And now we come to that period in history Allen calls "the Soviet climacteric". As you may have noticed, Allen consistently stakes out the contrarian point of view against the standard account of the Soviet Union's economic rise and fall, so it's no surprise that he does it again here. (As someone pointed out to me, it's an excellent career move.) But in the final chapter of Farm to Factory, he does it twice. Here's the play by play. In the standard view, central planning by its very nature caused persistent inefficiencies in the Soviet economy, due to its lack of price signals and incentives, leading to poor economic productivity and stagnation. This line of thought goes back to Mises's economic calculation argument of the 1920s, and appears to show up in the data, as a drop in total factor productivity growth, starting in the 1960s. But wait, said Weitzman, Easterly, and Fischer. It may be that the structural problems caused by central planning do not result in poor productivity per se at all, but simply make it harder to substitute capital for labor as well as a market-based society. Taking that structural difficulty into account, Soviet productivity growth is reasonable, though not stellar. Ah, but what contrarian position can Allen take? "I argue," says Allen, "the value of .4 is an illusion. The low measured value of elasticity reflects massive errors in Soviet investment strategy rather than a real difference in technology. It was not purely happenstance that these errors occurred in the 1970s and 1980s, for the end of the surplus labor economy posed new management problems, and the party leadership bungled them." In other words, even under central planning, had the party leadership planned better, the Soviet economy could have still managed to become more productive. To anyone familiar with the history of late Soviet (or eastern European) Communism, this is rather difficult to argue with, contrary position or not. I mean, the sheer waste is legendary.
Anyhow, Allen discusses three types of "massive errors" in Soviet planning: in industrial reconstruction, in developing the Soviet Union's natural resources, and in Soviet research and development. These are rather standard takes on the subject, so I will go through them quickly. The first massive error, in Soviet industrial reconstruction, is easy enough to describe. For political reasons, the Soviet state preferred to refurbish old industrial plants over constructing new ones, in order to prevent local unemployment, but also to prevent social dislocation, since Soviet factory towns were like the old 'company towns' of the US, but even more so. In addition, Soviet planners also believed that renovating pre-existing plant would be more cost-effective than building from scratch. This turned out not to be the case. Allen refers to Gosplan figures which show that retrofitting old plant for greater capacity cost 50% more than constructing new ones. Meanwhile, production remained low. At the same time, the Soviet Union's newer plants could match higher, Western levels of output. These new plants appear to be responsible for productivity gains in selected industries, such as Soviet steel in the 1960s and 1970s. Thus, Allen believes that had the Soviets committed to a program of building new plants and closing older ones, Soviet industrial productivity could have continued to increase. The explanation behind the second massive error, the failure of the Soviet Union to develop its natural resources efficiently, goes back nearly two centuries to David Ricardo. The Soviet Union suffered major declines in productivity in their coal, oil, and ferrous metals sectors. Why? Just as a farmer in a newly-settled country will pick the best land first, the second-best land next, and leave the worst choice for last, so too with the Soviets and their mines. The Soviets had already worked their most productive sites, many of which were playing out. And mines in ore-rich but remote regions took much more capital to develop than previous ones. As a result, output per capital -- productivity -- dropped markedly. In effect, the Soviet Union was having a "resource crisis", but one masked by its lack of price signals. And now we come to the third massive error, in Soviet research and development. There is a story, common in certain circles, that US military buildup caused the Soviets to move investment, especially in research and development, from civilian to military use. Allen agrees. But the common version of the story has this happening in the 1980s, leading to the Soviet Union's abrupt collapse. Allen would date the beginning of the trend to the 1960s, when total factor productivity growth began to drop, causing the slow stagnation of the Soviet economy. After all, as Adam Smith commented, there is much ruin in a nation. Allen notes that even near the end of its life, the Soviet Union was still able to plan and create an entire new and extremely productive industry from scratch (and pipe imports), the natural gas industry. This, for him, is evidence that the late Soviet system was still capable of feats of prodigious growth. Finally, in regard to the low capital-labor substitution hypothesis, it appears to me that Allen is providing the micromotives that produced the Soviet Union's poor macrobehavior, to modify a phrase of Thomas Schelling's. Each of the failures of investment Allen describes can be considered as individual examples of feckless capital intensification. But taken as a whole, the failures appear to add up to the picture drawn by Weitzman, Easterly, and Fischer. Or so it looks to me. But I should let Allen have the last word here, since after all, it's his book.
A new strategy was needed. The Soviet leaders responded to these changes by squandering vast sums on retooling old factories and by throwing additional fortunes into Siberian development. It was as if the United States had decided to maintain the steel and auto industries of the Midwest by retooling the old plants and supplying them with ore and fuel from northern Canada instead of shutting down the Rust Belt and importing cars and steel from brand-new, state-of-the-art plants in Japan supplied with cheap materials from the Third World. What the country needed was a policy to close down old factories and shift their employees to new, high-productivity jobs, reductions in the use of energy and industrial materials, and increased involvement in world trade. The interpretation of the Soviet decline offered here is the reverse of the analyses that emphasize incentive problems and the resulting failure of managers to act in accord with the plans. On the contrary, the plans were implemented; the problem was they did not make sense. The strength of Soviet socialism was that great changes could be wrought by directives from the top. [...] By the 1970s, the ratio of good decisions to bad was falling. President Gorbachev was as bold and imaginative as any Soviet leader was likely to be, but his economic reforms did not aim in the right direction. Perhaps the greatest virtue of the market system is that no single individual is in charge of the economy so no one has to contrive solutions to the challenges that continually arise. The early strength of the Soviet system became its great weakness as the economy stopped growing because of the failure of imagination at the top.