Command Administrative Economy
COMMAND ADMINISTRATIVE ECONOMY
The term command administrative economy, or often administrative command economic system, was adopted in the late 1980s as a descriptive category for the Soviet type of economic system. Throughout its history, the Soviet Union had a mobilization economy, focused on rapid industrial expansion and growth and the development of economic and military power, under the direction of the Communist Party and its leadership. This command administrative economy evolved from the experiences of earlier Soviet attempts to develop a viable socialist alternative to the capitalist market system that prevailed in the developed Western world. Thus it was built on the lessons of the nonmonetized pure "command economy" of Leninist War Communism (1918–1921), Lenin's experiment with markets under the New Economic Policy (NEP, 1921–1927), Josef Stalin's "great Socialist Offensive" (1928–1941), war mobilization (1941–1945) and recovery (1946–1955), and the Khrushchevian experiment with regional decentralization of economic planning and administration (1957–1962). This economic system reached its maturity in the period of Brezhnev's rule (1965–1982), following the rollback of the Kosygin reforms of 1967–1972. It provides a concise summary of the nature of the economic system of "Developed Socialism" under Brezhnev, against which the radical economic reforms of perestroika under Mikhail Gorbachev were directed.
The concept of the command administrative economy is an elaboration of the analysis of the command economy, introduced to the study of the Soviet Union by Gregory Grossman in his seminal (1963) article, "Notes for a Theory of the Command Economy." The term became common in the economic reform debates of the late Soviet period, even in the Soviet Union itself, particularly after its use by the General Secretary of the Communist Party of the Soviet Union, Mikhail Gorbachev, at the reform Party Plenums of January and June 1987, in his critique of the functioning of the Soviet economic system. The term highlights the fact that in such an economic system, most economic activity involves the administrative elaboration and implementation of commands from superior authorities in an administrative hierarchy, with unauthorized initiative subject to punishment.
The defining feature of such an economic system is the subordination of virtually all economic activity to state authority. That authority was represented in the Soviet Union by the sole legitimate political body, the Communist Party of the Soviet Union, which necessarily then assumed a leading, indeed determining, role in all legitimate economic activity. This authority was realized through a vast administrative hierarchy responsible for turning the general objectives and wishes of the Party and its leadership into operational plans and detailed implementing instructions, and then overseeing and enforcing their implementation to the extent possible. This involved centralized planning that produced five-year developmental framework plans and one-year operational directive plans containing detailed commands mandatory for implementation by all subordinate organizations. These plans were elaborated in increasing detail as they were allocated down the hierarchy, eventually becoming direct specific commands to individual firms, farms, stores, and other economic organizations.
The task of directive-based centralized planning in this system was made feasible by aggregation at higher levels and by the delegation of elaboration of details of the plan to subordinate levels in the administrative hierarchy. Thus administrative organs at each level of the hierarchy (central, republic, regional, local, and operational [e.g., firm, farm, etc.]) were responsible for planning, supervision, and enforcement, and engaged in active bargaining with other levels in the hierarchy to develop an agreed plan of activity that in general met the needs and desires of the highest authorities. The result of this administrative process bore the force of law and was not subject to legitimate alteration or deviation by subordinate units, although higher authorities did have the power to alter or reallocate the assignments of their subordinates.
To work properly, this system of administratively enforced implementation of commands requires limiting the discretion and alternatives available to subordinates. Thus the system, within the areas of activity directly controlled by the state, was essentially demonetized. Although money was used as a unit of account and measure of activity, it ceased to be a legitimate bearer of options in the state sectors; it failed to possess that fundamental and defining characteristic of "moneyness"—a universal command over goods and services. Rather it played a passive role of aggregating and measuring the flow of economic activity, while plans and their subsequent allocation documents determined the ability to acquire goods and services within the state sector. Similarly, prices in the command administrative economy failed to reflect marginal valuations, but rather became aggregation weights for the planning and enforcement of the production and distribution of heterogeneous products in a given planned category of activity. Thus in the logic of the command administrative economy, money and prices become mere accounting tools, allowing the administrative hierarchy to monitor, verify, and enforce commanded performance.
The command administrative system in the Soviet Union controlled the overwhelming share of all productive activity. But the experience of war communism, and the repeated attempts to mobilize and inspire workers and intellectuals to work toward the objectives of the Soviet Party and State, showed that the detailed planning and administration of commands were rather ineffective in dealing with the consumption, career, and work-choice decisions of individuals and households. The variety and variability of needs and desires proved too vast to be effectively managed by directive central planning and administrative enforcement, except in extreme (wartime) circumstances. Thus money was used to provide individual incentives and rewards, realizable through markets for consumer goods and services and the choice of job and profession, subject to qualification constraints. But prices and wages were still extensively controlled, and the cash money allowed in these markets was strictly segmented from, and nonconvertible with, the accounting funds used for measuring transactions in the state production and distribution sectors. This created serious microeconomic disequilibria in these markets, stimulating the development of active underground economies that extended the influence of money into the state sector and reallocated product from intended planned purposes to those of agents with control over cash.
The command administrative economy proved quite effective at forcing rapid industrialization and urbanization in the Soviet Union. It was effective at mobilizing human and material resources in the pursuit of large-scale, quantifiable goals. The building of large industrial objects, the opening of vast and inhospitable resource areas to economic exploitation, and the building and maintenance of military forces second to none were all facilitated by the system's ability to mobilize resources and focus them on achieving desired objects regardless of the cost. Moreover, the system proved quite adept at copying and adapting new technologies and even industries from the Western market economies. Yet these very abilities, and the absence of any valuation feedback through markets and prices, rendered the operation of the system extremely costly and wasteful of resources, both human and material.
Without the ability to make fine trade-offs, to innovate and to adjust to changing details and circumstances largely unobservable to those with the authority in the system to act, the command administrative economy grew increasingly inefficient and wasteful of resources as the economy and its complexity grew. This became more obvious, even to the rulers of the system, as microeconomic disequilibria, unfinished construction, unusable inventories, and disruptions of the "sellers' market," together with a burgeoning second economy (Grossman, 1977), grew with increasing rapidity through the 1970s and 1980s. These consequences, together with the repeated failure of partial and incremental reforms to improve the situation and a growing gap in technology from the levels of the developed West, inspired the radical economic, and indeed political, reforms of Mikhail S. Gorbachev that soon afterward brought an end to the Soviet Union and its command administrative economy.
See also: economic growth, soviet; market socialism
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Ericson, R. E. (1991). "The Classical Soviet-Type Economy: Nature of the System and Implications for Reform." Journal of Economic Perspectives 5(4):1–18.
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Richard E. Ericson
Command Economy
COMMAND ECONOMY
A command economy is one based on centralized decision making by government authorities rather than private individuals, and such decisions are not dictated by market conditions. The centrally planned economy requires a formal administrative hierarchy staffed on many bureaucratic levels. Basic decisions are grounded in ideologies and political imperatives. Key decisions involve all aspects of a firm's activity and are issued by commands, directives, and regulatory guides based on a national plan of inputs and outputs. The government determines what will be produced, production targets, investment in plant equipment, coordination between firms, use of natural resources, and how products will be distributed to the populace. Capital and national resources are property of the state rather than private persons. Prices and wages are centrally controlled and frequently remain at fixed levels for long periods of time.
Advantages of a command economy may be: (1) maximum mobilization of resources toward an urgent national objective, such as rapid industrialization of an underdeveloped economy or in times of war; (2) coordinated economic activity reducing wasteful duplication; (3) production of needed and desirable commodities; (4) reducing unemployment and idle capacity; and, (5) protection of the economy from the outside world.
Disadvantages of a centrally planned economy stem from the enormous amount of information required to achieve efficiency and the necessity of coordinating large numbers of components and decision makers at each level of the economic process. The supply of reliable information to all factions is generally not efficient enough to allow a high level of coordination or flexibility. Rigidity, exacerbated by a large organization or bureaucracy, leads to resource allocation which does not necessarily match resource availability, a nation's requirements, or consumer wishes. Manifestations include persistent shortages of some goods combined with surpluses of others. Throughout the decision process problems of accountability, self-serving behaviors, decisions made on inappropriate parameters, interference by party and other authorities, and divergent interests complicate the procedure. To alleviate inefficiencies, underground economies develop and lead to widespread corruption.
The Union of Soviet Socialist Republics (USSR) and Eastern European nations served as models of highly centralized command economies until the collapse of many of these Communist-styled governments in 1989 and 1990. Dissatisfaction with the failure of planned systems to deliver goods was partially to blame for the upheaval. Those economies have since moved to more decentralized systems based on competition and market demands. The People's Republic of China remained an example of a command economy in the 1990s.