Gerschenkron described a pattern of Russian economic development which is observable on a number of occasions in the course of Russian history. For the past five hundred years, the history of Russia has been dominated by the theme of territorial expansio n: from the small principality of Moscow just emerging from Mongol rule, Russia grew to great size. During this process of expansion, the Russian state at times came into conflict with Western nations more advanced than it was. Such confrontations force d upon the leaders of Russia the realization that they would not be able to attain their goals because of the extreme backwardness of the Russian economy. In such situations, Gerschenkron asserts, the Russian state took on the role of initiator of econom ic development. The state applied pressure to the internal economy to get the economy to grow rapidly to support its military aims in as short a period as possible. This relationship between military affairs and economic growth was the cause of the fitf ul nature of economic development observed in Russian economic history. When the military needs of the state were pressing, the economy was pressured into rapid growth. When a degree of power parity was reached, the need for further rapid growth subside d, and this coupled with the leader associated with the growth policy leaving the scene, led to the state removing its pressure for growth. Because so much growth was compressed into such short periods, the burden of sacrifice borne by the people living in Russia during those periods was great. To exact this sacrifice, extremely oppressive means and institutions were employed. The increase of pressure and the exaction of sacrifice were often so intense that they led to the exhaustion of the internal po pulation; consequently, a period of rapid growth was followed by a period of little or no growth. This pattern is clearly seen in the period of Peter the Great and Stalin, and also to some extent in the period from the mid-1880s to World War I under the growth policies of the finance ministers Vyshnegradsky and von Witte.
In Schumpeter's view, the power of the market system lay not in the level of static efficiency that it achieved (as most of the economics profession said it did), but in its level of dynamic efficiency. That is, the success of the market system was not i ts efficient resource allocation under static levels of technology and resource availability, but its ability to produce dynamic changes in technology and to achieve dynamic growth through such changes. To Schumpeter, center stage belonged to the entrepr eneur and innovational activity producing changes in the process of production, types of products produced, and the structure of economic organizations. He spoke of the innovational process as being a process of "creative destruction"_the new that is cre ated destroys the old. While the entrepreneur is a positive force in the dynamic growth of society's well-being, he engenders social hostility because of the destructive aspect of "creative destruction". For society to progress, therefore, the entrepren eur needs to be protected and encouraged.
In an important contribution to the NIE, Nelson and Winter argue that firms in a market system do not behave in the cost minimizing - profit maximizing way postulated by neoclassical economic theory, because the amount of information that has to be collec ted and processed for such calculations is so immense as to be beyond the firm's ability. In the real world, firms tend to cope with this information overload through habitual reaction or routines. They find a workable way of handling a problem, of coor dinating activities of workers within the firm, and then repeat the established routine, steadily learning by doing and slowly incorporating new information. But when there is a significant change in the firm's environment_be it a change in customers' de mand structure or in the behavior, the technology, of competitors_habitual reaction on the part of the firm is often not sufficient. The firm must find a way of breaking its routine, i.e., it must innovate. If its behavioral routine is so entrenched tha t it cannot innovate, it will not survive. The selection process in economic evolution, it is argued, tends to favor new firms and small firms which are not encumbered by strongly entrenched routines. Such firms are able to respond more flexibly to envi ronmental changes.
The application of these three themes to an analysis of Soviet experience with central planning yields some insight into the question of why Soviet central planning ultimately failed.
In the Gerschenkron pattern, the dominant goal of the introduction of central planning in the Soviet economy at the end of the 1920s was the rapid growth of heavy industry_metals, machinery, fuels_to support military growth perceived necessary by Soviet l eaders. The bureaucratization of the entire economy under central planning multiplied the information burden on decision makers, intensifying the use of routines to a very high degree. Such a bureaucratized environment is not conducive to innovation lea ding to technical change (it particularly inhibits organizational innovation). Given this situation, the designers of the Soviet system should have developed a managerial incentive system that would have counteracted the bureaucratic barriers to innovati on. Instead they constructed an incentive system that contributed further to these barriers. The basis of the Soviet system of central planning was the establishment by planners of obligatory production targets for Soviet enterprises, and the granting of monetary bonuses to managers for the fulfillment and overfulfillment of these targets, and the loss of managerial position for failures to meet the targets. Thus, demand for an enterprise's products was not set directly by its customers but by disintere sted planners. Managerial rewards and penalties were a function of performance relative to targets, and were not directly affected by competition from other producers. Under such conditions, Soviet managers tried to avoid the risks associated with innov ation. What technical change that was produced came first of all in the high priority military sector where the nature of the product_a military weapon_was essentially competitive. If the potential enemy is developing new weapons, the pressure to keep u p with him is extremely strong. Secondly, in the civilian sector technical change tended to come primarily when new factories were constructed. Over the years, the proportion of new capital to old capital decreased, so that the impact of this source of new technology diminished.
As long as the military objectives of catching up with the West remained dominant, Soviet central planning, with its routinized behavior, served a useful purpose for Soviet political leaders. Soviet military power grew significantly. But by the end of t he 1950s, with Stalin gone and with military parity with the United States achieved, the military sector lost its monopoly position as the sole objective. Attention began to be paid also to the Soviet consumer and pressure from the center on the economy began to be relaxed.
By the 1960s, the environment within which Soviet enterprises operated began to change. Multiple objectives raised the importance of the economic concept of opportunity cost. This, added to the variability and changeability of consumer tastes, raised th e level of the information burden on the economy. The existing routines in the existing organizations were unable to handle the expansion in required information. Furthermore, in the 70s and 80s, the growing Soviet awareness of the outside world led to competition with the West with regard to consumer standard of living. And with the rapid pace of American military technology, military parity with the U.S. began to slip away.
Soviet attempts to reform (to perfect) their system of central planning were not able to overcome the firmly established routines that so long guided Soviet economic decision making. The constraint on organizational innovation_the entry of new and new ty pes of economic organizations_played a critically important role. The Soviet system of central planning proved to be incapable of responding flexibly to the changes in environment. Gorbachev's decision (in June '87) to discard it and to initiate moves t o a market system was, in the end, a reflection of the evolutionary selection process at work.