Credibility In Soviet Reforms

1 William Shakespeare, The Merchant of Venice in The Complete Works of William Shakespeare, vol. 2 (New York: Bantam Books, 1988), Scene 4.1.

2 Andres Aslund, for example, even before the August coup concluded that 'Looking back at Soviet economic policy during the second half of the 1980s, it is difficult to avoid the impression that virtually every possible mistake has been made. Perestroika has proved to be an utter economic failure.' Aslund, Gorbachev's Struggle for Economic Reform, 2nd edn (Ithaca, NY: Cornell University Press, 1991), p. 225.

3 For interesting interpretative essays on the events in the former Soviet Union see Martin Malia, 'A new Russian revolution?,' New York Review of Books (18 July 1991), and 'The August revolution,' New York Review of Books (26 September 1991).

4 Mikhail Gorbachev, Perestroika (New York: Harper & Row, 1987), p. 33.

5 See Mark Harrison, 'Why did NEP fail?,' in K.Smith (ed.) Soviet Industrialization and Soviet Maturity (London: Routledge, 1986), p. 26, where he argues that the rejection of the NEP simply reflects 'the needs of a state committed to a rapid, large-scale industrialization to reduce the commitment of resources to agriculture and to enforce reduced living standards on both town and country.'

6 Alec Nove, 'The logic and cost of collectivization,' Problems of Communism (July-August 1976):59.

See, for example, Stephen Cohen, Bukharin and the Bolshevik Revolution (New York: Oxford University Press, 1981(1973)), and Nikolai Shmelev and Vladimir Popov, The Turning Point (New York: Doubleday, 1989).

An attempt at developing the revisionist interpretation is made in Peter Boettke, The Political Economy of Soviet Socialism: The Formative Years, 1918-1928 (Boston: Kluwer, 1990), pp. 34-8, 113-46. See, for example, Israel Kirzner, 'The perils of regulation,' in Discovery and the Capitalist Process (Chicago: University of Chicago Press, 1985). The classic statement of this problem is F.A.Hayek, 'The use of knowledge in society,' in Individualism and Economic Order (Chicago: University of Chicago, 1980(1948)). Also see Don Lavoie, Rivalry and Central Planning (New York: Cambridge University Press, 1985) and National Economic Planning: What is Left? (Cambridge: Ballinger Publishing, 1985), pp. 51-92.

See Mitton Friedman, 'A monetary and fiscal framework for economic stability,' in Essays in Positive Economics (Chicago: University of Chicago Press, 1953), p. 145.

The argument for rules rather than discretion can also be linked to the discussion of competitive market processes above. Since economic processes are in a constant state of flux, public policy that would also be in a discretionary state of flux would simply compound the instability and uncertainty of social arrangements. Fixed policy rules ground the constant flux of economic activity with some certainty. A variation of this argument with regard to the law is developed by Mario Rizzo, 'Law amid flux,' Journal of Legal Studies, 9 (2) (March 1980):291-318. See Geoffrey Brennan and James Buchanan, The Reason of Rules (New York: Cambridge University Press, 1985), pp. 82-96. See Tyler Cowen, 'Self-constraint versus self-liberation,' Ethics, 101 (January 1991):360-73, for a discussion of these issues associated with individual choice.

Clear presentations of this problem for public policy are presented in Herb Taylor, 'Time inconsistency: a potential problem for policymakers,' Business Review (Federal Reserve Bank of Philadelphia) (March-April 1985):3-12, and 'Rules v. discretion,' The Economist (2 March, 1991): 71-2.

A classic defense of discretionary policy can be found in Abba Lerner, The Economics of Control (London: Macmillan, 1944). See F.Kydland and E.Prescott, 'Rules rather than discretion: the inconsistency of optimal plans,' Journal of Political Economy, 85 (3) (1977):473-91.

Mikhail Heller and Aleksandr Neckrich, Utopia in Power (New York: Summit Books, 1986), p. 217.

Boris Pasternak, Doctor Zhivago (New York: Signet Books, 1958), p. 387. One exception to this is John Litwack, who has stressed that within the institutional arrangement of perestroika the leadership was unable to establish a credible commitment to liberalization policies. See Litwack, 'Discretionary behavior and Soviet economic reform,' Soviet Studies, 43 (2) (1991):255-79.

21 Marshall Goldman, What Went Wrong With Perestroika (New York: Norton, 1991), pp. 37-8, for example, emphasizes the point that all previous efforts at reform within the Soviet Union were viewed as a 'big lie' by the citizens of the former Soviet Union. The suppression of the kulaks in the 1920s and 1930s and Khrushchev's agricultural policies in the early 1960s had not been forgotten by the population and explain why individuals were reluctant to invest private income on economic ventures. Hardly a family in the former Soviet Union did not have a member that was directly affected by Stalin's terror, and this served as part of a historical memory which each citizen possessed concerning the nature of the CPSU. (See also Goldman, p. 116).

22 Henry Hazlitt discusses this particular problem of trust and strategic interaction in reforming a communist political and economic system in his novel, Time Will Run Back (Lanham, MD: University Press of America, 1986(1951)), pp. 126ff.

23 I recognize that several issues are bundled here. The reforms of the NEP and perestroika did not fail simply because of credibility problems. For example, many of the policies were simply incentive incompatible. And, it is also questionable to what extent the objective of liberalization was ever part of the agenda in either case. However, in attempting to tease out the different problems with Soviet reform history the credibility aspect provides fundamental insights into questions of policy design.

24 For an examination of the policies of 'war communism' see, Peter Boettke, The Political Economy of Soviet Socialism, pp. 63-111 (see Note 8). Also see Peter Boettke, 'The political economy of utopia,' Journal des Economistes et des Etudes Humaines, 1 (2) (1990):91-138. For a discussion of the debate over the meaning of these events in Western historiography see Peter Boettke, 'The Soviet experiment with pure communism,' Critical Review, 2 (4) (1988):149-82; Alec Nove, 'The Soviet experiment with pure communism: a comment,' and my rejoinder in Critical Review, 5 (1) (1991):121-8.

25 Alan Ball, Russia's Last Capitalists: The Nepmen, 1921-1929 (Berkeley, CA: University of California Press, 1987), p. 23. Also see N.Gubsky, 'Economic law in Soviet Russia,' Economic Journal, 37 (June 1927):226-36, for a contemporary account of the Civil Code.

26 Ball, Russia's Last Capitalists, p. 30 (see Note 25).

27 Ball, Russia's Last Capitalists, p. 75 (see Note 25).

28 The Soviet constitution barred from voting or holding office:

1. people using hired labor to make profits;

2. people living on 'unearned income,' which included income from private enterprises and property;

3. private traders and middlemen.

Lishentsy could not have careers in the military, or join cooperatives and trade unions, or publish newspapers or organize gatherings. In addition, they had to pay higher fees for utilities, rent, medical care, schools and all public services.

29 Aleksandr Solzhenitsyn, The Gulag Archipelago, vol. 1 (New York: Harper and Row, 1973), p. 52.

30 See Nikolai Bukharin, 'Concerning the new economic policy and our tasks' (1925) in Selected Economic Writings on the State and the Transition to Socialism, Richard Day (ed.) (New York: M.E.Sharpe, 1982), pp. 196-7. Ambiguity in the rules, Bukharin argued, would produce nothing but contradictory expectations, which would deter economic progress. Sizing up the situation, he stated, 'Consider the fact that the well-to-do upper stratum of the peasantry, along with the middle peasant, who is also striving to join the well-to-do, are both afraid at present to accumulate. A situation has been created in which the peasant is afraid to buy an iron roof and apprehensive that he will be declared a kulak; if he buys a machine, he makes certain that the communists are not watching. Advanced technology has become a conspiracy____The result is that the middle peasant is afraid to improve his farm and lay himself open to forceful administrative pressure; and the poor peasant complains that we are preventing him from selling his labor power to the wealthy peasants, etc.' In response, Bukharin argued that 'In general and on the whole, we must say to the entire peasantry, to all its different strata: enrich yourselves, accumulate, develop your farms.' This statement, of course, later became a bludgeon in Stalin's hands to demonstrate Bukharin's rightist deviation.

31 E.H.Carr, Socialism in One Country: 1924-1926, vol. 1 (Baltimore: Penguin Books, 1958), pp. 208-9.

32 See E.H.Carr, The Bolshevik Revolution, 1917-1923, vol. 3 (New York: Norton, 1981(1953)), p. 377.

33 See G.I.Khanin, 'Why and when did NEP die?,' Eko, no. 10 (1989), translated in Problems of Economics, 33 (4) (August 1990):21, 24.

34 As Robert Conquest explains: 'When the market mechanism had failed to give satisfaction, requisition made up the shortfall, and the government then went back to the market. But from the peasant point of view, the market was no longer a reasonably secure outlet, but one that might be superseded at any moment by requisition. And in the further deterioration of market relations thus produced, the government remembered the success it had had with forced requisition, and did not reflect that it was the requisition of grain produced with the incentive of the market, and that in the new circumstances this was certain to shrink in quantity.' See Conquest, The Harvest of Sorrow (New York: Oxford University Press, 1986), p. 93.

35 See 'The law on individual enterprise,' Pravda (21 November 1986), translated in The Current Digest of the Soviet Press, 38 (46) (17 December 1986); 'The law on State enterprises,' Pravda (1 July 1987), translated in The Current Digest of the Soviet Press, 39 (30-1) (1987); 'The law on cooperatives,' in J.L.Black (ed.) USSR Documents Annual (Gulf Breeze, FL: Academic International Press, 1988), 7: pp. 122-51.

36 See Goldman, What Went Wrong With Perestroika, p. 140 (see Note 21).

37 On the concept of 'hard' and 'soft' budget constraints see Janos Kornai, 'The soft budget constraint,' Kyklos, 39 (1) (1986):3-30; and The Road to a Free Economy (New York: Norton, 1990).

38 Litwack discusses the situation facing the Soviet manager in his paper

'Discretionary behavior and Soviet economic reform,' 257 (see Note 20). As he states:

A Soviet often averse to expending resources for improving the performance of his or her firm. But this is not because of a well-defined progressive tax scheme that requires sharing future benefits with the government. The problem is that the tax scheme tomorrow is at the discretion of superiors in the hierarchy. They will determine conditions only after observing the performance of the firm today. In the absence of long-run commitment, these superiors naturally attempt to extract surpluses from those subordinate organizations that reveal themselves to be more productive. In addition, poorly performing enterprises are typically 'bailed out'. The expectation of discretionary extraction and bailouts creates an incentive problem at lower levels.

39 Goldman, What Went Wrong With Perestroika, pp. 141-2 (see Note 21).

40 See Hewett, Reforming the Soviet Economy (Washington, DC: Brookings Institution, 1988), p. 340, fn. 60.

41 William Taubman and Jane Taubman, Moscow Spring (New York: Summit, 1989), p. 46.

42 See Misha Belkindas, 'Privatization of the Soviet economy under Gorbachev II,' Berkeley-Duke Occasional Papers on the Second Economy of the USSR, no. 14 (April 1989):1-35.

43 As Belkindas, 'Privatization of the Soviet economy,' points out opportunities for unearned income originate because of the shortage economy. Illegal housing transactions, medical care, admission to an institution of higher education, etc., are just some examples of how illicit transactions can 'correct' for the failings of the official economy.

44 See Belkindas, 'Privatizing the Soviet economy,' 37-97 for an overview of the development of private cooperatives in the Soviet Union. In addition, see Anthony Jones and William Moskoff, Ko-ops: The Rebirth of Entrepreneurship in the Soviet Union (Bloomington, IN: Indiana University Press, 1991). Also see David Prychitko, Marxism and Worker Self-Management: The Essential Tension (Westport, CT: Greenwood, 1991), for an examination of the theoretical and historical issues associated with the cooperative movement in general and its relationship to the main debates in comparative economic systems.

45 See Anthony Jones and William Moskoff, 'New cooperatives in the USSR,' Problems of Communism (November-December 1989):27-39. With regard to the hostility toward the emerging cooperatives they state that 'cooperative activity has.. .engendered a great deal of hostility from two groups: the consuming public, which it is supposed to serve, and the bureaucracy, which it threatens' (p. 32). Also see the discussion of the economic environment within which cooperatives had to operate and the array of official responses in terms of restrictions, interference and taxation which stifled the development of cooperatives in Jones and Moskoff, Ko-ops, pp. 34-77 (see Note 44). In addition, see Goldman, What Went Wrong With Perestroika, p. 113 (see Note 21).

'The halfhearted toleration of cooperative and private trade,' Goldman states, 'was guaranteed to sabotage the whole effort.'

46 The evolution of working capital markets, for example, depends crucially on the ability of the state to be bound by commitments that it will not confiscate assets. 'The shackling of arbitrary behavior of rulers and the development of impersonal rules' that successfully bind the state is a key component of institutional transformation. See Douglas North, Institutions, Institutional Change and Economic Performance (New York: Cambridge University Press, 1990), p. 129.

47 See Gertrude Schroeder, 'The Soviet economy on a treadmill of perestroika: Gorbachev's first five years,' in Harley D.Balzer (ed.) Five Years That Shook the World (Boulder, CO: Westview Press, 1991), pp. 31-48. Specifically on the consumer crisis, see James Noren, 'The economic crisis: another perspective,' and Gertrude Schroeder, '"Crisis" in the consumer sector: a comment,' in Ed Hewett and Victor Winston (ed.) Milestones in Glasnost and Perestroika: The Economy (Washington, DC: Brookings Institution, 1991), pp. 360-414.

48 'As Gorbachev moved back and forth from one comprehensive reform to another,' Marshall Goldman argues, 'he became more and more uncertain about subjecting the Soviet Union to the type of shock therapy such reforms would inevitably necessitate. He also concluded that unless reined in, the reform process would ultimately shrink his powers and those of the Soviet Union over central economic control, thus reducing the Soviet Union to an ineffective economic entity.' See Goldman, What Went Wrong With Perestroika, p. 222 (see Note 21). Gorbachev's economic zigging and zagging was not the only credibility issue at hand. The politics of discretionary power were also an issue of concern with liberal intellectuals. Individuals were not certain that the zigs permitted today would not be superseded by repressive zags tomorrow. 'Today,' Andrei Sakharov warned, 'it is Gorbachev, but tomorrow it could be somebody else. There are no guarantees that some Stalinist will not succeed him.' As quoted in Robert Kaiser, Why Gorbachev Happened? (New York: Simon & Schuster, 1991), p. 245.

49 Dani Rodrik has addressed the issue of commitment signalling with regard to policy reform in a game-theoretic framework. As he sums up his argument: 'At the outset of any reform, the public will typically be unable to fathom the true motivations of the government undertaking the reform. Since the distorting policies in question have been put in place by those in power to begin with, what reason is there to believe that the authorities now "see the light"?...Signalling via policy-overshooting can then help reduce the confusion.. .The more severe are the credibility problem and its consequences, the more likely it is that a sharp break with the past will be viewed as attractive.' Therefore, if the credibility gap is particulary important, as it is in the Soviet situation, then for the appropriate signal to be conveyed all notions of gradualism must be put aside. Policy overshooting can distinguish a sincere reform government from its insincere counterpart. Thus, policy overshooting will have the effect of rendering the policy reform more credible than it otherwise would be, and alleviate the problems associated with lack of credibility. See Rodrik, 'Promises, promises: credible policy reform via signalling,' Economic Journal, 99 (September 1989):771.

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