The New Economic Policy

by Professor R.W. Davies. Centre for Russian and East European Studies, University of Birmingham

new perspective. Volome 3. Number 3. March 1998

 

Summary: The New Economic Policy began in 1921 as a means of helping the recovery of the war-devasted economy of the Soviet Union: it created a mixed economy, combining state control of large-scale industry with a limited measure of private enterprise. After initial setbacks, progress was rapid, so that by 1928 agricultural and industrial production exceeded pre-war levels. Even so, agricultural marketing was a problem. Grain exports lagged well behind pre-war totals, and so it was impossible to earn the foreign currency needed to close the technological gap with the West. During the 1920s, important debates - mirrored in the works of modern historians - took place within the Bolshevik Party. After the grain crisis of 1927-8, the NEP was ended and Stalin emerged triumphant.

AFTER THE BOLSHEVIK REVOLUTION of October/November 1917, the former Tsarist Empire plunged into Civil War. The Bolshevik or Communist government, led by the revolutionary Marxist Vladimir Lenin, introduced strict measures to control the economy. These later became known as ‘War Communism’. They included large-scale nationalisation, state control of every aspect of the economy, and requisitioning of the produce of the twenty million peasant households who constituted over 80 per cent of the whole population. By 1920 War Communism had enabled the Soviet regime to establish itself over nearly the whole territory of the Russian Empire. Many Communists thought that the wartime system had been successful, and could be continued in peace-time.

But the economy was devastated. The output of large-scale industry had fallen to a mere 13 per cent of the 1913 level, iron and steel to a mere four per cent. And from the summer of 1920 peasant disturbances were widespread, and unrest spread to the industrial workers. Against this tense background, in March 1921 a Communist Party congress decided that compulsory food requisitioning was no longer possible, and resolved to replace it by a food tax. The peasants would retain any surplus. Their incentive to grow more food would thus be restored.

Features of the New Economic Policy

These decisions of March 1921 amounted to a quite limited reform. But this partial retreat proved to be unstable. Lenin later frankly admitted that ‘the private market proved stronger than us’. Within a few months, what became known as the New Economic Policy (NEP) had emerged from the ruins of civil war.

The central feature of NEP was the right of individual peasants to sell their products freely, whether to private traders or to state agencies. In industry, artisan workshops and some small factories were rented or sold by the state to individual owners. But nearly the whole of large-scale industry remained in state ownership, though state industry was instructed to adapt itself to the needs of the market.

NEP thus resulted in a mixed monetary economy, in which state industry traded with individual peasant agriculture through a market which was partly in state hands, partly in private hands. The state imposed firm limits on the development of capitalism. Moreover, while much freedom of discussion was permitted, the one-party communist dictatorship was consolidated, and discipline within the party was tightened up. This political dictatorship continued for nearly 70 years.

After the initial set-back of a disastrous famine in 1921-2, the pace of recovery was extremely apid. By 1927 or 1928 both agricultural and industrial production exceeded their pre-war level.

Technically, this was largely the same economy as before the revolution. In agriculture in the mid-1920s peasant cultivation - responsible for 90 per cent of the sown area in 1914 - continued largely by traditional methods.

But the revolution and its aftermath brought about profound changes in social relations. The Soviet Union in the mid-1920s was a more equal society than the Russian Empire in 1914. The revolution had flattened the top and extended the sides of the steep pre-revolutionary pyramid. In trade and industry, in spite of the encouragement given to small-scale private industry in the early years of NEP, private capitalists were far smaller in numbers, and far less wealthy per head, than before the revolution.

The Benefits and Losses

The industrial workers were the heroes of the revolution and its main beneficiaries. The introduction of the eight-hour day reduced the average working day from 9.9 hours in 1913 to 7.8 in 1928. Within the working class, the difference in earnings between skilled and unskilled was substantially narrower than in 1914. Women workers were more numerous than in 1914, and benefited from the legislation which introduced equal pay for equal work.

But dark clouds overshadowed these triumphs. By the mid-1920s the workers had effectively lost their hard-won right to strike (though illegal strikes still occurred on a small scale).

In the countryside, as well as in the towns, greater equality prevailed. The land and property of the landowners had been distributed among the peasants. Within the village, the ‘kulaks’ (richer peasants) were relatively less wealthy than before the revolution, and many formerly landless peasants had acquired land.

The Agricultural Problem

The social upheaval carried with it fundamental changes in the way in which capital was accumulated for investment in economic growth. The process of accumulation in the two main sectors of the economy, industry and agriculture, was very different. In industry (and in the railways and in most trade) the lack of private savings meant that capital accumulation overwhelmingly depended on the state. The private and artisan sectors were responsible for a mere 4 per cent of industrial investment in the economic year 1926/27. In contrast, in agriculture it was the millions of individual peasant households which undertook their own investment in the form of purchasing machinery and implements, breeding livestock and buildingdwellings and farm buildings.

The relation between agriculture and industry was the central preoccupation of the authorities. The towns depended on the peasantry for their food, and the needs of the town would necessarily grow with the expansion of industry. However, although agricultural production had recovered to the pre-war level, agricultural marketings (the amount of food and other agricultural products sold on the market) were substantially lower throughout the 1920s than before the war. One important consequence of this decline was that foreign trade utterly failed to recover to the pre-war level. Even in the best year of NEP, grain export (the main source of foreign currency before the revolution) amounted to only one-quarter of the 1913 level.

Why Did Agricultural Marketings Decline?

This is another issue on which historians disagree. Some put all the blame for the decline on the policies of the state. Certainly the peasants received less for their produce than before the revolution; and the amount they received was strongly influenced by the state. Most economists agree that the low prices discouraged the peasants from marketing their produce. But another factor, stressed by other historians, was the greater equality in the countryside, which had eliminated the landlords’ estates and reduced the wealth of the richer ‘kulak’ peasants.

Agricultural marketings were unstable as well as insufficient. Only two harvests in the 1920s escaped serious economic difficulties resulting from inadequate marketings. These fluctuations were partly due to Russian climatic conditions which resulted in great annual variations in the harvest. But, like the low general level of peasant marketings, the instability was also partly or largely due to the failure of the state to adopt economic policies which satisfied the peasants.

The failure of state policies towards the peasants was certainly partly due to human error. But it was largely the result of the fundamental dilemma facing the state. On the one hand, the Soviet authorities were constantly preoccupied with the danger that supplies of food to the towns and the army and of agricultural raw materials to industry would be inadequate. On the other hand, the persistent efforts of the same authorities to increase the share of resources available to industry constantly threatened the economic basis of the relationship between the regime and the peasantry.

Modernising Industry

The urgent necessity of developing industry was accepted by nearly all shades of opinion within the Communist Party. Karl Marx held that the pre-requisite for the establishment of a socialist society was the existence of a modern industrial economy employing a class-conscious industrial working class. But Communist power had been established in a peasant country. The Soviet leaders concluded that the state must itself organise and force through the development of modem industry, performing the role undertaken by private capitalists in Western Europe and the United States. Modernisation must be introduced from above.

Doctrinal arguments were supported by practical considerations. The Soviet Union had emerged less than a decade previously from the Civil War in which foreign capitalist powers had sought to destroy the Communist regime. This seemed to demonstrate the necessity for a broadly-based industry which would provide the basis for defence against a hostile world - and perhaps for the support of foreign revolutionary movements. But, in an international perspective, the restored economy of 1928 was in a less favourable position than the Russian Empire of 1913. The other Great Powers had suffered less from the war and its aftermath than Soviet Russia. By 1928, the industrialised capitalist economies were at the peak of the inter-war trade cycle. The gap in production per head of population between Soviet and West European industry was as wide as ever, and the gap with the United States had widened. Even more significantly, as a result of technological advances in the West, particularly in Germany and the United States, the technological gap between Russia and the other Great Powers was considerably greater than in 1913.

Unemployment

Belief in the need to develop industry was reinforced by an unexpected and unwelcome feature of NEP: the growth of mass unemployment in the towns. In contrast to the situation in Western Europe and the United States at the time, the prime cause of unemployment was not economic depression, but the huge scale of rural migration into the towns, a familiar problem in Third World countries. Unemployment was a constant reproach to the authorities, and seemed to confront them with an insoluble dilemma. To finance the growth of industry, they sought to increase productivity and rationalise administration, but this necessarily restricted employment possibilities. The pace of industrialisation feasible within the framework of the market economy of NEP might alleviate unemployment, but it could not eliminate it.

Grain Crisis

Matters came to a head with the grain crisis of 1927-8. In October-December 1927, peasants sold only half as much grain to the official grain collection agencies as in the same months of 1926. With this amount of grain the towns and the army could not be fed.

Historians differ among themselves about the reasons for the grain crisis. Traditionally, Soviet historians, reflecting the explanations offered by Stalin at the time of the crisis, attributed the failure to supply grain to the changed post-revolutionary socioeconomic structure of agriculture, combined with sabotage by the kulaks. In contrast, some Western political historians treat the grain shortages as deliberately created artificially by Stalin, and used by him as a pretext to crack down on the peasants. Other Western historians have stressed the effect on the relationship between the towns and the countryside of the substantial increase in industrial investment during the year before the grain crisis. The increase was particularly rapid in the industries producing coal, iron and steel, machinery and other capital goods, which did not provide an immediate return in the form of consumer goods. Still other historians place more emphasis on the erroneous price policies, which themselves were rooted in Bolshevik attitudes to the market. My own view is that both the expansion of the resources devoted to industry and erroneous price policies were major causes of the crisis.

The grain crisis illustrated the general dilemma of the New Economic Policy. The NEP had proved successful in bringing about the revival of the economy to the pre-war level. But could it provide an effective framework for the industrialisation of the Soviet Union, for achieving the goal accepted by all wings of the Communist Party - to catch up and overtake the advanced capitalist countries?

The Debates: Trotsky, Bukharin and Stalin

This was the central issue in the Soviet debates on general economic strategy which took place in the 1920s. These debates, mainly conducted within the framework of Marxist economics, preceded by twenty or thirty years the discussions of the ‘economics of underdevelopment’ in the West. Like the Tsarist Minister of Finance in the 1890s, Sergei Witte, the participants showed a remarkable grasp of what many economists now consider to be the essential issues in the process of industrialisation in peasant economies.

Among the political leaders, the three main viewpoints were those ofTrotsky, the leader of the ‘Left Opposition’ within the Communist Party, Bukharin, the principal intellectual leader in the 1920s, and Stalin, party General Secretary.

Trotsky believed that industrialisation could succeed only if the state set out to strengthen state industry at the expense of the richer peasants and the private traders - and he also argued that the triumph of socialism in the Soviet Union could ultimately be achieved only if the working class took power in one of the advanced capitalist countries.

Bukharin and Stalin both argued that ‘Socialism in One Country’ was possible and essential. Bukharin passionately insisted, however, that it was essential to develop industry at a moderate pace, so that the peasants would not be coerced and antagonised; the market economy must continue for a long time.

At first Stalin agreed with him. But in response to the grain crisis of 1927-8 Stalin and his supporters adopted so-called ‘emergency measures’, involving the use of compulsion by the state to seize grain. This was the beginning of the end of NEP. By the end of the 1920s, the NEP system had een destroyed, and replaced by forced industrialisation, all-out state planning and the compulsory collectivisation of agriculture.

The Debates: Historians and Economists

In recent work by historians and economists both in the former Soviet Union and in the West the collapse of NEP and its replacement by the Stalinist strategy of forced industrialisation have been central interests. In examining the strategy of Soviet industrialisation historians echo, repeat and enlarge upon these debates of the 1920s, and dress themselves in the clothes of the rival schools, just as nineteenth-century historians of the French revolution appeared as Girondins, Jacobins, Bonapartists or Monarchists. But, like the French historians, they are also able to stand outside and above these debates. Nearly all historians now agree that the differences in strategy between Trotsky and Bukharin were minor compared with their common rejection of the strategy adopted by Stalin.

In these recent debates at least four approaches may be distinguished. First, many economists hold that NEP restricted market forces too greatly, even in the years of the mid-1920s when the greatest freedom was allowed to the private sector. Central price controls, in operation since 1923, and detailed state management of investment, meant that the efficient allocation of resources was impossible. This view is broadly shared by the many present-day Russian economists who have insisted that Russia must be transformed into a capitalist country, and that no ‘Third Way’ between capitalism and centralised state socialism was possible.

A second group of historians, among whom the great historian of the Bolshevik revolution, the late E.H. Carr, is the most prominent, concurs that the economy of NEP was inherently unstable, if not a blind alley. But Carr’s standpoint was radically different. He believed that the world economy is evolving from private capitalism to forms of state planning, and that in this context there was ‘a latent incompatibility between the principles of the New Economic Policy and the principles of planning’ (Carr, p. 278). This general viewpoint is also advocated by some modern Russian historians. Thus Mikhail Gorinov assesses the potential of NEP very pessimistically, concluding that ‘the threat of technical backwardness, the permanent danger of war, and the instability of the market cast very gravedoubt on the effectiveness of this variant’.

A third group, very influential in recent Western discussions, argued that NEP was compatible with successful long-term economic development. Stephen Cohen in his biography strongly sympathises with Bukharin’s view that the only acceptable solution to the grain crisis was to restore equilibrium on the market and fit industrialisation into the NEP framework (Cohen, Chapter 9). The view that NEP provided a viable system of successful industrialisation dominated Soviet popular publications about the Soviet past at the height of the Gorbachev period (see Davies, Chapters 3 and 4).

A fourth group, including myself, takes an intermediate position between the second and third group. We argue that the economy of the mid-1920s had not yet reached an impasse. Before the grain crisis, and within the framework of NEP, industrial investment was already higher than in 1913. In our opinion, given sensible price policies, a moderate rate of expansion of both industry and agriculture could have continued. On the other hand, we do not believe that NEP was capable of sustaining much higher rates of industrialisation than those achieved on the eve of the first world war.

On this view, judgement about the long-term economic viability of NEP depends on a political assessment of how far it was essential for the Soviet Union to establish powerful capital goods’ and armaments’ industries in the space of a few years. The debate continues.

Words and concepts to note

Bolsheviks: more revolutionary section, headed by Lenin, of Russian Social Democratic Labour Party (so-called from the Russian bol’shinstvo, majority, because they obtained a majority of votes at one stage in the 1903 Congress); renamed Communist Party in 1918

Collectivisation of agriculture: Reorganisation of peasant family farms into collective farms (kolkhozy), launched end of 1929

Communism: In marxist theory, in the higher stage of Communism when goods are abundant, means of production will be publicly owned as under socialism (q.v.), but distribution will be according to the principle ‘from each according to ability, to each according to need’, not according to work done

kulak: more prosperous peasant (Russian word for ‘closed fist’ or ‘tight fist’)

NEP (Novaya ekonomicheskaya politika): New Economic Policy (initials of Russian phrase and English translation are the same)

requisitioning: taking without payment, for military or other purposes.

Socialism: In marxist theory, the first or lower stage of Communism; factories, mines and other means of production are publicly owned, and distribution is on the principle ‘from each according to ability, to each according to work done’

Soviet: Russian word for council, originally the name of local revolutionary bodies elected by workers, soldiers and peasants; until 1993 the name of central and local government organs

Soviet Union: see USSR

USSR: (SSSR - Soyuz sovetskikh sotsialisticheskikh respublik) Union of Soviet Socialist Republics, inaugurated in 1922; by 1941 had sixteen constituent republics; dissolved December 1991.

Chief personalities:

Bukharin, N.I. (1888-1938) Prominent Communist intellectual, principal ‘Right-wing’ opponent of Stalin, 1928-9, executed after show trial, March 1938.

Gorbachev, M.S. (b. 1931) General Secretary (main political leader) of the Communist Party of the Soviet Union, 1985-91.

Lenin, V.I. (1871-1924) Leader of Bolsheviks before and after October 1917 revolution.

Marx, Karl (1818-1883) German founder of Scientific Communism.

Stalin, I.V. (1879-1953) General Secretary of Communist Party 1922-53, dominant political leader from about 1928.

Trotsky, L.D. (1879-1940) Soviet revolutionary leader, headed Left Opposition from 1923, expelled from USSR 1929, murdered 1940.

 

Questions to consider

w How successful was NEP in restoring and expanding the economy?

w Why were the sales of peasant produce on the market during the NEP lower then before the war?

w Why was there a grain crisis in the winter of 1927-8?

w Could the NEP have succeeded in achieving socialism in the Soviet Union?

w Why did the NEP fail?

w Why did the Soviet leaders adopt a policy of rapid industrialisation at the end of the 1920s?

 

Further Reading: The best introductory account is Alec Nove, An Economic History of the USSR, Pelican Books, various editions, the latest is 1991, (Chapters 4-6). E.H. Carr, The Russian Revolution from Lenin to Stalin (1917-1929), Macmillan, first published 1979, is a summary of Carr’s 14-volume standard history, 11 volumes of which deal with NEP: it includes political background and foreign policy. Stephen Cohen, Bukharin and the Bolshevik Revolution: a Political Biography 1888-1938, Wildwood, first published 1974, (Chapters VI - IX), focuses on the leading supporter of NEP. Particularly useful for statistical evidence and the major controversies is R.W. Davies, Mark Harrison and S.G. Wheatcroft (eds), The Economic Transformation of the USSR 1913-1945, Cambridge University Press, 1994. V.P. Danilov, Rural Russia under the New Regime, Hutchinson, 1988, is an examination of agriculture in the 1920s by the foremost Russian specialist. M. Lewin, Russian Peasants and Soviet Power, Allen and Unwin, first published 1968, is an account of peasant society and state policy in the 1920s by a leading social historian. R.W. Davies, Soviet History in the Gorbachev Revolution, Macmillan, 1989, considers the NEP debate which shook Russia before the collapse of Communism. (All these books, except Danilov, are available in paperback.)

The New Economic Policy by R.W. Davies new perspective 1998

R.W. Davies, Emeritus Professor of Soviet Economic Studies, is the author of many books and articles on Soviet economic history and on contemporary Russia and has visited Russia many times to work in archives and libraries. He is writing a series on The Industrialisation of Soviet Russia, four volumes of which have been published by Macmillan Press Ltd.

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