The Struggle to Save the Soviet Economy, part 4
Enterprise managers understood the need for change but for egoistic reasons they resisted every reform
Sometimes the leaders of some agency seek more power. This happens in both government and in business. At the last few tech startups where I consulted, there was a constant struggle for power between the Chief Technology Officer and the Chief Product Officer, both thinking they should be in control of the software that was under development. In such situations, when the CTO wins, the CPO doesn't have much of a job left, but sometimes they pivot and grab power elsewhere, for instance, they take over the marketing department.
Of course, at a small company, the CEO can easily step in and say "Stop that. You over there, you're in charge of the product." This limits how much damage can be done by the struggle for power among the other executives.
Actually, I'm lying, the above is only true when the CEO is securely in control of the company. Occasionally someone like the CPO, after a defeat, will go to the Board Of Directors and say "The CEO is completely incompetent and they are destroying the whole company." And if they argue this persuasively enough, then the Board Of Directors will fire the CEO and put the CPO in their place. And then life becomes hell for the CTO, because now the defeated CPO is suddenly their boss. So perhaps at that point the CTO quits and then the CPO, who is now CEO, can consolidate their power by hiring a CTO who is loyal.
Smart, ambitious people will clash. There is nothing wrong with this, but the aggression does need to be funneled into constructive channels or the results will be destructive.
In the USA we've many examples of people in government grabbing power and building empires.
For instance, Robert Moses. His career ran for 31 years, from 1929 to 1960. For awhile, he was a hero for progressives, as he worked to support FDR's New Deal initiatives. He built roads, bridges, ports, and airports. He believed in infrastructure and he helped build it on a massive scale. He ended up with an empire in which he controlled most of the toll roads and ports and airports and transport in New Jersey, New York and Connecticut, the tri-state region. And yet, during this entire time, his official title was "Park Commissioner"! It remains an amazing fact that he gained so much power with so little of an official reason for doing so. Nevertheless, he was deemed a hero for a long while. His allies recite metrics such as these: "When Moses became Park Commissioner in 1934 there had been 119 playgrounds in the city. In 1960 there were 777. The Parks Department under Moses also had built 15 outdoor swimming pools, 17 miles of beaches, and 84 miles of parkways. Park acreage had increased from 14,000 acres to 34,673 acres." All of which is impressive. However, in recent years his reputation has been tarnished as it's become increasingly well known how racist he was, and how much he used his power to funnel money and projects to white neighborhoods, while starving non-white neighborhoods of resources.
Will there be a future Robert Moses? Probably, because the American system of government remains very flexible, in ways that are both good and bad. In any bureaucracy, in both business and government, it takes multiple, redundant layers of accountability to make sure that no one oversteps their allotted boundaries. Only careful review can ensure that money is being used correctly, without corruption, and for a purpose specified by the law. In recent decades, the Federal government has built more and more accountability into its processes, but at the local level American democracy remains unstructured, in ways that allow flexibility but also corruption.
Still, outside of the formal systems of government, the USA does have multiple systems of feedback: elections, newspapers, the occasional investigative report on television, historians who can be openly critical of powerful individuals, reasonably fair courts that enforce the law without necessarily giving government officials what they want. All of these systems of accountability were lacking in the USSR. Mikhail Gorvachev understood that a critical press was going to be essential for his plan of reform, that is, he knew he lacked the power to get the various ministries to enact needed reform, but he was hoping that investigative journalism would shine a light on the worst behaving ministries and then public pressure would help him push through the needed reforms. What took him by surprise was that many people used the new freedoms to push for ultra-nationalistic militarism and the threat of ethnic violence, which made civil war seem possible, then helped justify a military coup for the sake of avoiding civil war.
In the end, Gorvachev was taken down by an overconfident military that felt certain that if they launched a coup, they would be able to fix all of the problems in the country as soon as they were in control. And then when the military gained power, in 1991, they realized that Gorvachev had been correct about the scale of the problems, and the needed reforms, so the military then lost all credibility, as they had both violated the law with the coup, but also they had no new or original ideas for the problems that were afflicting the USSR. And the military then lost out, and with no legitimate actors on the national stage of the Soviet Union, the Union splintered into the 16 separate nations that had previously constituted it.
Sometimes we hate each other. That is a fact of life. Every society has internal tensions. A democratic process, freedom of speech and freedom of the media, impartial courts -- all of these are necessary to deal with the many problems that eventually must confront a society as it moves from the past into the future. Without multiple, redundant systems of accountability the struggle for power inside of the government is invisible and incomprehensible till it reaches that critical moment of collapse, revolution, perhaps civil war.
Maybe you think that much is obvious. In the political realm, most of us can imagine the connection between, say for instance, daring investigative reporters and the fight against bribery happening among government officials. A vigorous press helps keep the government honest — that much seems straightforward. But what happened in the Soviet Union points to something else. It is difficult to keep the economy on track without a vigorous press. Without lively public debate it is difficult for the public to make known what it needs, and therefore those at the top of the economic and government systems have no clear incentives to work together for the public good.
The Struggle to Save the Soviet Economy:
Mikhail Gorvachev and the Collapse of the USSR
By Chris Miller
©2016
Pages 75-77
Gorbachev repeatedly pointed to China’s restructuring to argue that enterprise reforms would spark growth in the Soviet Union.
Opponents of change, like Gromyko, vigorously resisted Gorbachev’s attempt to redefine socialism. Gromyko and his many allies succeeded in delaying change. More importantly, they extracted from Gorbachev a big increase in capital spending in exchange for their tolerance of industrial restructuring and the legalization of a private sphere. Soviet bureaucrats justified this surge of capital spending on the grounds that it would jolt industries back to life, but in economic terms, the spending accomplished little, and much of it was wasted. The main result of the capital spending binge was political, in that it won Gorbachev industries’ acquiescence while he pushed through structural reforms. By 1990, after five years of perestroika, Gorbachev had broadly succeeded in implementing Chinese-style reforms to Soviet industry. The cost, however, was a new spending program that placed enormous pressure on the Soviet budget.
The Soviet Rust Belt
The USSR’s industrial economy was forged in two periods of rapid and traumatic growth. First, the shock industrialization that Stalin initiated in the late 1920s expanded the country’s manufacturing potential, creating vast steel works, factories, and power plants. From the beginning, Stalin insisted that economic mechanisms serve concrete political goals. Feeding factory workers in urban areas was an important political objective, for example, so agricultural produce was diverted to cities, despite hunger in the countryside. Stalin demanded rapid growth in heavy industry, and because his diktats - not supply and demand - drove production decisions, light industry and the service sector grew much less quickly than they would have otherwise. Germany’s invasion of the USSR in 1941 spurred a second period of chaotic change, as whole factories were relocated to faraway cities east of the Ural Mountains to protect them from Nazi attack. This was a wartime necessity, but like the shock industrialization of the 1930s, it left painful consequences. Factories and their workers were spread across the far reaches of Siberia, hundreds of miles from other cities, sharing limiting transport links and suffering from brutal winter cold. Siberia boomed as the USSR industrialized. Between 1926 and 1959, the population of Chelyabinsk increased from 59,000 to 689,000, Norilsk from zero to 118,000, and Yakutsk from 11,000 to 74,000. Yet a sizable portion of this apparent growth actually destroyed wealth. Because costs in Siberia were up to 50 percent higher than in other parts of the USSR, workers and factories would not have moved there on such a large scale were it not for government diktat. Stalin’s industrialization succeeded in forging an industrial base and in winning World War II, but saddled the country with a huge long-term burden.
After Stalin’s death in 1953, Soviet policymakers began to reconsider the country’s industrial strategy. Even in the 1950s and 1960s, of course, no Soviet leader questioned the basic infrastructure of central planning. But it was clear that, even as growth continued during the immediate postwar decades, inefficiencies were building up and resources were being wasted. The reason was that neither enterprises nor individuals faced clear incentives to act efficiently. The most direct attempt to tackle this problem occured in 1965, just after Brezhnev came to power. The chairman of the Council of Ministers, Alexei Kosygin, devised a three-pronged strategy to fix the planning system. Centralizing power would ensure that Moscow’s orders were obeyed. Prices would be increased to more closely approximate market levels. Finally, rejigging incentives would create a system of costs and benefits and give enterprises and people clear reasons to perform economically useful activities.
The logic of Kosygin’s policies was sound - better incentives and rational prices would have reduced waste - but they had little practical effect. One reason was that the timing was inauspicious. In 1968, just after the reforms were beginning to be implemented, anti-Soviet protests erupted in Prague, prompting the Kremlin to send in the Red Army to crush the revolution. That experience discouraged ideological innovation within the Soviet Union. The bigger problem, though, was that the changes Kosygin envisioned lacked political support. Enterprise managers, who had access to privileges and elite social status, saw little reason to embrace change. Above all, Brezhnev has no interest in Kosygin’s reforms, or in economic efficiency more generally. Soviet citizens had limited ability to pressure the government for more rapid growth, and so long as the country’s external account was balanced - which was easy in the 1970s, because oil prices were high - Brezhnev was uninterested in the economy. He was plagued by illness, and even when healthy and sober he avoided dealing with economic questions. On one occasion when Gosplan head Nikolai Baibakov tried to brief Brezhnev on the country’s economic ailments, the Soviet leader complained that the report had “too many figures,” and ordered it shelved, “so I never have to see it again.” They went hunting instead; Baibakov hit 14 ducks, Brezhnev 21.
By the end of the 1970s, however, the economy stalled, making it harder to ignore the inefficiencies in the Soviet economy. Many Soviet economists argued that the USSR needed to shift its focus from “extensive” growth - expanding production by increasing resource use - to “intensive” growth, relying on productivity improvements. These economists believed that the problem was not simply to throw more labor, capital, and natural resources at existing enterprises in the hope that they would produce more goods. Such methods had been used repeatedly since the first industrialization push under Stalin. Extensive growth built the USSR’s industrial base, but its usefulness declined steadily since then. Reckless use of natural resources caused terrible environmental degradation. Hundreds of thousands of workers were forced to work and live in inhospitable Siberian cities, employed in jobs that often served little purpose. People responded by showing up to work drunk. “They pretend to pay us, we pretend to work,” went the popular saying. Many Soviet enterprises received generous credits from the government despite having lost money for years. Many enterprises actually destroyed wealth - producing less in useful outputs than they took in as inputs.
There were two arguments about how to improve industrial efficiency in the USSR. One approach, preferred by industries and the bureaucrats that governed them, was to spend more on upgrading production processes and investing in new technology. New spending programs promised to meet many of the goals of Gorbachev’s perestroika program. Gorbachev long emphasized the need to keep pace with the revolution in information technology that Soviet leaders saw taking place across the world. One response was to increase capital investment, overhauling old factories, building and buying new machinery, and adopting more capital-intensive manufacturing processes. Like America’s Rust Best, Soviet industry needed huge sums of investment if its factories were to be profitable again. New technologies, and therefore additional resources, were a necessary part of any solution.
On top of this economic rationale, increasing capital investment also had a clear political purpose. Higher investment appealed to the major lobby groups within Soviet politics.
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Page 82
Compared with the tremendous productivity increases that resulted from previous experiments, the large-scale economic experiment was a failure. It proved two important points, however. First, it showed that the Soviet Union needed bold changes to its economic structure to actually improve the efficiency of its economy; small-scale tinkering would only produce small-scale results. Second, it illustrated the political challenges that serious economic restructuring faced. Powerful interest groups benefited from existing policies and would suffer from change. Market reform would mean that enterprises were no longer guaranteed credit, and suppliers were no longer guaranteed markets. Patronage networks that developed over decades and which, in the absence of functioning markets, greased the wheels of the Soviet economy, would be upended. Relationships between employees, enterprise managers, and ministry officials would have to be reworked. In the past, these groups’ relations were built as much on social and political ties - what Russians called blat - as on economic usefulness. These ties would have to be shattered and replaced with a new logic of market efficiency.
Resistance was tremendous. Enterprise managers understood the need for change, one official complained, “but for egoistic reasons they don’t want to move, since work will get harder for them.” Gorbachev echoed these complaints. “We have to go forward….But we are still conducting experiments: one ministry calculates for three years ahead, another one for one year, and a third doesn’t want to do anything at all. Above all, everyone is busy keeping control for themselves.”