Potemkin America

Paul Craig Roberts
February 5, 2011

In 1961 I was a member of the student exchange program to the Soviet Union. It was the second year of the exchange and part of a diplomatic effort to achieve some thaw in the Cold War.


The fall of the Soviet Union resulted in high unemployment and poverty rates in Eastern Europe and Central Asia.

There were three groups of us totaling approximately 35 American students. The Soviet authorities were not comfortable with us hanging out with Russian students, so we were kept constantly on the move. Consequently, we saw a lot of the communist country and its empire.

My group went in through Yugoslavia and Romania, spent time in Moscow, Leningrad, Kiev, Tashkent, Samarkand, and a Soviet sports camp on the Black Sea in Georgia, and came out via Poland and East Germany during the construction of the Berlin Wall. We were in the Caucasus mountains when Yuri Gagarin made the first spaceflight, a propaganda success for the Soviet Union.

What was most striking about the Soviet Union was that, except for the sparkling clean Moscow subway with its gleaming marble floors and walls and some beautiful old buildings built by the czars, there was nothing there. There was no traffic on Moscow’s boulevards. The small food stores were empty. The department store, GUM, had nothing to sell us for our fistfuls of rubles we had been paid for our Levi jeans, button-down shirts, and penny loafers, clothes literally bought off our backs on the streets.

I remember being on a bus in Tashkent when a meat delivery truck appeared. The carcass was hanging on a rail in the open air. The few vehicles on the street were following the delivery truck. The bus driver deviated from his route to follow the delivery.

Bus passengers came alive with anti-cipation. People began coming out from shops and office buildings. By the time the truck arrived at the small butcher’s shop, a long line had formed.

In the Soviet Union people kept a sharp eye out for deliveries of any kind. People would line up to purchase whatever was available as it could be bartered to obtain other goods. As goods of all kinds were scarce, money was not an effective medium of exchange.

My time with the Soviets made me immune to the exaggerated claims made for Soviet economic performance. During my years in graduate school, it was taken for granted that central economic planning enabled the Soviet economy to continuously generate growth rates that were very high compared to those of market economies. In 1962, G. Warren Nutter’s study, Growth of Industrial Production in the Soviet Union, was published by Princeton University Press for the National Bureau of Economic Research. Nutter concluded that the official index of Soviet industrial output exaggerated Soviet growth, and that Soviet growth was not remarkable compared to that of the United States in similar stages of development. Nutter’s conclusions provoked much controversy, and he had few defenders at the time.

Even as late as the 1980s, the view still prevailed in the CIA that the Soviet Union could triumph in an arms race because central control over investment meant that the Soviets could cause their economy to grow at whatever rate it took to counter an American arms buildup. When the Soviet economy collapsed, the CIA arranged for me to explain to the agency’s analysts why they had been mistaken about their enemy’s capabilities.

The Soviet economy failed because it used more valuable inputs to produce less valuable outputs. The outputs would be measured as statistical product, but the values of the outputs were less than the values of the inputs. In other words, instead of producing value, the Soviet system was destroying value.

This was the result of ideological aversion to using prices and profits to allocate resources and investments. Instead of profit serving as a manager’s success indicator, managers were judged according to whether they fulfilled a plan measured in gross physical output, such as weight, number, square meters.

For example, the success indicator for the construction industry was the number of projects under construction. Consequently, Moscow was littered with unfinished projects because all activity was concentrated in starting new ones. The plan produced a housing shortage because the incentive was to start new constructions not to complete ones already underway.

If a shoe factory’s gross output indicator was a specified number of pairs of shoes, there would be plenty of baby shoes, but none for large feet, because the same amount of material could be used to produce one large pair or several small pairs.

If nails were specified in number, there would be small nails but no large ones. If specified in terms of weight, there would be assortments weighted heavily with large sizes. A famous Soviet cartoon shows the manager of a nail factory being awarded Hero of the Soviet Union for over-fulfilling his quota. In the factory yard are two giant cranes holding one giant nail.

If light fixtures were specified in number, they would be small. If in weight, they would be heavy. Nikita Khrushchev complained of chandeliers so heavy that “they pull the ceilings down on our heads.â€