Why Perestroika Failed

Peter J Boettke

• Publisher: Routledge
• Year: 1993
• Print ISBN: 9781138880870
• eBook ISBN: 9781134886302
• Topic: Business
• Subtopic: Economic Theory
• Index: Business

Perestroika was acclaimed in the west but brought empty shelves in the east. Why Perestroika Failed argues that this was inevitable because it was not based on a sound understanding of market and political processes. Even if the perestroika programme had been carried out to the full it would have failed to bring about the structural changes necessa

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INTRODUCTION

Ideas, unless outward circumstances conspire with them, have in general no very rapid or immediate efficacy in human affairs; and the most favourable outward circumstances may pass by, or remain inoperative, for want of ideas suitable to the conjuncture. But when the right circumstances and the right ideas meet, the effect is seldom slow in manifesting itself.

John Stuart Mill¹

INTRODUCTION

The most dramatic event in political economy to happen since the Great Depression of the 1930s was the collapse of the Soviet system and its satellites in the late 1980s. The Soviet admissions of the failure of their economic system to provide a decent standard of living to its people, let alone keep pace with the technological advances of the West, caught most Western Sovietologists by surprise. Watching the developments (zigs and zags) of perestroika and glasnost became a full-time occupation for many economists.

The events in the Soviet Union since 1985 have been nothing short of spellbinding. Academics, pundits and the man on the street have been transfixed by the ‘Gorbachev phenomenon.’ The turning point of the Soviet reform effort, however, came in 1989. One former satellite after another during that fateful year withdrew from the Soviet empire with Gorbachev’s blessing. Poland, Czechoslovakia and East Germany dramatically went their own way. The Berlin Wall fell, both figuratively and literally. The Brezhnev doctrine was repudiated by Gorbachev.

On the economic front, the pace of the Gorbachev reforms seemed to quicken (at least in rhetoric) as 1990 approached. No longer did thereform rhetoric limit itself to tactics for improved efficiency of economic administration. Now fundamental systemic issues were debated. Private property, free market pricing, currency convertibility, etc., were legitimate topics of discussion among the Soviet Union’s leading economists. These economic discussions culminated in the debate in the late summer and early fall of 1990 over the Shatalin 500-Day Plan.² The plan was at one and the same time a draft of a constitution for a new confederation of free sovereign republics, an outline for a market-based economic system for the new confederation and a plan of transition from the old union to the new confederation.³

But as is usually the case in political discussions, rhetoric diverged significantly from reality. Gorbachev quickly abandoned the Shatalin Plan and its political and economic program. A compromise Presidential Plan emerged in October 1990, which while maintaining some of the rhetoric of the Shatalin Plan, eliminated all of the details.⁴ Both the political and economic reforms in the Soviet Union possessed troublesome paradoxes that simply exacerbated the crisis situation. In the lead up to the failed August 1991 coup, the situation in the Baltic states highlighted the political troubles with the Soviet reforms just as the long lines and empty shelves highlighted the economic woes that continued to plague the Soviet people. Perestroika as an economic reform program failed to bring lasting and systematic change to the moribund Soviet economy.

This book represents a critical assessment of the reform effort (1985–91). The common theme that runs throughout the book is that only on the basis of a sound understanding of the operation of market and political processes can one begin to analyze the Soviet-type system, and the efforts to reform it, with any degree of accuracy. From this theoretical basis, best developed by scholars working within the Austrian (market processes) and Public Choice (political processes) schools of economic analysis, the various proposals and paradoxes of the Soviet effort are examined.

Perestroika failed in large part because it was not tried. Gorbachev between 1985 and 1991 announced at least ten radical plans for economic restructuring, not a single one was ever implemented. But even if perestroika—as represented in the major proposals and decrees—had been implemented it would not have produced the structural changes necessary to revive the Soviet economy.

Though the events examined are limited in large part to the reform history from 1985 to 1991—a working knowledge of which would be necessary to examine any direction the former Soviet Union may take in the foreseeable future—emphasis will be on the theoretical problems that economic reform confronts in general. Knowledge of the reasons why perestroika failed may provide us with important general lessons for how to proceed in charting a new course in the former Soviet republics and East and Central Europe.

OVERVIEW OF THE BASIC PROPOSITIONS

There are two general questions which the various chapters in this book attempt to answer. First, if socialism as an economic system was so inefficient, how could it have lasted for seventy-four years? Second, if market reforms are so desirable, why have all the transforming economies experienced an acute economic decline during the reform period? Both of these questions will be answered through a series of propositions which taken as a whole provide the critical answers. Each of the chapters will try to address a specific proposition and tease out its implications.

Proposition 1: Soviet economic strength was an illusion

It has become commonplace among neo-conservative commentators in the West, and even some Soviet intellectuals, to argue that the breakdown of the Soviet empire in the late 1980s was due to Ronald Reagan’s military build-up in the early part of that decade.⁵ By raising the stakes in the international military game, Reagan put the final strain on the Soviet system. However accurate this perspective is concerning the weight of the military burden on the Soviet economy, it does not address the systemic issues and problems surrounding the Soviet economy. The real question that must be raised is whether the Soviet system could have continued even if no military pressure was exerted by the West.

The neo-conservative perspective on the Soviet problem is untenable because it underestimates the extent to which military power is derived from a prosperous economic base and it overestimates Soviet economic strength. Questioning the neo-conservative hypothesis, however, should not be construed as support for the alternative suggestion that Mikhail Gorbachev was responsible for the break-up.⁶ Gorbachev did not become General Secretary to reign over the demise of the Soviet empire. Any view that draws our attention away from the structural problems the Soviet system faced throughout its history will fail to grasp the meaning of the Soviet experience with socialism.

Even if the US and the West had reduced the military stakes in the 1980s, the Soviet economy was doomed to fail. The Soviet system was structurally weak since its founding and collapse was inevitable. The economic fact that, as Aleksandr Zaychenko stated, ‘Russians today [in 1989] eat worse than did Russians in 1913 under the Czars’ had little to do with the military strains of the Cold War and everything to do with the structural problems of socialist economic institutions.⁷

The illusion of Soviet economic growth and progress was due to the failings of aggregate economics, in general, and an odd combination of ideas and interests in academic discussions which did not allow dissenting voices to be heard, in particular. In fact, the whole peculiar art of Soviet economic management amounted to the production, and distribution of this illusion.

To illustrate the conflict between Western perceptions of socialist industrial achievement and the realities of the formerly socialist economies, one need only consider the fact that prior to German unification, East Germany was considered the flagship of the socialist industrialized world. Now it is evident to all that the East German economy was a shambles—incapable of producing anything close to world standards for an industrialized nation.⁸ We now know just how inefficient these economies actually were.

It is not at all an exaggeration to say that in economic terms the socialist economies of Europe were Third World economies.⁹ As George Orwell pointed out in Animal Farm, to the outside world the farm may have appeared as if it was productive and prosperous after the revolution, but inside the farm the animals worked harder and ate less than they ever did before.¹⁰

Proposition 2: Socialism as originally conceived was (is) an economic impossibility

Soviet-style socialism did not fail because of half-hearted attempts or because of backward political and economic conditions, rather socialism as originally conceived of by Marx, Engels, Lenin and Trotsky was simply a utopian dream incapable of realization in any world populated by human beings. This does not mean that an attempt to realize utopia cannot take place, just that utopia can never be achieved.

In assessing utopias, it is important to clarify two issues. First, the internal coherence of the idea must be examined. Second, the vulnerability of the idea to opportunistic behavior and external invasion must be considered.

If a utopia is internally consistent, then it is said to be theoretically possible. However, if it is internally inconsistent, then it represents a theoretical impossibility. If a utopia is theoretically possible, but vulnerable to opportunistic invasion, then it may simply be impracticable. A utopian system which is both internally consistent and not vulnerable to opportunism, may actually cease to be a utopia, and, instead, offer a vision of a workable alternative social arrangement than that currently present in the world.

Socialism was an example of a theoretically impossible utopian dream. Given socialism’s own goals of increased productivity and the moral improvement of mankind (and man’s emancipation from the oppressive bonds of man and nature), the institutional demands of its project were inconsistent with the attainment of those goals. The unintended consequence of the attempt to implement this utopian dream in the real world was the Soviet reality of political oppression and economic deprivation.

Proposition 3: Mature Soviet-style socialism, since it could not have conformed to the textbook model of socialism, is best understood as a rent-seeking society with the main goal of yielding perquisites to those in positions of power

Throughout its history the defining characteristic of the mature model of Soviet-style socialism was political and economic monopoly. The vast system of interlocked monopolies, and the nomenklatura system, worked to provide perquisites to those in positions of power and controlled access to these positions. The Soviet system created a loyal caste of bureaucrats who benefited directly from maintaining the system. The existence of contrived scarcity rents available to managers and store clerks goes a long way to explaining the persistence of shortages, and the rationale behind many common Soviet practices, such as blat.¹¹

The narrow interests of the bureaucrats also explains why they did not pay attention to public interest goals such as economic policies which would increase consumer well-being. The main objective of bureaucratic action was not to increase economic productivity per se, but rather to increase the rents and perquisites available. Bureaucratic competition substituted for economic competition, and resources were allocated according to political rationales rather than economic ones with the corresponding waste that would be expected. But waste was not penalized in the Soviet system of bureaucratic management. As long as output targets were met, and everyone in the process received the perquisites due to them, then the Soviet manager was judged a success. Certainly such considerations as consumer demand were not to enter the state enterprise manager’s calculations.

Economic reform demanded a change in this way of doing things, but change was sure to be resisted. The bureaucratic caste could not be expected to give up voluntarily its privileged position in society.

Proposition 4: The basic organizational logic of politics conflicts with the logic of economic reform

Perhaps one of the oldest debates in the history of political economy is over whether ideas or interests govern policy change. Karl Marx, for example, argued that the economic base determined the superstructure. In other words, ideas flow from economic interests. John Maynard Keynes, on the other hand, argued that the impact of interests was largely overestimated, rather it was ideas that govern the world. Ironically, they both may be right.

The complex interaction of ideas and interests produces an intellectual climate within which the polity exists. Ideas, for example, which demand more government involvement, also create an interest group which will benefit from the intervention. Thus, ideas and interests work together to eliminate the constraints to government involvement in the economy that may exist. The logic behind this is rather straightforward.

It must be recognized that government, whatever form it takes, is an institution that can be, and will be, used by some to exploit others unless effectively constrained. Under democracy, politicians (by definition) seek election or re-election, and in order to accomplish that goal they require votes and campaign contributions. On the other hand, most voters confront a situation where the incentive to gather political information is absent. The expected value of any one vote is usually much less than the cost associated with even the simple act of voting let alone casting an informed vote. The expected value of political information on any candidate or issue is far less than the cost associated with seeking that information unless the voter has a selective incentive to acquire particular information.

Rational abstention from voting and rational ignorance among voters is a natural outcome of the logic of individual choice within the democratic political process. Well-informed and well-organized political groups are so because the members have a selective incentive to be informed and organized, i.e., they have a special interest in the issue under discussion. These special interest groups will supply both the votes and campaign contributions that politicians need to be successful in their bid for office. The main objective of political action, therefore, is to concentrate benefits on the well-informed and well-organized interests which represent a politician’s constituents and disperse costs among the unorganized and ill-informed mass of citizens. The bias in government policy-making is, therefore, one that yields short-term and easily identifiable benefits at the expense of the long-term and largely hidden costs. Despite the soundness of an economic policy, unless it can pass that bias test it is most likely destined for the political scrap heap.

Political programs for reducing government involvement in the economy for any particular action, for example, entail great costs and offer very little relative benefit in return. A reduction in government involvement in the economy results in short-term and easily identifiable costs to the existing bureaucracy with the promise of long-term and largely hidden benefits to consumers. Stated bluntly, if the logic of politics is to concentrate benefits and disperse costs, then the logic of political and economic liberalization is to concentrate costs on the existing interests who benefit from current government action and disperse benefits in terms of enhanced consumer welfare, and as such, the two logics conflict with one another.

Perhaps a simple example from a democratic regime may illustrate the point. Say a proposition is put forth that teachers will perform better if they receive a $1,000 increase in pay. The cost of the government’s education program, however, will be dispersed among tax payers of the state as an increase in their state income tax of $1. In order to be well-informed on the issue and work to defeat the passage of the government’s proposed program it would cost the individual opponent of the bill in excess of $100 in terms of time and expense. Such an activity is not economical for most individuals and, therefore, they will remain rationally ignorant of the issue. On the other hand, teachers who expect to receive $1,000 will take the time and additional expense to make sure that the program passes. The interaction of politics under democracy pits vote-seeking politicians and special interest voters on one side against rationally ignorant voters on the other. This interaction produces certain biases in thesystem which tend to support the ever increasing expansion of government involvement in the economy.

If we reverse the situatio...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• DEDICATION
• ILLUSTRATIONS
• PREFACE
• 1: INTRODUCTION
• 2: THE ROAD TO NOWHERE
• 3: THE THEORETICAL PROBLEMS OF SOCIALISM
• 4: THE NATURE OF THE SOVIET-TYPE SYSTEM
• 5: THE LOGIC OF POLITICS AND THE LOGIC OF REFORM
• 6: CREDIBILITY IN SOVIET REFORMS
• 7: CHARTING A NEW COURSE
• 8: CONCLUSION
• NOTES