Rethinking the State and Economy: Lessons from the Collapse of State Socialism

Abstract

As institutions, markets and states perform distinct functions. The Soviet experience is instructive as to where the state should not encroach upon the market. In the Soviet Union, the statist economy produced competitive quality only when the state was the consumer. The Soviet Union handily managed the production of homogenous goods such as basic utilities; indents for such goods throughout the Soviet Union could still be handled well because these orders from below only differed in quantity. However, the Soviet system was unable to manage the production of heterogeneous goods, as the price-setting agency at the center could not deal with the deluge of product specifications from below. Soviet managers also needed to deal with a ‘soft budget constraint’ that discouraged economy and abetted wasteful duplication and hoarding of production inputs. The Soviet system of economic management resulted in the collapse of the Soviet economy. While freeing prices from state control was a positive step in improving the condition of the Russian economy, state action is still necessary in order to combat monopolists and create a freer market. Completely disallowing state intervention in the economy will only perpetuate the prevailing unevenness and disparities in market power.