This post originally appeared on my substack.
The NEP, (New Economic Policy), in the Soviet Russia has often been considered a liberal period with market-led development. And compared to other periods of Soviet history, this has some credibility. But in the history of economic development, especially up to this point, the NEP was an extreme outlier. One should remember that even then all the country’s industry had been nationalized and placed under the control of central planners.
To begin to understand the situation of the NEP, one must first come to grips with the chaotic period of War Communism that preceded it. Much of these fundamental economic dynamics were driven not by any central decree from Lenin and the party, but by spontaneous dynamics on the ground, which were only formalized ex post by the Bolsheviks. These spontaneous dynamics include, quite incredibly, the nationalization of industry which was done by the workers in the various firms and factories, as well as the land reform. On paper, the land was nationalized too, however peasants redistributed land on their own accord, the result being more land holders and smaller land holdings. If the Bolsheviks did not accept this de facto reality and use their enshrining it in law to create legitimacy for themselves, it’s unlikely they would have had the support necessary to win the civil war.
Due to the violence of the civil war, much of the state apparatus was destroyed and therefore unable to carry out the decrees of the central government. In its place, the worker’s councils in factories, the Soviets, were empowered to make economic decisions in enterprises. However, this initial syndicalist moment was untenable – without discipline it was impossible to coordinate production, theft was common and materials sold off rather than used for production.
In early 1918, the Bolsheviks had by force taken direct control of the rail system and the banking system, where they expropriated all shareholders and expunged all foriegn debts. By this time they had also set up, on paper, an agency responsible for expropriation and planning. Beginning with just 15 workers, the bureau quickly grew and created subsections for specific industries.
In mid 1918 it was still considered possible that the model of the development for the USSR would be that of a mixed market, and capitalist owners and managers were included as members of the planning bureau. Lenin expected that the government would be doing business with large capitalist magnates, as the Tsarist government before him did. However, unauthorized nationalizations continued throughout this period, much to the dismay of central planners.
War communism was marked by extremely high inflation, rationing, and expropriation of food directly from the peasantry to feed industrial workers and soldiers. The Bolshevik government clamped down hard on the markets for grain, with harsh punishments for speculators. The Bolsheviks would gradually gain more power over the worker’s councils and the trade unions. Despite their growing power, and intense confiscations of food from peasant producers, it was usually impossible to live off official rations and there remained a large black market section of the economy. An estimated 60% of the economy in fact.
The intense inflation was caused by government spending being funded by printing money, and eventually led to money becoming obsolete as a medium of exchange. Exchange occurred directly, through movements of materials between firms and on their books, sellers in communities ceased to charge for goods, and exchange on the black market was done via barter. Wages were paid in kind, with rations.
After the civil war ended, there was some talk of moving directly to a moneyless society because of these conditions. However the chief issue remained that of agricultural production, which was stymied by the confiscation over subsistence levels that discouraged the creation of surplus. Throughout this period, there were continued embargoes and sanctions which prevented any serious level of foreign trade. In order to begin growing the economy, and to prevent revolt among the peasantry, the measures of War Communism were ended in 1920.
However, we should note the beginning conditions of the NEP in summary. There was a severe shortage of goods, infrastructure was widely destroyed and the population had shrunk due to the death caused by the war. The Communist Party directly controlled almost all industry, but agriculture only nominally or by threat of force. Despite central planning authorities on paper, the anarchy of production remained, driven not by markets but by bureaucratic and administrative conflicts and disorganization.
The NEP began when confiscation of peasant surpluses was replaced by a tax, thus allowing for accumulation. Private traders popped up, facilitating the movement of goods across the country and between small peasant producers and state owned industries. Small scale private manufacturing was also permitted, some via private producers using state leased facilities. Famines persisted in the early NEP period due to limited sowing of crops under War Communism, which were only somewhat mitigated by foreign aid.
Money returned, and wasteful and inefficient state enterprises were shuttered. Foreign trade slowly began to return as well, including with Britain and the US. Extreme measures were taken to balance the state budget with taxes and forced saving, despite the extremely unstable currency. The high inflation, previously paused by the abandonment of money as a medium of exchange, continued.
Initially, the return of commercial principles to the state industrial sectors led to firesales of assets and extremely low prices of industrial goods compared to agricultural goods. However, this situation was quickly reversed in the next few years, leading to the “Scissors Crisis”. Agriculture was able to recover much faster than industry from the war, leading to low prices for agricultural goods relative to industrial goods. “On 1 October 1923, in terms of the newly-stabilized currency, industrial prices were 276 per cent of 1913, agricultural prices 89 per cent.”
The state reacted to these price signals, the productivity of the state industrial sector grew rapidly, bringing the difference in prices down. By 1924, the currency had been stabilized, the budget balanced, and the prices between the two sectors brought down to ratios comparable to their pre-war level. This was a mixed economy, with the commanding heights of industry state owned and centrally planned to a large extent, but selling on the open market and competing with petty producers.
Despite the recovery in agriculture which ended the situation of famine, there was not enough agricultural surplus to sell on the international markets or to feed a greatly expanded industrial working class. If this surplus began to be generated on the basis of market exchange, it would create a class of agrarian capitalists which would pose a threat to the party and the socialist system. Buhkharin was among the supporters of such a policy, as it did not require the use of force and expropriation of the peasantry.
This was the background of the socialist primitive accumulation debate. Unlike Britain and other industrialized countries, where peasant wealth and land was confiscated, at home and abroad in colonies, to make such industry possible, Russia still had a large peasantry. Nor did it have access to the international markets as other industrializing countries did such as Imperial Germany at the time, or as South Korea or Taiwan would in the post-war period. It had been hoped that revolution in a Western country would smooth over these contradictions, hopes dashed by the persistent failures of German social democracy. The position of Trotsky, and then later Stalin, among others, was the eventual necessity of primitive socialist accumulation over agrarian capitalist accumulation.
The existence of markets and merchants in the NEP did not remove the question of economic planning – most industry remained state owned. The Soviet planners were thus among the first to consider how to allocate state investment directly in order to industrialize. Before the Stalinist purges there were wide-ranging debates on these topics.
Alec Nove’s words on these debates are remarkable for a Bourgeois economist:
The Soviet Material balancing process, which would come to coordinate the investment and production of the state sector, was far from perfect. It required drafting the budgets of every enterprise in material factors of production as well as money, as well as their output quotas. It could not be updated quickly with new data, and data from enterprises had to be compensated for deliberate misinformation meant to get larger budgets. After 1925, there were crackdowns on merchants in the industrial goods sector, although the state remained overtly committed to the mixed market/planning method. After 1929, agricultural merchants were targeted as well and the collectivization campaigns began, designed to carry out primitive socialist accumulation. The expropriation of the peasants would cause intense famines once again.
In the years that followed, despite the famines, industrial output would increase massively and money would become a passive social form as the material balancing method began to dominate coordination of production.