In the 1930s, when Western economies were laid low by mass unemployment, Stalin could claim to have found a cure: a command economy with ambitious five-year plans to promote rapid industrialisation. Deficient demand was not a problem, but what about supply? Stalin, who was planning for great increases in productivity, faced a problem: how was he to motivate workers with low levels of skill – including millions pouring in from the countryside who were entirely lacking in training or experience of the rigour and rhythms of life in a factory or on a construction site?
A commanding solution
The solution was to extend the command economy yet further, to encompass supply as well as demand. As Stalin warned the Party Congress in 1927 “Our plans are not prognoses, guess-plans, but instructions, which are compulsory”. If the labour discipline needed for creating a Socialist Utopia was not to be the threat of unemployment, what else could it be?
How the Gulag grew
Figure 1: Numbers in custody, USSR 1917-1953
For sure, the system of labour camps operated as a dreaded threat in Stalin’s time, but its shadowy outlines were not known with certainty. In an ‘an exercise in literary investigation’, Solzhenitsyn characterised it as the Gulag Archipelago. Now the archival data available, displayed in Figure 1, allow for a statistical account.
Using custodial figures over the Stalin era, 1928-1953 – and taking inflows and outflows (including releases plus escapes and deaths) to be constant proportions of the labour force L and the prison population P respectively – one finds:
where zero-one, step dummies are included to account for extra incarcerations during the Great Terror (1937-1938) and releases to the front-lines during World War II. These crude estimates imply that about half of one percent of the civilian labour force was incarcerated each year, and around one fifth of existing prisoners released (or died in custody) – with these flows averaging just under 400,000 per year. The implied equilibrium for the size of the Gulag during Stalin’s rule is about 2 million persons, i.e. almost three percent of the working population in labour camps.
In a challenging paper, Shapiro and Stiglitz (1984) argued that – despite imperfect monitoring – work incentives are preserved in Western economies because those caught shirking face the threat of unemployment and loss of income. The ‘No Shirking Condition’ they derive for wages constitutes the effective labour supply curve for the economy – with labour demand given by its marginal productivity. We apply the same broad logic to the Soviet system in CEPR DP 6621 – but with two significant alterations. First, in deriving the No Shirking Condition for labour supply, custodial sentences replace spells of unemployment-on-benefit as the ‘worker-discipline device’, so the supply price of labour falls not with the numbers of unemployed but with the population of the Gulag. Second, wages are set below the marginal productivity of labour as the dictator exercises monopsony power in the labour market to maximise investible funds.
What then are key features of Stalin’s system? It is a society where everyone works and substantial resources are generated either for investment or for military expenditure – whatever the dictator decides. The state commands a goodly share of national resources, but wages are pushed down to ‘efficiency’ levels – just high enough to prevent shirking. No-one is unemployed, but many are in labour camps.
Ironically, the outcome for labour is as if it faced a greedy capitalist who wanted to maximise profits and had the market power to do so. More than that, the state employer can also manipulate the living and working conditions for those not in civilian employment to further its own ends. To increase investment, for example, prison conditions can be made harsher – so as to lower the supply price of civilian labour and reduce consumption. Where this may lead is what Solzhenitsyn (1963) describes – from first-hand experience – in One Day in the Life of Ivan Denisovich.
Coercion as a discipline device may have helped Russia to industrialise at high speed – and to produce the arms needed to defeat Hitler. But, in the absence of legitimate successors, dictators are prone to paranoia; and the regime of punishment became a monster. The economic rationale for the Gulag does not encompass randomised terror for political ends: by raising the supply price of labour, it is economically counter-productive. So too is random application of coercive labour laws, exemplified by Stalin’s ‘five per cent rule’ for denunciation.1 Stalin’s successors realised this, attenuating the excesses of coercion soon after he died.
Coercion versus capitalism: survival of the fittest?
It is tempting to look beyond Stalin’s years of power for clues as to why the command economy finally collapsed. How do the two systems – Western capitalism and Soviet coercion – compare in terms of incentive constraints for labour, criteria for wage determination, and demand management?
Figure 2: Efficiency wage equilibria: Russia and the West
Figure 2 provides an overview, with each system represented by two schedules: a downward-sloping marginal productivity of labour schedule, MPL; and an upward-sloping curve showing the effective supply price of labour (labelled NSC to denote the lowest wage consistent with the No Shirking Constraint). In the Russian case, shown in bold, this No Shirking Constraint is based on imprisonment: so those not in civilian employment are in the Gulag, in forced labour camps whose harsh conditions act as a threat to keep wages down for civilian workers). Wages are set so as to maximise the resources available to the state, which restricts civilian employment so wages fall below the marginal product of labour.
Also shown is the Western case, where those not in work are unemployed on benefit; i.e. unemployment is the labour-discipline device. There is a higher supply price of labour (shown by the dotted line NSC'), and higher labour productivity (MPL'): but equilibrium depends on whether or not there is demand deficiency.
Take first the 1930s with the West mired in the Great Depression – diagnosed as demand failure by John Maynard Keynes writing in 1936. With a demand constraint (shown by the dotted vertical line in the figure) limiting the quantity of output that can be sold, let labour market equilibrium be at D, with mass unemployment and wages depressed to the lowest incentive-compatible level.2
How does Stalin’s contemporaneous experiment in coercion compare with what Western capitalism had to offer? Due to the low level of capital per head in Russia at the beginning of industrialisation, the productivity of labour is below that in the West; and the compression of real wages is a sign of the effort to catch up with the West by rapid capital accumulation. Real wages are not high in either system, but massive investment in Russia carries promises of a brighter future. Compared with the West in Depression, higher employment in Russia is relatively attractive for those in jobs: but for those not in jobs, the Gulag replaces the unemployment queue.
Now let time move forward some fifty years – to 1984 say, when Shapiro and Stiglitz publish their paper. Let the competitive equilibrium they describe represent the West – after it has learnt the art of macroeconomic stabilisation. There is no demand failure, so employment rises until the supply price of labour shown as NSC' matches its marginal productivity (and output is maximised subject to the incentive constraint imposed by asymmetric information) at point B.3 How does Stalin’s system compare now? Assume – as George Orwell had foretold – that Russia remains in equilibrium at C. What does the command economy offer now? Lower wages; lower output ; and higher coercion.
This comparison takes as given that labour productivity in the West continues to run ahead of that in Russia, despite fifty years of squeezing consumption to release resources for investment and growth in the command economy. But this is plausible if, as Skidelsky (1995) maintains, the resources so painfully extracted from the Russian people were not invested efficiently; and if the bureaucratic and centralised system based on fear failed to match the incentives in the West for innovation and continuous ‘technical progress’, as argued publicly by the Russian physicist Sakharov (1975) and his fellow dissidents.
The coercive system faces yet further challenges. Western spending on an ambitious and expensive arms race gives the Russian government added reason to compress wages – to pay for arms as well as investment. But the spreading doctrine of Human Rights makes repression less and less politically viable. The system is in danger of collapse – not from a shortage of demand, like the West in Depression, but from failure of supply, like an economic heart attack.
Skidelsky (1995) has argued that “the Stalinist command economy was not a technical solution to the economic problem of inadequate saving and investment: it was a device for maximising and perpetuating the power of the state”. It has been shown, however, that there is an economic rationale for a Gulag system as a labour-discipline device; and that there were economic incentives to make it harsh. Our analysis is broadly in line with the position taken by Gregory and Harrison (2005, p.740): “The effectiveness of the Politburo accumulation model rested on the dictator’s ability to create a gap between the civilian wage as a ‘fair’ return for effort, and low subsistence in the Gulag as the return to shirking, so that the difference between them was the intended punishment for shirking”.
This is the logic of coercion embodied in our efficiency wage analysis. But neither the frenzy of punishment in the late 1930s, nor subsequent randomness in the application of coercive labour laws, can be rationalised on economic grounds. By denying its people their Human Rights, yet failing to catch up with managed capitalism over the longer term, Stalin’s system condemned itself to extinction.
Gregory, Paul R and Mark Harrison (2005), “Allocation under dictatorship: research in Stalin’s archives”, Journal of Economic Literature, XLIII (September), 721-761.
Gregory, Paul, Philipp Schroder and Konstantin Sonin (2006), “Dictators, repression and the median citizen: an “eliminations model” of Stalin’s Terror (Data from the NKVD Archives)”, CEPR Working Paper No. 6014, December.
Keynes, John Maynard (1936), The General Theory of Employment, Interest and Money, London: Macmillan.
Miller, Marcus and Jennifer Smith (2006) “Punishment without Crime? Imprisonment as a worker-discipline device”. CEPR Working Paper No. 6621 London: CEPR (December)
Sakharov, Andrei (1975), My country and the world, London: Collins and Harvill.
Shapiro, Carl and Joseph Stiglitz (1984), “Equilibrium unemployment as a worker discipline device”, American Economic Review, 74 (3), 433-444.
Skidelsky, Robert (1995), The Road from Serfdom, London: Penguin Books.
Solzhenitsyn, Aleksandr (1963), One Day in the Life of Ivan Denisovich, Ralph Parker (trans.), Penguin Modern Classics.
Solzhenitsyn, Aleksandr (1974), The Gulag Archipelago 1918-1956: an experiment in literary investigation, New York: Harper and Row.
1 ‘Your task is to check people at work and if something is not right, you must report it. Every member of the party, honest non-party members, citizen of the Soviet Union not only has the right but is obligated to report the deficiencies he sees. If they are right, maybe only 5 percent of the time, this is nevertheless bread’ (Gregory et al, 2006, p.18).
2 Profits are maximised subject to a demand constraint, as would be consistent with weak labour unions.
3 The use of the same MPL' curve is, of course, simply for convenience.