@ Urban fox- I concur Stalin's forced industrialization distorted economic planning for decades emphasizing heavy industry and militarization of the economy.
Where I see the main problems in the Soviet economic system is the closed feedback loop of the command economy.
- Information flowed from the top down
- Anything new had to fight several layers of bureaucracy to see it carried out, unless it was a spiffy new military system.
- The civilian economy was treated as irrelevant except as it fed to "state" (Military) needs until the mid-1950's and even during de-Stalinization, it was as much for propaganda value as meeting real needs and wants. By the the 1980's the civilian economy was in sorry shape from decades of neglect and corruption and the defense buildup 1970-1990.
- The Soviet Union tried to be relatively isolationist from the international trade network for a variety of reasons. This led to what I call the toy-train nature of the Soviet economy. They exported to folks getting it dirt-cheap or for so much raw materials. Neither recipient nor donor cared terribly much about the quality of goods, and internal consumers were stuck with whatever rattled down the pipe instead of voting with their rubles for the best products.
As to what economic liberalization could have made the Soviet Union competitive and surpass the USA's, you'd have to get Gosplan back off by stages to be more like MITI and go ordoliberal once business law, tax collection structures, capital markets, and so forth come into being.
You'd have to have lots of Soviets studying abroad and inviting foreign experts in the USSR teaching business management, capital markets, and so forth doing internships with Western companies learning the dark arts of competing for market share, customer satisfaction, and process improvement.
By 1975, an entrepreneurial class would emerge that ran internationally-competitive businesses, and transformed Russian civilian culture as folks'd have to get used to a more capitalist way of doing things. Employees have rights and privileges. Employment would no longer be a right.
I'd imagine Jugoslavian-style co-operatives would be a popular model for a while.
Agriculture would go from rural-employment scheme to more competitive co-ops where choice of crops and who to sell to gets a lot broader. Russian aerospace becomes very competitive in long-haul airliners, as well as short-haul/rough-strip aircraft. Imagine Ekranoplans as ferries!
Long and short of it, the Soviets open up economically to the rest of the world, unleash spectacular growth in the civilian sector of their economy not unlike the Wunderwirtschaft from 1960 on. Dubcek inspires a Russian Spring in 1968 that prompts political liberalization as well and a largely bloodless coup against Brezhnev and conversion of the Warsaw Pact into a strictly defensive organization and stand-down in posture.
Soviet troops leave the DDR in droves. Checkpoint Charlie goes from bar
bed wire and machine-guns to a single border guard on the "Soviet" side.
Negotiations begin for removal of NATO troops from Germany as the Berlin Wall is dismantled in 1969. The US balks. The UK backs them up to a point, but France, Germany, and Italy, faced with massive student protests, insist on listening to Soviet proposals.
A neutralist German SPD government under Willy Brandt comes into power, and the Bundestag votes on whether to stay in NATO. To the US's shock and horror, votes tally 275-221 to leave NATO in 1970 based on demonstrated Soviet "good faith", withdrawal of combat troops from the border, even from the DDR itself, allowing inspections by NATO troops and foreign journalists of former Soviet bases to establish no more nukes, tanks, or artillery are pointed at the FRG.
ITTL, LBJ was re-elected in 1968 by "getting tough in Vietnam". Tet just made him more stubborn, and told Uncle Walt he was full of it. Allegations of ARVN troop massacres of civilians are rampant as pictures filter out of killing fields of suspected VC/NLF villages come to light. Project Phoenix is given 10X the resources and full presidential backing regardless of Westmoreland's feelings that search and destroy by uniformed troops is the way to victory.
Westmoreland tries to pull a MacArthur and gets relieved and replaced by Creighton Abrams as MACV CO, who vastly changes US tactical conduct in Vietnam. Instead of bombing the bejesus out of the HCM Trail, he makes a full armored assault of Cambodia and airborne assault on Laotian areas of the HCM trail as well as amphibious strikes up the Mekong.
Sinhanouk screams bloody murder but gets executed by Lon Nol, starting a Cambodian civil war. However, with plenty of US and ARVN troops on the ground in concert with Lon Nol's forces, the Khmer Rouge are quickly rounded up and executed. Casualties are high, 3500 US dead, 18000 wounded, but the Ho Chi Minh trail has been shut down. NVA/VC dead are roughly 25000, Pathet Lao and Khmer Rouge casualties are 12000 and 18000 respectively, eliminating them from the field.
You'd think these crushing tactical victories would yield goodwill at home.
However, student protests of the casualties to US troops as well as civilian casualties become even more fervent. Some of the press after seeing Water Cronkite dissed by LBJ, goes out of their way to embarrass the US government in SE Asia and at home. A press blackout of the war zone only exacerbates the antagonism between some elements of the press and the federal government.
LBJ is a broken man by 1972. All of his political credibility is gone. Congress has threatened impeachment proceedings for LBJ invoking sedition laws to muzzle inconvenient critics. COINTELPRO is revealed to be largely a goon squad going after political enemies rather than chasing Soviet spies and subversives. J Edgar Hoover conveniently dies of heart failure before being subpoenaed to testify before HUAC.
"Deep Throat" Mark Felt, openly testifies before Congress about the diversion of FBI resources and specious criteria for investigation, arrest, and harassment by COINTELPRO operatives.
If you think Watergate shattered American confidence in government, seeing half of the command structure of the FBI under arrest for civil rights violations galore, as well as the CIA getting gutted over its shenanigans on US soil might have an even worse effect.
Basically, US loses all credibility over trying to win Nam, nearly bankrupts themselves, and most alliances start unraveling once the scary Soviet bear becomes considerably more cuddly. YMMV whether that's possible or likely. The USSR continues to progress in savvy and prestige, as well as soft power. The US becomes a self-doubting neurotic mess swinging between extremes of self-flagellation and jingoistic silliness and having an economically competitive USSR as well as Japan and Germany, among others further underscores the slippage in American industrial and commercial might in the 1980's. US can't agree on what to have for breakfast, much less make a coherent economic policy. By the Oughts, most American firms have been bankrupted or bought out by foreign concerns.