This is a really gigantic topic, there's a lot of factors at play here. I'll try to organize the discussion around a few bullet points, and try to be historical instead of appealing purely to econ theory since this is a history sub.

Low Initial Base

The most obvious observation is that the USSR and eastern Europe have always been underdeveloped compared to the USA and western Europe, going back to the interwar period. And WW2 was far more materially destructive to eastern europe than it was to western europe. Even considering the enormous human losses of WW2, per capita output still fell in the USSR (as it did in every country which experienced significant ground combat in the war). Let's look at some numbers. These are estimates of per capita GDP in 1990 USD equivalents. Of course per capita GDP is not, by itself, a good measure of living standards, but we'll get to that later.

Year	USSR	Hungary	France	UK	USA
1929	1386	2476	4710	5503	6899
1939	2237	2838	4793	6262	6561
1946	1913	1721	3855	6745	9197

These numbers of course are somewhat misleading since the prices involved are not wholly reliable, and the composition of output matters for consumer living standards and that is all glossed over.

Planning System

As you know the USSR was a planned economy, with a planning apparatus that was replicated by the rest of the eastern bloc after WW2. At the top of the apparatus was the Council of Ministers. Below it were ministries for specific industries. These were rather broad, like heavy industry (steel mills for example), light industry (bicycles for example), agriculture, etc. Depending on country and time period, the planned economies had from 4 to 7 of these ministries that had jurisdiction over some sector. Each ministry controlled thousands upon thousands of individual state owned enterprises that would actually carry out the task of producing goods and providing services.

The Council of Ministers would draw up plans for the near future (five years in the USSR and most eastern bloc countries). This was an iterative process. Individual products would be given preliminary quantities. Each unit of some output product was estimated to consume some number of input products. Drafts would be passed down to the ministries, chopped up, and then down to individual enterprises. Managers at enterprises would adjust estimates of required inputs and target outputs and send it back up the chain. This process would be repeated many times.

This was a fairly slow and cumbersome process. Information was shared vertically between low level planners and high level planners, but not so much horizontally between different enterprises or different industries. Typically the plan would not be finalized until the well into the initial year that the plan ostensibly applied to.

The planners responded mostly to the dictates of the political leadership, which meant emphasizing heavy industry. Throughout the history of the USSR the planning apparatus made a point of skewing production in favor of heavy industry, at the expense of light industry (aka consumer goods), services, and agriculture. With de-Stalinization, this single minded focus relaxed somewhat but never really went away.

Incentive Structure

Under Stalin, low level managers and workers were incentivized to work by a system of harsh punishments (labor camps for example). Workers and managers were incentivized to meet production targets, which were specified in terms of quantity. Though quality control mechanisms did exist, they did not necessarily analyze the output goods beyond rating them as satisfactory or not satisfactory.

After Stalin's death, the system gradually switched to more carrots and less sticks as part of a general softening of Soviet life under Khrushchev. There were some tepid reforms towards merit pay and in some planned countries (Yugoslavia especially, where the possibility of enterprise bankruptcy was even floated). The workers themselves often resisted merit pay fearing that it would aggravate inequality and expose them to the possibility of unemployment (which are two problems the planned economy was very good at solving). Merit pay when it was introduced was often implemented as piece rate pay, aka pay per some fixed quantity of output. Whether the incentive was reward or punishment the result was that workers were incentivized to hit or exceed production numbers. Factors beyond raw quantity were not important.

Managers faced these same incentives, but were also in charge of managing inputs. Managers wanted to meet production quotas, but they faced no hard budgetary constraints. Typically managers would request as much capital and input as possible while dampening targets as much as possible. The idea is to maximize actual outputs and minimize target outputs, and to make each unit of output as cheaply as possible. The USSR and other planned economies often suffered from malinvestment and misappropriated raw materials. (Interestingly, when Yugoslavia experimented with a sort of 'market' socialism, some enterprises suffered from underinvestment as workers chose to pay themselves over investing in capital.)

Growth Strategy

The USSR and other planned economies adopted a strategy of extensive growth, that is growth based on harnessing raw inputs. Extensive growth is one part of the vague notion known as total factor productivity. Hiring more people, training them, building machines, digging mines, for example are all extensive growth mechanisms. Until the 60's or so the USSR had a lot of room for extensive growth. There were ample natural resources (in Siberia for example) ready for exploitation, a vast agricultural population that could be moved to industry, and a relatively small and/or low-tech capital base which could be grown. Employment in eastern Europe expanded by 1.7% per year on average during the 50's and 60's compared to 0.6% per year in western Europe. Share of capital as percentage of GNP was often nearly 50%, averaging 35% during the 60's for eastern Europe compared to 25% for western Europe. The majority of capital in turn went into heavy industry (aka more capital). Eventually there is a limit to the amount of machinery which can be operated, the amount of labor that can be marshalled, the amount of education any person can reasonably have.

Total factor productivity however was not very high if excluding the results of extensive growth. The USSR and other eastern bloc economies were noticeably lacking in the introduction of new consumer goods, the diversity of available goods, and the quality of produced goods. Some of this can be attributed to the incentive structures which considered quantity almost exclusively. There were also laws in place which drastically decreased labor mobility and autonomy. Deviation from prescribed practices or leaving your assigned job without employer approval was prohibited. Anecdotally, Hungary's shoe industry in the 1950's produced a grand total of 16 models of shoe, and the state quality control agency marked a quarter of them as substandard.

The USSR did create R&D bureaus to oversee product development, but they were attached to one of the sector-based ministries. R&D bureaus could not be attached to individual enterprises since the system did not incentivize long term development over meeting immediate production targets. There was very little information sharing in practice between the ministry R&D bureaus and the thousands of enterprises operated by any ministry. Various reforms of the 60's and later sought to reorganize these bureaus, by both centralizing them further or decentralizing them and putting them in closer contact with production units, but the introduction of high quality consumer goods never picked up in practice.

(Comparatively, this heavy industry first growth strategy is sort of the opposite of, for example, post-1978 China, which went from agriculture to light industry to heavy industry to high tech. But 1978 China was structurally very different from 1953 USSR, not a discussion to have here.)

International Trade

The USSR engaged in international trade mostly with other members of the second world. Most trade was bilateral, between the USSR and its allies, and not so much between the various member nations. The USSR created the Council on Mutual Economic Assistance (CMEA) in 1949 as a sort of counter part to the Marshall Plan and the later EEC. Trade within the CMEA region accounted for the majority of trade of member nations. There was relatively little contact with the outside, more affluent, world.

The actual mechanisms of trade, like planning, revolved around political considerations. Bilateral negotiations would be arranged between two nations (usually the USSR and one of its allies) and again quantities of various goods would be discussed. Each member nation wanted to build up a domestic industry of 'high prestige' goods and wanted self-sufficiency, and trade agreements reflected that. For example, multiple countries wanted to build cars and other machines and few countries wanted to export raw materials. Trade agreements didn't necessarily reflect any country's comparative advantage.

After the 70's, as information technology exploded in the west, political considerations limited their importation, as they were potential tools of dissent. (Computers were a fairly hot black market item.) This magnified differences as digital technology enhanced the productivity of western economies significantly.

aaand I'm running out of room, so biblio:

The World Economy Volume 1: A Millennial Perspective and Volume 2: Historical Statistics

The European Economy since 1945, Eichengreen

Eastern Europe since 1945, Swain

Postwar, Judt

The Political Economy of Socialism, Lange

The simple answer is that the Soviet system didn't have market forces to determine prices and output of goods. In a market economy, if a particular product is is high demand, usually one of two things will happen (or both): prices of that product will increase and/or its production will also increase. A price increase will reduce quantity demanded. A production increase will increase the supply. The gap between supply and demand will be eliminated.

In the Soviet Union, manufacturers rarely set their own prices for goods they produced, and didn't have much control over the quantity of output either (since they too, in turn, were dependent on their own suppliers). Nor were they sufficiently incentivized to produce more. The Soviet system was one of central planning where prices were set at the top. Planners usually wanted to keep prices low, especially on goods they deemed as necessities - food, basic clothes, even cars. Any time you have a price ceiling on something, and the market can't reach equilibrium, you will end up with insufficient supply. And that is basically what was happening. Certain goods were sold on the black market, at higher prices (which were probably closer to market rates). Usually though, the Soviet people resorted to other means of determining who gets what: rationing, queues, wait lists, under the table deals, quid-pro-quo, barter, etc.

So this is like my thread since my career is basically based on this question. Flying dragon did a good job and a far more comprehensive answer than I can be bothered with as I am tired and just came back from a Moscow economic archive.

Now here is where I would come in. The key problem of the Soviet economy beyond the low starting base was that it had what Kornai would call a "soft budget constraint." This meant that an enterprise literally could not go bankrupt at all no matter how inefficient it was. A great example of this was a town that had three plants doing the same thing, one built in the 19th century, one built in the 1930s, and one built in the 1970s. The one from the nineteenth century continued to work even as more efficient plants should have taken its place. An even more extreme example was a story I heard from another person working in the archives about a fish caning plant on the Aral Sea that, after the damage caused by the disastrous economic management, still operated despite the fact that there were no more fish. They were simply flown in.

So why is the question. There are many levels you can go on. One answer is that there was an absence of market forces that prevented the equilibration of supply and demand. That is true enough but very simple. It assumes that first the USSR's leaders and economists didn't understand this and that supply and demand automatically equilibrate in a capitalist economy- beyond micro 101 no one really believes that. The story is far more complicated and in practice there are all sorts of problems with the equilibration of prices. In fact I would argue that it is the inherent instability of prices in the capitalist system that leads to Shumpeterian growth- the thing the that USSR lacked.

Leaving aside those questions for later, let's actually break down the problem of the USSR and the development of its economy. The first thing to remember is that consumer goods only reach Western Europe on a mass scale in the wake of the first world war with the spread of the "second industrial revolution" from the United States- before that we really are in an intensive growth mode. Now let's look to the USSR. The USSR was founded by people of a certain world view. They weren't just Marxists but they were Marxists who came from a "backward" society of the late 19th and early 20th century- for them Marxism meant as much modernization as it did liberation. For them modernization meant the height of late nineteenth industrial production. The other thing to remember is that their project ran into trouble very quickly. The revolution in the West that was supposed to bring "real proletarians" into the fray never happened. So in a sense through the 20s they were kind of lost and the realist assumption of Leninism (as stated in "Imperialism") was that the state that was created was under threat of war at all times and was weak both socially and economically. The system that they created in the late 20s and 30s was extremely good at rectifying these particular problems. If you look to Robert Allen's regressions in his "Farm to Factory" the level of growth is stunning. The USSR won the Second World War because it essentially built a war time economy by 1932.

The problem is what do you do afterwards? In Western Europe, which suffered similar problems of transitioning from extensive to intensive growth this problem was solved in several ways- destruction from the Second World War, which the USSR had in spades, and by the restructuring of the economy towards consumption and export- often guided by New Deal American bureaucrats who had very much solved the problem of consumption and economic management in the US. In the USSR that wasn't possible, since unlike in the rest of the world, extensive industrial growth was not only coded into the regimes world view and ideology but the institutions that were created for it were more and more defined as the core of state legitimacy. So what I argue in my own research is that they Soviet Union's technocratic elite were not idiots- they knew they had a problem but the legacy of an ideology structured on extensive development meant that when they tried to improve or change the institutions of the system they would just create another layer without being able to destroy the stuff that came before it. This was actually one of the main impetuses for Perestroika- to purge the system using popular actions instead of violence, since the latter option was off the table since Stalin's death in 1953. This is why there was no innovation or Schumpeterian growth in the USSR, even when innovation happened it had to compete with old systems that could just go on.

Another note that is much more technical is that Soviet planning could not deal with the concept of "opportunity costs." Their main focus was the cost of production which doesn't really help you in decision making since you could have huge saving on the cost of production by directing a ton of capital into one entity but that means you just cost yourself alternative investments. Now, many people knew this and tried to rectify it but the problem was the legitimacy of the ideology and the legitimacy of the institutions became intertwined. This is actually why I think liberal-capitalism works so well- it, despite attempts by moralists these days mostly on the right, doesn't really build its political legitimacy on set pieces of economic prosperity. The liberal capitalist state has always through its history created and destroyed values as it pleased.