The Struggle to Save the Soviet Economy, part 5
Instead of strengthening incentives, the bureaucracy then doubled down on command methods
Some people believe that the USSR failed because it was Communist. This doesn't square with the facts. Put aside labels and focus on the details of what was actually happening.
The USSR grew faster than the USA from 1920 to 1960, so clearly there was a system there that could be made to work. The real question is why did it stop working after 1960.
It is fascinating to read the changing perspective of the great libertarian writers, as they looked at the Soviet Union, in particular Friedrich Hayek. In his 1944 book The Road To Serfdom he makes no suggestion that totalitarian methods of growing an economy are inefficient -- both Germany and the USSR had been growing faster than Britain or the USA, so it would have been absurd to make that argument at that time. However, by the 1980s, when the Soviet Union was in obvious trouble, it became common for pundits in the West to assert that Communism was simply inefficient. But if that was true in some general sense, the decades of rapid growth should have been impossible.
Putin now runs Russia by working with a small number of oligarchs. Fiona Hill describes this system in some detail in her book Mr Putin, a book we will soon review here on this weblog. In some sense, economic decisions are much more concentrated now than under Communism; there are certainly less people involved now than back in the 1980s. Putin has simplified things, he's replaced a complex system of committees with his opinion, after he's consulted with the oligarchs from the relevant industries. This is a recurring pattern throughout history: a system of committees becomes paralyzed by infighting, and so some dictator steps in to sweep away all of the committees.
About those committees: They seem to be the root of the problem. By the 1970s economic policy in the USSR was paralyzed as different factions used different committees to block the reforms that Gorbachev was hoping to put in place. I can think of many large companies that struggle with this issue. I've previously written, on my personal weblog, about one of the world's largest car rental companies that was trying to modernize its technology infrastructure, but was crippled by the infighting among the various tech teams, in different countries, who did not trust each other and who were unwilling to share information with each other. And so building a central API for the company, which should have been easy, was a project that had dragged on for more than 2 years and had already cost more than $25 million.
My point is, this particular pathology, being crippled by fighting committees, can happen in the private sector just as well as it can happen in government. At for-profit corporations there is the general rule that such projects only go quickly if the CEO gets personally involved, and is willing to burn some of their political capital trying to get all the various committees to work together. And often, the CEO just can't be bothered, and that's why a project that should take a few months instead takes several years.
Still, if the CEO is willing to come in and persuade those who need to be persuaded, and to fire those who can be fired, most projects can be made to go faster. There are, of course, limits to the power of the CEO, for instance, they sometimes have to deal with employees who have irreplaceable knowledge but who are being obstructionists. In such cases, the CEO cannot fire them nor easily persuade them -- a maddening situation for all involved.
Back in the 1970s, E. F. Schumacher, author of Small Is Beautiful, was also a central writer at Resurgence magazine, whose tag line was originally “Against Moscow and Washington, not because they are wrong, but because they are too big.” Often a system of committees works well when they are first created, because they are initially staffed by people who are specifically chosen because they are committed to working with the other committees for the good of all of society. Or sometimes, as in the case of the rental car company I worked with, the committees start off completely independent because they don’t need to work together, and it is only later on that a change in technology forces them all to work together. At such times, the obvious step is to push through a radical simplification of the committees — but I know this was basically impossible at the car rental company that I helped, and so I can imagine it was also impossible in the USSR, especially as some of the worst reactionaries had the favor of the military. One advantage I had at the car rental company is I never had to worry that a change in leadership would cause me to be put against a wall and shot.
My point being, these are difficult issues in any organization, whether the organization is private or government, and the problems are more complicated as the organization gets larger.
If we want to understand why the USSR failed, we have to ask why Gorbachev lacked the power to push his reforms through the committees. Why were the reformers beaten back, over and over again? We could reasonably say "There were many people who understood exactly what they needed to do to save the USSR, but they were outmaneuvered by entrenched interests." But then we'd need to ask, why were those reactionary factions so entrenched, how did they get so entrenched, was there really no way to force them out?
The situation in the USSR in the 1980s reminds me of the situation in the USA now, especially with regards to climate change: we have a large group of reformers who know exactly what needs to happen, and who know the situation is urgent, but structural factors keep them from getting the kind of large majority that they would need to push through a sweeping program of reform.
The Struggle to Save the Soviet Economy:
Mikhail Gorvachev and the Collapse of the USSR
By Chris Miller
©2016
Page 93-95
Instead of strengthening incentives, the bureaucracy was doubling down on command methods.
Consider the quality control agency, Gorbachev suggested. It “touches on the whole economy. And look what difficulties result - even among those who receive the ‘mark of quality’” from the agency. Even they were hamstrung by excessive bureaucracy. The problem was not only that Soviet officials strangled enterprises. Ludwig von Mises, a noted economist, pointed out in the early twentieth century that central planners were often unable to aggregate sufficient information to make sensible plans. Letting individuals make their own decisions actually improved society’s collective decision making, von Mises argued. In early 1987, Gorbachev himself took up this theme, mocking bureaucrats for being afraid “to give up ‘your’ direct connections [with enterprises]. But the economy is about 250 million points of mutual exchange. It’s not possible to regulate this from the center. No computer could manage.” Neither, Gorbachev believed, could Soviet planning officials.
Yet many of Gorbachev’s colleagues, especially those with close ties to industries, saw little benefit in the changes Gorbachev proposed. Most enterprises liked the existing set-up, especially those enterprises that were the least efficient. Moves toward self-financing or cost accounting would impose sharp costs, so they tenaciously fought change. For example, Andrei Gromyko, the former foreign minister and old Bolshevik, attacked Gorbachev’s policies in a Politburo meeting in March 1987. Because of perestroika, Gromyko argued, “in the social sphere the ice has been broken,” Gromyko saw evidence of problems in what he called the “social sphere,” but which referred not to social welfare programs, but to industries. “It’s tough for military factories,” Gromyko explained. “They don’t want to produce civilian goods. Textile industries are lame in both legs, there is no movement. Equipment is extremely old, it hasn’t been replaced for decades. That’s the case in Kalinin, in Novgorod Oblast - everywhere.” All of the problems that Gromyko outlined had a straightforward solution, he believed: more credit for investment, more subsidies from the center. The problem, in Gromyko’s eyes, was a lack of funds. If Moscow transferred more money to enterprises, Gromyko believed, the economy would pick up. Arguments such as Gromyko’s explained why, as Ryzhkov put it in the same Politburo meeting, “the general economic idea - self-governance, self-financing - is basically not being realized. There is no movement.” The reason, Ryzhkov argued, was simple: many powerful political groups were opposed to change. “The working class doesn’t understand what it needs to do. Directors [of industries] understand, but don’t want to move from their egoistic position, since work will get harder for them. Fewer and fewer volunteers will move toward self financing.”
Despite the opposition, Gorbachev did not back down. In the spring of 1987 he launched a new push for enterprise restructuring. In a Politburo meeting on April 30, 1987, Gorbachev interrupted a presentation by Gosplan, the government planning commission, to demand that the bureaucracy back decisive change. “The attempt at reform in the 1950s and 1960s [under Kosygin] choked specifically because no one at the top wanted to give up their rights,” Gorbachev argued. “And look, now we are listening to a presentation on perestroika from Gosplan. But are any radical reforms visible?” None were. “You,” Gorbachev said, addressing Gosplan chairman Nikolai Talyzin, “tell us that the ministries agreed with your ideas. Well why did they agree? Probably because you let them keep all their rights….They want to keep everything in their hands, to keep giving orders.” Gorbachev attacked Talyzin’s proposals. “Look - all the profit is planned from the top. When there is a real need for a product, production shouldn’t be limited by some control numbers. Yes, it is connected with the balance of resources. But who said that you, sitting here, in Gosplan, know better how much one factory or another can produce? Aren’t we restraining initiative and independence here?” Gorbachev thought an important principle was a stake. “A very sharp debate is going on. How can we govern the country if we don’t say in advance how much profit there will be? The Politburo is getting these questions. But I answer: how do you know, how much some enterprise or branch will make in profit?” That, of course, was von Mises’s critique of centrally planned socialism. This was not only an economic question, Gorbachev believed. “When we say - ‘Here is your target for profit, and no less!’ - there democracy ends and reform ends,” he argued. “This is the question of questions, the central question of the new planning. We need to create a system in which people consider all resources.”
Gorbachev finally cajoled the Politburo into passing the Law on State Enterprises in June 1987, a full year after he began pushing for such changes. The legislation modified Soviet enterprises in three ways, each of which mirrored China’s policy. First, the law transferred control over enterprises from the state to workers. Now, at least in theory, workers were empowered to elect management as well as a work council. Second, commands - the traditional way that the center controlled enterprises - were replaced by “state orders” (or “state purchases”), which covered production that was considered essential. Finally, enterprises moved toward self-financing, as the number of indicators by which enterprises were measured was sharply reduced, with revenue or profit often becoming the most important indicator. This gave enterprises coherent incentives. Self-financing meant that enterprises would have to be profitable to survive. Indeed, the law included provisions by which enterprises could close if they consistently lost money - a socialist version of bankruptcy.
The legislation left much room for debate, and in practice the central planners retained much control. The difference between the new state orders and the old commands was far from clear, for example. Often state orders applied to the entirety of a factory’s production, in which case they left no room for market forces. On top of that, profit taxes were extraordinarily variable, running between 0-90 percent. At the upper end, enterprises had limited incentive to make money because the government took 90 percent of any profit. Still, the legislation moved the Soviet Union significantly closer to the path of other socialist countries, such as Hungary, Yugoslavia, and above all, China. The law’s limitations were evidence not of Gorbachev’s lack of interest in increasing the use of market incentives, but of intense political battles within the top Soviet leadership, and of Gorbachev’s constant need to compromise. Abel Aganbegyan, an economist who advised Gorbachev, publicly stated as much, arguing that the legislation should be seen as an intermediate step rather than as the final solution to the USSR’s economic problems.