establishing new enterprises, hiring new workers or dismissing them on a large scale. The necessary proportions are established for the short term, which are repeatedly violated due to the antagonistic contradictions inherent in capitalism. Other economic laws of capitalism are expressed in the same way, which continuously preserve their spontaneous nature of operation. Meanwhile, in a socialist society, the proportions of economy are determined deliberately by meeting the growing needs of the working people during the planned development of the economy. It means that socialist property fundamentally alters the nature of operation of economic laws and the possibilities for using them in the public interest. This is how the goal of socialism is derived—to meet the people’s growing material and cultural needs by developing and improving public production and increasing labour productivity. Thus, the essence of the basic economic law of socialism is declared. It is, however, more similar to a political declaration than an objective economic pattern! Marxists, on the other hand, see not just one pattern, but an entire system of economic laws! They assert that there are such economic laws as the law of planned development, the law of work-based distribution, the basic economic law of socialism, and so on. Furthermore, they express the specifics of a particular mode of production and are thus referred to as specific. “What would happen if the target price was set very low, much lower than the value? In such a case, the demand for that commodity would increase significantly and its production would decrease because it would become useless. It means that

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prices should be set on a planned basis based on the value of commodities. A society, on the other hand, whose foundation is the public ownership of capital goods, can plan prices as well” (Politin˙e ekonomija, 1970, p. 177). But how does society prepare to carry out its economic planning function in practice? It turns out that V. Lenin has repeatedly stated that it is necessary to perform farming by combining the enthusiasm of the working people with the principle of material interest, and democratism with sustainable labour discipline, personal responsibility, and autocracy of production. All of these requirements are consistent with democratic centralism,1 which serves as the foundation for the organisation of the country’s economic management. In reality, it would imply that the working people democratically elect their leaders, who manage the entire country’s economy from a single centre; in other words, it defines ‘a central line of development of the country’”. Concerning centralised planning, V. Lenin stated that “socialist production will only be able to develop successfully further if it functions in such a way that hundreds of millions of people follow a single plan. As an orchestra requires a conductor, socialised socialist production necessitates that it be managed in a systematic manner from a single point” (Political Economy, 1970). Centralisation shall include: • The formation of national economic structure and economic proportions; • Determining the direction and pace of society’s economic development; • The coordination of an entire country’s general economic plans, as well as interregional economic development plans and the coordination of their implementation; • Implementation of a unified public policy in the areas of technological advancement, capital investment and identification of location of production of separate sectors of economy; • Implementation of the unified accounting and statistical system for wages, prices and finances; • The development of a system of economic behaviour standards for enterprises across all business chains. It is followed by the creation of local regional economic development plans and their coordination with the centralised economic development plans. According to the democratic centralism principle, these plans had to comply with the central economic development line while also evaluating local initiative or local specifics. Two types of plans are used for the planned management of the economy: perspective and current plans. Perspective plans, which are calculated for several years in advance, play an important role in planning. The main form of perspective plans is the five-year plans. How are perspective plans concluded in practice? The “scientific” forecasting of economic development over a long period of time (15–20 years ahead) is a necessary 1

Democratic centralism means: “[…] a) the election of all the directing bodies of the party, from top to bottom; b) the periodic accountability of party bodies to their party organisations and to higher bodies; c) strict party discipline and the subordination of the minority to the majority; d) the unconditionally binding nature of the decisions of higher bodies for lower bodies” (The Rules of the CPSU, 1971, p. 22).

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precondition for the conclusion of long-term plans. Forecasting, on the other hand, is not a plan. It is a type of scientific exploration in which scientists from various scientific fields (scientific economists, demographers, technicians, geologists, etc.) participate. The main objective of forecasting is to identify the main patterns of scientific-technological advancement and development of social relations and, on that basis, to provide the initial data for perspective plans. The directives adopted by the Communist Party and the government serve as the foundation for the conclusion of every perspective (five-year) plan of economy. However, it is unclear how these scientific economists, demographers, technicians and geologists, are able to analyse the demand of individual members of society for some or other specific products or services, and what research methodologies they use to determine the quantities and proportions of product production. It turns out that socialist production planning is carried out in a very different manner. Planning bodies, starting from the State Planning Committee to the corporate planning departments, prepare specific plans for the development of the entire economy, as well as plans for individual branches, associations and enterprises. In addition, the process of developing a plan for economy has two opposing directions: top-down and bottom-up. Each enterprise’s personnel define its boundaries and create production development plans in a specific production plant or factory based on directives of the Communist Party and government. It means that the central planning bodies determine the economic plans for the entire country for a certain period of time based on the forecasts of branch institute scientists and the possibilities of the socialist economy (top-down). Meanwhile, local planning bodies and individual enterprises interpret it as a directive and adjust their specific production plans accordingly by reciprocally dividing up production quantities planned by the directives, which they later coordinate with the central planning bodies (bottom-up). Therefore, plans drawn up in enterprises and associations are summarised in supreme councils and ministries, as well as regulated and coordinated with one another. Later, the State Planning Committee combines and coordinates the plans of the republics, districts, individual ministries, and departments to prepare a unified plan of economy that must ensure the necessary proportionality in the development of public production. Meanwhile, perspective (five-year) plans are carried out through the creation and implementation of current (annual) plans, which represent a specific stage in addressing the assignments outlined in the perspective plan. Therefore, each new current plan must be an organic follow-up to the previous plan. In addition, the current plan not only controls the implementation of the perspective plan, but it also determines whether assignments are correctly assigned in it. Furthermore, additional reserves for increasing production that were not anticipated when the plan was developed may be revealed during the implementation of the perspective plan at enterprises and other branches. For these reasons, the tasks of the perspective plans must be corrected and verified during the current planning process. Let us say we need to create a plan for the production of footwear for the next five years. Everything is performed in a simple manner: first, we must assess the number of pairs of footwear sold each year so far, then to determine the expected

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demographic growth of the population, the average frequency with which people change their footwear, and the number of types of footwear currently available on the market. Based on such data, it is necessary to determine how many pairs of footwear will need to be produced next year or a year later so that each resident can purchase the average amount of preferred footwear each year and plan in the direction of growth because needs are constantly increasing! Then this quantity must be multiplied by the current population (after assessing potential demographic changes), again in the direction of growth, and the obtained necessary average annual number of pairs of footwear must be distributed among the existing footwear factories. After distributing all necessary production quantities, these enterprises include them in their annual production plans approved by the respective industry’s ministry! If the existing production capacity is insufficient to produce all of the planned quantities, a new factory must be built to produce the missing quantities over time. Many enterprises, departments, and central and local planning “bodies” are involved in this complex planning process, setting production volumes, rates, and growth percentages and controlling them; in other words, ensuring the fulfilment of assumed planned assignments and even their excess! Therefore, there is no time or opportunities to consider individuals’ specific wishes, preferences, subtleties of model, design, and leather, as well as global fashion trends and other “whims” of these members of society! “The central planning bodies must first address the main, strategic objectives of communist construction by ensuring the most important proportions in the economy, properly distributing productive forces, developing economic districts in an integrated manner, and ensuring unity of technological progress, remuneration, pricing policy, etc. These objectives are used to approve mandatory planned assignments for branches, associations, and enterprises. Meanwhile, enterprises, with the active participation of the working people, must establish specific methods and means to carry out their planned assignments, find the most rational methods to use production funds and labour power, apply one or more technological methods, and to employ various forms of material incentives. It is impossible to predict all sources and reserves in every socialist enterprise from above” (Political Economy, 1970, p. 192). It should be noted that all centralised economic planning actually performs its primary function of regulating the country’s economy by eliminating capitalist business cycles and the causes of economic crises. Within the context of the entire economy, efforts are made to produce only what is required for public consumption in order to avoid overproduction and the bankruptcies of the related individual enterprises. Enterprises in difficulty are supported at the expense of successful enterprises; in the meantime, inefficiently working executives are replaced by new ones, and these enterprises, if necessary, receive state support (after all, all enterprises are state-owned!). Workers are not thrown out on the street because bankruptcy is avoided; instead, they continue to work in their enterprises. Therefore, all citizens of the country who are capable of working are employed, as planned. Moreover, they must work because the resources of labour power are also carefully planned.

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There are no benefits for the unemployed in the socialist society. On the contrary, the unemployed or idlers are punished according to socialist state laws, and they are constantly persecuted until they are eventually forced to work.

4.6 Peculiarities of the Planned Economy However, certain conditions must be met in order to implement socialist planning, and the resulting consequences must be accepted. The following are the most important issues in the planned economy: Prices. To begin with, prices for goods and services must not change, or they may only change in accordance with pre-planned procedures and in very exceptional cases. They are usually indicated on the goods and apply to all points of sale and services, regardless of location, time of day, season, or other factors. Allowing individual economic entities or individuals to freely arbitrarily change prices would result in huge disproportions in planning because the planned funds would be very different from the actual ones. There would inevitably be an excess or shortage of funds, resulting in accounting chaos throughout the entire sector. Therefore, enterprises are permitted to produce more units (to sell them in excess of the plan), but they are not permitted to change the prices of these goods. It should be remembered that in socialist production, the price of each product must correspond to the amount of socially necessary labour time required to produce that product. In K. Marx’s theory, differences between manual and mental labour are gradually eliminated; thus, the hourly or unit salaries of workers and servants gradually become similar, and only the labour time, which determines the level of remuneration, differs. Prices for raw materials and energy depend only on their type and are similar across the country for the same raw materials, substances, fuel, or services. Therefore, all current and perspective plans are drawn up on the basis of stable prices and rates. Only then does planning make sense because it can increase or decrease investments while also regulating the development proportions of the various sectors of the economy by producing the planned production volumes for each sector. Otherwise, when different parts of the socialist “syndicate” begin to change their production rates independently, the entire “syndicate” system that ensures its smooth operation is disrupted. Let us say that a socialist production enterprise or factory suddenly decides to raise its production price as a result of any external or internal factors. It’s beneficial if it produces the final products for a consumer who can pay more for it by purchasing relatively fewer goods at the same time. But what if this enterprise makes intermediate products, such as components for other factories that have strictly planned funds for purchasing raw materials and substances, including those parts? They will be able to purchase fewer of these components with their funds and, accordingly, they will produce fewer of their products that they will be unable to deliver to other factories. Because of the scarcity of these components, the latter will also produce

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fewer products! Thus, not only is the implementation of all production plans disrupted for one enterprise, but also for the industry as a whole! The socialist state performs planned accounting and controls both the activities of individual enterprises and branches, as well as the production and distribution of the entire social product, including the creation and distribution of national income, through the formation and use of monetary funds. There are significant differences in costs between enterprises producing homogeneous production in some sectors. It is primarily caused by natural and other factors that are beyond the control of individual production teams. In such cases, estimated prices may be set for groups of enterprises with roughly equal economic conditions. Such products must have a single consumer price. In other cases, fixed payments are used to strengthen the enterprise’s cost accounting. They represent financial support for a particular enterprise or a group of enterprises at the expense of more successful enterprises. I will look into how it is done later. Competition. The absence of competition is the second most important feature of the planned economy. The classics of Marxism have argued that competition is merely a phenomenon of capitalist society that leads to overproduction of goods and, as a result, economic crises. They cause economic chaos and recession, resulting in economic crises and a global economic downturn. Therefore, the socialist economy has an advantage here because overproduction of goods can be avoided if the quantities of products needed to be produced are correctly planned. Thus, by sharing the production volumes determined by the central authorities, the existing branch factories do not compete with each other at all. They are only required to carry out their assumed planned assignments, i.e., to produce the necessary product quantities. If they manage to do so, these products are delivered to stores for the anticipated number of customers who will come and purchase them. I will discuss the consequences of this phenomenon in greater detail later. Advertising. In this regard, the socialist mode of economy has a significant advantage over the capitalist because it does not require advertising in the absence of competition. Capitalist enterprises compete for customers by attempting to sell only their own products, persuading each customer that their products are superior to those of their competitors. In the long run, every capitalist who advertises his goods will try to produce and sell as many products as possible to cover the costs of advertising. It results in overproduction and all of the consequences that come with it. Advertising, on the other hand, makes no contribution to the creation of new value unless we value it solely artistically. Therefore, advertising in general is a waste of money that adds no new value to the consumers of products manufactured by socialist enterprises! It does not “fit into” the structure of the new socialist “syndicate” because it does not recognise unnecessary waste of money as a well-balanced mechanism. It is more focused on the rationality of the entire system and its optimal operation. Because the socialist economic system is focused on rationality, it relies on mass production and heavy industry, which produce primarily capital goods, and only then develops industries that produce consumer goods. It is related to K. Marx’s expanded reproduction theory, which favours the development of the capital goods sector over the manufacturing sector of consumer goods. However, both sectors are oriented

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towards the mass consumer. Otherwise, it would simply be impossible to include the needs of each individual in the country-wide current or five-year perspective plans. In this case, the individual must tailor his desires to the mass product rather than the other way around. Why do Marxists believe that communism is superior to socialism?

• Communism is a continuation of socialist economic development, but • The transition to communism is no longer revolutionary—it takes place peacefully because: • No antagonistic classes remain that should fight with each other; therefore, • Growing labour productivity increases the surplus value, which returns to workers through public consumption funds, so • The need for money is decreasing until it eventually vanishes because: • People’s basic needs are fully met, despite the fact that economic development allows them to produce more; therefore, • The amount of labour time required to ensure an abundance of products is reduced, resulting in more disposable time, so • Communism is superior to socialism because people can devote more time to selfeducation and personal development.

Chapter 5

Communism as the Higher Phase of Communist Society

5.1 Marxism and Theories of Marginal Productivity and Utility The law of diminishing returns. This law was recognised and gradually gained popularity in the late nineteenth and the early twentieth centuries. It was based on the “Trinity Formula” of the famous French economist J. B. Say (1803), who claimed that the national income of any country is formed by three main sources, or, in other words, the factors of production—labour that generates wages, land that generates rent, and capital that generates profit (Sowell, 1972). Later, English economist A. Marshall and American economist J. Clark developed the theory of marginal productivity, which was then applied to the formation of wage. According to this theory, the capital involved in production, embodied as the means of production, is subject to the law of diminishing returns (Marshall, 2013). The results of short-term production clearly confirm it. According to J. Clark, the social product will be distributed based on the productivity of physical contribution into the last work and capital units, taking into account competition and equal factors of productive labour and capital. This theorem has evolved into the fundamental statement of neoclassical microeconomics (Clark, 1891). He elaborated on this concept in his book “The Distribution of Wealth” (Clark, 1908). The same theorem was later independently formulated by John Atkinson Hobson (1891) and Philip Wicksteed (1894). The political message of this theorem was as follows: “What a social class gets is, under natural law, what it contributes to the general output of industry” (Clark, 1891, p. 313). Gross product (GP) consists of the number of products produced over a certain period of time using all available resources. If the costs of one of the production factors are fixed while the costs of another factor, such as wages, are variable, the variation in the gross product produced over a certain period of time will depend only on the variation in the costs of the variable factor. The average product (AP) is equal to the share of gross product per unit of costs of variable factor (in this case, the wage costs). © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_5

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A P = G P/L

(5.1)

Here, AP—average product; GP—gross product; L—labour costs. Marginal product (MP) is the change in gross product after the costs of variable factor (labour) change by one unit. M P = ΔG P/ΔL

(5.2)

Here, MP—marginal product; ΔGP—change in the gross product; ΔL—change in the costs of variable factor (labour). In the following example, I will demonstrate the change in gross product caused by changing only the value of variable factor (ΔL): Imagine that your enterprise is based in an old production building with the following means of production installed: five turning, grinding, and milling machines that produce a variety of metal products. Because the productive capital embodied in these means of production does not create products, labour power is required. At first, you hire one worker. This worker begins his work by taking a piece of metal and processing it through a single machine. After completing this processing work, he moves on to the second machine, then the third, fourth, and so on. As a result, this worker has created one item for you—a metal part that you can sell on the market. However, you notice that this worker spends a lot of time running from one machine to the next. He does not make many products, and you have to pay a lot of money for equipment and maintenance, which does not depend on the number of parts produced. Then you hire another worker. Workers divide production tasks among themselves, making the work more productive. Then you hire a fourth worker, then a fifth, and you notice that their productivity is increasing dramatically, until finally, each worker works with separate machine, does not run around, and only brings materials. Later on, you hire another to handle the delivery of materials to the machines, and yet another to assist everyone in general. However, as you continue to hire workers, you realise that you need to make more efforts to find work for them because they frequently begin hanging around with nothing to do. In the event of an increase in the costs of a variable factor or labour power, and with a certain size of fixed factor, the production volume of a marginal product is achieved where each additional unit of variable factor increases the gross product by less than the unit of variable factor used before it. The law of diminishing returns then begins to operate because the available capital potential is being used better with fixed capital costs but increasing labour costs; thus, the gross product (GP) grows. However, as labour costs rise, each worker creates less capital, and capital becomes a limiting factor in production growth. Every enterprise with a certain amount of capital hires a certain number of workers at a certain period of time to use the available capital (by producing potentially possible quantity of products). The enterprise installs additional equipment and hires more workers to increase production. If it only increased the costs of the latter factor, it would be impossible to use additional workers efficiently to expand production because it would not have enough necessary equipment. Therefore, the optimal ratio between the number of

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workers and the amount of capital generates the maximum productivity of a worker, or creates the so-called “golden rule” level of capital accumulation, also known as the “golden rule” of economic growth in modern neoclassical theory of economic growth. However, from a Marxist standpoint, the “golden rule” level of capital only ensures the maximum exploitation of working people. In this case, the wage share of the worker, embodied in each unit of the final product, has the minimum value. However, such a situation does not necessarily have to reflect in the final price of the product; therefore, the surplus value created by the worker becomes the maximum value, which is fully transferred to the capitalist in the form of profit. In this case, the product of the last, least productive increase, i.e., marginal labour productivity, determines the wage level of all workers. If the capitalist continues to hire more workers (in excess of their marginal number), the value produced will be less than the costs of paying them. Therefore, it’s not worthwhile for the capitalist to hire more workers because it, in turn, leads to the formation of a “reserve army of labour” and other consequences that I have already discussed in previous chapters. The law of diminishing marginal utility. This law is directly linked to the law of diminishing returns because the maximum result of work obtained by optimising the contributed labour power (number of workers) determines the utility of this work and all and any workers. Our economist qualifications do not allow us to conduct a comprehensive psychological consumer analysis, which is typically performed by qualified sociologists and psychologists. I will only look at very general matters that are directly related to the economic explanation of the issue. The utility theory that is widely used in economic theory fundamentally supports any consumer’s behaviour. Consumers include both individuals who purchase goods and services and capitalists who purchase labour power. This theory is based on the following assumptions: • The consumer has a limited amount of money and wants to get the most satisfaction (utility) out of it by spending it on goods and services; • He can freely choose how to spend his money; • All other factors are constant. The satisfaction provided to a consumer by a product is referred to as utility. To simplify the concept of utility, let us say that the usefulness of any product is measured by the maximum amount of money that an individual is willing to pay for it. Total utility is the satisfaction received from consuming a given total quantity of products. Marginal utility means a change in satisfaction a consumer gets from having one more or fewer units of a product. It corresponds to the maximum amount of money a person is willing to pay for an extra unit of product. We all know that the fact that as a person consumes more and more specific products over a period of time, the utility provided by each additional unit of that product decreases, is correct. Let us take a look at a simple example: Let us say that you enjoy eating apples. When you eat the first apple, you feel the general satisfaction. However, because the apple was small, eating a second apple increases general satisfaction. The third apple gives you general satisfaction, but not as much as the second apple did. When you eat the fourth apple, you still feel

72 Table 5.1 Total and marginal utility

5 Communism as the Higher Phase of Communist Society

Product units Q

Total utility TU (in cents)

Marginal utility MU (in cents)

0

0

–

1

10

10

2

24

14

3

27

3

4

28

1

5

26

−2

Source Created by the author

general pleasure, but it does not increase because you’re are already full of apples. Besides, the last apple was no longer as delicious as the third one. When you eat the fifth apple, you feel as if you were forced to eat it, so your overall pleasure decreases, not to mention the fact that you had no interest in this apple and no longer wanted it. It is necessary to understand the distinction between total and marginal utility. When I talk about total utility, I am referring to the satisfaction that comes from consuming the entire product. The marginal utility, on the other hand, is related to the satisfaction derived from consuming the last (i.e., marginal) product. For example, the total utility of four apples is equal to the satisfaction a consumer feels after eating all of them. Meanwhile, the marginal utility of the fourth apple is equal to the change in satisfaction (increase or decrease) after eating the fourth apple compared to the third apple. In this case, a change in the total utility of all apples, or marginal utility, is as follows: MU = a change i n t ot al ut i l i t y ΔT U/a change i n quant i t y consumed Δ Q.

In this case, we can compare total utility (TU) and marginal utility (MU) by making the previously stated assumption that utility is measured in money. Thus, the utility of each certain product is shown in the Table 5.1. As product consumption increases, both total utility (TU) and marginal utility (MU) increase to maximum point and then begin to decrease. However, the marginal utility reaches its peak only at the start and then falls. Meanwhile, the total utility grows, and its maximum point coincides with the zero point of the marginal utility. The shape of the marginal utility curve is not accidental. A consumer typically appreciates the first units of the majority products more because they provide him with far greater satisfaction than the recently consumed products of the same type. How much money would you be willing to pay for not reducing your usual water consumption by one litre per week? It is unlikely that such a reduction in water consumption would force us to take some money out of wallet. However, imagine a dramatic situation in which water consumption is reduced by up to 10 L per week due to a water shortage. How much money would you be willing to spend to increase your water consumption by one litre? The less people have, the more they appreciate everything. Alternatively, the more people have, the less they appreciate the extra

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unit, i.e., during a period when the consumer’s taste does not change, each unit of the product consumed provides a decreasing marginal utility. This law holds true if the consumption of other products remains constant, i.e., there is no substitution effect. This law, however, must be applied with caution because there may be numerous exceptions. For example, the second ski lesson may be more beneficial than the first due to fewer falls and more enjoyment. However, as you take more lessons, the marginal utility should begin to diminish. The hundredth lesson of the season will be less satisfying than the ninety-ninth. Could we apply this law to money as well? It appears that by consistently receiving certain amounts of money, a person can acquire various products that should ensure consistent or even increasing satisfaction with the received income. Thus, we could claim that the law of diminishing marginal utility does not apply to money. But how does it work in practice? When a person begins to receive a fixed amount of money each month, he feels happy at first. However, receiving money becomes a common practice or procedure over time, and a person gets used to it. After a while, a person who is constantly receiving the same amount of money becomes less happy. He is gradually developing a sense of dissatisfaction. If the amount of money received remains constant, the dissatisfaction grows with each subsequent receipt. Therefore, we must recognise that the law of diminishing marginal utility can also be applied to money. Let us compare the marginal utility of two different commodities. These goods or services may provide equal satisfaction or be equally beneficial, but the individual must spend more money on one product than on the other. As a result, the marginal utility per unit of money spent by this individual, such as the dollar, is gradually formed. Therefore, in order to maximise the total utility obtained by using all goods or services, the individual must allocate costs to the goods or services purchased in such a way that each dollar spent on the last unit of a given product would give him equal marginal utility. It can be expressed in the following formula: MU1/ P1 = MU2/ P2 = MU3/ P3 = MU n/ P n,

(5.3)

where n means types of the selected goods. In such a case, the individual does not seek to purchase one more product or service at the expense of another. It is a position of equilibrium. The total utility is at its highest. Marxist political economy strongly opposes both marginal productivity and marginal utility theories. Marginal utility theory is referred to as “subjective” because it asserts that the level of wages of workers is determined by the payment level of the marginal worker. If there are several product units of equal utility, the value of each unit may not exceed the value of the unit that meets the least necessary demand. As a result, “a marginal worker” is a unit of labour for which there is a minimum demand. His wage therefore determines the wage of all workers. Because the value of the labour product produced by each worker, except “the marginal worker”, exceeds the value generated by the latter, and each worker’s

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remuneration corresponds to the minimum value of “the marginal worker’s” labour product, there is a significant difference between the value of the total product produced by all workers and their aggregate wage. According to the marginal productivity theory, this difference goes to the capitalist as “remuneration for the capital”. According to Marxists, the marginal productivity theory must justify a high profit level for capitalists and a low level of wages for workers. Therefore, Marxists argue that this theory attempts to force workers to bear responsibility for low wages because the increase of their number lowers the wage level of “the marginal worker”. Marxists see many contradictions at this point, which make the claims of the marginal productivity theory “unjustified and fall apart from the smallest contact with reality” (Politin˙e ekonomija, 1974, p. 157). First of all, it is wrong that capital, embodied in capital goods, creates value on its own because the only source of value is labour. In fact, this claim could be accepted, but neither the theory of marginal utility nor the theory of marginal productivity contains any statement about capital that creates value on its own. According to these theories, value is only created in relation to labour power; meanwhile, total productivity or utility changes only as a result of a change in the variable factor. In terms of J. B. Say’s “Trinity Formula”, it presents an income distribution theory in which the owner of each production factor can accumulate the income corresponding to the factor’s contribution to the production process. Here, the capital owner receives an income proportional to the extent to which his capital participates in the production process; thus, it appears that the capital generates income on its own. However, later in the work, it is stated that a businessman or capitalist acts as an intermediary and organises the “cooperation” of industry, land, and capital in the field of production. He hires labour power known as “production services” and pays a reasonable price for these services, which is determined by the supply and demand for these services. He resolves the fundamental conflict of interest between labour and capital by acting as an intermediary in this manner (Say, 1803). Moreover, Marxists argue that another unjustified statement of this theory is that productivity is declining through additional worker employment because it ignores the development of productive forces and technological advancement, both of which usually involve new labour power in production. Labour productivity is increased rather than decreased as a result of technological advancement. This criticism could certainly be accepted under one condition: when production changes and is analysed over time, when two factors of production change (labour power and capital volume), or when a third factor of production (production technology) begins to change over time. However, marginal productivity and utility theories are based on the short term, during which only one production factor—labour power or its quantity—changes while the volume of capital remains constant. Therefore, technological advancement is neither assessed in the short term, nor in the law of the tendency of the average rate of profit to fall presented by K. Marx, which explains the third scenario of the capitalism’s collapse. It should be noted that the latter law of the tendency of the rate of profit to fall provides for a constant value of added value m/v, which is always equal to 100% in K. Marx’s “tendency”. However, such a constant value of the rate of surplus value can exist only over a long period of time when the organic composition

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of capital changes, i.e., only the amount of labour and capital changes. If we assess technological advancement, then the third factor (production technology), which is typical only to a very long period of time, also changes. We cannot apply marginal productivity or marginal utility theories, as well as the law of the rate of profit to fall at this time because technological advancement in developing new technologies significantly increases labour productivity, the level of which now depends on the level of technology rather than the mass of capital. During this period, rising labour productivity raises the average rate of surplus value, resulting in higher exploitation rates. Thus, the criticism of Marxists in respect of marginal productivity and marginal utility theories is unjustified because it is based on assumptions that are beyond the scope of these theories. Finally, Marxists have also criticised theories of diminishing marginal productivity and utility because they used conditions of “perfect” or “pure” competition to prove claims that contradict reality where large capitalist associations rule. In reality, such associations frequently distort competition and have a significant impact on real marginal utility or marginal productivity. However, these laws are based on the same conditions as “pure competition”, which is the foundation of K. Marx’s entire theory of surplus value. Let us say that the average rate of profit presented by K. Marx is formed as capital subsides in the branches with low rate of profit, which increases in these branches, and as capital flows into the branches with high rate of profit, the rate decreases in these branches. As a result of the capital’s spontaneous redistribution between different sectors of production, the average rate of profit remains similar. What is it if not “free” or “pure” competition? Therefore, we should note that if we do not derive clear conditions and constraints that make the objective laws of the economy more understandable and clearer in economic theory, we will be confronted with various phenomena in reality that affect one or more economic laws on the contrary, and we will eventually become confused in interpreting them.

5.2 Principles of Communist Society 5.2.1 “To Each According to His Needs” Despite the fact that the classics of Marxism repeatedly criticised both theories of “diminishing marginal utility” and “marginal productivity”, they both served as a unique foundation for the development of economic theory of communism and the implementation of distribution principle “according to one’s needs”. How to explain it? After all, both “diminishing marginal utility” and “marginal productivity” are scientific terms of classical economic theory, i.e., laws that are difficult, if not impossible, to deny, even to great “theorists” like Marxists. Let us examine the following example:

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Many of us had the opportunity to spend our vacation in Turkey or Egypt, staying in high-end (four or five-star) hotels and taking advantage of a popular “all inclusive” (AI) service programme. This programme stipulates that a specific hotel client (the participant in this programme) is entitled to eat as much food and use as many services as he desires in this hotel for the remainder of his stay, or to the extent determined by his needs and imagination. Such clients do not need to carry a wallet with them at all times. To benefit from this programme, clients have to wear a special identification mark (usually, a special wristband) to allow hotel personnel to recognise these clients and provide them with the products or services they want. This programme applies to the vast majority of the hotel’s food products and services; however, some products or services are not included (the client has to pay for them). If, on the other hand, the client decides to purchase a special “ultra all inclusive” (UAI) programme, the range of products (especially beverages) and services significantly expands, and the latter may feel like “a king” in this hotel. Why did I provide this particular example? In principle, this could be a kind of “model of communist society” that is at least partially similar to it in a given case. In fact, packages of this hotel programme are sold to anyone who wants them for a fixed amount of money. They estimate that the client typically consumes a limited amount of goods and services that usually do not exceed this fixed amount of money. There are, of course, exceptions when individual clients consume more food (especially expensive beverages). However, it is not typical of the vast majority of hotel clients in general. The price of the programme package is based on the “total costs that are necessary on average” to provide this package, which are determined by the average annual experience of the hotel and consumption habits of its clients. How are the total costs that are necessary on average determined? Each person, regardless of gender or physical build, can only consume a limited number of food products and use a limited number of services. This amount is determined by his physical characteristics, such as body mass, appetite, health, and so on, as well as time parameters, such as the duration and time of service use. In this case, the law of diminishing marginal utility states that the more different products a person consumes, the less pleasure he derives from continuing to use such products. He may already be full of them! The same can be said about services. A person has only 24 h in a day to use the services provided, but he cannot use several services at the same time. Even if he tries, he will most likely not feel the pleasure that he normally gets from using them separately. As a result, if we broaden this overall range of products and services by including clothing, footwear, modes of transportation, a larger residential area, and other items, the person should feel comfortable and use all of these goods rationally, i.e., moderately or only to the extent that he requires them at the time. Therefore, the development of this moderate consumption of social products must be directed towards the education of a “new member of communist society”, in which this “member” will use the products made by society rationally, i.e., “according to his actual needs”. Thus, the communist society must develop a sufficient number of products and services of all types required to meet the “rational” needs of its members. Marxists believe that everything happens in the following order:

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All the active members of society, each acting according to his or her ability, some of whom are initially forced, but later acting together, begin to produce pre-planned quantities of all the products and services that society requires. This creative process later becomes a habit, and its general result forms a total social product created by the collective labour of all members of society. This product is similar to a large “pie” that is not meant to be traded, but rather consumed by the same members of society. Therefore, all of the products within this “pie” from which it is made are not sold, but are instead redistributed to all of its developers—to each according to his or her individual needs. Unlike in capitalism, where there are “real” commodity-monetary relations by content rather than just form, and where, during the commodity exchange under the law of value, social products constantly change their owners, making some people richer than others, products do not change ownership in communism because they are developed by everyone and can be consumed by everyone. By giving an example of “all inclusive” hotel, I wanted to illustrate communist society by demonstrating that all residents of this hotel who initially invested their money in services provided by the entire hotel, i.e., by paying for the joint development of the hotel’s “pie”, can later use it, i.e., to share this “pie” according to their individual needs. It is possible that the needs of some residents are greater than others, but the overall “pie” is so large that, to the extent of the entire society, these differences gradually fade and become less visible. Therefore, all hotel residents can walk, eat, drink, entertain, and use other services without carrying any money. According to communist distribution, “differences in various activities or labour power specifics do not imply any inequality and do not confer any privileges in terms of ownership and consumption” (Marx & Engels, 1955, p. 542). Under these conditions, only the rational needs of a person become the primary objective of communist distribution. Their research and accounting, as well as caring for consumer satisfaction and production planning, become the primary objectives of special planning bodies of the communist society. The transition to distribution according to the needs is not some kind of revolutionary act. According to Marxists, it may become possible and even unavoidable, when a sufficient quantity of consumer goods is produced to meet society’s needs and labour becomes a vital need of society. In order to draw attention to this matter, F. Engels wrote that “distribution based solely on economic considerations will be governed by production interests; meanwhile, production development will be primarily driven by a mode of distribution that enables all members of society to develop, maintain, and express their abilities” (Marx & Engels, 1961, p. 206). Meanwhile, K. Marx described this principle as follows: “In a higher phase of communist society, after the enslaving subordination of the individual to the division of labour, and therewith also the antithesis between mental and physical labour, has vanished; after labour has become not only a means of life but life’s prime want; after the productive forces have also increased with the all-round development of the individual, and all the springs of cooperative wealth flow more abundantly—only then can the narrow horizon of bourgeois right be crossed in its entirety and society

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inscribe on its banners: From each according to his ability, to each according to his needs!” (Marx, 1970). From the very beginning, many economists considered this principle of communist distribution as unattainable. They wonder if society can fully meet the needs of a person whose greed and desire for accumulation of property is limitless. What if everyone asks for ten pianos, palaces, or cars? V. Lenin ridiculed attempts to distort scientific understanding of distribution in the higher phase of communism, demonstrating that communism neither provides for the current level of labour productivity nor for the current citizen, who could waste public property and demand impossible things. The reasonable needs of a person are not limitless during every period of time. There are certain, scientifically justified nutritional standards, whose violation is harmful to the body. There are also reasonable limits in terms of providing beautiful and comfortable clothing and footwear, an apartment, etc. It is possible to meet these needs completely with the development of production. The basic vital needs of a person will be fully met in the higher phase of communism. But the cultural and creative needs of a person, his attempt to achieve the new heights of nature are limitless. When some needs are met, higher needs emerge. It will encourage the continuous increase and improvement of public production. According to Marxists, the development of a material-technical basis of communism, the transition to unified communist property, and the future victories of communist labour will pave the way for the gradual implementation of this distribution principle. It can only be implemented if certain preconditions are met. First of all, the productive forces of society must be increased to ensure an abundance of material goods; second of all, labour must become the primal, vital requirement of everyone; and third of all, an individual must be educated to become a new person. According to Marxists, any attempt to introduce a communist principle of distribution can only jeopardise the development of a new society as long as these conditions are not met. The preconditions for the transition to the principle of communist distribution gradually mature under the conditions of socialism. Communism does not occur as a result of the ascetic restriction of working people’s needs and a low standard of living, but rather as a result of a comprehensive development of these needs and a constant increase in the level of people’s well-being. This goal is achieved through the principle of socialist distribution by work results, which in fact motivates workers to increase and improve production, promotes upskilling, and contributes to the transformation of labour into a first vital human need. It is necessary to distinguish between the historical circumstances that gave rise to the concept of “demand” and its original historical meaning—the consumer-oriented interpretation of this concept and its explanation in socialist ideology. Historically, communist society was understood as a society in which people’s equality in all aspects of their lives would prevail. The classics of Marxism did not want to think about the possibility that this society would create new forms of social and economic inequality, as well as cause them on a large scale. All evil has always been associated only with private property. Because the latter was practically doomed to extinction, all evil in human life had to vanish in the same primitive way that a lack of food,

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clothing, and shelter did. It was expected that all basic human needs would be met in the long run due to the abundance of goods produced, i.e., everything would always be produced “on demand”. However, the abundance of material goods is only a relative, historically defined concept. Despite what was thought over the past centuries, it was later achieved in Soviet society. There were almost no people who were literally starving, and only a few beggars and homeless people. Therefore, it was attempted to implement the primary principle of communist distribution in this manner. However, by meeting people’s basic needs, a different consumer perception of abundance and a new perception of the principle “according to one’s needs” have emerged over time. This principle became understood as satisfying all the possible desires of any modern people. These desires have grown so strong that even official socialist ideology has pushed the implementation of this principle into the uncertain future. The pioneers of Marxist communism could hardly believe that refrigerators and televisions would become necessities, or that a car would become a common mode of transportation. The modern layperson, on the other hand, does not think of communism without a flat in a multi-apartment building with all the amenities, without a TV, a refrigerator, a personal car, or a summer cottage. What if one person prefers to eat caviar with tablespoons, another prefers to fly to new resorts every week, and a third prefers to live in a 20-room apartment? The official socialist ideology recognised the danger lurking in such a careless interpretation of the statement of Marxism classics, and presented its interpretation. It began talking about rational needs that would be regulated and controlled by society. All of this became a hidden form of expression of the actual situation showing that there is the possibility of not meeting all of the needs of every person in a communist society. In fact, the social status of a particular individual determines whether or not his or her needs will be met. Therefore, the practical implementation of the slogan “To each according to his needs” becomes a principle of “To each according to his social status” in reality. It is the social status of people in society that determines the valid principle of the distribution of material goods. This principle is only “fair” in a socialist ideological sense when social and economic inequality of people is created under the conditions of social hierarchy of that time, which was not smaller than, and in some cases even exceeded, the inequality of systems of all other societies. However, the official socialist ideology, explaining the matter of needs, is not far from the truth. The truth is that there are two concepts of the needs: subjective (or psychological) human needs and objective (or sociological) needs. In the second case, not every desire of a person may be considered a need, but only those desires that are recognised as such by the social environment. It means that his needs can be determined only at a certain level of his social hierarchy, and consumption level of a certain individual can be met only at this level recognised by society. Having on demand means having according to this rate; meanwhile, not having on demand means a failure to achieve this rate or having too much of it. The term “not to have according to one’s needs” means a situation in which a person is not provided what he or she needs; meanwhile, the phrase “not according to one’s needs” means a situation in which a person has more than he or she needs.

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In addition, it is vital to distinguish between the need for what society is obligated to provide for a specific individual and the need that is considered natural under certain justified rules of this society. For example, based on the principles that existed in practice in socialist states, three square metres of living area for an individual of lower and middle social classes were considered sufficient to meet the needs of this individual in the subjective sense; nevertheless, the socialist society had already evolved the need (in the second sociological sense) for this individual to have a separate room for each adult family member. If we take into account all the possible elements of life, we can determine these two limits of “reasonable” needs for each stratum of the population, where the actual situation of people is constantly fluctuating. Then we must acknowledge that the aim of the socialist society was to keep the population’s standard of living within these limits in one way or another. Such principle, which appears to be somewhat selective yet accepts the ongoing growth in the needs of society, is typical of all socialist states. It is based on the understanding that these growing needs of members of society have strictly defined limits and are finite in size. The finite size is determined by the social education of a person, i.e., the concept of a new human being. A representative of communist society will only wish to use as much as he needs, not more or less, and he will be aware enough to comprehend it. It does mean that the needs of this individual will remain constant because they will constantly grow, increase and develop, but only within certain frames. For the most economists, sociologists, and philosophers, the principle of communism “From each according to his ability, to each according to his needs!” appears completely utopian. They frequently assume that this principle is humane but unrealistic. Some of them believe that it is harmful because it deprives the mankind of stimulus to develop. In addition, the greatest rejection includes the second component of the principle of communism: “To each according to his needs”. This situation appears to be completely impossible because the needs of the people can be limitless and none of the developed societies can fully satisfy them. Many critics of this principle of communist distribution are constantly trying to prove its utopianism and pointlessness. But the most incredible thing is that even those who believe that communist ideas are correct are unable to explain how it is possible to satisfy the desires of any member of society with limited resources. Can “distribution according to the needs” be progressive and encourage the development of society? If we reject the communist interpretation of this matter, which does not recognise private ownership and only allows for public ownership of capital goods, we can find plenty of evidence that even in a market economy, this principle can be useful and even significantly contribute to the development of the entire society and to the economic stability of the country. There is a clear lack of all public programmes aimed to meet basic social needs and create a dignified basis of life for every human being. The developed support programmes only meet people’s needs to the extent that the state believes it is possible with its own resources. However, their main characteristic is that support funds granted through governmental programmes are provided not in exchange for a labour power or its amount, but simply because an individual is a member of society as

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a whole. In the long run, as society’s well-being improves, the benefit received by citizens of the entire society, i.e., not on the basis of an equivalent exchange, increases and can eventually reach the level required to fully ensure a decent lifestyle of for members of society. This principle of distribution, which implementation was thought to be possible only under communist conditions, is now increasingly applied in certain capitalist countries. There are many successful enterprises, which, in addition to state-established support programmes, provide their workers with a comprehensive range of incentives free of charge. They include trainings during working hours at the enterprise’s expense to train workers on specific topics, the knowledge of which is critical to the enterprise’s success, provision of cheaper or free meals at the enterprise, provision of subsidies for the purchase of an apartment or guarantees for a soft housing loan, the accommodation of workers and their family members in the recreational zones of the enterprise at a lower fee or free of charge, etc. Private enterprises that are working hard towards this direction have calculated that all of their privileges might cost up to 30% of the total wage fund of the enterprise. However, they are still trying to use these support measures. It turns out to be more profitable than raising wages because the enterprise’s privileges provide workers a sense of sharing destiny with the enterprise. When a worker receives a higher wage, he believes he has earned it by his own work; therefore, he nearly never feels grateful to the enterprise. However, he is grateful for the enterprise’s privileges because he knows that the enterprise is not obliged to grant them. In addition, taxes also encourage it to do so—if the wage is raised, so are the taxes collected by the state. It does not have to pay any additional taxes if it provides services to workers. This sense of belonging to the enterprise’s interests becomes especially crucial when it is nearly impossible to separate an individual worker’s performance outcomes from the enterprise’s results. What motivates enterprises to provide support outside the market laws? There are two groups of reasons and both of which are linked to the ever-increasing acceleration of productive forces resulting from the scientific and technical revolution. Firstly, modern production requires an increasing number of highly qualified, healthy and loyal workers, which enterprises cannot grow. Only society has the ability to prepare them. Market laws inevitably lead to an increasing exclusion of society, but healthy, cultured, and educated people cannot exist and flourish in poverty, while remaining loyal to society. Therefore, the share of social assistance provided by developed European countries in recent decades has increased (up to 40–50% of GDP) and has been directed towards meeting the needs of free education, health care, and culture. However, many economists say that free product is seldom appreciated. They believe that it is better to pay higher wages for people so that they may get the necessary benefits for their own money. However, this opinion is not very popular in international practice. Secondly, mass production, which is the foundation of the modern economy, requires a mass consumer and a growing middle class. Billionaires and millionaires cannot be the basis for mass demand in order to meet mass production. The CEO of a large corporation, whose revenue is equivalent to that of a thousand ordinary workers, cannot afford to buy and consume such volume of products that would be

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equal to the needs of all of these workers. It is necessary to redistribute revenue through progressive income tax and, after receiving additional funds, to develop a variety of support programmes to assist poor families. Capitalists, as a class that dictates the laws of society, are forced to agree to such compromises. Although such compromises are unpleasant to each of them, they are simply necessary for all capitalists because they are the only option.

5.2.2 Economic Basis for the Principle of Distribution “According to One’s Needs” The programmes of the communist parties in the socialist countries have used the following description of communist society: “Communism is a classless social system with one single form of public ownership of the means of production and full social equality of all members of society; under it, the all-round development of people will be accompanied by the growth of the productive forces through continuous progress in science and technology; all sources of public wealth will gush forth abundantly, and the great principle ‘From each according to his ability, to each according to his needs,’ will be implemented” (The CPSU’s tasks in perfecting…, 1998). How does one move from socialism to communism? Marxist theory holds that these are not two distinct modes of production, but rather two stages of the same communist mode of production. Moving to a higher phase of communist society does not require a social revolution or the abolition of any class rule. There is no class that would oppose the transition to communism under socialist conditions. The economic laws that exist under socialist conditions are the laws of its transformation into communism. Thus, the transition from socialism to communism is a gradual transformation rather than a social revolution. Because the development of socialism into communism occurs within the same framework of communist, social, and economic formation, it differs fundamentally from the transformation of capitalism into socialism. What are the stages of this transformation? Stage one. If socialism emerges from capitalism through its revolutionary transformation, then communism occurs by itself, based on the development and strengthening of socialism. The transition to socialism presupposes the revolutionary renunciation of capitalism, as well as the dissolution and liquidation of its grounds. The transition to communism is implemented by strengthening and further developing the basic principles of socialism. Stage two. The process of formation of communism is completed not by the conflict between classes and nations, but by further developing and strengthening the cooperation among friendly classes and nations. The transition from socialism to communism occurs without the use of exploited classes, where all members of society—workers, peasants, intelligentsia, all nations and ethnicities—have a vital

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interest in and consciously pursue the victory of communism. It goes without saying that the construction of communism takes place through the further development of democratic methods, the improvement of social relations, the disappearance of old and the appearance of new forms of social life. The third stage involves a gradual transition from socialism to communism. In his book “The Poverty of Philosophy”, K. Marx noted that when there are no more classes and class antagonisms that social evolutions will cease to be political revolutions. Developing this idea, Lenin wrote: “socialism must inevitably evolve gradually into communism” (Lenin, 1964). The evolution of socialism into communism is a gradual process of development that occurs without political and social revolutions.

5.2.3 The Theory of Scientific Communism According to Marxist theory, communist society is founded on the principles of “scientific communism” and embodies the centuries-old dreams of humanity about the most ideal social system with a plethora of things and means of consumption (both material and spiritual), the best conditions for citizens’ personal development, and the best interpersonal relationships. In short, communism is attributed to everything that can be imagined in the consumer’s consciousness as the highest good in human life. However, moving from the first stage of communism to the second stage is possible only in the presence of mature socialism, not from any stage of the emerging new social system. Society must have already entered this stage of development, which, in Lenin’s words, marks the transition “from completely victorious and consolidated socialism to complete communism” (Lenin, n.d., p. 143). The theory of scientific communism defines the complete victory of socialism as follows: in the economic sphere, the consolidation of socialist property in the town and country, its transformation into indivisible and dominant property; the creation of a developed material and technical base of society, and the constant increase in the rate of growth of the scientifically managed economy; in the social field, the abolition of exploiter classes and all forms of human oppression, the establishment of a society of all working people—workers, cooperated peasants, and working intelligentsia—and the social and political unity of society as a whole; in the political sphere, the transformation of the proletariat’s dictatorship state on a national scale, the transformation of proletarian democracy into a national socialist democracy; in the ideological field, victory of socialist ideology over bourgeois ideology, consolidation of societal ideological unity based on Marxism-Leninism; in the field of national relations, after the abolition of national oppression and inequality of nations, respect for de facto equality between nations,

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fraternal friendship between nations, triumph of the principles of proletarian internationalism, universal prosperity and rapprochement of nations; in terms of people’s living conditions, providing all citizens with sustainable material well-being and the opportunity to enjoy all the socialist economic and cultural benefits. Why is scientific communism referred to as scientific theory or science? Marxists argue that science cannot be defined as anything that is inaccessible and unclear as to how to obtain it. Without a clear idea of how to achieve it, the ultimate goal is pure utopia, not science. Capitalism, for example, lacks its own scientific political theory, with the exception of Marxist theory, which examines capitalism in political terms. Everything else is purely economic theories that explain the operating principles of the capitalist market and the economic patterns of capitalism’s development. They have nothing to do with the political system or the foundations of private property. Therefore, here, the scholarliness of scientific communism is explained by the fact that it not only refers to society’s ultimate goal—the creation of a communist society—but also indicates how to achieve it. The path to communism is clear enough—through proletarian revolution and socialism. Socialism gradually “matures” throughout its development, eventually becoming “mature” and forming the material-technical base of communism, which is the economic foundation of communist society. Later, the comparative weight of a share of public funds in the newly created public labour product is increased. Despite the raising worker wages, a growing share of the product is distributed through public funds, i.e., not “according to one’s contribution” but “according to one’s needs”. Initially, only health protection, education, and culture are funded through these funds; however, as time goes on, the list of these funds expands (Kotelnikov, 2019). It means that more and more products and services are becoming available for free. Let us examine the following example of how it will happen: The 22nd Congress of the CPSU, also known as the “Congress of Builders of Communism”, held in 1961, outlined the very essence of communism. The amazing opportunities for consumers are the main, most comprehensive, and most appealing part of its description. If, in 1920, the management of the socialist state completely rejected the old urban lifestyle as a “foreign” to socialist morality, it has now sought to go beyond the standard of living in the richest country of bourgeoisie (“to catch up with and outrun America!”). Therefore, people of the Soviet country were promised to produce “an abundance of material and cultural goods” and to ensure “the highest standard of living compared to any capitalist country” by 1980. It is estimated that agricultural production will increase 3.5 times, resulting in universal access to high-quality food and a sense of fullness (due to the automation of production, mechanisation, and electrification, as well as achievements in chemistry, microbiology, and other sciences). By increasing the amount of national income of the USSR by five times and the actual income of the population by 3.5 times, the growth of industrial production had to exceed the growth of industry in the USA by 6 times. It was planned to abolish income tax, provide free public transportation (except

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for taxis), and provide residents with free apartments and houses by providing each citizen with an area of at least 20 square metres, thereby solving the housing problem. Every family (including newlyweds) should have their own comfortable apartment with free public utilities. Free meals in public canteens, free steam baths, and free and publicly available medicine and education should be implemented. The erasure of distinctions between rural and urban life should be ensured (i.e., the transformation of countryside into urban-type settlements would take place) (Fokin, 2017, p. 44). The self-government reform would be carried on. “The bodies that currently belong to the state and are in charge of planning and accounting, economic management, and cultural development will lose their political nature and become institutions of public self-government. Communist society will be a well-organised community of working people. There will be uniform, universally accepted communist concentration camp rules, adherence to which will become an inner need and habit of all people” (Programma KPSS…, 1974). Most of these promises were later abandoned, removed from all textbooks of scientific communism, and, as usual, became uncertain. It means that all plans for the construction of communism have become similar to declarations; therefore, they have always been consistent with the state’s aspirations and available capabilities. That’s all of their science! Critics of communism generally claim that the Marxists deceived people, refusing to fulfil their aspirations after gaining power. However, for some reason, they completely forgot that the majority of those who gained power in the new society had nothing to do with Marxism; thus, they are not and cannot be held accountable for the carefree promises of the founders of their accepted ideology. At the same time, it should be noted that communist societies were created in accordance with a theoretically approved project of “scientific communism”, although this project has nothing to do with science and the creators of the new society either knew nothing about it or had only heard a little about it. There is no doubt that only the most beautiful people’s dreams of what was best for them, namely for them and no-one else, were implemented in newly created communist societies! A new lifestyle that is unique to them gradually emerges in the newly formed communist countries. We must emphasise an important aspect here: these great desires and dreams that become reality bring with them consequences that the authors of these projects and dreamers are unaware of, issues they are attempting to avoid, and topics they cannot even allow themselves to consider. In general, it is understandable because the best intentions cannot result in the worst outcomes! At first glance, this illusion appears strange because people have known for centuries that the road to hell was built with good intentions. However, crowd psychology has different laws than every single individual.

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5.2.4 “Disposable Time” as the Basis of Communist Society If we accept the assumption that an advanced communist society is capable of producing all of the necessary material values and services for this society, which should be enough to meet the “constantly increasing” needs of its members, then we should also discuss how much time should be devoted to that process. Because the number of society members in most countries is only slightly increasing, the term “constantly increasing needs” refers to the nomenklatura of these goods rather than the quantitative expression of all the necessary goods. However, no matter how much we broaden the nomenklatura of these products, we will eventually face the limitation of society’s consumption possibilities. After all, a single member of society cannot begin consuming all products at the same time! He will most likely refuse to consume the fourth, fifth, or sixth product after consuming the first, second, and third products. Even if a woman desires more dresses, she must recognise that having all of the dresses in the world at the same time is probably impossible! She must choose rationally and only the most appropriate ones by leaving aside all others, despite their availability! What will be the outcome of this increase in labour productivity if the communist economy allows for the creation of all the products and services required by society to meet its needs over a clearly defined period of time? The answer may come as a surprise, but it is a disposable time! How should we interpret the term “disposable time” in this context? According to Marxists, disposable time can be defined as the time that remains after subtracting the consciously occupied time from the total time, i.e., all the available time (e.g., working time, commute time, time spent on household chores or meeting physiological needs such as sleep, nutrition, etc.). A person may spend the remainder of his disposable time as he deems appropriate, depending on his cultural level, material income, and physical condition. A part of society believes that the availability of disposable time is a key condition for social development. The more disposable time members of society have, the more time society can devote to the development of production and culture, and the higher level of social advancement the society achieves. K. Marx wrote that “The measure of wealth is then not any longer, in any way, labour time, but rather disposable time” (Marx & Engels, 1968, p. 217). The issue of disposable time or leisure time is closely related to the issue of personal development in society (Kydland & Prescott, 1982). It is necessary for a person to participate in the social and political life of all society during his leisure time, as well as to perform additional creative work in the fields of technology, science, and art, to develop his spiritual and physical abilities, and to devote this leisure time to recreation and entertainment. According to K. Marx, “Disposable time reflects both leisure time and, of course, time devoted to a higher level of entertainment, and whoever has it becomes a completely different subject of society” (Marx & Engels, 1968, p. 221).

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The disposable time available to people from various social groups differed in scope and structure at various stages of society’s development. For example, slaves and feudal serfs had almost no leisure time in slave and feudal societies. It was the prerogative of the ruling classes due to the unequal division of labour. According to Marxists, a similar situation existed in bourgeois society, though new opportunities for the formation of workers’ leisure time arose as productive forces developed. It became a reality for workers in their fight to reduce the length of their working day. Thus, leisure time became a significant achievement of the working class. One of the most important goals of shaping social and economic policies in communist society is to increase disposable time for all members of society. It increased, first of all, as a result of increased labour productivity and a more balanced distribution of labour among all members of society; second of all, as a result of shorter commute time, faster and more efficient operations in performing household chores, caring for children, etc. The more a communist society develops, the more disposable time its members will have. The social significance of leisure time is determined by its structure, i.e., to what extent this leisure time is filled with activities important for the life and development of society, whether it includes elements such as creative work, social-political activities, science, level of education and culture, art, sports, games, and whether it combines passive recreation. The nature of leisure time basically reflects each individual’s cultural level and qualifications, physical condition and mood, and thus influences how efficiently he uses his labour time. If a growing proportion of leisure time is devoted to activities that contribute to a worker’s personal development, it allows for greater use of available technologies and increased labour productivity. This is why K. Marx referred to leisure time as the most productive force. Speaking about the relationship between labour time, labour productivity, and leisure time, K. Marx wrote that “The saving of labour time is equal to an increase of free time, i.e., time for the full development of the individual, which in turn reacts back upon the productive power of labour as itself the greatest productive power” (Marx & Engels, 1968, p. 221). Such a view of K. Marx could be explained in part by the so-called Engel curves, named after the nineteenth-century German statistician Ernst Engel (1821–1896). According to Engel’s law, as consumers’ incomes rise, their consumption habits change noticeably. As consumers become wealthier, they are less likely to purchase lower-quality goods, preferring instead to purchase higher-quality goods from wellknown and widely recognised producers. As income rises, consumers devote less of their income to food and everyday goods, and they begin to purchase more luxury items. Therefore, in a consumer society where the standard of living is constantly rising, there is a noticeable satiation of everyday consumer goods, resulting in a decrease in their consumption increment. At the same time, the consumption of luxury products is starting to increase even more, but the growth of their consumption level has certain limits. In fact, defining these limits is extremely difficult because new and modern technologies are constantly emerging in developed societies, resulting in ever newer types of products. These technologies promote the development of new

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consumption habits as well as an increase in demand for their products. Meanwhile, the growth rates of this demand cannot be clearly defined, just as the growth potential of this production cannot be known. Therefore, it is very irresponsible to assert unambiguously that once society reaches a certain level of development, production will require less and less time to meet current consumer demand. However, when it comes to the sphere of services, it should be noted that, according to the E. Engel’s law, the demand for new services grows in tandem with the rise in the society’s standard of living and the increasing satiation with material goods. It primarily applies to the entertainment and sports industries, as well as various forms of leisure. However, if we look at it all through the prism of “disposable time”, as described by K. Marx, he was probably correct in terms of the growth of this demand. What did the authors of this concept overlook? Why should we blame the classics of communism? • The planned economy does not ensure the abundance of products because competition between enterprises is eliminated; therefore, • the “producer market” is formed, which does not take consumer demand into account and • limits the operation of the law of value, and thus prices do not correspond to the real value of the products, so • production prices are “fixed”, resulting in a production “deficit” and, at the same time, • incorrect distribution of production, which does not ensure reproduction conditions of production, and then • production ceases to grow and “fixed prices” limit foreign trade; as a result, labour productivity and product quality fall, and the economy gradually stagnates.

Chapter 6

Economic Contradictions of Socialism

According to historical materialism, productive forces and relations of production are evolving in very different ways, that’s the truth. At the same time, it states that productive forces typically develop faster; therefore, they outrun production relations by their dynamic of change. When production relations paralyse the development of productive forces and society as a whole, a revolution occurs that breaks the established production relations, rejects their outdated socio-economic forms, and creates new production relations corresponding to the changed productive forces. However, in the practice of socialist society, everything develops slightly differently than K. Marx predicted. Because production relations are changing at a faster rate, they frequently begin to outrun the development of productive forces. It also causes inconsistencies that are as painful for society as stated in K. Marx’s theory. Therefore, the logic of life forces it to alter its attitude towards the state as a political superstructure and introduce corrections on the theoretical dimension that do not exactly correspond to the classical Marxist understanding of the state. The attitude towards the state’s economy and politics, as well as objective and subjective factors that influence such perception, is changing. Marxism saw the political superstructure of the economic base in the state. Public policy is evaluated as a concentrated expression of its economy, without denying the policy’s potential retroactive effect on the state’s economic base. However, in the practice of socialism, politics is no longer a reflection of the current economic situation, but rather a force that initiates one or more economic processes and serves as the driving force of the entire state’s economic development. In social life, a subjective attitude towards societal development and an exaltation of the active role of administration begin prevail. A new socialist mode of production, which is mainly based on public funding and administration of all production processes, intrinsically eliminates the material stimuli for efficient farming. A suffocating state tax policy forcefully eliminates competing economic players from public life. Socialist practice does not require evidence of the progressive functioning of new forms of farming, manifested through active increase in production efficiency. At the © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_6

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same time, it loses its ability to be a criterion of truth; therefore, it cannot actively correct attitudes towards state governance. All of it creates new contradictions that are unique to the socialist and planned economies, halting the development of their productive forces and widening their gap from the production relations that the socialist administration is constantly “improving”. Let us reveal these contradictions in greater depth.

6.1 First Economic Contradiction of Socialism 6.1.1 The Concept of Labour Exploitation in Socialism The Labour Theory of Value and the Concept of Exploitation were examined in the works of many authors, such as (Cohen, 1979; Godels, 1996; Skillman, 1996). As previously stated, simple reproduction in any of society’s production units is expressed in the formula c + v + m = W, where c represents the value of the main funds used per year, v represents the value of labour power, m represents the surplus value, and W represents the annual production value of a certain production unit. Because capital goods are owned by a capitalist, only he is interested in their restoration. Capital goods c are restored to the same extent; therefore, wages of workers v remain unchanged, and the surplus value is completely misappropriated by capitalists. Thus, the production value of the production unit remains constant year after year. However, in such a case, capitalist production does not develop and eventually stagnates. Because the surplus value does not change or grow, it does not satisfy the capitalists. Capitalist production requires expanded reproduction in order to develop. In order to expand production, capitalists are forced to capitalise a portion of their surplus value m at the end of the current year (i.e., to invest it in the development of capital goods), thereby reducing their personal consumption. Thus, m = m a + m k , where m a is a part of surplus value for personal consumption, and m k is a part of surplus value for capitalisation. The capitalised part of the surplus value is used to purchase additional machinery and more labour power m k = Δc + Δv. The expanded reproduction in any of the public production units is then expressed in the following formula before the start of the second year: (c + Δc) + (v + Δv) + m a = W .

(6.1)

Here, we can see that the main capital has already increased in the second year— the capital goods have grown in size Δc and the number of workers has grown proportionally in the presence of constant organic composition of capital. It results in a larger mass of surplus value at the end of the second year. If a capitalist does it every year, capital concentration and accumulation will also increase.

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Classics of Marxism’s theory associated the degree of development of capitalist society with the degree of capitalist exploitation. By paying workers for a smaller portion of their working day, they increase surplus value, from which they later finance the larger portion of capitalist reproduction, and improve technologies. They also enable capitalists to increase labour productivity, which further reduces the necessary labour time. Thus, a vicious circle is formed, leading to a continuous increase in exploitation and greater exploitation of workers. Let us assume that, in this situation, the owner of capital goods is a capitalist, whose property has already been nationalised, i.e., he has already transferred all capital goods in order to control his workers. In such a case, the division of wages from the created surplus product indicates the degree of remuneration, while its inverse size indicates the degree of exploitation. If we use K. Marx’s formula, the degree of exploitation in socialist production will remain m' = m / v, where v is wage of the worker; however, m—the surplus value created by the worker, which in this case means the surplus product, will be much more complicated than under capitalist conditions. According to K. Marx, “the co-operative proceeds of labour are the total social product” in socialist society (Marx, 1970), it is produced within the necessary and surplus labour time. The value of the product produced during the necessary labour time restores the value of used capital goods (c) and labour power (v). K. Marx pointed out that the necessary items must first be deducted from the total social product to cover the consumed capital goods. If production volume does not change over time, these deductions remain constant. If the production volume remains constant, the costs of labour power remain constant as well. However, we are much more interested in the surplus product (m) produced during the surplus labour time. In a socialist community, both necessary and surplus products go to workers, but only a “reduced” portion, not the entire amount. During expanded reproduction, the surplus product (m) must be divided into two main parts: a portion of the surplus product for capitalisation (m k ), i.e., which is intended to expand production funds and hire more workers to service these funds (Δc + Δv) and consumption funds (m a ), which must be formed in accordance with specific production conditions and level of development. Therefore, the degree of “exploitation” of those workers in the socialist community can be expressed as follows: m' = m/v = (m k + m a )/v = (Δc + Δv + m a )/v

(6.2)

where Δc is a portion of surplus product for capitalisation, Δv is the additional labour costs required to service this capitalised portion of the product, and m a is the nationalised costs of personal consumption of the former capitalist who controlled the production, which has become public consumption funds. According to K. Marx’s theory of surplus value, the more developed a capitalist society becomes in the future, the more capitalist exploitation will grow, i.e., its degree will increase. If the working people take capital goods into their hands (remove private property) and nationalise them, the rising surplus value will fall into the hands of the same workers who created it. How will socialist society develop then? It must be

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understood that the more developed the socialist society becomes in the future, the more the result of the “socialist exploitation” (the surplus product) should increase. And only knowing that this product will later go to the hands of the same workers, who created it, allows us to claim that it will not be true exploitation because the workers will be able to use it. It means that “socialist exploitation” is a welcomed phenomenon; meanwhile, its growth determines the level of development of a socialist society! One of the most significant contradictions in K. Marx’s, F. Engels’, and later V. Lenin’s theory of the formation of socialist society and its subsequent transformation into communist society is manifested here. If we look at each of the components that make up a social surplus product separately, we can see that as consumption funds grow; the overall degree of exploitation m' = m / v in the socialist community tends to decrease significantly. It means that in the long run, as the “socialist exploitation” decreases, social production is doomed to stagnation. Let us examine it a little more closely. Because the surplus product m is divided into two main parts—the part of the surplus product for capitalisation (m k ) and consumption funds (m a ), it is necessary to clarify their structure. According to K. Marx, the increase in the value of production funds per year (Δc) can be expressed by the formula Δc = P + D, where P is the part that needs to be deducted from the surplus product to expand production, D is what is necessary to create reserves or insurance fund against accidents, natural disasters, etc. In turn, consumption funds m a should be expressed by the formula m a = MC + GN + UF, where MC is the total management costs of a socialist “syndicate” that is unrelated to specific production and tends to decrease; GN is what is spent to meet the general needs such as education, health care, sanatoriums, etc., and UF is funds for the unemployed, care for the poor people, etc. Let us say that the surplus labour time, through which an ever-increasing surplus product is created, is steadily increasing in both the socialist and capitalist communities. Later, a certain part of this product goes to various production funds. It is intended for the development of production, the creation of reserves (an insurance fund against accidents, natural disasters, etc.). The remainder of consumption funds (CF) should go to other consumption funds, such as (GN) and (UF), which, according to Marxists, have a clear tendency to grow after significant reductions in the management costs (state withers away). It means that a portion of the surplus value that previously went to capitalists now goes directly to workers via the growing consumption funds. By increasing, these funds increase workers’ actual income because “what the producer is deprived of in his capacity as a private individual benefits him directly or indirectly in his capacity as a member of society” (Marx, 1970). Therefore, regardless of how these consumption funds are distributed among workers (to each according to one’s contribution, in equal parts or according to one’s needs), they indirectly (via free education, health care, sanatoriums, kindergartens, etc.) and collectively increase income of workers and significantly reduce the degree of exploitation (the ratio between production funds and total labour income). The most important factor here is the attitude of the owners of capital goods (workers) to the growth of production funds in relation to consumption funds. In

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a capitalist society, “a handful of capitalists” controlled all the capital goods. They engaged in capitalist accumulation as owners of these capital goods because the greater the accumulation, the greater the surplus value. However, no matter how much the workers wished, they couldn’t pretend to the surplus product; therefore, they were not interested in its growth. K. Marx believed that a fall in the rate of profit was inevitable because increasing competition forces capitalists to increase efficiency and productivity by reducing a portion of labour power in the organic composition of capital and by employing more efficient technology, which would increase unemployment. Over time, the growing and deepening recession will eventually force workers to revolt and destroy the capitalist economic system. Workers, on the other hand, should become directly interested in the growth of the surplus product in socialism, particularly in the sphere of public consumption funds. In a community where “everyone” does everything, all the organisers of the work of the socialist “syndicate”, who receive the modest wage of the smallest worker, should always focus on the growth of these funds because social measures are later formed from them, ensuring the corresponding level of their well-being. They increase their income indirectly by increasing public funds. After all, large corporations that transfer large sums of money to the state have the right to claim the highest level of social assistance for their work collectives in the form of social measures. When their representatives are allowed to participate in the distribution of these social measures, they are especially active. However, the formation and development of the enterprise’s production funds is becoming increasingly unappealing to these workers’ representatives because it reduces the share of funds that enter public consumption funds. These “responsible servants of people” cannot directly benefit from the increase in production funds. A high wage does not always imply that people begin to live very well in domestic terms. People can be poor while earning a high wage or wealthy while earning a low wage. Wage level may rise, while living conditions may deteriorate. These are relative values that were not adequately assessed. A high wage is not always a good sign, and a low wage is not always a bad sign. On the contrary, in terms of civilisation advancement, an increase in the degree of exploitation and a decline in wages indicate a higher level of civilisation. It is an indicator of the increase in labour productivity. Although there is no direct relationship between these degrees and living conditions, large segments of society may begin to see the benefits of the socialist system in this situation and, having tried it out, are unable to refuse it voluntarily. Of course, in a socialist society, there will always be certain groups of society that are subject to opposite trends. However, they usually do not play a central role or wield power in society. According to (very simplified and approximate) observations and measurements, the degree of wages tends to increase and the rate of exploitation tends to decrease in socialist society for the most active and productive part of the population. Here, the degree of wages is higher and the degree of exploitation is lower than for certain types of people in capitalist society. This is due to the fact that workers receive a large portion of their income through various consumption funds, which is the main

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advantage of socialist society. It may be the primary reason why millions of people find the socialist community appealing. The tendency to raise workers’ wages and reduce exploitation in socialist society always contribute to a trend that, at the very least, slows the growth of labour productivity in society and, at the same time, can lead to stagnation and, in some cases, degradation. These trends are partially offset by scientific and technological advancement, as well as production progress. However, its power is not unlimited. Besides, it is becoming increasingly expensive. The same tendencies affect it, slow it down, and set its highest limits. There is reason to believe that stagnation and degradation will become more prevalent over time. However, neither K. Marx nor later V. Lenin saw this contradiction in their theories because they were based solely on the assumption that responsible servants of society will manage the socialist community’s property no worse than capitalists, even if they had no motives. The later history of society has demonstrated that the fact that socialist community was not able to compete economically with capitalist community was certainly not coincidental.

6.1.2 Distribution of the Surplus Product in Socialist Enterprises In the meantime, let us return to K. Marx’s theory of surplus value. The amount of the newly created value can be expressed in the formula v + m where v is the restored value of labour power and m is the surplus value. Thus, the formula for the value of commodities produced (W) by capitalist enterprises will be W = c + v + m. According to K. Marx, this value reflects the capitalist exploitation of the hired workers. The cost of production in socialist production enterprises consists of: the value of raw materials, substances, fuel, and energy used; and the transferred value (depreciation costs) of machinery, buildings, and equipment. It also includes the enterprise’s costs associated with production realisation, as well as wage costs (Table 6.1). In fact, these enterprises are subject to a similar formula W = c + v + m, but its component (m), i.e., the surplus value or surplus product is defined in socialist Table 6.1 The cost at the socialist enterprise Cost of production Depreciation costs

Costs of realising the production

Wage of workers (v)

Deductions to the social insurance fund

Turnover tax

Net income (m)

Profit (Pr)

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enterprises as the net income generated by the labour of socialist production participants above the value paid to them in the form of wages. Net income can take various forms in socialist economic practice. As predicted by K. Marx, one part of net income deducted to the social insurance fund is included in the cost of production. Another part of net income is immediately distributed to the entire society in the form of a so-called turnover tax. This is something that K. Marx did not anticipate because he stated that when the state disappears; the issue of taxes will be solved automatically because they will disappear as well. But that is not the most important aspect here! Part of the surplus product is no longer left at the disposal of the enterprise’s workers, but is taken from them and transferred to the general public. In addition, this part is paid based on the monetary turnover of the production rather than the final production results (profit). As the amount (m) decreases, (m' ), which means the degree of exploitation of workers in the production process, decreases as well. Turnover tax, on the other hand, only slightly reduces the degree of exploitation (m' ). Let us take a closer look at the following formula: m' = m/v = (m k + m a )/v,

(6.3)

here m k is a part of the surplus product for capitalisation, i.e., used to expand production funds and hire more workers to service these funds; m a , on the other hand, is consumption funds that must be formed in accordance with specific production conditions and level of development. Let us examine the individual components of this formula. The increase or decrease of these parts will help us to reveal which direction (growth or decline) the socialist “exploitation” is “programmed” to move.

6.1.3 Part of the Surplus Product for Capitalisation (m k ) Let us examine how K. Marx’s theoretical distribution of surplus product was put into practice in socialist countries. After all, K. Marx pointed out that “From this must now be deducted: first, cover for replacement of the means of production used up. Second, additional portion for expansion of production. Third, reserve or insurance funds to provide against accidents, dislocations caused by natural calamities, etc.” (Marx, 1970). Therefore, the production funds (PF) of the socialist enterprise are divided into fixed production funds (FP), which consist of buildings, equipment, machinery, machine tools, etc., and circulating production funds (CP), which consist of raw materials, substances, fuels, incomplete production, etc. However, I, which K. Marx attributed to stocks or insurance funds in the event of accidents, natural disasters, etc., are known as circulation funds, which were not a direct part of the fixed production funds, but were rather related to the final production and possessed monetary funds. However, in principle, the difference here is minor because stocks can be treated as both finished products and monetary funds that were used to form insurance funds.

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During their movement, circulating production funds (CP) are closely related to circulation funds (I). They are constantly moving from one to the other. Therefore, in economic practice, funds deposited in circulating funds and circulation funds are treated as a single entity—the working capital of the enterprise. The most important part of production funds belongs to the fixed funds. To increase production output, society must constantly build new factories, manufacturing plants, power plants and mines, as well as to expand existing enterprises. It requires huge capital injections. But there is another way to increase production output. It is referred to as making better use of already available fixed funds. For example, in order to obtain an additional 1 million tons of steel, the use of equipment in existing enterprises could be improved by one per cent, or a new medium-sized metallurgical plant could be built. Of course, the first option is far more beneficial to society. It no longer needs to make multi-million capital investments. The funds saved can be used for other production needs or to raise the standard of living for working people. In addition, metals become less expensive as better utilisation of production capacities raises labour productivity and saves material resources. The indicator of the use of the fixed funds is called the capital return (CR). It shows the ratio between the production quantity (PQ) expressed in monetary form and the production funds (F) that are also expressed in monetary form and can be represented by the following formula: C R = P Q/F

(6.4)

This indicator is very important in socialist enterprises, but it is assessed differently than in the capitalist economy. If a capitalist enterprise tries pay more attention to increasing the organic composition of capital first, i.e., increasing the amount of production funds in relation to labour power because it allows for more modernisation of production, the use of more expensive but more efficient machinery and equipment, which later greatly increases the mass of obtained profit, then the socialist enterprise tries to increase indicators of capital return by decreasing a portion of the fixed funds. It is done for several reasons. First of all, funds are required to purchase new and modern equipment, which an enterprise usually does not have, and which must be planned and coordinated with state planning authorities (the majority of the enterprise’s profit is taken by the state), which is not easy to do and takes too long. Second of all, in order to purchase truly modern equipment, an enterprise must usually buy it from abroad and pay for it in a currency that the enterprise does not have, because individual socialist enterprises are not permitted to trade directly with enterprises from foreign (particularly capitalist) states (these problems will be discussed in more detail in other chapters). Third of all, even after purchasing new equipment, it takes time to launch it, and even more time to see obvious results of increased production. It is necessary to consider the fact that large investments in production funds made during this period of time will significantly reduce the indicators of capital return of these enterprises. Therefore, socialist enterprises avoid making new investments in new production funds, preferring instead to get rid of

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inefficiently used capital goods, thereby reducing the part of production funds (F). (m k ) decreases at the same time. Another important indicator for which management of socialist enterprises is fighting is the ratio of profit (Pr) to value of the enterprise’s production funds (F), as well as the rate of profit (p' ). It is calculated in socialist enterprises using the following formula: p' = P r/F, or p' = P r/C,

(6.5)

where C is the cost of production. However, the (6.5) formula does not fully reflect the efficiency of the enterprise’s economic activity—it is almost completely unaffected by the use of fixed production funds. Meanwhile, the ratio of profit to value of production funds reflects the degree to which all of the enterprise’s resources—both living labour with material resources and production funds—are utilised. This latter indicator is especially important because a sudden increase in the mass of fixed funds compared to worker wages (or an increase in the organic composition of capital in capitalism) must result in an immediate increase in surplus product (or surplus value in capitalism). Otherwise, the enterprise’s rate of profit falls significantly, which is the most important indicator of the efficiency of the enterprise’s managers’ activities. That is why the profit-to-production-funds ratio was adopted as the planned and value indicator of the rate of profit in the socialist farming system. However, the same way as capital return (CR), it is improved through a reduction in the value of the fixed production funds, so as a result (m k ) also decreases. During the profit distribution process, a part of it goes to society (into the public budget), while the remainder is retained by the enterprise and used for its own purposes. A centralised remuneration for production funds deducted from profit is first used to fund the budget. In a socialist state, it typically accounts for about 6% of the value of fixed funds and working capital. The remuneration for funds demonstrates economic relations between the entire society and individual enterprises by utilising the socialist community’s resources and distributing the net income. Its primary function is to promote more efficient use of production funds. Because taxes must be paid, enterprises are encouraged to accelerate the acquisition of the design capacities of the newly launched machinery, to take measures to prevent technical downtimes, and to use the unused machinery, etc. It should be noted here that this tax does not depend on the enterprise’s final results (profit); therefore, if the enterprise’s management is not completely certain of the benefit of investments in production funds, it is best not to consider them. Otherwise, if these investments fail or are only partially successful, the payment must be made regardless of whether the enterprise has a profit, i.e., money to pay, or does not have it, i.e., is unable to pay. In this case, it will be required to pay based on the amount of money invested. But that is not all! Even if a socialist enterprise is successful in implementing its investment plans and is eventually able to generate profit, it must be especially cautious not to begin operating too profitably!

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When the profitability of more or more types of production is too high, a part of the profit may be contributed to the budget in the form of fixed contributions. Later, the enterprise pays the bank interest on the credit it received. Following the payment of contributions, the net (settlement) profit remains, which is used to create three economic promotion funds—the production development fund, the material incentive fund, as well as the creation of social-cultural means and the construction of residential houses. Later, a part of the profit is set aside to finance the centralised capital injections, as well as to supplement enterprise’s working capital and pay other planned costs. Finally, the remaining profit is transferred to the public budget. Marxists, on the other hand, believe that socialist enterprises already have ample opportunities to expand production using existing production funds. To increase capital return, it is necessary not to keep uninstalled equipment but to begin using it, and to sell the unnecessary or remaining equipment to other businesses in need. Equipment downtime can be reduced through faster and better repairs, the elimination of organisational-technical issues, and disruptions in enterprise material-technical supply. Much can be accomplished by increasing the duration of equipment’s operation by organising the enterprise’s labour in several shifts. On average, equipment is only used for a half-shift per day. Significant results can also be obtained by increasing the speed of machinery, thereby speeding up production processes, etc. All of this demonstrates that investments in the development of production funds are a very painful process for socialist enterprises; therefore, they are encouraged to refuse production funds and use existing resources more intensively; however, it severely hampers capitalisation of the surplus product (m k ), which tends to decrease then.

6.1.4 Consumption Funds of a Socialist Enterprise (m a ) The most important part of net income is profit, which is the only source of consumption funds of a socialist enterprise. It consists of the difference between the price at which the enterprise sells its products and the cost of this production. Although profit may no longer be a primary goal of social production in the socialist economy, it continues to serve as a general indicator of enterprise economic activities and a significant material incentive for their improvement. The lower the cost of production compared to the price, the higher the enterprise’s profit and the more materially the personnel are encouraged; therefore, consumption funds increase. But how do they increase, and what is their overall share in the profit distribution structure of a socialist enterprise? (Table 6.2). According to this table, the enterprise profit, which accounts for the majority of net income or surplus product generated by socialist workers in the enterprise, is reduced by the following taxes: • the remuneration for funds, which is paid out of profit, but calculated as a certain percentage (approx. 6%) of the value of production funds;

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Table 6.2 The scheme of profit distribution of a socialist enterprise Profit

Remuneration for funds

Fixed contributions

Interest for a credit

Economic promotion funds

Meeting of the enterprise’s planned needs

Remaining balance

Estimated profit

Source Political economy, 1974

• the fixed contributions to support hard-working enterprises, if the business is too successful; • bank interest, if bank credits are used; • taxes paid to economic promotion funds (that remain in the enterprise); • taxes paid to consumption funds in order to meet the enterprise’s planned needs (that remain in the enterprise). If any part of the surplus product (amount of funds) remains in the enterprise’s account, it must be transferred to the public budget for the needs of society. Therefore, only a small amount of money in economic promotion funds and a part of the funds for the creation of social-cultural means and construction of residential houses are left to the workers from the total surplus product, to which they can only pretend if they show good work results. Money from these consumption funds is usually distributed to those who work, but not based on their contributions, but rather at the discretion of management. The entirety of public consumption funds of all enterprises, as well as the personal consumption funds of workers working in non-material and material areas, is part of the common public consumption fund. So, how should we evaluate K. Marx’s socialist distribution model of surplus product? According to him, every individual of the socialist society “receives a certificate from society that he has furnished such-and-such an amount of labour (after deducting his labour for the public funds); and with this certificate, he draws from the social stock of means of consumption as much as the same amount of labour cost. The same amount of labour which he has given to society in one form, he receives back in another” (Marx, 1970). It could only be explained by the fact that a socialist enterprise does not intend to give away all surplus product to the workers. They may expect to receive only a small part of it through economic promotion funds. That promotion, however, is very symbolic because all possible bonuses are also planned in advance, i.e., they cannot exceed a certain predetermined value. Even if workers made every effort and significantly increased productivity in any enterprise, its management could not grant adequate bonuses in addition to the planned or “tariff” wages at their discretion because it is not provided for by the socialist system of planned wages and bonus arrangements (Table 6.3).

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Table 6.3 Necessary and net income of an enterprise

Remaining balance

Meeting of the enterprise’s planned needs

Economic promotion funds

Interest for a credit

Fixed contributions

Remuneration for funds

Turnover tax

Deductions to the social insurance fund

Net income or surplus product (m)

Wage of workers (v)

Costs of realising the production

Depreciation costs

Necessary product

Source Created by the author

The funds (light cells) remaining at the enterprise’s disposal after all deductions to the public budget were shown in the table 6.3. The enterprise transfers the remaining funds (dark cells) to the public budget. As a result, we have an interesting situation in which the majority of the surplus product of the socialist enterprise is “taken away”; therefore, it cannot use it any longer. Thus, the actual results of the socialist enterprise’s labour (the surplus product) are taken away from it “for the needs of society” in the form of money, various taxes, and contributions, leaving very limited funds for the material promotion of workers and meeting the enterprise’s planned (current) needs. The greater an enterprise’s production of the surplus product, the greater the proportion of it that is transferred to the general public. Thus, the enterprise’s consumption funds (m a ) tend to decrease in relative terms. What about the wages of employees?

6.1.5 Wages in a Socialist Enterprise (v) In socialist enterprises, distribution according to contributions is performed in the form of wages (v). Because the labour power is no longer a commodity in a socialist society, wage is no longer a price at which the value of the labour power is expressed. In socialist society, wage is a part of national income expressed in a predetermined monetary form, which is allocated for the personal use of working people and distributed in proportion to the amount and quality of labour performed by each person in public production. In socialist enterprises, the basic forms of pay are piece-rate and time-rate. In the case of time wages, the amount is determined by the amount of time the worker actually worked and his qualification. In the case of piece wages, the amount is determined by the quantity of a certain quality of product produced. Tariff-qualification guidelines define the characteristics of specific works in a given branch and the

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degree (category) of complexity of such works. These guidelines also specify what each worker in each category must know and be able to do. Tariff tables consist of tariff categories and tariff coefficients that determine the remuneration ratio based on the complexity of the work and the workers’ qualifications. There is also the rating of work, which is used to establish work standards (time standards, output standards, service standards, quantity standards, etc.). Labour standards are a measurement of each worker’s work and productivity. They define the scope of work that each worker must complete in a given amount of time. In enterprises which are considered as cooperative property, a guaranteed remuneration (in cash and in kind) of its members was introduced, taking into account the tariff wages of the respective categories of workers working in public farms. The size of the wage fund must be determined in advance. When distributing the income of cooperative farms, it has been established that funds must first be allocated to pay for the work of their members. Because the socialist community guarantees full employment, enterprises must hire free workers and guarantee them a fixed tariff wage. Any dismissals or reductions in the number of workers are out of the question. If any enterprise is closed down, its workers must be taken care of at the branch level by re-employing them in other enterprises. Therefore, there is no labour exchange in a socialist state, nor are there any officially unemployed people. All community members who are able to work must work on a mandatory basis, with no exceptions. In addition, recessions and crises are avoided in socialist countries with planned economies, so workers are not only not thrown out on the street, but their wages are not reduced. It is constantly increased in a planned, centralised manner. This feature of socialism actually contributes significantly to socialism as a system and its social attractiveness in comparison with a capitalist society and is regarded as one of the most important “achievements!” of the socialist system. Therefore, we can confidently assert that the costs of labour power (v) in every socialist enterprise have a clear tendency to rise.

6.1.6 The Link Between Labour Exploitation and the Level of the Societal Development According to K. Marx’s theory of surplus value, “as labour productivity increases, as we have seen, the cost of the worker becomes cheaper, which means that the rate of surplus value increases even if the actual wage rises. The latter is never increasing at the same rate as labour productivity… Not only is the reproduction scale expanding materially, but the production of surplus value is increasing faster than the value of additional capital” (Marx, 1959, pp. 539–540). It means that the more developed a capitalist society becomes in the future, the more capitalist exploitation will grow, i.e., its degree will increase. Let us remember that the degree of exploitation in capitalist production is calculated using the formula m' = m / v = surplus labour /

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necessary labour. It is determined by the ratio between the surplus value created by the worker and his wage. It can, however, be applied to a socialist society; the only difference is that the worker is exploited not by the capitalist, but by “himself”, i.e., by society (the member of which he is) and the state and its “responsible servants” acting on his behalf. In essence, nothing has changed much in terms of working conditions, labour intensity, productivity, and other factors that make it easy to estimate the size of a worker’s “certificate”. As previously stated, a working person receives a “certificate” or remuneration for his activities. It is not easy to assess this remuneration. In addition to the official wage, it covers a variety of other things, such as housing, childcare institutions, holiday homes and sanatoriums, medical care, loans, bonuses, benefits, summer residences, and private cars, but it is impossible to list all of the additional methods that people use in their activities (e.g., stealing, bribery, or abuse of power) to ensure the high stability of social positions. In fact, these enterprises are subject to a similar formula W = c + v + m, but its component (m), i.e., the surplus value or surplus product is defined in socialist enterprises as the net income generated by the labour of socialist production participants above the value paid to them in the form of wages. When we apply the formula m' = m / v, expressing labour exploitation in the production process, to socialist production, we see that an increasing part of net income leaves the enterprise, leaving it only the “symbolic” economic promotion funds and a certain minimum of funds to meet the enterprise’s planned needs. Therefore, m decreases here, and (v)—workers’ wages are at best tariff (fixed) wages, or they tend to rise. Thus, a shift in their ratio in favour of wages over time indicates a reduction in the degree of labour exploitation of the socialist enterprise. Meanwhile, the decreasing (rather than increasing) degree of exploitation means that this society tends to degrade gradually rather than develop progressively! We could counter this statement with K. Marx’s ideas from the “Critique of the Gotha Programme”, in which he states that “what the producer is deprived of in his capacity as a private individual benefits him directly or indirectly in his capacity as a member of society” (Marx, 1970). Then, all taxes and, in general, everything taken away from a socialist enterprise and its workers as private individuals in one form, later returns to the same people directly or indirectly in another form through various public-level consumption funds. They have nothing to lose in this case, so they must be directly interested in the development of socialist production. Maybe, but the problem is that the worker’s income, expressed in the form of his wage, is only increasing, albeit indirectly, through public consumption funds; however, it is still supplemented “in kind”, i.e., by “free” education, health care, “free” public housing, sanatoriums, travel itineraries, etc.; thus, it should be viewed as a factor further reducing labour exploitation. In the long run, it worsens the economy’s overall situation because: 1. workers become disinterested in improving labour productivity and production efficiency due to the enterprise’s limited abilities to materially promote them (the

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vast majority of net income or surplus product of enterprises is misappropriated by the state); 2. workers receive additional income from public consumption funds, which are not allocated based on their individual contributions, but rather on other factors that are not always related to specific production results. They begin to believe that regardless of how well or how poorly they work; they can still expect the state to provide them with a public apartment (because they have several children, old parents, etc.). Therefore, they become “passive” in the sense of taking the initiative in production because it is pointless to them. This situation is exacerbated by a lack of knowledge about where the majority of net income of enterprises is spent, which the latter transfers to the state, and from which public consumption funds are formed. What is the point of “socialist distribution”? Let us not forget that all funds that do not remain in socialist enterprises for their own distribution (as we have seen, only a very small portion of them do) are transferred to the public budget “for the needs of society”. Who will eventually distribute all of these funds? It turns out that it is carried out by “responsible servants of society”, who have in their possession the majority of the surplus product of all enterprises in monetary form. Let us take a look at who they are.

6.1.7 Responsible Servants of Society This class of “socialist nomenklatura”, which officially belongs to the “people’s intelligentsia”, determines who owns what portion of the newly created total social product and how it should be divided. They are not capitalists, so they cannot officially misappropriate this product, but they are well aware of how to distribute this product based on the “social status” of all members of society. We will try to discuss the anatomy and nuances of such distribution later. In general, we cannot claim that these “responsible servants of society” are completely out of control and mismanage the public funds at their disposal. They are forced to comply with the requirements of the planned economy; therefore, they develop public plans for the formation of current and perspective consumption funds and submit them for approval to the “parliament” of workers. As you may recall, all classics of Marxist theory argued that “parliamentarism” as such is not necessary for the socialist state and thus is doomed to wither away; however, in reality, “responsible servants of society” do not dare to completely abolish it. After all, K. Marx and V. Lenin’s principle of “All officials to be elected and subject to recall” (Lenin, 1917) must be implemented somehow. Moreover, how will the international community react if only groups of armed workers continue to supervise everything? Therefore, a “sort of parliament” must be retained, but greatly modified. It should be remembered, as V. Lenin said on the same subject, that it means “not the abolition of representative institutions and the elective principle, but

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the conversion of the representative institutions from talking shops into “working” bodies”. All existing “Soviets of workers and peasants’ deputies” must be merged to form the “Supreme Soviet” of the whole country. This Soviet is not a parliament in the true meaning of the word because this body does not meet on a regular basis. It consists of workers and peasants’ deputies and meets for several days once every few years to approve the perspective five-year plans and national development strategies of the planned economy prepared by the “responsible servants of society”. Understandably, it is impossible to comprehend or thoroughly examine all of these plans in a few days. Moreover, the workers entrusted with making these decisions are not professional lawyers or economists. “Responsible servants of society” invite them from all over the country to a sort of celebration and prepare speeches for them, which they read with great inspiration from a high tribune! They are extremely grateful for the great work that servants of society have entrusted to them, the ordinary workers; therefore, they unanimously vote in favour of all strategic documents and other legislation that have been prepared for approval. Thus, the five-year plans, and later the current plans approved by the entire economy, take on a “solid form” and must be implemented thereafter. They specify the overall size and scope of all public funds, as well as their distribution to various sectors of the economy in accordance with the planned economic development proportions. Workers in socialist enterprises thus recover their part of the newly created surplus product in a different form—as members of society. However, it does not deny the general trend of the decline of socialist exploitation! Workers are only increasing their personal income by receiving a part of the total surplus product through government funds, which further reduces socialist exploitation. Using all of these funds, the worker feels “comfortable” and that his socialist homeland cares deeply for him and his family members, but he has very little influence over the distribution of this income through his labour. Everything depends on the decisions made by the “responsible servants of society”, rather than on himself or the enterprise’s management. However, unlike capitalist production, in which capitalists directly solve issues related to the development of their production and are personally responsible for their decisions with their own assets, “responsible servants of society” typically do not feel personal responsibility and do not assume it, or at least try not to assume it. Because the majority of their decisions are made collectively in Soviets, these “servants” earn their income regardless of the status of individual enterprises; therefore, they feel also quite “comfortable” as workers. In the long run, the decline in labour exploitation in the socialist economy inevitably leads to a reduction in responsibility of enterprises and individual members of society, resulting in the gradual degradation of the economy and economic stagnation. When we examine the economic prospects of socialism, we can see that, in the long run, the situation is becoming increasingly unfavourable to the socialist economy and its development. The first contradiction between the organisation of the socialist

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production process (socialist production relations) and the method of distribution of its results becomes obvious.

6.1.8 Universal Labour Duty—The Basis of Economic Degradation There is one more serious issue related to the contradiction between socialist production organisation and distribution of its results. It is a universal labour duty under which unemployment in socialist countries is completely eliminated. Because “real” commodity-monetary relations exist in a capitalist society, labour is also considered a commodity. It behaves similarly to all other commodities on the market, i.e., its price rises or falls in accordance with the law of value, depending on demand. There are two main approaches to the issue of employment in economic theory: classical (Friedman, 1962) and Keynesian (Keynes, 1936). The latter’s ideas, known as Keynesianism, had a profound impact on modern economic theory and political theory, as well as on treasury policies of many governments (Andriušaiten˙e et al., 2016). Classical economists, also known as “monetarists”, argue that complete economic equilibrium can only be achieved with full employment, but unemployment is unavoidably rising during economic recessions because declining aggregate demand forces capitalists to reduce production and free up some workers, thereby increasing unemployment. However, market forces are gradually restoring demand, and unemployment is gradually declining, with the possibility of being reduced to a bare minimum during the economic recovery. Meanwhile, “Keynesians” argue that economic equilibrium is always characterised by a significant unemployment rate; therefore, it may lead to a significant fall in unemployment during economic recovery, but this status is very unstable, and unemployment begins to rise again, particularly after economy “overheats” and experiences recession. However, all economists agree that unemployment is an inherent feature of capitalism and that avoiding it is impossible. Rising unemployment, on the other hand, forces workers to cherish their workplaces and develops a responsible attitude towards the labour process. Therefore, the question is whether it is absolutely necessary to avoid it at all. K. Marx argued that unemployment was unique to capitalism and justified it in his economic theory in detail. According to him, unemployment is an unambiguously negative phenomenon. In a capitalist economy, unemployment decreases only during recovery, i.e., when the economy becomes fully operational. In the long run, it inevitably leads to product overproduction and crises. What about socialism then? In socialism, all production is planned, so even if everyone is working, there is no overproduction because everyone produces only as much as necessary!

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However, I would like to draw attention to the attitude of the ordinary worker towards labour. In socialism, labour is not a commodity; therefore, it does not sell itself to a capitalist, but instead “voluntarily” participates in the production process and receives a part of public property in exchange for its contributions to the newly created social product. Because this product and its size are planned in advance, personal contributions of a worker are also planned in advance. As previously stated, he is subject to certain planned output standards imposed by the state, with which he must comply. Tariff wage is calculated in accordance with them. However, workers are not exploited to the maximum extent here, but only to the extent specified in the plan. Exceeding plan results is preferable, but it is also necessary to ensure that all remaining production chains exceed their planned assignments, which is difficult to achieve on the scale of the whole economy. But how does a worker appreciate his work when he knows he will always be employed? We must admit that, in most cases, he does not appreciate his workplace at all! He knows that if one workplace is too demanding; he can always choose another workplace, where a new type of work and new opportunities will be waiting for him. The head of a socialist enterprise is comprehensively constrained here: 1. He cannot set work assignments for individual workers independently because he must achieve the results of planned assignments given from above; 2. He cannot force workers to work with maximum efficiency and responsibility because he is constrained by the pre-planned wage fund and tariff wages set from above, and he fears that applying more “pressure” to a worker will cause him to leave; 3. Lack of responsibility because he is a worker himself, who uses public money rather than his own or the money of another person; therefore, he fulfils all obligations only formally, sometimes even realising their futility. All of this leads to a situation in which enterprises employ a large number of people who do not actually work but merely simulate work, write reports, and receive lowtariff wages. Such manifestations of dwindling socialist labour exploitation gradually demoralise work collectives. As a result, production capacity increases only in documents, despite the fact that there is far less production made than would otherwise be possible.

6.2 Second Economic Contradiction of Socialism 6.2.1 Consequences of the Production Monopoly If we assess socialist economy at the national level, it may appear to be quite rational. In theory, if the economy operates in a planned manner, a sufficient amount of various basic goods necessary for a person’s subsistence should be produced. However, the question is whether such an economy is capable of producing precisely what members

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of society need and whether it is capable of producing the necessary quantities of production that society requires. Let us assume that the socialist industry produces cars that are becoming increasingly popular due to their characteristics and benefits in each individual’s or his family’s household. More and more members of society want to buy cars and are willing to pay for them. Demand for cars is increasing. What would a capitalist enterprise do in such a case? According to the economic law of value, when supply does not meet demand, the expected proportionality of the production and use of new cars is violated. The market immediately signals this violation and, through price fluctuations, causes car manufacturers to take economic actions that help to eliminate the occurred discrepancy. As the demand for cars exceeds their supply, the price and profitability of the automotive industry rise. If the industry does not respond in a timely manner, an import occurs, which eliminates the shortage of cars on the market; thus, causing problems for the local industry. Increasing competition encourages local car manufacturers to step up and expand their production in a timely manner. In a world of product differentiation, consumers gain from increases in variety, but scale economies require limiting the number of varieties. Hence, a large number of outcomes are possible when trading off between number of varieties and larger production facilities. The competitive economy chooses on the basis of a profit criterion, while efficiency requires the maximisation of total consumer surplus (Murrel, 1991). However, car manufacturers do not face any competition in a socialist country. The increased demand for local cars never decreases because the population of a socialist country has no other option. They are forced to buy local cars because: 1. They do not have real money to buy cars abroad. The state-owned monopoly foreign trade organisation deliberately avoids importing foreign cars because they should be paid for in real money, i.e., in foreign currency, but sold on the local market for local “certificates”. 2. Even if foreign cars were imported in the same manner as Finnish footwear or French perfumery, their customers would most likely have no major issues. However, it is not so simple to acquire cars. Vehicles require continuous maintenance and periodic repairs. It requires a well-developed car service network capable of ordering spare parts directly from factories rather than through a monopoly foreign trade organisation for each car model. However, the closed planned economy does not have such opportunity. Thus, while avoiding foreign competition, local manufacturers in a socialist country have all the conditions to plan production growth. Given this situation, state-owned planning bodies should incorporate it into (current and perspective) production plans in order to allocate more financial resources to the socialist industry for car production. The only question is at whose expense the socialist industry will receive these resources, and to what extent? The socialist industry does not have readily available resources that would be placed somewhere and awaiting someone to pick them up and use them. They must be “taken away” from someone, or they must contact a bank that can lend funds

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to the development of the automotive industry. It should be remembered that the automotive industry already exists and cars are being sold at prices that are higher than their production costs, but profit is similar to that of other sectors of the economy. Moreover, as we discussed in the previous chapter, this profit is distributed in a planned manner; therefore, the majority of it goes to the budget to be “at the disposal of the entire society”. In a capitalist economy, a capitalist who does not have available resources, seeing the growing demand and the absence of competitors, would probably be forced to raise the price of cars and collect the lacked funds during the shortest possible time in order to develop production. However, it is not that simple in a socialist economy. Even if they see that the demand for cars exceeds supply, socialist manufacturers cannot cause “price fluctuations”, i.e., they cannot raise their car prices wilfully. It is prohibited the planned economy, which has planned revenues and profits of these enterprises, including their future payments to the budget, long time ago. Therefore, these enterprises are forced to sell their products at fixed “public” prices rather than receive funds that they could easily earn by raising their production prices. However, it does not mean that car prices do not rise! They rise in the “black market”, which is defined as a market that is formed illegally and operates “spontaneously” outside of the control of a socialist state. We will discuss this market and its characteristics in greater depth later on when we examine the formation of the “second economy”. Therefore, the end result is completely opposite of what was expected! The car manufacturer sells the number of cars produced according to the plan on the market at fixed prices; meanwhile, these cars are purchased by members of society who are usually chosen “according to their merits”. These members of society pay the manufacturer for the car and then sell it on the black market at the “market price”, which corresponds to the balance between supply and demand, i.e., much more expensive. These “members” put the price difference in their pockets and use it at their discretion. What about the car manufacturer? He is paid a fixed price that guarantees him an average profit, which is later transferred to the public budget. However, the remainder of the profit, which remains in the enterprise, does not allow this enterprise to expand its production or provide additional material promotions to its workers. This amount is insufficient even to encourage management to look for ways to raise funds, take risks, take loans, or otherwise fight for an expansion of the scope of production. The funds received by the budget from this enterprise do not have to be used to develop the production base of this enterprise. They can be directed to support representatives of other; weaker industries that produce the necessary industrial or other products for a socialist consumer, even if they are not as profitable. In addition, a car, as a product, is a rather complex device. Not all of its spare parts are produced in the country. Some critical and technologically complex units can be produced only abroad and then imported into the country. Even if it were decided to produce all the units in the country, as is usually done in the defence industry (where priorities are quite different because they are related to state security), it would be not only irrational, but also economically unreasonable in the civil industry because it

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would stop scientific and technological progress in this area and, in the long run, make locally manufactured cars completely uncompetitive in foreign countries. Therefore, car manufacturers must order these critical spare parts from enterprises in another country with the assistance of the country’s foreign trade organisation. All of this complicates not only planning, but also production expansion. This problem is getting worse over time because the declining competitiveness of the socialist industry abroad prevents the country from earning more foreign currency; therefore, the public foreign trade organisation is becoming increasingly hesitant to order spare parts for the country’s economy. After all, these spare parts must be paid for in a foreign currency, which is insufficient and, despite the fact that it is not reflected in the official exchange rate, is becoming increasingly expensive. Meanwhile, the majority of cars produced are sold on the domestic market in local currency and at fixed prices that do not cover the costs of the exchanged foreign currency. All of it prevents the local automotive industry and other industries from developing and producing the ever-increasing number of products required by society’s needs. In the long run, as production growth slows, unsatisfied market demand forms, resulting in a “deficit” of cars that can only be eliminated through the black market. However, only “slow-witted representatives of society”, also known as “profiteers”, profit from it, while the automotive industry lacks the necessary financing and stagnates.

6.2.2 Ratio of Productive Forces to Aggregate Demand The second essential contradiction of socialism is becoming obvious—the growing discrepancy between the development of productive forces and the growth of aggregate demand. The socialist economic system prevents productive forces from fully realising themselves by meeting the ever-changing needs of people. The most important point is that the gap between the level of aggregate demand of the entire country’s population and the production capacity of the socialist industry is widening over time, constantly deepening this contradiction. To summarise, we can say that the first contradiction between the organisation of the socialist production process and the method of distribution of its results means that socialist relations of production are artificially created; they do not stimulate the development of productive forces because exploitation of labour power is decreasing. In order to maximise their profits, capitalists have forced productive forces to develop more quickly and become more productive in a capitalist economy. Meanwhile, in the absence of capitalists in the socialist economy, workers should theoretically maximise their profits themselves, but each of them is not entirely certain that doing so will result in a direct personal benefit. It benefits society and its consumption funds, but every worker must fight for this benefit by proving that he needs it. However, it has nothing to do with his personal, direct contribution to the production results. Thus,

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most workers focus on how to maximise their benefit from society rather than the end result of their work. All of it leads to stagnation in the development of productive forces because socialist production relations contradict rational and fair distribution (as declared— according to one’s contributions), which impedes the production of sufficient products and satisfying the consumption needs of the population. Consumption needs are increasing at a faster rate and becoming increasingly large over time; as a result, the producer is becoming more and more important to society. It is especially noticeable in light of the rapid development of productive forces in the capitalist states, where an increasing variety of consumer goods are produced, raising the desires and envy of consumers in socialist countries. It is also unavoidable because, in this case, the producer is beginning to dictate his conditions to the consumer based on his declining production capacities. The consumer only needs to accept it; therefore, the producer’s market is entering into force in socialist countries, limiting the abilities to operate on the consumer’s market. This contradiction gradually manifests itself in the majority of socialist sectors, resulting in a vicious circle: even constantly increased production plans are increasingly lagging behind society’s growing needs due to fixed prices and the associated very limited funding of production; therefore, they prevent not only satisfaction of these needs, but also their manifestation, which gradually leads to production stagnation and economic recession. How did the practical implementation of the socialist system correspond to its theoretical model? Did its developers strictly adhere to the instructions of its authors during the project’s implementation?

To answer this question, we must first divide it into the following questions: • Why should we not blame the classics of communism? • Has the state “withered away” as the result of the socialist revolution? • Have they succeeded in eradicating class antagonism following the establishment of socialism and the liquidation of the bourgeoisie as a class, as predicted by the classics of Marxism? • Were the builders of socialism able to develop the planned economy evenly after the elimination of business cycles? • How were the contradictions in the socialist model solved? • What was the outcome of socialism’s building, and was it expected?

Chapter 7

Socialist System in the Twentieth Century

On 25 October 1917, the October Revolution took place in Russia. It was an armed overthrow of the Provisional Government and the entry of Bolshevik Party into power, which proclaimed the establishment of the Soviet Government. It took place following the February Revolution of 1917, which ended the autocracy and overthrew the Tsar government. The House of Romanov, which ruled Russia for 300 years, ceased to exist. During and after the February Revolution, revolutionary masses throughout the country formed the Soviets of Workers’ and Soldiers’ Deputies, Soviets of Peasants’ Deputies, and Soldier Committees within the operating military and rear military units. The October Coup was led by the Russian Social Democratic Labour Party (Bolsheviks), or RSDLP (a), which announced the beginning of the abolition of capitalism and the transition to socialism, and saw it as the start of the world revolution. This party wielded all of the political power. Later, it was renamed All-Union Communist Party (of Bolsheviks), or AUCP(b), and then the Communist Party of the Soviet Union (CPSU). As a result, the world’s first socialist state and its new Soviet economic model were established, based on governmental centralisation governed by a single political leader (usually the Party’s Head). Because politics in the Soviet country had never been separated from economics, the power vertical was created as a tool for the leader to administer both the country’s political and economic activities. This model was able to demonstrate its viability, spreads throughout Europe, Asia, and Latin America, and survives for seven decades before “collapsing”. Let us look more closely at this administrative economic model, its internal links, and hierarchy, and how Soviet party and state nomenklatura levels were formed.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_7

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7.1 Marxist Theory and Practice of Socialism Why did the socialist revolution happen in Russia first? It was even less developed than France or Germany, let alone England! This question is asked by many theorists—Marxists. Was it predicted by the classics of Marxism such as K. Marx and F. Engels? Of course, they did, and they were completely correct in this regard! Let us recall their comments on this subject in “The German Ideology”, the famous “Manifesto of the Communist Party” or “The Principles of Communism” by F. Engels. These works clearly expressed the idea of socialism’s victory in one country. According to them, the more developed the capitalist system is, the easier it will be for the proletariat to achieve the desired results after gaining political power, and the faster the socialist state will develop the conditions for its transition to communism. “Revolution will first of all establish a democratic constitution and thus either directly or indirectly establish the political rule of the proletariat. Directly, mainly where the proletariat even at this moment makes up a majority of the people; indirectly, in France and in Germany where the majority of the people are composed not only of proletarians, but also of small peasants and petty bourgeois. These peasants and petty bourgeois are still in a transitory period towards the proletariat and are dependent in their political interests more and more on the workers and therefore will have to submit to the demands of that class. This probably will necessitate a second struggle which, however, can end only with the victory of the proletariat” (Engels, 1969). Therefore, if the country is more developed and the conditions for the development of socialism are optimal, it becomes a “guiding star” for the proletariat of all countries, who has carried out revolutions in its respective countries. Therefore, many Marxists believe that the modern history of Russia and other Eastern European countries only demonstrates that K. Marx and F. Engels were correct. Everything happened exactly as K. Marx predicted in the mid-nineteenth century: socialism that fails to develop enough of its productive forces (at least to the same level as capitalism) cannot be called real socialism and, in competition with capitalism, is doomed to become real capitalism. Therefore, it is only the retribution of history for ignoring the true teachings of K. Marx! This provision is more convincingly justified in “The German Ideology”, where: “this development of productive forces (which itself implies the actual empirical existence of men in their world-historical, instead of local, being) is an absolutely necessary practical premise because without it want is merely made general, and with destitution the struggle for necessities and all the old filthy business would necessarily be reproduced; and furthermore, because only with this universal development of productive forces is a universal intercourse between men established, which produces in all nations simultaneously the phenomenon of the “propertyless” mass (universal competition), makes each nation dependent on the revolutions of the others, and finally has put world-historical, empirically universal individuals in place of local ones. Without this, (1) communism could only exist as a local event; (2) the forces of intercourse themselves could not have developed as universal, hence intolerable

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powers: they would have remained home-bred conditions surrounded by superstition; and (3) each extension of intercourse would abolish local communism. Empirically, communism is only possible as the act of the dominant peoples “all at once” and simultaneously, which presupposes the universal development of productive forces and the world intercourse bound up with communism. The proletariat can thus only exist world-historically, just as communism, its activity, can only have a “worldhistorical” existence” (Marx, 1932). Let us examine what economic consequences it could have. Perhaps if the World Revolution of K. Marx and F. Engels had taken place, all the major capitalist countries of Europe would implement it at the same time and become socialist countries. It would result in the introduction of a planned economy in all countries in a centralised manner, allowing not only to broaden the scale of the revolution, but also to avoid political and economic isolation, thus reducing the economic attractiveness of a socialist state significantly. In addition, all of these countries can expect to demonstrate very high level of production and labour productivity, which will likely increase the popularity of socialism even further. It would happen because these countries, which at the time formed the core of the economy of the entire Europe or even the world of that time, would combine their planned economies and, at the very least, have no “spontaneity of capitalist economy” or a competitive struggle with each other. It is difficult to predict how long it would last and how long they would be viable, but from a Marxist perspective, it would have been a far more successful project than a victory of socialism in one country that was clearly lagging behind. Although V. Lenin sincerely believed in the “world revolution”, he recognised that if Russia began the “world revolution”; it would not initially become a “guiding star” for other developed countries, and their proletariats would be unlikely to follow such an example, even if it won a victory in its own country. The bourgeoisie of these countries may then try to isolate Russia, or even begin fighting with it. V. Lenin, on the other hand, desired a revolution and was not afraid of war, seeing new opportunities in it. In his works, he presented the theory of capitalism’s transformation into imperialism, which explained how all countries of the world are developing economically at different rates. Economic growth disparities are also common in developed capitalist countries. As a result, the more developed countries engage in economic expansion, colonisation, and exploitation of the less developed countries. It helps more developed countries in dealing with issues related to the constraints on their extensive growth. The occurred colonies are new markets where surplus industrial production can be realised, thereby mitigating overproduction crises. At the same time, it provides opportunities to import cheap labour power and raw materials, ensuring surplus profits, to neutralise the increase in unemployment caused by technological advancement, and to make concessions to their workers by forming their aristocracy. This group of workers may later become the support of capitalists that are more interested in reforms than in revolution. However, this extensive development of the developed capitalist countries is gradually coming to an end when there are no “unoccupied” places in the world where they could expand. Thus, colonial empires emerge, which develop unevenly because each of them tries to gain ever greater political influence. In addition, capitalist

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production relations are established in colonies, which encourage national liberation movements that weaken separate empires. All of it leads to imperialist wars for the re-division of the world. V. Lenin considered the First World War as such type of war. He saw the proletariat’s historic opportunity to “help” its government, which had caused this war, in losing it, thus weakening it. Later, this imperialist war should turn into a civil war, where the proletariat will replace the capitalist government with a socialist government while carrying out a proletarian revolution. Then, with the help of the proletariat of all countries, this government must take the initiative in any possible fight against international bourgeoisie and defeat it. Proletarians of all countries, unite! Under these circumstances, V. Lenin was prepared to defend it with a weapon. He hoped that the example of the Russian proletariat would inspire proletarians of other countries to join the fight against its own, and later, possibly against bourgeoisie of other countries. Therefore, having trampled on the views of K. Marx and F. Engels, he wrote the following before the revolution in 1915: “Uneven economic and political development is an absolute law of capitalism. Hence, the victory of socialism is possible first in several or even in one capitalist country alone. After expropriating the capitalists and organising their own socialist production, the victorious proletariat of that country will arise against the rest of the world—the capitalist world—attracting to its cause the oppressed classes of other countries, stirring uprisings in those countries against the capitalists, and in case of need using even armed force against the exploiting classes and their states. The political form of a society wherein the proletariat is victorious in overthrowing the bourgeoisie will be a democratic republic, which will more and more concentrate the forces of the proletariat of a given nation or nations, in the struggle against states that have not yet gone over to socialism” (Lenin, 1974). Just before the revolution in September 1917, V. Lenin wrote in the German newspaper “Jugend-Internationale”: “The victory of socialism in one country does not at one stroke eliminate all war in general. On the contrary, it presupposes wars. The development of capitalism proceeds extremely unevenly in different countries. It cannot be otherwise under commodity production. From this it follows irrefutably that socialism cannot achieve victory simultaneously in all countries. It will achieve victory first in one or several countries, while the others will for some time remain bourgeois or pre-bourgeois. This is bound to create not only friction, but a direct attempt on the part of the bourgeoisie of other countries to crush the socialist state’s victorious proletariat. In such cases a war on our part would be a legitimate and just war” (Lenin, 1964, p. 77). “Later, in J. Stalin’s classical work “The Foundations of Leninism”, he wrote: Formerly, the victory of the revolution in one country was considered impossible, on the assumption that it would require the combined action of the proletarians of all or at least of a majority of the advanced countries to achieve victory over the bourgeoisie. Now this point of view no longer fits in with the facts. Now we must proceed from the possibility of such a victory, for the uneven and spasmodic character of the development of the various capitalist countries under the conditions of imperialism, the development within imperialism of catastrophic contradictions

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leading to inevitable wars, the growth of the revolutionary movement in all countries of the world—all this leads, not only to the possibility, but also to the necessity of the victory of the proletariat in individual countries. The history of the revolution in Russia is direct proof of this” (Stalin, 1947, p. 106). It should be noted that following the October Coup in Russia in 1917; the proletariat of other countries quickly saw the results of this coup, which greatly “changed its mind” about carrying out similar “revolutions” in its respective countries. It was also linked to the advancement of labour relations in production and the emergence of civilised methods for resolving disputes between employers and employees. For example, the “General Agreement” between employers’ confederations and labour unions of workers was reached in Denmark in 1899 and in Sweden in 1900. Similar agreements have been also reached in other developed European countries. These agreements were intended to limit the number of working hours and provide workers with better working conditions. At the same time, they limited employers’ ability to dismiss workers. Workers, on the other hand, have agreed not to go on strikes spontaneously, but only by giving a prior notice to employers and after completing all stages of collective negotiations and overcoming complex procedures. Special labour courts were established to deal with legal issues as well as conflicts of interest between employees and employers. In this regard, Zenonas Norkus noted in his monograph the progress made since the mid-nineteenth century in the integration of the working class and its political representatives into capitalist societies, which “exposed another flaw in K. Marx’s theory, which could have been detected earlier by its more attentive critics”. “It is its inability to conceptualise and explain nationalism as a social phenomenon and political power that emerged in the nineteenth century alongside the labour movement and socialist ideology” (Norkus, 2008, p. 194). However, nationalism as a phenomenon is the subject of a separate political study, so we will not look deeper into it further. However, if the victory of socialism were to take place in all countries at the same time, as the classics of communism predicted, it would undoubtedly prolong its existence for a longer period of time because there would be no capitalist countries as an alternative perspective of economic development, influencing the collapse of socialism much earlier and with much smaller losses. The likelihood of long-term economic stagnation typical of socialism, which would last for decades or even longer, would remain because people would ask far fewer questions or, worse, would become accustomed to living in the reality of socialist dogmas. First of all, the world revolution would establish a “global economy” based on public ownership of capital goods, which would belong to the proletariat of all countries in common because the proletariat “does not have a homeland!” What does it mean? It means that the world socialist revolution, as predicted by K. Marx and F. Engels (but not as later decided by V. Lenin), would allow to form the total social products (public pies) of all countries in the same way on the same principles. Then a common “global international pie”, conforming to a unified international planning system,

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would be formed. Then, a worker who produced part of the social product in one country could pretend to any part of this international “pie” in other country. For example, if one worker created a part of the total social product in Germany and received a public “certificate” for it, the size of which corresponds to the amount of his working time, he can travel to America with such “certificate” and acquire a part of the social product corresponding to his “certificate”. It means that the total social product or “pie” would be so large that the worker’s certificate would be valid all over the world, as in one economy, the joint owner of which would be the society of all of these countries, and the co-owner would be the worker himself, as a representative of the global society, who could use its goods anywhere personally. He would also pretend to be a part of the rest of the joint “pie” in any country, i.e., to have access to health, educational, and other services “free of charge”. It would most likely be the “true” socialist and communist path of global development predicted by the classics of Marxism. There would be no capitalist economic system in the world, and the state would vanish because it makes no sense to divide a unified system of economy (individual states) into parts. Commodity-monetary relations would be abolished because there would be no-one to trade with, and labour power would no longer be a commodity! It would allow to forget all the inconveniences of foreign trade by trading between separate economic systems, and then the entire world would become a “corporation working in a united manner” where “everyone does everything”! However, in reality, the “carriers” of the building of the socialist system ruined everything! Global history took a turn that the classics of Marxism could not have predicted. Does it mean that the socialist system had a chance of survival? Could we live successfully in socialism if its “builders” had accurately followed the instructions of classics of Marxist economic theory? Certainly not because the global nature of the revolution does not address the internal problems of the socialist economy. The economic contradictions and characteristics of the planned economy that we discussed in the previous part presuppose the end of socialism as an economic system. However, assessing it separately is difficult; therefore, we will continue to look at the process of socialist development as a whole, regardless of “what if…” speculations. In conclusion, we may state that if the proletarian revolution had occurred in all developed countries at the same time, as predicted by the classics of Marxism, it would not have saved socialism. The inherent flaws of the planned economic system, as well as the economic contradictions of socialism, which we have already discussed in the previous chapter, lead the socialist system to a deadlock in the long run. It can only be sustained through political repressions and terror, which force people to accept the existing situation and stop seeking for any changes. The implementation of this system will be discussed in greater detail in subsequent chapters.

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Why did the state survive as a result of the socialist revolution?

• V. Lenin agreed with K. Marx’s theory that the state must “wither away” in communism, but: • He “adjusted” this science by claiming that in socialism, as in the first phase of communism, the state not only does not wither away, but grows stronger because • In socialism opposing classes are not yet abolished and class conflict continues. • So, dictatorship of the proletariat is required to break the bourgeoisie’s resistance, but • Dictatorship of the proletariat needs a strong state, which is based on violence against a class of exploiters.

7.2 Soviet Model of Socialism 7.2.1 The Socialist Concept of the State What should be the foundation of the political system of the state and what economic model should be used? F. Engels was very fond of the activities of state monopoly and trusts because they can plan the development of production and, by finally monopolising certain sectors of the economy, they may prove to be “quite progressive”. He even said: “When we pass from jointstock companies to trusts which assume control over, and monopolise, whole industries, it is not only private production that ceases, but also planlessness” (Lenin, 1917). What does it mean? Can it be related to the end of private production era? V. Lenin disagreed with a similar description, arguing that it is similar to “bourgeois reformism”, which cannot be called “state socialism”, despite being somewhat similar. There is so much planning, “however much the capitalist magnates calculate in advance the volume of production on a national and even on an international scale, and however much they systematically regulate it, we still remain under capitalism – at its new stage, it is true, but still capitalism, without a doubt” (Lenin, 1917). However, in his opinion, this circumstance should be taken seriously, not so much in terms of classic principle as it is in terms of facilitating the transition to “real” socialism, because the development of capitalism and the establishment of trusts and other monopolies make the transition much easier and simpler. It remains to change the superstructure of the state, and everything else may probably be left alone, after all, it is functioning relatively well! V. Lenin wrote: “The “proximity” of such capitalism to socialism should serve genuine representatives of the proletariat as an argument proving the proximity, facility, feasibility, and urgency of the socialist revolution, and not at all as an argument for tolerating the repudiation of such a revolution and the efforts to make capitalism look more attractive” (Lenin, 1917).

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K. Marx and later V. Lenin paid particular attention to large-scale production when developing the concept of “nationalisation” of capitalism. “We, the workers”, acting “on the basis of what capitalism has already created” and “establishing strict, iron discipline backed up by the state power of the armed workers”, shall “reduce the role of state officials to that of simply carrying out our instructions as responsible, revocable, modestly paid “foremen and accountants” (of course, with the aid of technicians of all sorts, types and degrees). This is our proletarian task; this is what we can and must start with in accomplishing the proletarian revolution” (Lenin, 1917). Later, V. Lenin broadened his understanding of “proletarian democracy”. “All officials, without exception, elected and subject to recall at any time, their salaries reduced to the level of ordinary “workmen’s wages” — these simple and “selfevident” democratic measures, while completely uniting the interests of the workers and the majority of the peasants, at the same time serve as a bridge leading from capitalism to socialism” (Lenin, 1917). Here, attention should be paid to the administrative apparatus, which consists of officials, accountants, and other “modestly paid” workers. After all, the contribution of different workers from various economic sectors, particularly the heavy industry sector, to the final work results and overall production efficiency varies in reality. For example, an ordinary workshop employee has far less influence on the overall production organisation of an enterprise or its effectiveness than the workshop’s master or director of the entire enterprise. Here, all executives are paid the same, “modest” wage as ordinary workers! After all, proletarian production must be more productive than capitalist production, but there is no mention of motivation! There is a lot of talk about “strict, iron discipline”, which will be used to force officials to work more efficiently. Therefore, the mere fear of being dismissed or replaced at any time must be a constant companion throughout the entire socialist production process, and it must be mercilessly linked to the proletariat through the hands of its representatives. What will be the ultimate goal of this process? The fact that all of these officials are basically doomed, so there is no point in caring for them. It is clear that “such a beginning, on the basis of large-scale production, will of itself lead to the gradual “withering away” of all bureaucracy, to the gradual creation of an order – an order without inverted commas, an order bearing no similarity to wage slavery – an order under which the functions of control and accounting, becoming more and more simple, will be performed by each in turn, will then become a habit and will finally die out as the special functions of a special section of the population” (Lenin, 1917). How can the functions of control and accounting “performed by each in turn” be explained? They can be explained the same way as K. Marx explains the governance of the state or a community that functions as “a well-functioning corporation”. It enacts and enforces its own laws. There is no independent “parliament”, so everyone does everything! Everything is so simple here that “every cook must learn how to manage the government”1 (Trotsky, 1933). 1

This renowned phrase was attributed to V. Lenin by J. Stalin’s opponent Leon Trotsky on 3 March 1933 in his article “Alarm Signal” (Trotsky, 1933): “What is at stake is the fate of the party and

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As an example of such a state, V. Lenin provided postal service: “To organise the whole economy on the lines of the postal service so that the technicians, foremen and accountants, as well as all officials, shall receive salaries no higher than “a workman’s wage”, all under the control and leadership of the armed proletariat – that is our immediate aim” (Lenin, 1917). This is the kind of state we need that would be based on such economic foundation. “This is what will bring about the abolition of parliamentarism and the preservation of representative institutions. This is what will rid the labouring classes of the bourgeoisie’s prostitution of these institutions” (ibid., 1917). Then he said: “A witty German Social Democrat of the seventies of the last century called the postal service an example of the socialist economic system. This is very true. At the present the postal service is a business organised on the lines of state-capitalist monopoly. Imperialism is gradually transforming all trusts into organisations of a similar type” (ibid., 1917). In fact, comparing the state to a postal service is a very accurate analogy! Its workers are all like ordinary, unexceptional cogwheels doing their jobs (performing functions) in a massive monopolistic apparatus. Together, these cogwheels form a well-functioning mechanism that can function perfectly on its own, constantly producing products (creating people’s well-being) for its owners! Everyone can do everything in this flawless mechanism—the distinction between manual and mental work is eliminated because there is no division of labour, as there is in capitalism. Even the difference in payment for manual or mental work is eliminated because all jobs are treated equally! The amount of necessary manual or mental work put in during each operation is measured for this purpose, and the individual performing them is compensated in proportion to the number of operations performed. Finally, the basic principle of socialism “from each according to his ability, to each according to his contribution!” or "an equal amount of products for an equal amount of labor” (Lenin, 1917) is implemented. In the long run, everyone becomes accustomed to this system, and there is no longer any need to control it! Thus, all of the major objectives assigned by Marxists to the socialist state have been completed—the time has come for the state to gradually “wither”! However, the question of who will lead this perfect and effective mechanism, this “corporation” of working people, arises. Who will “turn it” in the right direction from time to time so that this magnificent mechanism does not crash? As we all know, based on the experience of the Paris Commune, K. Marx declared that “while the merely repressive organs of the old governmental power were to be amputated, its legitimate functions were to be wrested from an authority usurping pre-eminence over society itself, and restored to the responsible agents of society”

of the Soviet regime. V. Lenin saw the democratisation of the administration as the most important objective of the dictatorship “Every cook must learn how to manage the government”. The process that has taken place is quite the reverse. The number of the administrators did not grow to include “every cook”, it constricted instead to a solitary chef, and thereto only a specialist in peppery courses. The political regime has become unbearable to the massed even as the name of its packbearer is becoming more and more hateful to them”. Here, L. Trotsky clearly referred to J. Stalin, who did not democratise the dictatorship of the proletariat, but rather strengthened it.

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(Marksas & Engelsas, 1949a, p. 451). When asked if he thought the central government should be taken away of all functions without exception, he said, “the few but important functions which would still remain for a central government were not to be suppressed, as has been intentionally misstated, but were to be discharged by Communal and thereafter responsible agents” (Marx, 1871). F. Engels described leading of the Commune 20 years later as follows: “Against this transformation of the state and the organs of the state from servants of society into masters of society, the Commune made use of two infallible expedients. In this first place, it filled all posts – administrative, judicial, and educational – by election on the basis of universal suffrage of all concerned, with the right of the same electors to recall their delegate at any time. And in the second place, all officials, high or low, were paid only the wages received by other workers. The highest salary paid by the Commune to anyone was 6,000 francs. In this way an effective barrier to place-hunting and careerism was set up, even apart from the binding mandates to delegates to representative bodies which were also added in profusion” (Marx & Engels, 1891). Who are those “strictly responsible agents” or “servants of society” appointed by the Commune? Neither K. Marx nor F. Engels detailed their functions and duties, but V. Lenin took a very clear and unambiguous stance on the subject: “Given these economic preconditions, it is quite possible, after the overthrow of the capitalists and the bureaucrats, to proceed immediately, overnight, to replace them in the control over production and distribution, in the work of keeping account of labour and products, by the armed workers, by the whole of the armed population. (The question of control and accounting should not be confused with the question of the scientifically trained staff of engineers, agronomists, and so on. These gentlemen are working today in obedience to the wishes of the capitalists and will work even better tomorrow in obedience to the wishes of the armed workers)” (Lenin, 1917). Later, V. Lenin clarified who should be in charge of the issue of control in a socialist state: “Accounting and control – that is mainly what is needed for the “smooth working”, for the proper functioning, of the first phase of communist society. All citizens are transformed into hired employees of the state, which consists of the armed workers. All citizens become employees and workers of a single countrywide state “syndicate”. All that is required is that they should work equally, do their proper share of work, and get equal pay; the accounting and control necessary for this have been simplified by capitalism to the utmost and reduced to the extraordinarily simple operations – which any literate person can perform – of supervising and recording, knowledge of the four rules of arithmetic, and issuing appropriate receipts” (ibid., 1917). On 22 November 1917 (currently 5 December), shortly after the October Coup, the Council of People’s Commissars of the Russian SFSR adopted a decree No. 1 “On court”—the first decrees to reform and regulate the activities of the judiciary. It was developed with the active participation of V. Lenin and abolished all pre-existing judicial institutions: the prosecutor’s office, the Bar, and the institution of judicial investigators. At the same time, it abolished district courts, judicial chambers, Government Senate including all departments, military and maritime, and commercial courts. Instead of these bodies local collegiate courts were created. They consisted of a

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permanent judge and two people’s assessors. The members of the new court were elected by local councils. Any person having civil rights could act as prosecutor, advocate, and attorney in court. As to preliminary investigation, judges exercised it alone. Simultaneously, “revolutionary tribunals” were established, consisting of a chairman and six jurors chosen by district or city councils. Their aim is not to administer justice, but to protect the state from “harmful elements”. At the Third All-Russian Congress of Workers’, Soldiers’ and Peasants Deputies’ Soviets, which took place in January 1918, V. Lenin underlined the significance of the Decree No. 1: “Let them cry that we destroyed the old court immediately without trying to reform it. But we have cleared the way for the real people’s court and not so much by force of repression, but by example of masses, authority of workers, without the formalities; of the court as an instrument of exploitation we have made an instrument of education on a solid foundation of socialist society” (Dekret o sude…, 1957–1997).

7.2.2 Iron discipline—the Basis for the Functioning of the Socialist State In fact, V. Lenin’s “armed workers” employ civil servants who keep the accounts of the entire state using “the strict iron discipline”. It is an excellent combination for ensuring the completion of tasks of the socialist “corporation”! Finally, it is necessary to implement “the complete subordination of the entire work of this syndicate to a genuinely democratic state, the state of the Soviets of Workers’ and Soldiers’ Deputies” (Miliband, 1970). After all, “the Soviets of Workers’ and Soldiers’ Deputies” are most likely elected representatives of workers and soldiers, or “parliamentarians” in governing bodies to be elected! These representatives, however, are no longer “parliamentarians” who enact state laws and delegate their execution to the government because the era of “parliamentarians” has passed! When Karl Kautsky, a representative of Marxism’s popular teaching, addressed the issues of “proletarian revolution” and “proletarian regime” in his brochure on “The Social Revolution” based on large-scale industry, he pointed out that “The most manifold forms […] can exist beside each other in a socialist society – the most diverse forms of industrial organisation, bureaucratic, trades union, cooperative and individual” (Kautsky, 1903). In fact, these are already very different forms of organisations and it is unclear what they mean! The latter have not been discussed in greater depth, but the “bureaucratic” form has been explained as follows: “There are, for example, industries which cannot be operated without a bureaucratic organisation, as for example railroads. The democratic organisation can be so formed that the labourers choose delegates, who will constitute a sort of parliament, which will fix the conditions of labour and control the government of the bureaucratic machinery” (Lenin, 1917), because “The technique of all these enterprises makes absolutely imperative the strictest discipline, the utmost precision

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on the part of everyone in carrying out his allotted task, for otherwise the whole enterprise may come to a stop, or machinery or the finished product may be damaged” (ibid., 1917). Here, V. Lenin strongly criticised such an approach, emphasising that “this “sort of parliament” will not be a parliament in the sense of a bourgeois parliamentary institution”. This is the entire point that this “sort of parliament” will not only “fix the conditions of labour and control the government of the bureaucratic machinery”, (ibid, 1917), as K. Kautsky imagines, whose mind is within the framework of bourgeois parliamentarism. In a socialist society, the “sort of parliament” made up of workers’ deputies will undoubtedly “fix the conditions of labour and control the government of the bureaucratic machinery”, but that machinery will not be “bureaucratic”. According to V. Lenin, it will only ensure that: “all become “bureaucrats” for a time, and no-one, therefore, can become a ‘bureaucrat’” (ibid., 1917). This is a very interesting explanation that complements the saying that “everyone does everything”! In this situation, everyone becomes a bureaucrat for a time before gradually becoming accustomed to working independently and controlling each other in the face of armed workers’ control; therefore, they cease to be bureaucrats. Then the “parliament” also ceases to exist! Let us examine how the “Soviets of Workers’ and Soldiers’ Deputies” occur, in other words, the “sort of parliament” whose function is to exercise power through “groups of armed workers”? When the old “bourgeois bureaucratic machinery” breaks down, completely new people emerge to the surface, who “theoretically” came from the circle of workers and soldiers (rather than bourgeoisie!) and are “renowned” for their participation in fights, i.e., the fiercest and most assertive ones, who are now becoming rulers of government, enacting and enforcing their laws or decrees with the help of “groups of armed workers”! Who controls their actions? “In theory”, the rest of the workers and soldiers who “theoretically” can be “recalled at any time”. Things are getting interesting here! What are these new “representatives” who have suddenly concentrated an unlimited power in their hands, i.e., become lords of power, going to do with it? The classics of Marxism do not provide a direct answer to this question, but it is clear from the context that all actions of this government should be limited to accounting and control functions, as well as the maintenance of “iron discipline”. The “sort of parliament” or management bodies of proletarian dictatorship are referred to as the “Soviets of Workers’ and Soldiers’ Deputies” here. How do they differ from the bourgeois parliament? First of all, the workers must consolidate their dictatorship in the country and dissociate bourgeoisie and any other reactionary sections of society from the political leadership of the state. However, the formation of a bourgeois parliament is based on a territorial principle. This parliament is formed by all residents who elect their representatives in their district, city, region, etc. If this practice continues, the elected parliament will represent the entire country’s population, regardless of the electoral composition of classes. It cannot be allowed because the dictatorship is proletarian! Therefore, it is necessary to alter the principles of election to public bodies in order

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to ensure that all representatives of government are elected solely from the circle of the proletarians and, above all, defend the interests of the proletariat. The bourgeois parliament, on the other hand, is a very slow and complex way of governance. Theorists gather into a large hall, discuss every detail for hours, and seek legal justification for their decisions until they “enact” a new law or decree. However, they have nothing to do with the practical implementation of these laws or resolutions. Prepared “legislation” is sent to various executors in government or municipalities, many of whom have no idea why one or another resolution was passed. The latter, without much thought, execute these decisions, and when asked why they need it, they point up (to the parliament), saying it is not up to them! Therefore, the Soviets of Workers’ and Soldiers’ Deputies are formed in the work collectives. It ensures that elements of opposing classes will not gain access to government. It does not matter that the work collectives do not represent the entire society of the country, but at the initial stage, it is necessary to do so until class antagonism disappears. The Soviets elect their representatives to the country’s branch “commissariats”, which appoint their own “commissars”. The latter enact laws or decrees and organise their execution. It should be noted that, in practice, these Soviets greatly simplify the entire public administration process. If any elected representative is disliked or disappoints in carrying out the tasks entrusted to him, it is not necessary to hold a new election! The work collective gathers, and all of the workers consult and recall their representative, while also appointing someone to take his place. Armed soldiers protect their representatives and take part in the process themselves. Everything is happening in a fast and disciplined manner! V. Lenin explains it very simply: “This “factory” discipline, which the proletariat, after defeating the capitalists, after overthrowing the exploiters, will extend to the whole of society, is by no means our ideal, or our ultimate goal. It is only a necessary step for thoroughly cleansing society of all the infamies and abominations of capitalist exploitation, and for further progress” (Lenin, 1917). Thus, the new lords of government, who only support “factory” discipline, will not lead this “syndicate”, i.e., the new socialist state should be led by all members of society, but there is no explanation as to explanation as to who and how should lead it (probably everyone as they deem it appropriate, but it is very difficult to imagine it in practice!). However, it must be assumed that, as in the past, this “syndicate” will be led by former capitalists, albeit at a lower rank, such as hired bookkeepers, accountants, and specialists of work organisation or other type of management. After losing their wealth and being terrified of violence, these “sons of the wealthy” will suddenly become very loyal to the socialist state and will begin working very effectively for the lowest wage of a worker! Such trust is worthy of praise! However, V. Lenin continues: “For when all have learned to administer and actually to independently administer social production, independently keep accounts and exercise control over the parasites, the sons of the wealthy, the swindlers and other “guardians of capitalist traditions”, the escape from this popular accounting and control will inevitably become so incredibly difficult, such a rare exception, and will probably be accompanied by such swift and severe punishment (for the armed

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workers are practical men and not sentimental intellectuals, and they scarcely allow anyone to trifle with them), that the necessity of observing the simple, fundamental rules of the community will very soon become a habit. Then the door will be thrown wide open for the transition from the first phase of communist society to its higher phase, and with it to the complete withering away of the state” (ibid., 1917). Logic dictates that, in order to ensure the loyalty of the “suppressed classes”, who are currently dealing with all of the new state’s issues, without creating any material incentives, we should at the very least maintain constant further “iron discipline”! However, V. Lenin thinks the opposite! He believes that all members of society, including former capitalists, should be initially controlled by armed workers, but that after they “get used to” both their working conditions and the modest wage of the “smallest worker”, there will be no need to control them, and they, along with the entire social “syndicate”, will be able to enter the new upper phase of communism! From that moment forward, the need for any kind of governance will begin to vanish; democracy will be very broad; therefore, it will also become unnecessary, just as the state itself will! Lenin emphasised that “Communism begins where the care of ordinary workers for the common good occurs”. “Communist labour in the narrower and stricter sense of the term is labour performed gratis for the benefit of society, labour performed not as a definite duty, not for the purpose of obtaining a right to certain products, not according to previously established and legally fixed quotas, but voluntary labour, irrespective of quotas; it is labour performed without expectation of reward, without reward as a condition, labour performed because it has become a habit to work for the common good, and because of a conscious realisation (that has become a habit) of the necessity of working for the common good – labour as the requirement of a healthy organism” (Lenin, 1965). But why is work necessary? It cannot be compared to the vital needs of air, food, etc. The need for air is purely physiological. Although the need for food, housing, and clothing develops as a result of social production, it is first and foremost a necessary precondition for the existence of a body. Meanwhile, the need for work is purely social, spiritual, and moral. It is formed by social circumstances and defines a person as a social human being. The need for work is defined by a strong sense of duty and a desire to solve socially significant production, technical, scientific, and other social problems creatively. These are new, socialist incentives for a person to work. During the creation of socialism and communism, all members of society develop an inner need to work voluntarily, i.e., by choice, for the common good of society. V. Lenin also applied this principle of “iron discipline” to party discipline, forming the principles of “democratic centralism”. However, he was heavily chastised by his party colleagues here. It was attempted to express this criticism openly at the Second Congress of RSDLP in London in 1903. V. Lenin responded by saying: “These attempts strikingly confirm what was already said at the Party Congress about the difference between the points of view of the bourgeois intellectual who attaches himself to the Social Democratic movement and the proletarian who has become conscious of his class interests. For instance, this same “Practical Worker” of the new Iskra (a political newspaper of the RSDLP – author’s comment) with

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whose profundity we are already familiar denounces me for visualising the Party “as an immense factory” headed by a director in the shape of the Central Committee (No. 57, Supplement). “Practical Worker” never guesses that this dreadful word of his immediately betrays the mentality of the bourgeois intellectual unfamiliar with either the practice or the theory of proletarian organisation. For the factory, which seems only a bogey to some, represents that highest form of capitalist cooperation which has united and disciplined the proletariat, taught it to organise, and placed it at the head of all the other sections of the toiling and exploited population. And Marxism, the ideology of the proletariat trained by capitalism, has been and is teaching unstable intellectuals to distinguish between the factory as a means of exploitation (discipline based on fear of starvation) and the factory as a means of organisation (discipline based on collective work united by the conditions of a technically highly developed form of production). The discipline and organisation which come so hard to the bourgeois intellectual are very easily acquired by the proletariat just because of this factory “schooling”. Mortal fear of this school and utter failure to understand its importance as an organising factor are characteristic of the ways of thinking which reflect the petty-bourgeois mode of life and which give rise to the species of anarchism that the German Social-Democrats call Edelanarchismus, that is, the anarchism of the “noble” gentleman, or aristocratic anarchism, as I would call it. This aristocratic anarchism is particularly characteristic of the Russian nihilist. He thinks of the Party organisation as a monstrous “factory”; he regards the subordination of the part to the whole and of the minority to the majority as “serfdom” (see Axelrod’s articles); division of labour under the direction of a centre evokes from him a tragicomical outcry against transforming people into “cogs and wheels” (to turn editors into contributors being considered a particularly atrocious species of such transformation); mention of the organisational Rules of the Party calls forth a contemptuous grimace and the disdainful remark (intended for the “formalists”) that one could very well dispense with Rules altogether” (Lenin, 1964). This approach sparked heated debate at the Second Congress of RSDLP in London, but the majority of delegates supported V. Lenin’s position. However, those who objected maintained to their position; therefore, the Russian Social Democratic Labour Party split into “Bolsheviks” (those who supported V. Lenin) and “Mensheviks” (those who disagreed with V. Lenin). V. Lenin harshly criticised his opponents in his book “One Step Forward, Two Steps Back”, accusing them of non-compliance with party discipline and opportunism. Since then, the Russian Social Democratic Labour Party (RSDLP) has added a new letter (b) to its name, which stands for “Bolsheviks”. In response to V. Lenin’s ideas, the famous Marxist theorist L. Trotsky observed: “After writing a whole book to tell us that revolutionary methods (“insurrection” and “overthrow”) were only acceptable during the circle period; that in a Party “one and indivisible” discipline must rule; and that elements who break discipline in the Party of the proletariat by that alone show their petty-bourgeois opportunism, Comrade Lenin, who in 500 pages has managed if not to convince his reader, a least to exhaust him with all this philosophy, suddenly throws at him this obscure aphorism: “Insurrection is an excellent thing when the advanced elements rise up against the

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reactionary elements. When the revolutionary wing rises up against the opportunist wing, that is good. When the opportunist wing rises up against the revolutionary wing, it is bad” (Lenin, 1964a, p. 160). It would be useful for all Comrade Lenin’s readers to pause over this “argument”. The “minority” does not wish to conform to Party discipline. By the very fact (please note!) it exposes its “anarchism” and “Jaurèsism”!2 (Trotsky, 1904). Therefore, the “minority” is the opportunist wing of our Party. This is the direct theorem. Now the reciprocal one must be proved. The insurrection of the “minority” is a very bad thing, since the “minority” is the opportunist wing of our Party. It is quite different if it is the “majority” which “rises up”, because the revolutionary nature of this “majority” is demonstrated by the fact that the opportunist “minority” fights it… The “minority” for its part, as the direct theorem has shown, is opportunist because it breaks discipline. The Conclusion of the two theorems: Comrade Lenin has elbowroom on both sides. Quod erat demonstrandum (“which was to be proved” – Latin)” (Trotsky, 1904). Then, L. Trotsky portrays the leader of the proletariat as follows: “And as Lenin, unlike the anarchistic intellectuals of the “minority” represents (I use a quotation he takes from an article by Kautsky) ‘the ideal model of an intellectual, totally steeped in the proletarian outlook… who without complaining marches in line, and works at each post he is given’; as Lenin, following Marx’s example never ingratiates himself into first place and ‘submits to Party discipline in an exemplary manner’; as Comrade Lenin possesses all these absolutely inestimable qualities as a disciplined Party member, who is not afraid to remain in a “minority”, he judges it indispensable to “slip” into his work in advance the philosophical justification for the split in the Party made to retain the remnants of his army. And he does it in a bare-faced way which is the reverse of his deep mistrust of his own supporters. If anyone rebels against me, it is very bad. If I rebel, then it’s good” (Trotsky, 1904). It is worth noting that L. Trotsky saw authoritarian and dictatorial features of the communist system in this project even back then and was able to predict the consequences of the communists’ entry into power, led by V. Lenin. Some of the pages of his book are now being read as a prophecy. L. Trotsky stated in his book that V. Lenin seeks to establish the party’s spiritual guardianship over the proletariat in order to replace a working class with a labour party with its introduced dictatorship (Rabotyazhev, 2019). L. Trotsky predicted that the organisation, established on the model proposed by V. Lenin, would eventually replace the party, then its Central Committee would replace this organisation and, finally, the new dictator would replace the Central Committee itself (these are incredibly accurate insights into the evolution of the Bolshevik Party while being in power!). L. Trotsky was a supporter of the permanent revolution who, unlike K. Marx and F. Engels, believed that the proletariat should not only assist the bourgeoisie in carrying out a bourgeois revolution but also, after abolishing absolutism, lay the groundwork for the emergence of bourgeois democracy, allowing for the subsequent socialist 2

This description is associated with the name of the socialist leader Jean Jaurès (1859–1914). According to him, the minority cannot express anything more than complaints about the use of overly strong terms like opportunism, anarchism, etc.

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revolution. The essence of L. Trotsky’s idea was that the Russian revolution should move immediately from the bourgeois democratic to the socialist stage; however, it could only win as part of the European Proletarian Revolution and become its prologue. L. Trotsky arrived in Petrograd in May 1917, when V. Lenin, who had already changed his positions and assessed the perspectives of the Russian Revolution (as L. Trotsky had done in 1905), joined an alliance with the theorist of the permanent revolution and even invited him and his supporters to take several leading positions in the Bolshevik Party. In July 1917, L. Trotsky joined the RSDLP(b) and was elected to its Central Committee. In September, he became chairman of the Petrograd Soviet of Workers’ and Soldiers’ Deputies and actively participated in the arrangement of the October Coup in 1917. He established the Military Revolutionary Committee, which served as the primary organising body for the armed uprising in Petrograd. After the Bolsheviks took power, L. Trotsky became the second person in the entire hierarchy of Bolsheviks after Lenin for several years. He was the actual founder of the Red Army. During the civil war and war communism, he proved to be an excellent orator, a great publicist, an energetic organiser, and a ruthless dictator who preferred to solve problems through violence and repressions.

7.2.3 The Role of the Communist Party However, let us return to the representatives of the “Soviets of Workers’ and Soldiers’ Deputies”, or the so-called leaders of the proletariat. As we have mentioned above, the proletarian revolution, according to V. Lenin, resulted in the concentration of unlimited power in their hands through the assistance of armed workers. They became leaders of the proletariat, so they have to demonstrate their leadership somehow. If they were only “parliamentarians”, it would suffice for them to personally represent the proletariat in parliament, to create, submit, and debate new public laws, to hold political debates, etc. However, because they are not only parliamentarians, they are entrusted not only with the creation of laws or decrees, but also with their implementation. These are much broader functions! Their compliance with the perception of democracy is a different matter, but functionally, they require a new “administrative apparatus”, which they must develop. Therefore, a new “apparatus” is being created instead of the old “apparatus”. In principle, it does not contradict Marxism’s statements because there is no indication of who these new “servants of communal society” or representatives of the “Soviets of Deputies” should be, what their structure should be, or how many of them there should be. Most importantly, the proletariat may appoint and dismiss them at any time. The procedures for appointment and dismissal are also not detailed, so, “everyone” can do “everything” in this situation. If the “Soviets of Workers’ and Soldiers’ Deputies” in the work collectives adopt and implement their decisions, it is not enough to do so on a national scale. Representatives of the work collectives are summoned to the All-Russian Congress of Soviets, which, unlike the bourgeois parliament, does not meet on a regular basis, but only once every few years for several days.

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The provision of Marxist classics to make parliament a “working” organisation was implemented in this regard. Representatives of the “Soviets of Workers’ and Soldiers’ Deputies” who attend the congress are merely ordinary workers who spend the rest of their time working in factories. They have little to do with state administration, so they only vote “unanimously” for the submitted draft laws. The congress appoints the “Council of People’s Commissars”. This Council functions similarly to a government, with branch commissariats led by ministers or “People’s Commissars”. These commissars are the actual leaders of each sector of the economy—monopolists, who create and implement the strategy of the sector entrusted to them. Over time, each sector of the economy becomes analogous to the public postal service or the public railway, with each individual worker serving as a “cogwheel” in the overall mechanism of the economic sector. Therefore, we can state that in this functional sense, the statements of Marxist classics and V. Lenin become practically feasible, and “Here the democratic organisation may take the following shape: the workers elect delegates who form a sort of parliament, which establishes the working regulations and supervises the management of the bureaucratic apparatus” (Lenin, 1917). Responsibility of the head of proletariat. Let us depict the political and economic image of the “responsible servant of society”. First of all, the term “responsible” raises concerns. Who are they accountable to? We must understand that, in theory, these representatives are accountable to the work collectives that elected them. The latter may appoint and recall them at any time. However, this is not how it works in practice. The work collective is not a homogeneous mass. It is made up of various groups that compete with each other for influence within the same work collective. These groups have leaders who are accountable only to the members of their group. If one group becomes dominant in the entire work collective, its leaders are directly accountable only to the members of the group and formally to the remaining members of the collective. Members of the group support their leader because he is one of them; therefore, hey may provide them with an advantage over the remaining members of the work collective. The leader of the dominant group, who is usually elected as the leader of the entire collective, forms his “team” from members of “his” group who have suggested him as a candidate and with whom he will have to work later. Because the appointed leader is given unlimited power, his subordinates believe they also have great power and are not accountable to anyone but their head. The accountability of the head of proletariat differs significantly from that of a capitalist, who is the legitimate owner of capital goods and the supervisor of all the workers in his enterprise. The capitalist’s assets are legally protected because he acquires them officially; therefore, he can use them freely and without any restrictions. Meanwhile, the head of proletariat, appointed by the work collective, has no official assets. Formally, he is the same worker as the rest; thus, despite having access to public property, he cannot use it for personal purposes. If someone suspects that he is attempting to do so, it could be very dangerous for the latter. It may, however, be no less dangerous for the person who has openly made such an allegation because it may result in punishment from members of the leader’s group who are protecting

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their leader. Therefore, workers often try not to talk about it when they notice the head’s tendency to use public property for personal gain. In turn, the head tries to remain formally “one of them”, i.e., the same as others, by not distinguishing himself from other members of society. In reality, he is not the same as others because he wields power that, in theory, is equivalent to that of a capitalist in his enterprise. The difference is that the capitalist is liable with his personal assets, i.e., his private property, in the event of a failure, whereas the head of proletariat does not have such risk or personal responsibility, especially when fundamental decisions are made collectively, i.e., within the same work collective. The position of the proletariat’s leader. In social terms, the position of a “sort of parliamentarian” or head of proletariat is always more favourable to that of a leader, and it is obvious to all ordinary people. Therefore, leadership is not a function performed by noble great martyrs for the sake of ordinary people. It is such a position that is usually the subject of a fierce fight. The higher the rank of the head, the safer and more beneficial his position is. Therefore, the fight for this position becomes increasingly fierce. The primary goal of the leader’s actions at first is to represent the interests of the group led by him or political “nomenklatura”, and then to use it to implement his personal interests. If a leader takes actions in the interests of society as a whole, it is only one of the means by which he achieves his personal goals and, more importantly, one of the ways he can advance his career. A person who organises production or trade well and performs entrusted tasks well has better career prospects only in some cases, but not always. A career, on the other hand, is frequently more successful solely because of representational achievements, which do not reflect actual good works or optimal solutions. Therefore, the desired reality is frequently created by means of fraud, disinformation, and intentional deception. The belief that the head and his surroundings will take the appropriate actions, care for, and improve is nothing more than a childish naive illusion. The management prefers demagogy about improvement rather than real development. However, if any part of the management implements any improvement, it will be only out of fear of losing its position or to strengthen its position in the government’s “nomenklatura” through internal intrigues. When it comes to the operation of the laws of the country’s society, the management does not seek to restrict them, but rather to encourage them in every way possible because it is the most concentrated product of these laws. Similarly, the relationship between the interests of the “nomenklatura” and the interests of its manager can be described. The public interest is respected only when it coincides with the personal goals of the head of the group. In other cases, the interests of the public or the “nomenklatura” develop independently of its head. The social status of a leader develops independently of society, and it usually does not apply to ordinary members of society as an exception. Therefore, the affairs of the head will never become the affairs of the rest of society; they will be limited to the appointment of candidates to the management, the maintenance of their duties, and their use to satisfy the management’s interests. The procedure for appointing heads of the proletariat. The rules by which individuals are suggested for head positions, continue their careers, develop historically,

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and eventually become common to all. Under these rules, an individual of average talent (or talented, which is nearly the same) or moderate stupidity (or moderate intelligence) is chosen to lead the lower levels, who is advantageous to management in a variety of ways. Because high-ranking heads are later elected from lower-ranking leaders, the same selection principle applies here as well. Therefore, as the rank of the head increases, the real value of the individual decreases (after the assessment of his intelligence quotient, the level of culture and professionalism, etc.). However, there are several ways to compensate for the head’s lack of intelligence, culture, and professionalism. The first is the need to establish a large circle of assistants, referents, deputies, or so-called political “apparatus” of trustees or “headquarters of nomenklatura”, as well as to begin the activities of newly established various types of institutions. In addition, the higher the rank of the head, the larger the group that implements his leadership. For example, hundreds of “qualified members of nomenklatura” prepare reports that are read by high-ranking heads. Therefore, the heads who read their reports to society are not only unable to write them themselves, but also do not fully comprehend them. However, all of the above-mentioned assistants have formed a nomenklatura that surrounds their leader in accordance with general laws of career. A systemic effect is gradually created when a sufficiently large group of specialists who follow established rules of conduct achieve the desired result in one way or another. Functions of the head of proletariat. As the rank of head grows, the operational functions are gradually becoming increasingly primitive. In fact, regardless of a person’s position or limitations of physical abilities, he can only communicate with a limited number of people and make a limited number of more or less deliberate decisions. Under these conditions, heads of the proletariat can only rely on their own party and ideological nomenklatura. Any person of average level or education who has passed the relevant stages of his career can master control functions of any level and become a member of this “nomenklatura” in a relatively short period of time. The problems here arise not from the difficulties of management as intellectual activity, but from the peculiarities of career as a special occupational activity. The position of the head of proletariat basically consists of the ability to retain power, maintain initiative on his side, and manoeuvre. And only a small portion of it is concerned with external affairs, such as the leadership of the people. Therefore, the battle for the role of leader or a place in the political nomenklatura is frequently fought by those who have the least regard for moral principles and are the least valuable in occupational terms. A person who begins his career as a head soon realises that it is the easiest type of activity in terms of mental and physical abilities. The number of people who later refuse to perform this activity is so insignificant that there are almost no such people. Therefore, it is not unusual for foolish old people to hold leadership positions and refuse to leave them voluntarily. In such cases, the leader from a certain level becomes nothing more than a symbol of the great “nomenklatura” in power.

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7.2.4 Constitutional Consolidation of Leadership The Communist Party (hereinafter—the Party) in a socialist state will never be just a political party—it will always be a “battle squad” whose main task is to support its political leaders. The Communist Party immediately becomes the primary government structure after the socialist revolution is won: all major decisions are made only in the Party’s committees at various levels (district, city, regional, republic, central). The Party Committees control everything and everyone, for example, the government’s spending, its actions, and personnel matters. Party organisations or at least small groups must be present in all ministries, departments, military units, divisions and formations, institutes, schools, production plants and factories, film studios, shops, creative alliances, theatres, public utility, and transport organisations, where management and part of the workers are required to be involved. Formed lists of positions, forming party nomenklatura throughout the state apparatus, are sent to the Central Committee (hereinafter—CC) from the District Committees of the Party. It applies to absolutely all national organisations. All appointments (and dismissals) of heads of enterprises are only permitted with the approval of the Party Committee of the appropriate level. The “nomenklatura” of the Political Bureau of the Central Committee (CC), such as ministers, leaders, secretaries of regional committees and republican central committees, and others can hold the highest political positions. The Political Bureau of the Central Committee performs functions of the sovereign power by managing the country on a daily basis. According to Article 6 of the Soviet Constitution, “The leading and guiding force of the Soviet society and the nucleus of its political system, of all state organisations and public organisations, is the Communist Party of the Soviet Union”.(Constitution of the USSR, 1977). This provision finally established the leadership of the sole political party. Other political parties are prohibited in the country, so they are unable to participate in the elections. They, like any other social organisation that opposes communist ideology, cannot organise public life in the country (Etot den v istorii…, 2016). In fact, a socialist state has no need for public life because no-one has any reason to engage in it. The party bodies have carefully planned who is responsible for what. As predicted by classics of Marxism, all members of society are cogwheels of one mechanism—each in its own place. Participation in the work of the Party communist youth (Komsomol), young pioneers, or labour union organisation may be similar to participation in public life because of their participation in ordinary meetings of these organisations, where plans for specific time periods are approved and reports are drawn up, as well as participation in demonstrations ordered by the Party during communist holidays. However, the most important political and economic objective of the Party is to ensure control of the activities of all national organisations, performance of the planned assignments and loyalty of heads of those organisations. Therefore, a position of “Party Leader” is established in all major organisations, in addition to the position of official head (director) of an enterprise. Thus, director of the enterprise

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is accountable for the overall productive functioning of the enterprise; head of the agricultural cooperative is responsible for the activities and results of the cooperative; head of the creative collective is responsible for its work and achievements; and the “Party Leader” of the collective or the “Secretary of the Party” supervises the political line of each collective and its head so that the latter does not unintentionally deviate from the Party’s national “strategic line”! Have they succeeded in eradicating class antagonism following the establishment of socialism and the liquidation of the bourgeoisie as a class, as predicted by the classics of Marxism?

• The creation of socialism gradually led to the abolition of the bourgeoisie as a class, but • Class antagonism was not completely abolished because • A new class occurred instead of bourgeoisie—a party and state nomenklatura, although • It was not the owner of the capital goods, as a bourgeoisie exploiting the proletariat; however, • It was worse than bourgeoisie because, by actually possessing productive resources of the country, it bore no personal liability for their use against society; • It was only accountable to the higher-ranking heads in the party and state hierarchy within the framework of its own “class”.

7.2.5 The New Class of “Nomenklatura” Although K. Marx, F. Engels, and later V. Lenin claimed that the first phase of communism, in which the bourgeoisie is liquidated as a class, will result in a new social system free of “class antagonism”, they did not anticipate that the temporary “empty” place of the bourgeoisie cannot remain “empty” for long! After the formation of appropriate conditions, when there is no other power on which leadership can rely significantly, we can state that such system of social order is created, in which new gentlemen or a new, currently, party “nomenklatura” of the proletariat appear. There are no longer any owners of capital goods or capitalists in this system. However, it appears that there are no longer any individuals who would invest their individuality in public affairs and become personally responsible for mismanagement and a lack of personal thrift. Although these new gentlemen are not formally the actual owners of capital goods, they are only trying to enrich themselves and take a better position without considering the immediate or long-term consequences. For the reasons stated above, the gangster system of nomenklatura consciousness and the form of conduct, moral impunity of consciousness, perception of fragility of one’s position, and the infinite need to make excuses, validate the legitimacy of one’s actions, and destroy opponents as a result of it is formed in the system

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of proletarian leadership. Therefore, the Communist Party is gradually becoming a new system of government by gaining a monopoly on power and eliminating all other political groups. Many years later, Milovan Djilas, a Yugoslav communist, defined “party nomenklatura” as a “new class”. Comparing the October Revolution with other bourgeoisdemocratic revolutions, Djilas paid attention to their fundamental difference: “New classes have gained power in a revolutionary manner by establishing and developing a new economic system in one or more countries that has opposed the structures of the old society. Meanwhile, in Russia, everything happened the other way round. The communists came to power not to establish a new economic order, but to establish a new economic system and consolidate their power in society through the implementation of this process. Therefore, a new class was formed after the communists took power” (Djilas, 1957, p. 38). In fact, the new nomenklatura takes on the role of a class. Because the proletariat, despite its abundance, is incapable of performing the functions of managing capital goods and organising production on a daily basis, it delegates these functions to its “responsible servants of society” or to its governmental nomenklatura. But to whom are these “responsible servants of society” accountable? Is it the proletariat? Formally, according to V. Lenin, “all officials, without exception, elected and subject to recall at any time” (Lenin, 1917) in the new socialist society; therefore, the proletariat (all workers) has the right to appoint and dismiss its representatives. But in fact, each individual proletarian is like an ordinary, unexceptional cogwheel in a massive socialist “postal service” (in a monopolistic apparatus) doing its job (performing functions) alongside former capitalists who are no longer true capitalists, but only “modest servants”, who are constantly supervised by ruthless armed workers! After all, they are the former class of exploiters who have not yet lost their “petty bourgeois” habits and must be constantly monitored and suppressed! But what distinguishes them from the rest of the ordinary proletarians and those who have always been proletarians? Almost nothing because their job or its nature, wages, living conditions, and other aspects became very similar. Therefore, groups of armed workers now vigilantly supervise all workers simply because “unreliably harmful elements” still exist or may occur among them. What does the new socialist society look like now? The newly formed class of “responsible servants of society”, or “nomenklatura”, now controls and suppresses the entire proletariat through the forces of armed workers or “proletarians” serving it! Later, these armed groups will cease to participate in the production process, and their functions will be limited to only supervision and control of criminal operations; therefore, they will gradually begin to perform the simplest functions of the “bourgeois police” with elements of “socialist ideological deviation”. In the long run, antagonism between this new party’s “class of proletarian nomenklatura” and the proletariat itself emerges. This class tries to emphasise its “exclusivity” in every way possible by granting itself new privileges and gradually distancing itself from the proletariat. Because each individual proletarian, like all of them collectively under “supervision of groups of workers”, is unable to express his opinion, the newly formed class in the socialist “corporation” feels accountable only to itself.

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However, how does the new class of “party nomenklatura” and its ruling “bodies” succeed to establish their position as society’s leaders? The government’s “collegiality” and the general collective decision-making procedure of the Soviets of Deputies enable them to do so by attributing to themselves the positive performance results of other individuals of society. On the other hand, in the event of failure, this method of decision-making allows for the transfer of liability for the negative consequences of their actions to other individuals, particularly if they are the leading individuals (including leading organisations). The success attained by all members of society (including the nomenklatura) is presented as success achieved through the wisdom of their leader. Moreover, the degree and nature of management’s involvement is irrelevant in achieving these results. Even when these accomplishments are achieved against the management’s will, they are later considered to be the management’s accomplishments! All victories achieved in the presence of these leaders become their victories. Nomenklatura portrays all previously banned or persecuted and later rehabilitated cultural events as a manifestation of the highest wisdom of the management of society. Meanwhile, the heads tend to see phenomena that are completely independent of leadership (such as good weather, ancient cultural monuments, or natural resources) as what they personally give to all people through nomenklatura as a gift. In addition, the responsibility for all possible negative consequences of management falls not on management, but on certain untrustworthy representatives of the nomenklatura or organisations whom management considers to be appropriate to blame for these consequences. The management makes no mistakes! The perpetrators are usually easily found. However, it is sometimes difficult to find the appropriate perpetrators, so they are fabricated. When it is difficult, if not impossible, to simply assess all of the social accidents that have occurred as a result of poor leadership or other automatic phenomena, and it is necessary to identify their causes; the perpetrators who may cause problems for the leaders are sought. In such cases, the government acts formally but blindly, attempting to present its criminal acts as the will of the nation or society. It is very convenient! The success of a society can always be portrayed as the result of people’s will and actions taken by leaders to express their interests! But probably according to Marxist classics, none of these circumstances should have been a serious reason to doubt the necessity of a socialist revolution, or perhaps they simply did not examine all of the possible consequences of the revolution, did not pay attention to them, and did not take them seriously.

7.2.6 Legalisation of the New Class of “Nomenklatura” or Its Transformation into a “Working Intelligentsia” The representatives of the proletariat, elected as leaders, are fundamentally changing their functions. Only the lowest-ranking leaders continue to do their normal manual labour while also leading small groups of workers. Higher-ranking leaders stop doing

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manual labour but continue to lead. They are no longer a true proletariat because they formally represent it. They become “elite” or members of the “class of nomenklatura”. Although it is a ruling class in the same way that the bourgeoisie is in capitalism, it is not officially referred to as antagonistic because no antagonistic classes can remain in socialism. If any “petty bourgeois” forms of ownership remain, they are ruthlessly combated in order to eradicate them. No-one, however, is fighting against or attempting to destroy the “class of nomenklatura”. On the contrary, this class develops very quickly and successfully in socialism, and in most cases, it acquires assets illegally. Therefore, an important question is how to officially legalise or legitimise his “class of nomenklatura”. It would be difficult to call its representatives true “proletarians” because they do not perform manual labour. However, it is necessary to assign them to some category. Therefore, they are usually associated with representatives of mental work, whom K. Marx and V. Lenin demoted to a lower rank—initially, former capitalists, who were gradually replaced by own members of nomenklatura educated within the framework of the socialist system. They are all referred to as “intellectuals”. Because the ruling class in socialist society is a proletariat exercising power through a “dictatorship of the proletariat”, peasants or cooperative peasantry are its assistants; therefore, intelligentsia is not permitted to refer to itself as a separate class. As a result, it officially becomes an “interlayer”, rather than a full-fledged class situated somewhere between the proletariat and the peasantry. However, this “interlayer” is far from homogeneous. Its political nature divides it into two major groups: “party nomenklatura” and remaining non-party production heads, scientists, cultural workers, and other respected members of society. Only the mental and, in some cases, organisational nature of the work unites these two groups. However, it is not a very strict distinction between them because top executives of enterprises, as well as cultural and educational institutions are frequently attempted to make representatives of the “party nomenklatura” in order to establish party leadership as widely as possible. Unfortunately, the wise executive of the enterprise is not always willing to agree to become a zealous member of a political party. Therefore, “party nomenklatura” should not be confused with “national nomenklatura”. It should be noted that in a socialist state, the “nomenklatura” may include individuals with valuable business characteristics and knowledge of scientific, production, or cultural areas. Despite not being “members of the party nomenklatura”, they are still members of the state’s “nomenklatura”. which enjoys similar privileges as the party. The only difference is that this member frequently receives the “party supervisor” (the Party Secretary), who closely monitors his political views.

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7.3 The Power Vertical System 7.3.1 Leader and Nomenklatura The leader cannot defeat the nomenklatura, but the nomenklatura cannot defeat the leader either. However, all components of the nomenklatura are interrelated like the Siamese twins. An attempt to destroy at least one component can ruin the entire system. Their relationships eventually become quite realistic, and they do not end with the alleged loyalty of the apparatus personnel to the leader. Although the leader creates and shapes the nomenklatura, he is also a creation of the nomenklatura, even if he does not understand it directly. The nomenklatura develops social support for dictatorship not because it adores its dictator, but because it wishes to ensure its collective dictatorship of a country. The nomenklatura justifies its slavish execution of the leader’s orders by claiming that all orders are given in the interests of all people. Of course, a dictator can destroy each nomenklatura representative individually by expelling him, but he cannot act against the entire nomenklatura (Shubin, 2004). Sometimes it is possible to launch new wars against the nomenklatura, but not everything is dependent on his will and desires. Willy-nilly, he is becoming increasingly unwilling to look after the interests of the nomenklatura, to strengthen its power and authority, and to increase privileges. Because he is nothing more than a protégé of his protégés, willing to exercise his will in exchange for him exercising theirs. And the leader’s intention for the nomenklatura he created is clear—he wants to ensure the unlimited and firm rule of the country. The ruling that is independent of the leader’s self-will and whims; on the contrary, the ruling that does not grant the leader the right to the property or even life of any member of the nomenklatura. Such an image of V. Lenin has persisted in legends. He forgave anything (any self-will) for his followers, allowing them to do whatever they wanted for personal enrichment and collective welfare. He was a true leader. Then, the unconscious desire to “return to the Leninist standards of party life” begins to mature in the depths of nomenklatura.

7.3.2 Administrative Negotiations In contrast to the usual market relations, administrative negotiations are related to values and institutions that are frequently lacking in the capitalist market. The market economy in general is not hierarchical, and its links are primarily horizontal. The market’s well-known hierarchical institutions, such as stock exchanges and banks, are only hierarchical internally, but interact horizontally in between, and they cannot exist in conflict with market laws. Buyers and sellers are equal in the market, and money is the unit of measurement for all relationships. The amount of money held by the buyer indicates his importance in the market. Unlike the market, however, political activity is hierarchical and limited by other values, objectives, and measures. Political activity hierarchises people involved and

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grants them various powers. A politician’s position in a hierarchical system is understood as the legal powers conferred upon him, which he uses to achieve his goals. And goals, in general, are the desire to increase his political weight (status) or, at the very least, to maintain it. Political power and economic opportunities form an organic whole in the administrative market of a socialist state, where all activities are hierarchised. Having these powers divides the citizens of the socialist state into certain separate social strata, i.e., the social groups of the socialist society. The economic situation of members of socialist society is unambiguously linked to their political status (in the sense typical of socialism). Looking from the system’s perspective, political statuses (social origin, education, social status, place of residence, etc.) clearly determine a citizen’s economic status in a socialist state. Therefore, any potential discrepancy between the political status of members of various social groups and their economic status (including level of consumption) is usually closely monitored and frequently attracts the attention of party and state repressive bodies. The entire state-owned national economic complex is a huge administrative market in which a separate industry or enterprise; a unit of administrative-territorial division, social accounting group, or an individual is only one of many elements with a permanent structure. Each enterprise belongs to a branch ministry and is assigned to a specific territory. Above enterprises, sectoral hierarchy levels (such as associations, trusts, councils, and national or republic ministries, where individual districts are the lowest territorial structure units) are established and integrated into cities, regions, and Republics of the Soviet Union. Administrative market relations are realised through an administrative structure determined by the branch structure, administrative-territorial division of the state, and special administrative institutions of market management—verticals of party apparatus and state executive committees. The socialist economy is always primarily focused on extensive development. There is no need to modernise the economy because of it. Colonised or “reclaimed” territories become part of the Centre’s raw materials, which are required to maintain the social structure of its “responsible servants of society”. The Centre establishes and maintains a massive “common fund”, also known as “obshchak” (similar to that of organised criminal structures), from which it feeds various types of “areas”, such as separate industries and regions. Uniform relations of resource deprivation and redistribution between the Centre and the periphery also determines a state’s territorial-administrative organisation, where government structures at any lower level of administrative governance more or less accurately reproduce the structure of a higher level of governance and where any two adjacent (higher and lower) levels of the administrative-territorial hierarchy are always in the process of continuous negotiation. The essence of these negotiations is to determine the quantities and proportions between industrial foodstuffs and raw materials that are taken from the lower level and given to a higher level. Later, the higher level, having these resources, redistributes them at its own discretion. The majority of them move upwards according to hierarchy, or “power vertical”, while the remainder is redistributed locally and returns to lower-level sectors of the national economy based on “relevance”. Industrial enterprises and regions are always attempting to contribute as little as possible to

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the “common fund” while receiving as much as possible from it. Therefore, administrative negotiations between higher and lower levels of administrative-territorial hierarchy, as well as administrative negotiations between different sectors of the economy, have a significant impact on the administrative market. The relationships between the levels of administrative-territorial hierarchy do not necessitate any economic innovations because the only way to solve the problems of resource deprivation and redistribution is to elevate the status of a republic, region, district, or city within the administrative hierarchy, thereby automatically granting the right to increase the number of resources received, which is attributed to such level. A socialist administrative market can exist only if the administrative statuses of all negotiators are unambiguously defined. First, it is necessary to determine which share of the “common fund” one or another holder of “significant” positions; the owner of the “name of honour” and a representative of another social and accounting group may pretend to. Every hierarchy of power at every level of the organisation “issues” its administrative “money” as a sign of rights to “its share”. However, physical sizes of “shares” are never unambiguously set, so negotiations usually occur during the actual distribution of power. At the same time, everyone is aware that documents bearing the stamp with text “The Central Committee of the Communist Party” grant the right to a greater “share” than documents bearing the signatures and stamps of the Regional Committee of the Party or the Council of the People’s Deputies. By solving various organisational and current economic issues, these “paper sheets” begin to function as securities, each with its own circle of circulation. Only documents approved by members of the Political Bureau of the Central Committee of the Communist Party had full “convertibility” (as a foreign currency); meanwhile, all other documents could be challenged in every single case. Therefore, incomplete convertibility of socialist securities (decrees) frequently creates a certain degree of uncertainty in their circulation, as well as in the distribution of the assets from the “common fund”. Such uncertainty is mitigated by a special type of administrative market relationship—an exchange relationship in which officials of the same level exchange administrative services (rights to their share) while taking the consumer value of these services into account. For example, a specific official can be “bribed” to make the necessary decision, or pressure from above can be applied to him to achieve the same result. However, in all situations, the status of the person making a decision must be clearly defined politically. He must be protected by the system and its political core—the Communist Party, which must have its own representatives at all these levels. They must act as “arbitrators” in administrative negotiations because they have an independent structure up to the highest level of national administration. However, these “arbitrators” frequently perform not only as a party’s supervisory function, but are also elected to councils of deputies at all levels, which make all decisions at their respective level. The executive-level representatives (such as heads and members of executive committees) are also members of the party. Thus, the principles of socialist self-government defined by K. Marx are fully implemented in the socialist state’s organisation—socialist self-government is gradually becoming

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a separate “syndicate” in which “responsible servants of society” adopt and execute their own decisions and decrees. Nevertheless, we can state that the number of levels of hierarchies of the administrative-territorial structure of politically stable and economically prosperous states usually does not exceed three levels, and in most cases—four levels of governance (the state—county—land), or (the state—county—land—municipal district), etc. The increased number of levels of administrative-territorial division usually results in conflicts between different levels. The governance structure of a socialist state consists of 5 or more administrativeterritorial levels of governance. These are State (USSR), Republican, District, City, and Urban levels. The Soviet Union level usually includes members of the Central Committee of the Communist Party of the USSR and deputies of the Supreme Soviet of the USSR, the Republican level—members of the Republic Central Committee of the CPSU and its deputies of the Republic Supreme Soviet, the city and district level—members of the City or District Committee of CPSU and deputies of their urban councils. It should be noted that party and state bodies are interconnected and form a common collegial decision-making body located at each territorial level. It is such a logically strict administrative division that can ensure the fulfilment of production plans, their exceeding and the delivery of manufactured products to the state. The leading roles of the Communist Party ensure the ability to move conflicts to higher levels of the hierarchy. Its management creates a hierarchy of administrative structure and forms a strict “power vertical”, the core of which it is. Conflicts between adjacent levels of the administrative-territorial hierarchy in control-repressive units, as well as planning and financial units of territorial administration of the socialist state, are converted into internal local conflicts in its apparatus. The bureaus of the party committees are institutions where conflicts are legalised and transformed into forms acceptable to the entire system. Therefore, the Communist Party leader or General Secretary becomes the most important inspirer and “arbitrator” of the national development strategy. In a five-stage structure, the administrative district may be even more “important” than the city, which means significant differences in its political behaviour, as well as the characteristics of the entire governance system. It is a functional characteristic of administrative-territorial division rather than a structural characteristic, primarily related to the fact that enterprises of union subordination established in cities are usually more important from the standpoint of the central government than enterprises of republic subordination. After all, there are specific local industries in the regions, which are more important to the leaders of the republics. The relations between any two adjacent levels of the administrative-territorial hierarchy are always contradictory because every Centre (the Union’s centre in relation to the Republic level and Republic’s in relation to the City or District level, etc.) functions as an institution for the expropriation of production made by lower administrative level producers, as well as a body distributing resources at lower levels. Therefore, lower-level management bodies always try to give the Centre as little as possible while obtaining as much as possible from it. But the Centre, in turn, objects to it

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and tries to take as much as possible from its subordinate territory while giving as little as possible. Conflicts between adjacent levels of the hierarchy are then solved by moving them to a higher level—the Republic or Central administrative level of the Union, with the latter acting as “arbitrators” and supreme managers of resources (Kordonsky, 1996).

7.3.3 Administrative Market The social accounting group was the key concept defining the structure of the Soviet society. The concept of a social group includes the volume and quality of consumption determined by a normative method, resulting in heterogeneity of living standards among representatives of various social and accounting groups. Because of a better category of consumption, depending on the position held, an opportunity arises to force people to migrate, change jobs, compete for positions in the labour hierarchy, i.e., to create social dynamics. This dynamic can be managed by regulating supply and security standards, establishing quotas and preferences, wage coefficients, and additional taxes related to the priorities of the state. The formation of the system of standards, quotas, premiums, and compensation forms the content of the social policy of the socialist state, which is strictly related to production. These activities become equivalent to market regulation mechanisms under conditions of real socialism. The “correctly” chosen combination of standards and quotas ensures an increase in labour power and a surge of people, as well as stability in country’s priority areas. By implementing this policy, local centres of prestigious or high-quality consumption are formed, around which the population’s structured activities are concentrated. The lack or “deficit” of individual goods, accompanied by a classified target distribution, forces labour power and those working in the administrative apparatus to concentrate where there is a sufficient supply of products and services. The goal and purpose of social activities are the desire to consume “no worse than others”, to settle in a location where a person can “access scarce goods” or “get scarce goods”. Social groups are defined in the following aspects: territorial, sectoral, and official. As we all know, the territorial-administrative divisions of the country’s settlements are hierarchical: there are non-categorical or “exclusive” settlements, such as capitals or resort cities, and settlements of the first, second, and other categories. The category determines the level of supply and provision of public goods, as well as many other parameters related to consumption. According to the standards, the standard of living in higher-category settlements is always higher than in lower-category settlements, which determines the natural movement of the population (migration) from lower to higher-category settlements. In terms of territorial aspect, a person’s social and registration status is determined by his assignment to a specific territory, a settlement (place of registration), the right to housing, which is reflected in the housing order, and, if he serves in the military, registration at a specific military commissariat. The standards and sanctions that

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determine the social status in terms of territorial aspect are called administrative regime. The institutions of the Ministry of the Interior, local administrations, and military commissariats supervise compliance with the administrative regime. The territorial categorisation system is far from unique and unambiguous. A strict territorial hierarchy can be consistently violated due to competition. Some territories may reach a higher-category than anticipated based on administrative status or demographic indicators, or they may be granted special privileges. For example, because of the higher-category, some territories may have a more favourable ratio between the supply of goods and the wages of the people who live there. Meanwhile, residents of lower-category settlements usually try to relocate to higher-category settlements or visit them for shopping, theatres, and consumer service enterprises. Another aspect of the social accounting group’s definition is related to employment in certain national sectors of the economy. Individual industries can be divided in the same way as settlements, although this division is usually less obvious. Enterprises belonging to the Ministry of Defence are always placed in clearly higher categories in state ratings than enterprises belonging to the Ministry of Agriculture; meanwhile, the status of the Ministry of Heavy Industry cannot even be compared to that of the Ministry of Culture. Housing, public utilities, wage level, and stability in enterprises of various industries differ depending on the “importance” of one or another enterprise or industry. Each individual’s social status in the industry is determined by his occupation and level of education, which are documented in diplomas and workbooks, certificates of qualification, employee identity cards, and other type of “certificates”. A change of workplace, if it is related to the transition to a higher-category enterprise, is always associated with various commissions, permits, and assignments. The actual rating of enterprises and organisations is also not unambiguous. This is because enterprises and organisations compete for the labour power and introduce various additional benefits, such as the relatively fast housing assignment, lower public utility fees, and access to “scarce goods” at their own expense. In the activities of state planning bodies, these consumption standards are consistently reorganised into plans, which are forcefully sent from above to enterprises, territories, and other entities of the state system with specific decisions on the employment or refusal to employ, the rules on the introduction of an individual member of society to a certain level of “nomenklatura” by allowing or limiting his registration, and so on. All quotas of administrative regime, personnel selection, and employment mechanism were implemented in accordance with the applicable Labour Code standards. Thus, the combination of standards of the administrative regime, the Labour Code, and the selection and employment mechanism established general parameters of state governance, which were understood as the creation of an optimal social structure with minimal social heterogeneity and maximum social justice. Overall, the optimisation of the entire social accounting structure in the socialist state has a huge economic significance. It is especially important in terms of the purchasing power of money or “certificates”, which is largely determined by the holder’s social and accounting status. The rating of territories, industries and positions, as well as the distribution of their “significance” lead to a corresponding

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increase in the purchasing power of money circulating in them. With the increase in an employee’s official status, when he moves from a lower-category settlement to a higher-category settlement, or from an enterprise operating in less prestigious sector to an enterprise operating in more prestigious sector or to a more “significant” enterprise, the special systems of social welfare and catering to employees, as well as other privileges set in the latter, allow an employee to purchase of goods and services at a significantly lower price. Because of specialised procurements and services, the individual’s higher official status allows him to earn a much higher actual income than other individuals with lower official positions, even if their nominal income is the same. The social and structural differentiation in purchasing power of money leads to the formation of the administrative market. It has its own “players”, which are enterprises, organisations, and even separate settlements and cities that compete with each other for economic status rather than money. After all, only economic status, not money, can provide opportunities to obtain all the necessary consumer products and services, as well as to provide them to others. The higher your status in the administrative market, the more administrative resources you can dispose of, i.e., the possibilities to distribute and redistribute them to lower administrative levels. These administrative resources consist of money transferred by lower administered structures to higher administrative structures. The higher level of the administrative structure, the lower subordinate administered structures it has and, accordingly, the more administrative resources increase. Massive cash flows occur in the long run, which are directed upwards towards the hierarchy of positions, resulting in corruption and abuse of power. Simultaneously, cash flows from lower-category to higher-category territories increase (people start travelling to the capital for shopping purposes). Cash flows are increasing from less “significant” enterprises to more “significant” enterprises because “scarce goods” (such as fuel, spare parts, imported alcohol, and many other products) can be accessed only there. Targeted movement of cash flows “from the bottom up” increases social inequality and disrupts the harmony of established social homogeneity. In addition, it reduces the efficiency of the management of the entire social structure by neutralising one of the primary methods of state administration—material incentives. It forces the state to tolerate phenomena related to corruption, inconsistencies, shopping trips, and other daily phenomena of social life that are typical of the “real socialism”. Why did the socialist economy continue to evolve cyclically?

• The business cycles that are typical of capitalism were eliminated by the builders of socialism, but • they did not eliminate the cyclic recurrence and were unable to stabilise economic growth because

7.3 The Power Vertical System

• business cycles had transformed into administrative cycles that are typical of socialism because • there is a fierce struggle between economic centralisation and its decentralisation because • as the Central government’s influence grows, so does its control; however, stagnation and decline begin. • The country’s economic growth begins with the decentralisation of the economy, but the government begins to fear losing control and reverting to capitalism.

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Administrative Cycles in the Soviet Union

Practice has shown that the planned economy model proposed in Marxist economic theory is capable of abolishing capitalist business cycles, but does not abolish them at all. So, these cycles do not disappear. In the socialist economic model, business cycles are transformed into administrative cycles, during which the economy continues to develop cyclically. In fact, socialist administrative cycles are very similar to capitalist cycles in terms of their manifestation and even outcomes. In terms of duration, they are only slightly longer and change not every 7–10 years, but they last about twice as long. However, these cycles are influenced by completely different factors. The centralisation of the economy begins to grow at the beginning of the administrative cycle, manifesting itself as the strengthening of the power vertical and the restriction of market factors. The role of the “Centre” is expanding, and the entire national economy is transforming into a unified military camp, where some people only give orders and others carry them out. There is very little room for individual initiative, and even if there is, it is only within certain and strictly defined boundaries. People are becoming more like “robots”, focused on carrying out orders without giving much thought to their purpose or economic feasibility. Especially, they don’t consider the long-term consequences of these orders. In the long run, this order destroys the creative spirit of the productive forces and kills the desire to innovate, despite providing a basic standard of living for society through various “team methods”. Inevitably, national economic stagnation sets in, characterised by a slowing of the rate of development and a decline in productivity. At first glance, it appears to be very similar to a capitalist economic recession that causes economic crises; however, there are some differences. The main difference is that a capitalist recession does not reduce the abundance of products; rather, it results in overproduction, which causes production to naturally decrease. Meanwhile, socialist stagnation does not result in overproduction, but rather in an increase in the deficit of basic products caused by the absence of competition and rigidity in the management of the planned economy, resulting in a lack of material interest.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_8

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In a capitalist society, a recession ends naturally when production level that does not ensure the usual abundance of products falls. If there is a market, increased demand automatically triggers all of the economic driving forces to begin producing more products, and economic growth begins. There is no market in a socialist economy; therefore, the growing demand cannot trigger any driving forces to overcome the economic stagnation. The growing dissatisfaction of society must reach a certain critical point when the management finally begins to admit that “Something has to be done!” Typically, the gradual introduction of very limited capitalist elements of the market into economic management begins, with the goal of retaining the maximum influence of the “Centre”, while allowing for the market forces to operate. Then, economic growth begins and continues until it starts to repeatedly frighten the nomenklatura that it may become out of control. As previously stated, the main driving force behind these cycles is a change in the country’s economic situation. It is determined by the degree of centralisation of the economy and determined by the country’s government—party nomenklatura and its leader—First Secretary of the Central Committee (later General Secretary). Administrative cycles are practically impossible in a capitalist or market economy because all economic entities have a clear autonomous economic status that is legally defined. The relationship between these entities is based on a contractual basis. Here, the management bodies can also be regarded as certain separate entities that are maintained from taxes of economic entities. Therefore, it is understandable that public authorities may force independent economic entities to pay these taxes and to adhere to clearly defined rules or requirements in their activities as established by those authorities. However, these authorities receive only as much funds as it is necessary for their maintenance and the performance of administrative functions. In individual cases, they may form funds in which funds are accumulated to support certain economic activities or to make grants. In this case, support may be granted only to enterprises that meet the clearly defined eligibility requirements for support. Everything is different in a socialist state. In fact, individual enterprises are not individual economic entities. Although they pay taxes imposed by the state, their right to dispose of the remaining funds is very limited. They cannot keep the majority of their funds, if not all of them, but must instead give them to organisations with a “higher ranking” in the “power vertical”. We have already examined it by presenting a socialist economy model. Later, when money is required, the enterprise is forced to request that such organisation allocates funds to it in order to carry out specific projects. It gives the impression that it is not the enterprise that finances the public authorities, but the public authorities that finance their enterprises and allocate funds to them. Enterprises cannot control how higher-level public authorities spend their money because they do not have that right. These funds are used by branch ministries and the party nomenklatura, who present very formal reports on their use to enterprises at party congresses and plenary sessions. The degree of centralisation grows when a greater proportion of corporate funds is entrusted to higher-level organisations and the amount of funds freely available to the enterprise decreases. It applies to both production and trade organisations, as well

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as their branch structures; besides, it also applies to public bodies. As a result, enterprises become more reliant on the Centre; meanwhile, the nomenklatura becomes increasingly important and gains more opportunities to control every transaction of the enterprise. It could be said that the system begins to function “as a single syndicate” in accordance with true Marxist principles. Individual branch organisations form parts of this syndicate function as separate states within a state. They develop and carry out their objectives and tasks while reporting only to the country’s highest leaders, who comprise the Political Bureau. The connecting or “reinforcing” link of these “syndicates” is the Communist Party, whose leaders form this bureau; meanwhile, its representatives participate at all levels of the syndicate’s management, forming a party nomenklatura that supervises and leads the process. However, the growth in the degree of centralisation gradually destroys the foundation of the system—its effectiveness. With fewer and fewer resources, the “bottom” is becoming less active; at the same time, its level of responsibility decreases with the decreasing amount of funds that it may use at its discretion. With no money, it only waits for orders “from above” and the money to carry them out. As centralisation increases, all funds begin to accumulate “at the top”, but the higher the government, the fewer physical opportunities it has to assess specific local needs for resources, control the situation, and always find an optimal solution to each problem under constantly changing conditions. Untimely or irrational decision-making is gradually leading to a crisis in the overall system’s management. Even if the lowest links notice problems, they are not authorised to solve them because they lack money. They can only inform “the top” about them, but they do not always dare to do so out of fear of being held accountable for the consequences. It is better if they “do not notice” anything because they will be told, “You were aware of it but did nothing about it!” What can they do if they do not have any funds or authorisations? In turn, the governing links are unaware of these issues and have only a few opportunities to check everything and give correct orders to everyone. Therefore, it is focused on the general “strategic” tasks of the state, as defined by the highest leaders of the party and the state, regardless of local conditions or specific economic circumstances. The functioning of the state economy gradually becomes ineffective after the maximum centralisation of governance because funds are wasted unreasonably, so the inevitable economic stagnation at the top of the administrative cycle requires to change the course and a move towards decentralisation. In such a situation, a new leader usually takes power and begins to “optimise” the state’s governance. The party and the state nomenklatura are forced to accept it because declining economic efficiency worsens its situation. Therefore, the party government is cautiously implementing decentralisation, allowing local authorities to take over leadership and providing them with more and more funds to carry out their decisions. The economy gradually begins to recover, decisions are made on time, and responsibility for using money starts to emerge. The power of branch ministries is usually reduced at this point, and more emphasis is placed on light industry and the production of people’s consumer goods, resulting in a decrease in product “deficit”.

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The question is, how far can decentralisation go? It should be noted here that as enterprises gain more autonomy, the party nomenklatura receives less and less revenue. Although the volume of revenue may not change or even increase as a result of improved efficiency, the significance of nomenklatura will inevitably decline. One more change and all of these leaders may become unnecessary! Then, the entire industry, or even the entire state system, may become a multitude of organisations with little reliance on one another (totally as in capitalism!) and each carrying out its own policies, which are little dependent on the Centre’s directives, rather than a smoothly operating “syndicate”! Therefore, as decentralisation spreads, the nomenklatura becomes increasingly concerned about its own survival and gives the alarm, demanding a return to Marxist-Leninist party leadership principles. Then, a new administrative cycle begins, signalling the end of decentralisation and the victory of the nomenklatura. It should be noted here that administrative cycles are impossible to eliminate in socialism because they arise from the fundamental contradictions of socialism, resulting in a deterioration of the country’s economic situation. It is a paradox that the more capitalism there is in the economy, the more it recovers and improves; conversely, the more socialism there is in the economy, the more it closes and stagnates! Therefore, if the nomenklatura fails to stop its leader, who was decentralising the economy, in a timely manner, socialism may never return! Let us now look at how these administrative cycles evolved historically, using the Soviet Union as an example.

8.1 The First Administrative Cycle 8.1.1 Policy of War Communism Following the October Revolution in Russia in 1917, the dictatorship of the proletariat was established, with V. Lenin as its leader. He and his comrades were the first to create a “party nomenklatura” of the socialist state. The occurred new nomenklatura actively increased its influence by establishing a “power vertical”, which was primarily based on branch leadership of entire country’s economy. According to K. Marx’s model of the socialist “syndicate”, the “people’s commissariats” of individual industries, along with their commissars, resembled separate states within a state with their strict internal iron order and rules. The social and economic system that existed between 1918 and 1921 was based on the accumulation of the country’s main resources in the hands of the state, where commodity-monetary relations were replaced by the state distribution of products. The “Policy of War Communism” was introduced as a new economic system. With its assistance, the Bolsheviks solved two problems: first of all, they introduced the elements of communist relations (which were understood as free labour and consumption), and second of all, they accumulated all the national resources required for civil war and the battle against intervention of capitalist states in their

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hands. The state took over the management of all economic and social relations, resulting in the establishment of the new nomenklatura. Because trade had been replaced by state distribution of products, the Bolsheviks took radical measures to establish communist rather than socialist relations in Russia. However, there were no economic premises for it even in Marxist theory. When the industry was destroyed, agricultural products and food became the country’s primary resources. The army, nomenklatura, and personnel had to be fed. To prevent the export of food products beyond national borders, the Bolsheviks almost completely banned trade, which resulted in the emergence of a “black” market. Because the monetary system had been destroyed, wages were replaced by food rations. All of it ruined the former order. Labour productivity declined, while absenteeism and thefts increased. One of the Bolsheviks wrote in 1918 that “The fall in production capacity has reached a critical point, beyond which there is total chaos and turmoil”. The Bolsheviks divided and transferred landlord estates to the peasants by exempting them from taxes paid to the landlords and removed their debts to the peasants’ Land Bank. But the peasants were not happy for long. The “food dictatorship” was introduced in the middle of 1918. Peasants were forbidden to sell their products. They were obliged to sell food to the state at a fixed price. However, nothing came of such “trade” because who would want to give away his products for a mere trifle? A decree on the expropriation of “food surplus” was adopted in 1919. According to the authors of this concept, it had to concern only the surplus of peasants’ food stocks, leaving the latter with a minimum amount of food for subsistence. However, things were different in practice. Armed groups of workers robbed villages and frequently expropriated not only the “surplus”, but everything they could find on the farm. The newly appointed people’s commissars began a ruthless fight against counter-revolution when entire villages and settlements were left without any food. Now, peasants received nothing in exchange for their products. Besides, they were shot down for demonstrating resistance. In order to simplify the process of food expropriation, the establishment of communes began in 1918. The peasants avoided this innovation because they wanted to keep ownership of their land. A ration card system was introduced, under which everyone could receive food only from the state. Attempts by some local councils to fight food dictatorship were brutally suppressed. The actual Soviet government was severely restricted, with the Council of People’s Commissars and other central governmental structures in charge of everything. Since the beginning of the civil war (1918–1922), in the summer of 1918, the entire country has been transformed into a “single military camp” led by the People’s Commissars, the Council of Labour and Defence, and the Revolutionary Military Council, all of which were subordinate to the Russian Communist Party (Bolsheviks), its Central Committee (CC), and its Political Bureau (since March 1919). On 28 June 1918, a decree was adopted that nationalised all large and medium-sized industrial enterprises. The suppression of all social forces that were dissatisfied with the Bolshevik regime’s policy was carried out using the “Red” Terror. The All-Russian Extraordinary Commission (VChK), which fought against counter-revolution and sabotage,

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was given extensive powers to carry out repressions. The “extraordinary commissions” were also established to address other issues, such as the expropriation of food leftovers and education; meanwhile, the Councils of the People’s Deputies in the front-line provinces have been replaced by “revolutionary committees”. The civil war justified the concentration of the Bolshevik government, but the continuation of this policy posed a threat to the regime because it worsened the national economic situation. The industry nearly came to a halt, with only military factories and a few crafts remaining. Forced labour was widely used. The new elite was now made up of the most active and radical representatives of the populace, middle-class extremists and a part of former elite members willing to accept the Bolshevik principles or at least maintain loyalty to the new regime. The old bourgeois elite of landowners was clearly discriminated and partially destroyed. The press in opposition was already closed by the summer of 1918. Free higher education was introduced at the same time. It was the beginning of formation of a new Soviet intelligentsia. Despite the extremely ineffective actions of the new bureaucracy and the significant losses associated with it, the “war communism” allowed the RCP(b) to accumulate the resources required to create a very large Workers’ and Peasants’ Red Army (RA), which was necessary to win the civil war. This army was formed on 11 January 1919, and with its help, the government was able to collect bread for 44.6 million pounds during the first year of the “food dictatorship” (until June 1919) and 113.9 million pounds during the second year (until June 1920). The Red Army consumed up to 60% of all fish and meat, 40% of all bread, and 100% of tobacco (Myagkov, 2017). However, due to the high level of confusion in the management process, some of the food spoiled. Workers and peasants were starving. Some peasants were still able to keep certain food stocks; besides, they tried to exchange bread for industrial goods obtained from citizens, including workers. However, such “businessmen”, who flooded all the country’s railways, were constantly persecuted by armed groups of the VChK. The goal was to put an end to the “black” market, which was beyond the state’s control. However, under pressure from workers and peasants, temporary decisions were made that slightly facilitated the food exchange procedure by providing conditions for transporting small quantities of food intended for personal consumption. The policy of war communism was already meaningless after the victory over the White Movement (White Guards), but it persisted because it was seen as a direct path to communism. It was planned to begin industrialisation without rejecting the nationalisation of the country’s economy adopted in 1918. The “Russian SFSR Electrification Plan” (GOELRO) was adopted in December 1920, with the goal of providing the country with new public energy sources. However, the country’s situation was catastrophic after World War I and civil war, which lasted seven years. It has lost more than a quarter of its national assets. There was a lack of basic food products. According to some estimates, Russia has lost between 15 and 16 million people since the beginning of World War I as a result of front-line fighting, famine, and diseases between 1917 and 1922, including approximately 1.3 million people lost during the “Red” and “White” Terrors between

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1918 and 1922 (Vegezzi, 2014). Another 2 million people left the country, including almost all representatives of the political and financial-industrial elite of the prerevolutionary Russia. By autumn 1918, huge supplies of raw materials and food stocks were supplied to Germany and Austria-Hungary in accordance with the conditions of peace. By withdrawing from Russia, the foreign intervention forces took huge amounts of fur, wool, forest resources, oil, manganese, grain, and industrial equipment valued in the millions of gold roubles. The continuation of the war communist policy led to civil unrest and peasant wars in Russia and Ukraine (Ukraine was dominated by peasant army, led by “Bat’ko” N. Makhno; there were also Antonov’s mutiny, the West Siberian rebellion, and hundreds of smaller unrest). The rebels, who were supported by a larger population, demanded the restoration of free trade, the abolition of food waste expropriation, and the abolition of the Bolshevik dictatorship. The workers’ unrest spread to Petrograd, Moscow, and other cities. Discontent with Bolshevik policy has also spread among the military. Kronstadt, the largest naval base of the Baltic Fleet “The Key to Petrograd”, rose to the armed battle. The great Kronstadt Rebellion (Semanov, 2003) began in March 1921, with participants supporting the principles of the Soviet government but opposing the communists and their politics. The Bolsheviks took urgent and violent measures to put an end to this rebellion. The state of siege was declared in Petrograd. Kronstadt was delivered an ultimatum that those willing to surrender would save their lives. Army units were dispatched to attack the fortress walls of Kronstadt. However, the attack on Kronstadt failed on 8 March. The 7th Army (45,000 people) led by M. Tukhachevsky moved through the thin ice of the Gulf of Finland at night between the 16 and 17 March 1921. The attack was also attended by delegates of the 10th Congress of the AUCP (b), having been sent directly from Moscow. The Kronstadt Rebellion was suppressed in the morning of 18 March.

8.1.2 The End of “War Communism” Policy. The New Economic Policy Everything happened until a massive expropriation policy produced results—peasants, who were a free class by nature, began hiding their grown crops or stopped producing agricultural production. The famine began, which forced V. Lenin to alter the course of the party. During the 10th Congress of the RCP(b), it was decided to introduce the New Economic Policy (NEP), which actually saved the socialist state from bankruptcy by allowing it to feed its people, and revived the national economy. The People’s Commissar N. Osinsky (the pseudonym of V. V. Obolensky, 1887– 1938) presented NEP and the main points of this policy in his speech at the 10th Congress of the RCP(b) on 26 May, 1921. His words and position are known only from the review of V. Lenin, who said the following in his summing-up speech (on 27

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May 1921): “V. Osinsky made three conclusions: First: “Seriously and for a long time”. And “Seriously and for a long time” meant 25 years. I’m not that pessimistic” (Ball, 1990, p. 26). Later, speaking on the report “On the domestic and foreign policy of the republic” at the 9th All-Russian Congress of Soviets, V. I. Lenin said of NEP (on 23 December 1921): “We will carry out this policy seriously and for a long time, but, of course, as has already been correctly noted, not forever” (ibid. p. 27). The decisions made at the 10th Congress of the RCP(b) resulted in the end of war communism policy and the beginning of a series of measures known as the “New Economic Policy” (NEP). The main points of this policy named at the congress were as follows: 1. To ensure proper and calm economic management based on freer regime for farmers’ work products and the order of their economic measures by strengthening farmers’ economies and increasing their productivity, as well as accurately determining farmers’ obligations to the state, the expropriation of food surplus, used as a public method of accumulating food products, was replaced by a natural tax. 2. This tax must be lower than the tax that has previously been imposed. The tax should be calculated in such a way that it meets the needs of the army, urban workers, and non-agricultural population. The total amount of taxes should be constantly reduced because the restoration of transportation and industry will allow the Soviet authorities to obtain agricultural products in exchange for factory and artisan products. 3. The tax shall be collected by deducting a certain percentage or portion of farm products based on harvest records, the number of consumers on the farm, and the number of animals. 4. It must be progressive. The percentage of deductions for middle-class farms, small-farm owners, and urban farm workers must be reduced. Farms owned by the poorest farmers may be exempt from certain taxes and, in exceptional cases, from all taxes. The exemplary peasants, who increase the area of seedlings on their farms and the overall productivity of their farm, receive tax deductions. 5. All remaining stocks of food, raw materials, and forage after the peasants pay the tax are at their disposal and can be used to improve and strengthen their economy, increase personal consumption, and exchange in the manufacturing, craft industry, and agriculture. Exchanges are permitted within the limits of local economic turnover, cooperative organisations, the market, and the marketplace. 6. Farmers who still have a food surplus after paying the tax and wish to voluntarily transfer it to the state should be given consumer goods and agricultural equipment in exchange for their surplus. Therefore, the state must maintain permanent stocks of agricultural equipment and consumer goods, from both domestic and imported products. A portion of the prepared raw materials and a portion of the national fund of gold must be set aside for this purpose (TSKP ir Tarybin˙es Vyriausyb˙es direktyva, 1957). It felt like a return to the capitalist economy, which, to some extent, legitimised private property and the relative autonomy of economic entities’ actions. Between

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1923 and 1924, it was permitted to pay the tax in both products and money. Following the legalisation of market relations, the entire national economic mechanism was restructured. Hiring of the labour power in rural areas was facilitated and it was permitted to rent the land. On 10 December 1921, the Council of People’s Commissars, which was the government at that time, issued a decree “On Enterprises That Have Become the Property of the Republic”. Its main aspects were the following: 1. All enterprises that have not completed the nationalisation procedure by the date of the decree’s publication are declared to be returned to their former owners; 2. All artisan enterprises that have become the property of the Russian SFSR may be returned to their former owners if the production process is not carried out in them (they shall not be returned if the state has already carried out their technical reform); 3. In some cases (collective requests, inefficient public use), former owners may be able to reclaim their enterprises if up to 20 workers work in them; in this case, the former owner must compensate the costs of the technical reform, if it has already been carried out; the decision on such appeals is made by the Superior Board of the People’s Economy in every case. This decision resulted in disagreements and deep disappointment among the party’s management: L. Trotsky described this decision saying “the cuckoo has already sung”. After all, less than 3.5 years after the October Revolution, one of the results of which was the nationalisation of the country’s economy, a reverse process was suddenly initiated. By the middle of 1921, only 4,500 of the 37,000 statemanaged enterprises remained (Istoriya RF, 2016). Small enterprises were returned to the private sector, and by the middle of 1922, the remaining enterprises had been consolidated into eight major industrial boards. These included “Glavkustprom” (an industrial board of craftsmen), which worked with enterprises that were not on the list of denationalisations. The question is, why was all of this done? Firstly, it was necessary to restore industrial production and establish trade with villages. After all, it was not enough to introduce a natural tax. Peasants were allowed to sell their products that remained in the rural markets. Trade, on the other hand, required industrial goods, which would participate in the exchange of goods because peasants needed them, not just money. Why did they need money if they could not buy anything for it? Secondly, it was necessary in order to remove state institutions from the process of leading the entire national economy, to allow small and medium-sized enterprises to pay taxes, and to decide what and how to produce autonomously. The Board of the People’s Economy was only supposed to have access only to the most important sectors of the economy, such as basic raw materials, energy, construction, and heavy industry. Some of these businesses have evolved into large industrial enterprises over time. Others carried out defence orders, including the production of projectiles, during World War II. And the third, in the form of artels, existed quietly until the end of the 1950s, when they were closed by the irrational decision of N. Khrushchev.

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Small and medium-sized industrial enterprises were privatised or converted from public property to private rent. A certain limited freedom of private equity in industry and trade granted by the state allowed for the use of wage labour. Thus, an opportunity to establish new private enterprises arose. The largest and most technically advanced factories and production plants have merged into public trusts, which worked under conditions of cost accounting and economic independence (“Chimugol”, the state machinery manufacturing trust, etc.). The government initially left the steel industry, the fuel and energy complex, and a portion of transportation for public supply. Cooperatives for consumers, agriculture, culture, and fishing have evolved. The wage, which had been equalised during the civil war, was replaced by a new policy of material incentive tariffs, which took into account worker skills, as well as the quality and amount of the products produced. The ration card system for food and other goods has been abolished. The food rationing system was replaced by cash payments. The universal labour duty has been repealed. The main fairs and trade exchanges in Novgorod, Baku, and Kyiv, opened the doors. A monetary reform was initiated in 1921. At the end of 1922, a stable currency, the Soviet chervonets, was introduced and put into circulation for short-term financing of industry and trade. It was gold-plated and secured by other easily realised values and goods. One chervonets was worth 10 tsar gold roubles and cost about 6 dollars on the world market. To cover the budget deficit, the old currency—depreciated Soviet roubles—was kept in use, but it was soon pushed out by the chervonets. In 1924, copper and silver coins, as well as treasury tickets, were issued instead of the old roubles. The government deficit was successfully eliminated as the reform gained momentum. Russia’s economy grew rapidly during the period of NEP. The economic interest of peasants in agricultural product manufacturing enabled them to saturate the market with foodstuffs and to overcome the consequences of the “war communism” years of starvation. However, most communist party leaders saw NEP as “unavoidable evil”, fearing that it would lead to the restoration of capitalism. Therefore, the state leaders of the party have taken all measures to discredit it. Official propaganda worked hard to create a negative image of a “NEPman” in the public mind by portraying him as an exploiter and a class enemy: In terms of their political, social and economic status, representatives of this stratum differed sharply from the rest of the population. According to the legislation in force in the 1920s, they were deprived of their voting rights, the opportunity to teach their children in the same schools as the children of other social groups of the population, could not legally publish their newspapers or propagandise their views in any other way, were not called up for service in army, were not members of trade unions and did not hold positions in the state apparatus. (Demchik, 2000)

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8.2 The Second Administrative Cycle 8.2.1 The End of the New Economic Policy (NEP) In December 1925, following the death of V. Lenin, the 14th Congress of the All-Union Communist Party (Bolsheviks) decided to return to the construction of socialism in the country. First of all, it was decided to protect oneself from possible defeat in the war with capitalist countries; therefore, it was necessary to strengthen the military power of the USSR. In 1928, the national income and its structure of the USSR were roughly the same as they were in 1913, i.e., in the pre-war years. Therefore, it was necessary to accelerate the development of heavy industry. After all, heavy industry was primarily the foundation of the military industry. The then-USSR industry had barely reached the level of 1913 by 1925, whereas Western countries (where there had been no such revolutions and many years of civil war) had advanced significantly since 1913. The public buying-in prices of grain were very low at the time, and there were not enough industrial goods required for a village; therefore, they were so expensive that farmers began to reduce the supply of bread. In 1927, an increasing number of workers and civil servants began to lack food. The NEP was in a crisis situation. N. Bukharin, the prominent ideologist of the party, proposed to continue to function in the spirit of the NEP, i.e., to stop developing heavy industry and to start developing the light industry, so that the latter produces the necessary amount of goods for the rural population. This should increase the motivation of the farmers and it is likely that they will eventually start producing more much-needed agricultural products. It would be important to return to the subject of industrialisation only when the village concerned creates a stable supply of food to cities. However, the General Secretary of the Central Committee of the AUCP(b) J. Stalin and his followers, who had won the political bickering in the party in 1928, had a quite different viewpoint. J. Stalin and his associates were well aware of the potential for a situation to arise when a village’s shortage of goods is combined with a city’s lack of bread. In fact, this combination of circumstances overthrew the Tsarist government in February 1917. Therefore, J. Stalin’s famous phrase: “We are fifty or a hundred years behind the advanced countries. We must make up this gap in ten years. Either we do it or they will crush us” was not about a potential defeat in the war against “imperialist predators” (Prokofiev, 2019). N. Bukharin openly confronted J. Stalin, saying that the latter’s goal is “to carry out industrialisation through military-feudal exploitation of peasants and the ruins of the country”. However, the position of N. Bukharin’s group, which had been accused of “Right deviation”, was completely defeated at the Plenary Session of the Central Committee of the AUCP(b) in April 1929. It resulted in the adoption of an accelerated course of industrialisation since 1929, as well as a revision of the key planned indicators for the first five years in the direction of their strong growth. Thus, “the Great Break” in a village was achieved by the use of “dekulakisation” or “depeasantisation” policies, and the implementation of extraordinary economic,

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social, and political measures of restructuring. This example is likely to have motivated the future leader of China, Mao Zedong, to initiate his policy of the “Great Leap Forward” later. However, in order to bridge the gap mentioned by J. Stalin, one critical component was required—money. But there was no money. J. Stalin realised that grain export and foreign investments, which had previously been the engine of the Russian Empire’s industrialisation, could now be used as a source of capital for industry. On the eve of World War I, these investments accounted for up to 43% of Russia’s total commercial and industrial capital. However, shortly following World War I, global grain prices plummeted and never recovered. It was necessary to return the factories and production plants to their former owners such as Lessner, Gujon, Michelson, and Siemens in order to attract foreign capital, something a Comrade Stalin could not achieve. Because Stalin was a pragmatist and a cynic, it does not mean he couldn’t do it personally, but how could he persuade his comrades in the Political Bureau? Moreover, it was absolutely impossible to rely on domestic capital. There is a well-known anecdote among the people. One member of the VChK invited several well-known “NEPmen” and lawful “Soviet capitalists” to visit him in Moscow. He wanted to ask them one question. “Why don’t you, dear citizens, deposit your money in public savings accounts?— yelled an honourable Chekist—Don’t you remember, villains, that the Soviet government guarantees the safety of your deposits?” One of the invited guests replied: “We, dear leader, have no doubts that your government guarantees the safety of deposits. But what about the safety of depositors?” The Soviet government could not guarantee “the security of depositors” unlike “the security of deposits” for fundamental reasons! It was required to obtain national funds by taking them from the pockets of workers and peasants. However, there were more peasants than workers in the Soviet country. More than 80% of the population of the USSR resided in rural areas at the time. Therefore, peasants had to become the resources of “industrialisation”. However, according to J. Stalin, the fundamental value was industrialisation rather than NEP. One of the key causes for its acceleration was the unstable political situation of the USSR. The economies of the leading Western countries stabilised at that time, and Western leaders’ speeches frequently consisted of hostile attacks on the USSR. It was confirmed by the facts of the provocative raids against Soviet missions and institutions in Beijing and London, the assassination of Soviet ambassador P. Voykov in Warsaw in 1927 (as a revenge for his active participation in the shooting of the Russian Tsar’s family), and the termination of USSR diplomatic relations with England. All of this was insufficient to create a strong sense of military threat in Moscow in the late 1920s. According to J. Stalin, industrialisation should have been carried out immediately in the face of external threats. If persuading peasants to sell bread voluntarily was impossible without delaying industrialisation, it was decided to take the “surplus of bread” away from them by force. Therefore, it was necessary to complete the NEP as soon as possible (Morozov, 1960).

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The reintroduction of forcible expropriation of food signalled the beginning of the end of the New Economic Policy (NEP): after all, the action of “taking away” is incompatible with market relations. However, now the Bolsheviks have started doing it much more easily, and it has been considerably aided by the innovation proposed by J. Stalin—the global “collectivisation”.

8.2.2 Course to Industrialisation Through Collectivisation From an economic perspective, “collectivisation” was nothing more than a special and very specific form of peasant taxation. Every collective farmer was required to do a certain minimum “work” in both the collective farm and the public works. It was referred to as “working one’s workdays” in the collective farm. Farmers in both collective and private farms were required to assume “obligations” about the sale of their agricultural production to the state in accordance with the approved list of agricultural products. It should also be accompanied by significant monetary fees, which were imposed to everything from fishing to vegetables. Farmers were frequently rewarded with vegetables for their workdays. The entire social infrastructure in the village was maintained at the expense of collective farmers. It was in addition to buying government loan bonds, paying construction taxes, etc. Everyone who could, began to move from the countryside to the city. Bolsheviks were waiting for it. Shovels, stretchers, and bricks have already been prepared for new workers to build factories. All urban means of production quickly found their labour power, who was willing to work under any circumstances to avoid returning to the collective farm. Thus, the great “industrialisation” of the country began. A new law on elections to the Councils was adopted in 1926, limiting voting rights for the wealthiest strata of the population. Private and concession-based industrial enterprises have started to reduce production. The private trade sector has also declined. In 1927, the trusts were ordered to submit planned tasks; meanwhile, the Board of the People’s Economy decided to increase investments in heavy industry. All government and economic structures were reverted to strong centralised branch management and administrative control. However, because the entire agriculture had already been collectivised, i.e., fully controlled by the state, the People’s Commissars could utilise severe sanctions to force the collective farmers to work for the benefit of the socialist state, i.e., to carry out agricultural production plans. In addition, the increased grain production has allowed to feed an increasing number of workers and even to export bread abroad, all while receiving money for the construction of new factories. According to J. Stalin and his followers, it could only be accomplished by liquidating small individual farms, limiting the economic freedom of producers, and introducing a strict planning regime. The transfer of funds from the agricultural to the industrial sectors was the most important source of funding for large-scale construction projects. Bread exports have increased, and for that money, industrial conveyors, machinery, and other equipment have been purchased. Oil, gold, and other minerals were also exported, while their

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extraction rose steadily. Over the first two years of the five-year period, industry progressed according to planned tasks, even exceeding them. However, its rate of development slowed dramatically at the beginning of 1930. Then, the government issued bonds of the government debt and increased money issuance, resulting in inflation. Because the pace of development of the light and food industries lagged behind that of heavy industry, the cities, to which millions of peasants had previously rushed, continued to lack food and basic household items. It has significantly hindered the growth of national consumption and has had a very negative impact on the standard of living of all working people. J. Stalin insisted on continuously increasing the level of production agricultural commodities by providing favourable conditions for the introduction of new technologies aimed at this objective. It was proposed to implement V. Lenin’s cooperative plan for this purpose. However, it was implemented in a strictly “Stalinist” manner. V. Lenin believed that the concept of cooperation should be spread gradually, beginning with cooperatives that supply machinery. J. Stalin began implementing it from the introduction of artificial production cooperation. He talked about voluntary cooperation and how no violence should be used; nevertheless, in reality, it was used in the most brutal form. Large agrarian combinations were formed without first establishing the necessary material base—a new system for the supply of agricultural equipment. As a result, the initial period of total collectivisation was marked by a significant decline in production. The first plan of the five-year period ended with the fact that the food supply to the population, while the country lived in the years of peace, was carried out on the basis of a ration card. J. Stalin had an illusion that large-scale farming always had more advantages over small-scale farming. However, experience has proven that the optimal size of the farm is determined by a number of factors and circumstances related to the level of development of productive forces and their specifics. Therefore, the mechanical merger of farms does not provide the necessary effect. Therefore, the development of collective cooperation did not proceed as planned by J. Stalin. His concept of collective-cooperative production was based on the mandatory concentration of all agricultural machinery in the hands of the state through establishment of machine tractor stations (MTSs).1 These had to give the producers with an opportunity to get the necessary equipment for temporary use, but

1

In the long run, MTSs proved to be ineffective because the technical standing of their machines and their assortment did not allow them to meet the needs of all collective farms in a timely and highquality manner; therefore, they began selling them to the same collective farms. J. Stalin became concerned because all of this could lead to the strengthening and development of commoditymonetary relations. According to him, the development should have taken place on the contrary by gradually converting collective-farm property into public property. In order to do it, “the surplus collective-farm output must be excluded from the system of commodity circulation and included in the system of products-exchange between state industry and the collective farms.” “But it must be introduced unswervingly and unhesitatingly, step by step contracting the sphere of operation of commodity circulation and widening the sphere of operation of products-exchange” (Stalin, 1972).

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not on the basis of ownership. J. Stalin considered MTS as a path to the future— communism—rather than a historically transient measure related to the shortage of agricultural machinery resources in collective farms. Such insights into future development clearly demonstrate that J. Stalin has fallen into a trap of war communism ideas. He repeatedly deviated from the ideological principle of the leader of productive forces by changing existing relations of production, i.e., existing forms of farming. It was later proven by practice when following the publication of his thoughts after J. Stalin’s death, a decision was made to strengthen the equivalent exchange of commodity production between the city and the village, resulting in a significant increase in the prices of agricultural products such as grain and livestock the following year. Product exchange of products was quickly pushed out by commodity circulation. However, all of this occurred much later. War communism, which expropriated large and medium-scale private property, was unable to rescue the economy from the ruins of civil war and assure the effective functioning of productive forces. However, public property, which was represented by state-owned enterprises, has now become much stronger and more viable. In addition, it acquired another important feature, planning, which did not exist during the period of war communism. The first public balance sheet was created, which linked individual industrial enterprises with each other through relations of production. It enabled the entire people’s economy to be viewed as a unified production complex, allowing industrialisation project to be implemented. The socialist economic model had to become universal over time. The entire economy then began to resemble a unified “factory”, or, as K. Marx put it, the “syndicate”, existing in accordance with a unified plan for the people’s economy and developing according to its specific non-market laws. Thus, it was actually returned to the model of war communism, with the exception that it has been significantly improved. In a conversation on 29 January 1941, J. Stalin pointed out that it was precisely the planned nature of the Soviet national economy that ensured the country’s economic independence: “If we did not have… a unified central planning that ensures the independence of the national economy, our industry would develop in a completely different way, starting with light and not heavy industry. We overturned the law of development of the capitalist economy, put it on its head, or, to be more accurate, on its feet. We began with heavy industry, not light, and we won. Without the planned economy nothing would occur. After all, how did the capitalist economy develop? In all countries, it began with light industry. Why? Because light industry made the most profit. Why should individual capitalists develop steel, oil or other industries? Profit was important for them, and light industry was the primary source of profit. We started with heavy industry, which is why we are not a supplement to the capitalist economy… The matter of profitableness is, first of all, related to our heavy industry, which requires great investment from the state and is unprofitable at the beginning. If we were to develop branches of the economy depending on their profitability, we would have been able to develop only flour milling and then production of toys. This is how the capital would begin to develop the industry”.

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Speaking of the priority development of Group A industries (production of capital goods) over Group B industries (production of consumer goods), it was not in fact the loud motto of “The Great Break” period, which was announced in 1930. There was a prevailing belief that the USSR economy operates in a hostile capitalist environment that aims to destroy the Soviet Union in every way, both economic and military. Therefore, only the high level of development of Group A can ensure an effective fight by USSR against its external enemies. Despite the low labour productivity and restriction of constantly rising expenses, the complete economic militarism of the country, and accountability for the implementation of the plans, the economic initiative of economic entities was constantly constrained and material incentives for ordinary workers and civil servants were reduced. The Soviet approach of industrialisation was based on the state’s decisive role in the economy and political judgements of national leaders. This situation was taken for granted in 1930 due to the mounting threat to the security of the USSR and the impending anticipation of war. However, forced feudal labour was ineffective because the strict “vertical” of branch management suppressed the local initiative, resulting in poor product range. The country’s economic growth began to slow down gradually. Extensive economic development prevailed against intensive economic development. The manual labour of former villagers was widely used for earthworks in the construction of industrial objects. However, due to scarcity of highly skilled workers and engineers, many of the already constructed industrial enterprises did not begin production process until a few months after the completion of the construction. Due to the inability to work with expensive foreign machines, they were frequently damaged. The percentage of production defects have increased significantly, while product quality has decreased. Therefore, major accidents were unavoidable. Both negligent company managers and “professional pests”, many of whom were simply inexperienced workers, have often been accused. The country has been constantly involved in legal proceedings, during which engineers, planners, and specialists of various levels have been accused of sabotage, for example, “The Shakhty Trial” in 1928, “The Industrial Party (Promparty) Trial” in 1930, and “The Working Peasants Party Trial” in 1931. Terror has become an integral part of the totalitarian state. Because the entire system foresaw the forcible formation of new relations of production based on a single form of ownership (the collective farms were virtually nationalised), it could not be expected that it would not develop into the system of state terrorism. The personality of J. Stalin presupposed his manifestation in its most extreme form. As a politician, J. Stalin was able to persuade opponents of the righteousness of his approach to the construction of the state. He devised theories justifying the despotism of the government. One of such “theories” concerned the deepening of class conflict on the way to socialism: The following was noted in the “Short Course of the CPSU(b) edited by J. Stalin: “When the Party assumed the offensive against the kulaks, and adopted emergency measures against them, the Bukharin-Rykov group threw off their mask and began to attack the Party policy openly. The kulak soul of the Bukharin-Rykov group got

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the better of them, and they began to come out openly in defence of the kulaks. They demanded the repeal of the emergency measures, frightening the simple-minded with the argument that otherwise agriculture would begin to “decay”, and even affirming that this process had already begun. Blind to the growth of the collective farms and public farms, those superior forms of agricultural organisation, and perceiving the decline of kulak farming, they represented the decay of the latter as the decay of agriculture. In order to provide a theoretical backing for their case, they concocted the absurd “theory of the subsidence of the class-struggle”, maintaining, on the strength of this theory, that the class struggle would grow milder with every victory gained by Socialism against the capitalist elements, that the class struggle would soon subside altogether and the class enemy would surrender all his positions without a fight, and that, consequently, there was no need for an offensive against the kulaks. In this way they tried to furbish up their threadbare bourgeois theory that the kulaks would peaceably grow into Socialism, and rode roughshod over the well-known thesis of Leninism that the resistance of the class enemy would assume more acute forms as the progress of Socialism cut the ground from under his feet and that the class struggle could “subside” only after the class enemy was destroyed” (History of the Communist Party, 1939). The growth of a subjective role in the economy could not cast doubt on economists about the existence of economic patterns in the new socialist order, which clearly contradicted the classic claims of Marxism. However, J. Stalin smartly explained these contradictions, noting that “Marxism regards laws of science—whether they be laws of natural science or laws of political economy—as the reflection of objective processes which take place independently of the will of man. Man may discover these laws, get to know them, study them, reckon with them in his activities and utilise them in the interests of society, but he cannot change or abolish them”. However, “having come to know the laws of nature, reckoning with them and relying on them, and intelligently applying and utilising them, man can restrict their sphere of action, and can impart a different direction to the destructive forces of nature and convert them to the use of society” (Stalin, 1972). Thus, he explained his statement that productive forces in industry have acquired their social nature long time ago. Therefore, after socialising the capital goods by transforming them into people’s property, socialism has taken all the necessary actions to align productive forces with new relations of production. However, if we look at the efficiency of J. Stalin’s economic model in general, we must acknowledge that the Soviet Union has evolved quite dynamically under his leadership, and its economic development has been quite impressive. The expansion of heavy industry equipment, electricity, and raw material extraction were quite significant. By the end of 1930, the USSR had already surpassed the United States and ranked second in the world in terms of its industrial output. It may now act as though it is one of the global leaders, defending its interests by relying on its powerful industrial base, which was created through strict administrative methods in line with the socialist economic model. Thus, the management of the Communist Party strengthened the idea about the possibility of communism’s construction in one individual country by using its real economic achievements. The stunning

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economic productivity was not a myth because according to the results of the first two five-year plans, the production of iron and steel in the USSR increased fourfold, coal production increased 3.5 times, oil production increased 2.5 times, and power production increased sevenfold (Knyazev, 2019). The gap separating it from the developed countries in terms of production output per capita has narrowed. Dependence on import was overcome, and the national defence forces received the necessary technical equipment. Several new industries occurred during the first five years, such as heavy mechanical engineering, automotive and tractor industry, production of tanks, aviation industry, and many more. Metallurgy, chemical industry, and transportation have been reconstructed. A new industrial base was created in the east of the country. A network of universities and vocational schools has been expanded, and the elimination of unemployment has been considered as a major achievement of the country. The USSR has evolved into one of the few countries capable of producing any industrial goods. However, we must note that all of these achievements occurred during the Great Depression in the capitalist states during the first five years of industrialisation. It was accompanied by a decline in productivity and mass unemployment. However, it was the opposite in the USSR at that time: new industries have developed and unemployment decreased. Such an opposite dynamic of the development of different economic systems was interpreted as an objective proof of the progressiveness of the Stalinist economic transformation, which inspired many people and gave them a lot of optimism and faith in the future. The leader used it very smartly. He proposed a theory of the development of a person’s role in production, in which the latter was portrayed as the true owner of the production process, despite the fact that the state owned all production resources and outputs. Labour, which has previously been a private matter utilised to provide members of society with subsistence products, suddenly became “a matter of honour, glory and heroism”. This ideological provision provided an opportunity to use the enthusiasm of masses for the further construction of socialism. At the same time, it had to compensate for the lack of material incentives, which were insufficient due to the slow pace of production of consumables. Therefore, the real consequences of this policy were not seen until the USSR returned from war and began a new stage of competition with the capitalist system.

8.2.3 “Stalin’s Economy” as a Big Corporation If we recall K. Marx’s words, “The Commune was to be a working, not a parliamentary body, executive and legislative at the same time” (Marksas & Engelsas, 1949a, p. 449). The Soviet economic model could be compared to a large corporation known as “the Soviet Union”, which consisted of separate workshops and production units that collaborated for the common goal of creating a single end product. The final product was a set of specific goods and services that met public and personal needs, rather than a financial result (profit). The indicators of the total social product (and

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its elements) in terms of value were simply specified as guidelines for implementing five-year and annual production plans by evaluating plan implementation results (after all, product prices here did not reflect their true market value!). The maximum efficiency of the entire corporation’s production was attained through division of labour, specialisation, and coordinated cooperation. It goes without saying that there cannot be any competition between workshops and production units. Such competition would simply disrupt the work of the whole corporation and add unnecessary costs. Instead of competition, there should be collaboration and cooperation for a common goal! Individual shop-floors, workshops, and production units produced raw materials, energy, semi-finished products, and components, which formed a total public product. This total product was then distributed among all the production participants. There could be no discussion of any distribution or redistribution of this product at the level of the individual workshops and production units. The USSR administration and coordination institutions managed the entire huge production, exchange, and distribution process. They consisted of the government with many ministries and agencies—in particular, a number of branch ministries. Their number steadily increased because the structure of the Soviet economy was complex. Every all-union ministry also had divisions known as councils, as well as various local territorial institutions (in particular, the union-republic ministries). Institutions such as the State Planning Committee of the USSR, Ministry of Finance of the USSR, the State Bank of the USSR, and some other committees had a coordinating and controlling role. They also had their own territorial network, which included agencies with names that sounded similar to all-union, but only on a republic level. By the way, such a scheme of organisation and administration also existed in the largest Western corporations (especially international corporations) related to certain economic sectors. They did not have any market relations, but products and individual components had fixed conditional values based on “transfer” (internal) prices of an enterprise. The key difference between the Western corporate model and Stalin’s model was that corporations belonged to private owners, whose activities were primarily focused on financial results (profit). The financial result was not distributed among workers, but rather was completely privatised by the corporation’s owners. Therefore, being very similar to a capitalist corporation, the USSR developed and implemented a distinctive domestic pricing system that allowed for the efficient use of available natural resources for the benefit of the national economy. Its main feature was low prices of fuel, energy, and other natural resources when compared to global ones. A sufficient allocation of funds for investments, defence, military, science, education, and culture was part of the corporate approach to the economy as a total shared organism. These funds were not distributed to ordinary individuals who would most likely spend them to buy food right away.

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8.2.4 Main Principles and Peculiarities of Stalin’s Economic Model (MPE) We cannot say with certainty that Stalin’s economic model was always based purely on forced labour economic incentives and material incentive systems had no place in it. Technical progress in the automotive, tractor, oil refineries, chemical plants, and design and construction companies of the United States of America, in terms of scale of production organisation, technical mechanisms and technologies, quantity and quality of products, in short, everything that was planned to be combined with “the advantages of socialism”, sparked the most interest of Soviet engineers and “red directors”. It was reasonably believed that if a technical mechanism worked well for capitalists, they would work even better for the working people. If concessions were regarded a capitalist element, alien to socialism, machinery and equipment, as well as knowledge and skills for their application, can be taken over without any restrictions. The remaining aspects of the “bourgeois” business, such as advertising, marketing, stocks and stock exchanges, loans and banks, drew no interest. Because there was no market element, economic crises, expropriation of private profit (as payment of dividends was known in the USSR), unemployment, and strikes in socialism, the highly productive American companies had to quickly elevate the Soviet economy to unprecedented levels. It must be acknowledged that the American and other industries of market economies have developed organically and consistently. The integration of interconnections (production, trade, sometimes raw materials, and determination of uninterrupted relations with suppliers) performed by introducing centralised administration significantly reduces operating costs that are inevitable when these functions are conducted by different owners. Thus, an opportunity to expand reproduction of capital occurs. The coordination and synchronisation of all actions within a single operating mechanism of the enterprise create synergy effect. It manifests itself in mass production and sales by continuously increasing the technical speed of all activities, lowering costs (via economy of scale), and expanding markets while maintaining competitive prices. Holding companies, formed through mergers and incorporations, manage several complementary enterprises, such as banks, extraction and transportation companies. This is how a “large-scale business” model was developed in the United States of America during the industrial age. “Ford Motors” company, founded in 1903, provided a classic example of the effective growth expansion during the first 20 years. Having established a small assembly plant that resembled a mechanic’s shop, buying car parts and components, its owner grew his business in a short period of time into a large enterprise with a full production cycle, car assembly companies established as its branches in a number of States and abroad that were selling branded products through its network of dealers. The synergy effect was created by the simplicity of the designed vehicle frame and its use, an opportunity to reinvest profit into production, the flow of production through the conveyor method, and the price reduction achieved by constantly increasing

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production and expanding demand. The conveyor was developed in stages as an experiment and took four years to complete (1913–1917); meanwhile, all business decisions were made by the company’s management. There was no disruption in synchronisation of production and trade until the middle of 1920 a self-confident “king of cars” made a series of strategic mistakes. Many historians believe that the new method of increasing economic efficiency, which was introduced in 1939, played a key role in the USSR’s economic development. This method was also known as the “Ford-Stalin” economic model, owing to the fact that it applied the same production organisation practice as Ford’s factories. The MPE has been used in many sectors of the national economy and has proven to be effective for both socialist and capitalist production methods; however, MPE efficiency was far higher for the socialist economy. In 1955, Japan borrowed the MPE, which enabled rapid economic development of the country, owing to new production technologies (“the Japanese economic miracle”); meanwhile, the USSR completely refused to use the MPE at the same year. Nowadays, we don’t hear much about this method, although it was widely used in the Soviet Union at the time. However, from the middle of the 1950s, the situation has changed dramatically, with growth slowing down and real problems emerging in many areas. This is what the Japanese billionaire Heroshi Terawama said about it in 1991, addressing Soviet economists: “You are not talking about the main thing, about your leading role in the world. In 1939, you, Russians, were smart and we, Japanese, were fools. In 1949 you became even smarter, and we were still fools. And in 1955, we got smarter, and you turned into five-year-olds. Our entire economic system is almost completely copied from yours, with the only difference being that we have capitalism, private producers, and we have never achieved more than 15% growth, while you have reached 30% or more with public ownership of the means of production. Your Stalinist slogans are displayed in all our companies” (Statistics, 2021). What an interesting observation! Thus, many modern economists, particularly in Russia, believe that “during Stalin’s reign”, the Soviet people lived much better materially and morally than anybody else in other countries in the mid-nineteen century, and even better than the modern United States of America, not to mention modern Russia. Then, Khrushchev came and ruined everything! After 1960, the people of the USSR did not even notice that they found themselves in a completely different country, and after a while, they had entirely forgotten how they had lived previously. Therefore, according to these economists, all the negative characteristics that were thought to be organically inseparable from the socialist system have emerged in this new country. Let us take a closer look at the MPE, a Stalinist “miracle” for stimulating the economy. At that time, an interesting and highly effective mechanism was introduced in the USSR economy—the production control and promotion for the cost reduction of production. It, along with other methods, ensured an annual decrease in prices. Let us look at Fig. 8.1. Fixed prices P1 are assigned to all basic goods at the beginning of the year, taking into consideration their level of production cost 1c and the established profit rate 1pr (e.g., 20%) for the beginning of the period. The prices of goods were not changed throughout the year, but high bonuses were paid for the

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Fig. 8.1 Work under price reduction regime (Redrawn from: Fursov, 2018)

cost reduction. There were funds available to pay for them because production was continuously improved throughout the year, yet the final production was still sold at the same price during the year, resulting in greater profitability. It was used to pay (so-called progressive) bonuses during the year. They were paid to all workers who directly contributed to the cost reduction, as well as researchers from higher education institutions of technology and scientific institutes who worked under service contracts, rather than their supervisors. Results were recorded at the end of the year. Those who reduced the cost the most were additionally rewarded once again. Public benefit was expressed through decreasing prices. Profit was not the main indicator; therefore, it was purposefully “reduced”. It was performed as follows: a profit rate 2pr (the same 20%) was added to the new (decreased) cost 2c, resulting in a reduced price P2. The latter did not change throughout the year; the only thing that changed (decreased) was the cost, which in turn increased profit. The reduced cost 3c and profit rate 3pr repeatedly created a new price for the beginning of the year. Thus, prices were regularly reduced, giving consumers more possibilities to purchase more products (Zverev, 1973). It appears to be a true paradise for buyers watching how prices continue to fall and money in their pockets becomes more valuable! But was it really that simple in this case? When we look at the essence of this system, the billionaire Heroshi Terawama was correct when he said that it was worthwhile for the Japanese to copy the Ford-Stalin (MPE) model and apply it in practice of their factories. It is critical that he mentioned the only but very significant difference, which is that they both have capitalism and

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private producers. It means that this model operates under conditions of competition between manufacturers. What exactly do these conditions mean? It means that several independent producers produce similar products, and while each of them is trying to reduce production costs, they are not permitted to deviate from the product quality standards. This is due to the buyer’s wide range of options! When the buyer notices poor quality of a particular product or that lower quality raw materials were used in its production, allowing the cost to be reduced, he simply stops buying it. As a result, the entire industry suffers because it is unable to sell its products, and its employees suffer as well. How does this situation look like in a socialist economy with no competition? The quality of the products is regulated by a “public commission”, which decides for the consumer whether the product is suitable for him, and whether it is of sufficient high quality and meets his expectations. If it deems it is suitable, it approves the production of such product and determines the production plan for the product based on the number of potential consumers. In the case of socialist production, the latter must usually correspond to the producer’s capabilities. Then, other producers usually do not need to produce the same or similar products unless the latter is completely unable to meet the needs of consumers. Therefore, the producers focus on their maximum production volume and are prepared to complete and exceed their target plans, knowing that everything that is produced will be sold. Meanwhile, the consumers have no choice but to purchase all products as soon as possible! It is easy for socialist producers to use a cost reduction model that allows for unlimited use of economy of scale while ignoring individual consumer needs in order to maximise production output! In the words of Heroshi Terawama, it allows to achieve 20% or higher growth in a socialist economy! It is worth noting who the so-called public commission represents. Is it a producer or a consumer? In formal terms, it could be the consumer, but in reality, it is the producer, because it is most interested in supplying the consumer with products that the latter is severely lacking. Therefore, in the absence of any major defects in such a product, the public commission generally approves its production. We can say that the application of the MPE economic model within the framework of a single factory or corporation can be very beneficial. They consist of producers and no consumers. Their material well-being depends on how much they will be able to sell their products outside of the factory, on the free market. If the product quality is the same as it is on the market, no-one will buy it, and it will probably have to be discarded, or they will have to force their workers to buy them at their own expense, which is highly unlikely! If it happens, it will serve as a good lesson for the workers to do their best in the future to avoid having to do this again. In a socialist “corporation”, however, the producers of goods are also the consumers of those goods. In a perfect scenario, this “corporation” should sell its products on the open market, i.e., abroad. The funds received from abroad could then be fairly distributed to the workers of the entire “corporation”, who could choose whether to buy goods from abroad or from their own corporation in exchange for their funds received. In reality, however, this “corporation” only serves its employees, as foreigners rarely need such goods. Therefore, workers are forced to purchase products from their

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“corporation” in exchange for its issued certificates at transfer (domestic) prices. If the “export department of this corporation” sells anything on the open market, ordinary “corporate” workers do not see the funds from these sales! Therefore, it is not surprising that this MPE model has allowed the economy to develop rapidly, providing the population with basic products of relative quality at a much faster rate than in capitalism. However, another very negative feature emerged later. Figure 8.1 shows that the annual decrease in cost and profit is accompanied by a decrease in investments in fixed production funds and their renewal. It means that society, paying ever lower prices for production every year, together with producers, satisfying themselves with ever-decreasing profits every year, “eats” the much-needed investments in the recovery of the main means of production, let alone their development and improvement. All of this may be effective at a stage of extensive economic development, but it cannot continue for a long period of time in economic terms. Product cost reduction has its natural limits, unless there is a fundamental change in production technology that provides new opportunities and a new cost indicator. However, we are talking about an intensive method of economic development here. An intensive method of economic development requires large capital contributions, serious organisational work, and complex incentive measures. At the time, no theoretical model demonstrating how to develop industry intensively had been developed. J. Stalin was constrained by his understanding of extensive economic development. He claimed that under the conditions of the new socialist economy, the concept of moral depreciation of property disappears completely. Morally obsolete technical mechanisms can be transferred in an orderly manner from certain branches of the economy to other branches of the economy where they can still be used successfully. It will extend its service life to full physical wear and tear. Thus, the underdevelopment of a country where there was no need to upgrade the means of production due to their moral depreciation was portrayed as a specific law of the new socialist system. This new economic system, based on the public ownership of capital goods, was developed in a purely planned manner, in which the state became a grandiose distributor of resources, acquiring the exclusive right to distribute them at its own discretion rather than through the market. Thus, the policy of the gradually returned “modernised” war communism completed the second administrative cycle of the Soviet state at the end of the 1930s, forcing management to look for new ways to free both industry and agriculture from the destructive claws of centralisation. It was necessary to allow the national economy, as it was during the NEP, to provide more freedom and opportunities for regions to address challenges autonomously by decentralising management and developing new models for promoting efficiency that focused not only on cost reduction, but also on innovations and technologies of intensive economic development.

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8.2.5 “Khrushchev Thaw” Following J. Stalin’s death, the Soviet writer I. Ehrenburg described the newly altered situation in the country as “the Thaw” (Cpenbypg, 1954). Because this name was accepted, we now say that N. Khrushchev’s Thaw period, which lasted from the mid-1950s to the mid-1960s, began at that time. Its main distinguishing feature was a partial deviation from the Stalinist course of totalitarian politics. It was the first attempt to comprehend the consequences of Stalin’s regime, revealing the peculiarities of social and political policies of Stalin’s era. The main event of this period was the 20th Congress of the CPSU in February 1956, which condemned Stalin’s personality cult and the implementation of his repressive policy. N. Khrushchev did not criticise J. Stalin’s policy during the periods of industrialisation and collectivisation in his speech at the Congress. It was concluded that Stalin’s deviation from the correct Leninist path began only in 1934, and that everything he had done before was entirely consistent with Marxist theory (Naumov, 1996). Stalin’s mistakes were separated from the entire party’s activities, allowing to deviate from criticism of the CPSU policy and party nomenklatura. Both N. Khrushchev and the leaders of other socialist-communist parties realised that J. Stalin’s discredit would be a huge blow to the global communist movement. The report of the First Secretary of the Central Committee of the CPSU was classified, but it was later discussed in party meetings. However, many delegates of the Congress, and later the rest of the Soviet people, were undoubtedly shocked when they learned the main content of Khrushchev’s report. The entire concept of Stalin’s role in the lives of the entire state and every individual was destroyed overnight. However, massive protests have not arisen throughout the country in response to it. People were increasingly wondering how all of this could have happened and why it had not been discussed before. Society was polarised into those who wanted to completely expose the cult and those who saw only a gross error of leadership in it. The massive destruction of J. Stalin monuments began throughout the country, while there was a massive protest and rallies in Georgia (Stalin’s birthplace), where nationalist slogans were heard. N. Khrushchev and his followers became concerned about potential unrest. Then, on 30 June 1956, an open resolution of the Central Committee of the CPSU “On Overcoming the Cult of Personality and Its Consequences” was published. It was less radical, emphasising Stalin’s achievements in the fight against hostile groups and leadership in the field of socialist state defence during the war. The sharpness of the fight against hostile classes (kulaks, landlords, and capitalists), the complex international situation, and the threat of war, which required maximum mobilisation of the country and principled leadership, were also named as causes of his personality cult. At the same time, attention was drawn to J. Stalin’s personal rudeness and his unwillingness to respect the opinions of those around him, and the premortal “Letter to the Congress” by V. Lenin, which contained a warning about these qualities of J. Stalin, was published. However, in conclusion, it was stated that denunciation of the cult of personality cannot change the political course of the Soviet state and its Communist Party.

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Another significant outcome of the 20th Congress of the CPSU was N. Khrushchev’s final victory over his rivals in power. There was a fierce fight where his opponents, including G. Malenkov, V. Molotov, L. Kaganovich and D. Shepilov, attempted to oust N. Khrushchev from power in 1957. At the Congress of the Central Committee’s Presidium, held between 18 and 19 June 1957, 7 out of 11 Presidium members strongly criticised the activities of N. Khrushchev, accusing him of rash industrial reorganisation and violation of the principles of collective leadership, which in fact corresponded to reality to some extent. However, they saw the most serious danger in further denunciation of the personality cult, which threatened both them and the country’s international authority. In one confidential conversation, V. Molotov stated that if at least half of the world supported the USSR up until that point, it was not even worth discussing it after the congress. Despite the fact that the Central Committee’s Presidium of the CPSU had condemned N. Khrushchev, the latter was not going to give up. He had a back-up plan to convene the Plenary Session of the Central Committee of the CPSU (a higher collective body of the CC of the CPSU than the Presidium) to make a final decision. He was able to arrange an urgent delivery of Plenum members to Moscow (involving aviation forces) with the help of KGB Chairman I. Serov and Minister of Defence G. Zhukov by gathering the necessary number of all members of the Party’s Central Committee, the majority of which supported N. Khrushchev. The Plenum condemned the “Anti-Party Group” of V. Molotov, G. Malenkov and L. Kaganovich and D. Shepilov who “joined them” and removed them from the Party leadership. The updated party nomenklatura granted the new leader, N. Khrushchev, “permission” to carry out reforms in the country for a certain period of time. However, in order to carry them out, he had to commit not to cross the “red line” while taking his reformist actions. The autocracy of the First Secretary of the CC of the CPSU, N. Khrushchev, which was not stained by any previous palace coups, began only after he scattered the rebellious party organisation of the Institute for Physical Problems of the Academy of Sciences of the USSR, which members declared that they “will not give Stalin away to anyone!” especially when he suppressed the Hungarian Uprising in 1956 (Sovetskiy Soyuz i vengerskiy krizis, 1998). The Communist elite, which governs these and other similar events, has ensured that all reforms carried out will be of “smart scale” and will have no impact on the dominant status of this elite. N. Khrushchev supported the idea of the extinction of the dictatorship of the proletariat’s state with all its repressive functions when preparing the new, third programme of the CPSU in 1961, so it was decided that the new “nationwide state” would appear in its place. On the initiative of N. Khrushchev, a provision regarding the rotation of employees at party apparatus was included in the CPSU statute in 1961 (which was later abolished in 1966).

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8.2.6 Economic Characteristics of “the Thaw” After J. Stalin’s death, all of the difficulties of economic life in USSR were revealed. Hundreds of innocent victims of political repressions were killed in the camps. There was a lack of food. Peasants (which made up the majority of citizens) were completely impoverished as a result of the extremely low buying-in prices of meat, milk, and other necessities in rural areas. The agricultural sector of the economy has collapsed, and peasants have been subjected to high taxes that they were unable to pay in any way. Labour productivity of collective farms was very low. Peasants did not have passports, so they were deprived of their freedom of movement and were actually turned into slaves. Following the resignation of G. Malenkov, who briefly led the government after J. Stalin’s death and focused his economic policy on Group B enterprises (production of consumer goods) and agricultural development, the CPSU repeatedly focused on investments in Group A (production of capital goods). Thus, the CPSU leaders expected to prevent the risk of scientific and technological lag of the USSR. A new phase of modernisation of the Soviet economy has started. According to official data, the average annual growth rate of industrial production in USSR was 13.1% between 1951 and 1955, compared with 10.3% between 1956 and 1960, and 8.6% between 1961 and 1965 (Drozdov, 1996). The national energy base was strengthened, and new hydroelectric power stations were built in Bratsk and Kuybyshev, increasing production by 2.4 and 4.3 times respectively in 1960. In 1960, the USSR was ranked third in the world in terms of productivity following the USA and France. A certain recession began in the late 1950s and early 1960s, but many economists believe it was not insurmountable (Vakhitov, 2019). Finally, the USSR began to develop the production of Group B products. It could be compared, in part, to the start of the NEP that followed the period of “war communism”. N. Khrushchev delegated more authority to local (regional) authorities, who began to promote the development of local industry and agriculture. In May 1957, the Councils of National Economy, which were directly subordinate to the Councils of Ministers of Union Republics, passed a new law on industrial administration. Its essence was the proposal to abolish direct management of enterprises by branch units and give them regional jurisdiction. The reform involved the division of the USSR’s territory into so-called economic administrative regions through the establishment of a network of territorial councils for national economy in the USSR’s regions, territories, and republics, under the jurisdiction of which the enterprises, previously subordinate to the ministries of the Agro-Industrial Complex, were transferred. At the same time, many ministries of both federal and republican importance were abolished. The financing of enterprises has improved and regions could now make some decisions independent of the centre and all branch institutions. However, the bureaucracy of national economic administration has seriously hampered economic growth. The various councils engaged in a fierce battle for resources. The introduction of new enterprises was often reckless—the related enterprises were thousands of kilometres away from each other, requiring products to be

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transported across the entire country. To cope with “departmentalism”, the USSR’s leaders began to implement risky reforms. “The power vertical” was being destroyed everywhere. A new law “On further improving the organisation of industrial and construction management” was adopted in May 1957. Instead of powerful branch ministries of the Union, territorial Councils of the People’s Economy were established, which were in charge of all urban and rural problems in one or two areas of the country. They were similar to small committees in charge of joint planning, scientific and technical policies in a certain separate industry. They also were responsible for the overall territorial labour coordination of industrial enterprises. 105 Councils of the People’s Economy were established instead of 141 union and republic ministries replicating them. The transition from ministries to Councils of the People’s Economy ensured more rational costs of regional resources and arrangement of enterprises. However, because the political system of the USSR remained authoritarian, it was impossible to link officials’ actions to the needs of the population and make them dependent on these needs. However, economic bodies have now become fully dependent on territorial party organisations. Regional subordination of the country’s economy weakened the interregional links of the USSR and contributed to regionalism, i.e., the dominance of regional interests over national interests. However, N. Khrushchev believed that departmentalism, or the dominance of the interests of central industrial bureaucracy, posed even greater threat. One of the main achievements of N. Khrushchev’s politics was the implementation of social reforms, such as pension reform, increasing population income, addressing the housing problem, and introducing a five-day week. The collective farmers and other agricultural workers were given passports that they did not have before. They were allowed to travel freely in any direction throughout the country. The wage of collective farmers has also been raised. Collective farmers were now also covered by such social security measures as pensions and health insurance. Tax debts of rural population were written off. Selling prices of certain food products have been raised. Agricultural machinery was delivered to collective farms. In 1958, machine tractor stations (MTSs) were liquidated, and agricultural equipment was sold to collective farms. Because no additional funds were received from collective farms, the equipment was sold on loan, and collective farmers had to pay for it to the state for an extended period of time before the debts were cleared. Despite the difficulties, the collective farmers were pleased to purchase the equipment because they no longer had to rely on the self-will of the operators of the machine tractor stations and could now better plan their work. Soviet engineering quickly reached the level of technical advancement of Western countries not only in the field of machinery production. The novel technical solutions were demonstrated during the installation of automated production lines of machinery. Production of metal cutting machines in the USSR increased from 70.6 thousand units in 1950 to 117.8 thousand units in 1955. It should be noted that prior to the war, only 58.4 thousand units of machines were produced in the USSR in

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1940 (Aizenshtadt & Chikhachev, 1957). The technical production level has been thoroughly updated, and national production funds have significantly increased. Economic indicators grew rapidly at the end of the 1950s. As a result, wages increased nearly threefold. Free secondary education was introduced. Significant funds were directed towards housing construction—one-quarter of the population was relocated from old houses or communal apartments in unsatisfactory condition, where usually several families lived, to free apartments in multi-storey buildings. For the first time in their lives, millions of people could use hot water, gas, and other modern-day household amenities in the new apartments. That year, televisions and landline telephones became extremely popular. The quality of life has significantly improved. On 24 December 1953, the main department store, or GUM, was opened in Moscow following its reconstruction. GUM, which was built in 1893 and represents the best achievements of Russian early modern architecture, became one of the NEP symbols in 1920; however, it has been closed as a shopping centre for a long time since 1930. Various Soviet ministries and departments were housed in its premises for more than 20 years. Therefore, GUM entered a new stage in its history on that day when it reopened as a public and widely visited store.

8.2.7 The New Economic Incentive System of the Country Because the “Stalin-Ford” model was adapted to the entire state as a single corporation, rather than individual corporations as in capitalist states, it gradually began to fail to meet the needs of the developing society that arose during “the Thaw” period. Then, it was moved to “Khrushchev’s” new system, which increased the economic efficiency of production. This system was also “borrowed” from the West, but it was no longer focused on the cost of production. People probably realised that reduction of the production cost has its natural limits and that the cheapest product is not always be the most optimal production solution. They do not always need the best price because they are also very interested in the product’s quality and novelty. Therefore, enterprises began to plan profit, using it to determine who should be rewarded and who should be punished, as the most important economic indicator. Profit was calculated in absolute numbers, i.e., how many thousands (or millions) of roubles of profit each enterprise must make. The most important task was to make the maximum profit. However, the profit (pr) was expressed as a percentage of the cost (c). The obtained profit-to-cost dependency meant that the more an enterprise incurred costs, the more profit it had to make. It was discovered that it is necessary to increase the cost rather than decreasing it. Therefore, the question was whether a business operating under such conditions could increase its profit by increasing the quantity of products produced. At first glance, the answer appears to be “Yes”! But do not be in a hurry! It is possible that a socialist enterprise has already fulfilled or even exceeded the planned tasks of this particular production, so producing more such products makes no sense!

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But there is another, more important reason. It cannot be applied to a single enterprise because modern production is usually linked with other enterprises via a common technological chain, making it impossible to wilfully increase the number of products produced. Suppliers of a large enterprise usually have hundreds of suppliers, all of whom must adapt to the expanded production volume at the same time and to the same extent. Therefore, it is very difficult, if not impossible, to increase production of products wilfully without the approval of a powerful and reliable planning institution. There is also a third reason. Let us assume that an individual enterprise forms a reserve of production capacities that can be used to expand production. The planning institution assesses this reserve immediately and plans the increase of production for the next estimated period accordingly. Because the mass of profit, which the planning institution has also carefully planned, increases significantly, no bonuses will be paid for it during the next production period. After all, socialist producers are not their own enemies! They quickly become aware of the situation and do not allow the plan to be significantly exceeded. Therefore, efforts are made to exceed the plans by 1–2% because premiums are paid and reserves are not reduced then. On the other hand, let us imagine what would happen if no new planned tasks of profit were assigned to producers based on their performance. In this case, they would continue to receive bonuses for exceeding plans, which would likely encourage them to improve their performance even more. However, in reality, socialist enterprises would simply “inflate” the cost, on the basis of which they would increase profit by the same percentage, and prices would skyrocket as a result! Meanwhile, when profit is increased slightly, prices rise slowly, so no-one is surprised. What an incredible self-regulation! (Fig. 8.2) Then what was the purpose of this new material system that increased efficiency? Was it a completely new fictitious system that had never been tested anywhere in the world? It was most likely tested, but similar systems, such as the “Stalin-Ford” model or this “Khrushchev’s” system, work in a completely different way under socialist conditions. Let us examine how the “Khrushchev’s” system might work under capitalist conditions. As previously stated, the fixed profit-to-cost dependency implies that the more an enterprise incurs costs, the more profit it must make. It means that the cost must be increased rather than reduced; however, socialist enterprises do not do so because they are likely to have completed, if not exceeded, their planned tasks. Meanwhile, planned tasks are irrelevant to capitalist enterprises, so, according to this logic, they should produce more and more products in order to increase their profit! However, practice shows that they do not do it either! Why? Because they have compelling reasons to do so. A capitalist enterprise would significantly raise the prices of its products by increasing cost and profit; therefore, consumers would stop purchasing them. Unlike in socialism, there are many producers on the market offering similar products, so consumers will not suffer as a result. The losses would be borne by the enterprise and its workers. It forces producers to use alternative methods such as expanding the range of existing products, attempting to please a consumer, and improving the price-quality ratio of the product.

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Fig. 8.2 Khrushchev’s material incentive system (Redrawn from: Fypcov, 2018)

It does not imply that a capitalist enterprise ceases to seek profit! However, even under the “Khrushchev’s” system, it can maximise it only by offering a new, unique product that is distinct from its competitors. It is likely that the cost of this product will be significantly higher, but the product will be more appealing for consumers, who will be willing to pay more for it. The enterprise will then make greater profit and try to produce as many of these products as possible. It will continue until competitors create similar goods and overcome the competitive advantage of this enterprise, at which point the latter will be forced to offer something new! As a result, in the capitalist system, this “Khrushchev’s” system may appear to be quite progressive! Another critical factor is the existing technological chain, which prevents individual socialist enterprises from producing more products than planned. Therefore, it halts socialist production because the increase in production in one chain provokes the need to increase production in all other chains, which are “unable” to adapt to the increased volumes in a timely manner. Capitalist enterprises faced the same challenges, but they were able to overcome them successfully! Why? Because any large enterprise is a “customer” who, like any other “customer” in the market, has an option of selecting from a number of suppliers who produce unique goods to order. Of course, the supplier cannot force his “customer”, like any other customers, to buy more of such products, the bigger amounts of which he may have produced, but the “customer” has such power and makes full use of it. It is very easy to explain this—in socialism, where there is a lack of goods, the producer market prevails; meanwhile, in capitalism, where there is an abundance of goods, the consumer market prevails. We use the term “market” not by accident because it still exists in cooperative and

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private trade, as it does in commodity-monetary relations, even when there is no real market in the public sector. The third factor, when an individual enterprise forms a reserve of production capacities that can be used to expand production, is very important. In the socialist economy, the planning institution assesses this reserve immediately and plans the increase of production for the next estimated period accordingly as the mass of profit. It means that when demand for products significantly exceeds supply, it is possible to plan additional production and ensure a calculated profit mass corresponding to such increased production! What a wonderful thing! The problem is that the planning bodies do not provide for additional bonuses paid on this “planned” profit mass! Therefore, there is no point for the socialist production to develop rapidly. Because the socialist producers understand this situation and limit production expansion to 1–2%, demand remains unmet, which results in a further increase in the deficit of most products on store shelves. In fact, in a socialist economy, it is a terrible problem that hinders the development of the entire state! In the capitalist system, there is usually no deficit of goods that should be resolved at the expense of the production reserve at some point, because all reserves are used immediately. As demand rises, traders place more orders to producers who employ all of their available reserves to meet this demand. However, even if market demand is completely met, the production reserve can still be maintained! But what should one do with it? There is a solution! Because we are talking about a market, i.e., a specific market in a certain country that can be fully satisfied with the efforts of existing producers, who still have enough reserves to develop production, then we can discuss markets in other countries that may not yet be sufficiently satisfied with this type of goods. There are a lot of new opportunities here even for those producers with relatively high average production costs. It is particularly relevant to producers in developed capitalist countries, whose production costs are higher than average after assessing the high wages of workers, are higher than average, but whose unused production reserves account for a large part of total production capacities. As we already know, the total costs of production consist of both fixed and variable costs. Fixed production costs consist of anything that isn’t affected by changes in production volume, such as buildings, equipment, and all production infrastructure. The other part of expenses belongs to variable costs, the amount of which varies depending on the production volume. These are raw materials, energy resources, labour power, and everything related to the final product. Therefore, if a capitalist enterprise’s production capacities are not fully utilised to meet domestic demand, it can employ them for export. When forming export prices, it does not need to include all production costs, but only to assess variable costs that are directly related to the production of the additional final product. Fixed costs do not change or change slightly in any case (factory, equipment, and maintenance costs do not change, only the intensity of their use increases). Therefore, a capitalist enterprise can offer highly competitive export prices in this case and so compete successfully abroad with local producers who are forced to assess all production

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costs on their market. In this instance, export becomes a solution that allows the enterprise to make better use of production reserves and hence maximise profit. However, the socialist enterprise cannot do it because no-one will allow it to conduct any export operations on its own. As we have already mentioned, export is handled by a state-owned international trade organisation, which is also authorised to set product prices abroad and receive all foreign currency. In such a case, socialist enterprises may only expect additional income for bonuses in the form of socialist money paid to them by this organisation, as well as possibly some foreign currency for international business trips of enterprise employees. But none of this creates actual material incentives for higher-level export, and only a very small number of socialist enterprises can and do have something to export abroad. As we can see, no material incentive systems, which have been and are widely used in practice abroad, can be used successfully in a socialist economy. The attempted introduction of the “Stalin-Ford” model and “Khrushchev’s” in the socialist economy eventually failed because it became obvious in the long run that they did not work in practice. The reason for this is that the effectiveness of these systems is ensured by the operation of the law of value in an economy that is absolute in capitalism. However, in socialism, the operation of the law of value is “regulated” by public institutions; therefore, no capitalist material incentive systems are suitable for it or operate ineffectively and fail to reach their ultimate goal.

8.3 The Third Administrative Cycle 8.3.1 The End of Khrushchev’s Economic Reforms N. Khrushchev made every effort to intensify agricultural production and increase its profitability in order to bring agricultural production closer to the level of industrial production. However, he made a lot of serious political mistakes at the same time, which had a negative impact on the national economy later. First of all, it should be noted that he was the initiator of the country’s extensive economic development, which is understandable. Because the intensive method of development requires significant investments in production technologies and, at the same time, a considerable amount of time for their implementation, reclamation of new territories for agricultural activities appeared to be the only way to increase the production of grain and other crops with the aim of quickly resolving the problem of food scarcity. The Virgin Lands campaign. Grain harvest nearly did not increase between 1949 and 1953 as a result of Stalinist policies in USSR agriculture and averaged around 81 million tons each year (Mironin, 2012). The worrying food situation has been exacerbated by the rise in the population of the USSR due to the rise in the birth rates during the post-war period. However, the country’s grain harvest was insufficient to bake bread and feed livestock in 1953. To avoid starvation, the government had to

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take drastic measures, such as using a portion of the strategic grain stocks held in the state reserve in the case of war. To change the situation, urgent measures were required. The so-called epopee of virgin lands began (Zhuravlev, 2018). At the end of January 1954, Khrushchev submitted a report to the CC of the CPSU on the situation in agriculture and its perspectives. He drew attention to the deep crisis on the grounds that the country collected less grain in 1953 than it did in 1940. 99.6 million tons of grain were collected at that time (Mironin, 2012). The main point of his proposals was the need to increase the area of arable land by reclaiming an additional 13 million hectares of land in steppes of Kazakhstan, Siberia and the Urals. It was planned to plough the so-called “areas of virgin lands” (Russian “Tselinnye zemli”). In total, nearly a million people were sent to virgin lands from the central regions of Russia, Ukraine and Belarus. Up to 33 million hectares of land have been ploughed after several years of this epopee instead of 13 million hectares of land (Ratkovsky & Khodyakov, 2001). In 1956, the record grain harvest of 125 million tons was achieved, where crops accounted for approximately 40% (Mironin, 2012). However, it was accompanied by unforeseen problems. Because of the impassable roads, delivering grain from production locations to storage and consumption locations was very difficult, resulting in high transportation costs for equipment, fuel and construction materials. The lack of storage capacities and poor work organisation of hundreds of thousands of people who came to reclaim new areas of land contributed to them. The disturbed ecological balance of these lands was the most critical factor. In the absence of forests and other wind barriers, the turf ploughed in steppes lost its natural protection. In the early 1960s, massive wind storms caused soil erosion. They led to a very sharp decline in agricultural productivity; therefore, a large part of the arable land had to be immediately converted to pastures. From an environmental perspective, this “storm” meant a grandiose expansion in agriculture, full of catastrophic consequences. Only a few years after the massive reclamation of land began, this disaster has presented itself as a huge “dust cauldron” throughout the entire area of steppes in the south of Western Siberia and Kazakhstan (Zhuravlev, 2015). Was it a predictable problem? In fact, it has previously happened in the Great Plains of the USA and Canada in the 1930s. Knowing that the massive reclamation of many million hectares of virgin lands in the prairies led to massive wind erosion due to which many farmers went bankrupt at that time, it was possible to prevent the imminent losses. Nevertheless, the USSR did it all over again barely 20 years later, as if nothing like that had happened before. The corn campaign. Soon after, a new, so-called corn campaign began, which paid particular attention to increasing maize yields wherever it was possible or impossible. N. Khrushchev developed this programme for several years, but it began to form in January 1954 when he wrote a corresponding letter to the Presidium of the Central Committee of the Party. He wrote in it that “a portion of maize area in the USSR covers only 3.6% of the total grain crop area, while it is 36% in the USA” (Artemiev, 2013). It also leads to a higher yield of all cereal grain crops in the United States (17.3 quintals per hectare), because maize yield is more than twice as high as wheat

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or oats per hectare in the USA”. He also mentioned the yields of these crops in his letter: 26.2 quintals per hectare in USA and 36.6 quintals per hectare in Canada. “I am corn crop duster”, liked to joke N. Khrushchev while speaking to party members and recalling how, as First Secretary of the Ukrainian SSR Communist Party in 1949, he saved the republic from starvation with the aid of corn. Khrushchev claimed that by producing corn, the two major issues of Soviet agriculture, namely grain scarcity and the lack of animal feed, could be solved. The Plenum of the CC of the CPSU decided in 1954 that if maize crop yield in the USSR was 3.5 million hectares at the time, it had to increase to 28 million hectares by 1960, which was equal to the area of all newly reclaimed virgin lands in Kazakhstan (Artemiev, 2013). The slogan of the party members who carried out the Central directive in such areas was “Let us donate 50 quintals of maize per hectare to our homeland!” and the maize crops began to be planted everywhere, regardless of the existing climate or the presence or absence of proper agricultural infrastructure. Besides, they created another slogan “Communist youth, let us cultivate two corn harvests per year!”. In fact, the Soviet Union did not have its own cold-resistant corn seeds at the time to plant maize in such large quantities; therefore, heat-tolerant Moldavian maize varieties were imported and planted in the non-Black Earth Region of the USSR, but many of these turned out to be of poor quality. The yield was high only in Ukraine, Moldova, and the North Caucasus, where American varieties were purchased. Roswell “Bob” Garst (1898–1977), the owner of a very profitable farm in Iowa State of the USA, was one of the corn merchants approached by Soviet plant breeders. During his visit to the United States, N. Khrushchev paid him a personal visit. N. Khrushchev insisted that farmers sow corn in square-clusters, a pretty difficult and unusual method that was very convenient for mechanical harvesting. He actively persuaded them (including American R. Garst) that the square-clusters method, which involves destroying weeds and hilling planted crops in two directions, is more effective not only for maize, but also for all other arable crops. N. Khrushchev’s interpreter Viktor Sukhodrev later recalled: “I have interpreted conversations between Garst and Khrushchev in several meetings, and I can tell you that these were dialogues between two people: one was a true corn expert, while the other was someone who only thought he was a specialist” (Shesternina, 2009). However, most collective and public farms had no experience with annual and quite fastidious maize, which required annual planting, heat, fertile and fertilised soil, timely sowing carried out in a short period of time and at a high agro-technical level, continuous maintenance, scarification, and fertilisation during their growth, as well as special forage harvesters for harvesting. The collective farmers were unaware of it and lacked the necessary equipment. In Western Siberia alone, the yield of maize crops was increased from 2.1 thousand to 1.6 million hectares between 1953 and 1960. However, the quantity did not grow into quality—on average, only 7.2 thousand hectares were allocated for corns during this period, i.e., less than a percentage of the entire crop area (Artemiev, 2013). Situation of maize (green) forage was better—its yield increased fourfold—up to 100 quintals per hectare. It has contributed to the development of animal husbandry because more feed was now available. However, maize crops gradually displaced

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other cereals such as wheat and rye; therefore, the shops began to lack bread in 1963. In the autumn of 1962, the CC of the CPSU and the Council of Ministers published a resolution “On Restoring Order in the Expenditure of Bread Resources”, which restricted the sale of bread to no more than 2.5 kg to the hands of one person. There was simply a lack of grain for the country’s flour production. It has also been severely affected by the dust storm in virgin lands of Kazakhstan and poor harvest across the country. R. Garst visited collective farms in Kuban during his regular visit to the USSR and saw maize being cultivated without the use of fertilisers. He scolded the local chairman of the collective farm, threatening to report it to N. Khrushchev. However, N. Khrushchev replied that he was aware of the situation, but “he had to feed people” (an episode from the documentary series “Namedni” released in 1961). Despite the fact that peasants had previously gotten passports, the base of public farms was strengthened; therefore, their number increased fourfold between 1950 and 1964, thus greatly increasing the income of the collective farms. It was the largest in the country’s east and resulted in a major rise in grain yields as a result of the development of the first and uncultivated areas, which began in 1954. The net revenue of collective farms in the Altai region increased by 14 times in 1954 compared to 1953; meanwhile, the cash remuneration per workday increased by 4.1 times, from 1.3 roubles in 1953 to 5.4 roubles in 1954 (Narodnoe khozyaystvo, 1958). Many economically weak collective farms were converted to public farms, which were considered the most productive form of management. During his trip to Kazakhstan in 1954, N. Khrushchev drew a conclusion about the advantages of public farms over collective farms, stating that huge public industrial enterprises could utilise technologies more efficiently, pay higher salaries to employees, and make the cheapest bread (Khrushchev, 1962). Although the motivation of the collective farm workers to carry out highly productive work in public fields and farms remained low, the discipline of labour power has decreased; therefore, agriculture has failed to achieve the desired results. Even after the sale of machinery and tractor station gear, the constant consolidation of collective farms, which resulted in a reduction in the number of collective farms, did not contribute to the improvement of their efficiency. It was even discussed whether or not personal farms should be liquidated (Blagikh, 1993, c. 315). The economic return on public farming has proven to be low. Three quarters of public farms created on the basis of collective farms proved to be loss-making at the turn of the 1940s and 1950s. One of the reasons for this situation was that the public sector was developed without taking into consideration the material and financial capacities of the state; therefore, many newly established agricultural enterprises lacked funds for the rapid economic growth (Andreenkov, 2012, p. 283). In the early 1960s, the country experienced a food crisis despite an inefficient system of collective farms and unbearable spending on military and various space programmes. Therefore, the USSR was forced to purchase 12 million tons of wheat in Canada for the first time in 1962 (Pihoya, 2004). However, unlike V. Lenin and J. Stalin, N. Khrushchev spent the available currency on food rather than allowing citizens to starve to death. However, white bread almost vanished from the shelves

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of shops, and the rye bread was baked with a pea flour mixture, which significantly worsened its flavour. N. Khrushchev was shocked by the new problems in the rural areas. The decline in agricultural production output between 1959 and 1963 was not unnoticed. He flew all over the country enraged and ardently scolded all leaders of the republics and the party nomenklatura of the provinces and districts, demanding that they overcome their backwardness, and giving specific instructions to remedy the situation. On 17 May 1962, the government issued a decree to increase retail prices for meat and sausage by 30% and oil by 25% from 1 June, explaining that it does so “at the request of workers”. Therefore, according to KGB sources, protests of varying scales have taken place in Moscow, Leningrad, Donetsk, Dnipropetrovsk, Gorki, Tambov, Tbilisi, Novosibirsk, Chelyabinsk, Zagorsk, Vyborg, and other cities, where proclamations have been distributed (Popova, 2017). There have been 58 factory strikes and 12 street demonstrations (Krechetnikov, 2012). However, the main drama took place in Novocherkassk. The management of the local electric locomotive building factory had no other choice but to accept the increased food prices by increasing its production rates, which were announced on 31 May 1962. This decision reduced earnings of factory workers by almost 25–30%. Because housing rental prices were one-third of the average worker’s wage, a large proportion of the citizens lived in barracks. People even had to stand up in a queue from 1 AM in order to buy potatoes. Probably no-one would dare to mention it during Stalin’s reign, but the “Khrushchev Thaw” created the impression that “it was not those times “. On the morning of 1 June, about 200 workers in the steel industry refused to work, went to the yard, and raised a question: “How should we keep living?” They went to the factory administration at 11 AM. Workers from other workshops joined them on the way, and around a thousand people gathered in front of the administration building. Director Boris Kurochkin got into an argument with them. When he saw a woman selling patties, he shouted: “If you don’t have money for meat, eat liver patties!” (Manaev, 2020). According to some witnesses, the director used the word “devour “. Perhaps B. Kurochkin could have solved the situation, but this phrase outraged the crowd. The director was able to quickly retreat into safety. Worker Viktor Vlasenko activated the factory whistle, for which he was later sentenced to 10 years in prison. The strike occurred throughout the entire factory, and the number of participants in the spontaneous strike reached five thousand people. They went to the city, but tanks arrived, scattering the crowd until the late night. Many people were under arrest. In the morning, the crowd headed towards the Executive Committee building, which was preceded by submachine gunners. The crowd was told to disperse through the speakers, but they did not listen. People fell into blood pools after submachine gunners opened fire. The bodies of the 26 protesters were later secretly buried in cemeteries scattered throughout the Rostov region, without the participation of relatives (Krechetnikov, 2012). Although N. Khrushchev condemned Stalin’s terror and significantly expanded the limits of freedom, he responded very sensitively to the conservatives’ accusations that his regime was “the devil of a mess”, which “was not so under Stalin’s ruling!” People who knew the impulsive leader very well could easily manipulate his moods

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in any direction. The government has made it clear that, despite the “Thaw”, it will not guarantee anything to anyone, will determine the permissible limits on its own, and will not stop before anything if it deems it necessary.

8.3.2 Betrayal of Nomenklatura Overall, it can be said that N. Khrushchev’s policy was rather superficial and had little impact on the foundations of the totalitarian system. The dominant one-party system promoting Marxist-Leninist ideas has been preserved. N. Khrushchev was not planning for further de-Stalinisation because it would require him to admit his crimes. Thus, the implementation of the USSR as the rule of law and its national policies show that during the reign of N. Khrushchev, the country shifted from totalitarian to authoritarian rather than democratic regime. If the totalitarian society was politically monolithic, with the governing group fully controlling its social life, then under authoritarian conditions, society became more independent from the governmental institutions, but the government itself broke down into separate groups defending their different group interests. At the same time, the government maintained its independence from society, and the decisions made by its officials were little dependent on the interests of ordinary people. On the initiative of N. Khrushchev, the Plenum of the Central Committee of the CPSU began a course of restructuring all governing bodies in accordance with the principle of production in November 1962. Both regional and local party organisations were divided into industrial and rural organisations. Later, regional departments of communications, trade, public education, and health were established, which were subordinate to both industrial and rural party organisations and Soviet bodies. Every day, the latter began to receive various decisions and orders on the same matters, which duplicated each other. It has greatly disturbed the leadership because it was unclear who to listen to. However, the main problem was that the leader began to disregard the nomenklatura and make decisions on his own (Pihoya, 2004). In addition to his position as First Secretary of the CC of the CPSU, he took office of Chairman of the Council of Ministers of the USSR, thereby usurping the executive power and its party control in the hands of one person. The party nomenklatura could not take it any longer and began to rebel. D. Polyansky, a member of the Central Committee’s Presidium of the CPSU, was tasked with preparing a report, which was presented by his colleague, M. Suslov, at the meeting of the Central Committee of the CPSU on 14 October 1964. The removal of N. S. Khrushchev from office was proposed in the report (Aptizov Cigaqev, 2016), which read as follows: “He is the only one who speaks at Presidium meetings. If someone attempts to express his opinion, he is immediately interrupted. It is pointless to talk because the First Secretary will continue to do things his way. “Methods” such as angry misdemeanour, harsh and indecent insults, and cursing have become his constant code of conduct… He acts as a demagogue: verbally, he opposes the

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cult of personality by strictly adhering to the principles and standards of V. Lenin, but in practice, he behaves the opposite by employing methods of personality cult… In 1952 (Pihoya, 2004), only six portraits of Stalin were published in “Pravda”. Meanwhile, only in 1964 was Khrushchev mentioned and depicted 147 times in the same newspaper. Here is an example of a true fighter against the cult!” Therefore, it was joked in the hallways that during Stalin’s reign, there was not only a “cult of personality”, but also “a personality”, whereas during N. Khrushchev’s reign, there was a “cult”, but no “personality”! Therefore, the nomenklatura removed the leader from office.

8.3.3 Kosygin’s Economic Reform In August 1967, an interesting experiment involving the improvement of the productivity of this enterprise’s production began at the Shchukin’s chemical plant in the Tula district. A stable wage fund was established for the enterprise, and a specific production plan was defined at the same time. If the factory is able to fulfil its planned tasks with fewer workers, all wage savings will remain at the disposal of the factory. The principle of “Less staff—more end products” was applied. The savings were used to pay wages and meet other needs of the enterprise. Over the course of two years of working under new conditions, the number of workers in the factory decreased by 870 people. Over a ten-year period, the volume of products produced increased by 2.7 times, while labour productivity increased by 3.4 times. The Central Committee of the CPSU evaluated this advanced practice favourably across the country. Therefore, over the course of two years, the number of followers of Shchukin’s method increased from 30 to 200 (Krakova, 2018). Despite the fact that a new leader, L. Brezhnev, came to power, the economic reforms were continued at the beginning of 1965. The Shchukin’s experiment started the economic reform of 1965, which was initiated by A. Kosygin, Chairman of the Council of Ministers of the USSR. Its essence is to increase enterprises’ autonomy, their freedom to dispose of their profits, and to reduce many other planned indicators. The terms “market”, “profit”, “efficiency”, and others began to be used. According to other sources, economic reform of 1965 was first proposed by E. Liberman, a scientist-economist from Kharkiv, who was the true “founder” of this reform (Lisovsky, 2016). Back in 1962, the newspaper “Pravda” published a scandalous article titled “The Plan, Profits and Bonuses”, in which he proposed for the first time to make the criterion of enterprise’s profit and profitableness, i.e., the ratio of profit to the main and rationed circulating funds, which was the main measure of the enterprise’s assessment. If Stalin’s economy had clear elements of totalitarianism, where all industries were highly interconnected and the public plan of the USSR served as the main planned indicator, Kosygin’s transformations were related to the decentralisation and autonomy of enterprises. Profit, profitableness, and selling indicators were used

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instead of general production, which was previously the primary indicator of the enterprise’s efficiency. By 1969, more than 32,000 enterprises had adopted the new system, accounting for roughly 77% of the USSR’s total industrial and agricultural production. The introduction of new mechanisms has accelerated economic growth and export of industrial products contributing to a significant increase in the standard of living. During the period of the eighth five-year plan (1966–1970), the USSR’s national income increased by 42%, industrial production by 1.5 times, and agriculture by 21%. Despite the fact that one peasant farm in collective Russia could “feed” an average of 10 citizens in 1970, a “small bourgeois farm” was able to feed 71 people in Great Britain, 56 in Belgium, and 57 in the United States (Krakova, 2018). Therefore, the sectoral governance of industries was restored, and territorial Councils of the People’s Economy were abolished during the reform. The reform’s objectives were to increase productivity, improve product quality, and make progress in the field of science and technology because it was decided that sectoral ministries were much more related to sectoral research institutes than territorial management units.

8.3.4 “Suppression” of Kosygin’s Reform Regardless of how “innovative” these reforms were, they soon faced with growing contradictions of socialism. The growing discrepancy between the development of productive forces and the growth of aggregate demand was particularly noticeable. All of it became apparent when producers began to artificially raise the cost of products and, accordingly, raise profit indicators, which were calculated as a percentage of the cost of products. In the result, the prices of goods began to rise uncontrollably. If such a situation occurred in a capitalist economy, it would resolve on its own because the rise in prices of individual producers is limited by competition. However, there is no competition in a socialist state! Therefore, commodity prices continue to rise and the poor residents of the country are forced to pay them! In any case, it could not last indefinitely, and prices were eventually limited by decreased demand for the solvent population. People simply did not have so much money, so they began to limit their consumption. It, in turn, began to limit production and all indicators of growth of national product. Production growth slowed down significantly. The shadow economy began to develop, and people began to acquire goods and services in a variety of ways. At that time, it was necessary to move towards even deeper structural reforms in order to open up opportunities for any kind of competition in the entire economy. However, it required a strong political will, which the political leaders lacked at that time. It seemed dangerous to them because they were at high risk of losing control. In addition, in the long run, profit and profitableness became increasingly similar to capitalist statements for many public members; therefore, the party and Soviet nomenklatura began to see a threat to their existence once again. Decentralisation

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reduced the “significance” of the union institutions and the influence of the Centre on the regions, as well as the huge cash flows to the Centre, and related privileges. The Ministry of Defence “suffered” the greatest losses. The “party nomenklatura” then began to claim that any attempts to improve socialism are equivalent to “revisionism”. It especially manifested in the brutal suppression of the uprising in Czechoslovakia during the “Prague Spring” in 1968. The Political Bureau of the CC of the CPSU was terrified. According to it, it was a clear deviation from Marxism, or the “Trojan Horse”, through which capitalist values would be introduced into socialist countries. “Nothing is left; everything has been destroyed. The reforms were enacted by people who did not want them at all. People who have worked with me and this material have already been removed. I do not expect anything more”, A. Kosygin complained to Prime Minister of Czechoslovakia, Lubomír Štrougal, in 1971 (Andriyanov, 2003). In the early 1970s, the reform became so overloaded with supplements and explanations that it ceased to function. Active centralisation of governance has begun. The defence-related industries are prioritised. Since 1972, the main funds for the development of the light industry have been directed towards the development of the defence complex. The concept of promoting local initiatives, cost accounting of enterprises, and the development of independent farming were completely buried. All of it shows that economic reforms, which initially provided a significant boost to economic development, have gradually lost their enthusiasm. They were hampered in large part by internal economic contradictions of socialism. The increased autonomy of enterprises and their ability to dispose of their earned funds is a good thing, but under the conditions of a planned economy with no competition, enterprises are gradually becoming a kind of sectoral monopolies, with no interest in lowering costs, but rather artificially increasing them while increasing their profit. It was difficult to keep them under control. This has distorted the development of the entire national economy over time because production has become less competitive, not only abroad, but also in domestic trade, where it has become less affordable. People simply did not have as much money because not everyone worked in the “most profitable” enterprises! It should be noted that the nomenklatura’s concerns were not unfounded in this case. Only restoration of market relations in the economy could create competition, but this would mean the end of the planned economy. Therefore, competition was restored only within the enterprises, where efforts were made to reduce the number of workers by paying higher bonuses to those who remained. It forced workers to fight for their survival, increasing the efficiency and wage of their work while improving the enterprise’s profit indicators. However, competition was restricted to this. Beyond the gates of enterprise, there was no competition or comprehensive market relations. The socialist enterprises did not compete with one another, which meant that their aim was not to establish themselves on the entire market, but to complete the planned tasks assigned and approved by someone else on time. There was no point in fighting or lowering the cost and price while increasing product variety and quality to please the customer. Sooner or later, the customer will buy it anyway. He will buy it when

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he has money! After all, there are only as many available products as are produced— why should businesses produce more of them? After all, they cannot compete with themselves once their plans are completed! There is nothing wrong if they later realise there is a small quantity of goods that may result in a deficit! Planning bodies will develop larger plans in the future, and they will gradually produce slightly more products. However, in order to completely eliminate the deficit of goods, expand the range of products, and improve their quality without raising prices, it is necessary to establish or permit the establishment of new enterprises producing more various goods. But what does it mean to establish them? After all, there are as many enterprises as there are planned, and plans are already being carried out! Resources are required to establish new enterprises, and in order to obtain them, people must explain why such enterprises are needed. Nobody will allow the establishment of a new enterprise solely for the purpose of creating competition for existing enterprises and possibly causing overproduction. At best, people will be advised to revise existing production plans for existing enterprises! What would happen if new enterprises were granted a permission to establish on their own? But at what cost? It requires independent economic entities with funds, free of subordination to ministries and agencies (because they cannot and do not want to do it themselves), capable of making investments and planning the production of missing goods. It would definitely solve the problem of scarce goods! At the same time, it would encourage competition and force existing production monopolists to lower the prices of their products, which would be very convenient for customers, i.e., the entire population of the country. However, it would be pure capitalism on a national scale, leading from a planned economy to “chaos”! But that is not even the main issue! After all, autonomous economic entities are “autonomous” because they plan their tasks on their own; they do not require the “centre” and its bureaucrats, who initially collect and then distribute the funds! Therefore, people began to act on the contrary. The beginning of the centralisation of the entire economy, as well as the restoration of the “power vertical”, began to gradually strengthen the significance of the Centre and the rule of the nomenklatura. However, there was another important factor that allowed to refuse further reforms in the Soviet Union, while temporarily rescuing the state from the threat of future bankruptcy. It was the global oil crisis, which was related to the steadily rising oil prices. Since 1973, as a result of the Arab–Israeli political conflict, the oil factor has become a critical factor in the Soviet country’s development for many years to come. Therefore, the economic transformation, in the opinion of the management at the time, had become completely unnecessary for the successful development of the country. In fact, the USSR has been severely affected by the so-called resource curse, which gradually led to a less efficient, one-sided, and non-diversified economy that was largely dependent not only on oil revenues but also on imports of finished products. Revenues from oil exports have undoubtedly contributed to the increase in actual income of the population and the country’s consolidation in the world’s leading positions based on its quantitative indicators. However, it was stopped to seek

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for structural transformation and there was no need to invest in the most advanced industries at the time. Everything could be purchased for “oil money”!

8.3.5 L. Brezhnev’s “Economic Stagnation” Nowadays, many people consider this period to be golden in terms of the overall development of the national economy. This period was unusually appealing due to rejection of revolutionary transformations, calm and slow pace of life, and creative work for the general good of society. After rejecting all personalities, L. Brezhnev and his comrades have one great merit that must also be discussed. After L. Brezhnev came to power, the Soviet Union abandoned the communist concept (Sliznikov, 2012). He was well aware that this concept was ephemeral. Another issue was that he was unable to express his position openly. However, he gradually and deliberately replaced the concept of communism with the concept of “developed” or “mature” socialism. This concept may appear stupid to some at first glance, but it turned out to be almost the most realistic concept of the Soviet Union’s development period at the time. People finally realised that the time had come to start living for themselves, rather than creating communism and a bright future, as all previous leaders, including V. Lenin, J. Stalin, and N. Khrushchev, had stated. Therefore, the main achievement of the so-called Brezhnevian Stagnation was that Soviet people were able to spend time on themselves. During the period of the tenth five-year plan (1976–1980), the country’s planned economy continued to develop, but its rate of growth slowed significantly. Significant efforts were made to increase production efficiency as a result of the concentration of production. Therefore, huge territorial-industrial complexes have occurred in Siberia, Kazakhstan, and Central Asia. The main focus was on the development of Siberia, which was the main supplier of oil to both domestic and foreign markets in the 1970s. In fact, such a policy was focused on extensive development and led the country to the “niche of raw materials”. It is characterised by the fact that, in the 1970s, when it became clear that the USSR was losing its position as an industry leader and was unable to actively increase its planned indicators, the country’s government began to use ideological pressure and to “experiment”. The “brigades of communist labour” were created throughout the country, i.e., labour brigades, symbolically involving people to work instead of those who died during the Great Patriotic War (they had to carry out an extra production plan for such a “brigade member”; meanwhile, their accumulated wages were transferred to the state). Later on, a “movement for the counterplan” was created (workers were required to take the initiative and assume higher-level planned tasks than those assigned to them from above). In the late 1970s and early 1980s, the phenomenon of “counter-initiatives” as an analogue of the “counterplan” appeared. It has resulted in a situation in which the supply of products has begun to exceed demand in many industries, but in the absence of competition and market analysis, it was an excess supply of unnecessary products. Much attention was paid to the development of

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socialist emulation. New movement has emerged, such as “for communist labour” and brigade contracting. They will later be inflated by propaganda and transformed into formal forced occupations. In 1979, the Central Committee of the CPSU and the Council of Ministers adopted several resolutions on the country’s economic governance and improvement of production efficiency. Productive and scientific-productive associations were established (Postanovlenie ot 12 iyulya 1979 goda № 695). In fact, it was a concentration policy that was typical for that period, but it did not produce the expected results. It was planned to increase the accumulation fund in national income. The main emphasis was on construction and the implementation of new technologies in enterprises. Nevertheless, particular attention has been paid to the priority areas of machinery manufacturing, chemical and petrochemical industries, and energy enterprises, as well as their development. Agriculture had to be developed on the basis of advanced experience on farms, new technologies, land improvement, and the active use of chemical fertilisers. It was predicted that during the period of the tenth five-year plan, industrial production would rise from 35 to 39% when compared to the previous five-year period; meanwhile, the production of capital goods would rise between 38 and 42%, and production of consumer goods would rise between 30 and 32% (Gazanchiyan, 1976). Agriculture was not exempt from the idea of concentration and growth. The development of enterprises belonging to the AgroIndustrial Complex was prioritised. Both agriculture and industry have shown a tendency for undertaking gigantic projects. It manifested itself by removing small and “prospectless” villages and merging collective farms into separate large farms. Another significant project was the diversion of Siberian riverbeds to the south in order to irrigate the infertile lands of Central Asia. Targeted bombings were used to divert riverbeds, but the desired result was not achieved. Because of it, the ecology of these lands has changed, and significant areas have been flooded. The construction of the Baikal-Amur Mainline was resumed. The Food Programme was adopted in 1982, setting out measures to address agricultural problems in a relatively short period of time. However, despite new achievements, the national economy has begun to slow. Mining and rail transport productivity has slowed, while raw material consumption has increased. The costs of research that did not produce the expected result increased, while the efficiency of development and integration of new technologies decreased. Production costs and turnover taxes have both risen. Therefore, growth from foreign trade was expected, mainly through the sale of raw materials abroad. Economic stagnation began in the early 1970s, when global oil prices tripled and new oil resources were discovered in Western Siberia. The USSR willingly became “dependent on oil”; meanwhile, L. Brezhnev lost his interest in any reforms. From then on, the most important thing for the country’s government was not to modernise the USSR, but to keep the country stable in the face of a desperate economic deterioration. Queues for scarce goods have grown longer, while the list of “goods available to” an average person has shrunk.

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The principle of rotation of leading party employees was removed from the Communist Party’s statute at the 22nd Congress in 1966. The new statute introduced a new wording regarding cadre renewal—“on demand”, which paved the way for complete lawlessness in party cadre policy. Between 1964 and 1980, only 10 people left the Political Bureau of the CC of the CPSU, half of whom (Grechko, Kulakov, Mazurov, Kosygin, and Masherov) died of “natural” causes. The Political Bureau has been characterised by “enviable” stability for nearly 20 years. It consisted of leaders, the majority of whom were L. Brezhnev’s comrades from former party and public work. At the same time, the party nomenklatura’s aim was to obtain as many privileges as possible. The privileges were paid not only from party funds, but also from the State Treasury. However, neither party members nor ordinary taxpayers had any control over the costs of the state and party apparatus. The privileges became more intolerable as the standard of living fell. The explosion of public dissatisfaction was prevented only because the government skilfully “fed” certain segments of the working class and intellectuals, partially reconciled to manifestations of mismanagement, thefts, and embezzlement of public property, as well as applied wage equality policy. Between 1970 and 1980, the CPSU reverted to strict party centralism and granted party organisations the right to control public administration bodies more strictly. The “Brezhnevian elite” established far more ministries and agencies than N. Khrushchev. However, it was nothing like the “war communism” of the first administrative cycle, which was introduced as a result of the October Coup, or the “modernised war communism” of the second administrative cycle, which was returned by J. Stalin. Meanwhile, the centralisation of power, while sharing some external characteristics with the former one, has occurred in a much gentler manner, with far less bloodshed (with the exception of the Prague Spring that happened in 1968). The Councils have become similar to decorative institutions. Party congresses also served similar functions. Another example of the merger of leading positions and posts was the concentration of party and public power in the hands of one person. Despite N. Khrushchev’s condemnation, L. Brezhnev merged the positions of Head of State of the Soviet Union and General Secretary of the Communist Party in 1968. On 7 October 1977, the Supreme Soviet of the USSR adopted a new constitution, which proved to be the fourth and final in the history of the Soviet country. This Fundamental Law, proudly referred to as the “constitution of the developed socialism”, formally legitimised a one-party political system (Article 6), which had actually existed previously but had not been enshrined in previous versions of the constitution. The discussions about “developed socialism” in 1970 were based on huge amounts of petrodollars obtained from the sale of oil and gas. Monetary support has been so substantial that economic and social problems have been significantly alleviated for some time. If the only way out of the economic impasse in the second half of the 1960s was through reforms based on socialist cost accounting, increased profitability, and material promotion of production, then by the early 1970s, only memories remained out of such reforms. Because everything was planned from above, there was little that could be done at the level of the household, individual worker, or enterprise. Leading “power

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vertical” has slowed decision-making times and the rate of economic development significantly. It has undermined the initiative shown from the bottom; meanwhile, the planned nature of the economic system has occasionally led to absurdity: for example, in order to make minor changes in clothing designs in the light industry, it was always necessary to coordinate them at different levels of branch management for a long time. Thus, the potential of people in this system could not be properly utilised, and it was brutally suppressed in this regard. The party nomenklatura, with its ever-expanding privileges, felt somewhat comfortable at the time, but economic stagnation increased the gap between the USSR and developed capitalist countries.

8.3.6 Prevalence of Economic Inequality Visually, the country appeared to be producing a lot of products; all enterprises tried to carry out their planned tasks and they not only successfully completed them, but also exceeded them; however, the product deficit continued to grow. In the absence of competition and market research, enterprises chose the easiest way to produce massive amounts of goods that nobody needed. People had no choice but to buy some of them, but unnecessary goods were piling up in warehouses until they were “written off” at the expense of the state. The wages and bonuses of the enterprise’s personnel depended on the implementation of the plan; meanwhile, the goods were “written off” much later. Therefore, workers were paid well, and they were unable to spend their money anywhere due to the growing deficit. If new goods were delivered to stores, their deficit was immediately announced. People immediately bought them as soon as they were delivered to stores. The only thing people did was look for “scarce goods” everywhere and at all times, whether it was during working hours or leisure time. They walked around the shops, as well as the “Univermag” and “Universam” department stores (which were always crowded), observing where the queues were forming. Then they hurried to stand in a queue without even asking what the shop sold. They began to wonder, “What are they throwing out?” only later in the queue and continued to stand because they had to buy whatever the shop had to sell. Even if the shoes or dresses sold were of the wrong size, they could always repair them at home. If people were unable to repair them, they could still donate them to their friends! If they do not fit, people will be able to sell them through acquaintances or in the “marketplace”, thus earning more money! All of it resulted in the unprecedented problem related to the wasted working time. Huge losses in production productivity occurred gradually, and people began to regard their direct work as secondary. Therefore, the amount of goods sold at fixed prices in the country and the amount of money spent on purchasing those goods began to change significantly in prejudice of the former. Despite the fact that people have tried to spend their money in every way possible, the amount of money in the savings banks has steadily increased. It grew together

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with its inflation. It has gradually become a major source of concern for the Soviet government, but it has found a very original way to solve this problem. As previously mentioned, the USSR gradually became dependent on oil during the Brezhnev era; that is, it began to export oil in greater quantities. Knowing that global oil prices were constantly rising at the time, the Soviet government was quite successful. It was one of several ways to earn more foreign currency. But what should it do with this currency later? A. Kosygin’s reform had already been suppressed, and there was no significant need to purchase new machinery and equipment for its enterprises abroad (in order to strengthen production sector A); meanwhile, “oil” money continued to flow. Therefore, it was decided to spend it on strengthening production sector B, i.e., to use it to acquire consumer goods abroad because it was a growing lack of them in the country. The socialist “labour camp” countries were unable to pay for oil in currency; thus, they paid for it in the form of goods produced by it for fixed prices. It was regarded as “brotherly aid of socialist countries” rather than a “sale of raw materials”. Capitalist countries, on the other hand, paid in a currency that could be used to buy both food and industrial goods. Those goods were later delivered to the “Vneshposyltorg” (monopolistic foreign trade organisation) shops of the Soviet Union, where they were traded for currency; meanwhile, the other part of goods was dedicated to the “top of nomenklatura”, also known as the “elite of public powers”, and sold through special state-run stores. The remaining imported goods were distributed through trade bases to the regular stores, where these “scarce goods” were constantly sought after by ordinary buyers. I will discuss all of this in a more detail below. Stores that sold goods in exchange for foreign currency. As I previously stated, the government has established a network of special stores where all products were sold in exchange for foreign currency. Before entering such store, a person had to present his passport and, if necessary, proof of where he or she had received foreign currency. Upon decision of the Council of Ministers of the USSR, the first stores of the retail chain “Beryozka” (lit. “little birch tree”) opened in 1961. At first, they sold goods only in exchange for foreign currency and served only foreigners. Vice-Minister of Trade D. Korolev wrote to First Deputy Chairman of the Council of Ministers of the USSR, A. Mikoyan, as follows: “According to the decision of the Council of Ministers of the USSR of 23 March 1961, the Ministry of Trade of the Russian SFSR organised trading in the “Rossyuvelirtorg” system for freely exchangeable foreign currency. The title of shops and kiosks selling goods in exchange for foreign currency will be “Beryozka “. “Beryozka” stores at Vnukovo and Sheremetyevo airports were opened in April; meanwhile, two “Beryozka” kiosks in the hotels “Ukraina” and “Leningrad” were opened in the middle of May” (Liubimova, 2014). Initially, these stores could serve only foreigners as customers. Citizens of the socialist state, including those who could legally possess currency (such as diplomats, people who had previously worked abroad, and researchers who were paid in foreign currency), could not legally possess foreign currency with them because they had to deposit money to their personal account at the Public Foreign Trade Bank “Vneshposyltorg”. Therefore, later on, when they went shopping at these stores, they

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could pay with foreign exchange certificates issued by this bank, which served as currency substitutes. Some representatives of the high-ranking “nomenklatura” were also able to receive a part of their salary in the form of such certificates even if they did not travel abroad but worked with foreign countries. There were three types of certificates: with a blue band, a yellow band, and without any bands. The worst certificates had a blue band. They were issued for the currency of the socialist countries. The product selection was very limited, but it was better than in regular stores. Certificates with a yellow band were much better—they were issued for the currency of developing countries. Typically, these were countries from the African and Asian regions. The most valuable certificates were those with no bands. They were issued to workers or diplomats working in capitalist states. The variety of products available in exchange for them was unlimited. Only later the socialist state liquidated these certificates, replacing them with a system of “checks” that were not divided into different types based on their attractiveness. With the development of socialism and the decreased control over the years, the “privileged” representatives of socialist society began to sell their “checks” illegally in the “black market”. With fewer goods in stores and a growing “deficit”, demand for checks and their prices have risen significantly, attracting profiteers and other currency dealers. There is one thing I would like to mention. It is fact that all imported goods were distinguished by unique pricing. Their price in currency stores was significantly higher than the price of similar goods abroad. In addition, the monopolistic foreign trade organisation purchased a large quantity of goods from abroad in bulk during their sales, so various models of clothing were frequently out of date and were not subject to any discounts. Nevertheless, the quality and variety of these clothes were much better than their socialist analogues. Foreigners, who regularly visited these stores, on the other hand, simply had no choice. They could not buy anything like that in regular stores, so they were resentful. They were forced to buy here and pay money. Specialised stores for the “elite”. Since its establishment in the Soviet Union, the socialist state began to take care of the exceptional service of its leaders, i.e., the “responsible servants of society” and the improvement of their quality of life. Gradually, specialised shops (mainly in the party’s “nomenklatural” institutions) or special departments (as indoor premises) in regular stores were established, where the abundance of goods significantly outperformed the range of goods in regular stores. Because there could be no “rich or poor” people in the Soviet Union, the salaries of the leaders of the party nomenklatura could not be several times higher than the average national salary, and the prices of imported goods were set at the same level as domestic ones. Ordinary people in the Soviet Union did not see them because no-one was permitted to enter these stores; therefore, they were unaware of their existence. It allowed the “elite” to enjoy its privileges and imported “scarce goods” without being constrained by high prices. Retail sale at fixed public prices. Nevertheless, the majority of imported goods reached trading bases, with the remainder entering free trade. Working in a trading base at the time automatically meant belonging to a “elite”, though it was not a

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political one. It gave rise to speculation and caused all of the other issues that I will discuss in greater detail in later chapters. The pricing of imported goods should be highlighted as one of the most important economic tools available to the Soviet government at the time. It enabled the Soviet government to significantly halt rising inflation and balance the national budget temporarily. As I previously stated, by regulating the prices of goods, the Soviet government enforced a political order—there could be no “poor” or “indecently rich” individuals in society. Therefore, by establishing a pricing policy, it artificially reduced the prices of many necessity goods while artificially raising the prices of luxury goods. For example, the average monthly salary in the USSR at the time was 100–200 roubles. The fees for public utilities such as electricity, gas, and water, as well as the rent of a public apartment with several rooms, amounted to only one-tenth of the monthly salary, or 10–20 roubles. 1.5 kg of brown bread cost 0.36 roubles, while a loaf of white bread cost 0.22 roubles. 1 kg of “Doctor’s Sausage” cost 2.10 roubles. A matchbox cost 0.01 roubles. For comparison, I would like to note that the perfume bottle “Climat” (100 ml) made by the famous French company “Lancôme” cost 25 roubles in the stores of the Soviet Union at the time; meanwhile, the Belorussian colour TV “Horizont” cost 650 roubles, and a compact sedan car VAZ 2101 (the cheapest model) cost 5,100 roubles, i.e., roughly 25–50 monthly salaries. However, these were also “scarce goods”; therefore, they were sold “in sequence” at the working team. If a person did not want to wait 5–10 years a queue, he could buy this car in the “marketplace”, i.e., on the free market for a speculative price of up to 8,000 roubles. On the one hand, this “flexible” fixed-price policy allowed the government to avoid harming low-income residents, who could easily “survive” by purchasing the full range of necessity goods at relatively cheap prices. Despite a deficit of many goods, the Soviet government’s policy created a sense of social trust among this group of people, which was additionally promoted by free health care, free education, and offers of “cheap” or usually completely free cultural events. This social group was forced to forget the luxury that had become completely inaccessible to it, but it also could not complain that the socialist state did not care about it at all. On the other hand, people who had money and wanted to spend it were given an incredible opportunity to buy “imported scarce goods” or local “non-essential goods” and pay a high price for them. In this case, by not giving this social group another option, the state artificially raised prices for “luxury goods” and successfully collected excessive money from the population, thus lowering the country’s monetary inflation. An interesting fact is that the issues concerning production efficiency in the local industry, as well as the high production cost of electronics and progressive household appliances, have greatly aided these governmental measures. Because the government began to pay less attention to the acquisition of foreign technologies and more emphasis on the import of finished goods, the local industry was unable to develop rapidly. Because it was unable to develop new technologies on its own and lacked the necessary resources, it attempted to replicate samples of foreign products. Because

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the Soviet legal system, like the state, was quite closed, it paid little attention to foreign copyrights and their protection. However, despite all these circumstances, it was difficult to reduce the cost of production of the Soviet high-tech industry, which resulted in relatively high prices for its products. Meanwhile, the prices of imported electronics and foreign household appliances could be described as “sky-high”. Because their quality and design differed significantly from Soviet analogues, which were already expensive due to their high cost, only the most privileged members of society, such as underground millionaires and profiteers, as well as people with extremely high incomes, were able to purchase them. It was difficult or nearly impossible to find them in regular stores, but these goods were quite actively distributed “through acquaintances” or through a wide network of consignment shops, which was becoming more popular; meanwhile, at least one sample of these technologies had to be honourably placed as a decorative element of interior in the homes of the wealthier citizens of the Soviet state. Some types of these speculative activities were even encouraged unofficially during the Brezhnev’s reign because they served as social buffers. J. Stalin had almost no close friends. Meanwhile, L. Brezhnev had a lot of friends, the majority of whom he almost “pushed up” the career ladder, thus creating his personal support, which was based on mutual ties rather than fear of death. L. Brezhnev frequently invited his friends to his home and demanded that they refer to him as “Lyonia” rather than “Leonid Ilyich”. In the long run, all of this led to nepotism, abuse of power, and bribery. L. Brezhnev ignored it as if he did not see it. According to F. Burlatsky, during a conversation between L. Brezhnev and the authors of his official speeches, the latter mentioned the difficult and poor life of ordinary people in the Soviet country. “You do not know life”, said L. Brezhnev, “No-one lives on wages alone. I remember in my youth we earned money by unloading railroad freight cars. So, what did we do? Three crates or bags unloaded and one for ourselves. That is how everybody lives in (our) country!” (Medvedev, 2015). Tens of millions of people have gained additional income as a result of the shadow economy, which has compensated for a severe shortage of goods and services that were essential to the population. At the same time, such activities did not harm the state or the public economy because representatives in this field generally worked in accordance with market economy standards and rules. Earnings “from the outside” increased in the country, which benefited the state in many cases. Any reckless battle campaign in this difficult area of society could cause only harm. However, stagnation has increasingly engulfed the national economy. By relying on oil and purchasing an increasing share of the scarce goods abroad in exchange for its currency, the Soviet government further deepened this problem. Enterprises produced only necessity goods for ordinary consumers who were not very picky and lacked money for them. The rich tried to obtain imported goods, but there were few of them, so there was practically no reason for the Soviet industry to reform itself. Economic development has frozen, and everyone has been living relatively calmly. Therefore, L. Brezhnev’s reign came to an end with the latter’s death without any major shocks.

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The export of oil and natural gas, as well as other natural resources, enabled the USSR to allocate more money to the defence industry and expand its geopolitical ambitions, pretending to the status of a “superstate”. One of these ambitions was the start of the Soviet-Afghan War in 1979. Unexpectedly, the USSR entered into a large-scale conflict, which had unanticipated consequences that not only weakened the international authority of the USSR, but also drained the national economy and deepened stagnation. As a result of this war, many developed countries boycotted the 1980 Summer Olympics in Moscow in protest against the aggressive foreign policy of the USSR. However, the third administrative cycle of the Soviet state did not end there. For the most part, the country’s economy has remained largely centralised; therefore, it has operated inefficiently. Someone had to start reforming it sooner or later. At the end of the first cycle, it was made by the NEP, and at the end of the second cycle, it was made by the “Khrushchev Thaw”. Despite the fact that both reforms revitalised the socialist economy by introducing market elements and distancing it from “true” Marxist socialism, the party nomenklatura was able to make amends and return the Soviet state to the Marxist path of development in both cases. In both of these cases, the party nomenklatura was powerful enough to fiercely defend its interests and privileges. Besides, the capitalist countries were not as powerful at the time. In the first case, the Great Depression, which affected the entire capitalist economic system, greatly aided Soviet propaganda in criticising and condemning capitalism and the NEP. In the second case, rising global oil prices and new oilfields in Siberia aided in suppressing N. Khrushchev and A. Kosygin’s reforms by restoring the power vertical and centralisation of the entire economy with the help of gratuitous “petrodollars”. Therefore, it was interesting to see how this third administrative cycle would end. What are the reasons that should serve as “a wake-up call” for the economy? Another intriguing question is what level of economic reforms will be required if they are going to occur in the future. Will the party nomenklatura be able to control them and return the Soviet country in the hands of the Central government once again? All of these questions had to be answered in the future! Why Was Stagnation Present in Every Cycle of the Socialist Economy?

Chapter 9

Disadvantages of Soviet Economic Model

9.1 Causes of Stagnation As everyone knows (from the classic works of Marxism), the most important contradiction of capitalism is the contradiction between the social nature of production and private misappropriation of its results. Thus, the most important principle of the socialist economy is the nature of social misappropriation, which eliminates this “cursed” contradiction that exists in the capitalist system. The principle of social product distribution according to one’s contributions is supplemented by the principle of social misappropriation. In particular, the surplus product created by public labour is evenly distributed among all members of society through a mechanism that lowers retail prices of basic consumer goods and services and supplements public consumption funds. Another important principle is to focus on natural (physical) indicators when planning and evaluating economic performance. First of all, valuable indicators in the socialist economy are quite relative (especially in production, but not retail trade). Second of all, they play only a complementary role because profit will never be the most important indicator. The main criterion is the decrease in production cost rather than an increase in net profit. Now, let us examine the essence of reduction in production costs. We can only reduce them through economies of scale, which require the use of highly productive and efficient machinery and equipment in production. It creates favourable conditions for producing large quantities of the same product by lowering the cost of each individual production unit. It is, in fact, the objective of socialist production. Working in this direction, fair leaders of the socialist economy could quickly achieve significant production results and stock the country’s stores with all basic consumer goods by selling them at very good prices (which would be acceptable to all members of society). All of these members would have clothing, food, and a place to live. They could enjoy their lives and be happy! But, once again, we can only speculate on what would happen if it happened.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_9

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There is only one question here: do those who produce these products in a socialist country and reduce the cost of production pay any attention to what food products people want to consume or what clothes they want to wear? This question often remains a secondary matter—after all, the most important thing is that there would be an abundance of everything and nobody would miss anything! In fact, no-one requires to add variety to the range of products on a regular basis so that the entire mass of the population does not look completely dull and similar. However, in reality, it looks exactly like that! There is no provision in the socialist system for every individual member of society to be some kind of exceptional personality! According to Marxists, a person has never been the objective of this system, but only a measure. The objective was socialism and communism that had to be “built”! After all, no-one has ever “built” feudalism or capitalism. They “built” themselves regardless of others’ wishes or efforts, and no-one identified themselves as being involved in the “construction of capitalism!” It seems that people needed these systems because they gained more freedoms and most of them began to live better. However, during the “construction” of communism, it is mandatory for a working person “to sacrifice” himself in order for his children, if not himself, to have a better life in the new system someday in the future! It is unclear how much better, but it would definitely be better! Therefore, in this “construction”, he has always been and will continue to be only a tool that is often referred to as “human factor”, “production factor”, “labour power”, and “labour resources”. Socialism that seeks to provide all members of society with all necessary commodities and goods, as it pertains to wellmaintained tools, strives to ensure that no representative of society complains about his deprivation or starvation, and that no-one is cold or naked. It aims that its each of its representatives would fully express his creative abilities only in collaboration with others, would be honoured among his friends or in his country, but would be able to enjoy only what the socialist society has to offer. Therefore, anyone who dares to demand something “special”, i.e., something “other” than what the socialist state has and wants to give him, is labelled as “slowwitted” or “egoist”, and he is considered “a pest” because he demands something from society that it does not have and does not intend to have at the time. In general, the individual must adapt to society and strive to do good for everyone, rather than distancing himself from society or become “exclusive”. Can capitalism, however, guarantee this exclusivity? It turns out, it can! As previously stated, the capitalist economy operates in a chaotic manner and is dominated by market laws such as the law of value and competition, which force producers to adapt to consumers. Can the capitalist economy plan its production for each individual customer to satisfy his individual whims? It appears that it can, but why? Because tens of thousands of “planning committees” operate in the capitalist economy, each of which plans its own production separately without waiting for instructions “from above” on how much and what to produce for it, and without sharing the total amount of planned production with other producers, as in socialism. After all, its product is intended for exchange rather than meeting the “basic needs of all members of society”! A capitalist easily agrees to refuse his ownership and to receive “real” money

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that would allow him to purchase other desired goods anywhere, in any country, including the socialist one, through the monopolistic foreign trade organisation, instead of a “certificate” indicating this individual’s contribution to the common social product of his country. The planned economy has specific characteristics that, on the one hand, give it advantages over a market economy under certain historical conditions and circumstances, but on the other hand limit its own ability to develop fully by using global achievements, regardless of the type of economy in these countries. Let us take a closer look at it: Let us return to the principle of “distribution according to one’s needs”. Previously, I gave an example of a hotel with an all-inclusive (AI) service programme. Virtually, it can be illustrated as a “prototype” of a new communist society, which could be explained in part by an example of a specific case. All hotel residents enjoy all of its products and services to the extent that they are required to meet physiological and cultural needs. Nobody is starving or living in poverty; everyone has their own rooms that are well heated and ventilated, so they can feel good and continue to share that common “pie” of all the hotel’s products and services. But the question is whether it is the only hotel in the world with such a programme and such a wide range of products and services. As it turns out, no! There are numerous hotels with such a programme in various countries, each with its own range of products and cultural characteristics. However, the most important distinction between them is the hotel rating, which indicates a corresponding level of comfort of the hotel, the quality of service, and the abundance of products and services. Hotels are typically classified by the number of “stars” awarded to them by accredited institutions. If a hotel is of average quality, it will be given “3 stars”, and if it is a luxury hotel with many amenities, it will be given “5 stars”. It should be noted that both hotels provide more than enough food and entertainment to ensure the normal well-being and good living conditions for all of their residents. However, the quality of life they provide varies greatly. It is also determined by the price of the chosen programme, which is significantly higher in the five-star hotel. Can a three-star hotel become a five-star hotel on its own, with the assistance of its residents? Hardly. Besides, why should it become one? After all, the residents of the three-star hotel feel pretty good because they are well-fed and well-dressed! They live in a warm environment and feel happy! Therefore, in order for this hotel to gradually transform into a five-star hotel, at least one, if not all, resident must become dissatisfied with the current situation! The constant dissatisfaction of residents and the desire to live in better conditions lead to competition between hotels. Not only do hotels of different classes compete here, but so do hotels of the same class. Everyone wants to become more appealing and offer their customers as many products and services as possible at the same price. However, can a socialist and communist “hotel” ensure competition? Probably not, because if anyone even attempted to express their dissatisfaction with the current situation and demanded the standard of living of a five-star hotel, he or she would be labelled a “pest” and a “dissident”. However, it does not mean that the residents of a socialist hotel cannot express their dissatisfaction at all! They can and must do so, but

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they must also identify the specific disadvantages of socialist practice. These flaws are then thoroughly discussed, and as a result, the “responsible workers” solemnly accept the commitments to correct these flaws! Socialist emulation. As previously stated, socialist enterprises do not compete with each other. They are, however, “emulating” each other! How could we explain this emulation? First of all, it is very different from competition. Competition is cruel and angry, with competitors fighting for their well-being, trying not to help each other if not to harm each other; meanwhile, socialist emulation is quite a friendly act. Its participants, i.e., various enterprises of a socialist “syndicate” belonging to the same society, emulate each other in a friendly manner while carrying out their planned tasks. Employees are materially promoted, receive bonuses, and receive letters of honour from management as a result of this. It is probably the most important method for increasing the efficiency of the socialist economy because the winners are not interested in the failures of other enterprises because they all contribute to the total product, or the “pie”. They share their experience of innovative work with the “lagging ones” because they are concerned that the latter will no longer “lag”. It can be easily explained. According to K. Marx, the entire socialist community must operate as “a well-functioning corporation”! It means that within this “corporation” all of its components or public enterprises form a huge homogeneous mechanism and function as its well-adjusted “cogwheels”. Therefore, it cannot have any “lagging cogwheels”. What about the leading ones? The dynamics of the socialist economy. If we have already depicted the socialist community as a unified, well-functioning “corporation”, we must now define the rates at which it is developing. Let us arrange all of its well-functioning components in a single row and launch them at the same time. The state leaders or the “responsible servants of society” will be the supervisors of this “caravan”, who closely monitor and regulate the general process of functioning. Who will decide how fast this “caravan” will move? We can only assume that if lagging links occur in this “caravan”, they will eventually begin to stop the caravan itself. Being integral parts of this “caravan”, they will inevitably slow down its speed! What about the leading links? They must quicken their pace in order to force everyone to improve, while also occasionally assisting those who are lagging behind. Leading enterprises and their employees strive to not only meet, but also significantly exceed, the objectives of their planned tasks. Exceeding the plan here means that by increasing the pace, the leading links force all other links related to them to increase the pace as well in order to keep up, pushing the entire socialist economy forward. Therefore, high achievers of socialist labour here are undoubtedly highly respected and valued individuals, who occasionally even enter the circle of the “chosen ones” or the class of “nomenklatura”. However, we discussed the rate of development of the socialist economy here, i.e., the socialist emulation is primarily related to the rates of growth of the newly developed total product, as measured in purely quantitative terms of production. Increased production rates allow for more and faster production, but what should one produce? This question is not addressed by any socialist emulation. Product quality. Therefore, when a mass product is produced and when it is not produced under competitive conditions, the issue of production quality inevitably

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arises. Because socialist enterprises are forced to carry out production plans for mass products based on production volume or quantity, they are not inclined to adjust to each individual. Quality is almost never mentioned here, and when it is, it is only in the form of declarations or slogans. “The trade in consumer goods trade is a very important form of goods circulation. Its primary objective is to deliver goods to consumers (the general public of working people) faster and to better meet their needs. Therefore, trade organisations must constantly examine the needs and tastes of consumers and actively contribute to the development of product range and quality improvement, as well as to continuously improve the customer service culture by providing appropriate production requirements” (Politin˙e ekonomija, 1974, p. 268). In practice, there is no real economic reason for producers to fully comply with product quality standards. If any local customer complains about the poor quality of the product, he is treated formally by agreeing to repair the defect at best. However, because the local customer usually has no other option, he gradually “gets used” to it. An international or a foreign customer, on the other hand, does not want “to get used” to it. Because his country has a market economy, he is used to buying what he wants and is willing to pay more for a high-quality product. How will foreign trade then be conducted? Problems with innovation implementation in the manufacturing and household sectors. When it comes to innovations related to modern manufacturing technologies, fashion trends, and things that diversify and enrich people’s living conditions, we must acknowledge that socialism has serious issues in this regard. Firstly, the socialist industry is focused on a standard product and a standard customer who does not impose any specific requirements on consumer products. Secondly, even if consumers expressly stated any specific requirements, the industry would not rush to meet them. Why? In a capitalist economy, the demand for and supply of goods is governed by the law of value, which means that private producers compete with one another in order to please the customer so that the latter will choose their product over that of the competitor. There is usually a large variety of products on the market from which a customer can choose the one he prefers. It is especially relevant to the various innovations that are usually most marketable. It is usually impossible to predict how a specific innovation will be accepted on the market or whether it will be chosen by a customer in advance. It is associated with a significant risk because the funds spent to create it do not always completely pay off. A private producer who intends to sell the product agrees to accept personal liability for any losses incurred in the event of failure. He puts his personal or corporate assets at risk, which he can afford to lose. In the event of success, he and his enterprise could become extremely wealthy. He bravely bears the costs of developing and launching a new product into the market, expecting to gain a competitive advantage over other manufacturers. As a result, new innovations and fashionable products are constantly entering the market, not only attempting to meet current customer needs, but frequently shaping even new consumer needs through advertising.

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How does it work in a socialist economy? It should be noted here that, in practice, socialists are frequently as inventive as their capitalist counterparts in creating new products. But what happens to the innovations they propose? First of all, there are no private producers in the socialist economy (this form of property is doomed to disappear), so if any producer agrees to take risks by introducing a new product to society, at whose expense does he intend to do so? It is undoubtedly not his own because the capital goods, raw materials, and other resources he employs do not belong to him, but rather to the same society within the state. Then, he puts public property at risk, but how dares he to risk at the expense of the state? Unless he is fully aware that if he fails, he will almost certainly go unpunished! In general, he may be in serious danger as a result of it. Secondly, why should he take a risk? Public production proceeds according to plan, products are produced in sufficient quantities, and overproduction is avoided. Because there is no competition, there is no obvious need to create and offer something new for public consumption! Moreover, innovations are usually associated with additional production costs, making it difficult to apply economy of scale by lowering the overall cost of production. So, what do we have as a result? Even with its human potential for innovation, the socialist economy cannot create or implement them in practice. Therefore, innovations are frequently left uncreated or are taken over (copied or their production licences are purchased) from foreign capitalist countries, where they have already been developed and proven to be successful. Here’s an example from the history of the mobile network: The first mobile phone was sold in the United States in 1979. At the same time, Martin Cooper, who was one of the heads of “Motorola Corporation”, is officially referred to as head of the working group responsible for the discovery of this type of communication. After betting with the head of “Bell Laboratories” that mobile communication was no longer science fiction, M. Cooper called his colleague while walking down the street of Manhattan, using a mobile phone that weighed about one kilogram. It is believed to have been the world’s first mobile phone call. However, experts who have studied the history of radio communication claim that the first mobile phone was invented by L. Kupriyanovich in 1957 in USSR. This scientist was awarded an author’s certificate for his “radio phone” which was an automatic radio telephone with the ability to directly dial a landline phone. It should be noted that this “radio phone” functioned similarly to modern mobile phones. It connected to the urban phone network via short waves within a radius of up to 30 kms, allowing its owner to talk to any subscriber on his landline phone. L. Kupriyanovich’s first device, weighing 500 grammes, was tested in 1958. Thus, the mobile phone was officially invented and tested in the USSR 15 years earlier than in the USA (5 velichayshikh izobreteniy SSSR, 2020). Another example is the advancement of computer technologies and their application in various parts of the world. In the first year, Soviet microelectronics developed original microchips with the technical level that corresponded to global level. However, the situation has changed quickly. Users of microchips (electronic equipment developers) began ordering new similar microchips from foreign colleagues, which later became a widely accepted practice. Therefore, original samples of

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microchips in the Ministry of Electronics Industry were gradually pushed out, resulting in a significant lag in electronic development, affecting almost all sectors of the national economy, including the defence complex. Despite the fact that scientists from the USA are widely regarded as computer inventors in the West, the first author’s certificate for the invention of the electronic computing machine (ECM) (which is not denied in the USA) was awarded to Soviet scientists Isaac Brook and his colleague Bashir Rameev. As a result of complex engineering and design researches, scientists presented the concept of the first ECM to the scientific community of the Soviet Union in 1948, and it received the author’s certificate No.10475. This invention was registered on 4 December 1948. However, the first working model of computer was introduced and launched in the USSR only in 1952. Later, in 1968, Arseny Gorokhov patented a personal computer in the USSR, i.e., eight years before the founder of “Apple”, Steve Jobs (ibid., 2020). In terms of innovations and scientific and technological inventions that are strategically important to the socialist state (arms race, space acquisition programme), it tends to mobilise all of its resources and scientific potential for the implementation of these tasks and strategic challenges as a huge autonomous corporation. Then, as an economic entity, it allocates funds for research and assumes all associated risks, not in the interests of individual members of society (each of whom is of little concern to the individual state), but in the interests of the general public as a whole.

9.2 Peculiarities of Foreign Trade Because socialist and capitalist commodity production is similar in form but completely different in content, it creates significant obstacles to the foreign trade operations of these countries. As shown in Fig. 9.1, a socialist state worker who creates product No. 1 with his own labour increases the total social product and receives a “certificate” corresponding to the amount of work he has invested. He does not sell his labour power anywhere and is the co-owner of the remaining total social product. Therefore, he may freely exchange the certificate obtained for product No. 1 for product No. 2 within his “pie”. But what about products No. 3 or No. 4? After all, they’re also in other “pies” where this worker produces nothing! To buy something there, one must first sell something there! However, the prices of foreign goods are determined by the law of value, i.e., supply and demand, which plays only a secondary role in a socialist state. The planned economy enables product prices to be set without regard for the societal cost of their production. Frequently, necessity goods are sold at a lower price so that as many residents as possible can “afford” them. At the same time, the prices of luxury goods are frequently artificially raised because their consumers can afford them. Therefore, foreign trade is managed on the basis of a state monopoly, which means that the state has the exclusive right to conclude all trade agreements and transactions with foreign states and firms. Foreign trade monopoly guarantees the

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Fig. 9.1 Socialist state and foreign trade (Source Created by the author)

stability of the domestic market of the socialist state by protecting it from the impact of capitalist spontaneity and ensures the planned development of the country’s foreign trade relations. Is it possible to imagine it in practice? Yes, because the state determines the fixed exchange rate of its money in relation to a foreign currency, such as the US dollar, and assumes the potential risk in the event of currency fluctuations. Therefore, bank of the socialist state usually sets a very high exchange rate of its money in relation to other foreign currencies. However, it does not mean that money of the socialist state can be freely exchanged abroad at this rate set by the state. The socialist states cannot boast of large sales abroad due to the poor quality of their goods; therefore, this rate does not reflect the socialist state’s monetary demand and is not officially recognised abroad. It is mainly used for the domestic market when selling its currency to visiting foreigners, renting premises for foreign representative offices, etc. The state manages all foreign currency resources received for goods sold abroad and distributes them to those sectors of the economy that are planned in accordance with the development priorities of economy and five-year plans. How to travel abroad without any foreign currency? It turns out that members of the socialist society do not necessarily have to travel abroad unless there is a valid reason, with the exception of business trips or visits to close relatives abroad. When enterprises find partners abroad through a state monopolistic foreign trade

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organisation, and when they sell or buy from these countries through the latter’s mediation, their representatives are allowed to acquire a very limited amount of foreign currency at the rate set by the state. Persons travelling to visit their relatives may also acquire the same amount of currency. With these funds, it is barely possible to meet the basic needs of living abroad. The socialist state is in desperate need of foreign currency. It can be used to buy goods or technologies from other countries that the socialist industry cannot produce. When it comes to consumer goods, the latter is focused on the mass consumer and does not recognise exclusivity; therefore, foreign currency is used to purchase “exclusive” goods, which are then sold in the country to an “exclusive” consumer. Special stores are established for such consumers, which are not accessible to the average citizen of the socialist state, where imported goods can be purchased using local money. The prices of goods in these stores are calculated at the official rate set by the state; that is, they are relatively low. However, only “responsible servants of society” can belong to this category of customers, and only those with “the highest social status” can become them. Therefore, these customers are not required to have a high official salary and can feel completely “comfortable” with the funds at their disposal. The socialist state, on the other hand, must find more ways to obtain foreign currency. Therefore, it establishes special stores not only for “responsible servants of society” but also for other potential customers, such as foreigners. These stores, however, differ from the ones mentioned above in one important aspect: everything in them is sold exclusively in foreign currency. So, why do they exist? It turns out that the state monopolistic foreign trade organisation has two reasons: firstly, foreigners who arrive in a socialist state for a variety of reasons bring with them the foreign currency that needs to be taken from them. Therefore, these stores only sell (mostly imported) goods that are not available in regular stores. There, foreigners can buy goods or gifts to the local citizens of the socialist state, who will be very grateful for them. Secondly, these stores are intended for a small number of citizens of the socialist state who have been given a fantastic opportunity to work abroad. It should be noted that these stores exist in almost all socialist countries with a planned economic system, i.e., where the described total social product is produced and where they are considered a product of the planned economy. However, I will discuss these stores in greater detail later. Ordinary citizens of a socialist state have no opportunities to earn foreign currency, so they are not permitted to possess it. People are subject to strict criminal liability for its possession or disposal. Individuals who violate the established procedure face up to ten years in prison or more. The need for the Iron Curtain. In conclusion, there are two major reasons impeding foreign trade: 1. Socialist enterprises and individuals do not have any money. They operate only in “accounting units” or “public worker certificates” that are not directly related to the demand for or supply of the products they account for. These “certificates” indicating the proportion of total social domestic product cannot be used outside

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the socialist state. They are not recognised by other countries that operate in real money because they are not intended for capitalist exchanges. Only the socialist state has real money, which in this case operates as a separate enterprise that disposes of the total social product. And only it is permitted to sell individual parts of the social product outside of the country. Part of this product, at its initiative, ceases to circulate within the country and be distributed among members of society. It is taken from the public and exchanged for other products abroad. The state conducts these exchange transactions with real money. In the course of the exchange, the state ceases to be the owner of its products and, after receiving real money, purchases goods from other countries. 2. Even through direct transactions (without money), socialist enterprises would be unable to adapt to market spontaneity in capitalist countries and respond independently to external market demand and supply. After all, the state and cooperative trade in them constitute the planned market, in which the state plan determines the volume and price level of circulated goods. In the socialist state, these two types of trade account for up to 97% of total retail circulation of goods! If they were allowed to purchase goods from enterprises in capitalist countries whose prices are constantly changing, it would create disproportions in both their own costs and the planned use of their funds, and it would pose a serious threat to the planned economy as a whole at the national level. By imposing such strict sanctions and restrictions on its citizens, the socialist state “dropped the Iron Curtain” by isolating itself from the outside world. However, the reasons for this are purely economic rather than political. The adopted political decisions or strict legislation did not happen by chance; they directly reflect the current socialist economic reality and try to defend it in every way. The planned economy does not allow for collaboration with the market economy at the level of individual enterprises or economic entities. The reason for this is that all of the socialist economy’s planning can be influenced by the capitalist economy’s spontaneity, price fluctuations, and the destruction of related economic planning. As in the capitalist economy, recession may occur in the long run because some socialist enterprises will be able to acquire the necessary production resources to carry out their planned production assignments with their planned funds in the face of changing prices while others will be unable to do so. Therefore, the results of all socialist production may become completely unpredictable in the long run.

9.3 Formation of the “Second Economy” Although socialism has greatly suppressed innate human egoism, it must necessarily manifest itself. People want to emphasise their individuality and exclusivity; therefore, the “massive” goods provided by the socialist economy cannot fully satisfy them. Therefore, if we truly believe that competition between individual members and various enterprises ceases to exist in socialism, we will undoubtedly be mistaken!

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In socialism, competition exists as an expression of the simplest human individualism, namely the desire to wear more beautiful clothes, eat more delicious food, look better among friends and relatives, etc. In the long run, it not only does not disappear, but gradually transforms and takes new forms. Although it is not visible on the surface, it develops unofficially at first before becoming an “open secret” of all states. If the socialist economy does not ensure a sufficient abundance of high quality, in-demand products and services, each individual is forced to take care of everything on his own. If official channels do not permit it, it is necessary to seek alternative unofficial ways of obtaining those products and services. Therefore, in the socialist economy, in addition to the official economy, which provides a “basic” or “planned” supply of the basic products and services offered to individuals by this economy, the “second” and its “shadow” economies gradually begin to form, giving individuals access to all the remaining goods that they can only imagine under socialist conditions. However, the “shadow economy” differs greatly between socialism and capitalism. If it manifests only at the level of certain goods and types of business prohibited by the state in capitalism, it is spread to almost all sectors of the economy where there is a lack of these goods, or “deficit”, in socialism. However, the occurrence and formation of the entire “second economy” in socialism is caused by a lack of supply of certain groups of products whose demand is increasing. It is caused by the second fundamental contradiction of socialism, which I previously mentioned—the growing discrepancy between the development of productive forces and the growth of aggregate demand. Because of fixed public prices, productive forces do not have enough money to increase production of “scarce goods” to the level required to meet demand. Therefore, the unofficial “second economy” ensures the occurrence of missing products. At first glance, it seems that it contributes to meeting the growing demand for certain products to some extent. True, but in reality, the participants in this economy have no interest in eliminating the “deficit” of products. On the contrary, the “deficit” of products allows them become important participants in the economic process, to rise above the grey mass of all ordinary individuals and to become “exclusive”. At the same time, a lack of certain consumer goods gradually creates new trends in the “shadow economy” or “black market”, leading to the growth of separate groups of organised economic crime and their dominance. Their occurrence and existence, as well as their activity over time, are becoming more widespread and intense. The further they progress, the more they expand their influence, cover more social production units, and gain more importance as a “highly significant factor” capable of destabilising the entire existing socio-economic and political system under certain conditions. The previously described first feature of socialism—the deepening contradiction between the socialist organisation of the production process and the method of distributing its results—also determines the strengthening of the “second economy”. The newly created total social product does not remain in the enterprise; rather, it is transferred “to the entire society”, where it is used by “responsible servants of society”. These “servants” distribute products at their discretion in accordance with their

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predetermined plans; therefore, ordinary employees of the enterprises that produce these products have no influence on the further distribution of their products. Gradually, groups of “responsible servants of society” are formed, which are engaged in the distribution of all products produced, including the “scarce goods”; therefore, their members become “exclusive”. It is entirely up to them to decide who, how many, and what products should receive. This process concerns the public funds to a large extent. Seeing it, ordinary workers in enterprises want to directly acquire or appropriate the products produced in their enterprise without waiting for someone “from above” to allocate these products to them. Sectors of the “second economy” such as the “black market” and similar sectors, which contradict the law, are not only a “prerogative” of the socialist countries and their societies. Illegal capitalist-type economic activities, for example, include a widespread prostitution network, the distribution and sale of unregulated drugs, smuggling of alcoholic beverages, forgery of financial statements, etc. For example, as a result of the “Prohibition Law” in the USA in the early decades of the twentieth century, the “black market” of alcoholic beverages grew to great magnitude. Later, during World War II, the same thing happened with the sale of car tyres and cameras, as well as sugar and other scarce consumer goods. The problems of the “black market” can acquire similar or even greater significance and scope under socialist conditions only because the process of developing private economic activities is initially determined within certain frameworks. It is also feared that these issues will be exacerbated by the especially rapid growth in consumer demand from socialist countries, which frequently exceeds the supply of certain goods and services. To some extent, it can be explained by the fact that socialist revolutions frequently occur and win in underdeveloped or colonial countries whose economies have been destroyed or are dependent on foreign metropolises. Given the hostile external and internal response, such countries are forced to focus more on defence and security issues, which, in general, reduce investments in the production of consumer goods. As the economic situation worsens, it is often necessary to implement a ration card system that specifies the norms for necessity goods. The temptation to acquire certain goods and services in violation of existing laws usually increases then. The longer the list of scarce goods, the more complicated the methods and various “schemes” for circumventing these laws become. Typically, public authorities respond to this practice by increasing control and further restricting private illegal economic activities. Therefore, there are two economies in socialism: the “first” or planned economy, which does not rely on market relations at all, and in which money is similar to “real” money only in form, but not in content. And there is a “second” economy, which is based on market relations (Kurkchiyan, 2000). Under socialist conditions, we cannot in any way identify the “black market” with the entire second economy. In it, socialist money actually becomes “real” money not only in form, but also in content. After all, the society does not have “real” money, so “certificates” must play a role in financial settlements, both on the official market—in the marketplace, where there are legal commodity-monetary relations—and in the illegal or “black market”, where any, even capitalist products, can be acquired in exchange for “certificates”.

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The value of “certificates” is calculated here based on their commercial value, i.e., the law of value, which is based on the supply and demand of “certificates” available on the market at the time, rather than their public value. All of it creates massive chaos in the entire socialist economy. The state plans the volumes of public production and services and assesses them at fixed prices. According to this, it establishes the public issue of socialist money and the amount in circulation. The “second” economy has no place here because unaccounted goods and services, or commodities sold at speculative prices, require extra money for which they should be bought. How can this need for extra money be measured when the entire “second” economy (except for official sales of agricultural cooperatives in the marketplace) is not accounted for? It creates a gap between a massive amount of money in circulation and the total amount of goods and services produced. Because the amount of money in circulation becomes insufficient, an increasing number of people use services of profiteers. If the socialist state did not take the actual circumstances of the “second economy” into account, it would have to combine the massive amount of money in circulation with the amount of goods and services produced by the planned economy. However, the lowest-earning strata of society, such as pensioners, healthcare providers, educators, and cultural workers, would be severely impacted then. Income should fall evenly as the planned economy shrinks and more products are added to the list of “scarce goods”. People would be less able to buy “scarce goods”, which are typically sold at speculative prices, making them unaffordable to an ordinary citizen. Perhaps it would help to reduce the “second economy”, particularly its speculative part, but the standard of living for “ordinary” members of society would deteriorate significantly, possibly leading to their dissatisfaction. Therefore, the socialist state uses two methods to address these problems. To begin with, it artificially lowers fixed selling prices for many essential food products such as bread, boiled “Doctor’s Sausage”, milk, curd, and others. The state subsidises their sales through budgetary funds so that “ordinary” people can afford them. The producers sell these goods at a loss while maintaining their standard quality and a relatively high production cost. The state compensates for the resulting loss. However, sometimes it can have “absurd” consequences: For example, many rural residents begin feeding bread to their animals, particularly pigs, which they purchase in large quantities from rural shops. Why do they do that? It appears that forage has become scarce, making it difficult and expensive to obtain it from the cooperative. Bread is cheap enough in shops because it is subsidised by the state, so rural residents feed it to their pigs. You can only imagine what kind of attitude it forms to the young generation towards the basic food products! On the other hand, the state raised prices of luxury goods such as goldware, various jewellery, crystal (lead glass), porcelain, and imported perfumes. “Ordinary” citizens cannot afford them in any case, so the wealthy can spend even more in the socialist state! Although this pricing does not reflect the content of socialist money and is more akin to speculative trade in these goods, it partially helps the state to compensate for the losses associated with the sale of the subsidised products.

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Therefore, the state keeps the necessary amount of money in circulation so that the population, particularly the “ordinary” people, does not feel its shortage. They must always receive salaries, pensions, and other allowances on time. It is obvious that speculation expands and large sums of money are deposited in the pockets of illegal profiteers and “parasitic capitalists” as a result. The state, on the other hand, conducts “monetary reforms” on a regular basis, forcing the population to “legalise” the funds accumulated by exchanging them for a new type of money during the reform. Such “campaigns” cause certain problems for illegally rich people, but they are generally focused on the consequences of the “second economy”, rather than the causes of its emergence. Because the “second economy” operates illegally and is not part of the overall structure of the total social “pie”, it is evaluated separately from the socialist economy. The product of the “second economy” can be divided into three major categories or structural parts, which are as follows: The first category is “subsistence” or “small-scale production”. This production, at least officially, does not involve wage labour. Because labour is not considered a commodity here, the socialist state recognises such production. It is based on the production and exchange of goods for personal subsistence, similar to a feudal society. 1. The socialist state allots small plots of land to workers of its enterprises so that they can grow vegetables and fruits for their own consumption. In the absence of a diverse range of products in public stores, citizens can grow agricultural products in these “gardens” on their own, which they can then prepare for the winter in their kitchens by making jams, compotes, pickled cucumbers, tomatoes, etc. In the long run, it becomes a habit and tradition, during which family recipes are passed down from generation to generation, providing ordinary residents of the socialist state with products that they cannot purchase in stores. 2. In the event of a food shortage, the rural population, which has the ability to grow agricultural products on larger farms, sells them in a marketplace that is subject to market relations. Because they are able to produce higher-quality products on their farms compared to the mass production of cooperatives, farmers deliver their products in the marketplace earlier than socialist cooperatives and sell them at their own prices. Thus, “marketplace relations” based on “actual” commodity production and commodity-monetary relations are becoming more important in a socialist state. These relations are totally legal; the only difference is that the socialist “certificates” are used in them instead of “real” money, so they resemble “real” money not only in form, but also in content. Because the production of these goods is not planned, prices are determined by the law of value, based on demand, i.e., “spontaneously”. As previously stated, the socialist state is still on its way to communism, so there are still some forms of private property in it (especially in agricultural cooperatives) that manifest in real commoditymonetary (marketplace) relations. Interestingly, while these forms should, in theory, die out in the long run, in reality, they are increasingly developing and becoming stronger when the socialist economy is experiencing stagnation.

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3. In the absence of industrial products, the citizens are also starting to engage in individual activities. Petty commodity production and handicrafts, such as sewing and knitting of clothes, and shoemaking, occur. These products allow residents of a socialist state to express their individuality because the products manufactured are much more diverse than the socialist economy’s mass products. People can use various capitalist magazines and clippings, as well as to take into account fashion and design trends because these products are tailor-made. Therefore, private manufacturers closely follow and attempt to obtain this information in a variety of ways. The second category is partial privatisation of the total product. Another important feature of the “second economy” as a phenomenon is that its representatives, both initially and later, do not appear as a separate social class or, at the very least, a separate social stratum for an extended period of time. In fact, it may be only individual members of society or a certain part of ordinary citizens employed in direct production sectors of industry or agriculture. Unlike other workers, however, their efforts were primarily focused on how they could use production opportunities and working time for their personal enrichment. In addition, a certain type of activity can often be documented as “completely legal”. However, most of the time, such activity is not completely legal in terms of its socialist concept, even if it does not directly contradict the laws. These people are distinguished by having a “blat” in socialist production! This word is clearly derived from the Russian prison slang, where the word “blatnye” meant “verhi”, i.e., “legal thieves”. Let us look at a few examples by “criminalising” the situation. The first case is as follows: Let us imagine that you work as a warehouse manager of industrial products, i.e., at the base. This base receives products from various socialist enterprises’ producers and distributes them to various stores or other points of sale. You are aware that socialist economy does not produce sufficient amount of most goods, so there will always be a shortage or a “deficit” in stores. While distributing products to stores, you can do so at your own discretion, which is legal. Once upon a time, you decide to keep some of the products in the base for your “friends” and distribute the remainder to your other “friends” who run the stores. When these “friends” ask you to sell them one or more “deficient” industrial products, you provide them with the opportunity of purchasing them at a fixed public price. In fact, you did nothing wrong because, after all, you have not robbed your socialist homeland! It still receives all the planned revenues from the sold products. However, your “friends” remain grateful to you, so now you are gaining a “blat”, which is more valuable than money! The next day, you and your family want to attend the opening night of the new play at the theatre. Of course, no more tickets are available at the box office, but your “friend”, for whom you recently sold industrial goods, works as the administrator of this theatre, and he offers you the opportunity to purchase a ticket to the play at the public price. Formally, he did nothing wrong. After all, the theatre also received its planned revenues for tickets! In the long run, a harmonious and effective circle of “friends”, helping each other and greatly easing life in a socialist state, develops. Even if it is sometimes difficult

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to find a direct “friend” who can assist in the purchase of a “scarce” good or service, it is possible to find a “friend of another good friend” who may help. Therefore, such seemingly “innocent” assistance fosters a very strong bond between “friends” and contributes to satisfaction of each individual’s personal egoism—the desire to stand out from the crowd, i.e., to be “exclusive”! The only requirement for remaining in this circle is to be useful to others, i.e., to have constant access to a certain category of “scarce goods”. If you lose this access, you will no longer be useful; therefore, everyone will gradually forget about you, and you will remain “just like everybody else”. Therefore, all respectable families strive to enrol their children in universities to study specialities such as trading economics, medicine, and transport economics, which ensure the manager’s position in the sector of trade or services. At the same time, it should be noted that such a relationship cannot be described as corrupt because no-one bribes anyone—everyone simply “assists” in purchasing the desired products at the official public price. However, the described relationship between “friends” only partially reflects the relationship between members of socialist society. Sometimes, some “friends” may desire to stand out more from society and express their own exclusivity or egoism more strongly. They no longer act like “friends” and completely disregard any “assistance”, instead focusing solely on their personal gain. Therefore, they engage in speculation. Let us analyse the second case. Let us assume that the head of a socialist grocery store has been given a certain amount of “scarce goods”, such as smoked sausages, “Skilandis” sausages, imported beer, and other products, in accordance with planned order and must decide what to do with them. He can sell them and they will be immediately sold out. On the other hand, he can only sell a small part of these products (enough to draw up a report) and purchase the remainder at the public price. The question is why does he buy these products? He cannot consume so many of them, and neither do his “friends” need them at this time. However, he has reliable “assistants” who can sell these products in the marketplace at a speculative price, i.e., at a market price that is significantly higher than the public price. They can split the price difference later on. However, even in this case, this individual did not rob the socialist homeland because he paid the full price for these products! Despite this fact, if it is discovered that he engaged in such “transactions”, he will be severely punished and may even lose his job! The penalty will be imposed on him not because he caused harm to the socialist homeland, but because such activities are prohibited by law. Therefore, these products are sold in the marketplace by his “trustees”, who have no connection to his enterprise, rather than him. This situation may significantly expand in socialist states over time, and its potential extent may depend only on the governmental actions. However, regardless of scale, all governmental actions are aimed at combating speculation as a phenomenon. This combat never addresses the fundamental contradiction of socialism, which causes the “deficit” of most products and is the main reason of this phenomenon. It always just a fight with consequences that can never be won. Bribery should be included in this category of illegal economy as well. Certain “exclusive” members of society who have access to certain types of goods and

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services sell them at speculative or market prices, but only indirectly, by “bribing” someone. Thus, by selling this “scarce” good or service, they receive additional personal remuneration just like in the case of speculation. Some workers in socialist enterprises gradually begin to interpret the distribution of the total social product “in their own way”. They understand that they are coowners of this product, but they disagree that it will first be placed at the disposal of the entire state before being returned to them in the form of various social funds. Therefore, they decide to take part of this product directly without waiting, i.e., they steal from their enterprise. Let us examine the third example: Let us assume that some kind of worker of the food industry is employed in a meat processing plant, also known as a meat processing factory. Work of this nature in a socialist enterprise is usually not very clean; besides, people must work in industrial refrigerators and wear warmer clothes. Because meat and its products are classified as “scarce goods” in the socialist economy, they are frequently in short supply and have a limited selection in shops. If someone occasionally “disposes” of some better meat (this is how the delivery of “scarce products” for sale is referred to in the socialist jargon), buyers stand up in long queues and immediately buy up everything. Therefore, on his way home from work, this worker wraps the chain of sausages or other meat products around his body, puts warm clothes on top and quietly passes through security guards. If he is caught, he must pay a fine or be dismissed immediately. Because the vast majority of meat products are sold frozen, workers at the meat processing plant soak it in water for a longer period of time before quickly freezing it. Because the frozen pieces of meat do not lose their weight, the overall shortage of meat products is concealed. In this case, the socialist state is robbed directly. Workers frequently agree to work in more difficult conditions and for a lower wage in order to gain access to “scarce goods” and abuse their power. However, thefts from socialist enterprises can sometimes take on a much larger scale when the management of enterprise agrees with security guards to illegally transport significantly larger quantities of products out of their enterprise. These products are later sold in the marketplace by “farmers” as “their own” at market price. All of this not only increases distrust in a socialist state, but also destroys the foundations of the socialist economy. The third category is “parasitic” capitalism. It is the creation of new capitalist surplus value solely on the basis of public capital goods. The further development of the socialist economy gradually reveals the essence of these purely capitalist changes. They emerge and develop as parasites in the entire public socialist property, eventually forming a negative attitude in society towards the socialist economy. Therefore, this type of the “shadow economy” may become the most undermining and harmful to the existence of a socialist society. Here is another example: Let us assume that the director of a socialist garment factory, who organises the production process himself, receives fabrics and other raw materials for mass production of clothing in accordance with a planned order. Typically, the range of these materials is limited, and suppliers are “forced to share” their pool of resources with the factory because these products are also considered as “scarce goods “. Therefore, the factory does not always operate or carry out its plans at full capacity,

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and employees do not always receive their bonuses. The director receives additional amounts of “scarce goods” through “friends” and at his own expense, from which the factory produces additional products, which is not fully reflected in the enterprise’s accounting. These products are then sold on the “black market” by individual sellers at market prices. Thus, a new surplus value is created with the help of public capital goods, which a “capitalist” misappropriates free of charge as director of the enterprise. These “transactions” are sometimes carried out even more boldly, when readily available public substances and raw materials are purposefully labelled as “defective” in order to later produce “unaccounted” products from them. Such a parasitic “capitalist” can bribe both security guards and all other organisations controlling the factory with the surplus value he has accumulated, while continuing to use public capital goods for personal enrichment. Products produced on private production bases are sometimes referred to as “scarce goods”, but their production requires the use of public property, i.e., public materials. Typically, it can be certain types of tricot fabric, footwear, sunglasses, fashionable handbags, etc. Illegal copies of Western music records, which are later released on the market, can be produced industrially. According to studies, this system can include not only the actual owners, but also “family clans” with multimillion assets that control dozens of enterprises. This capitalist category of the “black market” should also include various types of illegal business, such as prostitution, human trafficking, and illegal drug trade. Despite the fact that these types are illegal in any economic system, they are also common in socialism. However, in this regard, socialism also had a specific type of “black market”— currency transactions, which were considered legal and lawful in all other economic systems. The only difference is that in a planned economy, when individuals do not have any legal opportunities to earn currency, it is considered a national crime, for which they are severely punished. In the summer of 1957, the 6th World Festival of Youth and Students was held in Moscow, during which a young lad named Yan Rokotov witnessed how his colleagues purchased currency from foreign tourists for the first time in his life. From that moment on, he purposefully chose a new area of activities—currency transactions. At the time, the official exchange rate for US dollar was four roubles (taking into account the old price scale, i.e., before the monetary reform in 1961). Then, in the late 1950s, the country introduced a special exchange rate for foreign tourists – 10 roubles per dollar. However, foreigners who arrived in the USSR preferred to use Y. Rokotov’s services because he and his group paid 25 roubles for a dollar. In addition, he bought-in gold coins from Tsarist Russia. Such a rouble was worth 9 dollars at Swiss bank prices, but Y. Rokotov paid 20 dollars for it. Then he immediately sold them in Moscow for 1,500 roubles per coin. He was able to earn up to 50,000 roubles in one evening of such “work”. Soon Yan was able to reach an agreement with a West German bank. Foreigners arriving in the USSR received Soviet currency at a favourable rate from Yan after transferring their money to the bank, and Soviets leaving abroad received a corresponding amount of money in the necessary currency from this bank after transferring Soviet currency to Yan. The KGB could not find him

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for a long time because he was also a secret agent of the Ministry of the Interior and had friendly relations with the head of the currency department in Petrovka St. 38, Moscow. The head with the rank of major got along well with Y. Rokotov because he visited Moscow restaurants and rested in the resorts at the expense of the latter. This “friendship” ended in May 1961, when the major betrayed his agent out of fear for his safety. Y. Rokotov was arrested near the left luggage office at Leningrad Railway Station, where he kept his millions. Y. Rokotov and his friends were at ease in the courtroom. All of the defendants were well aware that at the time of the crime, a law was in effect in the USSR that sentenced them to only three years in prison and confiscation of their assets. However, this law was tightened in 1961, and they were sentenced to 15 years in prison under its new version. At the same time, N. Khrushchev travelled to the USA, where he met with US President John F. Kennedy and fiercely criticised the capitalist system. Suddenly, he learned that Moscow’s “black market” for currency had become a Mecca for all European profiteers. He was taken aback by the news, and upon his return, he summoned the head of the KGB, A. Shelepin, and asked him if it was true. The latter just shrugged his shoulders. N. Khrushchev took over control of this case after learning that currency profiteers faced only 15 years in prison. The Chairman of the Court was removed from office, and on 6 July, a new order of the Supreme Soviet of the USSR was issued, stating that such crimes could be punished with the death penalty in exceptional circumstances. Soon after, the Procurator General of the USSR filed an appeal in cassation against Y. Rokotov and his accomplices, which resulted in all of them being executed by firing squad (Razzakov, n.d.). It should be noted here that all of these manifestations of the “black market” are greatly strengthened at the end of each administrative cycle (during decentralisation) and greatly weakened when the power vertical becomes stronger, and in other words, when centralisation of the planned economy increases. Then, all public control bodies begin to gain more importance in the economy. However, with each new administrative cycle, public punitive measures become weaker because they have a very negative impact on the overall development of the socialist economy. No matter how conservative the new leaders of the party and state are, they can all comprehend this trend. When we examine the dynamics of this economy’s development, we must acknowledge that a growing proportion of the “first” or planned economy gradually migrates to the right, i.e., blends into the structure of the “second” economy and its separate parts. Then, trading in a “marketplace” becomes more frequent. It gradually expands and goes beyond the cooperative trade in food products. It encompasses an increasing number of clothing, household items, appliances, and other industrial products. As planned public production shrinks and stagnates, and the list of “scarce goods” becomes longer, a “blat” becomes more popular; therefore, a limited amount of goods is redistributed among a large circle of “friends”, further separating goods from “ordinary” citizens. The worst part is that these “ordinary” people are forced to use the services of profiteers or begin stealing from their enterprises because they cannot use the privileges of “nomenklatura” or the assistance of their “friends”. Thus, the “black

216

9 Disadvantages of Soviet Economic Model THE ECONOMY OF A SOCIALIST STATE LEGAL ECONOMY

ILLEGAL ECONOMY

First (planned) economy

Second (unplanned or market) economy Goods

Total social production, Spec.

Spec.

planned supply

supply,

currency

, trade,

trade,

trading,

services

services

services

Trading in marketplac e, production, services

and

Goods and

services

services at

provided

speculative

for a

prices or for a

“blat” or

bribe. currency

“for

transactions

Stolen public goods and services

“Parasitic” capitalism using social capitalist goods and raw materials

friends”

“BLACK MARKET” (OF CRIMINAL NATURE)

Fig. 9.2 Structure of the socialist economy (Source Created by the author)

market” is constantly expanding, gradually taking on more complex and inventive forms, increasingly manifesting itself in the form of “parasitic” capitalism. To sum up, we can say that as the military control mechanisms introduced by the “dictatorship of the proletariat” weaken, the socialist economy is increasingly returning to capitalist or “real” commodity-monetary relations of the market during its development. Figure 9.2 depicts the overall structure of this economy:

9.4 Has Competition Disappeared Completely? Could we say that officially recognised “real” competition has completely disappeared in the Soviet Union? Absolutely not! It simply advanced to a higher level. If competition existed at the lowest level in capitalism, i.e., at the level of enterprises, then competition was not anticipated at this level in socialism. There were no separate independent enterprises with their own individual plans that competed with one another. All enterprises produced a total product or a total “pie”, each producing a portion of it, which all members of society later shared (distributed) among themselves. The State Planning Committee determined the size of this future “pie”, namely that it would be neither too small nor too large, but would meet the needs of this entire society, taking into account its “wise” consumption. There was no competition here, and there should not have been. We must understand that competition occurs not when goods or services are produced in sufficient quantities and there is no shortage, but when they are produced

9.4 Has Competition Disappeared Completely?

217

in far greater quantities than required. Only then can the consumer decide when and which product to consume. He selects one product from several options, namely the one he likes the best that meets his expectations. The remaining products are left unselected, causing a “headache” for their producers. It may appear irrational at first because unselected products must be placed somewhere, their prices must be reduced, or they must be destroyed, but it forces producers to please their customers so that the latter choose their products. Thus, competition occurs, which necessitates the production of high-quality goods because customers value only such products. But, if official competition does not exist at the level of enterprises, where is it in socialism? It turns out that it rises to the state level and actively manifests itself in relations with capitalist states. A socialist state recognises and openly declares this competition. After all, the state appears here as the manager of the entire socialist “syndicate”, which operates as a separate enterprise. It makes use of its country’s entire social product, i.e., the social “pie”, and thus has the full right to trade all of its components on the international market. Let us take the foreign trade of the USSR as an example (Table 9.1) : As you can see, trade between socialist countries constituted the main part of foreign trade of the USSR. But what components did the state trade in? After all, there is real competition on the international market, so the state must only offer products that may be in demand by customers from other countries! As we have mentioned earlier, in the absence of competition between enterprises, only products for mass consumption were mainly produced in a socialist state. They were frequently visually unappealing or of poor quality, so consumers in capitalist countries were not interested in them. But what would be interesting to them? It turns out that the socialist state had something to offer on international markets. First of all, these were raw materials such as oil and gas, as well as other mineral resources. These goods do not need to be advertised and are always in high demand on a global scale. Sometimes these products accounted for up to 70% of the total export of a socialist country. It is especially noticeable in trade with socialist countries, which have received raw materials at special prices and even in non-convertible currency. At the same time, the export of these goods to the USSR accounted for the majority of their total export. They all produced products for mass consumption, such as Table 9.1 Foreign trade of the USSR between 1960 and 1975 (in million roubles) (Sources Bneshnyaya torgovlya …, 1982; Alkhimov, 2021) Categories of countries and trading method/Year Socialist countries Capitalist countries Developing countries

1960

1965

1970

1975

1982

Export

3,790

5,002

7,530

14,584

34,136

Import

3,581

5,049

6,873

13,967

30,815

Export

913

1,347

2,154

6,140

18,149

Import

1,004

1,469

2,540

9,703

18,892

Export

304

1,010

1,836

3,306

10,179

Import

481

734

1,146

2,999

6,702

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household appliances, food, clothing, and footwear, and paid the USSR in the form of these goods. Perhaps residents of capitalist countries were unwilling to purchase these goods due to their poor design and quality, but citizens of the USSR were not picky because the quality of their own products was much worse. Second of all, the socialist countries have taken great care of their military defence. Therefore, the majority of the total social product was allocated to the military industry. Because this industry does not work for a single person and cannot be the object of his consumption, there is no need to conduct an analysis of the population’s domestic needs. The nomenklatura tried to maintain power in its hands in every way possible in order to protect itself from internal enemies, particularly its own society, which could unintentionally carry out a revolution! It also protected itself from external enemies, namely the capitalist world, which was constantly portrayed as a horrible monster, whose intent was to cause as much harm to socialism as possible! All of it allowed the “party nomenklatura” to divert citizens’ attention away from internal problems because the socialist state was under siege by capitalist states considered to be its enemies! Thus, all citizens had to “tighten their belts” and allow the party to invest in armaments! At the same time, it should be noted that well-funded and modern weaponry was another propaganda tool used to increase their pride and trust in their socialist state, its massive military power, and the associated threatening international image! It was not only a propaganda tool, but also a trading tool! After all, the military industry does not need to worry about fashion or style. It must be practical and effective; therefore, it was possible to successfully export it to other foreign countries for “real” money, particularly to the hottest regions of the world, where it was always in demand.

Chapter 10

Socialism with Chinese Characteristics

There was a Soviet army in China at the end of World War II, following the Manchurian operation in 1945. In early October 1945, US warships entered the ports of North China, while at the same time American airborne forces landed in Peking and railway junctions. At the time, two public entities were established in China: the larger part of China’s territory was controlled by Kuomintang nationalists led by Chiang Kai-shek, a Chinese politician and General, and the smaller part of China was controlled by military units of the Chinese Communist Party (CPC) led by Chairman Mao Zedong. Because the Chinese Communist Party was a member of the Third International, it was supported by Soviet Union military forces, and Chinese Communist military units obeyed their orders. Despite having a large and quite powerful army, not many communists fought against the invader when Japan attacked China, and only when it could not be avoided. Mao Zedong marched his entire army on foot across China to the Northern border with the Soviet Union and hid in the mountains, leaving nationalists led by Chiang Kai-shek to fight the Japanese alone. Then, with the assistance of the USSR, they easily defeated the exhausted nationalists in the war. The Chinese Civil War ended in 1949, when the Communists seized control of the entire Mainland China and Hainan Island, while Kuomintang established itself in Taiwan.

10.1 Historical Role of the Peasantry “A revolution is not a dinner party, or writing an essay, or painting a picture, or doing embroidery; it cannot be so refined, so leisurely and gentle, so temperate, kind, courteous, restrained and magnanimous. A revolution is an insurrection, an act of violence by which one class overthrows another” (Mao Zedong, 1927). On 1 October 1949, Mao Zedong proclaimed the establishment of the People’s Republic of China (PRC) in Tiananmen Square in Peking. He was a true fanatic of Marxism. Once he said, “There were three books that left great impressions on © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_10

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my mind. Among the three important books was ‘The Communist Manifesto.’ They helped build up my solid faith in Marxism” (Sennikov, 2021). Xi Jinping, the current leader of China mentioned that Mao Zedong read this book in a way that people could see. Thus, he wanted to demonstrate that even the leader sincerely and diligently learns to understand the essence and purpose of Marxism. “Speaking of the party workers”, said Xi Jinping, “their learning from “primary sources” is difficult, but at the same time it “sets the bar high” (Semenov & Semenova, 2021)”. Therefore, Mao Zedong tried to firmly reference Marxism theory in all of his subsequent activities and apply it in real life. The preamble to the first 1954 Constitution of the People’s Republic of China reads as follows: In the year 1949, after more than a century of heroic struggle, the Chinese people, led by the Chinese Communist Party, finally achieved their great victory in the people’s revolution against imperialism, feudalism and bureaucrat-capitalism; and so, brought to an end a long history of oppression and enslavement and founded the People’s Republic of China, a people’s democratic dictatorship. The system of people’s democracy—new democracy—of the People’s Republic of China guarantees that China can in a peaceful way banish exploitation and poverty and build a prosperous and happy socialist society. (1954 Constitution of the People’s Republic of China). However, there was a problem—China’s proletariat had not yet been developed sufficiently to be a driving force for revolutionary transformations. It had yet to be created. China was a purely agrarian country at the time, with very pronounced feudal remnants not only in the country’s economy, but also in people’s consciousness. Therefore, Mao Zedong decided to rely on a peasantry that, according to Marxist interpretation, was not completely free and was deeply embedded in the national bourgeoisie. As a result, the latter had to be liquidated or its impact had to be limited at first. In his speech at the 2nd session of the 8th National Congress of the Chinese Communist Party (CCP) held on 17 May 1958, Mao Zedong said: “It makes no difference if half of humanity dies during the war. I’m not worried if only one-third of the population remains. If a nuclear war occurs, it will not be so bad because capitalism will die in the end, and eternal peace on Earth will prevail” (Dushenko, 2020). As a result, the first objective of Mao Zedong, after gaining political power, was to abolish private ownership of capital goods by nationalising big business and establishing public enterprises that would become the country’s dominant productive forces. Therefore, Article 10 of the Constitution of the People’s Republic of China established a very unusual approach to property for a socialist country: “The state protects the right of capitalists to own means of production and other capital according to law. The policy of the state towards capitalist industry and commerce is to use, restrict and transform them. The state makes use of the positive sides of capitalist industry and commerce which are beneficial to national welfare and the people’s livelihood, restricts their negative sides which are not beneficial to

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national welfare and the people’s livelihood, encourages and guides their transformation into various forms of state-capitalist economy, gradually replacing capitalist ownership with ownership by the whole people; and this it does by means of control exercised by administrative organs of state, the leadership given by the state sector of the economy, and supervision by the workers” (1954 Constitution of the People’s Republic of China). In the long run, Mao Zedong became dependent on Chinese peasants in this fight because workers were too weak in it. Because he came from a peasant family, he quickly established a good reputation among them. The most important thing was to introduce Marxism to them properly. According to his theory, it was necessary to abolish the union of imperialism and feudalism in China. In his words, “The class struggles of the peasants, the peasant uprisings and peasant wars constituted the real motive force of historical development in Chinese feudal society” (Mao Zedong, 1939). At the same time, he did not forget the proletariat, because Marxism saw the proletariat as the primary driving force of society. Thus, he aimed to bring the peasantry closer to the proletariat, ensuring the victory of the proletarian revolution. According to him: “[…] that means to bring about, step by step, the socialist transformation of the whole of agriculture simultaneously with the gradual realisation of socialist industrialisation and the socialist transformation of handicrafts and capitalist industry and commerce; in other words, it means to carry out co-operation and eliminate the rich-peasant economy and the individual economy in the countryside so that all the rural people will become increasingly well off together. We maintain that this is the only way to consolidate the worker-peasant alliance” (Mao Zedong, 1955b, pp. 26–27). As a true Marxist, Mao Zedong admired J. Stalin’s economic model and sought to implement the concept of collectivisation in agriculture. He was the peasant’s authority, but they viewed the cooperatives with suspicion and did not understand why it was necessary to return their private land, which they had only recently reclaimed, to collective property. However, the 20th Congress of the CPSU held in 1956, and the policies of deStalinisation and economic liberalisation launched there, had a ripple effect in China; therefore, J. Stalin’s cooperation model proposed by Mao Zedong became unpopular in China. The begun wave of collectivisation in China has slowed.

10.2 Economic Situation of China on the Eve of the Second Five-Year Period During the first five-year period (1953–1957), industrial production in the PRC increased by 18% per year on average; meanwhile, agricultural production increased by 4.5% and national income increased by 8.9% per year. Between 1953 and 1957, industrial production in the People’s Republic of China developed slightly faster than

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that of many other socialist countries during the same period of planned economy. All of this can be explained not only by the fact that China began its development at a lower economic level of the economy, allowing for faster industrialisation, but also by the fact that socialist construction in this country was carried out with the assistance of other socialist countries, the “fraternal” states and, above all, the Soviet Union. The agricultural growth in the PRC outpaced population growth, but the rate of agricultural development could not be faster because the low level of national industrialisation did not allow for the supply of a diverse range of machinery and fertilisers to this industry in sufficient quantities. The economic development of China was characterised by a relatively rational use of resources. The growth of industrial production has outpaced the growth of industry and the number of employees. After the number of employees and servants increased by 1.5 times over five-year period, industrial production accordingly increased by 2.3 times. The high growth rates of national income were supported by a relatively small increase in the share of accumulated national income, which was a normal phenomenon during the early stages of industrialisation. On the eve of the first five-year plan, the accrual rate for the entire Chinese economy was 20%; however, it increased to an average of 23% over the next five years (Yaremenko, 1968, p. 11). The achievements of industrial and agricultural development have ensured a rising standard of living for the Chinese population, as well as some preconditions for socialist changes in agriculture, businesses of homeworkers, industry, and trade. Therefore, the continuation and development of those economic policy directions, which started during the first five-year plan, had to become the natural foundation for all other national economic development plans. Thus, the main provisions of the new five-year plan for 1958–1962 were approved at the first session of the 8th National Congress of the CCP held in autumn 1956. The second five-year plan was developed with the progress of the first five-year plan in mind, and it was entirely based on the previous experience of economic management, which was accumulated in the PRC until then. As in the past, it was planned to increase industrial production: the average annual growth rate of industry was set at 15%. At the same time, it was planned to develop agriculture faster. If agricultural production increased by 20% during the first five-year period, or 4.5% per year on average, agricultural production was expected to increase by 6.2% per year during the second five-year plan (Yaremenko, 1968, p. 12).

10.3 The Hundred Flowers Campaign China has tried to copy the Soviet Union since 1949. Mao Zedong admired J. Stalin because he believed he was the only person who could help him to build socialism. J. Stalin, on the other hand, approached Mao Zedong with caution, seeing him as a potential competitor in the global communist movement. J. Stalin welcomed Mao Zedong in the Kremlin for a short period of time and in a rather formal manner during his first visit to the USSR on 16 December 1949, but

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did not engage in more serious negotiations with him. He housed the Chinese leader in one of his residences near Moscow, where Mao felt indirectly “imprisoned” at the disposal of its “landlord”. J. Stalin responded to the question of when the actual negotiations would begin by saying: “We have had a lot of foreign guests. Comrade Mao should not be distinguished from the rest of them”. It should be noted that the country was celebrating J. Stalin’s 70th anniversary at the time, and Mao Zedong delivered a heartfelt speech, for which J. Stalin raised his first toast. However, the actual negotiations did not take place until 14 February 1950, when the Sino-Soviet Treaty of Friendship, Alliance and Mutual Assistance was signed. It provided a $300 million loan to China for the construction of new factories and the purchase of their equipment. For it, China has committed to carrying out its economic reforms in accordance with the USSR model, copying everything and everywhere. It is worth noting that an interest rate of up to 10% was applied to this loan. Later it had to be repaid, which had a painful impact on the recovering economy of China (Galenovich, 2012, p. 183). Even the Constitution of the People’s Republic of China was practically “copied” from the 1936 Constitution of the Soviet Union by slightly “enriching it” by the revolutionary quotes of Mao Zedong. However, living conditions in China gradually improved in 1956, and the CCP decided that because everything was going well, there was no need to change anything else. The “Stalinist” economic model did not work in practice, as did the classical economic theory of Marxism. Mao Zedong soon noticed that the “revolutionary spirit” of the Party’s members and even its management was gradually fading; in the meantime, some Party comrades openly expressed themselves, saying that all Party members are equal and that no member is “more equal” than others! Soon after, Mao Zedong’s quotes were removed from the Constitution of the People’s Republic of China. In the meantime, the monuments of Stalin were demolished throughout the USSR, and the cult of personality was exposed. It meant that his personality was no longer influential in the life of a socialist country! What about China, which became accustomed to copying the USSR, and all of its residents became accustomed to following its example as well? But that is not all! Even worse for Mao Zedong were the bloody events that began in Hungary in 1956. Crowds of people took to the streets, destroying monuments, tearing apart socialist symbols, and shouting anti-communist slogans. It happened for the first time not in any other country, but in a socialist one! He was shocked by the response of N. Khrushchev, who sent 17 military divisions to Budapest. The latter made no agreements, did not discuss the situation with the masses, and even did not try to persuade them of the benefits of socialism, but instead brutally deployed tanks in the capital of Hungary, killing 2,652 rebels, 348 peaceful residents, and injuring 19,226 people (Sovetskiy Soyuz i vengerskiy krizis…, 1998). What does it look like? It reminds the pure public colonialism! The Soviet Union, which has grown into a massive metropolis, has ruthlessly suppressed the resistance of its colonies by using weapons and forcing them to obey its economic policy! It

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dealt a serious blow to the entire global communist movement by discrediting the socialist system in the remaining socialist countries, including China. After all, someone has to do something about it! Firstly, it is necessary to reestablish unity within the Chinese Communist Party, then to persuade its members of the benefits of a socialist economy and, finally, to demonstrate it with real deeds. Once completed, it will gradually be possible to take over the entire leadership of the global revolutionary communist movement into one’s hands! However, Mao Zedong, as a gifted tactician, fully understood that if his ideas did not receive the necessary support among Party comrades, it was necessary to approach the masses of people. His announced “The Hundred Flowers Campaign” was extremely beneficial for this purpose because it encouraged the masses to openly criticise all Party members and governmental policy. The criticism had to give the opportunity to express hundreds of new opinions “letting a hundred schools of thought contend” (Mao Tse-tung. Speech at the Chinese Communist Party’s National Conference on Propaganda work. Selected Works. 12 March 1957), that were not always coinciding with the grey and immovable general opinion of the Party, and to make society’s life much more colourful. At the time, he wrote: “Thoroughgoing materialists are fearless; we hope that all our fellow fighters will courageously shoulder their responsibilities and overcome all difficulties, fearing no setbacks or gibes, nor hesitating to criticise us Communists and give us their suggestions. “He who is not afraid of death by a thousand cuts dares to unhorse the emperor”—this is the dauntless spirit needed in our struggle to build socialism and communism” (Speech at the Chinese Communist Party’s National Conference on Propaganda (12 March 1957) cited from the 1st pocket edition, p. 14). This campaign has given unexpected results. Delighted with the opportunity to play democracy, intellectuals began to criticise the Party’s policy, its leaders, and their actions. Criticism has grown and begun to jeopardise the foundations of the socialist system. Mao Zedong’s plan worked out, and he officially declared all opponents of the socialist system to be enemies of the working class. After such statements, it does not look like “letting a hundred flowers bloom and a hundred schools of thought contend”! (ibid., 1957). These are not fragrant flowers, but poisonous weeds that must be ruthlessly eradicated in order to clean up society like a soil in order to make it much more fertile. Mass repressions began, and over 500,000 people, the majority of whom were intellectual teachers and cultural workers, were sent to labour camps for re-education, where the most of them died of starvation. Many Party leaders were also oppressed, and their positions were filled by the loyal supporters of Mao Zedong. After seizing control of the Party, the path to the Marxist development of the country became clear. In November 1957, Mao Zedong visited Moscow, which at the time had been transformed from a former ally into a new rival. In one conversation, N. Khrushchev told him that in the next 15 years, the USSR’s industrial production would reach a new high and surpass that of the USA. Mao Zedong accepted the challenge and stated that the Chinese steel industry would inevitably reach and surpass that of the United Kingdom during the same period of time.

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10.4 The First Administrative Cycle in China: “The Great Leap Forward” The concept of the “Great Leap Forward” arose from Mao Zedong’s desire to accelerate the development of China’s socialist economy. The Mao aimed to make China a classless society as soon as possible because it was considered the foundation of communism. He wished to demonstrate to the world that his country was more than just one of many young partners in the global communist movement led by the Soviet Union. This approach encouraged him to achieve a new drastic project aimed at demonstrating to Mao’s followers and foreign observers that China is a powerful state for reasons other than its adherence to the Soviet Union. Moreover, Mao Zedong wanted to demonstrate that his country could become equal to, if not outperform, the strongest Western countries. He urged people to reject the slow “step-by-step” policy and wished for the “Great Leap Forward” to quickly achieve the highest level of collectivisation while boldly increasing yield and steel production. All of it was done to make China more powerful than the Soviet Union and to achieve economic equality with the West. The initial five-year plan of China continued to develop all the main trends that were common to the first five-year period. The economic policy results and methods of the first five-year period have been fully approved. We could blame the authors of the second five-year plan only for overestimating the economic development opportunities indicated in this plan, particularly in agriculture. The Chinese Communist Party clearly formulated its General Line before the second session of the 8th National Congress, defining the key tasks that the country faces during the transition period— the implementation of industrialisation and socialist transformations. These key tasks that the Party faced were clarified again during the first session of the 8th National Congress held in 1956, and it was noted that their implementation would take a “quite long time”. However, during the second session of the 8th National Congress of the Chinese Communist Party in 1958, the Mao Zedong’s group unexpectedly rejected the second five-year plan for the economic development that had been approved during the first session (in 1956). Instead, Mao Zedong and his group from the Chinese Communist Party proposed a new strategy that aimed to accelerate economic development several times. The newly approved programme for increasing the rate of economic development was completely out of the ordinary. The people who concluded it appeared to have no understanding of the economic history of mankind, and did not think that economic development had its own laws and internal logic. The growth rates of the economy planned under conditions of socialism may be much higher than those of capitalism, but even in this regard, there has already been accumulated enough experience, which was completely underestimated by the Chinese leaders of economy in 1958 (Kitay k nachalu noveyshego…, 2020). During the second session of the 8th National Congress of the Chinese Communist Party held in 1958, a new line of a common party was formulated. Liu Shaoqi, who delivered a speech at the 2nd session of the Congress, unambiguously rejected his

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previous statements on the priority of slow development: “[…] China’s economy will not develop slowly, but rather extensive, and China will thrive, possibly within a few days” (Kulik, 1985, p. 228). The following is also indicated in his report: “Karl Marx predicted that the proletarian revolution would encourage us to enter a great period of time in which one day would be equal to twenty years”. Then the policies of the “Great Leap Forward” and the “People’s Communes” were adopted, which were initiated by the announcement of new principles in the economic policy of the People’s Republic of China. It was later confirmed in various official documents of the party and state. The specific formula of the General Line, announced in 1958, was expressed quite laconically: “To go all out, aim high, and build socialism with greater, faster, better, and more economical results” (Mao Zedong, 1959). Nonetheless, the new General Line represented a significant shift in economic policy, a change in economic system methods, and an overview of all planning objectives. The main ideas of the new General Line were a sudden acceleration of national economic development, as well as a sudden increase in the growth rate of industry and agriculture. “Complete the socialist construction as soon as possible”, “turn our country into a great socialist power as soon as possible”, and “increase the pace”—these were the main theses that revealed the essence of the General Line during the second session of the 8th National Congress of the CCP (Yurkevich & Maslov, 2004). According to the new indicator, the average annual growth rate of industrial production between 1958 and 1962 had to be 45%. Meanwhile, the second fiveyear plan required total industrial production to increase not twice, but 6.5 times. Agricultural output had to be increased by 2.5 times. The average annual growth rate of agriculture had to be 20%. Some industries, particularly those that, according to Chinese leaders, symbolise the nation’s power, had to develop very quickly. For example, steelmaking should have increased by more than 18 times, despite the fact that, initially, it should have increased slightly more than twice, according to the second five-year plan (Galenovich, 2012, p. 12). The new “General Line” of the Chinese Communist Party and its economic policy were far more radical than the economic policy pursued by the Soviet Union at the time. According to Mao Zedong, the economic policy of the USSR was too “conservative” and failed to use all the advantages of socialism hidden in the science of Marxism. In fact, the new “General Line” was never democratically debated anywhere. In terms of real-life cases, the typical contradiction was described as “the manifestation of the class conflict”. At the time, common sense firmly fell into the categories of “right-wing views” and “conservative opinions”. Chinese leaders said that an example of the Soviet Union is one of the main sources of “conservative thinking”. According to them, China’s slow pace of development during the first five years was primarily related to the Soviet Union’s experience. According to the Chinese textbook (Yaremenko, 1968, p. 24) on national economic planning, published in 1958: “In the past, some friends fell into the trap of a declining pace theory… they are dogmatically persecuted by the Soviet Union’s experience related to the pace of industrial development”. The result of the Soviet economic development over several decades has been compared to what China should achieve

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in the next few years, demonstrating how slowly the Soviet Union is moving and how inefficient its methods are. A particularly negative attitude was associated with the seven-year plan for the development of the people’s economy of the USSR (1959– 1965). Propagandists of the “Great Leap Forward” saw this plan as the epitome of conservatism in the economy. The second five-year plans and prospects for economic development were related to the slogan “We must catch up and surpass England in 15 years”. It must be acknowledged that this slogan was based on realistic calculations and most likely corresponded to the actual opportunities to keep up with production volumes of the most important types of industrial products in England over a period of 15 years. But this slogan was quickly rejected. Mao Zedong made the following statement prior to the approval of the “Great Leap Forward” plan: “In light of the new plans, England cannot be among our valuable competitors”. “The main objective now is not to surpass England”, wrote Chinese economists, “but to go all out and surpass America”. Indeed, according to agricultural production plans, China had to catch up with and surpass the United States of America over the next 20 years (Usov, 2004, p. 169). A significant increase in economic growth is obviously impossible without a significant increase in capital investment and additional labour resources. China did not have the financial or material resources for such economic changes in 1958. In order to increase investments, it was necessary to have sufficient financial reserves at the outset or to redistribute national income by increasing savings. There were no initial savings in China that would at least correspond to the new enormous tasks to some extent. The redistribution of national income in favour of saving, when China had a very low standard of living at the time, could also provide very little. Capital investments of 560,000 Yuan were required during the first five years to increase industrial production by 1 million Yuan. According to this rule, annual investments should increase to 290 billion Yuan by the end of the second five-year period. The total consumption of China over the last five years has been less than this amount. Because financing alone was no longer sufficient, it became even more difficult to invest in the form of new machines, metals, and construction materials. New equipment was required, which took time to develop. The one-off mobilisation of all financial and material resources could probably ensure short-term growth in capital investment, which inevitably had to disrupt the overall economic balance (which subsequently occurred). At the time, there were no conditions for such large-scale and long-term investments. There were also no objective conditions for a sudden redistribution of labour power. Because of the high level of industrial development, the majority of labour force had to be transferred from agriculture to industry. Therefore, Chinese Communist Party leaders planned to carry out massive industrial production development at the expense of peasants. However, China was not ready to automate agriculture quickly. Finally, it was impossible to suddenly prepare many skilled workers from a large number of peasants immediately, as well as to increase the number of technicians, engineers, and other industrial workers several times. Statements about the greatness, power, and even “exclusivity” of Chinese peasants clearly did not

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compensate for the lack of a specific and detailed analysis of agricultural opportunities. Therefore, without conducting a deeper analysis of economic policy, the authors of the “Great Leap Forward” stated that its main disadvantage was that the Chinese economy did not sufficiently rely on peasant forces in industrial development. One of the main evidences of Chinese peasants’ potential was references to the history of revolution and civil war, in which peasants played a critical role. It was argued that peasants played an exceptional role in the Chinese revolution. It means that it should also be exceptional in the field of industrial construction.

10.4.1 The People’s Communes: The Most Important Form of Self-Government Mao Zedong and his group have found a way to attract the necessary number of people into an industry whose mission should be to implement all the grandiose plans of the party. He recognised this method in K. Marx’s theory, particularly in the section where K. Marx discussed the Paris Commune: “In reality, the Communal Constitution brought the rural producers under the intellectual lead of the central towns of their districts, and there secured to them, in the working men, the natural trustees of their interests. The very existence of the Commune involved, as a matter of course, local municipal liberty, but no longer as a check upon the now superseded state power” (Marx, 1871). Thus, mass mobilisation was implemented in China in 1958, employing a novel method of organising peasant lives in communes. These were large-scale agricultural units comprised of several cooperatives. With their assistance, Mao Zedong was able to directly manage all areas: agriculture, industrial production, marketing, and other areas such as crafts and households. Mao Zedong said: “People’s commune is distinguished by its large size, on the one hand, and its sociality, on the other hand…It combines production and administration, provides catering in public canteens, and liquidates personal farms. Peasants continue to keep chickens, ducks, and trees near their homes. However, they will be socialised in the future” (Shapinov, 2007). In this regard, the policy of formation of the proletariat class proposed and initiated by Mao Zedong was far more radical than that of the USSR while also being much closer to Marxism as a science. China had to defeat the remnants of feudalism in the countryside because ten years have not passed yet since the abolition of the semi-colonial and semi-feudal systems in China. Respect and obedience to superior officials are centuries-old traditions that are far from extinct. Relations in the party, state apparatus, industry, and agriculture remained very different from those in the USSR and other socialist countries at the time. No socialist country has ever compared its “leaders” and “masses of people” to “higher” and “lower” levels as China has. The principles of party and public discipline, such as minority subordination to the

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majority, as well as the implementation of decisions made by elected party members, have always played a very important role in all norms of social life: “We must affirm anew the discipline of the Party, namely: 1) the individual is subordinate to the organisation; 2) the minority is subordinate to the majority; 3) the lower level is subordinate to the higher level; and 4) the entire membership is subordinate to the central Committee. Whoever violates these articles of discipline disrupts Party unity” (Mao Zedong, 1938). The strict line that was drawn between the executives and subordinates, between cadres and the masses, aggravated the atmosphere of the personality cult that existed throughout China. The first result of the new course in the countryside was the implementation of more rapid social changes without any preparation. Socialist agricultural transformations in China’s culturally and economically developed coastal provinces have taken place for several years in a row—from mutual assistance brigades to lowerlevel cooperatives and from lower-level cooperatives to higher-class cooperatives. People who lived in the most primitive conditions of a public organisation in the central and western regions were united in cooperatives within a few days, and later into communes, transforming most peasants into proletarians capable of carrying out grand industrialisation projects. Mao Zedong spoke openly about his approach to theoretical and practical policy and economic issue solving, as well as his approach to China’s development at the Beidaihe Conference of the Political Bureau of the Central Committee of the Chinese Communist Party held in Hebei Province on 17–30 August 1958. Mao Zedong argued that in order to implement a system of equal distribution, communes should be established not only in rural, but also in urban areas. At the same time, he emphasised the importance of using coercive methods: it was necessary to exercise strict control over the Chinese population by militarising life in communes and organising the people’s militia. His quote “We cannot simply comply with democracy; we must be able to combine Marx with Qin Shi Huang”1 was very significant (Nepominin, 2011, p. 517). This text was not meant to be used as a press release. Following the Beidaihe Conference, the creation of communes, which had begun in the spring of 1958, accelerated significantly. 720,000 agricultural production cooperatives have been merged into 26,000 people’s communes, each comprising an average of 20,000 inhabitants (Soveshchanie v Beydaykhe, 2020). Even the most basic aspects of peasants’ daily lives have changed dramatically as a result. People who lived in communes were not allowed to own private property. Peasants were forced to refuse not only their private plots of land, but also personal belongings such as jewellery and watches. All the daily household routine and activities of peasants have become highly socialised. Members of the commune were entitled to free meals in public canteens. People would have to eat the same food in common messy halls. The government regulated 1

Qin Shi Huang was the emperor of the Ancient China and the creator of despotism in the first unified Chinese Empire—Qin dynasty (from 221 to 206 BC). His name has become a symbol of despotic power in China.

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the amount of food consumed and dictated the order of work and life. Workdays were abolished within the commune, and the working process became highly militarised. In this regard, Mao Zedong brought the actual concept of the commune very close to its Marxist origins, embodying the example of a “socialist syndicate” in it, where everyone does everything, private property is liquidated, and the strictest discipline is implemented. Unlike agricultural cooperatives, these communes were run directly by an administration appointed by the Communist Party. Everything was done in accordance with the principles of V. Lenin’s theory, which states that “the Commune substitutes for the venal and rotten parliamentarism of bourgeois society institutions in which freedom of opinion and discussion does not degenerate into deception, for the parliamentarians themselves have to work, have to execute their own laws, have themselves to test the results achieved in reality, and to account directly to their constituents. Representative institutions remain, but there is no parliamentarism here as a special system, as the division of labour between the legislative and the executive, as a privileged position for the deputies. We cannot imagine democracy, even proletarian democracy, without representative institutions, but we can and must imagine democracy without parliamentarism” (Cohen, 2018, p. 488). Regional administrative bodies in China have become bodies that govern communes by passing and enforcing resolutions, and strictly adhering to the “General Line of the Party”. This “Line” was established not by some sort of “Parliament”, but by the Communist Party—a revolutionary avant-garde of the proletariat. The decision of the 6th Plenary Session of the Central Committee clearly stated that: “In 1958, a new social organisation appeared, fresh as the morning sun, above the broad horizon of East Asia. This was the large-scale people’s commune in the rural areas of our country which combines industry, agriculture, trade, education and military affairs and in which government administration and commune management are integrated. Since their first appearance the people’s communes with their immense vitality have attracted widespread attention… This shows that the emergence of the people’s communes is not fortuitous; it is the outcome of the economic and political development of our country” (Materialy 6-go plenuma…, 1959, pp. 24–25). Cooperatives have practically ceased to exist. They were abolished because the remnants of economic independence of cooperatives prevented the formation of mass labour teams. For Mao Zedong, China’s “own path” meant transforming the entire country into a massive militarised “commune”, in which food and clothing were distributed under the equality principle. Mao Zedong’s ideal reminded the vision of the welfare state of Taiping (Heavenly Kingdom of the Great Peace in South China between 1850 and 1864—author’s comment) (Nepominin, 2011, p. 517). However, farmers did not want to leave their families for months in order to build channels, railways, and enterprises. Peasants were paid significantly less for their work in communes than for similar work in public organisations, and even less than in cooperatives. At best, peasants brought from various locations to the commune were provided with food; meanwhile, they were paid for workdays in cooperatives where they had previously worked. When thousands of districts in the country became subordinate to the management of authorities of central municipalities, all barriers to worker mobilisation vanished.

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The latter was often very far from the actual needs of agricultural production, and were uninterested in the common affairs of cooperative members. However, this bureaucratisation of agricultural management was entirely consistent with the objectives of the “General Line”. The abolition of cooperatives created an opportunity for unlimited lawlessness in Chinese agriculture. Peasant private plots of land in China were very small—less than one hundredth of a hectare. However, they have been extensively used. Their abolition has resulted in a significant deterioration in the rural population’s living conditions. Peasant income from private plots of land accounted for roughly half of total income paid to them and, in some cases, approached it. The socialisation of pig breeding, the main productive livestock industry in China, has severely harmed agriculture. According to research, a significant mortality in pigs was observed in most communes during the first months following this decision. One-third or more of these animals have died in some areas (Yaremenko, 1968, p. 112). The amount of fertiliser used has been drastically reduced. The communes now owned not only capital goods, but also houses, buildings, and food supplies. Vegetables from personal plots of land were no longer owned by their former owners after the communes were established, but were instead delivered to public canteens. Purely Marxist principles of commune were implemented everywhere. The liquidation of private plots of land, as well as the socialisation of resources, livestock, and equipment, has become an additional source of funds for development of irrigation equipment and local industries. At the same time, all payments to cooperative members for means of production provided to cooperatives above the established shares were abolished. Finally, peasants were no longer paid for their accumulated workdays in 1958. It was announced that harvest income would not be distributed in 1958 because peasants did not need it because they had free meals in canteens and received some cash on a monthly basis for their small expenses. The peasants were extremely dissatisfied with such news. Even the abolition of the plots of land did not lead to so many complaints as the misappropriation of peasants’ work results. The socialisation of houses was characterised by the fact that, following registration and evaluation, some buildings were used for the needs of the communes, while the rest of the population was housed “more densely”. In the meantime, communes received reports that capital investments had increased “several times” or “more than ten times” since 1957 (ibid., 113) because the unallocated income of peasants was the primary source of financing for these investments. On the one hand, free canteens allowed for the total amount of unallocated income to be spent on production, but on the other, they significantly reduced daily consumption. When compared to the expenses incurred by paying differentiated wages based on workdays, much less money was spent on food production. However, people, the majority of whom were large families with disabled members, rarely rated free canteens favourably. A certain temporary improvement in the living conditions of the poorest groups of the population could in no way justify the general impoverishment of peasants and, subsequently, the rest of the rural population. Nevertheless, by

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establishing such canteens, Chinese economic leaders not only received immediate large funds for further implementation of the “Great Leap Forward”, but also hoped to increase the labour army at the expense of work performed by women “liberated from their households”.

10.4.2 “Groups of Armed Workers” “Once we have overthrown the capitalists, crushed the resistance of these exploiters with the iron hand of the armed workers, and smashed the bureaucratic machinery of the modern state, we shall have a splendidly equipped mechanism, freed from the “parasite”, a mechanism which can very well be set going by the united workers themselves, who will hire technicians, foremen and accountants, and pay them all, as indeed all “state” officials in general, workmen’s wages. Here is a concrete, practical task… whose fulfilment will rid the working people of exploitation, a task which takes account of what the Commune had already begun to practice (particularly in building up the state)” (Lenin, 1917). In addition to the collectivisation of everyday life, measures to militarise life in the commune have been taken. The new military organisation “People’s Militia” was founded in tandem with the communes, and a labour organisation, an educational organisation, and even a sports organisation were announced. According to the Chinese press, farmers must “act faster, more disciplined, and more efficiently in order to manage their labour power in the same way that factory workers or soldiers in the armed forces do”. The People’s Militia had to serve as the foundation of the entire labour organisation. It included the young and healthy men and women. The Militia was divided into platoons, companies, and battalions, etc. (Zhenmin Zhibao, 2003, p. 51). Some of them were even given weapons, and military training started. People marched in formation to work and carried out commands. The Militia needed to set a good example for the rest of society. It was completely consistent with V. Lenin’s concept of “groups of armed workers” and was its actual implementation in practice. The introduction of the military labour discipline has significantly contributed to the implementation of methods of administration, coercion, and fraud. Even in communes that were under the supervision of central public authorities, the cadres did not provide food to offenders, forced men to wear white caps and did not allow them to remove them, and forced women to wear headscarves with the text “a lazy woman”. Fraud methods manifested not only in the provision of false information about the harvest and its quantity, but also in other aspects of the work. Employees frequently created an environment of “demonstrative procedure”, after meeting with the management that came to check, in order to conceal reality. The biggest problem was that such demonstrative style had become the norm in everyday life. For example, when inspectors visited one canteen, one of them asked a commune member what he was eating. The latter replied: “Cabbage soup!” Therefore, the

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commune did not receive the Transferable Red Banner, which was given out in socialist emulation. The cadres of the commune were extremely dissatisfied! During the general meeting of rural areas, secretary of the party harshly criticised this individual for his lack of “flexibility”! (Yaremenko, 1968, p. 117). The large size of the communes hindered the efficient management of their economies. The management bodies of communes were unable to manage the entire production process at the same time. Their instructions frequently did not correspond to local conditions. The fact that peasants gradually lost interest in production harmed the economy of communes in many ways. Despite the enthusiasm displayed during the discussions in the common canteens, the motivation of peasants for joint work was significantly affected, regardless of who and how long they worked there. Mao Zedong and his comrades attempted to portray the organisation of the communes as creation of one of the first communist forms of social life and the beginning of the transition from socialism to communism, which they predicted would occur in China much sooner than previously thought. According to the “Resolution on the Establishment of Communes in Rural Areas” issued by the Central Committee of the Chinese Communist Party: “It is clear that the implementation of communism in our country is not a distant matter, so we must actively use the organisational form of the people’s commune to find specific ways to move towards communism”. The public newspaper “People’s Daily” (a.k.a. Rénmín Rìbào) wrote that the people’s commune is such an organisational form that best fits the momentum of socialist construction and ensures the transition to communism, as predicted by utopian socialists such as Marx, Engels, and Lenin. It should serve as the primary cell of the future communist society. Thus, people’s communes were theoretically justified as two types of socialist property, namely, a form of state and cooperative merger into a common public property of the state. According to the newspapers, “one of the main evidences that “sprouts of capitalism” have already sprung in Chinese society is the destruction of the border between the two forms of socialist property”! In addition, linking of the region’s public management bodies to the commune’s management bodies was viewed as one of the manifestations of communist self-government and a sign of the gradual “withering away” of the state. Theorists of the Communist Party attempted to prove that the transfer of millions of peasants to industry is a process that eliminates distinctions between urban and rural areas, as well as between industry and agriculture. The coercive transfer of intellectuals to the rural areas was portrayed as the beginning of the abolition of distinctions between mental and manual labour. There were different offers regarding a specific time of transition to communism. However, everyone agreed that it should happen within the next few years. Nevertheless, many local leaders did not want to delay the “transition to communism” even for a short period of time. Some communes and counties have developed “individual” plans for the transition to communism. The newly formed people’s communes were transformed into “communist people’s communes”.

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10.4.3 Disadvantages Turning into Advantages “Apart from their other characteristics, the outstanding thing about China’s 600 million people is that they are “poor and blank”. This may seem a bad thing, but in reality it is a good thing. Poverty gives rise to the desire for change, the desire for action and the desire for revolution. On a blank sheet of paper free from any mark, the freshest and most beautiful characters can be written, the freshest and most beautiful pictures can be painted” (Mao Zedong, 1958). What objective factors have Chinese leaders considered when devising their plans to surpass the entire history of mankind in a few years? They strongly believed that 600 million Chinese people were a key condition for the successful implementation of the most ambitious projects. One of the Chinese interviewees of Soviet journalist M. Yakovlev described the mood at the time as follows: “I… heard that workers said this morning that “our factory’s director is conservative. And we can do anything, including things we see only in our dreams” (Yakovlev, 1981, p. 63). Thus, the economic development plans approved at the 8th National Congress of the CCP began to appear conservative not only to the leadership of left-wing party, but also to the employees of the enterprises. Modest members of the CCP actively opposed the new course by providing a motto of the fight against “blind running forward”, but it was not supported by the masses. The newspaper “People’s Daily” condemned those who “had become infected with right-wing conservatism”, comparing them to “snails due to their slowness”. “They do not understand that, following implementation of agricultural cooperation, we have all of the conditions and the need to make a great leap forward in the front of production” (Kulik, 2000, p. 223). Mao Zedong also condemned the fight against “blind running forward”, saying: “We will put an end to people’s enthusiasm as soon as we begin such a fight. If the enthusiasm of 600 million people fades away, it will be a very serious turn” (Mao Zedong, 1970a, p. 116). The problem of population was not new for China. Times have changed, but the population problem, with its exceptional, from the point of view of the Chinese leadership, importance, and role in the national economy, remained, only with one difference—previously, a huge population was declared as the cause of all national troubles, and now, on the contrary, it has turned into a source of fabulously rapid flourishing of the country from the problem. Representatives of Malthusian theory in China “scientifically” stated at the same time that the large population is a burden on China. According to Mao Zedong, the claim that agricultural production growth cannot keep up with population growth is an absurd argument of the Western bourgeois economists (Limonov, 2018, p. 93). One of the most common postulates of Mao Zedong’s teaching was “Let us make the bad thing good!” It means that those who have mastered the Mao Zedong’s “dialectical method” gain the ability to turn any phenomena and events in life inside out. Chronic disadvantages and difficult defeats are transformed into dignity and victories in a unique way. Mao Zedong presented his viewpoint on the problematic size of population according to the same assessment of

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his role and impact on China’s economic life as the Chinese followers of T. Malthus. However, he only changed the negative sign to a positive one in accordance with his teaching principles. During the first five years, Chinese economists argued that a certain reduction in population growth, combined with a relatively low level of development of productive forces, could play a positive role as a temporary measure to raise the standard of living. This provision has also been confirmed by Marxist economists in many countries around the world. A certain level of population control may have improved the living conditions of Chinese workers. Only 70% of the total increase in the country’s annual consumption fund could be used to improve living conditions, and only 30% could be used to ensure consumption of the increased population at the rate of population growth at the time (Yaremenko, 1968, p. 27). However, immediately following the announcement of the new General Line, China’s birth rate reduction campaign was halted. It was only renewed after the “Great Leap Forward”, but, unlike in 1957, it was extended as a result of a sharp decline and the food shortage that followed, rather than a gradual improvement in living standards. Now it has become compulsory. By emphasising the positive aspects of the vast population, followers of Mao Zedong’s economic theory clearly undermined the role of technologies and productivity. Manual labour, the main characteristic of which is muscle strength, was raised to the highest level; meanwhile, the work of a qualified worker or a researcher was regarded as a secondary factor.

10.4.4 The Mass Line “The masses have boundless creative power. They can organise themselves and concentrate on places and branches of work where they can give full play to their energy; they can concentrate on production in breadth and depth and create more and more undertakings for their own well-being” (Mao Zedong, 1955a). In order to maximise the rate of industrial production, China’s economic leaders have expanded the network of small enterprises by increasing capacities and the front of major construction works, as well as sending a huge amount of labour power from rural areas to industry. After all, the “Manifesto of the Communist Party” clearly declared “extension of factories and instruments of production owned by the state; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan” (Marx & Engels, 1969). Small enterprises have already supplied the majority of the cast iron ore excavated in the country. Approximately 90% of these enterprises were founded in rural areas (Nepominin, 2011, p. 522). In determining the course of development of small enterprises, many of their advantages have been listed: the ability to attract dispersed capital funds, the rapid return for the use of various local resources, etc. Those arguments cannot be accepted to a certain extent. Small enterprises can be found in any country, even those with a very high level of economic development. They could have been used more effectively in China, where economic life is

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still highly decentralised. However, the role assigned to the small-scale industry in the PRC did not correspond to its true potential. Everywhere in the world where the system of small enterprises is developed, they only supplement large-scale industries and play a supporting role. However, in 1958, China decided that the main direction of development should be the industrialisation in communes where the number of small enterprises could be increased. In addition, the organisers of the “Great Leap Forward” did not take into account the fact that a certain basic technical level of production is required for the small-scale industry to be cost-effective. If the technique is below this level, funds will be wasted in small-scale production, which will never be justified. However, most of China’s small enterprises, which may not have required significant capital investments, used an excessive number of raw materials, substances, and, in particular, labour power. It is sufficient to say that the average amount of coal excavated per day in small mines in China was less than 500 kg. The ferrous metallurgy enterprises (discussed further below) were especially primitive: all types of quarries and mines, small cement production plants, etc. However, in China, the aim of mass campaigns with “assault elements” in various sectors of the national economy was to gather all residents and significantly accelerate the pace of economic development. The calculation was very simple. According to Xinhua News Agency, “Recently, the relevant central agencies concluded that it is entirely feasible to construct a small mine, a small chemical fertiliser plant, a small kerosene plant, a small metal production plant, a small cement production plant, a small power plant, and a small repair plant in a few years with the necessary natural resources (mainly coal and iron). There are over two thousand counties in China”. Therefore, huge problems can be solved quickly and easily because of a simple arithmetic solution: if each county creates one enterprise, even if it is small, it will be a large-scale industry on a national scale, and because a small enterprise can be built quickly, a new industry can occur here in a few days. If we focus only on the slogans used during the transition to new Chinese economic leadership methods, the “mass line” was an unprecedented democratic movement. However, in fact, the method of “mass movements” did not only imply, as was claimed, democratisation of economic leadership, but also created a universal administration and granted total freedom to subjective and strong-willed decisions of party leaders. Systems for organising and planning scientific work, economic justification, individual workplace coordination, and material incentives for workers have all become obsolete. The “mass line” was basically an extreme administration policy. Its methods were based on the contraposition between the masses and the state, comparing the activities of the masses to those of the state. The leaders of China stated that there are two options: one is to entrust everything to the state and do it from top to bottom, and the other is to do everything with the help of the “mass line”, i.e., from the bottom up. Experience has shown that choosing the second option allows people to work more, faster and better, and, most importantly, more cost-effectively. According to this concept, “the state is not masses” and “masses are not the state”. Its essence is that the volume of production can be significantly increased without any additional resources being allocated by the state, by simply using additional efforts of the population. This policy was known as “mass orientation”. However, in reality,

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it was done at the expense of the workers, significantly worsening their financial situation and living conditions. The plans were implemented in two directions. Firstly, the network of various small production units, which did not require specialised equipment and relied heavily on unskilled labour power, was fully expanded. Secondly, the entire production management system was decentralised to the greatest extent possible, so that the commitments made in this area could be implemented by using local savings rather than at the expense of additional public expenditures. Enterprises that were previously subordinate to central government were gradually transferred to local public authorities in order to extend their assistance to local industries. The newspaper “Nanfang Daily” described the construction of the dam over the Dabu River in Lingshan County, Guangxi Province, as follows: “When the question of whether or not to build a dam was settled, another question arose: at whose expense should it be built? There were many people, including some leaders, who underestimated the mass line. According to them, significant public investments were required to irrigate 18,000 mu (the unit of area equal to approximately 0.067 ha – author’s comment). However, after these facts were presented to the representatives at the meeting, arguments were provided, after which everyone realised that the state’s financial capacities were limited, so irrigation must be a matter of the masses themselves. Each cooperative has mountains covered in forests, so the wood problem can be completely solved. Because stone was also available, each cooperative only needed to allocate workers – here, no money was required. Many cooperatives had lime pits where lime could be produced. They only needed to buy a small amount of cement, and the rest could be replaced with clay. If only each cooperative allocated the labour power and began construction using simple methods and local manpower, they would require no more than 2,000 Yuan (a day before that, experts estimated that construction would require approximately 500,000 Yuan). Therefore, a cooperative can also allocate such a sum of money” (Yaremenko, 1968, p. 107). After ten cooperatives began construction on a dam, some peasants began to expect the state to help them with bread after seeing that on other large construction sites, builders received additional food rations from the state. The rest of the cooperative workers began to support the position of this part of the peasants. However, following the application of general discussion methods, a general willingness to save food for the state has emerged, as it should significantly contribute to socialist construction. Because the cooperative’s stocks still contained small quantities of coarse grain, they all agreed that it was unnecessary to request grain from the state because they could assist farmers by providing them a portion of coarse grain available. At the same time, new enterprises of a different profile and ranging in size from 4 or 5 to 200–300 people were established in many cities. Because new enterprises were established alongside the system of already existing businesses, this process was compared to “a chicken laying eggs”. Craft cooperatives were another production base used for the establishment of small enterprises. Society also established small businesses according to the slogans: “the masses build, the state only supports”, and “do not be afraid of small size and dispersion! Everything happens in response to

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the supply—what is served is what must be done”. These enterprises were used to establish more small businesses that employed even housewives.

10.4.5 “Everyone Does Everything” All of these measures were viewed only as a first step in 1958. Between 1954 and 1957, annual production growth reached 12% (Delen, 1972, p. 17). It was planned to equalise the scale of industrial production to the scale of agricultural production over a one-year period in many provinces where the proportion of industrial production was very low prior to 1958. The aim of the “Great Leap Forward” was to accelerate national industrialisation and increase the rate of growth in industrial production and agriculture (the figures in the industrial sector had to be exceeded by 6.5 times, while in agriculture by 2.5 times compared to figures of 1958) (Erzhanova & Omarov, 2021). A mass movement was organised to create a production equal to the entire agricultural production, which fed millions of people. This mass movement brought together the following initiatives: “four in half”, “four at once”, and “four fast”. “Four in half” meant “semi-worker, semi-peasant; semi-worker, semi-trader; semiworker, semi-student; semi-industrialist, semi-householder keeper”. “Four at once” meant “building and starting production at the same time; searching for minerals and extracting them at the same time; extracting iron ore and melting it at the same time; working and mastering the speciality at the same time”. “Four fast” meant “keeping up the fast pace; completing the construction of the manufacturing plant as soon as possible; and producing and shipping products as soon as possible” (Yaremenko, 1968, p. 44). It was completely consistent with K. Marx’s theory of the “socialist syndicate”, in which “everyone does everything”, and was later reflected in the “Manifesto of the Communist Party” as follows: “Combination of agriculture with manufacturing industries; gradual abolition of all the distinction between town and country […]”. Certain measures were taken in the first half of 1958 to decentralise the management of the entire economy of the People’s Republic of China, in particular industry. Virtually, this process largely coincided with similar decentralisation processes in the Soviet Union. Chinese leaders have undoubtedly observed that economic decentralisation increases the economy’s efficiency and accelerates its development. It was critical for these leaders because they needed to reach a rapid pace of development. Therefore, the decentralisation of the economy in China took place much more radically than in the Soviet Union at the time. Approximately 80% of all Chinese enterprises previously managed by the central ministries of industry were transferred to local public authorities. These measures were a deliberate step towards limiting centralised planning, allowing local initiatives to take place, and thus achieving the “Great Leap Forward”. It is necessary to acknowledge that China’s economic indicators were indeed impressive: Between 1958 and 1960, the total value of Chinese industrial production increased by 2.3 times, from 70.2 billion Yuan to 163.7 billion

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Yuan; meanwhile, heavy industry production increased by 3.4 times, from 31.7 to 109 billion Yuan (Shapinov, 2007). The financing of the economy, including loan amounts and their terms and conditions, has also become a competence of local public authorities, which could grant loans at their discretion. However, during the preparation and approval of plans, the financing of capital injections, and the collection of taxes, the reorganisation took place in the same direction. The commitments to implement the “Great Leap Forward” were approved only as official party plans. These plans were not interrelated on a national or local level. Because there was no direct link between the plans, this principle was called “active equilibrium”. This principle meant that economic problems were solved throughout the entire process and only when they arose, so there was no need to worry that the first chain of production was not pre-linked to the subsequent chains. The practice of pre-linking plans in certain industries and at the level of individual production sites was referred to as “passive equilibrium”. The Planning Committee of the Communist Party on one Chinese province interpreted these principles as follows: “Contradictions are inherent to the development of all phenomena. It is also necessary to resolve the newly discovered contradictions. The transition from developmental imbalances to balance contributes to rapid movement forward. For example, when all of our people began constructing irrigation equipment and local industry, it was discovered that there was a shortage of cement. To address this issue, we dispatched our people to learn local methods of producing the most basic cement. We have established cement companies in each settlement and cooperative. When the semi-finished products from which cement was made were prepared, it was found that there were no grinding machines. It is impossible to produce the end product if these semi-finished products are not ground or sieved. At this crucial moment, we gathered the populace and used everything that can be used by replacing grain roller mills and air blowers with expensive grinding and sieving machines. Thus, cement was obtained and the needs of all industries were met. Using such active balance, production was further developed. It is clear that this is a fundamental distinction from the passive balance” (Yaremenko, 1968, p. 48). Such methods were used to solve various economic problems. During the “Great Leap Forward”, the role of the planning and statistical authorities was to record the assumed commitments and to verify their implementation. The State Council of the People’s Republic of China has granted construction organisations the right to determine the entire procedure of the allocated funds on their own, including the authority to review the established public standards in the field of construction and to amend initial projects in accordance with local conditions. This “initiative” resulted in massive violations of public standards, leading to a significant deterioration in construction quality. The creation of new types of production over a few days no longer surprised anyone. The new production started running within a few hours from the beginning of its implementation. The main goal of the heads of construction organisations was to reach new construction records, which overshadowed all other concerns.

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Along with the “Great Leap Forward” in production and science, the “Great Leap Forward” in culture and education was announced. Prior to that, it took more than a decade to eradicate illiteracy. It was a very difficult task in the absence of a phonetic writing system. By 1958, roughly 40% of industrial workers were illiterate, while the vast majority of peasants could not read or write. However, the abolition of illiteracy took only one year. In October 1958, it was declared that illiteracy had been “nearly completely” eradicated in up to seventeen Chinese provinces. Cultural workers and artists have assumed increased commitments. They specified the exact number of stories, novels, and paintings they planned to create in the coming years. The figures were usually significant: 10 plays, 100 different paintings, etc. Even ordinary students who had previously had no special interest in literature decided to “overcome the blind belief that only writers can create works of art”, and as a result, they undertook obligations to write a story, a poem, or even a novel. Chinese propaganda tried to portray the “Great Leap Forward” as the happiest period in Chinese history, when art and life merged. However, some forms of art admiration, described in local newspapers, were extremely concerning: “People expressed their opinions in many places during the meetings through singing in response to other songs; meanwhile, during the discussions, everyone sang in chorus. Singing became an integral part of daily life in some provinces. Up to 200 songs about the construction of irrigation equipment in Ganxian District were sung during one meeting” (Yaremenko, 1968, p. 52). However, the atmosphere of the “Great Leap Forward” was not so joyful. The working day in enterprises was not standardised. The end of the working day depended on the “enthusiasm” of employers and their plans. Workers in many enterprises relocated to live in their enterprise’s workshops. They also ate and slept there. People were encouraged to demonstrate “labour heroism” by not leaving their machine-tools for a day or two even after suffering serious injuries. Because of the large number of production assignments, they were frequently required to work night shifts. The number of industrial injuries has increased dramatically, particularly since the start of the steelmaking campaign. The enormous tension persisted during the sleepless nights caused by the militarised regime, when the entire nation was chasing after dubious labour “records” in the name of the “Great Leader” and “in response to the Great Leader’s concern”.

10.4.6 “Ants Gnawing at a Bone” “There is an ancient Chinese fable called “The Foolish Old Man Who Removed the Mountains”. It tells of an old man who lived in northern China long, long ago and was known as the Foolish Old Man of North Mountain. His house faced south and beyond his doorway stood the two great peaks, Taihang and Wangwu, obstructing the way. He called his sons, and hoe in hand they began to dig up these mountains with great determination. Another greybeard, known as the Wise Old Man, saw them and said derisively, “How silly of you to do this! It is quite impossible for you few

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to dig up these two huge mountains”. The Foolish Old Man replied, “When I die, my sons will carry on; when they die, there will be my grandsons, and then their sons and grandsons, and so on to infinity. High as they are, the mountains cannot grow any higher and with every bit we dig, they will be that much lower. Why can’t we clear them away?” Having refuted the Wise Old Man’s wrong view, he went on digging every day, unshaken in his conviction. God was moved by this, and he sent down two angels, who carried the mountains away on their backs. Today, two big mountains lie like a dead weight on the Chinese people. One is imperialism, the other is feudalism. The Chinese Communist Party has long made up its mind to dig them up. We must persevere and work unceasingly, and we, too, will touch God’s heart. Our God is none other than the masses of the Chinese people. If they stand up and dig together with us, why can’t these two mountains be cleared away?” (Mao Zedong, 1945, p. 322). There are some industries where products can be produced only in large-scale enterprises. It is required by the production technology. However, during the “Great Leap Forward” period, it was attempted to produce steel, cars, and locomotives in small enterprises. The invasion of small-scale production into heavy industry has become a huge sensation. The production of large equipment for power plants and metal rolling machines posed a significant challenge to supporters of the “Great Leap Forward” policy. It was obvious that such equipment could not be produced at the expense of small businesses. However, the solution was found. To fill gaps in the small-scale industry, a new production method known as “ants gnawing at a bone” was invented. During the production process, “many small devices were arranged around each large part, resembling many ants surrounding and gnawing at a large bone”—this is how the name and origin of this method was explained. Therefore, when a large high-pressure compressor was developed in one small machinery production company as a result of a “three-month intense struggle”, this method was enthusiastically accepted by all of China’s renowned economic leaders (Yaremenko, 1968, p. 66). Once upon a time, the most famous Chinese newspaper “People’s Daily” wrote: “We should force ants to gnaw at bones and use small machines to produce large devices”. This method was declared to be the most effective methodology available at the time, as well as the “key to the advancement of engineering”. However, the attempt to produce heavy equipment using small machines and devices while crossing several engineering production steps at the same time was doomed to failure from the start. Technological challenges have been insurmountable. Finally, it was discovered that the finished product was of poor quality. The “ants gnawing at a bone” method has wasted a lot of power and resulted in a significant waste of resources, but it failed to meet expectations and produced no significant results. Finally, the increased number of small enterprises has resulted in a significant disproportion between industrial and agricultural development. The industry must have a strong foundation in agriculture that provides food and raw materials to it. Moreover, the development of small-scale industry can only occur until it begins to weaken agricultural production. However, the increase in the number of small

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enterprises between 1958 and 1959 could not have no detrimental effect on agriculture because it wasted a lot of labour power, as well as various material and financial resources. The reckless development of the small-scale industry gradually places it in a very precarious position—it can only exist until the first serious difficulties in food production arise. Any decrease in food supply first restricts the supply of small-scale industry, followed by a reverse shift of labour power from industry back to agriculture. Given the limited demand for industrial equipment and production resources, small-scale industry (taking into account its contribution to production) pretends to a disproportionately large share of centralised food resources. The very methods of establishing a small-scale industry in China did not compensate for the leak of labour power from agriculture. Food supply issues have become unavoidable, and the majority of the small-scale industries has ceased to exist as soon as they arose. Individual provinces have become economically isolated as a result of the strong emphasis on local resources, the transfer of a key leadership role to local public authorities, the arbitrary selection of products, and the termination of production relations. Each province has established its own metallurgical base, basic engineering equipment, raw materials extraction industry, etc.—a separate independent economic complex. Such measures that destroyed the rational and economically optimal division of labour were encouraged rather than condemned. At the end of 1958, Mao Zedong stated that the system of division of labour, in which an independent industrial complex serves several provinces, is already obsolete; therefore, it is necessary to transition to a system in which each province of China becomes a separate industrial complex.

10.4.7 Steelmaking Campaign The “national struggle for steel” became the focal point of the “Great Leap Forward” policy. The concept of mass movement of people as a key factor in economic development was fully implemented in this campaign. Between 1952 and 1957, China’s steel production increased from 1.0 to 5.2 million tons (Shapinov, 2007). The entire national economy was mobilised to achieve a single goal—to melt a record amount of steel. However, it was not so much an economic problem as a matter of the national prestige. Among the other indicators of the “Great Leap Forward”, the amount of steel produced was regarded as the most important. The amount of steel melted by the national industry determined how successfully the party’s “General Line” was followed. The rapid increase in iron and steel production had to be accomplished by establishing a large number of small local enterprises. In the autumn of 1958, craftsmen in China had over 700,000 blast furnaces; at the same time, up to 100 million people were employed in metal production (The Great Chinese Leap, 2016). These enterprises were equipped with basic equipment and relied heavily on primitive manual labour. It had nothing to do with the traditional iron and steel furnaces built in China up until the end of 1958. The issue of raw materials for these “furnaces” was also

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radically resolved. The party’s leaders encouraged the public provincial and national authorities to establish small mines everywhere and created such slogans as “To fight for steel heroically” and “Three years of hard work – ten thousand years of happiness”. At the end of 1958, China had 700,000 backyard furnaces, which mobilised approximately 1 million people (Nepominin, 2011, p. 521). “Iron Horse” was announced as a developmental basis of steelmaking, the volume of which was expected to increase 10 times—up to 100 million tons. Large metallurgical plants shut down, and their workers went to rural areas to teach peasants how to melt cast iron (Izmailov, 2020). Small blast furnaces were built throughout the country. They were constructed in a matter of hours and began producing results almost immediately. Shapeless scraps of molten bricks, slag and cast iron, referred to as “steel”, were carefully weighed and accounted for. The “achieved results” of production were reported on a regular basis. The work was divided into day and night shifts. The combination of nocturnal lights and the movement of thousands of people created a very impressive view. Behind this exotic scenery, there were millions of ordinary workers, separated from their business and families, and engaged in meaningless work, the results of which later had to be destroyed. The furnaces were unreliable because they quickly wore out and accidents happened with them on a regular basis, which meant that their restoration and repair work took much longer than their useful operation (Murmceva, 1971, pp. 50–51). Even according to official reports, less than one-third of all iron blast furnaces were typically operational at the same time. However, the situation with steel furnaces was far worse. If a ton of cast iron cost 70–80 Yuan in modern enterprises at the time, the same ton of cast iron obtained by craftsmen cost between 300 and 700 Yuan, i.e., several times the state-set price. It is understandable that the quality of cast iron was poor, and it could only be used for steel production after incurring significant additional costs. 100,000 small mines were established in the country to supply carbon-based fuel to the steel industry. One such mine employed between 50 and 60 people on average. Every day, 25 to 30 tons of coal were extracted. Because coal was still scarce despite all of these measures, the only solution was to reduce domestic coal consumption. Residential buildings were inadequately heated during the winter of 1958–1959. It was especially difficult to supply coal to the steel industry in the country’s south, where there were no large industrial carbon mines. This steelmaking campaign was halted as soon as it became clear that the planned targets had been met and exceeded. Out of 11 million tons of steel, 3 million tons of steel were obtained in the furnaces of craftsmen. Steel production increased by 45% in 1958 and by another 30% in 1959. Propaganda trumpeted that steel production had increased by 70% in a year, but fanfares quickly faded because steel production fell in 1961. The inefficiency of the small-scale steel industry was revealed, and as a result, steel production fell sharply, returning to 1958 levels only in 1964. The massive consumption of coal has resulted in the discontinuation of electric energy supply; in the meantime, most light industries in many north-eastern provinces have been closed down in the autumn (Meliksetov, 2002, p. 661). In addition, a large amount of coal was used in rural furnaces, causing power plants and factories to

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shut down. However, the party’s leaders later admitted that people processing steel from craftsmen’s products were able to obtain steel suitable for rolling only “in some areas”. These statements sounded very strange after praising the benefits of a smallscale steel industry not so long ago. The failed “fight for steel” cost China’s budget 2 billion Yuan (Izmailov, 2020). However, the impact of the growth of the steel industry on machine production was minimal, owing to the fact that the increase in steel processing and its rolling capacities lagged significantly behind the rate of steel melting. Even a new campaign was announced, with the goal of establishing machine production enterprises using their own resources, rather than relying on public investments in steel rolling equipment. Thus, a closed circuit (metallurgy-machine production-metallurgy) was formed, which spread not only on a national scale, but also in all provinces, districts, and even in individual production plants. Regardless of specialisation, all large machinery production enterprises had to master the production of cast iron and steel, as well as produce the equipment necessary for such production and supply raw materials and equipment to the newly constructed steel plants. In this case, the Marxist theory of reproduction offers no theoretical arguments confirming the necessity of such production for the sake of production; meanwhile, all subsequent practical experience with economic development has demonstrated the ineffectiveness of such a one-sided developmental path.

10.4.8 Material Incentive: A Capitalist Relic “Capitalist culture has created large-scale production, factories, railways, the postal service, telephones, etc., and on this basis the great majority of the functions of the old “state power” have become so simplified and can be reduced to such exceedingly simple operations of registration, filing, and checking that they can be easily performed by every literate person, can quite easily be performed for ordinary “workmen’s wages”, and that these functions can (and must) be stripped of every shadow of privilege, of every semblance of “official grandeur”. All officials, without exception, elected and subject to recall at any time, their salaries reduced to the level of ordinary “workmen’s wages”—these simple and “self-evident” democratic measures, while completely uniting the interests of the workers and the majority of the peasants, at the same time serve as a bridge leading from capitalism to socialism” (Lenin, 1917). According to this principle, the leaders of the Chinese Communist Party, led by Mao Zedong, began to regulate the national economy mainly through administrative methods. In particular, they undertook to abolish the system of material incentives for workers. Material incentives were abolished in agriculture with the introduction of communes, while their destruction in industry began with attacks on the piece-rate pay system. When production increased due to millions of people migrating from one industry to another, longer working hours and more intense work, material incentives became unnecessary. In addition, keeping the piece-rate pay system would imply that

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increased production would result in an increase in worker wages, which the leaders of the People’s Republic of China did not want to allow. The abolition of the piece-rate pay was primarily related to practical considerations. The piece-rate pay system contradicted the fundamental principle of the “Great Leap Forward”, which called for the mobilisation of all available funds to accelerate economic growth. The authors of the “General Line” did not see an improvement in workers’ living standards based on production development as compatible with their plans. The abolition of the piece-rate pay system has been presented as greatly beneficial to workers; therefore, they had to fully support it. During the extended Beidaihe Conference, Mao Zedong expressed his disappointment with the piece-rate pay system. He advocated for the direct provision of all necessary products to workers. The wage freeze, in his opinion, may be a step backward. Then he said, “We should consider the possibility of abolishing the wage system (and) restoring the direct supply chain… The restoration of the supply chain seems like a “regression”, (but) “regression” means progress because we have already taken steps back since arriving in the cities”. According to Mao Zedong, the wage payment system will be permanently abolished in the future, if not immediately. In his opinion, the wage payment system has regressed in two ways: it has placed too much emphasis on incentives while ignoring political work, resulting in a new form of inequality between workers and civil servants (Wikipedia: 360wiki.ru). Thus, Mao Zedong assumed the role of theorist of the main global communist movement. All of this corresponded to his thesis that “as we move from socialism to communism, we should not linger in the stage of socialism”, as well as the statement that “the free supply system, carried out in people’s communities, begins to grow sprouts of the communist distribution principle in terms of their needs” (Soveshchanie v Beydaykhe, 2020).2 The national newspapers described the workers’ attitude towards piece-rate pay as follows: “Many workers who receive piece-rate pay are in a difficult situation: in large factories, they are paid too much when they exceed production standards; therefore, they stop working because they are afraid of being accused of working only for money”. It was proposed to solve the issue of encouraging worker activity through “political, ideological, and moral methods” rather than material incentives. “Otherwise, it would mean that money, rather than politics, is the driving force in public life!” yelled opponents of material incentives. “It is impossible to see a variety of things 2

However, at a later meeting in Wuchang in November 1958, Mao Zedong corrected himself, recalling that the upcoming China’s transition to communism was discussed in Beidaihe. “It is good that the five conditions listed below were agreed upon”, said the Chairman, emphasising that they should be implemented first: “1) The greatest abundance of products; 2) high communist consciousness and morality; 3) a widespread high culture; 4) the abolition of three types of differences (i.e., those between urban and rural areas, those between the working class and peasants, and those between mental and manual labour – author’s comment) and relics of bourgeois law; 5) the gradual disappearance of all public functions, except for external ones… During 20 years, it is impossible to eliminate three differences and relics of bourgeois law” (Mao Zedong, 1970b, p. 395). We can see here that Mao Zedong takes a purely Marxist view of the transition to communist society, which has nothing to do with “war communism”.

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without seeing people, or to see money without seeing people”, they wrote. Chinese leaders defended this system of administration and arbitrariness with pathos, claiming that eliminating material incentives accelerates the establishment of communist relations in a society where money serves only a temporary function. Thus, the society approaches the principle of communist distribution “according to one’s needs”.

10.4.9 The Finale of the “Great Leap Forward” or the End of the First Administrative Cycle of China The massive campaigns of the “Great Leap Forward” in China have failed one after the other. The steelmaking movement ended in failure. The implementation of the industrial and construction development programme encountered a severe shortage of raw materials while diverting many resources away from agriculture. The establishment of People’s communes did not help, but rather exacerbated the situation. Growing disproportions have resulted in a monthly drop in people’s overall standard of living. A severe shortage of basic food products occurred as a result of increased food demand, poor farming in communes, and the destruction of private plots of land. There was a particular scarcity of high-quality grain, rice and wheat. After the establishment of communes, the supply of vegetables, meat, fish, and eggs became even worse. At the beginning of 1959, it became clear that it was absolutely impossible to do without material incentives in agriculture. It has been acknowledged that the role of wages should be increased. However, it was impossible to do anything realistic in this direction by keeping the original form of communes with free canteens and the lack of autonomy of the individual farms that were an integral part of the commune. Therefore, the overall decline in Chinese production began in agriculture. However, it was initially justified by poor climatic conditions. In fact, weather conditions in China were unfavourable for harvesting during this period of time. However, the weather was also bad in other countries of Southeast Asia, but nowhere did it have such disastrous effects. According to some foreign observers, losses in China were three times higher than in countries with similar climatic conditions at the time. In 1960, the actual grain harvest in China fell by 26.4% compared to 1957. Although the “Great Leap Forward” did not reduce industrial production volume, it did have an effect on its distortions. Between 1957 and 1960, the share of light industrial products produced decreased from 53.5% to 33.4%, while the share of the heavy industry increased from 46.5% to 66.6%, respectively (Sbornik statisticheskikh materialov…, 1999, p. 95, 108). The reason for the sharp decline in agricultural production in China was not so much drought and floods as it was the disorganisation of agriculture caused by the People’s communes, the loss of motivation of ordinary commune members in the field of production, and finally the causes of the decline were rooted in campaigns and

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experiments which were aimed at increasing agricultural production output several times in a short period of time. Mao Zedong used every means possible to persuade people to follow him, so that their “revolutionary spirit” would smoulder indefinitely. In one of his speeches, he stated that sparrows were to blame for massive agricultural losses and a deteriorating harvest. He referred to them as “the little enemies”. According to him, large flocks of birds land in crops and eat grain, destroying the harvest. Therefore, it was necessary to launch a sparrow eradication campaign immediately. Millions of children and schoolchildren began chasing sparrows with flags, preventing them from landing and resting. The poor birds flew until they dropped dead on the ground from exhaustion. They were then assembled, loaded onto trucks, and utilised. In a short period of time, nearly the entire sparrow population was driven nearly extinct, making way for a new “enemy”—insects. These were previously eaten by sparrows, but now that the insects have won, they have multiplied massively and have continued to destroy the entire agricultural yield (Izmailov, 2020). Mao Zedong renamed sparrows as “little friends” in 1960, prohibiting their killing and ordering to purchase them from the USSR and Canada. However, it was too late because famine struck large parts of the country in the same year. It was caused not only by the fight against sparrows, but also by the seizures of grain from peasants. According to official data published many years later, the total number of fatalities reached 20 million.3 Crowds of hungry peasants went to the gates of the penitentiary camps, pleading to be imprisoned because their inmates were fed, albeit poorly (Izmailov, 2020). The decline in agricultural production output has caused disruptions throughout the entire economic chain. The scarcity of agricultural raw materials has reduced production in the light and food industries. Many small and medium-sized enterprises were forced to close because the state was unable to provide food for their workers. Millions of people have returned to the rural areas in search of food. The 3

The number of people who died of starvation during the Great Leap Forward is still debated in China’s scientific community. The population censuses of 1953, 1964, and 1982 provide the most reliable estimates. According to Jiang Zhenghua and Li Nan’s estimates, “the total number of unnatural deaths in three difficult years was around 17 million” (See Jiang Zhenghua, Li Nan. (1987). Identifikatsiya parametrov dinamiki naseleniya Kitaya [Identification of parameters of Chinese population dynamics]. Demograficheskaya nauka Kitaya, 1, 56–63; Jiang Zhenghua, Li Nan. (1986). Korrektsiya parametrov dinamiki naseleniya Kitaya [Correction of parameters of Chinese population dynamics]. Vestnik Sianskogo transportnogo universiteta, 3, 46–64; Jiang Zhenghua, Li Nan. (1989). Metody i rezultaty otsenki dinamiki naseleniya Kitaya [Methods and results for assessing population dynamics in China]. Naselenie Kitaya. Ezhegodnik, 94–106. A. Coale estimated that there were approximately 27 million unnatural deaths in China between 1958 and 1963 (Coale, A. (1984). Rapid population change in China. 1952–1982). Meanwhile, B. Ashton believed that approximately 30 million people died of starvation in China between 1958 and 1962 (Ashton, B., Hill, K., Pizza, A., & Zeitz, R. (1984). Famine in China. 1958–1961. Population and Development Review, 10(4), 613–645). Regardless, Li Chengzhi revised A. Coale’s estimates for up to 22 million people. Li Chenzhi. (1997). Vyzvannye “bolshim skachkom” demograficheskie izmeneniya [Demographic Change Caused by the “Great Leap Forward”]. Issledovanie istorii KPK, 2, 1–14. As a result, the number of people who died of starvation in China ranges from 17 to 30 million (Xu Jinqiu, 2012).

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closure of small enterprises, including mines, has further exacerbated the shortage of raw materials. Large industrial enterprises have closed or were underutilised as a result of a lack of food, raw materials, and financial resources. The government was forced to implement massive construction conservation measures. Construction of the railways was halted. In a very short period of time, total product production has fallen significantly below the level that was before the “Great Leap Forward”. Thus, recklessly expanding raw material extraction, which massively used unskilled labour power from the agricultural sector while creating a huge demand for food resources, was the channel through which the Chinese economic recession spread from agriculture to other areas of production, particularly industry. The Second National People’s Congress (NPC) was held in April 1959. Following harsh criticism during the first session, Mao Zedong resigned as Chairman of the People’s Republic of China (Usov, 2004). In the spring of 1961, Chairman of the People’s Republic of China, Liu Shaoqi, visited his native province of Hunan and found out that most of his close relatives died of starvation there. He decided to call an end to the “Great Leap Forward”, but did not make the decision public until the Party conference in 1962. The scientific community is divided on the causes of famine in China during the “Great Leap Forward”. Some scientists believe that the famine was primarily the result of a “natural disaster”, citing China’s survival of a severe drought between 1959 and 1961 (Chen Donlin, 2000). Only after the huge economic catastrophe, moderate and realistic decisions found their place in the economic strategy of the People’s Republic of China. It has been noted that the rapid development and high growth rate of the heavy industry should not be considered an end in itself. Heavy industry should serve as the technical foundation for the entire national economy. It was noted that, depending on the volume of production, care must be taken to ensure its quality and other issues. In agriculture, private plots of land were returned to peasants, various production groups or brigades were granted a certain degree of economic autonomy (the People’s Communes remained only as administrative territorial units), and surplus agricultural products were allowed to be traded. All of it was accompanied by the removal of incompetent activists of the “Great Leap Forward” from leading public positions. Thus, the first administrative cycle, which was characteristic of all socialist countries, ended in China around 1963, and was initially marked by the total abolition of peasants’ private property (the proletariat did not actually have it), i.e., the total misappropriation of capital goods, their maximum centralisation and mobilisation for the implementation of the strategic “General Line” of the Communist Party.

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10.5 The Second Administrative Cycle: The Cultural Revolution “What should our policy be towards non-Marxist ideas? As far as unmistakable counter-revolutionaries and saboteurs of the socialist cause are concerned, the matter is easy, we simply deprive them of their freedom of speech. But incorrect ideas among the people are quite a different matter. Will it do to ban such ideas and deny them any opportunity for expression? Certainly not. It is not only futile but very harmful to use crude methods in dealing with ideological questions among the people, with questions about man’s mental world. You may ban the expression of wrong ideas, but the ideas will still be there. On the other hand, if correct ideas are pampered in hothouses and never exposed to the elements and immunised against disease, they will not win out against erroneous ones. Therefore, it is only by employing the method of discussion, criticism and reasoning that we can really foster correct ideas and overcome wrong ones, and that we can really settle issues” – Mao Zedong (Shapinov, 2007). In 1966, Mao Zedong, Chairman of the Central Committee of the Chinese Communist Party, announced the start of the “Cultural Revolution” aimed at “fighting internal and external revisionism”. According to historians, with this ideological and political campaign, Mao Zedong launched a mass terror policy aimed at excluding all those who disagreed with his policy from the party’s governing bodies. The “Cultural Revolution” marked the start of a new administrative cycle in China, which was no less devastating and detrimental to the country’s economic and cultural life than the “Great Leap Forward” policy, and it proved to be one of the greatest tragedies in Chinese history. The failure of the “Great Leap Forward” policy was one of the primary causes of the “Cultural Revolution”. Dissatisfied with this political course, members of the CCP’s leadership, including the Chairman of the People’s Republic of China, Liu Shaoqi, and Deng Xiaoping, began to form an opposition within the Party. The latter gained increasing support within the Party and attempted to broaden their influence. While driving home from work one evening, Liu Shaoqi stopped by Mao Zedong’s house. During their conversation, he mentioned that they both had to accept responsibility in the Party for the national disasters and the deaths of millions of people. He said they would be condemned in future history textbooks. Since then, Liu Shaoqi has become the greatest enemy of Mao Zedong. Another significant factor was the Soviet Union’s example. After J. Stalin’s death in 1953, N. Khrushchev was appointed First Secretary of the CC of the CPSU. At the 20th Congress of the CPSU, he delivered a speech in which he revealed the personality cult of J. Stalin and its consequences, launched a broad de-Stalinisation campaign throughout the country, convened a Plenary Session of the CC of the CPSU, in which he condemned J. Stalin’s followers—the “anti-party group of V. Molotov, G. Malenkov and L. Kaganovich” and D. Shepilov who “joined them at the last minute”, and expelled them from the Party. By renouncing the “Stalinist” policy, N. Khrushchev began the gradual liberalisation of the entire country’s economy.

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Mao Zedong became terrified when he realised it. He recognised that the failure of the “Great Leap Forward” made it increasingly difficult for him to maintain power, so he had to act quickly. Otherwise, he and his followers would be in serious danger. Mao Zedong was furious at USSR leader N. Khrushchev for his disrespect for J. Stalin, even as economic liberalisation reforms were being implemented. The USSR was also dissatisfied with Mao’s policy, and cancelled all Soviet specialists who worked in China at the time. Therefore, at the end of the 1950s, there was a huge disagreement between the USSR and China, which resulted in the dissolution of the entire international communist movement. The confrontations at the border around the Damansky Island (Zhenbao Island) on the Ussuri River were the apex of the conflict between the two countries. This confrontation was sparked primarily by territorial claims of both countries, but a clear and significant political narrative was noticed here as well. Throughout this time, criticism of Soviet economic experience was an integral part of Chinese ideological attacks on the Soviet Union. One of Mao Zedong’s most important speeches, delivered in 1964, i.e., before the “Cultural Revolution” began, clearly expressed his attitude towards the leader of the Soviet Union at the time: “In order to guarantee that our Party and country do not change their colour, we must not only have a correct line and correct policies but must train and bring up millions of successors who will carry on the cause of proletarian revolution. In the final analysis, the question of training successors for the revolutionary cause of the proletariat is one of whether or not there will be people who can carry on the Marxist-Leninist revolutionary cause started by the older generation of proletarian revolutionaries, whether or not the leadership of our Party and state will remain in the hands of proletarian revolutionaries, whether or not our descendants will continue to march along the correct road laid down by Marxism-Leninism, or, in other words, whether or not we can successfully prevent the emergence of Khrushchev’s revisionism in China. In short, it is an extremely important question, a matter of life and death for our Party and our country. It is a question of fundamental importance to the proletarian revolutionary cause for a hundred, a thousand, nay ten thousand years. Basing themselves on the changes in the Soviet Union, the imperialist prophets are pinning their hopes on “peaceful evolution” on the third or fourth generation of the Chinese Party. We must shatter these imperialist prophecies. From our highest organisations down to the grass-roots, we must everywhere give constant attention to the training and upbringing of successors to the revolutionary cause. What are the requirements for worthy successors to the revolutionary cause of the proletariat? They must be genuine Marxist-Leninists and not revisionists like Khrushchev wearing the cloak of Marxism-Leninism. They must be revolutionaries who whole-heartedly serve the majority of the people of China and the whole world, and must not be like Khrushchev who serves both the interests of a handful of members of the privileged bourgeois stratum in his own country and those of foreign imperialism and reaction. They must be proletarian statesmen capable of uniting and working together with the overwhelming majority. Not only must they unite with those who agree with them, they must also be good at uniting with those who disagree and even with those who formerly opposed them and have since been proven wrong. But they must especially

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watch out for careerists and conspirators like Khrushchev and prevent such bad elements from usurping the leadership of the Party and government at any level. They must be models in applying the Party’s democratic centralism, must master the method of leadership based on the principle of “from the masses, to the masses”, and must cultivate a democratic style and be good at listening to the masses. They must not be despotic like Khrushchev and violate the Party’s democratic centralism, make surprise attacks on comrades or act arbitrarily and dictatorially. They must be modest and prudent and guard against arrogance and impetuosity; they must be imbued with the spirit of self-criticism and have the courage to correct mistakes and shortcomings in their work. They must not cover up their errors like Khrushchev, and claim all the credit for themselves and shift all the blame on others” (Mao Zedong, 1964, pp. 72–74). But in reality, Mao Zedong was not going to be responsible for the policy of the “Great Leap Forward”. He was given “the opportunity to act” in 1966 when China’s “Cultural Revolution” began. On 16 May 1966, a new “Cultural Revolution Group” was formed, consisting of Mao Zedong’s close followers, such as Chen Boda, Jiang Qing, and others. This group has become the initiator of the fight against modest leaders of the CCP, intellectuals, and carriers of traditional culture throughout the country. Since 25 May, the group has been distributing big-character posters (“Dazibao”) urging young people to support Mao Zedong during the implementation of the “Great Proletarian Cultural Revolution” and to destroy “the bourgeois culture”. It meant destroying everything that did not adhere to communist principles to some extent. Students and young rebels formed a “rebel faction” (Chinese: zao fan pai), as did a group of working youth known as the “Red Guards” (Chinese: hong wei bing). On 5 August 1966, a new Mao Zedong’s big-character poster “Bombard the Headquarters!” (Mao Zedong. A Document, prepared on 5 August 1966, during the 11th Plenary Session of the 8th Central Committee of the CCP, published in 1967), was released. He demanded to bombard the handful of “persons in power who are taking the capitalist road” (Usov, 2004). In response to this call, crowds of hong wei bing vandalised party offices and public institutions. Thus, a wave of violence swept across the country. Officials and intellectuals were beaten, humiliated, paraded through city streets with offensive posters, and then frequently killed or sent to rural areas for further labour “re-education” (Usov, 1991). Hong wei bing was greatly aided by public security structures led by Mao Zedong’s follower Kang Sheng. Deng Xiaoping and the leader of the CCP, Xi Jinping, were among the oppressed. Hong wei bing destroyed ancient temples and museums because its members saw everything associated with “non-proletarian culture” as useless or harmful. In January 1967, hong wei bing and zao fan pai, led by Zhang Chunqiao, stormed the CP headquarters in Shanghai. They besieged diplomatic institutions in August, exacerbating the conflict between the USSR and China (Shubin, 2021). An excerpt from a propaganda newspaper published on 1 June 1966: “Let us eradicate the dominance and malicious plans of the revisionists strongly, radically, fully and completely! Let us destroy the monsters—the Khrushchev’s revisionists!”

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Some of the leaders of the CCP, like the “February Countercurrent” of 1967 (a group of conservative Communist Party veterans to oppose the ultra-leftist radicalism at the beginning of the Cultural Revolution—V.P.) and soldiers opposed the hong wei bing, but Mao Zedong then devised an original solution to this problem. It was no coincidence that the beginning of this revolution coincided with a massive campaign of “self-criticism”, the essence of which was that all Chinese (including Party members) were required to report their political mistakes in writing and submit them to the Party. This new procedure had to be followed by the Chairman of the PRC, Liu Shaoqi, as well as his followers. It was quickly turned against them by Mao Zedong. The letter from Liu Shaoqi was examined at the 11th Plenary Session of the Central Committee of the CCP in August 1966, after which he was suspended from work “until the Chinese Communist Party determines the nature of these mistakes”. It was a common practice in China at that time. In such a case, a member of a political party who has not been formally removed from his position but has been suspended from work is placed under house arrest. This arrest may last as long as necessary or until the Party decides otherwise. Therefore, the suspended Liu Shaoqi and his family were summoned to numerous interrogations, and the crowds of Mao’s supporters gathered outside their home on a regular basis were eventually imprisoned and died in 1968. During the 11th Plenary Session, representatives of “massive revolution organisations” took the place of oppressed party cadres. The Plenum declared Mao Zedong’s ideas to be the “ruling ideology of the CCP” and confirmed the removal from office of the four Vice Chairmen of the Central Committee of the CCP: Liu Shaoqi, Zhou Enlai, Zhu De, and Chen Yun, leaving only Lin Biao in office. At the same time, the Secretariat of the Central Committee of the CCP, led by Deng Xiaoping, was disbanded. As a result, Mao Zedong and his partners regained complete control of the country (Meliksetov, 2002, pp. 678–679). The resolution “On the Great Proletarian Cultural Revolution” sounded as follows: “At present, our objective is to struggle against and crush those persons in authority who are taking the capitalist road, to criticize and repudiate the reactionary bourgeois academic “authorities” and the ideology of the bourgeoisie and all other exploiting classes and to transform education, literature and art and all other parts of the superstructure that do not correspond to the socialist economic base, so as to facilitate the consolidation and development of the socialist system… The mental outlook of whole society needs to be changed through “new ideas, culture, customs and habits of the proletariat”” (Decision of the Central Committee of the Chinese Communist Party…, 1966). The hong wei bing formed gangs and searched for “revisionists” who were frequently teachers, lecturers, or members of weak local public institutions. The rebels mocked the captured people by putting on the fool’s cap and painting their faces. More than 2600 literary and artistic workers have fallen victims to persecutions. Lao She, Zhao Shuli, and dozens of other well-known writers died. Over 142,000 education staff and teachers have been accused in 17 provinces and towns

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alone. Over 53,000 people working in science and technology have been oppressed (Usov, 2004). An excerpt from a letter written by a student at Xiamen University in Fujian Province: “Some of them (teachers) are unable to withstand the criticism and struggle of the meetings, and they begin to feel bad and die, to put it bluntly, in our presence. I have no sympathy for them or those who jump out of windows or plunge into hot springs and perish by boiling alive”. More than 200 hong wei bing from Beijing organised a pogrom in the Confucius temple complex in Shandong Province in November 1966, which included Confucius’ former house, temple, and ancestral cemetery. They demolished over 1000 monuments, smashed 2000 tombstones, and set fire to over 6000 ancient artefacts and 100,000 books. All bookshops in the country were closed, and all books were prohibited from being sold, with the exception of Mao Zedong’s quotations in the “Little Red Book”.4 The latter had become a tool for both ideological and physical fight. There have been numerous instances where the hard covers of this book have been used to hit people on their heads, attempting to knock out “bourgeois poison”. Only “revolutionary operas from modern life” written by Mao Zedong’s wife were performed at the theatre. Thus, a campaign of “socialist re-education” was implemented. The majority of the hong wei bing were children from poor and unfortunate families. They had grown accustomed to cruelty since childhood and eagerly listened to Mao and his supporters’ orders. However, a breakdown soon occurred in their environment, which arose on the basis of the origin of its participants. The gangs were divided into two groups: “red” (emigrants from the families of intellectuals and party workers) and “black” (children from poor and unfortunate families). They soon started fighting with each other. Mao Zedong was eventually forced to use the army against the disobedient hong wei bing. They were recognised as “incompetent” and “politically immature”. The gangs engaged in combat with the army, putting themselves in danger of annihilation. At the same time, the local government (all party committees, with the exception of the military party committees) ceased its activities. In China, a “Maoist” communist model was approved (Meliksetov, 2002, pp. 683–684), with “revolutionary committees” at its core. Under pressure from the army, Mao Zedong, Lin Biao, and Jiang Qing agreed at an extended meeting of the Central Committee of the CCP that “extremes should be avoided” during the “Cultural Revolution”. In September 1967, the restoration of party and public administration institutions began. The hong wei bing units and their organisations were liquidated. A year later, Mao Zedong decided to send the hong wei bing to remote rural areas to “learn from the peasants” in December 1968. Their leaders were sent to the province to perform agricultural work for re-education purposes (around 1 million people in autumn 1967 and 5.4 million in 1970), and

4

From 1964 to 1976, more than 5 billion copies of the “Little Red Book” quotations from Mao Zedong (427 quotations on 33 topics) were printed in more than 40 languages, putting this book second only to the Bible in terms of popularity (Foto: 10 simvolov…, 2016).

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some of them were publicly executed by firing squad. More than 10 million people were sent for “re-education” in total (Usov, 2004). The outcomes of the “Cultural Revolution” policy were even more terrifying than the consequences of the “Great Leap Forward” policy: between 1.4 and 1.6 million Chinese people were killed (Ebbighausen & Filimonov, 2016). Almost 5 million Party members have been oppressed. Mao Zedong replaced them with zealous followers of his personality cult. In addition, the “rebels” destroyed a significant portion of China’s and other nations’ cultural heritage, including thousands of ancient Chinese historical books, paintings, churches, monasteries, and temples in Tibet. Over 6000 architectural monuments were destroyed (including Confucius complex in Shandong Province, a section of the Chinese border, Tibetan temples, etc.), as well as 2357 million historical books (Erzhanova & Omarov, 2021).

10.6 The Beginning of a New Administrative Cycle Between 1973 and 1975, Mao Zedong launched a new campaign to support “Learning the theory of the proletarian dictatorship”. The aim of this campaign was to oppose and openly criticise “pragmatists” (Zhou Enlai, Chen Yun, and Deng Xiaoping), who advocated balanced and rational administration methods of national economy. At the same time, Jiang Qing (Mao Zedong’s last wife), Zhang Chunqiao, Yao Wenyuan, and Wang Hongwen formed the “Gang of Four” at the Politburo of the Central Committee, which greatly strengthened the Jiang Qing gang’s forces. Mao Zedong repealed several economic reforms (peasant personal plots of land, material stimuli, and economic incentives) introduced and implemented by these reformers, and restored “unification”. It began to cause societal upheaval and discontent (Erzhanova & Omarov, 2021). Zhou Enlai, the first Premier of the State Council of the People’s Republic of China, died in January 1976. During his commemorative ceremony in April of the same year, a mass rally took place at Beijing’s main Tiananmen Square. It condemned the activities of Jiang Qing and other members of the Cultural Revolution Group. The assembled crowd demanded that they would be removed. It caused another wave of political repressions. Many members of the party, including Deng Xiaoping, have been removed from their positions. As a result of this wave, Minister of Public Security Hua Guofeng became the Premier of the State Council of the People’s Republic of China. In China, a new political “Anti-Rightist Campaign” has been launched to “fight against the right deviation in order to review the correct conclusions of the Cultural Revolution” (Usov, 1991). Mao Zedong died in Beijing on 9 September 1976. On 7 October, one month after the internal party negotiations, Hua Guofeng was elected as the new Chairman of the Central Committee of the CCP. Jiang Qing and her supporters were arrested on the same day. In August 1977, an extraordinary 11th National Congress of Chinese Communist Party was held. According to its decisions, the “leftists” were officially expelled from the Party, Deng Xiaoping was elected as one of the Vice Chairmen of

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the Central Committee of the CCP, and the new statute of the CCP was adopted. The Congress also officially declared the end of the “Cultural Revolution” (ibid., 1991). In 1981, Deng Xiaoping allowed to hold a demonstrative trial regarding the “Gang of Four” (consisting of Cultural Revolution activists, including Mao Zedong’s wife— author’s comment), and called the “Cultural Revolution” a “major catastrophe to the party and state”. The party’s official line today is that Mao Zedong was only 30% wrong and 70% right (Ebbighausen & Filimonov, 2016). An excerpt from a decision of the Central Committee of the Chinese Communist Party made in 1981: “The Cultural Revolution did not in fact constitute a revolution or social progress in any sense, nor could it possibly have done so. History has shown that the Cultural Revolution, initiated by a leader labouring under a misapprehension and capitalised on by counter-revolutionary cliques, led to domestic turmoil and brought catastrophe to the Party, the state and the whole people” (Resolution on certain questions… 1981).

10.7 Similarities and Differences Between Administrative Cycles In principle, we can compare the administrative cycles in China to those that occurred in the Soviet Union and other socialist countries. They all share similarities, but there are also differences that reflect the historical, cultural, and economic characteristics of individual countries. The main similarities between administrative cycles are as follows: 1. The majority of administrative cycles were conducted in accordance with K. Marx’s “People’s Communes” model, in which the “masses of the people” were mobilised to fulfil the great tasks of socialism and communism; 2. The “centralisation of the people’s economy” occurs at the beginning of each administrative cycle, when the Communist “power vertical” assumes great importance and significance by making decisions and organising their execution on its own; 3. At the start of the cycle, private property is completely abolished or severely restricted, particularly in rural areas, converting farmers into “proletarians” who are gradually impoverished until they become economically inefficient; 4. The principles of economic management no longer apply. Gradually, they make way for the centralised administration of the party apparatus, which begins to manage the economy through resolutions and decrees, carrying out the “General Line” of the Party and paying little attention to local specifics;

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5. The systems of economic and material promotion of workers are abolished, “iron discipline” is introduced, the working process is gradually militarised, and workers are transformed into “fighters” and “labour army”. At the same time, administrative cycles in socialist countries vary depending on their characteristics. If we compare the administrative cycles that occurred in socialist countries, the main differences between them are as follows: 1. The “power vertical” of the Soviet Union and other European socialist countries was based on full economic administration and its very detailed central planning. Local public bodies had very limited options to deviate from the plan, which covered each chain of production and was approved by a higher-level organisation. Thus, the entire administrative initiative was developed “from the top to the bottom”. It hindered the manifestation of a local initiative because it took so long to coordinate and approve any new proposals; therefore, they eventually lost their relevance; 2. The Chinese Communist Party established the “General Line”, which defined only the most important indicators of a few key industrial and agricultural sectors that needed to be achieved in a very short period of time. However, the entire local economic administration was largely decentralised. The initiative of the “people’s masses” “from the bottom up” was permitted, but it had to be ensured by local cooperatives and public bodies of communes. Unlike the Soviet Union, these initiatives have been based on local industry and have frequently created closed production cycles in small enterprises in individual regions, thereby weakening the links between them and increasing their isolation. It has hampered the establishment of large enterprises in domestic industry, as well as the introduction of new technologies; meanwhile, small businesses have proven to be non-viable due to their low technical level and widespread use of unskilled labour power. Low productivity and poor quality of work have resulted in a significant increase in production defects and, as a result, production costs. The production process became unsustainable, and the results were short term; therefore, they could not serve as the foundation for future economic development; 3. Because Mao Zedong, the leader of the Chinese Communist Party, was a true Marxist, he implemented Marxist principles in China’s economic and political life much more consistently and deeply than all subsequent communist leaders of the Soviet Union. He remained loyal to “classics” of Marxism, i.e., K. Marx, F. Engels, V. Lenin, and J. Stalin. The latter backed oppressive tactics, liquidated the NEP, and established a communist “power vertical”. Therefore, Mao Zedong and his comrades despised his criticism, which was expressed by the Soviet Union’s leader, Nikita Khrushchev, in his historic report during the 20th Congress of the CPSU “On Overcoming the Cult of Personality and Its Consequences”, which put an end to the glorification of Joseph Stalin. He probably felt that the same thing could happen to him, so he drastically changed his attitude towards the CPSU leaders, particularly N. Khrushchev. Administrative cycles can be described as attempts by the communist government to apply Marxist theoretical principles to the economic management of the country.

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However, these principles do not allow for the expansion of private ownership of capital goods, the full autonomy of individual enterprises, or economic systems based on material incentives. The more they are implemented in practice, the more the economy shrinks, stagnates, and becomes inefficient.

Chapter 11

Back to the Future

11.1 Is Socialism a Step Forward or a Step Back? First of all, let us address the question of where socialism is heading. Is it guiding society towards progress, which is defined by the enrichment of the entire state, the development of each member’s personal well-being, and an increase in his freedom of choice? According to K. Marx’s interpretation of socialism, socialism is born as a result of the proletarian revolution, which is then followed by the establishment of proletarian dictatorship—i.e., the dictatorship of the majority over a minority. K. Marx’s entire science is focused on the well-being of the majority, which is completely understandable. However, it is critical to comprehend and evaluate methods of how to do it. According to K. Marx, when the proletariat gains power, it makes all of the country’s people “equal” and creates a state that later turns into a community and creates wellbeing of life for the majority, and later for everyone. “The Marxist doctrine was a good blueprint for converting human society into a giant concentration camp; to be sure, this was not Marx’s intention, but it was an inevitable effect of the glorious and final benevolent utopia he devised” (Kolakowski, 1978). In this theory, the proletariat plays a key role, i.e., the majority of society, but not each proletarian individually, but everyone collectively. Later, the proletariat creates well-being for all by not paying individual attention to every member of society. Well-being comes “from above” and is intended “for everyone collectively”! After all, well-being cannot be granted automatically. It does not exist on its own and cannot be taken from a specific location and distributed to all! Every individual in society must contribute to its creation. Only by bringing together all of the wellbeings of each individual can we expect to have the common well-being of society as a whole! Then well-being will be created “from the bottom”! In order for every individual to be willing to do so, he must be materially interested in this purpose and motivated to carry it out. According to Marxist theorists, in a new socialist society, each member must contribute to the social product. It will cause this product to grow; therefore, the entire © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_11

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society and each individual will become richer. Everyone’s well-being through public funds will become each individual’s well-being, regardless of how much personal effort each individual puts into it. Of course, every individual understands it, and almost everyone can agree on it. However, everyone also understands that with greater efforts, work, abilities, and possibly talent unique to each individual, there is also a desire to obtain an adequate amount of well-being proportional to these contributions. Only a small portion of this contribution is accounted for by public consumption funds. If we rely on the theory of Marxism, as the society develops, the surplus product tends to grow continuously. The share of public funds, or their relative weight in the overall structure of the total social product, increases accordingly. Therefore, the inadequacy of the distribution of a social product to the contribution made by each individual becomes increasingly significant over time. Marxist theorists explain it in a very universal way: every individual in a new society must be sufficiently aware and understand that, despite the growing inadequacy of total product distribution, he must make every effort to make the entire society richer. Then the entire society will appreciate him and he will become its highly honourable representative. Moreover, after the transition to a new phase of communism, this matter will be deemed completely irrelevant because labour will become one of the most important people’s vital habits, and the total product will be distributed “according to one’s needs”. However, not everyone is willing to agree with it! And just because they formally agree with it does not mean that they will demonstrate it through their actions. Everyone would rather “benefit more from society than contribute to it” than “contribute more than benefit”! Throughout history, socialism has already demonstrated it during its development period. To put Marxist theory into practice, all socialist states were forced to introduce a labour duty, i.e., to force people to work because some of them decided to use public consumption funds instead of working. Thus, violence has been implemented in these countries because labour has not become a habit or “a first vital need” throughout the time.

11.2 The Serfdom’s Shadow What should socialist production be focused on? The theoretical aim of the socialist production is focused on a human being and says that “everything is for a human being, everything is for his well-being!” But how is it implemented in reality? Socialism and communism are both defined as the rule of the majority over a minority. Therefore, each individual here more resembles a statistical unit, the sum of which forms “masses” of the working people. Both the socialist product and the service are mainly focused on a mass consumer rather than an individual customer. Therefore, the number of products and services that would be sufficient for the

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“masses” of working people to consume is prioritised here. The needs of each individual are related to his individual characteristics; thus, they differ significantly from those of the entire working class. Therefore, the socialist state encourages every individual to consider the needs of the entire society or “the matter of the entire proletariat” before considering himself. Massive needs lose their individuality and concentrate on values that are important to all members of society, such as “the power of homeland”, “homeland’s safety”, “the international authority of homeland”, etc. It is natural because the “homeland” is understood here as a massive “syndicate”, with humans serving as “cogwheels” making up their mass in the harmonious mechanism of this syndicate. It requires that all people or members of society would always be in their proper place, would be loyal and harmoniously integrated into society, would not flee anywhere, and would not express any personal dissatisfaction. However, people can and must express their dissatisfaction when it comes to the interests of the entire society. Therefore, in the long run, serfdom relations between the state and its citizens take effect in the socialist state. The state becomes similar to a huge feudal, represented by the head of the party and all the party and public “elite” or “nomenklatura”; meanwhile, the remaining members of society gradually become “serfs” of the state, who are not allowed to leave this state and are forced to work only for this state selflessly and only “for certificates”. At the same time, they can enjoy the favours granted to them only by public “nomenklatura” rather than someone else from abroad. The public propaganda machine strictly commands these “serfs” to love their state because they must know who feeds them; to rejoice over the joys of the entire state (especially during public holidays), and to despise all enemies of the state (not their own) together! This is probably why all socialist states are sometimes referred to as “socialist labour camps”. All of these countries have created very favourable conditions for the implementation of socialist serfdom. These conditions could be described as follows: 1. The state issues passports to its citizens, which must include their place of residence. If it is not indicated, the citizen becomes “unregistered” and loses all support of the state. Thus, this “serf” is “bound” to his place of residence and has no right to change it without the official permission of public institutions. However, he has almost no chance of obtaining a permit allowing him to live in the capital, unless the state officially “transfers” him there or he marries a “registered” resident of the capital; 2. The formation of the “iron curtain” allows the country’s entire population, particularly the working people, to be kept in the same place and prevents them from freely moving abroad. As it was mentioned above, a socialist state simply has no other option. Even if it allows its citizens to leave, they do not have “real” money, so what will they do abroad? Moreover, many of them would remain abroad, so in political terms it would mean betrayal of the state and humiliation of the entire socialist system! 3. The passports of the socialist state cannot be used to travel abroad. For this purpose, a citizen must fill out numerous forms, demonstrate his loyalty to the

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socialist state, and request permission to travel abroad. With the state’s permission, he must obtain a special foreign passport that allows him to travel to a specific country named in the passport; As a true feudal, the socialist state eliminates unemployment in its territories, i.e., finds work for everyone in its economy. Moreover, it has the right to force all its “serfs” to work for it! During the day, the “ciwuns” of the state’s controlling labour services visit the city’s hairdressing salons and various entertainment institutions, monitor everyone who does not work, investigate their reasons, and after determining that individuals do not work deliberately, they impose various penalties on them as idlers; After graduating from higher or vocational schools, the young generation of a socialist state is forcibly assigned to work in various public locations at the discretion of the socialist state, i.e., they go to the workplace that the state (the feudal) indicates “based on their appointment”; Workers in socialist agricultural enterprises and cooperative farms, like true “serfs”, must work off the farm’s established “rates”, for which they are paid very little. No self-respecting worker would agree to work for such a low wage in a capitalist society, but the socialist economy forces its employees to do so. Otherwise, the farm may later refuse to provide firewood for the winter and may withdraw some other services from them. It is nothing more than the “forced labour for the benefit of the feudal”! The work collectives provide citizens (the true “serfs”) with small garden plots free of charge, where they can grow vegetables and fruits for personal consumption. They are permitted to construct a homestead of strictly limited size (usually not exceeding 25 square metres). However, if such a “slow-witted” citizen builds a larger house, he may lose his apartment in the city because a socialist state citizen cannot live “in two places”! After all, he got this apartment from the state for free! Socialist propaganda is constantly shaping the positive image of the socialist feudal, emphasising his “favours”, such as free education, free health care, as well as other free goods and services, as if all of this occurred due to him. At the same time, it highlights the flaws of capitalism, such as unemployment, overproduction of goods, crises, racism, political instability, etc.; If an individual attempts to protest against his feudal—the state, demanding greater freedoms, he is subjected to corporal punishments as a true “serf”. He could be imprisoned and tortured, referred to a private psychiatric hospital, or punished physically in other ways.

A new term of a “true patriot”, is gradually applied to such public citizens, which is unique to serfs and demonstrates their unending sense of pride: “Despite the fact that I live in a slummy farmhouse with a straw thatch, my master’s castle has three floors and is thus the largest in our governorate!” In the socialist state, it would sound as follows: “Despite the fact that we live in poverty, our country is magnificent!” Regardless of how strange it may sound, it is the most significant advantage of the socialist state and its economy over the capitalist economy! The socialist state is

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constantly forming its public “soldiers” from its members of society, i.e., its “serfs”, who have no private property and only a small number of personal belongings because they can be easily mobilised, simply controlled, and thus directed to perform various important public tasks unanimously. These advantages are especially noticeable during times of war. During the war, the interests of individual members of society are unconditionally subordinated to the interests of the entire state in all countries; in the meantime, these individuals and their needs become completely irrelevant, with only the number of individuals remaining important. However, socialist patriots in war are becoming particularly effective! They demonstrate true heroism and sacrifice in wartime because they are already accustomed to such an attitude during peacetime! However, during peacetime, the socialist state can achieve truly impressive results in the construction of the entire country! These mobilised “soldiers”, along with legal “slaves”, i.e., prisoners made up of “enemies of the state”, are capable of performing incredible tasks such as digging channels, building dams, laying roads and railways through wetlands and deserts, and so on. It would be possible to launch rockets into space if their intellectual potential was used by confining them all somewhere far away in certain engineering offices! There is only one problem! All of these “production victories” have no effect on the living and domestic conditions of individual members of society. Even if some public programmes that are important to people are implemented, financed by the “planned” public funds and new public soldiers are mobilised to carry them out, these programmes focus on the “mass” construction of typical apartments, the “mass” production of typical cars, the “mass” production of consumer goods rather than individual members of society. However, it should be noted that all of this is merely declarations because none of these programmes guarantee that apartments, cars, or consumer goods will be provided to all members of society.

11.2.1 Why Do People Agree to Become Serfs? One of the most important doctrines of the socialist state deserves special attention— the doctrine of “love to one’s homeland”. In their “Manifesto of the Communist Party”, K. Marx and F. Engels clearly stated that “the proletarians do not have a homeland”. There is no homeland because there is no state, which seems logical. Later, all socialist countries agreed amicably that each of their citizens’ duty is “to love and defend the Soviet country”. Why is it necessary to love and defend it? Does the homeland love and defend each and every one of its citizens? That is why socialist propaganda frequently emphasises that everyone must first ask himself what good he has done for his homeland before expecting anything in return. If this state valued its citizens as individual personalities, each individual could expect the state to pay special attention to him based on his contributions. His salary and social conditions would be direct validation of this. However, things are different in practice. It appears that a state can take care of its every citizen “in

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person” only as much as it takes care of all the other citizens, i.e., without paying special attention to anyone. Therefore, the socialist homeland pleases its citizens “massively”! The citizens of the socialist state love their homeland “massively” as well! Ask any of them, and they will all confirm that they absolutely love it! What would happen if anyone said that he did not love it! At best, everyone would probably condemn him. But what would happen in the worst-case scenario? Everyone would unanimously declare that they love their socialist homeland very much and are willing to defend it without question. Do they really say and do it sincerely and voluntarily? Most likely not. What is the essence of voluntariness? Let us look at the terms of voluntariness and coercion: Here is a simple hypothetical example: You are surrounded by a much more powerful enemy in war who offers you the option of surrendering or being destroyed. After much thought, you decide to forgo further combat and surrender to the enemy. Was your action voluntary or not? If the factor of unnecessary coincidence or circumstances is ignored in this case, this action should be considered as voluntary. You had complete freedom of choice: to fight or to surrender. You were not forced to select a specific option and you were given the opportunity to make a decision on your own. But then you started thinking, did some social calculations by assessing the potential consequences of your choice, and decided to surrender. Similarly, actions taken by the community are free and voluntary if they are examined separately and not associated with any context. However, when we begin to consider community actions taken by many individuals as massive phenomena, a different relationship between voluntariness and coercion emerges based on definitions of mass cases. In terms of communist society, the standard massive reaction of people to certain actions taken by one or more individuals is being developed, and as a result, these individuals “voluntarily take into account” this potential reaction before deciding whether or not to take any actions. It does not mean that they occupy their minds for an extended period of time by counting and analysing possible consequences. The latter are more or less obvious; therefore, people almost instinctively follow the community’s rules. In this regard, voluntariness (freedom of choice) is practically reduced to nil; meanwhile, community rules acquire coercive force. It is a good example of how controversial decisions on the same subject can be made. However, there is no logical contradiction here. Here, a single decision can be correct only when an individual member of society takes a separate action at his own discretion. The opposite decision can be made when attention is diverted from a separate action of an individual and a large mass of people unanimously takes standard actions under normal conditions. In reality, both the first and the second decisions can be made at the same time, but the first decision is now meaningless, giving way to other “social” decisions and actions.

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11.2.2 “Vassals” of the State Prioritising oneself over the grey mass of serfs is a defining feature of all feudal systems. In general, the feudal state is not an individual. Therefore, feudals who represent it want to live differently than their enslaved peasants. They must live “exclusively” better, eat better, dress better, etc. Everyone must recognise that they are part of the “elite”, i.e., the circle of “exclusive” individuals. The party and state “nomenklatura” represent the socialist state or the feudal. They also want to fulfil their egoistic desires, stand out from the “grey crowd”, and live a better life. Money aids in this process in other social formations. However, this is not the case in socialism! The planned economy only allows for the production of mass goods, which contradicts the egoistic plans of the “nomenklatura”. According to George Orwell, they want to be “more equal than others”! Therefore, the socialist state establishes special shops, special supply enterprises—“buffets”—and special motor transport enterprises to service the “nomenklatura”. The “nomenklatura” lives in special apartments or summer cottages for which it pays nothing or only a symbolic price, eats at special canteens or restaurants, and dresses in imported clothes purchased in special stores stocked by the monopolistic foreign trade organisation. They can purchase all of this only at a public price that has nothing to do with the market value of these goods. The primary concern of such a consumer is not how to make money, but rather how to obtain “scarce” consumables and services. Members of the nomenklatura have the greatest privileges in this regard. To gain access to goods and services in such a distribution system, “ordinary” people had to either belong to the category of people to whom such access would be formally granted, or know someone who would have legal access. However, we must consider some of the positive features of this system as well. Because the official representatives of the party “nomenklatura” want to stand out from the general public and constantly demand special supplies of various clothing, food products, and industrial goods, they force the monopolistic foreign trade organisation to import these products from abroad. Then all special stores are stocked with imported goods, and the “elite” has clothes to dress up in. Its representatives become very visible in society because they dress in luxurious Western clothes and wear other accessories, encouraging “ordinary” people to follow their example. Because socialist enterprises do not compete with one another, no-one is concerned about public market research or global fashion trends. However, the appearance of representatives of the “nomenklatura”, their outfits, and their household greatly impress “ordinary” people; therefore, even the socialist industry gradually begins to take it into account. “Marxism was a philosophical or semi-philosophical doctrine and a political ideology which was used by the communist state as the main source of legitimacy and the obligatory faith. This ideology was indispensable, regardless of whether people believed in it. In the last period of communist rule it hardly existed as a living faith; the distance between it and reality was so great, and hopes for the joyful future

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of the communist paradise were fading so rapidly, that both the ruling class (i.e., the party apparatus) and the ruled were aware of its emptiness. But it remained officially binding, precisely because it was the main instrument of the legitimacy of the system of power. If the rulers really wanted to communicate with their subjects, they did not use the grotesque doctrine of “Marxism-Leninism”; they appealed, rather, to nationalist sentiments or, in the case of the Soviet Union, to imperial glory. Eventually the ideology fell apart, together with the empire; its collapse was one of the reasons that the communist system of power died out in Europe” (Kolakowsky, 1978).

11.3 Where Should We Go Next? Not everyone will probably agree that the only way for a socialist state to progress is to simply restore capitalism! At the same time, the question is how far the socialist economy can be liberalised before it becomes capitalist, and whether it can be liberalised at all. Where is the line between socialism and capitalism? As it was mentioned above, even F. Engels stated that “When we pass from jointstock companies to trusts which assume control over, and monopolise, whole industries, it is not only private production that ceases, but also planlessness” (Essential Texts of Marxism-Leninism, 2017, p. 153). V. Lenin strongly disagreed with a similar description, referring to it as “bourgeois reformism”, which cannot be called “public socialism”, despite being somewhat similar to it. There is so much planning, “however much the capitalist magnates calculate in advance the volume of production on a national and even on an international scale, and however much they systematically regulate it, we still remain under capitalism—at its new stage, it is true, but still capitalism, without a doubt” (Lenin, 1917). K. Marx also stuck to the opinion that capitalist or socialist society is determined by the relationship with the means of production and their ownership. He clearly indicated it in the “Manifesto of the Communist Part”. The small private labour property of individual peasants, domestic manufacturers, and craftsmen is also recognised at the start of the socialist community’s development. However, it should gradually and voluntarily become socialist property through cooperation. Thus, private ownership must be abolished in a socialist society because it is based on wage labour exploitation. When labour becomes a commodity, commodity production occurs. As it was previously mentioned, K. Marx said that “Within the co-operative society based on common ownership of the means of production, the producers do not exchange their products; just as little does the labour employed on the products appear here as the value of these products, as a material quality possessed by them, since now, in contrast to capitalist society, individual labour no longer exists in an indirect fashion but directly as a component part of total labour. The phrase “proceeds of labour”, objectionable also today on account of its ambiguity, thus loses all meaning” (Marx, 1970).

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V. Lenin made this point very clear: “There is nothing more erroneous than the opinion that the nationalisation of the land has anything in common with socialism, or even with equalised land tenure. Socialism, as we know, means the abolition of commodity economy. Nationalisation, on the other hand, means converting the land into the property of the state, and such a conversion does not in the least affect private farming on the land. The system of farming on the land is not altered by whether the land is the property or “possession” of the whole country, of the whole nation, just as the (capitalist) system of farming by the well-to-do muzhik is not altered by whether he buys land “in perpetuity”, rents land from the landlord or the state, or “gathers up” the allotment plots of impoverished, insolvent peasants. So long as exchange remains, it is ridiculous to talk of socialism. The exchange of agricultural produce and means of production does not depend upon the forms of landowning at all” (Lenin, 1973, p. 135). As we can see, socialism cannot be achieved solely through the nationalisation of land, factories, means of production and other tangible assets owned by capitalists. After all, in every capitalist country, there are industrial enterprises, large trusts, and syndicates that are not required to be joint-stock companies owned by private shareholders, i.e., a limited number of co-owners. There are public enterprises, such as postal services and railways, in all of these countries, i.e., national corporations and concerns. However, we cannot label these countries as socialists solely because of this! According to the classics of Marxism, socialism provides not only for expropriation or nationalisation of property, but also for the abolition of the commodity production, in which all products are produced for exchange. It is very simple to explain it—if you want to buy any product, you must offer any other product or money in exchange, in which all the values of the goods are expressed as a universal equivalent of the product. But what kind of product could an ordinary worker offer if he has no means of production to produce anything? He has only one commodity to offer—his labour power! The labour power is no longer a commodity in socialism, and even if it becomes a commodity for some reason, it is no longer a real socialism! According to classics, it is a pitiful illusion of socialism embellished with details of “revisionism”. It is necessary to refer to the phenomena by their correct names! According to Marxist classics, the liquidation of commodity production in socialism is a matter of principle. Let us examine why. The theory of Marxism indicates that socialism is the first phase of the communist mode of production, after which society gradually (rather than through revolution) progresses to the higher phase of communism. During this phase, public divisions and class differences disappear completely; meanwhile, a new principle of distribution according to one’s needs emerges. It means that all members of society can equally use the entire product of society as their own, based on their needs. In fact, it does not differ from the principle of socialist distribution—to each according to his contribution! The difference is that the socialist society has not yet been able to create a global abundance of products that should be sufficient for everyone according to their needs. Therefore, in socialism, everyone still receives a share of the social

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product according to their contributions. The most important point to remember is that in both cases, any member of society is a co-owner of the total social product. The only difference is that in one case he only becomes a partial co-owner, whereas in the other case he fully meets his needs at the expense of this product. In other words, in socialism, the total social product (a pie) is not yet large enough to be sufficient for everyone who wants it, while in communism, the product is large enough to fully satisfy the needs of the entire society and all of its members. Now consider the impact of exchanges in this context, i.e., commodity-monetary relations. If any member of society produces a product for exchange, he forfeits all rights to that product once it has been exchanged. He is no longer a co-owner of this social product. Moreover, the exchanged product is no longer a part of the total social product and belongs solely to the person who acquired it. The question then arises, “Is it really that bad?” After all, in socialist or communist society, anyone can take a certain piece of the social product (pie) and consume it personally! Only in a socialist society will an individual receive a portion of the product based on his labour efforts (contributions), whereas in a communist society he will receive it based on his needs. What is the difference? The difference is enormous! A particular person who acquires certain goods in exchange for other goods does not always consider his personal needs, i.e., he does not always use them for personal purposes. He acquires the maximum amount of goods that is permitted to purchase. This individual may consume some of these products himself, but the remainder of the goods will be kept as far away from the public “pie” as possible! He can use some goods, such as money (universal equivalent), for new exchanges or any other purpose at his own discretion. So, what is left of the total social product? It is simply distributed to all members of society, without regard for the socially necessary labour time used, as in socialism, or the needs of all members of society, as in communism. There is nothing left out of it, so there are also no perspectives of communism! When it comes to possible “market relations” in socialism or “market socialism”, we leave only the sign of socialism but completely lose its Marxist content in every case. When discussing the so-called theory of “equilibrium”, J. Stalin stated very accurately that: “This theory (of “equilibrium” – author’s comment) assumes that we have, in the first place, a socialist sector—which is one compartment, as it were—and that in addition we have a non-socialist or, if you like, capitalist sector—which is another compartment. These two “compartments” are on different rails and glide peacefully forward, without touching each other. Geometry teaches that parallel lines do not meet. But the authors of this remarkable theory believe that these parallel lines will meet eventually, and that when they do, we shall have socialism. This theory overlooks the fact that behind these so-called “compartments” there are classes, and that the movement of these compartments takes place by way of a fierce class struggle, a life-and-death struggle, a struggle on the principle of “who will beat whom?” And so, the question stands as follows: either one way or the other, either back—to capitalism, or forward—to socialism. There is not, and cannot be, any third

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way. The theory of “equilibrium” is an attempt to indicate a third way. And precisely because it is based on a third (non-existent) way, it is utopian and anti-Marxist” (Stalin, 1929). However, in reality, the chosen socialist path led the country to serfdom because it turned its citizens into prisoners or “serfs”. The question is whether it was a step forward. Most likely not. It was actually a step back! So, what should we do next? We need to move forward into capitalism because there is simply no “third way”! Why did the communism project fail? Was it the fault of its authors, or was it the fault of those who carried out the project?

11.4 Egoism: The Engine of Society’s Development According to Marxist economic theory, a successfully developing socialist and later communist society can be compared to a certain mechanism, such as an expensive Swiss watch, which all parts are well aligned with each other, each performs the task entrusted to it, and everything happens according to a predetermined plan, so, if this watch was slightly adjusted, cleaned, and greased, it should function endlessly! In fact, everything in human society is different! People are not like various separate parts of a large mechanism, which may initially adapt (or be adapted) more difficult to other parts, but later begin to work harmoniously and without problems because they are constantly lubricated and cleaned. Egoism is part of human nature! Many people will naturally wonder whether it is good or bad. In general, egoism as a concept creates negative associations for some people because it is associated with the exaltation of one individual or personality over other individuals or personalities. The simplest social individual is a separate individual. He has his own body and internal organs that control it, allowing it to predict the direct consequences of certain actions on it as well as the actions of others associated with it. The fundamental principle of humanity requires a person not to harm himself, to prevent others from acting against him, to avoid deteriorating living conditions, and to prioritise better living conditions. This principle occurred historically as a result of human evolution. Therefore, a person is included in community life specifically as a product of past evolution, i.e., on the basis of this fundamental principle. He cannot revoke this principle on his own; he can only overcome it by completely obeying it. This principle applies to the social environment in the following way: an individual seeks to maintain and strengthen (improve) his social situation in any case, as well as to prevent it from deteriorating. But how is he going to do it? In most cases, all of the places to be occupied have already been assigned, and there are no vacant places at all, unless they are the worst ones. In addition, there are a lot of other

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people who want to be in the best places. Therefore, it is quite obvious that under such conditions and circumstances, our individual member can implement his fundamental principle only in one way—at the expense of others! He is forced to prevent others from strengthening their social positions, thereby defending his own personal positions in society. Under these conditions, the other person becomes an enemy of each individual member of society because the implementation of their fundamental principle may depend on him. Moreover, social life does not weaken this principle in any way; rather, it reinforces it numerous times by creating innumerable temptations and new life desires for individual members of society. The question is whether it is possible to deviate from this fundamental principle? In fact, there are several possibilities: The first is deviations from the social environment, such as loneliness, or satisfaction with basic material goods or their minimum amount. In this case, the situation is analogous to that created by the laws of fall: you cannot rise to the height from which you could fall. The second is extensive, i.e., to broaden the scope of social activities, such as the development of new territories and the establishment of new institutions. The third is to create a different type of relationship between people (for example, marital relations, friendship, and love), as well as other actions that paralyse or overshadow the actions of community forces. The fourth is various forms of mediation in interpersonal relationships. That person will assist others in strengthening their positions because his assistance (in his opinion) will strengthen his own. The fifth is to unite people and thus strengthen their positions. In addition, not everything a person does in his favour must necessarily be harmful to his surroundings. It can actually be beneficial to many people. Finally, there are people in society who pursue their selfish goals by working for the benefit of others—they claim that doing so gives their lives meaning. However, all of this does not mean that the fundamental principle is no longer applicable. Sometimes, it just takes different forms. Imagine that you are a regular factory worker who goes to work every day to operate machinery and service the production process. You do not hold a highranking position and are paid an average wage that allows you to eat normally, dress up, pay for housing, and be a significant support to your family. But you have a dream—to purchase a brand-new car! Of course, you do not have enough money to buy a new car right now, and after assessing your income, you can only afford to buy a middle-class passenger car, such as a “VW Golf”, the latest model of which you can expect to buy only after saving enough money and only next year! After a year, you have saved enough money to go to the nearby Volkswagen dealership, where you select the model in the desired colour and, after paying, you are driving home cheerfully! You have just fulfilled your old dream, so when you come home and wipe the dust off your shiny car, you are overjoyed! But how long will you be happy? A week? Perhaps a month? It is so difficult to predict! One evening, while you are admiring your car in the garage, your neighbour

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unexpectedly returns home with his new luxurious Porsche Cayenne SUV! Suddenly, you become dissatisfied! What had just happened? Is there a problem with your car? No, it is fine, but you have the impression that something is wrong! You are no longer happy, so there is clearly something wrong with you. The innate human egoism forces a person to seek exclusivity and something new or more perfect in all aspects of his life, rather than accepting his current situation. He no longer wishes to be merely a member of society or a simple “cogwheel in a mechanism”. He wishes to be recognised as a unique individual by others! Regardless of whether he is fully aware that he is not so “exceptional” in general, he still aspires to be so! Here is another example. A young girl is invited to her friends’ anniversary party, which will be held in the most luxurious restaurant of the city. She rushes out to find a new dress because she needs to look good at this party! After long searches and visits to many shops, she finally chooses a very beautiful dress that suits her well. Shop consultants lavished her with compliments when they recommended this model, and they were absolutely correct! She liked how this dress looked on her, so she was happy to wear it to the party, where her friends were delighted to meet her. Everyone complimented her on how beautiful she was. She was overjoyed until she saw another girl wearing a dress that was identical to hers! What a disaster! Suddenly, she became the most unhappiest girl in the world, wanting to curl up and die because of her appearance! Was there a problem with a dress? No, but there was something wrong with a girl! All members of society want to look extraordinary. However, there are no identical things on this planet. If you take a handful of sand from the beach and carefully examine it under a microscope, you will not find two completely identical sand particles. Can you find two identical trees in the forest? Every flower is an egoist in itself—after all, it is constantly fighting for a better place in the sun, wanting more sunlight and water. However, the same egoistical flower later blooms and shares its beauty with people! It does not always matter what you do or whether it is good or bad. You just have to stand out from the crowd. You must be exceptional. You want to be a “personality” rather than another “cogwheel”! We are born with a certain amount of potential: we have health data, intellectual properties, preferences, abilities, and talents. Every individual must make a critical decision about how he will use them in life—whether he will nurture and improve them or, on the contrary, ignore and destroy them. However, one’s uniqueness is not solely based on physical abilities or body type. Can you think of another creature on Earth that has produced so many amazing works of art, architectural monuments, or technological inventions? Is there any other living creature in the world who can dream and fulfil those dreams, love or enjoy life besides humans? When we discuss an individual’s egoism, we must recognise that it has both a positive and a negative side of this term. We often think of the egoist as an arrogant and selfish individual who is only concerned with himself and ignores those around him. However, it is a negative side of an egoist, who rarely thinks about his own

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future because his actions, in the long run, provoke a corresponding attitude of other people towards him—ignorance and contempt. However, egoism also has a positive side when it comes to an individual’s desire for individuality, i.e., dissatisfaction with one’s current situation and a desire for a more comfortable and interesting life. When creating such a life reality, an individual usually considers himself and his better subsistence first. He is very concerned about the state of his future environment. If the environment is unstable or dangerous, the individual will never feel at ease or secure because he will be constantly concerned about his future. For that reason, he must take care to make the environment more hospitable to the people around him, as this will determine his personal well-being. The question is where should he begin? Should he think about himself first, how to benefit himself, and only then think about the environment and how to improve it? Or is it necessary to first create a suitable environment that will then create favourable conditions for each individual’s well-being? In the context of capitalism, every individual actually prioritises himself and his family’s well-being. However, when he creates it, he also ensures that the entire environment in which he lives does not become hostile to him. After all, it must ensure the long-term stability and well-being of his quality of life! That is why we cannot refer to him as an egoist. Because he can be defined as an individualist, a person who aspires to be special in his environment while also fostering it for his own benefit. How is the individualism of each individual person understood in the context of socialism? Can it be acceptable and supported? Where should we begin to create human well-being in socialism? We will address these and other questions in the sections that follow.

Chapter 12

Transformation of Socialist Countries. Market Socialism in China

According to Lenin’s revolutionary situation theory: “To the Marxist it is indisputable that a revolution is impossible without a revolutionary situation; furthermore, it is not every revolutionary situation that leads to revolution” (Lenin, 1974b). As a result, V. Lenin identified three major symptoms of such situation: (1) when it is impossible for the ruling classes to maintain their rule without any change; (2) when the suffering and want of the oppressed classes have grown more acute than usual; (3) when, as a consequence of the above causes, there is a considerable increase in the activity of the masses, who […] are drawn […] into independent historical action (ibid., 212). Let us examine how these situations evolved in individual socialist countries and how closely they corresponded to the theory’s statements. The only difference now is that capitalism has not led the countries to a revolutionary situation. On the contrary, socialism has forced the government to change its political course and implement revolutionary reforms, resulting in the socialist economies becoming capitalist. We can debate, whether a peaceful revolutionary transition from socialism to capitalism is possible, for a long time. After all, it may appear to others that there was no “revolution” because no blood was shed and the economic reforms did not face fierce opposition, which should be inherent in a true revolution. People simply took to the streets to protest, demonstrating that they were not serfs. They did not want to be “cogwheels” of their socialist state, or tools used to satisfy the whims of the party nomenklatura; thus, they demanded that their individuality be respected. As a result, these revolutions are also known as “velvet revolutions”, because the Communist Party’s government passes relatively peacefully into the hands of revolutionaries without much bloodshed. However, experience has shown that, in some cases, the ruling Communist Party is not going to relinquish power and instead initiates reforms that turn the socialist country into capitalist one. It is compelled to do so because only capitalism can ensure every person’s individuality, the disappearance of deficit of goods, and further economic development. The leaders of the Communist Party believe that once these reforms are implemented, people will likely stop protesting because the economic

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_12

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basis for the protest will vanish. In such a case, this party will remain in power and will be able to officially declare that “socialism is being built” in the country! Protests may end, but there will be no socialism. Economic reforms, which result in the transformation of socialist ownership of the total social product or of the “public pie” by eliminating the socialist state’s “certificates” and replacing them with real money, cannot be called socialist. This money is used in all domestic financial transactions, including those involving labour. It now becomes convertible in relation to other capitalist currencies. In reality, the Communist Party establishes commoditymonetary relations throughout the country’s economy. They become universal, much like labour power, which is reclassified as a commodity. Therefore, statements made by leaders of the ruling Communist Party that their country is socialist only because the majority of its enterprises are owned by the state and power is held by the Communist Party do not fully withstand criticism because these statements are in no way associated with Marxist theory! It is not even “revisionism”, but the most genuine restoration of capitalism. The existing mode of production determines whether a country is socialist or capitalist, not the number of state-owned enterprises or their share in the list of all national enterprises. When a country recognises private ownership of capital goods and wage labour, implying labour exploitation, it is capitalist rather than socialist. It means that the economy is no longer planned because the government does not set production plans for private equity companies. In this case, the economy as a whole may begin to develop spontaneously, with production cycles and economic crises inherent to it. Even if the state owns the enterprise, its workers do not become co-owners of the enterprise’s final product. In this case, the state plays the role of a large capitalist who misappropriates a product made by a worker during surplus labour time. The state does not even need to own all of the enterprise’s shares in order to control it; it only needs to own a majority of them. The remaining shares will be owned by private investors. Is it socialism then? No, it is just plain public capitalism! Another issue is the political leadership of the Communist Party, which may even remain enshrined in the national constitution. It does not imply that the country is socialist. It only demonstrates that this particular country is not democratic and that one political party has usurped its political power. However, it also demonstrates that the previous planned economy was inefficient and either capitulated or resulted in a revolutionary situation in the country. Therefore, this political party was forced to implement such economic reforms that led the country to capitalism. Was it good or bad? That is a different question!

12.1 The Chinese Economic Reform China was in a deep economic, social, and political crisis until the end of 1976. The crisis was caused by Mao Zedong’s great course of the state, which manifested itself in the economic policy of the “Great Leap Forward” and the ideological policy of

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“Cultural Revolution”. According to the Chinese press at the time, the years 1966– 1976 were a “lost decade” for China, which has taken the country’s economy back to the brink of collapse. The Chinese economy has been nearly completely destroyed, with hundreds of thousands of people below the poverty line. The class conflict, declared during the “Cultural Revolution”, exacerbated the accumulated social, political, and economic contradictions. Mao Zedong’s social policy led to social polarisation, which directly contradicted the strengthening of political and moral unity advocated in socialist society. The “big bang” in Eastern Europe and the former Soviet Union resulted in an unexpected sharp and prolonged decline in GNP with extraordinarily high inflation rates. China’s transition started at the end of 1978. Since then, China’s GNP has grown continuously at a phenomenal rate while inflation has remained under control ever since the transition started (Yifu Lin & Makarov, 1998). Following the death of Mao Zedong on 9 September 1976, a new government led by Hua Guofeng, who was Chairman of the Central Committee of the CCP, Premier of the State Council of the People’s Republic of China, and supporter of the “Cultural Revolution”, announced the continuation of Mao Zedong’s course. However, the process of reorganising the leadership was accompanied by a struggle between various groups for dominance within the party and the entire state apparatus. This struggle was won by a group of Maoists and pragmatists led by Deng Xiaoping. It was rehabilitated one year after his second suspension in June 1977, at the 3rd Plenary Session of the 10th Central Committee of the CCP. Deng Xiaoping was reinstated in all of his previous positions, and he became the official leader of the party and the country at the end of 1970. Deng Xiaoping’s primary goal was to modernise the national economy. It was reflected in his “Four Modernisations” plan, which included agriculture, industry, science and technology, and military. This plan was included in the Communist Party’s programme in August 1977 and in the national Constitution in March 1978. The “Four Modernisations” policy reflected the significant content of the reform. The essence of ideological and political line of the reform was “Four Cardinal Principles”: keeping to the socialist road, upholding the people’s democratic dictatorship, leadership by the Communist Party, and Marxism-Leninism and Mao Zedong Thought (Deng Xiaoping, 1997). The 3rd Plenary Session of the 11th Central Committee of the Chinese Communist Party took place on 18–22 December 1978. During it, Deng Xiaoping and his comrades made a historic decision to abandon the theory of “continuity of revolution under the conditions of the proletarian dictatorship”, as well as the main political provision of “class conflict”, and to shift the entire centre of gravity to the party’s work by implementing the country’s modernisation. On the basis of it, the People’s Republic of China announced and approved a new “Reform and Opening Up” policy (3-y plenum TsK KPK 11-go sozyva, 2018). The aim of these reforms was to align existing relations of production with the objectives of the development of productive forces, i.e., to change them so that they did not stop the process of development of productive forces. The “Opening Up”

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policy has been designed to involve China in the global process of economic globalisation and other aspects of community life by actively attracting foreign capital and utilising scientific and technological achievements, as well as management experience to improve China’s global competitiveness (Abilekova, 2012). According to Deng Xiaoping, “The present world is open. One important reason for China’s backwardness after the industrial revolution in Western countries was its closed-door policy. After the founding of the People’s Republic, we were blockaded by others, so the country remained virtually closed, which created difficulties for us. The experience of the past thirty or so years has demonstrated that a closed-door policy would hinder construction and inhibit development” (Deng Xiaoping, 1984). “Chief Architect” Deng Xiaoping described the reform process as a “second revolution” after 1949, carried out “on the basis of revolutionary renewal of socialism, in the manner of self-improvement”, i.e., without destroying the old superstructure and not directed against any social class. He saw the new reform as a sort of continuation of the previous revolution under new conditions. If the “first revolution” liberates productive forces as the country transitions to socialism, the “second revolution” or new reform does so within the socialist system. Deng Xiaoping rejected the dogmatic path of socialist construction of the USSR from the very start of development of the country’s modernisation strategy, instead searching for his “own” model of “socialism with Chinese characteristics”. These “characteristics” were manifested in the country’s historically well-established and objectively conditioned socio-economic backwardness. Given the length of time required to overcome this backwardness, it was concluded that China is in the early stage of socialism, which will last until the middle of the twenty-first century. It is commonly assumed that the increase in the share of non-public forms of property and the development of the associated social strata with their specific interests, the improvement of people’s living standards and quality of life, as well as the raising of the nation’s cultural level, objectively require the acceleration of political reforms. China was expected to do so. However, the country aimed to transform its political system in its own unique way, taking into account its ambitious development goals, cultural and historical traditions, and large population. The political system reform was based on the doctrine of “state governance on the basis of law”, which had to permeate public consciousness and administrative practice. This doctrine was based on the types of Western law and the rule of law, the ideology of “Legalism” (or Fˇaji¯a) that existed in ancient China,1 and the experience of establishing socialist rule of law in the USSR. Unlike the traditional understanding of the “rule of law”, which was based on the reduction of the role of the state and the development of personal and public autonomy on a legal basis, the Legalists saw the role of the state as an increase in 1

The primary principles of Legalism were formed by Guan Zhong (720–645 BC), a Chinese thinker, founder of the Spring and Autumn period, acknowledged as the founder of Legalism—philosophical and political teaching that contradicted Taoism and Confucianism—as well as Sun Tzu (544-496 BC), Xunzi (l. c. 310-c.235 BCE), and Han Feizi (d. 233 BCE). All of them were famous soldiers and political figures. Legalists argued that it was necessary to educate physically resilient people and “to develop the theory of a strong, centralised state” (Andrijauskas, 2004, p. 51).

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state control over society and the individual on a legal basis. Their main idea was to achieve equality for all members of society in the face of God and the law. “The ruler and officials, high and low, noble and vile—everyone must follow the law. This is called the great art of management” (Peremolov, 2006). As a result, all the ranks and titles of the state had to be earned rather than granted on the basis of origin. According to ideas of Legalism, any member of society had the right to advance to any rank, including Prime Minister (Sonin, 2016). Compliance with the law should have been guaranteed by the authority of the government and its created universal and fair system, which did not recognise any of exceptions, punishments, and incentives. All of this can be ensured by its well-designed and optimally functioning apparatus of public officials, who will be responsible for ensuring that every member of society can do the best job he is capable of doing. In this case, Chinese reforms were based primarily on ethics of Legalism, which aimed to rationalise public bureaucratic labour and eliminate corruption among officials while paying less attention to the rights and freedoms of each member of society. China lacked the necessary historical and cultural foundations, as well as traditions to do so. Therefore, the state was deemed to be a governable entity, as in the Western example, but the law did not acquire its ruling power against it and thus had only a minor impact. However, the law in itself has become an effective tool in the hands of public sovereignty represented by the Chinese Communist Party.

12.2 Two Leaders—Two Approaches For a long time in China, the market economy was regarded as a feature of capitalism, whereas the planned economy was regarded as a key feature of socialism. However, the experience has shown that the plan and the market are only means of economic regulation; therefore, Deng Xiaoping decided that the market economy was better suited to socialism. When it comes to the leading role of the Chinese Communist Party and the need to rely on Chinese characteristics when choosing the path of modernisation, Mao Zedong and Deng Xiaoping’s opinions were almost similar. At the same time, however, their other viewpoints differed significantly, and in some cases fundamentally, as a result of the initial worldview of the two socialist Chinese leaders (Abilekova, 2012). The basis of Mao Zedong’s worldview, as demonstrated by his activities in the 1950s and 1970s, was the decisive role of a subjective factor in state’s administration, leading to the supremacy of political and ideological methods of administration, and an attempt to achieve an artificially accelerating social transformation, which Mao Zedong regarded as a key condition for accelerating economic development. It includes centralised government, state ownership and ignorance of the right to personal economic interests, wage equality for workers, and the emergence of venturesome trends of economic, domestic, and foreign policy that have led

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to China’s economic stagnation, political chaos, cultural degradation, and de facto isolation from the outside world. Deng Xiaoping followed the principle of “taking practice into consideration” (that is why his works do not include large-scale theoretical works). He was convinced that the main goal of the modernisation policy of the People’s Republic of China was the development of productive forces, and that the main objective of leadership was to satisfy the material interests of the people through the mechanism of market relations. It resulted in the dissolution of “people’s communes” and the introduction of household responsibility system in rural areas, the introduction of a principle of contribution-based distribution, and the elimination of equality, the diversity of property forms in urban and rural areas, the refusal of excessive centralisation of government, the development of science and technologies as primary productive forces, and the development of comprehensive economic and cultural integration with the outside world in foreign policy (Gelbras, 2009). Therefore, he proposed a new theory of socialism with Chinese characteristics, as well as the corresponding model of a new society. This theory reflected the entire history of the new China. It meant that when its leaders took China’s realities into account, success was unmistakable. On the contrary, when they attempted to ignore reality, as during the “Great Leap Forward” and the “Cultural Revolution”, the country’s development stopped and regressed. The main question that Deng Xiaoping tried to answer was how to create socialism in such a backward country as China was at the time. He said that China should not be limited by the experience of other countries in creating socialism. This is the experience that should be studied, not replicated. “China has its own model”. It must “go its own path and build socialism with Chinese characteristics because it this the fundamental objective”. According to him, “the essence of Marxism is a realistic approach to reality” (Abilekova, 2012). On this basis, he demanded to merge Marxism with Chinese reality and requirements of the new era. However, by declaring it, he was forced to fight left-wing and right-wing opportunism in the party, which he believed had the potential to “destroy socialism”. In his fight against the leftists, whom he blamed for causing “the major danger”, he opposed their false thesis that “it is better to be poor under socialism than to be rich under capitalism”. Deng Xiaoping said angrily that those who advocated a materialistic understanding of history could not discuss “socialism and communism with poverty”. After all, communism, according to K. Marx, meant “abundance of tangible goods”. In this regard, he urged people to better understand the critical role of productive forces in shaping Chinese socialism. In his opinion, eradicating poverty and raising people’s standards of living cannot be accomplished without rapid development of productive forces. Unfortunately, the leftists completely ignored this alphabetical truth of Marxism. In the polemics with them, Deng Xiaoping noted that “The advantages of the socialist system are manifested in the fact that productive forces develop faster in socialism than in capitalism, and people’s material and cultural lives are constantly improving as a result of their development. After all, the goal of socialism is to eradicate poverty” (Makeev, 2020). He also suggested abandon the approach of leftists, which “emphasises class conflict”. He

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insisted that during the establishment of socialism, particularly in the lagging country, the emphasis should be on economic development and the consistent implementation of socialist modernisation, i.e., accelerating the development of agriculture, industry, and science, improving socialist democracy, and establishing the rule of law (Abilekova, 2012). His attitude towards ownership was very similar. Deng Xiaoping believed that the initial stage of socialism allowed for the development of various forms of ownership that contributed to the development of productive forces. Therefore, after this approach was implemented, private property development was not hampered while public property dominated. Despite the fact that the latter’s share of the economy has steadily declined in the future, it has continued to cover strategically important sectors of the economy, accounting for more than 75% of GDP (Abilekova, 2012). The aim of the first phase of the Chinese economic reform was to introduce a household responsibility system in agriculture in order to replace disintegrated “communes”, as well as “large” and “small” brigades (1984). The land outside of urban areas was declared collective property of villages and towns. The preservation of this form of land ownership enabled it to be announced as a part of the socialist economy (Gelbras, 2009). In foreign relations, the “Open Door Policy” was implemented, which paved the way for international trade and foreign direct investment. Chinese diasporas abroad played an important role here. These initiatives immediately raised the living standards of the majority of the Chinese population and later aided in the support of more complex reforms. The very fact that enterprises could already trade freely and independently with the foreign countries drew foreign currency and strengthened the local currency, which gradually became convertible.

12.3 Plan and Market However, the transition to the market was rather complicated, and it was still far from complete in 1987. The reduction of restrictions on economic activities has significantly improved some industries in the stagnant Chinese economy, but it has also created new challenges. Inflation, which had been the greatest concern of Chinese consumers, has become a major issue for the first time since the early 1950s. The state still controlled the largest industrial enterprises, and the majority of them still adhered to central planning principles. The Chinese economy could have been classified as a mixed system at the end of the 1980s. It could not be categorised as either a planned or a market economy. The leadership continued to develop reforms as a necessity for economic growth, but it was also forced to consider inflation and grain production in order to avoid widespread political discontent in the country. As a result of these circumstances, economic forces have acted against each other, resulting in what Chinese governmental institutions have referred to as “contradictions”. On the one hand, because of the rapidly expanding industrial market, the Chinese economy was no longer so

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tightly controlled by the government. On the other hand, the market could not function effectively because many goods were still controlled by the state, preventing or otherwise limiting their price changes. Despite significant economic achievements since 1949, the massive manufacturing imbalance and product deficit have persisted in the country. The deficit was exacerbated by the state’s disorder, which destroyed the economy during the Cultural Revolution (1966–1976), as well as inflexibility in planning, which caused pricing problems. The outdated and unsatisfactory fleet of vehicles and telecommunication networks, a shortage of technicians and other highly skilled workers, currency acquisition issues related to the purchase of advanced technologies from other countries, and improper legal and administrative measures that continued to restrict domestic and international trade, have all contributed to modernisation challenges. The transition to the market economy in the early 1990s caused two major problems. First, financial policy mechanisms, the banking system, and financial capital markets had to be established at the end of central planning. In the 1990s, every effort was made to implement these objectives. Secondly, state-owned enterprises cause many problems. Their revenues and expenditures were planned at fixed prices, the difference of which was used to ensure the social protection of workers. When it was started to calculate revenue and expenditures at market prices, many state-owned enterprises became particularly unprofitable for two reasons: they had to continuously guarantee social protection for their workers, despite producing goods that no-one wanted to buy. Over time, this problem was eventually solved by bank loans, but it resulted in massive debts of these enterprises. Therefore, most of them had to be closed in the late 1990s and early 2000s, and a new social security system had to be established in the country. When Chinese reforms began in 1978, state-owned enterprises accounted for 77.6% of total industrial production. As reforms continued to deepen, particularly by encouraging the development of the collective, individual, and private sectors, as well as foreign investments and other forms of economy, the share of gross product generated by state-owned enterprises has decreased significantly. China has been experimenting with the formation of joint-stock companies from state-owned enterprises since the 1980s. However, because the majority of them were unaware of reforms and the right to manage the production process autonomously, many of these enterprises were only subject to a name change. It was especially noticeable in enterprises where the state remained their founder. The governance mechanism of the state-owned enterprises remained in place. They continued to suffer from poor management and unprofitability; meanwhile, their property was used inefficiently, and their debts increased. The consequences of poor investment decisions could be seen everywhere, but none of the managers felt personally accountable. In 1993, the 3rd Plenary Session of 14th Central Committee of the CCP, led by Deng Xiaoping, made an important theoretical “breakthrough” by announcing the link between the market economy and socialism. This “breakthrough” was strikingly similar to the theoretical legalisation of the NEP implemented by the USSR, but unlike the NEP, it became irreversible in the long run.

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The Chinese leadership then decided that the direction of reforms for state-owned enterprises should be defined in the same way as the direction for the rest of country’s enterprises. Capital of various types was encouraged to participate in the management and development of state-owned enterprises by allowing it to make investments, transforming state-owned enterprises into mixed-ownership enterprises and entities of balanced capital. The practice of property system reforms in state-owned enterprises has demonstrated that managers’ responsibility for pecuniary damage has begun to increase, and a serious approach to important decisions has occurred, which has significantly changed the situation in these enterprises. According to statistics, the number of state-owned enterprises and enterprises with a controlling block of shares owned by the state decreased from 238,000 in 1998 to 150,000 in 2003, but profits increased from 21.4 billion Yuan to 495.1 billion Yuan during the same period; meanwhile, net capital increased from 5.2 trillion Yuan to 8.4 trillion Yuan, and the profit percentage of state assets has reached up to 5.9% (Gosudarstvennye predpriyatiya…, n.d.).

12.4 Chinese Socialism and Economic Theory of Marxism To comprehend the essence of Chinese reform, we must accept the assumption that the socialist system and the socio-economic system are two different things. The reform requires to fundamentally change the old economic system rather than the socialist system. It means that the abolition of the socialist system cannot be the goal of the reform, and a highly centralised, planned economic system should be the subject of reform. At the same time, this reform should not be limited to external amendments and supplements because it is necessary to radically transform the overall model of the economic system and its primary governance mechanism, i.e., to implement a transition from the planned economy to the market economy. Chinese reform has presented an opportunity for theorising path-dependent development in countries that did not declare an absolute break with previous economic policies and did not attempt to transform the entirety of the economy in one moment (Pavlovskaya & Pickles, 2001). Deng Xiaoping claimed that “A planned economy is not equivalent to socialism, because there is planning under capitalism too; a market economy is not capitalism, because there are markets under socialism too. Planning and market forces are both means of controlling economic activity” (Xiaojing Zhang & Xin Chang, 015, p. 37). Is it difficult to understand how it relates to the economic theory of Marxism? Firstly, two key points must be defined—what the ultimate goal is and what measures will be taken to achieve it. After all, Marxist economic theory arose as a result of the spontaneous development of the capitalist economy since its inception, and economic crises were commonplace. According to K. Marx, it was the primary reason why capitalism had to fail. Because “In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier

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epochs, would have seemed an absurdity—the epidemic of over-production. Society suddenly finds itself put back into Na state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence” (Marx & Engels, 1848). It should be noted that the primary goal of K. Marx’s theory was to create a society in which such crises would be impossible! This society must plan its production, produce only what is required, no more and no less, and use its production resources rationally. Then neither overproduction nor the related trade crises will exist! Secondly, what measures must be taken to achieve those objectives of the proletariat? It is necessary to carry out a revolution and establish a proletarian dictatorship, as well as to nationalise industry and agriculture in order to manage them and to carry out planning of the entire state. Capitalists will become into ordinary workers, and the country will begin to function as a unified corporation! How can the return to the market be explained, and how can it be linked to the construction of socialism then? After all, socialist society is characterised by the fact that it is being developed in a planned and proportionate manner! It is necessary to avoid the market rather than seek for it! After all, the market anticipates the exchange of goods, i.e., commodity-monetary relations. While goods and their exchanges are gradually coming to an end in socialism, there can be no goods in communism! One can agree with Chinese leaders’ logic that China is in the early stage of socialism’s development; therefore, there is no way to distance itself from reality— the market and the related commodity-monetary relations—at this stage. Although K. Marx and his theory discussed little about this period, we can acknowledge that, while rejecting the dogmatic approach to this theory, it evolves and improves over time, adapts to the realities of life, etc. These processes occurred in the Soviet Union, as well as in all socialist countries; therefore, they could happen in China too. We may also agree with another statement, according to which K. Marx’s theory recognises that socialist and communist societies must have an abundance of products and cannot turn into poor societies. True, but K. Marx’s theory envisions quite different methods and means of accomplishing this—the conversion of the private economy into public property, as well as further centralised planning and organisation of its development, similar to the separately taken corporation. All of the issues have arisen in this specific area! The former Chinese leader Mao Zedong equalised the economy, after which he made every effort to make it effective, but he failed. “The experience has shown” that it was not beneficial, so it had to be changed. However, Mao Zedong implemented one of the measures envisaged by K. Marx’s theory to achieve his noble goal of establishing the socialist society. He introduced the dictatorship of the proletariat and established the monopoly power of the Communist Party as the country’s avant-garde of the working class. The Chinese Communist Party and its leaders have made numerous mistakes that have had a negative impact on the country’s development, which we have previously discussed and which have been acknowledged by the Communist Party. However, if it had admitted that the theory it had been following for years was incorrect at the time, it would have had to resign from power immediately! But it did not want to resign! To remain in power, it was necessary to demonstrate that the goal of the

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Party and the state remained the same—socialism and its creation, as planned by K. Marx—but that the means to achieve it could and must change! So, what if these measures directly contradict Marxist theory? After all, it is always possible to explain that this theory is actually a developing living organism; therefore, it is necessary to look at it creatively, rejecting all dogmas! The reality of life changes the same way as the theory itself, so people must adapt to these changes. The national (Chinese) characteristics are another important factor that allows for a freer interpretation of the economic theory of Marxism. It is necessary to acknowledge that neither K. Marx nor F. Engels, and later V. Lenin, developed their theories specifically for China, so too much emphasis may be placed on this factor, and we may later have to explain its deviations from the clear concepts defined in the initial theory of Marxism.

12.5 State-Owned Enterprises in China and Their Significance Another important argument used by the Chinese leadership to demonstrate the country’s socialist nature is the dominant role of state-owned enterprises in the national economy. It is, indeed, a critical factor, demonstrating that the majority of the Chinese economy is socialised, with private property accounting for only a small portion of it. However, this critical factor does not in any way negate the fact that the national economy has indeed become capitalist. Although state-owned enterprises are socialised, they are required to follow market rules because the economy is no longer planned and the law of value is fully operational. In this economy, stateowned enterprises have become ordinary “market players”, planning their market behaviour to a large extent and attempting to work profitably and efficiently, similar to private enterprises. Because there is no central planning committee in the country that would “give” plans to individual enterprises, state-owned enterprises in China plan their activities on their own while keeping the political course defined by the central government in mind. When major national infrastructure projects (such as laying roads and railways or constructing strategic facilities) or strategic scientific projects (such as a space programme or fundamental science area) must be implemented in the country, these enterprises prove to be very effective. Then there are no concerns about mobilising the necessary resources among the heads of state-owned enterprises because they all actively participate in dealing with these issues. On the other hand, the heads of these enterprises are not the owners. They are, in fact, only officials or “soldiers of the state”. Therefore, by leading these enterprises, they are unable to focus solely on the most optimal commercial calculation, i.e., selecting the most profitable solution for the enterprise, because it may occasionally differ from the official course implemented by the central government. Even if they

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see a more rational solution that will result in a significant increase in the enterprise’s profit, it does not mean that they will offer it for enforcement. Why? Any decision made by the head of an enterprise, particularly one related to innovation, is usually associated with significant investments that the enterprise is required to make. The heads must calculate the expected profit of an enterprise in the event of successful implementation of this innovation. However, it is frequently associated with a significant risk if the project fails. Who will then be held accountable for the enterprise’s losses? It is most likely the hired heads of the enterprise, but it is not their money. Perhaps the shareholders of the enterprise, whose money was used to fund the project and who granted such permission. Maybe, but in this case, the government and its representatives are the shareholders and officials at the same time! Do they have the right to authorise innovations and risky investments? Of course, they have the right, but how will they explain why they spent (lost) money of the state in case of failure? Because of the “expected” increase in the enterprise’s profitability? In this case, we used the word “expected” not by chance, because a government representative must firmly “believe” in the calculations and innovations determined by his hired head of the enterprise. However, this should be his responsibility despite the fact that it involves a significant risk! In addition, what will he have as a result if everything goes perfectly? The government representative can hardly expect material incentives for this particular decision (after all, it is his duty!), so in the event of success, he will most likely receive friendly praise at the government congress or an ordinary meeting with the Prime Minister! Things are different when state-owned enterprises carry out strategic projects of national significance! Their leaders can then calmly think about the most rational solutions to these objectives without avoiding potential risks. Because the objectives are “strategic” and must be completed, the approval of government representatives (the enterprise’s shareholders) can also be easily obtained! In the event of failure, it is always possible to explain that the head first understood the “strategic significance of the objectives”, and only then did he become more focused on the rationality of achieving these objectives. Then no-one will be angry at him if something goes wrong. There is, however, little room for rational commercial calculations and potential profit maximisation! Therefore, it raises the question of whether state-owned enterprises can function effectively. It is difficult to answer it unambiguously. China’s path of development and reform is indeed unique in this regard, and it is sometimes referred to as the “Chinese Model of Development”. To this day, there is a heated debate in China and beyond it about whether China’s rapid development is due to the state’s large role in the economy, or whether it is the opposite. These debates are important and beneficial because they influence the future direction of reforms. It is clear that China’s “Reform and Opening Up” policy is now regarded as a success story. Over a 40-year period, 740 million people have risen out of poverty, and China is now the world’s second largest economy after the United States, according to the World Bank, and China is firmly established among middle-income countries, where GNP per capita is the main indicator.

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Between 2000 and 2014, the contribution of Chinese state-owned enterprises to national GDP was approximately 63% due to the high consolidation of state-owned enterprises and preferential public lending, but at the same time it also generated up to 80% of tax revenue into the state budget and created over 90% of workplaces in the country. More than 20 state-owned enterprises have been named among the world’s 500 largest transnational corporations (TNCs). They work in industries that have traditionally been thought to be the most important: petrochemicals, coal and gas extraction, energy, non-ferrous metallurgy, electronics, aerospace, etc. However, it demonstrates that the private sector in China, which employs only 10% of the labour power, has managed to generate nearly 40% of GDP in the same period of time (Zapolskis, 2019). China’s reforms emphasised the government’s leadership and national capacity building in stages and steps, pay attention to the dual role of formal systems and informal rules (Weichang & Volchik, 2022). In practice, middle-income countries fall into a sort of trap, or a situation in which a country’s economy is already sufficiently developed; therefore, it loses the initial benefit, such as cheap labour power, low production costs, etc. On the other hand, the country is still underdeveloped to transition to a high-tech economy with higher added value. Therefore, it led to a corresponding decrease in labour productivity and average production results in the country. China has already reached this stage of development; therefore, its GDP growth has slowed significantly. It is necessary to pursue additional growth, which entails transformation from the “extensive” to “intensive” course of economic development. In fact, intensive development is based on innovations, which are extremely difficult for enterprises, particularly state-owned enterprises, to implement. Their heads, or “soldiers”, are hesitant to pursue these innovations because they are concerned about losing their “credibility”. It is also risky and unprofitable to do it for government representatives who are shareholders of these enterprises. The Party’s top management would like it very much, but it cannot give direct orders to enterprises to innovate. Only free enterprises with sufficient equity capital and a willingness to take risks for their own benefit can innovate, while also pursuing an intensive course of economic development. It can only be done by private or mixed enterprises, i.e., those with a significant amount of private equity. The latter even have some competitive advantages over purely private enterprises because public capital entitles them to preferential lending, which is typical of China that implements a protectionist policy towards public capital. However, in the long run, it distorts competition conditions; therefore, such practice should be liquidated in the future.

12.6 Practical Implementation of Market Socialism Since 1985, public price control has been significantly weakened, and the privatisation of small state-owned enterprises, which has proven to be not very promising, has begun. However, there has been a significant decentralisation of state control,

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allowing heads of local provinces to look for ways to accelerate economic growth and gradually privatise the public sector (Lieberthal, 2004). Urban and rural enterprises, as well as companies that formally belonged to local governments but operated as private enterprises, began to significantly increase market share at the expense of the public sector. China’s first joint-stock insurance company “Ping An Insurance” founded banks such as the first shareholding commercial bank “China Merchants Bank”. On the other hand, the conservative senior opposition in the Party, led by Chen Yun, attempted to prevent a number of fundamental reforms that would have jeopardised the group’s interests in the government’s nomenklatura. Corruption and rising inflation increased discontent in the country, contributing to the protests at Tiananmen Square in 1989. Following this event, the conservative wing of the party overthrown several primary economic reformers. However, Deng Xiaoping continued to pursue its reforms. In November 1990, he re-opened the Shanghai Stock Exchange, which had been closed by Mao Zedong 40 years ago. In the 1990s, he forced many conservative party members, such as Chen Yun, to resign so that he could carry out his radical reforms. Special economic zones were established to represent geographically restricted areas. They reflected the government’s gradual approach to reforms. One Chinese city reflected the success of this strategy, namely Shenzhen, which was at the forefront of “Reform and Opening Up” policy. As a result of this policy, it has grown from a small fishing village to one of the richest and fastest growing cities in the country. Shanghai could also make a boast of similar accomplishments. On 13 November 2003, Chairman of the State-owned Assets Supervision and Administration Commission, Li Rongrong, stated that the need for public control over most sectors of the economy had become “irrelevant”. In fact, November 2003 is only one of the dates for China’s economic denationalisation (Zatsarin, 2015). The first phase began in 1998 and lasted for five years. It was five years of China’s “small privatisation”, i.e., the sale of small enterprises and assets (household services, catering, etc.). This year, the Chinese government had three main objectives: to get rid of loss-making assets, to sell property that was too small to be managed by the states (i.e., it was a reverse operation, which was previously carried out by N. Khrushchev in 1950). Many small and medium state-owned enterprises were privatised and laid off several million workers from state enterprises. It weakened the Hukou system. With opportunity to find work, buy food, and obtain housing in the market, upward of 100–150 million workers moved from rural to urban areas—the largest internal migration in history (Freeman, 2010). The third objective was strategic: to prepare national capital for the next stage of privatisation. But how did it actually work in practice? The type of privatisation was closed between 1998 and 2003. Enterprises and their property were mainly purchased by their directors and employees. Everyone was forced to do it from their savings. Only in the absence of money were loans granted to people, who were then required to repay them from the profits received. Despite the fact that employees could sometimes become co-owners, directors were in charge of an enterprise’s management. Wages for skilled work increased, raising

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the return to education. Tens of millions found work in the private sector. Productivity rose in state-owned enterprises (Freeman, 2010). The more valuable property was offered for sale in the second stage. Other principles of management of the sales process were applied here. First of all, the government has chosen to maintain a monopoly, or at the very least a major dominant position, in many industries. Thus, China has maintained complete control over the tobacco industry since 2011 (a similar analogue to receive money from the sale of alcoholic beverages was used in Russia). The state controlled 90% of infrastructure construction and energy companies, as well as 85% of oil production and refineries. Telecommunications, transportation, and financing remained largely in the hands of the state (Zatsarin, 2015). This example demonstrates why the privatisation programme was called “grasping the large and letting the small go” (Naughton, 2007). Yes, the number of state-owned enterprises has decreased by more than 10 times during this period of time. However, what remained as a state property has exceeded the private sector in terms of size and income. Despite the death of Deng Xiaoping in 1997, the reforms were continued by his successors, Jiang Zemin and Zhu Rongji, both of whom were passionate reformers. Large-scale privatisation continued in 1997 and 1998, resulting in the liquidation of all state-owned enterprises, with the exception of a few large monopolies, the property of which was sold to private investors. The 15th National Congress of the CCP, held in 1997, included a provision in the statute on the guiding significance of “Deng Xiaoping Theory” in the early stage of socialism. It was announced as a new stage in the development of Marxism in China, a second theoretical achievement following “Mao Zedong’s ideas”, “The continuation and development of Mao Zedong’s ideas”, and the scientific system of socialism with “Chinese characteristics”. During this meeting, the new leader of the Central Committee of the CCP, Jiang Zemin, encouraged people to support the development of individual and private capital, which was seen as an important part of the socialist market economy, in his speech. In that year, state-owned enterprises raised another issue. The prices of these revenues and expenditures of these enterprises were fixed, i.e., set by the state. They were permitted to use the difference between fixed prices to finance social protection. When it was started to calculate revenue and expenditures at market prices, many state-owned enterprises became particularly unprofitable for two reasons: they were responsible for provision of social protection of their workers, despite producing goods that no-one wanted to buy. Bank loans were used to try to solve the problem over time, but this resulted in a large number of unpaid debts. This problem was addressed in the late 1990s and early 2000s by closing unprofitable state-owned factories and developing new social insurance schemes (Gelbras, 2009). Between 2001 and 2004, the number of state-owned enterprises nearly doubled.

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During the same period of time, Jiang Zemin and Zhu Rongji made the following significant contributions in order to increase country’s continued opening up and competitiveness: . Reduced import tariffs; . Removed foreign trade barriers and regulations; . Reformed the banking system; Reformed the social security system of the Mao Zedong’s era; . Forced the Chinese army to refuse military business; . Controlled inflation in the country; . China has joined the World Trade Organisation (WTO). For the first time in China’s history, the private sector produced goods that exceeded 50% of total GDP in 2005. Since then, this share has continued to grow. On the basis of purchasing power parity (PPP), evaluation of China’s share in the global GDP has risen about two-and-a half fold during last 15 years, from 5,4 per cent in 1989 to over 12 per cent in 2004 (Yifu Lin, 2004). In 2005, China surpassed Japan as Asia’s largest economy. At the same time, it should be noted that some state monopolies continue to exist, but only in the oil and banking industries. In terms of international trade, the share of Chinese state-owned enterprises accounted for 42.5% of the total in 2001. This share fell to 16.3% in 2017, while the share of enterprises with foreign investments and enterprises operating in nongovernmental economic sectors increased from 57.7% to 73.7% during the same period of time (Portyakov, 2019). In 2017, one of China’s largest news agencies “Xinhua” commented on excerpts from a speech by China’s head of government (official post—Premier of the State Council of the People’s Republic of China), Li Keqiang, in which he officially announced the end of the first stage of strategic modernisation of the country’s economy, and set out further long-term goals for its development. The first significant “discovery” was that China has changed drastically over the last decade. In 2018, the private sector in China already accounted for 60% of its GDP, 80% of all workplaces, and 70% of technological innovations. According to Xi Jinping’s advisor and Vice Premier of the State Council of the People’s Republic of China, Liu He, private enterprises contribute 50% of tax revenue to the budget and are more efficient and flexible than state-owned enterprises. However, obtaining business financing in China is becoming increasingly difficult because banks prefer state-owned enterprises due to the low risk and solid tangible assets offered as collateral. Xi Jinping has already stated his intention to “vigorously” support the private sector. He was also backed by Premier Li Keqiang and Governor of the Central Bank Yi Gang, who promised to provide quick assistance to such enterprises (Chernyshov, 2018). Another significant “discovery” revealed by open-source analysis is that China has undergone a qualitative transformation from economic perspective. Between 2007 and 2016, the services sector accounted for as much as 51.6% of GDP, while the share of industry and construction fell from 47% to 39.8%. According to forecasts from the Chinese Academy of Social Sciences, services will account for 59% of GDP by the end of 2020 and 72% by 2030. After all, services are the most important

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area of private capital activities, the share of which is expanding significantly and outpacing the development of public-sector enterprises (Zapolskis, 2019). All of these changes clearly demonstrate that today’s Chinese economy bears no resemblance to the socialist economic model described in K. Marx’s theory. Such “modernisation” is fundamentally different from the basic concept of Marxism theory, and these distinctions are becoming increasingly apparent. Only the preamble to the new Constitution of the People’s Republic of China (version of the year 2018) remained socialist: “After the founding of the People’s Republic of China, our country gradually achieved the transition from a new democratic society to a socialist society. The socialist transformation of private ownership of the means of production has been completed, the system of exploitation of man by man abolished, and a socialist system established. In our country the exploiting class, as a class, has been eliminated, but class struggle will continue to exist within a certain scope for a long time to come. The people of China must fight against those domestic and foreign forces and elements that are hostile to and undermine our country’s socialist system” (Chinalaw. Center, 2018). Singapore has become a unique example for China, demonstrating how to develop the national economy while maintaining constant power of a single political party in the country. Its statesman, Lee Kuan Yew, who is of Chinese descent, was clearly fascinated by the new Chinese leaders. Therefore, many Chinese reformers, including Deng Xiaoping, saw Singapore as a role model for Chinese government administration. They even referred to Singapore as “the little China”, which Singapore’s leaders clearly disliked. Lee Kuan Yew was one of the first people in the region to accurately assess China’s potential. In 1976, he visited China where he met Mao Zedong, who died later that year, and established good personal relations with Deng Xiaoping, the future author of Chinese reforms. The latter paid a visit to Singapore in 1978. However, Singapore did not establish formal diplomatic relations with China until 1990 because it waited for the rest of the ASEAN Alliance countries to normalise relations with China (the last country to do so was Indonesia in 1990) before exchanging ambassadors with China. Lee Kuan Yew was able to elevate a backward country to the ranks of the world’s richest countries in a relatively short time. The share of GDP per capita in this country is one of the highest in the world. In fact, in terms of its size and population, Singapore is far from being equivalent to China. Managing and keeping order in a country of an average-size city should be much easier than in the giant China, but management methods, attitudes towards foreign capital investments and their protection, as well as the liquidation of potential political turmoil in the country are all very similar. Such attitude of Chinese leaders towards Singapore clearly demonstrates the true objectives and aspirations of the PRC and its Communist Party. Despite all of the

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famous declarations about the construction of socialism in China, it is clear that they attempt to make Chinese economy as close to Singapore as possible. The problem is that no-one in Singapore mentions the fact that their country is building socialism.

Chapter 13

The Economic Transformation of the USSR

13.1 The End of the Third Administrative Cycle. The Crisis of “Middle Class” Society According to official statistics, in 1985, approximately 16% of workers, civil servants and families, as well as 39% of the collective farmers earned less than the subsistence minimum (Ovcharova et al., 1999). The presence of two or more children or dependants significantly increased family insecurity. Wage equalisation has persisted in the form of pension or social benefits. As a result of the created “equality”, citizens were deprived of initiative and the desire to work in more efficient and high-quality manner. In many cases, wage in the USSR did not depend on the size of an individual’s direct labour contribution; therefore, it did not encourage him to work more productively. Residents of the other country’s wages and income have always been subject to state control. The basic level of income is determined not so much by the patterns of the development of the planned economy, but by the ideological attitudes of the leadership. The Council of Ministers of the USSR centrally implemented the country’s wage policy, ensuring social uniformity among citizens and high priority support to their certain groups, primarily industrial workers. The ideology of certain equality resulted in the underdevelopment of the material and spiritual needs of various groups of people. The findings of the 1989 sociological study revealed a relatively low level of needs of Soviet citizens. Respondents (lower-ranking workers) reported an amount of 200–300 roubles as a preferred salary, while the average monthly salary in industry at the time was 219.8 roubles (Babaeva & Dmitriev, 1989, p. 94). Such low needs of Soviet citizens may be explained not only by the total trade deficit, but also by assurance of supposedly free basic social services, such as culture, education, health care, and the public paternalism policy (Shayakhmetova, 2015). The minimum level of subsistence was calculated in order to determine the list of products, goods, and services included in the minimum consumption basket. This data has served as the foundation for a production plan for cheap and affordable © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_13

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goods and services. In addition, the relatively low prices for housing, transportation, and other services in the USSR have in fact significantly equalised people with low and high incomes with their main lifestyle indicators. These prices kept the Soviet citizen from falling to the bottom of the social ladder. According to some scientists, Soviet society was a “middle-class society”. However, the food structure consumed by Soviet citizens did not meet the requirements for normal physiological functioning developed by the World Health Organisation. When comparing the diets of the average USA and USSR families, the dominance of high-calorie and nutritionally deficient products in the diet of Soviet citizens was observed. They mostly ate bread, potatoes, and pasta. The annual consumption of meat in the United States was 123 kg per person, while in the Soviet Union it was only 68 kg; the consumption of sunflower oil was 22.4 L and 10.1 L, respectively; vegetables—126 kg and 101 kg, respectively; and the consumption of bread and pasta was 97 kg and 124 kg, respectively (Sotsialnoe razvitie SSSR, 1990, p. 136, 179). By the early 1990s, on average, public utility bills accounted for only 4–5% of the average family budget. The difference between the actual costs of housing maintenance and the nominal price was paid with state budget subsidies, which were increased annually by 300 or 400 million roubles (Mikulsky, 1987, p. 247). However, the level of economic development of the USSR did not allow each family to acquire housing. The lack of housing has resulted in a continuous expansion of the range of benefits and privileges; meanwhile, the principle of social justice, as a mandatory attribute of a socially oriented economy, has often been ignored.

13.2 What “Transformations” Were Required? The process of disengagement of socialism can be described in a variety of ways, but it becomes inevitable in the long run. Therefore, the party saw the victory of the relatively young Secretary of the Central Committee Mikhail Gorbachev over the old political “Guards” as happiness, and the country saw it as an incredible relief (Kolesnikov, 2020). The existing political power vertical, manifested in fully centralised economic management and the eventual abolition of private initiative, has actually established stagnation of national economy. Therefore, everything had to be changed immediately. On 23 April 1985, the Plenum of the Central Committee of the CPSU was held in Moscow, where Mikhail Gorbachev announced the plans of reforms aimed at accelerating the country’s socio-economic development, and where the term “perestroika” was used for the first time. By the way, this term was previously used during the great reforms of the 1860s, as well as by Pyotr Stolypin. At the Plenary Session, he presented a report of the programme titled “On the Convening of the Next 26th Congress of the CPSU and the Tasks Related to its Preparation and Implementation”. It announced a course to accelerate the economic and social development of

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the USSR. For the first time, the previous period was described as “stagnant” in the report (Aprelskiy plenum TSK KPSS 1985 goda…, 2010). M. Gorbachev admitted that many social problems (including food, housing) remained unresolved in the USSR, and available resources were being used irrationally. He claimed that “[…] society has not been able to fully realise the potential of socialism to meet growing needs” (ibid.). In such a situation, there was an urgent need to choose another path of development—either “perestroika”, as a continuation of the socio-economic revolution aimed at creating “normal” socialism, or the formation of market economy mechanisms. At first glance, it appeared that M. Gorbachev was seriously thinking about the market and competition: According to him, the problems of national economy’s stagnation were caused by “weakness of internal stimuli for self-development”. Practically all expenses are covered, sales of products are essentially guaranteed and, most importantly, the employees’ incomes do not depend on the end results of the collective’s work: the fulfilment of contract commitments, production quality, and profits. Such a mechanism is likely to produce medium or even poor-quality work, whether we like it or not. How can the economy advance if it creates preferential conditions for backward enterprises and penalises the foremost ones? We can no longer run our affairs like that. The new economic mechanism must put matters right. It must become a powerful lever, a motivating force for resourceful quality performance. Every enterprise must proceed from real social demands to determine production and sales plans for itself. Those plans must be based not on numerous detailed assignments set by higher bodies, but on direct orders placed by government organisations, selfaccounting enterprises, and trade firms for specific products of appropriate quantity and quality. Enterprises must be put in such conditions as to encourage economic competition for the best satisfaction of consumer demands and employees’ incomes must strictly depend on end production results, on profits (Gorbachev, 1987, p. 19). The question is what transformations were necessary and whether everything had to be changed. Is M. Gorbachev really going to be such a radical “innovator” as Deng Xiaoping in China, who will replace the entire socialist economic system by giving enterprises much more authority, including competition for consumer demand? In fact, it was only a first impression. He and other creators of “perestroika” had not considered radical changes in the social and public systems until the beginning of 1988. The most daring step they dared to take (which seemed radical at the time) was to declare “socialism with a human face”, i.e., to perform modernisation in the communist system. He sincerely believed at the time that socialism is a very promising social system, eliminating unemployment, providing all members of society with at least a minimum income, the opportunity to learn, improve, and enjoy cultural heritage, and having guaranteed health protection. What else could a person need? He only needs to eliminate such menaces as drunkenness, corruption, speculation, living beyond one’s means, official bureaucracy, fear of criticism, and a lack of publicity. Then socialism will manifest in all its glory, and it will be accepted by society. M. Gorbachev did not want to change the socialist foundations of the state and society. He did not want to hear anything about changing the planned economy,

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introducing elements of a free market, or competition between people and enterprises at the time. In the same publication, he writes: […] the press carried some proposals which went outside our system. There was an opinion, for instance, that we ought to give up planned economy and sanction unemployment. We cannot permit this, however, since we aim to strengthen socialism, not replace it with a different system. What is offered to us from the West, from a different economy, is unacceptable to us. We are sure that if we really put into effect the potential of socialism, if we adhere to its basic principles, if we take fully into consideration human interests and use the benefits of a planned economy, socialism can achieve much more than capitalism (Gorbachev, 1987, p. 86) According to the plan of the Party’s reformers, perestroika had to include “additional reserves and advantages” of socialism, such as increasing labour discipline in production (the so-called human factor), particularly by strengthening administration, efficiently using the latest technologies in production, etc., M. Gorbachev encouraged better implementation of accumulated material and financial resources and assurance of maximum utilisation of production capacities, including increased use of shift work, particularly in the field of machinery manufacturing. In his opinion, there was a need to improve the quality of products produced, to develop innovations, as well as to employ best practices and socialist emulation methods. He sincerely believed that socialism has large internal reserves, and that once they are discovered, everything will immediately begin to function properly. He repeatedly shared his thoughts on V. Lenin’s works, which he had read in the circle of comrades of the Political Bureau of the CC of the CPSU and other fellows because M. Gorbachev truly believed in socialism. His slogan was “the more democracy – the more socialism”. In terms of ideology, he intended to abandon the use of established dogmas in favour of rediscovering “good Lenin” rather than “bad Stalin”. In foreign policy, he sought to end confrontation with capitalist states, as well as to limit and eventually end the arms race, particularly the nuclear one. M. Gorbachev was in a better position in this regard than, for example, N. Khrushchev, who was about to begin his reforms. At least, that was the case at first. That was not only because the upper stratum of party and state leadership were adamant that serious reforms were required. It is also worth noting that, after nearly two decades of L. Brezhnev’s rule, this stratum has grown far too old. By presenting the slogan of stability of cadres, L. Brezhnev made it clear to all the secretaries, ministers, marshals, and generals of the Republics of the Soviet Union and fields of party organisations, as well as leaders of public organisations and creative unions that they could hold their positions until they died. The same could be said for L. Brezhnev too. This unspoken social contract has been strictly followed. His infinite affection for the same people, including his personal nurse, N. Korovyakova, and his personal hairdresser, was tolerated. Therefore, until M. Gorbachev was elected General Secretary, the Political Bureau of the CC of the CPSU was primarily dominated by pensioners. The average age of its members was more than seventy years. The majority of these people were determined to live out the rest of their lives peacefully. Everyone feared engaging in the fight because of the unpredictable results, no matter how strong their desire to stop the upstart young

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General Secretary was. As a result, they could lose their decent salary and pension, treatment in a private clinic, recreation in high-class resorts, etc. Therefore, this relatively weak opposition explains why the Central Committee and the Political Bureau unanimously approved almost all of M. Gorbachev’s broadranging initiatives and officially approved revolutionary ideas such as civil society, the rule of law, free press, as well as ideological and political pluralism. Along with M. Gorbachev, new people came to power. Suffice it to say that in a year or two, the composition of all the top officials, including the Central Committee of the CPSU, was renewed by 40%, and that of the Political Bureau by up to 70% (Medvdev, 2016). However, what was initially done demonstrates that these people did not have a deliberate programme and did not fully comprehend the magnitude of the crisis that afflicted the Soviet country. Where did the reforms have to begin? The primary means of achieving this goal had to be a significant “acceleration” (“uskoreniye”) of social and economic development of society. In fact, this acceleration has become a symbolic introduction to the early perestroika. The party’s strategists decided to reorganise the economy by increasing administrative control over enterprises, which were required to strictly follow the instructions of the central organisations in order to accelerate the production process, implement a shift regime, and promote socialist emulation (Shmelev & Popov, 1989). It seems that it had to be a serious breakthrough in overcoming the economy’s stagnation. However, it was a serious strategic error: instead of the limited liberation of market forces and granting of relative autonomy to enterprises, as envisaged by the once suppressed A. Kosygin’s reform or by the gradual economic reforms of Deng Xiaoping in China, it was done the opposite, i.e., administrative control of enterprises was further strengthened, relentlessly directing “mass enthusiasm” in the right direction. The problem is that by allowing market forces to operate freely and giving enterprises autonomy, competition occurs, which clearly defines which goods must be produced and which, on the contrary, must no longer be produced. The market determines the need for the development of one or more industries, and enterprises in these industries that are self-sufficient gradually begin to adapt to market trends. In this case, investments in the production of marketable goods that meet market demands make sense. However, market relations did not work in the USSR’s economy at the time. The established large industrial enterprises produced “planned” products that were approved by the State Planning Committee but had nothing to do with the actual market and its development trends. The expansion of planned production has only weakened the foundation of the country’s economy because more and more lowdemand products have been produced (Katzwa, 2017). In addition, efforts were made to produce them in multiple shifts, with the introduction of socialist emulation at all levels of production, where the winners received premiums for exceeding results of the planned production. Later, this quantity was stored in an orderly manner in the warehouses of public bases until it was written off. Because of the emphasis on speed and freedom, Russia’s system changes gradually departed from the government’s

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control, leading to an economic recession, political corruption, and serious social problems (Weichang & Volchik, 2022). This situation has been exacerbated by the fact that massive investments were made on the initiative of the state in some economic sectors, particularly large-scale production of machinery (because economic “acceleration” was required!). As a result, while growth has accelerated slightly, the main economic regulator (the law of value) has failed to function in the absence of a market. In general, the same thing happened as it did under J. Stalin’s rule: production of only category A products that were not intended for direct consumption increased. Therefore, the shelves of the country’s stores continued to empty, and the population was able to purchase an increasing number of products for the “vouchers”. However, the most significant factor was not even this, but the absolute inaction of the administrative economy (Shmelev & Popov, 1989). The issue was that the demand for goods produced was often artificial because it was one of the main features of the planned economy. As a result, the so-called unsatisfied demand, also known as the “deficit”, grew. Little could be purchased with the money in the hands of the people and in their savings accounts. Before the start of perestroika, the annual growth rate of the “deficit” of unsatisfied demand reached 16% (Kolesnikov, 2020). It was already worth around 80 billion roubles at the start of 1988 (Katzwa, 2017). It was also noted by M. Gorbachev, emphasising that: The gross output drive, particularly in heavy industry, turned out to be a “toppriority” task, just an end in itself. The same happened in capital construction, where a sizeable portion of the national wealth became idle capital. There were costly projects that never lived up to the highest scientific and technological standards. The worker or the enterprise that had expended the greatest amount of labour, material and money was considered the best. It is natural for the producer to “please” the consumer, if I may put it that way. With us, however, the consumer found himself totally at the mercy of the producer and had to make do with what the latter chose to give him. This was again a result of the gross output drive (Gorbachev, 1987, p. 19). M. Gorbachev took action only after some time had passed: a true economic reform was launched at the Plenary Session of the Central Committee of the CPSU in June 1987. However, it had to happen very neatly according to the plan. It should not have been a complete market reform, but it has given enterprises much more independence. As soon as it began, such a reform slowed rapidly as it was predicted because it had its limits within the framework of the socialist economy. It was prevented, as it was during the N. Khrushchev era, by the fundamental contradiction of socialism that was discussed previously—the growing discrepancy between the development of productive forces and the growth of aggregate demand. The socialist economy system prevented productive forces from fully realising themselves by adapting to ever-changing needs of consumers in a timely manner. In fact, the situation was even worse—with the state setting fixed prices for products, enterprises did not have enough funds to expand their production and produce more and more of the missing goods after realising their products because public investments were used in the wrong areas of the economy. As a result, speculation increased uncontrollably.

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Let us examine the factors that contributed to the weakening of the Soviet economy after M. Gorbachev came to power. It should be noted that it was not a random factor that “accidentally” caused problems for socialism. Of course, such factors existed! But, in general, it was a combination of factors, each of which drove a nail into the coffin of the socialist system. They all eventually created conditions under which the socialist system could not survive. These conditions gradually altered the population’s consciousness and thinking, resulting in changes in their behaviour, aspirations, and overall system of values. Let us distinguish between two groups of factors that led to the subsequent events that accelerated the collapse of the socialist system of USSR—exogenous and endogenous factors.

13.3 Exogenous Factors of Economic Degradation and Their Impact The first group of factors is exogenous factors. It includes factors that occurred or took place intrinsically in the Soviet Union since its establishment. Because these factors were determined by the characteristics of the socialist system, M. Gorbachev and his other comrades could only influence them to a limited extent. These factors could also have occurred relatively unexpectedly, i.e., their occurrence was beyond the Soviet government’s control at the time and its decisions had only an indirect impact on them. Nevertheless, the impact of these “external” factors on the Soviet economy was extremely significant.

13.3.1 Falling of Global Oil Prices One of the most significant factors that negatively affected the Soviet Union’s economy was the global prices of raw materials. They obstructed the implementation of reforms and filled the gaps in food production and supply through import. For example, it was more cost-effective to import meat from New Zealand or grain from the United States and Canada than it was to produce them locally. Therefore, the USSR became the largest importer of food in the world: in the early 1980s, the surplus of imported goods over exported goods exceeded 15 billion US dollars; the buying-in of grain amounted to 46 million tons by 1984 compared to 2.2 million tons in 1970 (Kolesnikov, 2020). Oil prices reached unprecedented highs in the late 1970s, rising from 3 US dollars per barrel in the early 1970s to 35 US dollars per barrel in 1981. Several “shocks” of the decade have contributed to it, including the Arab oil embargo, the Iranian Revolution, and the Iran-Iraq War. In terms of current prices, the average oil price in 1980 was 104 US dollars per barrel (Sukharevskaya et al., 2015).

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For a long time, the Soviet Union was one of the largest crude oil exporters in the world. These resources generated significant income in foreign currency, allowing to purchase food and industrial goods from abroad, thus reducing the impact of inflation. In the long run, crude oil has become the main export commodity of the USSR and the largest contributor to its budget. On the one hand, it rescued the socialist state, prolonging its existence; on the other hand, “easy money” discouraged investments in production of high added-value goods, condemning the country’s entire economy to lag behind (Kolesnikov, 2020). Between 1981 and 1983, oil accounted for half of the country’s hard currency export revenues. During these years, the Soviet Union exported approximately 160 million tons of oil and petroleum products each year, thus significantly replenishing its budget with foreign exchange reserves. According to economist N. Shmelev, between 1973 and 1984, the Soviet Union received approximately 200–250 billion dollars from oil export (Shmelev & Popov, 1989). The country’s 12th five-year plan was developed with the expectation that high oil prices would remain stable. However, Western countries began to emerge from the crisis in 1983. Thus, more cost-effective technologies and new “economic” car models have been introduced. Extraction of petroleum began in the North Sea. Its transportation costs have been significantly reduced, and natural gas extraction has expanded significantly. High oil prices, on the other hand, have encouraged many countries to expand petroleum extraction and refining, including in areas where production costs were previously relatively high. Oil supply on the world market gradually began to exceed demand, causing its price to fall. This was not a quick process, but it was noticeable. Peace and relative prosperity were purchased in the Soviet Union for petrodollars in the late 1970s, as was the exceptional influence of the USSR on the world stage. Food products (the impoverished rural areas from which the collective farmers fled were unable to provide food to the expanding cities), consumer goods (production of which, unlike tanks or missiles, had no priority over Soviet industry development), and equipment for factories and production plants were mostly imported. The abundance of oil significantly reduced Moscow’s political caution; therefore, the USSR military invaded Afghanistan in 1980. If oil prices only fell between 1980 and 1985 due to an increase in market supply, they have simply collapsed since the beginning of 1985. Brent crude oil cost 36.8 US dollars per barrel in 1980, 33 US dollars per barrel in 1982, 28.7 US dollars per barrel in 1984, and only 14.4 US dollars per barrel in 1986 (Statista, 2021). After Saudi Arabia refused to subsidise prices at the end of 1985, petroleum extraction began to decline in the late 1980s. According to the famous Russian economist Yegor Gaidar, “Between 1985 and 1986, the prices of resources on which the Soviet Union’s budget depended, the balance of foreign trade, and consumer market stability fell; therefore, the opportunity to buy tens of millions of tons of grain per year, service external debts, finance the army, and the military-industrial complex has decreased several times.” (Kolesnikov, 2020) A state that relied solely on petroleum revenue simply could not exist in such a situation. It was necessary to start economic reforms.

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13.3.2 The Cold War On 5 March 1946, Winston Churchill delivered a speech at Westminster College in Fulton, Missouri, which he later referred to as the main public speech of his life (Churchill, 1946). He was also called the godfather of the Cold War later on. However, many scientists urge not to overestimate the role of personality in history, pointing out that a radical deterioration of relations between former allies would have occurred even without W. Churchill and his speech. In Tehran, Yalta and Potsdam, Washington and London acknowledged Moscow’s right to make Eastern Europe its geopolitical sphere of influence and deploy its troops there, but disagreed with its Sovietisation. Meanwhile, J. Stalin believed that “everyone imposes his own system as far as his army can reach” (Krechetnikov, 2016). In a conversation with Belgian Prime Minister Paul Spaak in October 1956 in Moscow, N. Khrushchev admitted that he wanted “a victory of the working class in France and other Western European countries” in 1945. “The leaders of the capitalist countries rightly see us as a breeding ground for socialist contagion throughout the world. From here, the tension builds”, he said (Krechetnikov, 2016). Therefore, a bipolar system of international relations has developed in global geopolitics with NATO led by the USA representing the capitalist world and the WTO (the Warsaw Treaty Organisation) led by the USSR. NATO was established in 1949, prompting the Soviet Union to establish the WTO in 1955. The further conflict between these military blocs led to the Cold War and the nuclear “arms race”. The Cost of Defending “Socialist Victories”. Another disastrous characteristic of the Soviet economy was its extreme militarisation. The majority of the economy served for war. In his memories, the former Minister of Finance of the USSR, A. Zverev, presented very interesting figures related to military expenditures of the Soviet Union in the pre-war period: if they amounted to 2.7 billion roubles (21.3% of the country’s total expenditure at 1961 prices) in 1938; it was already 4.1 billion roubles (26.3%) in 1939 and 5.7 billion roubles (32.2%) in 1940. Even in the 1941 budget, which was discussed and approved during peacetime, military expenditure amounted to 7.1 billion roubles (33.8% of total expenditure). However, it was not the limit because, during its session, the Supreme Soviet of the USSR decided to increase the number of military expenditures to 7.3 billion roubles (Zvepev, 1973). Thus, even during peacetime, the country spent roughly one-third of its total expenditure on military purposes. The population’s already low incomes were sacrificed for the benefit of economic militarism: the value of public bonds redeemed “voluntarily” by the population in 1939 was 29% higher than in 1938 (ibid.). However, the residents of a large country were certain that all difficulties in their lives could be explained only by the consequences of the previous war: no-one knew and could not know how high the level of military expenditure was because the entire financial system of the Soviet Union was hidden under a veil of complete secrecy. At the same time, the massive load of “defence budget” expenditures was masked in two ways. The first method was to attribute the military expenditure to enterprises

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that operate in “peaceful” industries. In fact, such attribution was very convenient: in the post-war period, the military industry began to decline; therefore, defence enterprises were forced to produce “peaceful” products, at least partially. Despite its name, the famous Ural railway wagon factory “UralVagonZavod” in Nizhny Tagil has been (and possibly still is) the largest producer of tanks in the world for a long time. Has all of its military products been allocated to the defence budget? There are reasons to be sceptical. What about enterprises that belonged to the Ministry under the modest name “Minsredmash”, which developed and produced nuclear warheads of the USSR? The answer is the same. The second method was to use secret sources of funding. The official reports on the implementation of the public budget of the USSR in the first post-war years contained neither a separate article nor a paragraph on the assessment of the costs of the “Uranium Project”. In its Resolution No. 9887 of 20 August 1945, the State Defence Committee directed the State Bank of the USSR to open a special credit line for these purposes, with the share of these “special works” in all public expenses set at 2% (Simonov, 1996, p. 241). However, it must also be acknowledged here that determining the monetary value of military products in the USSR is difficult. Military weapons are produced in capitalist states by private enterprises, which set the prices for the state; however, in the case of the USSR, the prices of military industry products are determined in a completely different manner. The state-owned enterprises sell military weapons to the state at prices set by the state. Therefore, both its price and all purchase expenses do not reflect the actual market value of these products. Even if the USSR exports its weapons abroad, the costs of national defence cannot be calculated using the export prices of such weapons. Therefore, official statistics do not accurately reflect the actual situation regarding national defence expenditures (Table 13.1). According to official data (Shulunov, 1998), the USSR’s defence budget amounted to less than 10% of the country’s Gross National Product, which is truly incredible. It is natural to wonder how it is possible to resist such a large military machine of the USA and their allies, which spends 300 billion dollars per year, with such a small budget. In reality, actual data has been constantly falsified because it was encouraged to show a better statistical situation, and this situation has persisted for many years. Even the Political Bureau of the CC of the CPSU was unaware of the total amount of defence expenditure; therefore, M. Gorbachev said in one of his meetings the following: “Our military budget figures are ridiculous. The entire world is laughing because the United States spends 300 billion dollars on defence, while we spend Table 13.1 Official national defence expenditures of the USSR between 1968 and 1987 (in billions of roubles) (Source Shlykov, 2002) Year

1968 1969 1970 1975–76 1980–84 1985–86 1987

Defence budget of the Soviet Union 16.7 in billions of roubles

17.7

17.9

17.4

17.1

19.1

20.2

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only 17 billion roubles! And we are still able to ensure parity! You need to be able to do that!” (V Politbyuro TSK KPSS…, 2006, p. 125). However, no new information was released following this statement. Finally, the budget was created in such a way that it could be proudly displayed to everyone. The USSR reached the peak of the “nuclear arms race” of the Cold War in 1986, when it deployed 40,000 nuclear warheads (meanwhile, the United States reached its peak in 1962 by deploying more than 30,000 nuclear warheads). Thus, when M. Gorbachev came to power, the USSR managed not only to achieve parity with the USA, but also to surpass the potential enemy in the majority of key indicators. In fact, the total defence expenditures of the USSR during the post-war differed little from those during the pre-war years. The total cost of the Soviet “Uranium Project” between 1947 and 1949 was more than 1.45 billion roubles (in 1961 prices). Such a high level of “atomic” expenditures could not affect the country’s budget— their direct impact changed little in the first five post-war years in the direction of reduction. Of course, it is sufficient to compare two figures: even in 1950, the share of military, naval, internal affairs, and state security costs in the USSR state budget was 25%, compared to 29.6% in post-war period in 1946 (Simonov, 1996, p. 201, 226, 227, 242). It was required by the preparations for war in 1939, as well as the onset of the Cold War. As a result of such unprecedented militarisation in world history, the Soviet Union armed forces had 1398 intercontinental ballistic missiles, 62 submarine-launched ballistic missiles, and 162 heavy bombers capable of carrying nuclear weapons at the start of 1991. The total number of nuclear warheads in them amounted to 10,271 units (Gaidar, 2006, p. 421). In addition, on 1 January 1990, the armed forces of the USSR had 63,900 tanks (more than all countries of the world combined), 76,520 infantry combat vehicles and armoured personnel carriers (Mamyachenkov, 2016, p. 273). In addition to this, a massive amount of artillery, firearms, as well as other military weapons and ammunition must be added. It is difficult to imagine their actual total cost. In the 1970s, the insightful analysts recognised that the military-industrial complex of the USSR had become not only a burden on the country’s economy, but also an actual threat to its stability and security. A. Chernyaev, a well-known party functionary and M. Gorbachev’s assistant, wrote the following in his diary about the reduction of defence costs: “Having created a military apparatus with dozens of marshals, tens of thousands of generals, and hundreds of thousands colonels, and a military industry infrastructure that employs millions – we can’t just ship them off to the moon! By now it is a self-propagating force. It is a social category of our society, one that is highly privileged and influential. You can’t simply part ways with it” (Chernyaev, 1975, p. 66). In fact, the military forces of the USSR had already become not only a serious military but also a political force. Because all defence ministers at the time were members of or candidates for the Political Bureau of the CC of the CPSU, or members of the Defence Council of the USSR, no-one wanted to argue with them and did not reduce funding for their agencies. Based on the dynamics of military spending, some Soviet economic analysts correctly observed in the 1990s that the Great Patriotic War ended for Soviet citizens only after the dissolution of the Soviet Union.

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“Star Wars Program” during World War II, the President of the United States, R. Reagan, produced educational propaganda films. Eventually, he mastered the art of propaganda and manipulation of human consciousness. When communists in socialist countries began to feel a shortage of petrodollars in the late 1980s, it was a good time to put his knowledge to use. They were now grateful for the opportunity to come and discuss disarmament. But R. Reagan surpassed them. During the heated ordinary peace conference, he suddenly announced the launch of his new project—the Strategic Defence Initiative (SDI). Within the framework of this programme, the United States intended to launch hundreds of satellites into space, each outfitted with cutting-edge weaponry such as lasers, nuclear missiles, and magnetic cannons. They had to defend the United States from any potential attack and directly destroy the enemy on its territory from outer space (Grigoriev & Vasiliev, 2013). Confirming the seriousness of his intentions, R. Reagan demonstrated his most successful short film, which lasted only a few minutes. Journalists immediately referred to this initiative as “Star Wars”, associating it with G. Lucas’s highly popular trilogy of the same name at the time. However, R. Reagan’s short film had a far greater impact on the world than films about Jedi. Despite the fact that Soviet scientists predicted that such a system would take decades to develop, the Soviet Union’s leaders began to take the threat seriously. It was rumoured that the Americans planned to use a space laser weapon to destroy the entire leadership of the CPSU when it stood on the mausoleum during the demonstration on the 1st May. The USSR withdrew from peace talks and began developing its own “Star Wars Program”. A significant amount of money has been invested in the development of combat satellites “SKIF”, “KASKAD”, “BOLID”, and “KAMIN”. The first demonstrative prototype of the 80-ton orbital laser system “SKIF DM” was even launched into space. Although the cost of this orbital laser is unknown, it is regarded as one of the most expensive military projects in Soviet history. However, this project failed because “SKIF DM” drowned in the Pacific Ocean on 15 May 1987. This dealt a significant blow to the Soviet country’s economy (Delyagin & Sheyanov, 2011). The leadership of the USSR recognised the gravity of the situation, as a result, it changed its attitude and retreated slightly. Negotiations on disarmament have been resumed. Moscow’s stance has shifted: it has now agreed to reject a significant number of its missiles in exchange for R. Reagan’s promise to end the “Star Wars”. The latter, on the other hand, was ruthless and struck even more insidiously. This time, he created one of the world’s first 3D animated films! Despite the establishment of offices and hired employees, it was now claimed that R. Reagan’s “Star Wars Program” was a complete fabrication. It was clear that a substantial amount of money had been allocated to this project. Soviet intelligence saw all of this and it intimidated its leaders even more. During its 10 years of existence, an incredible amount of 21 billion dollars was spent for the “Star Wars Program”. However, unlike the Soviet Union, the US economy survived its boom period in the 1980s. R. Reagan could afford it (Padenie tsen na neft i raspad SSSR…, 2020).

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The consequences of the arms race. If we were to assess all non-productive expenditures of the state (those that do not generate direct use value for its population), the state’s constantly increasing military component appears to be the most oppressive. This is due to the fact that, despite being very tangible, these expenditures generate relatively little revenue, while meeting the second most important human need—the so-called sense of security. At the same time, the level of military expenditures directly reflect the state’s financial policy, which in turn depends on a number of factors, a significant portion of which is usually classified and not available to the public. Most citizens of the USSR did not have the real household comfort or equipment that people in developed countries had, and many of them were deprived of many things that any person in Western Europe or the United States used on a daily basis. The USSR’s need for massive military expenditures has always been justified either by the “tense international situation” or “threats of global imperialism”. But the question is, what have these powerful armed forces protected for which Soviet citizens have paid such a high price? Was it deprivation that these citizens were subjected to? After all, due to the majority of these armed forces and the entire army, the Soviet people were unable to travel abroad and see for themselves the living conditions of the people living there and their household conditions. The security and military structures, maintained by the Soviet people, did not allow them to do so! Later, in the early 1990s, the military-industrial complex was the first to show signs of a grandiose decline in production. However, even indirect evidence shows abnormal priorities of the military industry: in the 1970s, the USSR produced 20 times more tanks than the USA. To a large extent, all of it has already been dictated not by genuine military needs but by the need to maintain employment in enterprises. A country that has spent its entire life preparing for war has been undermined by the arms race, as well as regimes of socialist system states and support from “fraternal” communist parties (Kolesnikov, 2020). Discussions about scientific and technological progress and the need for it remained only on paper, while in practice it was limited to copying Western technologies, producing the most advanced missiles rather than the most advanced footwear, and opting for “guns versus butter”. As the country’s economic situation deteriorated, M. Gorbachev and the entire party’s leadership realised that continuing to fund the military budget to the extent that it had previously been possible was simply impossible. Therefore, appealing to the apocalyptic nature of a potential Third World War, the USSR side proposed universal nuclear disarmament, with the goal of creating a world free of nuclear weapons by 2000 (known as “new political thinking”). In the context of such “thinking”, a contingent of Soviet soldiers was taken out of Afghanistan, thus demonstrating “good will”, despite the fact that the Soviet government felt strong pressure from the USA for their withdrawal, and the Soviet government clearly began to run out of money to maintain its soldiers.

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13.3.3 The Chernobyl Disaster The explosion that ruptured the reactor core of the Chernobyl Nuclear Power Plant in Ukraine, followed by a 10-day fire that began on 26 April 1986, resulted in an unprecedented release of radioactive materials into the environment. The radioactive cloud from Chernobyl spread quickly to Belarus and Russia, and two days later reached Scandinavian countries, Poland, the GDR, and the south of Germany. It caused radioactive rainfall in Romania and Bulgaria. The radioactive clouds covered the entire northern hemisphere in a few days. The International Atomic Energy Agency (IAEA) described this disaster as “the largest, human-made catastrophe in the history of humanity” (Chernobyl: Looking back…, 2008, p. 9). On 26 April 1986, the total radioactive contamination reached 380 million curies, 400 times higher than during the atomic bombing of Hiroshima. However, comparing these two tragedies is not entirely accurate. According to some data, the source of radiation in Hiroshima was approximately 700 g of uranium. The Chernobyl Nuclear Power Plant was designed to hold 180 tons of nuclear fuel, but during the accident, 2 tons of uranium were released into the atmosphere as a result of direct nuclear chain reaction. The scale and severity of the Chernobyl accident had not been foreseen and took most national authorities responsible for public health and emergency preparedness by surprise. The intervention criteria and procedures existing in most countries were not adequate for dealing with an accident of such scale and provided little help in decision-making concerning the choice and adoption of protective measures. In addition, early in the course of the accident there was little information available and considerable political pressure of the CPSU, partially based on the public perception of the radiation danger, was being exerted on the decision-makers. Only on 28 April 1986, did the Telegraph Agency of the Soviet Union (TASS) receive the first brief official report on the emergency situation. According to an interview between Mikhail Gorbachev, General Secretary of the CC of the CPSU, and BBC, the government of the country did not cancel the May Day parades in Kyiv and other cities because they still “did not have information on the full extent of the disaster” and were afraid of “a terrible panic in a town of several million inhabitants”. Mikhail Gorbachev made an official announcement on television only on 14 May 1986, in which he revealed the true scope of the incident. The Chernobyl disaster had an impact on all aspects of human life, including production, culture, science, economy, and others. 54 collective and public farms were liquidated, and nine industrial processing plants of the Agro-Industrial Complex were closed. Crop areas and their total yields have declined dramatically, as has livestock farming. Between 1986 and 1987, it was estimated that approximately 200 thousand people were involved in emergency response work, including military personnel, nuclear power plant personnel, local law enforcement officers, and firefighters. On the first day of the accident, ambulance personnel and on-site personnel received the highest doses, with a total of around 1000 people (Chernobyl…, 1995).

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It is critical to understand that the accident occurred in a country with a centralised planned economy, which allowed for the immediate mobilisation of massive resources for its liquidation. The entire nation was mobilised and worked towards this goal. Construction equipment, building materials, foodstuffs, and other consumer goods were delivered to the accident site from everywhere. It imposed a significant economic burden; however, the planned economy redistributed funds, reducing supplies to other, equally important, economic areas in other regions. One of the most serious consequences was the inclusion of millions of people living in low-risk areas in a mass relocation of residents that was never completed. It covered vast areas with relatively low level of contamination, the population of which had to be gradually relocated to completely new parts of the country, providing them with all necessary living and working conditions. In comparison, no similar measures were applied in foreign countries where the same level of contamination was recorded (Gerasimova et al., 2006, p. 5). The public authorities in charge of dealing with the consequences of the accident and taking responsibility for the fate of the people in these areas have proven to be incapable of doing so. There simply was not enough money for that. In addition, the number of people eligible for the benefits associated with this accident did not decrease as expected in the long run, but began to increase significantly. As the economic crisis worsened, recognising a person as a victim of Chernobyl accident was almost the only way to increase his income and obtain the opportunity to ensure at least a minimum level of health protection and obtain the necessary medicines. The Soviet authorities had no idea that their attempts to compensate victims of the accident would be misinterpreted by the recipients of benefits, and it will only increase their anxiety. Only later, it was acknowledged that some of the initial measures were improper. Public authorities have gradually begun to remedy the situation. Therefore, it was possible only to predict the psychological impact of some official government decisions on society. The ambiguous interpretation or even misinterpretation of various recommendations of the International Commission on Radiological Protection, particularly regarding the implementation of measures to reduce the level of contamination in foodstuffs, has resulted in the adoption of incorrect decisions and recommendations. All of this heightened public distrust of Soviet authorities and resulted in unnecessary economic losses. However, additional factors have occurred in the Soviet Union that influenced society’s reaction. It is worth noting that the Chernobyl disaster occurred in the midst of the “glasnost” and “perestroika” periods. After nearly 70 years of repressions, ordinary citizens in the Soviet Union began to openly express their dissatisfaction and frustration for the first time, which was almost impossible to do in the past. Mistrust and even hatred against the Central government and the entire communist system may have emerged for the first time despite possible retaliation. In addition, nationalist tendencies have started to become apparent in the country. The Chernobyl disaster symbolised everything that was negative and associated with the old system, such as over-classification, information concealment, and the party’s authoritarian

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attitude. The resistance to Chernobyl symbolised not only the anti-nuclear and anticommunist aspirations of the people, but it was also associated with the emergence of nationalism (Katzwa, 2017). During this time, serious economic problems have worsened significantly, contributing to social unrest and increasing resistance to the formal stance of the government. Within a few years of the accident, anti-nuclear demonstrations became common in the largest cities of Belarus (Gomel and Minsk) and Ukraine (Kyiv and Lviv). The derogatory attitude of some Soviet scientists and government officials, who labelled the emerging public reaction as “radiophobia”, irritated society even more because this term implied that people’s reactions were caused by some kind of mental illness or were completely irrational and abnormal. It served as a convenient excuse for all cases demonstrating that society is somehow guilty and that public authorities are powerless to address such manifestations. After halting the construction of all new nuclear power plants in the aftermath of this catastrophe, the Soviet Union immediately began to plan the development and construction of new thermal and hydroelectric power stations. However, after oil prices fell, it became unprofitable to supply it from Western Siberia to Europe. But what should the extracted oil be used for then? The development of a massive project for the construction of a Tyumen gas and petrochemical complex for the production of plastics was launched as a matter of urgency. However, economic calculations revealed that this project was highly questionable and had therefore been rejected, demonstrating the government’s confusion and lack of a clear strategy at the time.

13.4 Endogenous Factors and Their Impact on the Economy The second group is endogenous factors whose occurrence and impact have been determined (provoked) by the policies or decisions made by the party and state government of the Soviet Union. These factors are significant because they did not appear by themselves, but were “provoked” by strategic and tactical decisions made in light of the specific conditions of the time, as well as their political and economic context. These are “internal” factors that reveal the economic policy implemented by M. Gorbachev and his comrades, which later determined the future destiny of the Soviet Union.

13.4.1 Anti-Alcohol Campaign From the very beginning, the Soviet government took a traditional negative stance on the abuse of alcohol as it was the case in pre-revolutionary Russia. However, the state

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policy on this issue was quite ambiguous. It first manifested itself in the preservation of the so-called dry law that existed during the First World War. On 8 November 1917, one day after the coup d’état, the Petrograd Military Revolutionary Council passed a law prohibiting the production of alcohol and alcoholic beverages was prohibited “until special order is given”. In May 1918, a decree was issued criminalising the production of home-made vodka, punishable by up to ten years in prison and property confiscation. A year later, V. Lenin signed an order prohibiting not only the production, but also the sale of any alcoholic beverages— the offenders now faced five years in prison. By 1920, most of the country’s alcohol factories had been nationalised, and the alcohol they produced was used to make fuel or gunpowder. However, these measures did not prevent the spread of home-made vodka production, which contributed significantly to the destruction of peasants’ farms; meanwhile, recruitment of proletarians, primarily at the expense of rural youth, resulted not only in the “export” of home-made vodka to cities, but also in the formation of habit to consume this product, i.e., an increase in consumer demand (Sherstneva, 2014). However, the state soon could no longer continue imposing such prohibitions. In order to replenish its budget, the Soviet government authorised the production and sale of grape wine with 14% alcohol by volume in 1921, and all other alcoholic beverages with up to 30% alcohol by volume in 1923. Therefore, the prohibitions on the production and sale of alcohol imposed in 1919, particularly during the transition to the NEP, were gradually relaxed. The decree on the renewal of alcohol production and trade was signed by Chairman of The Council of People’s Commissars A. Rykov. Under his leadership, vodka with 30% alcohol by volume became known as “Rykovka”. It was the beginning of the Soviet state’s monopoly on the production and sale of alcohol, which lasted nearly 70 years. Finally, in 1925, J. Stalin signed a resolution on the free trade of alcohol and the introduction of a state monopoly on wine, which also legitimised vodka with 40% alcohol by volume. However, it did not produce the desired results. According to V. Bekhterev, a wellknown Russian neurologist, “The militia arrested 6,296 drunk people in 1924, 21,048 in 1925, and 94,791 in 1926. In rural areas, peasants used 200 million poods of bread to make home-made vodka in 1923, whereas in Leningrad, where home-made vodka was not popular, residents spend between one-sixth and one-third of their earnings” (Bekhterev, 1927). The fight against alcoholism has been ongoing in the Soviet Union. These campaigns were carried out between 1958 and 1972. For example, in 1972, the public authorities reduced the production of spirits, raised prices, and limited the selling hours from 11 a.m. to 7 p.m. At the same time, wine and beer production was expanded. However, for the first time, mandatory work-and-treatment prophylactoriums were established for those who were unable to abstain from alcohol. Therefore, it was deemed that M. Gorbachev’s anti-alcohol campaign began only two months after his coming to power. On 16 May 1985, the USSR issued a decree “On the Increased Struggle Against Hard Drinking and Alcoholism, as Well as the Distillation of Home-Made Vodka”. An anti-alcohol campaign has been launched

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throughout the country. During it, liquor stores were closed, and the use of alcohol at banquets and other events was prohibited. The country’s leaders linked widespread drinking among the populace to a decline in moral values in society and a decrease in the level of production. However, members of the Political Bureau M. Solomentsev and Y. Ligachyov are regarded as the primary initiators of the fight against alcohol abuse. In a 2010, interview with a correspondent of “Komsomolskaya Pravda”, the latter explained that everything began with former General Secretary of the CC of the CPSU, Y. Andropov. “He had good reasons to fight the “green serpent”. The first reason was that the production and consumption of alcoholic beverages in the USSR has increased fourfold over the last 20 years. The budget revenue has also quadrupled. However, violations of discipline and order at work and in everyday life, as well as absenteeism and industrial injuries became more common. Heavy drinking has led to increased crime and morbidity”. His second reason was complaints received from the general public. “Therefore, a special Commission of the Political Bureau was established in 1983 to combat heavy drinking. M. Solomentsev, who did not drink or smoke and led a healthy lifestyle, was appointed as its leader” (Okunev, 2020). In fact, regional anti-alcohol measures have been implemented in a variety of ways, depending on local government. First Secretary of the Moscow City Committee, V. Grishin, ordered to close many liquor stores. The remaining points of sale were permitted to sell alcoholic beverages and vodka products between special hours— from 2 p.m. to 4 p.m. or from 2 p.m. to 7 p.m. Their price was raised twice. If vodka was previously available in any grocery store and a customer could purchase any quantity, after the campaign’s launch, one person could purchase up to two bottles. It was necessary to provide a marriage or death certificate of a relative in order to purchase more. Customers who wanted to buy vodka stood in long lines overnight. Passengers were disembarked from long-distance trains, fired from their jobs, and expelled from the Party for alcohol abuse. Anyone caught by the militia while under the influence of alcohol was fined or detained for 15 days. All alcohol consumption scenes were cut from films, performances, and TV shows. Even song lyrics have been altered so that no mention of the theme of alcohol is made. The network of involuntary treatment prophylactoriums has been expanded, and new outpatient clinics have been established in enterprises. Hectares of vineyards were cut in wine-making areas; the unique selected grape varieties were destroyed, and the equipment purchased for currency obtained for the production of alcohol was scrapped. High-quality wine was processed into yeast. According to some reports, up to 30% of vineyards were destroyed during the campaign. The cultivation of new vineyards, as well as the scientists who carried it out, has been strictly persecuted. Relations between Moscow and Hungary, Romania, and Bulgaria, which produced wine for export to the USSR, deteriorated dramatically (Okunev, 2020). M. Gorbachev’s assistant A. Chernyaev described his impressions of the first dinner at the hotel under the terms of the “dry law” in his book “The Joint Outcome. Diary of Two Eras. 1972–1991 Years”. On 22 May 1985, a communist delegation from Hungary arrived in the USSR. According to A. Chernyaev, communicating without alcohol was unusual because it was difficult to determine the directions

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of the conversation. “The Hungarians chuckled about it, and we made excuses; of course, there is no toasting, and the conversation drifted to irrelevant topics. It is lucky that they are [our] old friends and we can talk frankly on any subject. They tell us: we were bringing you presents, wine sets as usual, but we decided to drink them ourselves on the plane, “so as not to violate [the new laws]”, concluded M. Gorbachev’s assistant.” (Chernyaev, 1985, p. 54) Being very “grateful” for the “dry law”, the citizens of the Soviet country devised various nicknames for M. Gorbachev, which were very much in line with the spirit of the time. The most respectable of them was “General Secretary of Mineral Water” (Okunev, 2020). Sales of sugar, confectioneries, fruit juices, tomato paste, and come other food products used in the production of home-made vodka have increased everywhere since the second half of 1986. Sales of sugar in 1987 amounted to 9280 thousand tons and, compared to 1985, increased by 1430 thousand tons, or by 18%. As a result, sugar was sold for vouchers almost everywhere. According to the State Statistics Committee of the USSR, 1.4 million tons of sugar were used in the production of home-made vodka in 1987, amounting to approximately 140–150 million decalitres of home-made vodka and nearly fully compensating for the decreased sales of vodka and other alcoholic beverages (Ryzhkov, 1995, p. 98–100). Reckless anti-alcohol measures have effectively destroyed the state. According to various estimates, profit from the sale of alcohol to the general public accounted for up to 30% of state budget revenue until 1984 (Grebennikova, 2002, p. 2). By 1987, official sales of alcohol in the country decreased by 2.5 times—up to 16 billion of roubles per year, compared to 1984. In 1987, it was 50% of what it had been in 1980. The number of shops selling alcoholic beverages decreased by 55% between 1985 and 1986 (Petrov, 2021). Between 1980 and 1984, the food industry generated revenue of up to 60 billion roubles per year, but only 38 billion roubles in 1986 and 35 billion roubles in 1987 (Redichkina, 2020). Thus, the USSR budget under this article lost more than 10 billion roubles in 1985. Budget losses amounted to approximately 20 billion roubles in 1986, and another 30 billion roubles in 1987. The anti-alcohol campaign was suspended only in 1988, but production of wine, beer, and vodka could not be restored so quickly and reached its previous level only in 1991. Therefore, according to some economists, the total budget losses under this article amounted to approximately 100 billion dollars (calculated in convertible currency) (Shakhnazarov, 2001, p. 296). To comprehend the magnitude of the problem, it is enough to recall the era of L. Brezhnev, when large industrial enterprises in the country were often faced with a lack of cash or working capital at the factory tills. Therefore, a week before the wages were paid to the workers, the management of these factories, with the help of district and regional party members, “terrorised” the managers of the local spirit and beer factories, demanding that they ensure the continuous supply of their production to the shops. Thus, the necessary funds were collected from the population in order to pay salaries. In previous years, revenues from the sale of alcoholic beverages allowed to maintain and subsidise artificially low prices for bread, milk, sugar, and other basic food

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products. The fact that the majority of the money lost by the state ended up in the pockets of shadow manufacturers and sellers of home-made vodka, significantly increasing inflation, was a much greater loss. Therefore, the state suffered another financial setback. However, there were some positive outcomes from this campaign. During those two years of true struggle against alcohol, 5.5 million newborns were born in the USSR per year on a national scale, which was 500,000 more children than every year in the last 20 years. In addition, by 1987, life expectancy of men in the USSR had risen by 2.6 years to its highest level in the country’s history (Khalturina & Korotaev, 2006). But there is another problem: both newborns and men of pensionable age who live longer are not producers or taxpayers who contribute to the state budget. On the contrary, they all demand additional funds from the state budget for their own subsistence. Later, M. Gorbachev acknowledged the failure of the Soviet leadership in the fight against heavy drinking. In an interview with a kp.ru correspondent in 2015, he stated the following: “I believe that the anti-alcohol campaign was a mistake in the way it was carried out. The line was crossed in terms of store closures, particularly in Moscow, long queues, an increase in illegal production of home-made vodka, and a lack of sugar in stores. It was necessary to implement a systematic long-term fight against alcoholism rather than campaign. The sobering up of the public cannot take place intermittently or sporadically. It takes many years. And it is necessary to fight continuously and uninterruptedly. I think we must fight alcoholism at this moment too. Otherwise, it will get worse” (Okunev, 2020).

13.4.2 Publicity and Democracy For the first time, M. Gorbachev mentioned the need for publicity (glasnost) in his speech in the report of the 27th Congress of the CPSU. The congress was held in Moscow from 25 February to 6 March 1986. According to the understanding at the time, it was supposed to be limited and moderately censored freedom of speech. But why did the subject of publicity arise at that time? It turns out that there were several reasons for this. In the 1970s, it became clear that the rigidity of the Soviet system, and reluctance to respond to the challenges of that time, were primarily due to a lack of democratic mechanisms of the country’s governance. A. Yakovlev, one of M. Gorbachev’s closest comrades, was the first to address this issue, referring to it as a lack of opposition. In 1985, he began to persuade M. Gorbachev that changes in this area were required, such as changing ideological attitudes, relaxing censorship, and even discussing the introduction of a two-party system. M. Gorbachev did not agree on everything, but he recognised the most important point—the need for opposition. Later, in his memoirs, M. Gorbachev described how he felt after the congress, when “perestroika” was “skidding” because “perestroika” was initially hampered by the party-soviet apparatus, the party nomenklatura. Therefore, during his meeting

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with press representatives, he stated the following: “Many of our mistakes and miscalculations are the result of lack of alternative opinions of opposition. At the current stage of development, the press could become such a kind of opposition”. What a strange phrase! Why should the press play the role of opposition instead of informing the public about the political situation and reporting on various national and international events? It turns out that, aside from the media, there was no real or perceived opposition in the Soviet Union at the time (Katzwa, 2017). However, there was another significant reason for this: a severe lack of money! Because lower oil prices reduced petrodollar inflows, the leadership of the CPSU and the Soviet government were forced to make a “very unpopular” decision— to begin raising prices throughout the country! What does it mean? Well, the fact that the country’s population has been convinced for years that there can be no money inflation due to the fixed prices in the planned economy of the Soviet Union! Inflation is a phenomenon that occurs only in capitalism, so the absence of it is the first advantage of socialism as an economic system! In the previous chapter, we discussed the events in Novocherkassk in 1962, when the general public’s dissatisfaction with the increased prices was only managed with the assistance of military forces. These events have clearly demonstrated what happens when a socialist state decides to raise the prices of basic goods! Therefore, M. Gorbachev did not wish to achieve it! So, what should he do? Should he significantly reduce military spending? It would cause additional problems. The fact that this decision could lead to external aggression, which M. Gorbachev feared the least, was secondary! Troubles may arise when he is forced to explain everything to the country’s Minister of Defence and the entire management of the Military-Industrial Complex, with whom he does not wish to argue! In addition, wielding a significant political power, they may vigorously resist! Another option was to seek financial assistance from Western countries, obtain credits to fund public social programmes, and carry out other assumed financial obligations. But it was not so simple! When granting credit, Western countries first consider the country’s human rights situation. They also consider domestic economic policies (because they need to know that the credits granted will not be wasted!). Furthermore, the country may be forced to make certain political concessions, for example, in its relations with Eastern European countries. All of these requirements are usually directly linked to the freedom of speech and the implementation of publicity policy. M. Gorbachev recalls in his memories: “We started promoting critical speeches in the press, on radio, and on television, but once we turned on the oxygen for journalists, they quickly developed a fever of criticism… It concerns both modern politics and history, such as Stalin’s repressions… We initially attempted to remove this “public waste” using conventional methods. The General Secretary drew the attention of the party’s chief ideologist, who gave instructions to the propaganda unit of the Central Committee, which gathered editors and journalists, and told them how to do everything. But these proven methods began to fail gradually. Editors began to make excuses and demonstrate disobedience” (Gorbachev, 1995).

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13.4.3 Prohibit It or Allow It! What Will Be the Choice? the End of the Planned Economy. The fact that the heads of state did not have a clear plan for how to recover the economy is evidenced by the fact that an unexpected but intense political campaign against “unearned income” began just a few months after the 27th Congress of the CPSU. The CC of the CPSU took the initiative for this campaign, issuing a decree “On Measures to Strengthen the Struggle Against Unearned Income” on 15 May 1986. On this occasion, the Presidium of the Supreme Soviet of the USSR issued a special order with the rule of law on 23 May 1986. In this regard, the Council of Ministers of the USSR has also adopted a special decree (Postanovlenie Sovmina SSSR…, 1986). Interestingly, the scope of application of this order included unearned income that did not contradict other legislation in effect at the time, such as the rent of apartments and rooms in cities and resorts, as well as the provision of transport services, etc. The decree of the CC of the CPSU condemned speculation, as well as all types of activities in which citizens “used official state cars and mechanisms, vehicles, residential area, fuel, raw materials and other substances”. Therefore, people who “arbitrarily used official state cars, violated procedures for craftsmen and other individual work” and “used bread to feed animals” faced up to five years in prison with confiscation of property. In this regard, since the summer of 1986, the law enforcement agencies of the Soviet country have been engaged in stormy activities to prohibit and restrict the work of many small repair shops, as well as to destroy the system of private medical care. Private apartment and house rents were restricted or strictly controlled, particularly in the capital and resort areas. The wave of repressions has passed through millions of personal garden plots. Decisions, prohibiting the construction of residential buildings in garden plots, as well as the installation of greenhouses larger than 10 or 15 square metres, have been made in many regions of the country. Garden products could only be used by family members and could not be sold (Katzwa, 2017). M. Gorbachev did not object and even agreed with the Supreme Soviet’s order. The destruction of greenhouses and livestock buildings began in the country. “Extra” floors of summer cottages and furnaces were demolished, and “surplus” products in the garden plots were confiscated. Many rural residents, as well as collective and public farm workers, who developed highly profitable but “non-sectoral” industries in their holdings, have been affected. For example, private flower-growing has been severely impacted in the south of the country. The most beautiful rose plantations in the Krasnodar region were destroyed when farms were ordered to plough up roses and plant potatoes instead. Strict punitive measures were imposed on “speculators”—in urban markets, only vegetables and fruits grown by the sellers were permitted to be sold. The repurchase of products, without which market trade cannot develop, has been recognised as “unearned income”. As a result, marketplaces in all northern parts of the country have ceased to operate, and trade in the central and southern parts of the country has decreased significantly. The May decree was a masterpiece

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of administrative tightening measures. The planned economy was given the final chance to demonstrate its viability (Minzhurenko, 2020). However, the planned economy did not justify the trust of leaders of the USSR. It was unable to compensate for the entire loss incurred by the population by removing people’s opportunity to resolve the situation on their own, by “adding” a certain portion of their extra income to their low governmental wages. People began to express their dissatisfaction openly. Therefore, the collapse of the planned economy as the dominating public farming system finally began in the Soviet Union at the time. As expected, this prohibitive document was withdrawn six months later, in November 1986 but distrust and dissatisfaction with the state persisted for a long time. Therefore, the Supreme Soviet of the USSR passed a new Law No. 6050-XI “On the individual labour activities of the citizens of the USSR” on 19 November 1986. This document diametrically opposed the previous order. It allowed citizens to use more than 30 different types of goods and services in their private activities. Previously, all of them were considered illegal or undesirable activities that were frequently the subject of administrative or even criminal proceedings. The law permitted “individual labour in the field of handicrafts, household services, and other activities based solely on the personal work of citizens and their family members”. Now, according to the law, “individual labour activities in the USSR were used to better meet public needs for goods and services, to increase the employment of citizens in socially beneficial activities, and to enable them to earn additional income based on their labour costs”. Individual labour activities of Soviet citizens were now officially permitted, but only during leisure time and in strictly defined areas. At the same time, it was strictly prohibited to hire labour power. Private entrepreneurs were subject to a 65% income tax. The law provided support for self-employed citizens. The executive committees of the local councils of members of the parliament were directed to assist them in acquiring raw materials, tools, and other equipment required for their work. The law allowed people to engage in individual labour not only in their spare time from working in state-owned enterprises, as was previously the case, but also to make it their primary source of income, involving family members and friends as assistants and forming small partnerships and cooperatives. Then it became even more intriguing! On 26 May 1987, the Supreme Soviet of the USSR passed a new law titled “On Cooperation in the USSR”, which defined the place of cooperation in the country’s economy as well as the principles and forms of cooperatives. In 1988, cooperatives began to spring up everywhere like mushrooms after the rain. Their annual number exceeded 100,000, and by the end of 1989, it was close to 200,000. Cooperatives employed approximately 3 million people and produced goods worth more than 60 billion roubles by the end of 1990 (Minzhurenko, 2020). The cooperatives were granted many privileges and were able to sell their products at market prices, but they were unable to solve the deep problems of the Soviet economy. In 1990, cooperatives accounted for no more than 3–4% of total industrial

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output in the USSR and employed approximately 2% of the country’s economically active citizens. However, all of this occurred against the backdrop of the complete collapse of economy due to the failure of the modernisation programme for machine production, and the “deficit” grew every day.

13.4.4 “Finances Sing Romances!” The new leadership of the CPSU was unprepared to deal with the country’s difficult economic challenges. It was unable to discontinue many programmes that were clearly unprofitable and did not benefit the country, but required investments for which the country lacked funds. What should it do in order to make money? The answer was very simple, but improper at the same time. The printing press to produce paper money was switched on. Tens of billions of paper roubles were simply printed and put into circulation to supplement a part of the budget’s revenue. Because the production of consumer goods did not increase and their prices were fixed and controlled and remained low, the population began to have a surplus of money, i.e., the demand for goods exceeded its supply. Therefore, people began to buy everything they could. The deficit of goods in the country grew rapidly, as did citizens’ dissatisfaction. There was a popular joke (or even a true story) at that time. The administrator of a small town’s department store noticed a large amount of salt in the warehouse, which took up a lot of space. He made a bet with his friends that he could sell it all and left a note on a small piece of paper in the window-case of his shop that said, “No more than 2 packages of salt per person”. All of the salt had been sold out by the evening, and buyers had been continuously asking him, “When will you have more salt?” It turned out that after learning about the restriction of sales, the residents realised that there would be a shortage of salt soon, so they had to buy as much as they could ahead of time! Thus, the salt disappeared from the shelves! The next question was how much salt he had to deliver so that the people would believe there was no shortage of salt. While bread and milk were still available in stores at normally low prices, the population was particularly irritated by the sudden shortage of meat, sausages, sugar, and a variety of other goods. At the very end of 1986, the Council of Ministers of the USSR proposed that meat, sausages, and some other commodities could be sold at higher “cooperative” prices, as cooperatives do. Thus, speculation and corruption have increased even more. Because the state security institutions had lost their primitive “vigilance” after a long period of stagnation, the second economy grew rapidly, gradually taking over an even broader range of goods from the first. The stagnation in the Soviet Union, which had a very severe impact on the entire economy, allowed the “blat”, and speculation to grow stronger. The store shelves were already empty, and little could be purchased without a “blat”, or products could be purchased illegally “under the counter”, and mostly at speculative prices. Speculators were uninterested in increased production because it

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would make them unnecessary. They bought-in the majority of products at a fixed factory price and then sold them on the black market at speculative prices, profiting from the difference between these prices. Therefore, ordinary citizens were forced to pay more to speculators for products whose production did not increase and was sometimes suspended. In August 1990, a crowd of people outraged by the shortage of cigarettes blocked the Shchyolkovsky Highway near Moscow’s metro station. Because of traffic congestion, public transport stopped, forcing passengers to disembark and walk (Baikov, 2020). Leningrad. Nevsky Prospect. There was a long line of people near the tobacco store. Meanwhile, the shop was empty, and it was unclear when the cigarettes would be delivered. Angry people blocked the avenue and started burning fires. Meanwhile, elderly women were selling jars containing cigarette butts on the streets (Progulka po Leningradu…, 2020). It was discovered that the main cause of the overall tobacco shortage was the simultaneous closure of several USSR tobacco factories for repairs. It would never happen in a capitalist economy, and if it did, the remaining tobacco producers would rejoice, able to immediately fill the market with their products at the expense of others and thus triple their profits. However, it most likely happened accidentally in the Soviet Union. But even after witnessing such a situation, no-one cared to change anything by supplying these products to the market. For the administration of the remaining tobacco companies, it would be more of a headache (to calculate how many unplanned products should be made and where to get so many raw materials) than an opportunity to profit from such a situation. However, it was a great opportunity for speculators, who sold a pack of “Astra” cigarettes (a cheaper version without a filter that cost 14 kopecks) for 3 roubles, a pack of “Java” cigarettes for 5 roubles, and a pack of “Cosmos” cigarettes for 6 roubles (Baikov, 2020). The most intriguing fact was that a large number of finished products were discovered after an investigation and subsequent check of the warehouses of the tobacco factory in Leningrad. However, the workers only shrugged their shoulders because no-one “anticipated” that they could sell these products before closing the factory for repairs. In December 1989, riots erupted in the city centre of Sverdlovsk (currently known as Yekaterinburg). It all started when people waiting in line at the gastronome were unable to purchase vodka and champagne for the New Year. Sellers announced that the goods had been sold out. The enraged crowd took to the streets and blocked tram traffic. Thus, a spontaneous riot began. The crowd said that “It was not just for vodka. Winter holiday was approaching, but the stores were empty – no mayonnaise, sausages or sweets were available”. At the request of protesters, urban and regional leaders came to the place of riots near the building of Ural State University. According to the newspaper “Rabochaya Tribuna”, “they managed to relieve tension and resolve the situation. Wine and vodka products were soon delivered to many of the city’s shops”. The majority of rioters went shopping, but some protesters began to gather in front of executive and party committee buildings in Sverdlovsk. “Now people were no longer discussing vodka, but rather the fact that they could not buy meat or oil in exchange for vouchers – there was clearly a scarcity of these products

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in stores. No-one remembered the issue of alcohol any longer because, by the end of the day, it was freely sold in many points of sale” (Perekryli dorogi, trebovali vodki…, 2019). Because of the scarcity of goods, residents began to purchase them in large quantities, regardless of whether they needed them or not. They were constantly walking around the shops, watching if anyone delivered any “scarce” goods. If that was the case, buyers immediately formed long lines at the stores or departments selling the corresponding scarce goods and purchased them all. Here, the literal phrase “to feel comrade’s elbow” had a very negative connotation in this context because people standing in line continuously pushed each other with their elbows in order to purchase the final scarce goods in a timely manner, i.e., faster than the person standing nearby because they might leave empty-handed. If there was a rumour that flour, sugar, or groats were going to disappear, the residents rushed into shops and carried these products out in tons, which they later stored in their cellars and collective garden plots in case they needed them later! It especially concerned pensioners who remembered the wartime and the scarcity of products at the time. This circumstance significantly distorted overall production planning in any industrial and agricultural area on a national scale because it prevented an objective assessment of the actual need for individual goods or services. The speculation was so widespread that it involved the majority of residents, particularly pensioners who could not make ends meet. Workers, on the other hand, spent the majority of their time in stores looking for a variety of products and waiting in lines. According to studies conducted at the time, the search for products and standing in lines next to all shops in the country at the time took 20% more time than the total working time of the USSR workers combined. These were significant losses of working time at the national level. On the other hand, people were enraged because they could not get the necessary products and services and had to buy them from speculators. They became angry and jealous. They had a grudge against people who were able to act “wisely”, i.e., to gain access to scarce goods or services. At the time, the phrase “Don’t have a hundred roubles, rather have a hundred friends” took on a new meaning because people could not buy anything with Soviet money, but their friends could help them buy everything they needed. Therefore, people frequently choose friends based on how much benefit they could derive from them rather than whether they liked or disliked them. Being “beneficial”, you had to find “beneficial friends” to assist you in providing all of the necessary material valuables in order to create a “decent” life that would appear “no worse than others”. By being friendly with all of his “friends”, such an individual gained the social status of a “successful Soviet citizen”, allowing him to feel very comfortable even in times of public deficit of goods. However, those who were not so successful and “needed” to their friends were forced to pay a speculative price for all the deficit goods. Because the population paid more, it had to earn more, causing a huge issue to the socialist state. The state was forced to print more socialist money (certificates) and raise inflation. To begin a true market reform, it was necessary to liberalise prices and deal with the country’s

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financial issues, such as attempting to eliminate the budget deficit and halting the increase in public debt. However, it would most likely become similar to capitalism! There was insufficient political will to do so, and the life of the socialist economy was coming to an end: goods were already disappearing from store shelves, and inflation was steadily rising. However, belief was even more important than the economy. Nobody believed in communism anymore. The society was motivated. Theft and corruption became the norm of everyday life organisation, which corresponded to the artificial adjustment of the shortage of goods (bribes in the trading area and the Soviet verb “to get” flourished), but not the logic of the market economy. The so-called administrative market thrived—many suppliers travelled across the vast country, handling supply issues for their enterprises and adhering to the adage “You give me and I give you”. Until 1991, depositors had no real money in Savings Banks, only records in their accounts, and the state managed to borrow these resources as well. Inflation has eventually had an impact on people’s savings. As a result, M. Gorbachev’s transformations were gradual—and, in this sense, purely “Chinese”. However, the Chinese had time, whereas Gorbachev did not. China in 1979 resembled the USSR in 1929. Prior to the reforms, China was an agrarian country with vast resources of cheap labour, and the transformation of its economy coincided with urbanisation. On the other hand, the USSR was an urbanised country—the urban population had already surpassed the rural population since the late 1950s, and there had been no cheap labour power. Therefore, what could be the Chinese method for reviving the economy of a country that was reliant on oil and unable to withstand external shocks such as falling oil prices?

Chapter 14

The Dissolution of the Soviet Union

14.1 Boris, You Are Wrong! On 21 October 1987, the CC of the CPSU convened a plenary session in Moscow to discuss “issues related to the celebration of the 70th anniversary of the October Revolution”. The plenary session was about to end when the First Secretary of the Moscow City Committee of the CPSU suddenly raised his hand. M. Gorbachev announced, “Comrade Yeltsin would like to make a statement”. Boris Yeltsin later recalled, “I did not have a written speech, only abstracts scribbled on a piece of paper”. After taking the podium, he stated that he had no comments and “fully supports” the General Secretary’s report. However, in his opinion, it was necessary to “restructure the Party’s work”, “beginning with the secretariat of the Central Committee”, because “five months have passed since the June plenum of the CC of the CPSU, and nothing has changed in terms of the style of work”, including the Secretary of the Central Committee, Y. Ligachyov. “We should be more careful when we announce the time frame and the actual results of perestroika in the next two years”. B. Yeltsin emphasised that “it is always encouraged to accept fewer documents, but more of them are constantly accepted”. According to him, it causes “some kind of disbelief in these resolutions”. In addition, the Soviet state clearly loses because “the party power is given into the hands of one person who is completely protected from any criticism”. Recently, there has been an increase in praise “for the General Secretary”. Therefore, B. Yeltsin asked to be dismissed from his post as a candidate for membership in the Political Bureau. The subject of his leadership to the Moscow Party Organisation had “to be decided during the plenary session of the city party committee” (Korchenkova, 2017, p. 4). The participants of the plenary session harshly criticised B. Yeltsin, describing his speech as “politically erroneous” and recommending to dismiss him from the position of Head of the Moscow Party Committee. The next day, “Pravda” published a brief report: “The plenum approved the main provisions and conclusions set out in the M. Gorbachev’s report and adopted a resolution on the subject. The plenum

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_14

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also discussed organisational matters. Hereby, the plenum of the CC has completed its work”. There was no mention of B. Yeltsin’s speech. However, all of this impressed the society. Standing openly against the party line and its General Secretary was a huge challenge. Unlike B. Yeltsin, none of the party’s high-ranking representatives dared to do so. However, during the “perestroika” the gradually growing publicity policy opened up new opportunities for criticism, even at the level of high-ranking public and party officials. Even without realising it, the official party press of the time greatly contributed to the growth of B. Yeltsin’s political figure by deliberately remaining silent and thus creating an inadequate public interest in both the speech of B. Yeltsin in the plenum and the response of the party’s functionaries to it. Because no verbatim reports remained, everyone was wondering what B. Yeltsin actually said in his speech. It was attempted to create various versions of speech. The authorship of one of them is attributed to M. Poltoranin, the then Chief Editor of “Moskovskaya Pravda”, who later became Minister of Press and Mass Media during Boris Yeltsin’s presidency. M. Poltoranin recalled in one of his interviews in 2011 that Chief Editors of other Soviet publications had asked him to “get the famous speech”. He said, “I sat down and wrote it. If his true speech was published, the people would be disappointed”. A former employee of the Central Committee did not rule out the possibility that this version of the speech could have been written in collaboration with B. Yeltsin himself. However, B. Minaev, a journalist and biographer of B. Yeltsin, claims that B. Yeltsin had nothing to do with this work: “Yeltsin knew nothing about it. His aide L. Sukhanov recalled how he brought this text to the leader, after purchasing the latter’s “speech” for a rouble near the metro stop, and told B. Yeltsin this story as a joke. Of course, he was taken aback” (Korchenkova, 2017, p. 4). This “speech” addressed a variety of issues, including the need for Soviet troops to withdraw from Afghanistan, a lack of products in stores, opposition to Y. Ligachyov, and even criticism of General Secretary’s wife, Raisa Gorbacheva, and her behaviour. Therefore, B. Yeltsin was immediately removed from his position in the Moscow Party Committee and from the list of candidates for the Political Bureau of the CC of the CPSU and demoted to Deputy Minister for Construction of the USSR, allowing him to retain his ministerial rank. M. Gorbachev was hesitant to grant him access to politics, but he failed to do so. The more he tried to silence B. Yeltsin, the more popular the latter became in society. His interview with foreign press representatives, as well as the subsequent “silence” of the Soviet media, has greatly contributed to this. After all, B. Yeltsin succeeded in being elected to the 19th All-Union Party Conference since the Karelian party organisation. The organisers of the conference did not allow B. Yeltsin to speak until he finally decided to take the podium and ask for permission to speak. He succeeded in doing so, and at the time he began openly criticising the supreme party government from the podium, eventually demanding his political rehabilitation. His opponent, Y. Ligachyov, responded that B. Yeltsin had a destructive, rather than a creative force in the Party, and ended his speech with the words: “Boris, you are wrong!” (Matyukhina, 2018).

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However, it was too late. This arrogant remark from the podium, “Boris, you are wrong”, elicited an immediate response in the rallies under the slogan “Boris, fight!” The most important thing is that the 19th All-Union Party Conference made a principled decision to hold elections for the First Congress of People’s Deputies of the USSR on an alternative basis.

14.2 The End of Gorbachev Era This party conference has radically changed the country because the Party forum was broadcast live on public radio and television for the first time. It was a triumph of publicity accompanied by rallies and public speeches. In July 1988, a rally was held in Sverdlovsk in the form of a meeting with conference delegates, who expressed their support for B. Yeltsin and condemned Y. Ligachyov’s speech. The First Congress of People’s Deputies convened in 1989 in the midst of a rapidly deteriorating economic situation. M. Gorbachev was in the position of a person who was unable to keep up with the changes that occurred. He was victoriously elected as Chairman of the Supreme Soviet. There were 2,123 votes for him and 87 votes against him. However, when he was elected as President of the USSR at a later congress, only 60% of the votes were cast in his favour, and his popularity continued to decline rapidly. Why? 1. The country’s economic situation deteriorated gradually and nothing could be done without deep economic reform, but M. Gorbachev was hesitant to act. He was only wasting time because, together with the “Old Guards” of the CPSU, he still strongly believed in the possibilities for socialism’s renewal; 2. He was a true embodiment of the “Old Guards”. He was torn between the conservatives who put pressure on him through the “party line” and the democrats, with whom he was still afraid to associate. But why did M. Gorbachev disagree with the democratic part of society? He made every effort to retain power that had already slipped from his grasp as General Secretary of the CC. He changed tactics after sensing that the party’s conservatives were putting pressure on him, putting him at risk of losing power in the party. M. Gorbachev then decided to remain in power as President rather than General Secretary. To prevent the party’s leadership from controlling him, he abruptly advocated the repeal of Article 6 of the Constitution of the USSR (on the leading and guiding force of the Communist Party in the state—author’s comment), despite previously defending it fiercely. But it was too late because he already lost his popularity. B. Yeltsin described this period as follows: “Gorbachev was tired of perestroika. He was clearly aware of the deadlock. The evolution of the situation was obvious—the time had come to gradually transition from failed reforms or the “Thaw” to “freezing” of political climate, stabilisation of the situation by force, and strict control of political and economic processes. His first step was to assume the presidency. He has recently completed the formalisation

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of his new status. At the same time, he protected himself from communists because it was much more difficult for them to threaten the President of the USSR” (Yeltsin, 2008, p. 5). The deteriorating economic situation forced, whereas public relations policy allowed the regions of the USSR to seek solutions on their own to improve their economic situation. No-one wanted to listen to the Centre’s instructions any longer because they promised nothing good. Lithuania was the first Soviet republic to declare its separation from the CPSU at its congress. Soon after, M. Gorbachev arrived in Lithuania and attempted to persuade the leaders of the Communist Party to change their minds and revoke their decision. However, it was ineffective, and M. Gorbachev returned to Moscow without accomplishing anything. Later, on 11 March 1990, Lithuania declared its independence. How has M. Gorbachev reacted to it? He decided to impose an economic blockade on Lithuania, which had no effect and only made people angry. Lithuania continued to consider itself independent, but the attitude towards Moscow has constantly deteriorated. In the meantime, B. Yeltsin was elected as a member of the Supreme Soviet of the Russian SFSR on 4 March 1990 and as Chairman of the Supreme Soviet on 29 May 1990. The Russian democrats then concluded that they could not achieve anything at the Congress of People’s Deputies of the USSR, so they decided to call the Congress of People’s Deputies of the Russian SFSR. Soon after, on 12 June 1990, the Congress was convened and immediately adopted the Declaration of State Sovereignty of the Russian SFSR. It declared the priority of the constitution and laws of the Russian SFSR over the legislation of the Soviet Union (sovereignty) then the conflict between Russia and the Centre began. But what is Russia if not the centre of the Soviet Union? Admittedly, the conflict between the governments of the Russian Federation and the Soviet Union was related to their economic programmes. M. Gorbachev made every effort to maintain the gradual and indecisive programme of the then-Chairman of the Council of Ministers of the USSR, N. Ryzhkov, while B. Yeltsin supported the 500 Days Programme1 of economist G. Yavlinsky. However, the programme has been criticised by the Union government, as well as many economists and politicians who have advocated for the immediate establishment of market relations prior to privatisation. Meanwhile, N. Ryzhkov and his team had their own programme for transition to a market that had to last five years rather than 500 days! When confronted with their opposition, M. Gorbachev began to seek a compromise, proposing to combine the two programmes into the “USSR President’s Programme”. However, his hesitancy and contradictions, as well as his “centrism” and desire to rise above his “opponents” no longer satisfied the left and right wings, who correctly saw the weakness of state power and betrayal of national interests in

1

This programme was a draft economic agreement that clearly defined the powers of the Centre and the Republics. It included 20 more draft laws that allowed to start privatisation by keeping current prices in place for 100 to 250 days. The Supreme Soviet of the Russian SFSR supported this programme.

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his political manoeuvres. Each new week of conflict between the “centre” and the republics, “democrats”, and “partocrats” heightened societal discontent. On 16 October 1990, B. Yeltsin delivered his programme-related speech at the Supreme Soviet of the Russian SFSR, in which he criticised M. Gorbachev for his hesitancy and non-compliance with mutual agreements of the 500 Day Programme, and announced that Russia would carry out its programme on its own without the approval of the Soviet Union government. This statement was purely political because the programme was actually designed for the Union reforms. In addition, this programme included a new version of the “one-channel” tax collection: all taxes had to be collected to the republican budget, and then the republics had to recalculate them and pay a share to the centre. This irritated M. Gorbachev because it represented a clear decentralisation of government. Russia and the Union Centre began an irreconcilable conflict. The Centre’s subsequent actions have only exacerbated the Union government’s crisis. Following the withdrawal of N. Ryzhkov’s government, the new government, led by V. Pavlov, suddenly announced that the denominations of 50 and 100 roubles would be changed. It allowed to change them only until the next morning. People waited in lines at savings banks, where everyone tried to exchange their money, while others bought everything they could buy. The next day fixed prices of many products nearly doubled! People stood in long lines to buy bread, and the stores were quickly emptied. On January 1991, special Soviet military forces, aided by tanks and combat vehicles, stormed the Vilnius TV tower belonging to the Radio and Television Centre and attempted to occupy the Supreme Council building. Lithuanians defended their Supreme Council. However, all of it had an immediate impact on the entire Soviet Union. Following the events in Vilnius, the Republics of the Soviet Union began to negotiate and conclude direct horizontal republican agreements with each other by deliberately bypassing the Centre. The obvious process of the Union’s dissolution took place. Upon the proposal of the People’s Deputies of the Russian SFSR, it was decided to create the post of President of Russia in a referendum held by Russian Federal Republic on 17 March 1991. Following the general elections on 12 June 1991, B. Yeltsin was elected as the first president in the first round with approximately 57.3% of the votes cast. It increased public trust in B. Yeltsin because M. Gorbachev was elected as President only by the Congress of People’s Deputies, whereas B. Yeltsin was elected by the people themselves in general elections (Istorija RF, 1991). B. Yeltsin started to work right away. He issued a decree prohibiting all party organisations from engaging in activities in institutions, enterprises, and educational organisations. It has resulted in a decrease of the influence of the Communist Party and the number of its members, which has already declined by 2.5 million people between 1989 and 1991. B. Yeltsin and his followers resigned from the Communist Party at the (final) 28th Congress of the CPSU held on 2–13 July 1990. Meanwhile, M. Gorbachev and conservatives remained in the CPSU. To that end, the Russian party conference was convened shortly before the opening of the Congress of the entire CPSU on 19–23

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June 1990, which identified itself as the constituent congress of the Communist Party of the Russian Federation (within the CPSU). The Russian communists separated themselves from the CPSU in order to follow the example of the Communist parties of Lithuania and other Baltic States.

14.3 An Attempt to Stop the Dissolution of the USSR and Begin the Fourth Administrative Cycle 14.3.1 The Novo-Ogaryovo Process “Do you consider it necessary to preserve the Union of Soviet Socialist Republics as a renewed federation of equal sovereign republics, in which the rights and freedoms of a person of any nationality will be fully guaranteed?” This question was raised in a referendum held on 17 March 1991, which was attended by citizens from only nine republics because the Baltic States, Moldova, Georgia, and Armenia refused to participate. For the first time, citizens of the Soviet Union had the opportunity to express their views on the country’s future. However, the phrase “sovereign republics” must be noted. What does sovereignty mean and how does it differ from independence? (Formula raspada, 2016). The question was answered affirmatively by 76.4% of voters. However, the wording of the main referendum question, whether it was about preserving the USSR or forming a new federation, sparked a lot of debates from the start because it seemed confusing. Many opponents of the Soviet Union did not dare to reject promises of public institutions to respect human rights and freedoms. Everyone had a different interpretation of the question. However, the fact that ordinary citizens were asked what country they wanted to live in for a first time seemed delightful. Shortly after, the Novo-Ogaryovo process began, with the goal of forming the New Union Treaty, in which only nine republics participated, as in the referendum. On 22 May, the Supreme Soviet of the USSR passed a resolution requiring negotiators to coordinate the text of the draft Union Treaty with the results of the referendum on the preservation of the USSR. This process, which began in April 1991, was named after M. Gorbachev’s estate in Novo-Ogaryovo, Podmoskovye. The process violated the then Constitution of the USSR (Articles 173 and 174) because any amendments to the constitutional order of the USSR could only be made by a two-thirds majority of the members of the Congress of People’s Deputies of the USSR, and the Constitution was the most important law of the USSR. The main source of disagreements in the discussions was the topic of taxes and budget of the Union. M. Gorbachev advocated for a system of “three-channel” tax collection into the Union’s budget, where all taxes would be paid separately to the union, republic, and local institutions. However, B. Yeltsin, who was elected as President of the Russian SFSR on 12 June 1991 (IctopiR PF, 1 iolR 1991), and L. Kravchuk (the first President of Ukraine—author’s comment) strongly opposed

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it, advocating for a “one-channel” taxation system in which the Republics would pay fixed contributions to the Union’s budget on their own. It means a clear decentralisation (Protokoly “novoogarevskikh mudretsov”…, 2001). M. Gorbachev was concerned about the Union’s taxation because this decision had to determine the administrative and territorial structure of the reformed Union. The federation would remain if Union taxes were kept, but if Union taxes were abolished, the Union would become a confederation. On 27 June 1991, the draft Treaty on the Union of Sovereign States was published in the newspaper “Pravda”, which received many critical comments from people on all sides of the social and political spectrum. The most critical form was expressed by representatives of the scientific intelligentsia, who referred to the Treaty as “an act to legitimise the Soviet Union’s dissolution” (Literturnaja gazeta, 1991). On the same day, the Supreme Soviet of the Ukrainian SSR adopted a resolution postponing the discussion of the draft Union Treaty until September 1991. According to this resolution, it was necessary to consider the compliance of the draft Union Treaty with the provisions and principles of the Declaration of State Sovereignty of Ukraine and its Act on Economic Independence. However, the final version of the Union Treaty has been prepared and discussed previously. It provided for a common foreign policy, military, and currency, which had to be issued and controlled by the single Central Bank; meanwhile, the new constitution of the Union had to clearly outline methods to withdraw from the Union. The document was initialled by all nine republics. It remained to sign it solemnly on 20 August 1991.

14.3.2 August Coup We declare that, in accordance with Article 127 3 of the USSR Constitution and Article 2 of the USSR law “On the Legal Conditions Applying in a State of Emergency”, and striving to fulfil the demands of broad strata of the population concerning the need to take very decisive measures to prevent society from sliding towards a national catastrophe and to safeguard legality and order, a state of emergency is introduced in certain localities of the USSR for a period of six months, beginning at 4 a.m. Moscow time on 19 August 1991. That it is established that the USSR Constitution and the USSR laws have unconditional supremacy throughout the USSR (Obrashchenie k sovetskomu narodu, 1991). This report was broadcast on all media channels of the USSR on 19 August 1991. The so-called August Coup began, which became the cause of the further dissolution of the USSR, despite its purpose being a completely different development of events. “Because M. Gorbachev is unable to continue performing his duties “due to the state of his health”, the State Committee on the State of Emergency takes over all power in the country”. In fact, M. Gorbachev was on vacation at the time, resting at the “Foros” governmental residence in Crimea.

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This “Committee” included Vice President of the USSR G. Yanayev, Prime Minister of the USSR V. Pavlov, Minister of Interior of the USSR B. Pugo, Minister of Defence of the USSR D. Yazov, Chairman of the KGB V. Kryuchkov, and others. These were the true old conservatives who had lost patience watching the power slip out of the hands of the Centre. According to G. Yanayev, the main objective of the “putschists” was to prevent the signing of the New Union Treaty. At that time, the central government of the country was simply in a state of uncertainty. The Soviet Union have come to the crossroad and had only two options—either to restore the power of the CPSU or to condemn itself to the dissolution. Therefore, the old conservatives decided to stop the ongoing process of power decentralisation in the country, which at the time increased its momentum to begin new, fourth administrative cycle in the country. The coup organisers issued a statement to the citizens of the USSR in which they stated that the political freedoms granted by M. Gorbachev led to the formation of numerous anti-Soviet structures aimed at occupying government by force, splitting the USSR, and finally destroying it completely. Therefore, in order to resist it, the country’s government had to be changed. On the same day, leaders of the “committee” issued their first order, which prohibited all associations that were not recognised by the USSR Constitution. Simultaneously, many parties and organisations that opposed the CPSU were dispersed by reintroducing strict censorship and closing many publishing offices of newspapers and other forms of media (Benyumov, 2016). In order to ensure the new order, an army and tanks were deployed in Moscow on 19 August 1991. However, the fight of the “committee” for power did not seem to be simple because President of Russian SFSR, B. Yeltsin, who had organised a strong defence, was against them. He climbed onto one of the tanks and ordered the organs of local power to unswervingly adhere to constitutional laws and decrees of the President of Russia. The order started with the words: “We considered and consider that such methods of force are unacceptable. They discredit the union in the eyes of the whole world, undermine our prestige in the world community, and return us to the cold-war era along with the Soviet Union’s isolation in the world community. All of this forces us to proclaim that the so-called committee’s ascendancy to power is unlawful. Accordingly, we proclaim all decisions and instructions of this committee to be unlawful” (Yeltsin, 1991). That made a strong impression on the people and troops, inspiring everyone to oppose the “putschists”. The confrontation between the two structures—the conservatives of the Soviet Union and the Russian democrats—ended on 20 August 1991 with B. Yeltsin’s victory. All members of the “committee” were immediately arrested. M. Gorbachev returned from “Foros” on the night of 21–22 August 1991 (accompanied by B. Yeltsin’s delegation). He claimed that he came back to a different country and repeated those words many times in the future. However, he did not fully comprehend it at the time, so his initial reaction was inadequate to the newly changed situation. Besides, who, after such an experience, could easily return to the previous routine or even create a new one corresponding to the changed situation? B. Yeltsin described the event as follows:

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“Late at night, M. Gorbachev and his family stepped off the plane at Vnukovo-2 airport with a “distorted” face expression, as someone put it. I watched this footage on TV and thought to myself, ‘Although M. Gorbachev was and still is my political opponent, it is great that such a terrible story has such a happy ending’” (Yeltsin, 2008, p. 121).

14.4 The Belovezha Accords. The Fall of the USSR The subsequent events unfolded like an uncontrollable avalanche. From 20 August to 27 October 1991, eleven republics of the Soviet Union declared their independence (withdrawal from the USSR). The Communist Party of the USSR ceased to exist. Almost all public institutions of the Soviet Union have also ceased their operations. In the autumn of 1991, the Novo-Ogaryovo Process working group prepared a new draft Union Treaty to recognise the Union of Sovereign States as a confederation of sovereign states. Its interim version had to be signed on 9 December. However, in a referendum held on 1 December 1991, more than 90% of the Ukrainian population voted for their country’s independence, and on 5 December 1991, Ukraine’s President, L. Kravchuk, declared that the country would denounce the Treaty on the Creation of the Soviet Union, which was signed in 1922. Thus, the agreement has stuck again (Protokoly “novoogarevskikh mudretsov”…, 2001). On 8 December 1991, Presidents of Russia and Ukraine, B. Yeltsin and L. Kravchuk, as well as Chairman of the Supreme Soviet of Belarus, S. Shushkevich, signed an agreement at the governmental residence “Viskuli” in the Białowie˙za Forest (Belarus), declaring the USSR as effectively ceasing to exist and establishing the Commonwealth of Independent States (CIS) in its place as a successor entity (Soglashenie o sozdanii SNG…, 2016). The agreement included a list of the main spheres of joint activity, implemented through jointly coordinated institutions, such as coordinating foreign policy activity, cooperating in the formation and development of a common economic space in the area of customs policy, cooperating in the development of transportation and communications systems, cooperating in the field of preserving the environment, and battling organised crime. In addition to the main meeting document, the leaders of the countries signed a statement declaring that “negotiation on the preparation of the New Union Treaty has stalled; therefore, the objective process related to withdrawal of Republics from the SSR and formation of independent states has become a fact”. Later, the heads of the three states emphasised that they decided to form the Commonwealth of Independent States “recognising responsibility for their people and the global community, as well as the urgent need to put political and economic reforms in practice”. The accords were ratified by the Supreme Soviets of Ukraine and Belarus on 10 December 1991 and by the Supreme Soviet of the Russian SFSR on 12 December 1991. On 21 December 1991, the leaders of eight additional former Soviet Republics

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signed the Alma-Ata Protocol. On 25 December 1991, President M. Gorbachev resigned and dissolved the Soviet Union. At the same time, the State Flag of the USSR was lowered in Moscow.

14.4.1 Causes and Lessons of the Collapse of the USSR From a legal standpoint, the USSR was an asymmetric federation (in which different constituent states possessed different powers) with elements of the confederation. At the same time, the Union Republics were in an unequal position. First of all, the Russian SFSR did not have a Communist Party or an Academy of Sciences, but this Republic was the primary donor of financial, material, and human resources to the remaining Union Republics. The Communist Party of the Soviet Union (CPSU) supported the unity of the Soviet state system. It followed a strict hierarchical principle and duplicated all the remaining public institutions of the Soviet Union. According to Article 6 of the 1977 Constitution (Fundamental Law) of the Soviet Union, “the leading and guiding force of Soviet society and the nucleus of its political system, of all state organisations and public organisations, is the Communist Party of the Soviet Union”. As the economic stagnation worsened in the 1980s, the USSR began to lag significantly behind the developed capitalist states; therefore, its leaders actively looked for ways to revitalise the economy, but they failed to do so due to the inherent internal contradictions of socialism as an economic model. Despite the success of power decentralisation in the past, the government has this time released more democratic constraints and implemented a policy of transparency, allowing ordinary citizens of the country to become aware of their actual situation, as well as objectively evaluate the government’s actions and seek independent solutions to change the situation. It had an impact not only on individuals, but also on nations and national republics. According to some researchers, one of the most critical decisions made during this period was M. Gorbachev’s refusal to equalise the status of the Russian SFSR with that of other republics. M. Gorbachev was strictly opposed to the formation of the Communist Party of the Russian Federation and to the Russian Federation being granted equal status with other republics. Perhaps it could contribute to the unification of Russia and the union structures and thus to the ultimate preservation of a United State. However, it was simply the unjustified political misrepresentations. Another interesting point of view is that the Declaration of State Sovereignty of the Russian SFSR was adopted to prevent the withdrawal of the autonomous republics from the Russian SFSR, rather than to split the Soviet Union. The CC of the CPSU prepared the new status of the Russian autonomous republics in order to weaken the Russian Federation and B. Yeltsin; therefore, it decided to equalise the rights of the Russian autonomous republics and the republics of the Soviet Union. For the Russian Federation, it would mean the loss of half of its territory—nearly 20 million inhabitants and the majority of its national resources. Therefore, on 24 December 1990, the Supreme Soviet of the Russian Federation passed a law stating that the

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Russian public institutions were entitled to suspend any actions taken by the USSR institutions “if they violated the sovereignty of the Russian SFSR”. However, we cannot say that these were decisive factors in the collapse of the Soviet Union. However, few of the researchers could deny that the country changed unrecognisably as a result of the August Coup. As a result, the country experienced a classic revolutionary situation in a relatively short period of time, in which the lower-ranking bottoms attracted by convergence with the West were no longer willing to live as before. By 1997, the private sectors of Russia, the Czech Republic, Slovakia, Hungary, Estonia, and Lithuania were generating 70 per cent or more of their respective GDPs (Lavigne, 1999, p. 200). Meanwhile, the tops, having lost the development guides and traditional tools of propaganda and persuasion, could no longer govern in the old way. The artificial disintegration of the country’s one-party system, which resulted in the split of the ruling elite, has also played a significant role in this. Has this system completely failed, or have some of its individual elements survived?

Chapter 15

Wrecks of Socialism

M. Gorbachev, who had just returned from “Foros”, appeared on central television and addressed the public on 22 August 1991: Dear compatriots, I am speaking to you now at a time when I can confidently declare that the coup d’état has failed. The conspirators miscalculated. They underestimated the main thing that people became completely different during these extremely difficult years. They inhaled the air of freedom, and no-one can take it away from them (Moroz, 1991). Is It True That Russian People Changed So Much That No-One Can Take Away Their Sense of Freedom?

15.1 The Modern Oligarchs The capitalism that returned to Russia in the 1990s was correctly described as nomenclatural, bureaucratic, and, later, oligarchic. It has survived to the present day, albeit with some changes, due to the composition of those people (and professions) who have successfully merged with the ruling party and government. However, it was not foreseen either in the “perestroika” or in the subsequent reforms implemented by Y. Gaidar’s team. On the contrary, the true liberal reforms in Russia took quite a short time—from November 1991 to December 1992. The nomenklatura has been able to organise effective resistance to them and, most importantly, to privatisation, which has taken place in a compromise way. Despite the government’s efforts to legalise privatisation, the actual power and political influence remained in the hands of corporate directors (also known as “red directors”) and industrial lobbyists. They were eventually replaced by oligarchs; the majority of whom were “appointed” by the state through the loans for shares scheme rather than by providing funding to the red directors. At the same time, the system remained the same—the main property belonged to those in power (here we are talking about large-scale © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_15

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owners). However, those who own property also wield significant power over the government. In the early 2000s, the Chekists became the new oligarchs of the state. The only difference between the new government and the former Soviet government was that the new oligarchs were not afraid to publicly display their assets and did not need to hide them. The country’s return to capitalism has consolidated private ownership of capital goods, which has served as the foundation of the new economy. How much that economy has become more efficient is another question!

15.1.1 The Immortal “Power Vertical” It turns out that socialism can be abolished while still maintaining a functioning system of “power vertical”. It becomes nearly “immortal”! Thus, only one key feature of socialism remains—power centralisation, which ensures the stability of authoritarian regime. The remaining things in the country’s economy were transformed by market relations. State property, which was previously considered public property, is now owned by the new oligarchs, who dictate trends and support the country’s government, which is appointed by the ruling party and its President (Oreshkin, 2014). The power structure, also known as the “power vertical”, continues to function. Only now the zealous officials, who become the economic “core” of the new system, serve it. When visiting Moscow or Minsk, the question of how people are served and services are provided there arises. Why are there so few public catering establishments, cafés, and restaurants in comparison with Western European cities or even the Baltic States? After all, cafés and restaurants are established almost “at every corner” in European Union cities, whereas there are fewer of them in Russian and Belorussian cities. Meanwhile, the price level at any of those restaurants is quite surprising. Almost everything is much more expensive there than in the public catering establishments in the Baltic States! However, if we examine statistics on the average income level of the population in Russia or Belarus, we can see that it is significantly lower than in the Baltic States. How do such disproportions arise, and who dines in Russian and Belorussian restaurants then? The answer is most likely to be found in the state’s administrative management system. Usually, all authorisations and permits to open a café or restaurant in a specific location in an urban or rural area are issued by officials of the local municipalities. The procedure for issuing such permits is frequently very complicated and confusing. It requires a large number of certificates, arrangements, and other documents to be presented by the applicant asking for a permit. In most cases, everything depends on the official, who accepts and verifies the documentation before issuing the permit. Formally, he can either accept or reject the documents. When the entrepreneur arrives to apply for a permit, the official informs him that, despite official state taxes, he will have to pay a certain unofficial large tax to the “party’s till” every month. It should be understood that some of the money will be distributed among the officials, but the majority of it will be contributed to the “top”

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of the power vertical. An entrepreneur may express his discontent by explaining that he will then be forced to raise prices to customers or risk going into debt, but his turnover may begin to decline as a result. However, the official’s response confuses him: “You will either pay or you will not obtain a permit to trade! It will be issued to someone who agrees to pay! Do not worry about the prices of their size”. Raise them as much as you need because we are working here to “eliminate” competition in the entire district surrounding your restaurant; therefore, no-one will obtain a permit to trade except you! Having no other choice, all customers will be forced to pay the price you request. Besides, not many customers can afford to come to the restaurant for lunch. Ordinary people do not go to restaurants because they are too expensive for them. And those who come usually have enough money, so the price is irrelevant to them. Of course, there are not a lot of customers, but there are not many restaurants like yours either. Therefore, the limited demand for solvent customers most likely corresponds to your limited supply in this case! Do not worry and get to work! Corruption is an evil that, like mould, permeates through the entire national economy and impedes its development and progress. For example, if an entrepreneur disposes of any surplus funds that he is not going to invest directly in his business at the particular time for whatever reason, he can afford to build a more luxurious house, a villa by the sea, or even purchase a recreational yacht. All of this is understandable and justified. By doing so on a regular basis, he creates workplaces for construction organisations, suppliers of building materials and raw materials, and yacht manufacturers, whose revenues are increasing, thereby increasing the gross national product. Therefore, it is beneficial for every country. Meanwhile, a corrupt official robs his country twice. Once, when he rackets money from the entrepreneur in the form of bribes, then he shares it with his “colleges” and other high-ranking officials. It should be noted here that the entrepreneur can no longer invest this money anywhere, including his own business, which cannot develop and expand faster as a result. On the contrary, an entrepreneur is forced to raise his prices, thus reducing market demand. Moreover, the corrupt official assists him by artificially limiting competition and preventing the occurrence of other entrepreneurs who could also create new workplaces and attract new customers. And again, when the corrupt official is not in a hurry to spend all of the money that he received from the entrepreneur in the form of bribes. He saves it because he is afraid to publicly display it. This money is invested within the country only in very rare cases. It is typically transferred to secret “offshore companies” in low-tax countries or free economic zones, or simply deposited in secret personal accounts at Swiss banks. In short, the state loses such money. By constantly transferring the majority of bribes “up” through the vertical, corrupt officials generate huge assets for “responsible servants of society”, which they spend at their discretion, but mostly to finance their new electoral campaigns. The undeclared funds in this case serve to hide the actual costs of the latter’s electoral campaigns and allow their owners to appear “decently” in the background of the remaining alternative electoral rivals.

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After winning the elections, these “gentlemen” appoint their necessary officials down the “power vertical”, prioritising those who have proven their loyalty and “ability to share”, thereby strengthening their mutual relations and reinforcing the entire system of this “power vertical”. But what about ordinary people, who, in M. Gorbachev’s words, “became completely different during these extremely difficult years” because “they inhaled the air of freedom, and no-one can take it away from them”? It seems that it is still possible.

Chapter 16

Conclusion

The goal of Marxist economic theory was to eliminate the inherent flaws of capitalism as a system—industrial business cycles in which goods are overproduced, a reserve labour army is formed, and economic chaos dominates. This theory provided for the development of a new socialist farming model in which private property of capital goods is abolished, all capital goods are socialised, and the entire global economy is governed from a unified centre. It is critical that this model would begin operating in the entire world, first occurring in the developed countries and then in all other countries. Because the economy of all countries is gradually becoming social, led by a proletariat that “does not have a homeland”, the state, with all of its political institutes, also loses its meaning as a political institution. The global economy begins to function as a “unified corporation”, in which everyone knows their place, all works are equally honourable, where the distinction between physical and mental labour, as well as urban and rural areas, is eliminated, and one person can replace another in case of necessity. This economic model was implemented in practice of the Soviet Union and its allies in Eastern Europe, as well as in China and some Southeast Asian countries. It was “exported” and used in Cuba and Latin America. However, it was not fully implemented on a global scale, as predicted by the classics of Marxism. Russia, which later formed the Soviet Union, was not the most progressive country at the time; meanwhile, the new socialist economic system introduced by the proletariat, which carried out a revolution, somehow did not seem very appealing to the rest of the world. Therefore, organisers of this revolution had to look for ways to “modernise” Marxism and justify the theoretical possibility of having socialism in only one country. However, it has also caused significant problems for the socialist economic model to some extent. The experience has shown that while this model was indeed capable of eliminating capitalist business cycles; it did not eliminate them at all. In the socialist economic model, these cycles do not disappear anywhere. They only become administrative

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 V. Petraškeviˇcius, The Paradox of Marxist Economics, Springer Studies in Alternative Economics, https://doi.org/10.1007/978-3-031-36290-3_16

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cycles in which the economy continues to develop cyclically, but under the influence of completely different factors. Administrative cycles do not result in overproduction of goods, but rather in a product deficit that grows with each administrative cycle, depending on its depth and phase. The deficit is largely caused by decreased labour exploitation. K. Marx very correctly observed that the more progressive a society and its economy (which was only capitalist at the time) become, the greater the exploitation of labour. However, it turns out that the same can be said about socialist labour exploitation. According to K. Marx, it must decrease and then disappear completely! But what about society, its economy and progress? Does it have to degrade as well? It may seem to be a paradox, but it is true! The lack of material incentives, as well as the distribution of workers’ labour results not according to their contributions, but through the supposed social “consumption funds”, gradually degrade workers’ initiative and willingness to work, and leads to a situation in which the employee thinks not how to work and earn as much as possible, but how to “get” as much as possible while working as little as possible, or how to get something for free. Terror and possible repressions are the only things that can force him to work in such a case. Each administrative cycle begins with an increase in the level of centralisation, the influence of the Centre and the strengthening of its “power vertical”. The “leader” and its party state nomenklatura are increasingly strengthening their power, limiting the democratic freedoms and personal initiative of citizens. It does not mean that this initiative is completely suppressed. On the contrary, it is even encouraged, but only within certain strict frameworks. However, it must not deviate from the “general line of the part”. But then people’s initiative loses its economic foundation. It becomes an external indulgence and a desire to please the leadership. At the same time, a sense of fear is growing and a sense of responsibility is being lost because, in addition to the loss of economic freedom, the delegation or transfer of decisions to the “leader” and his team is accompanied by delegated or “transferred” increased responsibility for the implementation results of these decisions. It means that people externally agree with the leader and his supporters by enthusiastically implementing these decisions, but if the practical implementation of the decision fails, they try to disassociate themselves from their personal responsibility by claiming that they were “forced” to execute the leader’s orders and acted as they were told. They could not do anything else because they were afraid and wanted to avoid possible harsh punishment! Can socialism make people happy? It turns out that it can, but only externally. In this case, the assets of the country or the abundance of material goods in society are irrelevant here. The more centralised political power is and the more the “leader” and his comrades control society and suppress the political freedoms of citizens; the more everyone will begin to express their joy and admiration for the “leader’s” personality, as well as all decisions made by him and his followers. Everyone will be incredibly happy and will greet the “leader”! Therefore, the “leader” and nomenklatura eventually create a true Marxist corporation, but not a on a global scale as K. Marx intended, but on a national scale. In this

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“corporation”, people become only “cogwheels”, each located in their place, regularly slightly “lubricated” in material terms, and very carefully supervised, passionately implementing their tasks and following the orders of other higher-ranking “cogwheels”. Then people start acting like “cogwheels” in their lives too. They severely limit their needs by not allowing themselves to fantasise about various things and indulge in any whims. They are increasingly avoiding taking personal responsibility for the adoption of industrial decisions because they are overwhelmed by fear. Therefore, all decisions must be made “collectively” by carrying less or no burden of responsibility at all. But then, the economy begins to jam in the midst of the administrative cycle. People’s needs are limited, so they are being to adapt to reality. But then they only do what is necessary and wish only what is permitted to wish; therefore, this reality does not lead society to any economic progress. If K. Marx’s economic theory were fully implemented and applied globally, this situation would probably not seem to be so bad. There would be no way to see that everything could be different! However, this is not the case in reality because people in socialist countries are not stranded on a deserted island; thus, they can see how people outside of the socialist economy live, even if the view is hazy. The “leader” with his party state nomenklatura sees it as well. Therefore, they are forced to “loosen the cogwheels” in order to make progress while also seeing the declining indicators of economic growth. Thus, the economic “Thaw” begins. However, they must be very careful! Typically, the economic “Thaw” is associated with decentralisation of the economy, the transfer of decision-making process to lower-ranking chains, and the according increase of their responsibilities. However, people who make their independent decisions become freer; meanwhile, the country’s economic life gradually begins to recover and even to grow slowly. When people see that their efforts bring good results, they begin to act like egoists because egoism, or the manifestation of individuality, is an inherent characteristic of human nature. Therefore, they want more and more—they want to begin living better and earning as much as possible. They want to be able to use or at least control the results of their work. They do not need any Centre with its bureaucrats to do it. However, this is what the “leader” and his political state nomenklatura are most afraid of! As a result, each administrative cycle must come to an end when the economic “Thaw” becomes uncontrollable. The “leader” or his nomenklatura is forced to stop this “Thaw” along with the process of economic decentralisation in a timely manner by repeatedly beginning to “tighten the cogwheels” carefully and gradually taking control of the entire economic life of the country into his hands. Then a new administrative cycle of the socialist economy begins again. If they do not act quickly, the process of “Thaw” can become uncontrollable. Then all control of the country’s economy, as well as political power, will gradually slip from the hands of the “leader” and his team. After humiliating the “leader”, society will resume living by its “market laws” by returning to capitalism because it is not necessary to build it, as it is in socialism or communism. The only question is whether society can function without a leader for an extended period of time. The experience

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has shown that a return to capitalism does not mean that society becomes completely free and independent. There will always be poor and disadvantaged people in a capitalist society who dream of “equality for all people”, so they will want a new “leader” who can take care of all of them and solve the problems of their well-being that are so important to them. But that is another topic.

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