The Struggle to Save the Soviet Economy, part 9, final part

Incentives matter, but the most powerful incentive is being told you'll be executed if you miss your production quotas

"It was not inevitable that combining central planning and single-party rule would create a system with such fundamental flaws."

In particular, the consolidation of the big industries into 3 power blocks was truly not needed. You could have central planning and avoid economic concentrations that then become monopolies over a an important branch of the economy, which then allowed them to engage in all kinds of economic blackmail. You could have many thousands of industries, instead of allowing the economy to consolidate into 3 main political blocks. If you had thousands of industries competing for favors, they'd be less able to threaten to strangle the economy, or demand subsidies.

This is politics 101. This is basic stuff, the kind of observation that Machiavelli would have understood. Don't let your enemies unite into a coalition that can block you. Keep your enemies divided enough that they have to compete for your favor.

But who was responsible for ensuring that the USSR had a functional government? From 1964 to 1982 Brezhnev was in power, then briefly Andropov. These were old men, alcoholics, exhausted, often sick. They allowed the USSR to drift. And almost the entire bureaucracy was pleased to have a long era of stability, a calm era, an era free of the violence, murder and purges of the Stalinist era.

But it was that earlier violence that explains both the rise and fall of the USSR.

Stalin built a system based on violence. Factory managers who didn't fulfill their production quotas might end up in front of a firing squad. With incentives like that, you get a bunch of managers who work 90 hours and week and don't ask for vacations. And that discipline, as brutal as it was, is part of the reason why the USSR grew faster than the USA for most of the stretch from 1920 to 1960, especially after 1929.

Still, even in a totalitarian society, it is difficult to maintain a murder machine that is aimed at the party cadre itself. The cadres wanted the purges to end, the middle managers wanted the purges to end, the ministers wanted the purges to end. In 1953, when Stalin died, there was a brief power struggle between Nikita Khrushchev and Lavrentiy Beria, and one reason Khrushchev won is because Beria was known for his bloodthirsty love of torture, and so many in the Party were worried that if Beria gained power, the purges would continue. So Khrushchev gained power and ended the era of easy accusations, automatic guilt, widespread paranoia, and too frequent executions.

But then how should the USSR be governed? Stalin had built a governing system based on fear and murder and the new system would be based on... nothing? While fear and arrests and murder was still used to keep control of the general population, the party cadres faced less of that going forward. They were able to relax. And as they relaxed, discipline disappeared.

In the end, for a society to have any kind of internal coherence, there needs to be some kind of incentives to guide people's behavior. Historically there have been 2 main options: you can threaten them with death or you can offer them money. The USSR gave up on option 1 in 1953 but it was not until 1985 that Gorbachev suggested "Maybe we should let people make money? Make things and sell things? Turn a profit?"

So it should be obvious why the USSR drifted badly during those 32 years.

(Off topic: anarchists make the case that in a less hierarchical society there is a 3rd option, which is mutual agreement and negotiated settlements. Demodexio will be looking at several books on that subject later on.)

The Struggle to Save the Soviet Economy:

Mikhail Gorvachev and the Collapse of the USSR

By Chris Miller

©2016

Page 181-183

The only force that proved strong enough to break the military-industry-agriculture coalition that dominated Soviet politics was the collapse of the Communist Party - which in turn caused the dissolution of the Soviet state. Until mid-1991, the three economic lobbies were bound together by interest, ideology, and inertia. Had Gorbachev been able to divide the coalition partners, playing one interest group against the others, he might have had more success in asserting control over the Communist Party and the Soviet state. But a strategy of divide and rule proved impossible. So long as they dominated the Communist Party, and as long as the party controlled the state, these groups’ shared interests overwhelmed any tactical alliance Gorachev could have conceivably offered. In the years after the collapse of 1991, with the military divided and discredited by the failed coup, and with industry and agriculture writhing under the pain of inflation and depression, Russian president Boris Yeltsin finally managed to split the groups, co-opting much industrial support while slashing farm subsidies and cutting military funding. Even though the Soviet Union by then no longer existed, however, Yeltsin still faced several years of resistance in his attempt to break the lobbies’ stranglehold on the federal budget and on the central bank. Only after Yeltsin shelled parliament in 1993, pushing the country to the brink of civil war, was the military-industry-agriculture coalition finally destroyed.

Was the Soviet Union simply unreformable? China’s experience proved that there is nothing inherent in Marxism-Leninism, in autocratic political systems, or in centrally planned economies, that makes a transition to a market economy impossible. In the USSR, to be sure, decades of wasteful investment left the country a burdensome economic inheritance. Yet the most damaging legacy of the command economy was not economic inefficiency, but political sclerosis. The Soviet system proved unreformable not because its economic problems were insurmountable, but because it entrusted vast political power to groups that had every reason to sabotage efforts to resolve the country’s economic dilemmas. In part, this situation was the result of the USSR’s relative wealth. When Deng took power in China, for example, the country’s farmers were on the brink of starvation. No matter what Deng did, the state of China’s countryside could hardly get worse, so China faced no built-in lobby that opposed change. By contrast, the USSR was stuck in a politically induced middle-income trap: many Soviet citizens, especially among the elite, lived decent lives that were threatened by change. Whereas Chinese farmers embraced decollectivization, Soviet farmers - who had benefited from several decades’ worth of farm subsidies - found that Gorbachev’s agriculture policies offered risks as well as rewards. A similar mechanism obstructed change in Soviet manufacturing and service enterprises.

Economic efficiency was also restrained by the relative leniency of the Communist Party during the postwar period. Under Stalin, the party had few interest groups because the Soviet dictator enforced his writ through purges and mass killings. Enterprise managers dared not miss production targets, on pain of death. The rapid rotation of cadres, facilitated by Stalin’s purges, reduced the influence of patronage networks. Brezhnev’s policy of “stability of the cadres” ended the use of the firing squad to encourage effective management. That made the Soviet system more humane, but it degraded incentives to work efficiently. Bureaucrats and managers now faced few reasons to act effectively: their firms could not go bankrupt, their salaries did not depend on performance, and they received promotions based on political connections. In China, the Cultural Revolution of the 1960s had shaken up the party and the bureaucracy, cutting back the strength of interest groups and paving the way for Deng Xiaoping’s market reforms. In the Soviet Union, by contrast, the 1960s and 1970s saw patronage network and interest groups solidify. Gorbachev inherited a system in which economic lobby groups played a larger role than ever before. Yet his powers as head of the Communist Party were weaker than any Soviet leader since the Bolsheviks took power in 1917.

It was not inevitable that combining central planning and single-party rule would create a system with such fundamental flaws. Different decisions in the decades before perestroika might have avoided such disastrous results. Stalin need not have collectivized agriculture. The Kremlin could have built factories near Moscow rather than spreading them across the frozen wastelands of Siberia. The Communist Party could have backed Kosygin’s reforms during the mid-1960s to make enterprises more efficient. Brezhnev could have opted not to coddle Soviet farms with increasingly unaffordable subsidies. By the time Gorbachev came to power, these choices had been made. Given the political constraints, there was no way out. The Soviet system gave power to a new ruling class: generals, collective farm managers, and industrial bosses, all of whom benefited from waste and inefficiency. They dominated the Communist Party and hijacked its policymaking process, so that by the 1980s, there was no longer a boundary between industrial lobbies and the Communist Party itself.

The political clout of these groups proved far more significant than anyone expected. Gorbehev’s legacy - and the entirety of Soviet history during the perestroika period - cannot be understood without a clear view of the vicious infighting that determined which policies were implemented and which were discarded. The Soviet archives show that every perestroika-era policy was the result of conflict and compromise, a negotiation process in which Gorbachev often held the weaker hand. As Gorbachev reminded George H. W. Buh in 1991, “We need to reduce arms in a way that won’t make the army rise up.” That was the dilemma, in a nutshell: to reform the economy without angering the energy industries, or the farm bosses, or - most dangerous of all - the security services. The threat of a coup, potentially violent, backed by regressive economic interests, was always lurking in the background. That was a threat Deng Xiaoping never faced.