To understand the origins of Gorbachev's ideas and their ultimate failure, we must go back to the period of Khrushchev's Thaw and especially the reforms that were started in 1965 by Alexei Kosygin in Soviet Union along with reforms pursued in Hungary (New Economic Mechanism). The reason was that both of these trends had various powerful influence on the Government and society in general.

Glasnost

The origins of Glasnost (openness) lay in the reforms pursued by Khrushchev who stressed the gradual reduction of powers in the State in the social sphere and a desire for a more tolerant and freer society. Khrushchev's condemnation of Stalin and the all powerful totalitarian State was a powerful symbol for the reformers in the Soviet bureaucracy. Gorbachev was of the opinion that an open society would ultimately strengthen Socialism and the Soviet society. Moreover, the moral imperative of Glasnost to the Soviet leaders should not be underestimated.

Indeed, here is what Gorbachev himself later told interviewers,

The Soviet model was defeated not only on the economic and social levels; it was defeated on a cultural level. Our society, our people, the most educated, the most intellectual, rejected that model on the cultural level because it does not respect the man, oppresses him spiritually and politically.

Another sample by Nikolai Ryzhkov (who was the Prime Minister to Gorbachev) on what he termed as a terrifying moral state of the society,

[We] stole from ourselves, took and gave bribes, lied in the reports, in newspapers, from high podiums, wallowed in our lies, hung medals on one another. And all of this — from top to bottom and from bottom to top.

The above statement was made in 1985. One last thing to note is that, nobody (even the observers in Western countries) predicted that the Soviet Union would collapse. It was widely believed to be a stable, if totalitarian country.

Perestroika

Unlike Glasnost, however the reasons for economic reforms were more pragmatic. It was also a response to the change in economic situation because of discovery of oil resources in the country. The principle of "self sufficiency" had already ended and the total trade (Imports plus exports) the Soviet Union had with the rest of the world was increasing at a rapid rate. MacDonalds was already negotiating with the authorities to enter into the country since 1976!.

It is well worth noting, that use of market had already been employed in Yugoslavia (from 1950 but especially after 1967), Hungary (from 1968), China (from 1978) and the results had been generally favourable. Hungary was the most well managed economy in the Soviet bloc and the GDP per capita of Yugoslavia had reached around 35 percent of the US by 1980. The roots of the economic reform lay in the economic troubles that had started from the lowering of growth rates from the mid 1960's.

In 1965, Kosygin attempted to use pseudo market reforms to improve economic growth. One of the persistent problems of the country was the unusability of many goods that were produced and overproduction. At the beginning of 1964, unsaleable stocks of ready-made clothing in Soviet shops exceeded 500 million rubles. In all industry, the total value of such goods had reached upto 2 billion dollars and had to be sold at a below market price. Such major waste had largely occurred because of the continuous emphasis by Planning authorities on production rather than "sales" and "profits". Under Soviet planning, enterprises were not allowed to own their profits but were required to send about 70 percent of it to the Central Government and use the rest to further invest, liquidate past debt or to cover losses from preceding years.

The economic planners then sought to create quasi market like relations between the newly formed "firms" and profits were considered to be the new "index" for guiding investment. The use of profits and interest rate on capital was intended to prevent wastages and continuous overproduction because of shoddily made goods. Sales were to complement it. The aim was to maximize sales by a firm which could be done by increasing the quality of consumer goods by giving the firms freedom in creating and selling those products. This was applied to 32 firms in regions like Moscow. Managers were given greater material incentives (in form of bonus) to encourage output. The bonus was often of very great value varying from 23.5 percent of basic salary for a manager in machine-building plant “Krasni Proletarii” in Moscow to 30 percent for some other factories.

This was ultimately unsuccessful and the experiment ended in 1970's. The rapid rise in oil prices along with their discovery in the Soviet Union allowed the authorities to paper out the difficulties and abandon tougher reforms to improve productivity. The previous reform had brought a sea change in attitude. The New York Times noted that many Soviet executives used to hang out with their American counterparts after work. Chase Manhattan had even opened it's office in No 1 Karl Marx Square. In fact an Hungarian commercial attache had even stated "“Our businessmen and Government officials are very practical in these matters. So long as a project makes a good profit, then there is nothing to stop us". Many American firms had started opening their representative offices in Soviet Union. The problem was how to integrate them into the system of planned economy. Thus their role was minimized and lesser known.

By 1980's, with the crash in oil prices, the problems in the Soviet economic problems were becoming increasingly apparent. The exports other than petroleum had little competitiveness in the world which deprived the country of hard currency reserves it needed.The Soviet Union was dangerously close to becoming a Socialist version of a Petro State. Moreover, they had missed out on the electronic boom that propelled East Asian State Capitalist Tigers. The Soviet Union in particular was eager to learn from Japan.

Gorbachev thus sought to encourage building of innovation centers with the help of foreign Capital to help the State to deal with the perennial shortage of Consumer goods. Meanwhile, he sought to create a market relationship between State firms and allowed significant autonomy to them to hire and fire workers, set wages and allow increase in variety of goods and give Consumer choice.

Reference:

Everything you know about collapse of Soviet Union is wrong by Leon Aaron; Foreign Policy

Soviet Management Reform by Ernest Germain

The Strange Death of the Soviet Empire by David Pryce-Jones

An analysis of the Soviet economic growth from the 1950’s to the collapse of USSR by Numa Mazat, Franklin Serrano, Centro di Ricerche e Documentazione.