All entries for October 2017

The Soviet Economy Collapsed After the World for Which it was Designed Disappeared

Writing about web page https://www.elindependiente.com/opinion/2017/10/28/por-que-colapso-la-economia-sovietica/

This column appeared (in Spanish) on 28 October on the website of El Independiente.

Soviet economic institutions were inspired by two western economic models of the early twentieth century. One was the German war economy of the Great War, which Lenin observed and admired for its government priorities, the control of supply chains by committees of industrialists, the rationing of commodities at fixed prices, and obligatory labour mobilization. The other was the American system of mass production of standardized products in great factories under centralized management.

Combined with an authoritarian single-party dictatorship, these two models made the Soviet economy as it emerged under Stalin and persisted until 1991. Everything was designed for mobilization, production, accumulation, and expansion. To ensure this, the state owned nearly everything and directed nearly everything from the centre, either by decree or by pressure to conform, backed up by the secret police. The citizens were motivated to comply with authority by a mixture of patriotic appeals, fear, and meagre rewards. The economy could supply basic consumer goods and services, but its special advantage lay in supplying the means of national power in the world, especially a mass army with vast quantities of standardized weapons. By the outbreak of World War II, Stalin’s Soviet Union had become one the world’s two leading producers of armaments, the other being Hitler’s Germany.

The Soviet economy was capable of growth, but it never proved capable of catching up with the innovative market economies of the time. Moreover, the growth rate of the Soviet economy steadily deteriorated through the postwar period. From the mid-1970s, the Soviet Union was falling further behind the United States in productivity and prosperity. While its economy began to stagnate, the Soviet Union faced additional challenges of the time. One challenge arose from the U.S. rearmament under Presidents Carter and Reagan. Another arose from the self-imposed burden of the Soviet Union’s entanglement in Afghanistan. In the international economy the Soviet Union was reliant on the oil market, where prices collapsed.

The Soviet leaders made repeated efforts to overcome economic constraints through reforms. The reforms sought to raise productivity by decentralizing management and improving incentives for efficient behaviour, while retaining the framework of state ownership and the party monopoly of power. All such reforms failed, as the economy reverted to its basic type. Later, the Chinese leader Deng Xiaoping would say that the last Soviet leader, Mikhail Gorbachev, was a fool for abandoning the party monopoly of power without reforming the economy. But this was unfair. Gorbachev did so only after all economic reforms had been tried, including most of the reforms that had been tried out successfully in China. Why they failed in the Soviet Union is an important story, but one for another time.

The end of the Soviet economy cannot be explained by economic factors alone. This should be clear from the example of countries like Cuba and North Korea, where ruling parties are facing vastly greater economic problems and threats than the Soviet Union ever faced, yet regimes have not collapsed. In the case of the Soviet Union, politics was decisive. The conservative generation of leaders such as Leonid Brezhnev, born in the early twentieth century, died out. A new generation took command, led by Mikhail Gorbachev. The new generation was more open-minded, and their open minds had been influenced by the ideas of the dissident movement – nationalist, liberal, or social-democratic. Gorbachev was decisively influenced by ideas about social democracy and rule by consent. He did not want to rule at any price, or to rule by fear. Once it became widely understood that resistance to power would not be punished, people stopped being afraid. The Soviet Union became ungovernable and fell apart.

Politics was decisive in the moment, but at the same time we should not ignore the deeper economic forces. The Soviet economy was designed for a world of mass production and mass armies. That is no longer the world in which we live. In the 1970s, the information revolution gave rise to flexible production and a services economy based on information sharing. In the same decade, precision guidance and miniaturized nuclear weapons put an end to the idea that the future of Europe could be decided by a great battle fought by thousands of tanks and planes and hundreds of thousands of soldiers in the central European plain. The world for which the Soviet economy had been designed was disappearing. The Soviet Union had no future. No one should want to see it return.

Mark Harrison : 28 Oct 2017 09:48 |  Tags: 1917 Communism Economics History Politics Russia War |  Comments (0) |  Close comments |  Report a problem

The Past and Future of Free Trade, or How Partisan Preferences Spread Foolishness

Writing about web page https://twitter.com/nickdearden75/status/919871698236829697

I woke up on October 16 to a learned debate on Twitter about economic history. Daniel Hannan, who is a Conservative Member of the European Parliament, had posted this:

What made us the world's richest nation? We removed trade barriers and so put money into ordinary people's pockets.

In response, Nick Dearden, who is the director of Global Justice Now, a campaigning organization, replied:

No. We plundered & pillaged. We sold people by the millions. We forced China into opium addiction. We decimated Bengal's textile industry.

(At the time of writing, both of these tweets were well liked, with Dearden well ahead: Hannan 982, Dearden 1.9K.)

Maybe you've guessed: this dispute was not really about economic history. It's about Brexit. Hannan urges Britain to go it alone as a free-wheeling, free-trading nation state, as in the past; that, he maintains, is what made us rich then, and it will work for us again. Dearden maintains that we owe Britain's wealth to the world, from which we once stole it. I'm not sure what that implies for Brexit, but for sure he doesn't seem to like free trade.

Considered as economic history, which version is more plausible? Neither account would pass even a low bar, say, that of an undergraduate multiple choice test. But, of the two, I prefer Hannan's. Here's how that works:

Why Hannan would not pass: he is wrong to imply that free trade was the key factor. Britain's relative advantages can be dated at least back to the fourteenth century, long before free trade; in fact, long before foreign trade represented a substantial share of Britain's economic activities.

Why Hannan deserves some credit: he is right to suggest that in the nineteenth century free trade further promoted British productivity and prosperity. He is also correct to remind us, as many forget, that trade is primarily about wages and prices, and that the gains from trade stem from higher productivity in the jobs we have, not from more jobs.

Why Dearden would fail -- on every count. Plunder, pillage, and the slave trade have little or nothing to do with Britain's modern competitive advantages. These advantages stemmed from factors that came into play long before the eighteenth century. Even in the eighteenth century, Britain's foreign predations were not on a sufficient scale to explain the continued growth of the economy at home, for at that time the total of foreign transactions was not large enough relative to the size of the economy, and all profits on trade did not represent a significant share of British investment.

At home, the revenues from British colonies and plantation enriched a few, but they did not generate economic growth. Britain's industrial revolution was made by mill owners and ironmasters, who were not especially enriched by their entrepreneurship because competition continually drove down their prices and profits. Those enriched by the cotton trade were the many who gained from falling textile prices and cheap imported food.

That's at home; what about the rest of the world? The cotton trade did not only enrich Britain. It also enriched others. It did not, as Dearden claims, "decimate Bengal's textile industry." That was done by Indian mill owners. In India as in England, some lost but many gained. This is shown by the fact that, throughout India's so-called deindustrialization, both production and consumption of textiles rose decade by decade.

So . . . if Hannan had the better case for Britain to have embarked on free trade in the nineteenth century, does he have the stronger case for Britain to leave the EU in the twentiy-first? Absolutely not.

The gains from free trade in the nineteenth century arose from exchanging basic staple commodities: food and raw materials, textiles, and simple machinery. These goods could be described by simple standards, and contracting for them was largely free of regulation. Trade in the twenty-first century is radically different.

Today, trade in complex machinery and electronic devices relies on common standards for quality, safety, and networking. Trade in services, where there are the greatest unrealized gains, relies even more on common regulatory standards for consumer protection and contract enforcement. These things are not provided by the WTO, or by free trade, or by free trade agreements. They are provided by international regulatory harmonization, such as by the EU's Single Market.

If you want to import, you have to export. By leaving the Single Market, we throw up a trade barrier between ourselves and our largest, most competitive market.

So, to the extent that Hannan is correct on free trade, his is a powerful argument against Brexit.

More generally, the exchange between Hannan and Dearden illustrates how the desire to defend or attack prompts the opposing sides to oversimplify history and to spread half-truths and "alternative facts." Partisanship makes idiots of us all.

Mark Harrison : 20 Oct 2017 12:27 |  Tags: Brexit India |  Comments (0) |  Close comments |  Report a problem

Soviet and Russian Inequality: Was the Soviet System Pro–Poor?

Writing about web page http://wid.world/

In August this year Filip Novokmet, Thomas Piketty, and Gabriel Zucman circulated a new working paper, “From Soviets to Oligarchs: Inequality and Property in Russia, 1905-2016” (NPZ 2017a, b). This paper makes several advances, including a novel estimate of the evolution of Russians’ offshore wealth.

To situate the subject briefly, Cold War scholarship has left us a substantial literature on income inequality under communism. Bergson (1944), Yanowitch (1963), Wiles and Markowski (1971), Pryor (1972), Wiles (1974, 1975), Wädekin (1975), Chapman (1977), McAuley (1977), and Matthews (1978), each made valiant attempts, sometimes extending to piecemeal comparisons over countries and over time. “Considering the obscure data with which they had to work,” a survey by Schroeder (1983) remarked, “Western investigators display a large degree of agreement.” Measured by the decile ratio, the distribution of official incomes in the Soviet Union was becoming more equal over time and was substantially more equal than in the developed market economies then available as comparators. Schroeder noted, however, that Western researchers could not access data on the Soviet distribution of illegal incomes, or on privileged distribution of goods and services including accommodation and health care.

More recently, Lindert and Nafziger (2014) made an advance in another direction, examining inequality in Russia before and after the Soviet era. They concluded that pre-tax income inequality in 1997, although likely understated by official reports, was greater than in 1904.

Finally, a new paper by Allen and Khaustova (2017) examines Russian real wages in the long run. This paper does not address income inequality directly but allows inferences to be drawn from comparing real wages and productivity in industry. They find that real wages stagnated from the 1860s to 1913 (in St Petersburg, the capital, and Kursk, a provincial centre) or showed modest gains (in Moscow) but lagged everywhere behind productivity, suggesting a movement from wages to profits and income from wealth. After the troubled wartime and revolutionary period, the 1920s brought large real wage gains. These were short-lived, evaporating in the famine-led inflation of the early 1930s.

Novokmet and co-authors (NPZ) are the first to have tried to measure wealth and income inequality in Russia over the whole twentieth century. And, as many readers will be aware, their paper is part of a much larger collaborative project, the World Inequality Lab and the associated World Wealth and Income Database, one that aims to measure inequality in many countries over hundreds of years.

Here I focus on income inequality:

Income shares in Russia, 1905-2016 (selected years): bottom 50 per cent and bottom 90 per cent

Source: Novokmet, Piketty, and Zucman (2017a,b).

According to NPZ, the share of the top 10 per cent in pre-tax income distributed to adults in Russia was 47 per cent in 1905. The share fell to 22 per cent in 1928, increased modestly to 26 per cent by 1956, and began to fall gently back again, reached a low of 21 per cent in 1980. (The Soviet-era years observed are 1928, 1956, and then roughly every second, third, or fourth year to 1988, when annual observations begin.) By 1996 the top 10-per-cent share had returned to the 1905 level and remained in that vicinity through 2016. NPZ comment: “our benchmark estimates suggest that inequality levels in Tsarist and post-Soviet Russia are roughly comparable. Very top income shares seem if anything somewhat larger in post-Soviet Russia.”

Measured by the top 10-percent income share, Russia today appears in the World Inequality Lab database in the same inequality band as the United States and China. Income inequality is reported as greater in a few countries: Turkey, India, South Africa, and Brazil. All north and west European countries that are represented in the database are more equal than Russia. But all are smaller than Russia in population, and a larger population will always tend to show greater inequality, because unequal economic outcomes are promoted by heterogeneity of all kinds, and heterogeneity is inevitably increasing in population size.

In its time the Soviet Union, in contrast, was apparently one of the most equal countries in the world. This is particularly striking, considering the large size of the Soviet population, 288 million by 1991. Other countries in the WID dataset with top 10-percent shares of 26 per cent or below at any time from 1917 to 1991 are few, and they are also much smaller in population: Australia, Denmark, Mauritius, Italy, New Zealand, Norway, Portugal, Sweden, and Taiwan. Of all these countries, only Italy’s population had reached 57 million by 1991, and Taiwan’s 20 million.

These results are broadly consistent with the earlier research described above. They confirm that income inequality in Russia after the Soviet era was comparable to before the Revolution, if not greater; that the distribution of Soviet official incomes was markedly more equal than in most market economies at the time and today, and in Russia beforehand and today; and that, within the Soviet era, inequality followed a modest Kuznets curve, rising, then falling.

Seen in this light, Soviet institutions and policies appear distinctly pro-poor. Before we take that as settled, however, there are three issues that point the other way.

First, in the Soviet era the poor might have gained relatively, but the chief factor in this was impoverishment of the rich. What the rich lost was not transferred to the poor, or was given only temporarily before the state grabbed it back, as clearly implied by Allen and Khaustova (2017). NPZ measure inequality by shares of income distributed to adults. In the Soviet era, the share of income not distributed to adults, but retained by the state, became unusually large. As a first approximation, household consumption fell from around 80 per cent of GDP in 1913 to around 50 per cent in 1940 and through the postwar period. By implication, what the rich lost was diverted into government administration and investment and defence projects; it was not passed on to the lower income strata. If there was an initial transfer to the poor, it was confined to the 1920s, and was then cancelled in the Great Breakthrough of Stalinist collectivization and industrialization.

Second, the Soviet state did not take only from the rich. It took also from the poor, including the poorest. This applied particularly in the years from 1928 to 1956, a period for which the NPZ dataset has only gaps. While I cannot find full explanation on this point, the NPZ dataset (like most Cold-War scholarship) seems to rely on reports of the distribution of official wage earnings to capture Soviet-era inequality. Wage earnings accounted for less than one third of Soviet household incomes in 1928, just over 60 per cent in 1937, and nearly 70 per cent in 1956 (Kashin and Mikov 2004: 17, 23, 34). The largest category of households excluded from reports of wage earnings were collective farmers – the great majority of Soviet farm workers – who received an uncertain dividend, not a wage. If that is the case here, then the rural poor are left out of account. (Forced labourers are also left out. There were millions of these from the 1930s to the 1950s. But they are a small omission compared with many tens of millions of collective farmers.)

Narrative accounts of rural food shortages and periodic famines indicate that rural poverty contributed substantially to Soviet-era inequality before the 1950s (e.g. Davies and Wheatcroft 2004). After that time, the compensation of collective farmers moved gradually, but never completely, towards public-sector standards.

Finally, as NPZ acknowledge, under Soviet arrangements, persistent shortages and privileged distribution decoupled consumption inequality from income inequality. In the Soviet Union everyone had an income, but not everyone could spend it on the same terms. A privileged class of insiders – the party elite and the employees of key production and service establishments – who had access to relatively high-quality goods and services at prices fixed below the market-clearing level without waiting. Others had limited access to staple goods and services, for which they either waited in line or paid a higher, sometimes illegal price. As long as the poor had money they could not spend, or faced higher prices to spend it, it is possible and even likely that consumption was distributed more unequally than income. This contrasts with the pattern that has been found to prevail in market economies, where consumption inequality is generally less than income inequality. But comprehensive data on Soviet consumption inequality would seem far more difficult to come by than income data, so this may well remain a conjecture.

Consumption inequality was important not only for ex post evaluation of economic welfare under Soviet arrangements. It was of central importance to the political economy of the time. During the 1930s, as Paul Gregory (2004: 76-109) has noted, Stalin received regular reports of discontent and falling effort among the workers in the provinces and intervened from time to time to improve their condition. When he did so, he did not order their wages to be raised because, in a supply-constrained economy, this would only have lengthened local queues. Rather, he ordered consumer goods in short supply to be redirected to the towns and factories where dissatisfaction was rising, so that the workers could more easily spend their wages.

The existence of unofficial incomes in the Soviet era only adds complexity to the problem. We guess that unofficial incomes were substantial but of time-varying size. Anecdotes on who received them are plentiful. The Soviet central bank compiled annual estimates of their aggregate size (Kashin and Mikov 2004), but we continue to lack (and may never find) data on their distribution. Thus, it is impossible to say whether their net effect was to increase or reduce the extent of inequality of different kinds.

To summarize, the extent to which Soviet institutions favoured the poorest in society is easily overstated. The impact of the Bolshevik Revolution was to flatten the distribution of wages. On that official measure income inequality fell sharply. But non-wage earnings were likely distributed more unequally than wages. Unofficial incomes also mattered; how they mattered is unclear. Consumption inequality mattered too, and arguably mattered more than income inequality. Most likely, consumption inequality did not fall to the same extent. Whereas consumption inequality in market economies is relatively stable, it is possible that Soviet consumption inequality was volatile, spiking in particular years of crisis.

Any judgement on new work must be preliminary, but my thoughts so far are as follows. NPZ (2017) is a substantial contribution. It is not the first word on the subject, and it will not be the last word either. It turns a new page and sets a new challenge.

References

• Allen, Robert C., and Ekaterina Khaustova. 2017. “Russian Real Wages Before and After 1917 in Global Perspective.” University of Oxford: Discussion Papers in Economic and Social History no. 158 at https://ideas.repec.org/p/oxf/wpaper/158.html.
• Bergson, Abram. 1944. The Structure of Soviet Wages. Cambridge, MA: Harvard University Press.
• Chapman, Janet G. 1977. “Soviet Wages Under Socialism.” In The Socialist Price Mechanism. Edited by Alan Abouchar. Durham, North Carolina : Duke University Press.
• Davies, R. W., and S. G. Wheatcroft. 2004. The Industrialisation of Soviet Russia, vol. 5. The Years of Hunger: Soviet Agriculture, 1931-1933. Basingstoke: Palgrave.
• Gregory, Paul. R. 2004. The Political Economy of Stalinism. Cambridge: Cambridge University Press.
• Kashin, Yu. I, and V. V. Mikov, eds. 2006. Po stranitsam arkhivnykh fondov Tsentral’nogo Banka Rossiiskoi Federatsii, vol. 1. Denezhnye dokhody i raskhody naseleniya 1924-1990 gg. Moscow: Tsentral’nyi Bank Rossiiskoi Federatsii.
• Lindert, Peter H., and Steven Nafziger. 2014. “Russian Inequality on the Eve of Revolution.” Journal of Economic History 74(3): 767-798 at https://ideas.repec.org/a/cup/jechis/v74y2014i03p767-798_00.html.
• Matthews, Mervyn. 1978. Privilege in the Soviet Union. London: George Allen & Unwin.
• McAuley, Alastair. 1977. “The Distribution of Earnings and Incomes in the Soviet Union.” Soviet Studies 29(2): 214-237.
• Novokmet, Filip, Thomas Piketty, and Gabriel Zucman (NPZ). 2017a. “From Soviets to Oligarchs: Inequality and Property in Russia, 1905-2016.” WID.world working paper no. 2017/09 at http://wid.world/.
• Novokmet, Filip, Thomas Piketty, and Gabriel Zucman (NPZ). 2017b. Appendix to “From Soviets to Oligarchs: Inequality and Property in Russia, 1905-2016.” WID.world working paper no. 2017/10 at http://wid.world/.
• Pryor, Frederic. 1972. Economic System and the Size Distribution of Income and Wealth. Bloomington, IN: International Development Research Center.
• Schroeder, Gertrude. 1983. “Consumption.” In The Soviet Economy: Toward the Year 2000. Edited by Abram Bergson and Herbert S. Levine. Winchester, MA: Allen & Unwin.
• Wädekin, Karl-Eugen. 1975. “Income Distribution in Soviet Agriculture.” Soviet Studies 28(1): 3-26.
• Wiles, Peter, and Markowski, Stefan. 1971. “Income Distribution under Communism and Capitalism”, Soviet Studies 22(3): 343-369; 22(4): 487-511.
• Wiles, Peter. 1974. Distribution of Income: East and West. Amsterdam: North Holland.
• Wiles, Peter. 1975. “Recent Data on Soviet Income Distribution.” In Economic Aspects of Life in the USSR. Brussels: NATO, Economic Directorate.
• Yanowitch, Murray. 1963. “The Soviet Income Revolution.” Slavic Review 22(4): 683-697.

Mark Harrison : 13 Oct 2017 09:44 |  Tags: Communism Inequality Russia |  Comments (1) |  Close comments |  Report a problem