As you know I am intensely interested in matters of law and economics, especially as it relates to the question of new ideas as opposed to old ones. Curiously, of all people, the President of Iran has agreed that a “New World Order” needs to be based on a bottom-up re-assessment of our ideas and understanding of the social contract. I find myself in agreement here and I’m strangely comfortable with that. I’ve stated elsewhere that technological progression has grossly outstripped advances in our ability to govern ourselves and there seems to be a paltry investment indeed in new, original thinking about how to improve on the dismal record of social organization and governance. To see how bad it really is, you can read this. And for a basic understanding of the solution I’ve proposed you can read this.
One of the basic tenets of my approach is that in order to realize change that improves the human condition (as opposed to just making matters worse) a sobered, scientific, objective and sincere study of history is essential. One of the many elephants in the living room in that department is the history of the Soviet Union; in particualr, its economy. Unfortunately, like so many topics in the area of law and economics, it is laden with ideology and nationalism. I’d like to move beyond that and understand what really happened in the Soviet Union. And I am the man for it; I am devoutly apolitical and I don’t much care whose ideology wins or loses here. So, to do that I need the numbers. But in the former Soviet Union numbers are ephemeral and tackling this is no small task. That’s not to say that there aren’t plenty of quick answers to this question. They’re all over. Here is a sample of some of the common answers you hear both here in the West and from the former Soviet Union itself:
First, from the West
By 1970 the Soviet economy was in noticeable decline; however, due to the status as the world’s biggest petroleum exporter at that time, the USSR held on until the end of the eighties.
This is probably true as the numbers I’m about to introduce don’t deny this. Given the obvious impact of petroleum, this almost certainly played some role in the eventual timing of the outcome. I think we can at least assert that much.
One clue to the fall is that the economy boomed when Stalin was in power and industrialization was the goal. The economy, in fact, set world records. So, any explanation of the collapse of the Soviet economy must include some explanation for how this shift from growth to decline occurred. The same communist system was in play at both periods.
This is true to a fault. The problem is that the numbers prior to 1950 become a bit more than just ephemeral. Economists studying the matter have concluded almost to a person that the numbers prior to 1950 are riddled with mathematical inconsistencies so as to make them clealry unreliable, regardless of your ideology. For the purpose of this discussion, therefore, I’m going to ignore this claim unless we find something else to support it with pre-1950s numbers we can believe in.
The Soviet command economy had virtually no incentives for technological progress or entrepreneurial discovery-despite some of the best educational institutions in the world.
Now we get into the frustrating realm of ideological opinion. We hear this kind of thing often from capitalists but I’ve never found numbers to back it up. It sounds reasonable, but I can’t really know if this is true without some kind of solid confirmation in the data. I’m going to shelve this comment for now and see if I can find numbers to back it up. And, to be fair, this is one of the reasons I’ve proposed remuneration based on individual, financial productivity. So it may be that I, too, have been wrong in that assumption. We’ll see what happens when we get to the data.
Physical measures of output were often used as indicators of success in evaluating firms’ performance-but without regard to the quality of the goods produced. Firms sometimes made many unusable nails or shoes all in one size. Agricultural production was evaluated based on the amount of inputs used-which encouraged agricultural collective enterprises to waste fuel and fertilizer.
Nobody was capable of defining all the feasible economic plans-and therefore it was impossible to choose the optimal plan based on any sort of rational calculation. Rather, decisions were made arbitrarily and often with heavily political considerations in mind. Some institutions-such as the military-were greatly favored over others, while consumers were often put at a disadvantage by the system.
Firms had strong incentives to deliberately misinform the central planners by requesting many more resources than they would need to meet their production targets. Since firms often did not get the full amount they requested, requesting too much made them more likely to get enough materials; but this also meant that the central planners seldom had an accurate idea of the actual state of the economy.
These arguments are all classic but once again enter into a frustrating world of ideological opinion. Again, prima facie, they sound reasonable. If true, it looks like we’re seeing the cult of bureaucracy at work here and it might indeed have caused the kinds of major problems indicated. Anyone who has dealt with government in the United States knows there might be a kernel of truth to this.
The Soviet economy had none of the free-market mechanisms that could eliminate economic malinvestments; it lacked recessions, bankruptcies, or layoffs for the purpose of cost-cutting-and thus there was no built-in economic mechanism to correct for unprofitable or unwise use of resources.
Now, this one is fascinating. It lends itself to numerical analysis and we are about to see that, though it might have played a role, it was dwarfed by something deeper and more fundamental.
Now, back to the East
Unfortunately, I’ve not heard nearly as much chatter about the reasons for all the change in the Soviet Union coming from the East and I’d love to hear what many who lived there at the time might have to add to this discussion. But here is what I do know.
The common thread I hear from within the former USSR is that the Party (read Communist Party) loyalists were betrayed by the likes of Yeltsin, Gorbachev, et al. These were the “reformers”, you may recall, who began the Perestroika phase and who faced a failed coup de etat by the Party loyalists at that time (about summer 1991); members of the elite units of the Armed Forces of the USSR (such as spetsnaz), KGB career men, much of the military leadership, and others loyal to the Party tradition. While Gorbachev was traveling near the Black Sea, just a day or so before a treaty was to be signed relinquishing some degree of Soviet sovereignty to the various Republics (here, Americans might better think of the Republics as States, as that is the federal analogue), the coup planners made their move to save the Union. To understand the argument, one has to realize that by now much was going on economically behind the scenes that strongly colored events. The American President George Bush, Senior sent strong messages to the establishment there that foreign loans made out to the USSR would be halted if the coup succeeded. Bush interfered in the internal politics of the USSR by publicly lending support to the faction already in power (he even went as far as to lecture the Russians about what constituted legitimate, Constitutional authority – Soviet fundamental law! – and that the coup leaders were violating it). Behind the scenes he was pushing major economic pressure to compel military leaders to side with the newly-warm relationship between Gorbachev and Yeltsin. I truly believe that as history exposes more of this story we will indeed find massive monetary bribes to military leaders – courtesy CIA – to convince them to side with the “Bush” faction.
Having noted all this, several military leaders then sided with Yeltsin who was doing a spectacular Machiavellian job of convcincing low-ranking military units not to side with the coup leaders. This caused their military officers further up the chain of command to shift as well (along with a little help from our friends at Langley). Once these allegiances in the military shifted the writing was on the wall and the coup leaders skipped town. The coup was over. One of the saddest things to watch is the last October parade of the Soviet Union held in October, 1990. Whichever side you fall on, it is sad because it represents the end of a dream, however ephemeral or however misplaced those dreams might have been.
But the problem with this view is that it is short on history and economics and says little about what led up to it. With some education on the matter I might be convinced that there was more to this story to support it, but so far that is all I know. What I do know is that international banking, alack, played a role. So, obvioulsy, the economy of the USSR was vulnerable in this regard. I think the numbers I’m going to share will strongly support this view.
So what have reputable, serious, academic researchers found regarding the data? Well, first, numbers before 1950 must, unfortunately, be discarded. There is little we can do with it. We can thank Stalin (and to a lesser degree, later with Kruschev) for this lacunae of vital historical import. There was simply too much “cooking of the books” to have any solid idea of what was going on from 1917 to about 1950.
But, after 1950 we see one of those rare, silver bullet numerical phenomenon showing up. It is rare because seldom does one factor play such a singularly important role. Here is what was found.
Oddly, the Soviet economy was schizophrenic. On the one hand, massive new wealth was in fact being created. The economy was performing remarkably well in that regard. Communism worked as far as producing capital. Curiously, though, the capital was not being converted into productivity gains. In other words, the capital was not improving output. Normally, when capital is produced that capital gets recycled back into the economy and results in greater gains in wealth due to its investment in the future. The great capital gains were leaking out of the productive economy like a sieve. Where it was going is conjecture, and some of the semantics cited above might explain it, but I am going to work in the numbers and stay out of the ideological debate as much as possible. In hindsight, to correct the problem the Soviets might have been better off if they could have found a way to make this newly created capital more productive.
To illustrate what we’re talking about, imagine what happens if the State orders the production of vast military resources that cannot be used in the civilian economy. Or imagine the effect of produucing billions of pairs of shoes all of one size. This is the kind of “sieve” I’m talking about. And don’t think this fact didn’t have a major impact on how I addressed economics in General Federalism. I specifically created a “Public Trust” in which all commercial assets are owned by the people at large and controlled by democractically elected “Fiduciaries”, an entirely separate branch of the government Constitutionally firewalled from the Treasury. In this scheme, currency is used to buy, sell and trade capital between organizations in an open market ruled by valuable consideration. In other words, the market is free to take capital and apply it to its “best use”, something economists will often speak of when speaking of the capital problems of the USSR.
Thus, the key historical lesson is this:
don’t pretend to let the State control the means of production, but let them influence how much is produced.
The latter attribute allows the economy to produce vast amounts of capital at will, just like the USSR was so good at doing. In a deliberate, planned manner, capital of various kinds can be produced in whatever quantities are needed but the means by which this is done is left to the markets to control. Let the public genuinely own the means and let them, as market forces in their inscrutable design dictate, determine best use.
We now come full circle in understanding the semantics with which we introduced this article. How, exactly, do we allow the public to determine, via market forces, the means of production? Where, exactly, do we place the dividing line between a “planned” economy and a free-market economy? Notice that I am deliberately attempting to plagiarize on precisely those attributes of both free market and planned economies that are most productive and beneficial to the economy, whilst discarding the rubbish that ruins economies. Here is where ideas become original. Sing along.
General Federalism specifices that all commercial assets are held jus publicum as well as jus praesens (it is both public and private) in an irrevocable Trust supported by the full faith and credit of rule of law. All public aspects of the Trust are not controlled by a central party, but by an elected body of Fiduciaries who are, in all practical terms, the chief executive and operations officers of the entire economy. The key difference is that the public elects them … and can send them packing. Officers of individual companies come up through the ranks as they do here in the United States and are limited Fiduciaries, called intrapreneurs. They stand to profit considerably from their productivity contributions but ultimately the Fiduciaries are responsible for ensuring that their compensation is not only reasonable but based on a predictable, market driven determinant. Pay is not determined by ideology or opinion … or corruption.
But more importantly, the Fiduciaries can influence “national” (read global) objectives. For example, suppose we really, really need to develop fusion power for the sake of humanity’s future. The Fiduciaries can encourage this, though not control it, by promoting investment in those areas. Let me say that again. They influence national objectives not by controlling the means of production, but by having a systematic, predictable means in rule of law for influencing investment. Nothing more. And yes, there is a check valve. If the proposition doesn’t make market sense it fails. There is a lengthy article on how this works here here, but the idea is based on Zero-Zero banking, a clever substitute for fractional reserve banking that I believe would substantially outperform an economy operating on the basis of reserve lending. It also grandfathers capitalists into the system, so if you feel a little closer to Bill Gates than Mother Theresa, don’t worry, no one is mad at you.
Under Zero-Zero banking loans are made with zero interest obligation and zero required reserves. This is what Alexander Hamlton called an aggressive economy. And the math is sound because currency prints are pegged directly to wealth in an actuarially sound formulation. Anyone with the right resume and risk profile can start a new business, no oligarchical background required. Not only that, but critical national objectives can be pursued without wrecking the economy. This is what capitalism wanted to be and Alexander Hamilton would be impressed.