REPRESSED INFLATION

The Soviet State Price Committee (Goskomtsen) set prices for 27 million products during the post World War II era. It compiled data on the unit labor and capital cost of each good, and added a profit mark up. The resulting prime cost–based prices were supposed to be permanently fixed, but many were revised every decade or so to reflect changes in labor and non-labor input costs. These adjustments should have been small, because the state raised wages gradually, and improved technologies reduced material input costs. Some sectors like machine building, where productivity growth was especially rapid, even reported falling unit input costs, creating a condition called "repressed deflation" during the interval between the establishment of the initial price and its revision. Had the Soviet Union been a competitive market economy, characterized by rapid technological progress and state wage fixing, strong deflationary pressures would have caused prices to fall continuously.

However, many prominent Soviet economists such as Grigoriy Khanin contend that it was inflation, not deflation that was repressed by the Soviet brand of price fixing. They argue that while prices were supposed to be fixed, enterprise managers driven by a desire to maximize bonuses tied to profits, circumvented the authorities, causing intermediate input prices and therefore unit costs to rise. Had the Soviet Union been a competitive market economy, strong cost-push inflationary pressures would have forced prices to steadily rise.

Some Soviet economists, such as Igor Birman, have claimed that repressed inflation was exacerbated by weak monetary discipline and soft budgetary constraints, which allowed firms to spend more than they were authorized. The purchasing power of these offending enterprises, and of the public, therefore exceeded the cost of goods supplied. This created inflationary excess demand that was easily observed in empty shop shelves, rapidly increasing savings deposits, and the public conviction that money was worthless because there weren't enough things to buy.

The evidence for this position is inconclusive, because goods were often distributed in worker canteens instead of shops, and there could have been many alternative reasons why bank savings rose. Nonetheless, the consensus holds that the USSR was, in some important sense, an economy of shortage, in a state of monetary disequilibrium that subverted effective planning and contributed to the system's undoing. Although repressed inflation may have seemed innocuous because Soviet growth between 1950 and 1989 was always positive, most specialists consider it to have been an insidious source of destabilization.

Repressed inflation was specific to the Soviet period, and has not carried over into the post-communist epoch, because prices are no longer fixed or controlled. Price liberalization produced a bout of hyper-inflation in 1992, only partly explained by the so-called Soviet "ruble overhang," but the problem subsequently subsided.

See also: economic growth, soviet; hard budget constraints; monetary overhang; ratchet effect

bibliography

Bornstein, Morris. (October 1978). "The Administration of the Soviet Price System," Soviet Studies 30 (4): 466–490.

Grossman, Gregory. (1977). "Price Controls, Incentives and Innovation in the Soviet Economy." In The Socialist Price Mechanism, ed. Alan Abouchar. Durham, NC: Duke University Press.

Steven Rosefielde