The Economic Demise of the Soviet Union

1. The Economic Demise of the Soviet Union

2. The Economic Demise of the Soviet Union

3. The Economic Demise of the Soviet Union

4. The Economic Demise of the Soviet Union • Lesson 1: Opportunity Cost • Lesson 2: Missing Markets and Missing Prices • Lesson 3: Incentives Matter • Lesson 4: Private Property Rights • Lesson 5: Transaction Costs - Life in a Soviet Household • Lesson 6: Applying the Lessons of the Soviet Union • Conclusion The Economic Demise of the Soviet Union

5. The Economic Demise of the Soviet Union

10. CHOOSING IS REFUSING

14. Decision-Maker: YOU Don’t Get Up Now Get Up Now The Economic Demise of the Soviet Union

15. Decision-Maker: YOU Don’t Get Up Now Get Up Now The Economic Demise of the Soviet Union

16. Decision-Maker: YOU Don’t Get Up Now Get Up Now Don’t rush Walk the dog Coffee 1st in shower Read newspaper The Economic Demise of the Soviet Union

17. Don’t Get Up Now Get Up Now Don’t rush Walk the dog Coffee 1st in shower Read newspaper Sleeeeeepp! Stay warm Choice XXX  Opportunity Cost The Economic Demise of the Soviet Union

18. Don’t Get Up Now Get Up Now Don’t rush Walk the dog Coffee 1st in shower Read newspaper Sleeeeeepp! Stay warm XXX  Opportunity Cost Sleeeepp! Stay warm The Economic Demise of the Soviet Union

19. Decision-Maker: YOU Don’t Get Up Now Get Up Now Don’t rush Walk the dog Coffee 1st in shower Read newspaper Sleeeeeepp! Stay warm XXX  Opportunity Cost Walk the dog, Shower, Coffee, Don’t rush, Read newspaper The Economic Demise of the Soviet Union

20. What About . . . ? Don't Confuse Cost & Consequence The Economic Demise of the Soviet Union

22. A Journey of Choices • Opportunity cost – the benefits of the foregone (next best) alternative The Economic Demise of the Soviet Union

27. A Journey of Choices • Opportunity cost – the benefits of the foregone (next best) alternative The Economic Demise of the Soviet Union

28. Decision-Maker: Stalin 5-Year Plan (Emphasize Investment) No 5-Year Plan (Emphasize Consumption) The Economic Demise of the Soviet Union

29. Decision-Maker: Stalin 5-Year Plan (Emphasize Investment) No 5-Year Plan (Emphasize Consumption) • Fewer resources diverted from agriculture • More “consumer” goods   • Fewer resources diverted from agriculture • More “consumer” goods The Economic Demise of the Soviet Union

30. Change Perception of Benefit propaganda trains The Economic Demise of the Soviet Union

31. Change Perception of Cost of Opposition genocide in Ukraine toll: 5-12 million arrest of kulak (landholder) gulag (forced labor camp) The Economic Demise of the Soviet Union

32. Decision-Maker: Stalin Don’t Sign (Try to work with Allies) Sign Pact with Nazis The Economic Demise of the Soviet Union

33. Opportunity Cost Analysis Decision Maker: time territory technology ? snub Nazis trade w/ West Signing Molotov – Ribbentrop Pact The Economic Demise of the Soviet Union

34. Nazis Invaded USSR, June 1941 . . . and . . . The Economic Demise of the Soviet Union

35. . . . lost the war Don't Confuse Cost & Consequence German POWs in Moscow The Economic Demise of the Soviet Union

36. Other Examples: Cuban Missile Crisis The Economic Demise of the Soviet Union The Economic Demise of the Soviet Union

38. Task of the Production Ministers • Allocate resources to production: goal is to provide the goods and services citizens want and need • Decide how many pencils and how much candy to produce • Assign prices to pencils and candy The Economic Demise of the Soviet Union

40. It’s Really Hard to Get It Right! optimization (plywood) linear programming (1930s) shadow pricing Leonid Vitaliyevich Kantorovich Boy Genius Leonid Vitaliyevich Kantorovich Nobel Prize in Economics, 1975 The Economic Demise of the Soviet Union The Economic Demise of the Soviet Union

41. Soviet State Stores – Administered Prices lines common: part of “price” is time in line very little choice of style, quality, or sometimes, even size “Universam” – state supermarket The Economic Demise of the Soviet Union The Economic Demise of the Soviet Union

42. Opportunity Cost Analysis Decision Makers: Connect Back to earlier lesson • prices allocate resources to their most highly-valued uses • Information transmission and processing is low-cost and spontaneous • rapid industrialization • capital investment • military strength The Economic Demise of the Soviet Union

43. Centrally directed production– consumer goods low priority State stores: Unpredictable availability Unchanging prices Because little available, most everything purchased The Economic Demise of the Soviet Union

44. 1st-come-1st –served rationing: life lived in line The Economic Demise of the Soviet Union

46. Why Would Anyone DO That? • Who is the decision-maker? • What incentives does the decision-maker face? The Economic Demise of the Soviet Union

47. Production Incentive: Output targets Part of a report from the British Ambassador in Moscow, comparing 1936 USSR production targets with those from 1935(Catalogue ref: FO 371/20344, January 1936) 4. The following increases in crops are anticipated (figures are in most cases derived from percentages and are therefore only approximate): 5. In 1935 live-stock is stated to have increased as follows: horses, by 5 per cent; cattle, by 18 per cent; pigs, by 38 per cent; sheep and goats,  8. Production in 1936 is to be raised to 135 million tons (approximately 108 million tons in 1935) of which 80 million tons will be provided by the Donetz coal-field, and 17.8 million tons by Kuznetsk. Mechanisation will be increased to 80.7 per cent for cutting and 87.7 per cent for hauling 11. The output of the machine-building industry, which is developing rapidly, is to be increased by a further 24 per cent. Imports have now dropped to a very small sum – 62 million roubles in 1935 as compared with an average of 500 million roubles per annum during the First Five-Year Plan (1929-3 12. 161,500 automobiles are to be produced In 1936, as compared with 96,700 in 1935, but the growth in numbers will be confined to motor trucks, as the car plants at Moscow and Gorki are being converted for the manufacture of new types of machines. By the end of 1936 it is estimated that the country will have 314,000 trucks and 86,000 cars The Economic Demise of the Soviet Union http://www.nationalarchives.gov.uk/education/heroesvillains/transcript/g4cs2s1t.htm

48. Incentive:Gold Star Hammer and Sickle Hero of Socialist Labor For outstanding achievements in socialist labour that improved production and the might and prestige of the USSR Alexey Stakhanov : miner & Hero of Socialist Labor He became a celebrity in 1935 as part of a movement that was intended to increase worker productivity and demonstrate the superiority of the socialist economic system. He mined a record 102 tons of coal in 5 hours and 45 minutes (14 times his quota). http://www.acepilots.com/medals/soviet/highest.html The Economic Demise of the Soviet Union

49. Well, Comrade, I see that the new quota is in tons. The Economic Demise of the Soviet Union

50. Perverse incentives: output targets “Suppose you were in charge of nail production and your quota was set in tons of nails. What would be the easiest way to beat your quota? By weight, spikes are easier to produce than small nails. If your quota were in units of nails, you might produce lots of tacks. Length? Long skinny nails. . . . The result is that consumers' needs have been poorly met. Gold-filigreed sewing machines that did not work resulted when quotas were set by value. Similarly, quotas for square feet of housing generate warped floors and cracked walls, and required units of clothing invite sloppy sewing on shoddy material.”  http://www.unc.edu/depts/econ/byrns_web/Economicae/sovietecontransition.html The Economic Demise of the Soviet Union