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The Economy and the Downfall of the Soviet Union Explained in Simple Terms

Written By Hou Han Zhang

The Soviet Union, also known as the USSR, was one of the most richly endowed countries after the Second World War. However, how did its reputation and system deteriorate so drastically over time? Although various factors, such as the Cold War and the government ideology, might contribute to such a powerful nation’s downfall, the most crucial factor inefficient economic system. This article will explore why the Soviet Union’s decline in simple terms, omitting the jargons and convoluted formulas used by many professional columnists.

The Crucial Concepts of Economy

 First, it is essential to debunk the economy’s myths and grasp its utmost important concept. Many people would associate the economy with prices or with a field of competition of prices between sellers and consumers. However, we must realize that prices have nothing to do with the economy itself; it is only a tool to enhance its efficiency, a topic that will be covered shortly.

The economy is synonymous with optimizing and using scarce resources at their fullest potential. For example, time can be understood as a form of economy. We are continually optimizing our time through decision making. I chose to write this article instead of watching a movie. 

It mainly boils down to knowing how to efficiently use raw materials with alternative uses regarding a nation’s economy. For example, iron ore is found in numerous products, such as watches, scales, and silverware. However, how should we know where to invest the limited source of iron ore? The answer to this question is simple: prices. Prices are not merely an obstacle that consumers face when purchasing products; they form an autonomous economic system to redirect the investments of scarce resources. 

It is crucial to note that, in a broad overview, a market system comes down to supply and demand. In other words, sellers will supply products, and consumers will buy and demand them. When supply exceeds demand, competition rises among sellers fighting to get rid of their extra products. Consequently, the prices of such products will drop, and further production will be discouraged. On the other hand, when demand exceeds supply, the product becomes a rarity, and competition grows among consumers who are bidding for the item. Thus, prices and production of the product will rise. 

Let us go back to the previous dilemma on whether iron ore should be invested in watches, scales, or silverware. Suppose that a new watch model begins revolutionizing the fashion trend and that supply exceeds demand. In this case, the prices of watches will rise, and their production will be encouraged. Consequently, more iron ore will be directed into the making of watches. Therefore, this investment will be the most appropriate one since the nation provides consumers with what they want. As we realize, prices automatically redirect the market and create an independent economic system from the country’s leader. 

The Downfall of the Soviet Union

With a better understanding of the economy, let us explore the reasons behind the Soviet Union’s economic system’s failure. The USSR was governed under a communist regime. The prevalent mindset was ‘one for all and all for one.’ The crucial problem was not that communism is terrible or that Stalin was the wrong person. The major problem was simply the fact that automatic price adjustments under the influence of supply and demand were non-existent.

As everyone was meant to have equal status, the leader of the Soviet Union had the duty to govern everything. However, watching the economic changes of millions of people and noting everything down was merely impossible. When a single person setting the price of every product, negative consequences cannot be restored.

For instance, suppose that the Soviet Union faced the previous dilemma of iron ore investment and that watches became the new trend. As mentioned previously, under the effects of supply and demand, the prices of watches will increase, iron ore will be invested into watches, and the economy will be efficiently balanced. However, with a single leader trying to balance everything, they could probably overlook this new trend and completely omit to redirect more iron ore investment into watches. This small mistake is logical; there are way more national economic issues other than iron and watches, such as health care, food, clothes, etc. The problem is that such a seemingly small mistake can produce a snowball effect and create more giant holes in the economy.

To understand this unwanted snowball effect, let us analyze an actual example in the USSR that is very similar to our iron ore analogy. Back in the golden age of the Soviet Union, a product that became popular was the pelt, a hat made out of beaver fur. Of course, everything went well at first. However, a high-quality pelt could last an individual a lifetime, and not everyone would buy ten pelts. Therefore, the diminishing demand was overlooked, which resulted in overproduction.  The major problem of overproduction is not simply overproducing unsold items and consequently wasting resources. The major problem is wasting the labour workforce that can be used elsewhere. When a product is produced excessively and unsold, the efficiency of that production line slows down. As the pelt companies need fewer and fewer workers, many people are laid off. Since they get laid off, their family income significantly drops, resulting in a decrease in purchase power, which then goes back to the original issue of overproduction. This vicious cycle indirectly affects other crucial fields in the economy. Labour workers who are technically wasting their potential twiddling their fingers outside the pelt shops could work in other blooming factories.  

Throughout the Soviet Union era, many similar problems occurred, leading to more similar vicious cycles. For instance, according to economists Shmelev and Popov, it took 1,000 kilowatt-hours of electrical energy to produce one ton of copper compared to West Germany’s 300 and twice of Japan’s use of energy to generate one ton of cement.

Thus, as similar problems accumulate due to the main reason for omitting the natural and automatic supply and demand on the redirection of prices, the Soviet Union slowly and inevitably collapsed. 

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