Coexistence of Private and Public Sectors

The laws sanctioned the coexistence of private and public sectors, which were incorporated in the NEP, which on the other hand was a state oriented "mixed economy. "  Rather than repossess all goods produced, the Soviet government took only a small percentage of goods. This left the peasants with a marketable surplus which could be sold privately.  The state, after starting to use the NEP, migrated away from Communist ideals and started the modernizing of the economy, but this time, with a more free-minded way of doing things. The Soviet Union stopped upholding the idea of nationalizing certain parts of industries. Some kinds of foreign investments were expected by the Soviet Union under the NEP, in order to fund industrial and developmental projects with foreign exchange or technology requirements.

The move towards modernization rested on one main issue, transforming the Soviet Union into a modern industrialized society, but to do so the Soviet Union had to reshape its preexisting structures, namely its agricultural system and the class structure that surrounded it. The NEP was primarily a new agricultural policy.  The Bolsheviks viewed traditional village life as conservative and backward. The old way of village life was reminiscent of the Tsarist Russia that had supposedly been thrown out with the October Revolution. With the NEP, which sought to repudiate the “old ways,” methods were put in place which promoted the pursuit by peasants of their self-interests. However, the state only allowed private landholdings because the idea of collectivized farming had met with much opposition.  Disagreements in leadershipLenin considered the NEP as a strategic retreat. However, he justified the NEP by insisting that it was a different type of capitalism. He insisted that this form of “state capitalism” was the last stage of capitalism before socialism evolved. Leon Trotsky and Joseph Stalin disagreed over how to develop the Soviet Economy after the World War and the Civil War. Trotsky, supported by left-wing members of the Communist Party, believed that socialism in Russia would only survive if the state controlled the allocation of all output. Trotsky believed that the state should repossess all output to invest in capital formation.

On the other hand, Stalin supported the more conservative members of the Communist Party and advocated for a state run capitalist economy. Stalin managed to wrest control of the Communist Party from Trotsky. After defeating the Trotsky faction, Stalin reversed his opinions about economic policy and implemented the First Five-Year Plan. Agricultural production increased greatly. Instead of the government taking all agricultural surpluses with no compensation, the farmers now had the option to sell their surplus yields, and therefore had an incentive to produce more grain. This incentive coupled with the breakup of the quasi-feudal landed estates not only brought agricultural production to pre-Revolution levels but surpassed them.

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While the agricultural sector became increasingly reliant on small family farms, the heavy industries, banks and financial institutions remained owned and run by the state. Since the Soviet government did not yet pursue any policy of industrialization, and did not allow it to be facilitated by the same private incentives that were increasing agricultural production, this created an imbalance in the economy where the agricultural sector was growing much faster than heavy industry. To keep their income high, the factories began to sell their products at higher prices. Due to the rising cost of manufactured goods, peasants had to produce much more wheat to purchase these consumer goods.

This fall in prices of agricultural goods and sharp rise in prices of industrial products was known as the Scissor crisis (from the shape of the graph of relative prices to a reference date). Peasants began withholding their surpluses to wait for higher prices, or sold them to "NEPmen" (traders and middle-men) who then sold them on at high prices, which was opposed by many members of the Communist Party who considered it an exploitation of urban consumers. To combat the price of consumer goods the state took measures to decrease inflation and enact reforms on the internal practices of the factories. The government also fixed prices to halt the scissor effect.

The NEP succeeded in creating an economic recovery after the devastating effects of the First World War, the Russian Revolution and the Russian civil war. By 1925, in the wake of Lenin's NEP, a "... major transformation was occurring politically, economically, culturally and spiritually. Small-scale and light industries were largely in the hands of private entrepreneurs or cooperatives. By 1928, agricultural and industrial production had been restored to the 1913  level. However, unemployment skyrocketed under the NEP and a wider gap was created between classes.

It was abandoned in 1928 after Joseph Stalin obtained a position of leadership during the Great Turn. Stalin had initially supported the NEP against Leon Trotsky, but switched in favour of Collectivization as a result[citation needed] of the Grain Procurement Crisis and the need to accumulate capital rapidly for the vast industrialization programme introduced with the Five Year Plans. It was hoped that the USSR's industrial base would reach the level of capitalist countries in the West, to prevent them being beaten in another possible war. " Stalin proposed that the grain crisis was caused by the NEP men, who sold agricultural products to the urban populations for a high price.

An alternative explanation for the grain crisis (which is more popular among western historians)[citation needed] revolves around the focus on heavy industry creating a significant consumer goods shortage; which meant peasants had nothing to spend their resources on, thus resulting in the hoarding of their grain. For Lenin and his followers, the NEP was intended as an interim measure. However, it proved highly unpopular with the Left Opposition in the Bolshevik party because of its compromise with some capitalistic elements and the relinquishment of State control. They saw the NEP as a betrayal of communist principles, and they believed it would have a negative long-term economic effect, so they wanted a fully planned economy instead.

In particular, the NEP created a class of traders ("NEP men") whom the Communists considered to be "class enemies" of the working class. On the other hand, Lenin is quoted to have said "The NEP is in earnest and long-term" , which has been used to surmise that if Lenin were to stay alive longer, NEP would have continued beyond 1929, and the disastrous collectivization would have never happened, or it would have been carried out differently. Lenin had also been known to say about NEP: "We are taking one step backward to later take two steps forward", suggesting that, though the NEP pointed to another direction, it would provide the economic conditions necessary for socialism eventually to evolve.

Lenin's successor, Stalin, eventually introduced full central planning (although a variant of public planning had been the idea of the Left Opposition, which Stalin purged from the Party), re-nationalized much of the economy, and from the late 1920s onwards introduced a policy of rapid industrialization. Stalin's collectivization of agriculture was his most notable and most destructive departure from the NEP approach. It is often argued[citation needed] that industrialization could have been achieved without any collectivization and instead by taxing the peasants more, as similarly happened in Meiji Japan, Otto von Bismarck's Germany, and in post-World War II South Korea and Taiwan.

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