Rules governing economic activity were pervasive in the Soviet Union. The annual plan was a major source of rules, guiding the allocation of goods within the state sector. Prices and wages within the state sector also were centrally determined. Furthermore, the state sector was itself very large as a result of rules that prohibited most forms of private economic activity.

The prevalence of rules within the Soviet economy was matched by evasion of the rules. The rigidities of central planning virtually required informal or illegal activity, even for state-owned enterprises, to meet the plan. Many goods were allocated illegally outside the plan. Price controls were evaded by bribes, whether monetary or in kind. Private economic activity flourished underground. Theft of state property was common enough that it became an accepted practice, almost a standard component of compensation.² Leonid Brezhnev was reported to have said, "No one lives on wages alone. I remember in my youth we earned money by unloading freight cars. So, what did we do? Three crates or bags unloaded and one for ourselves. That is how everybody lives. . . ."³ Indeed, the second economy probably helped bolster the planning system by compensating for planning errors or shortcomings and by contributing to higher living standards. That some forms of economic crime in the prereform system were accepted and perhaps even socially beneficial is highlighted by the lack of social opprobrium attached to them.⁴

Almost from the beginning of Soviet power there was significant evasion of the economic rules.⁵ But it was only during the Brezhnev era that the second economy began to expand noticeably (Millar, 1988; Treml and Alexeev, 1993). Sixty years was enough time for people to devise "ingenious"—and generally illegal—methods of making the most of central planning.

Early Gorbachev-era reforms attempted to legalize some of the existing activity and encouraged more private enterprise. The consequence was a