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August 19, 2019
This column is about the short-term costs of a no-deal Brexit. Like many economists, I tend to think any disruption will prove temporary, even in the case of no deal. It’s in the nature of temporary costs that, in the long term, they disappear. It’s the long-term costs that we will be left with, and they will exceed the short-term costs by many orders of magnitude. Nonetheless, the only way to the long run is via the short run. As the short run looms before us, we are all understandably fixated on a single issue: what will happen next?
According to yesterday's leaked disclosures, the Cabinet Office’s Operation Yellowhammer report predicts the short-term consequences of a no-deal Brexit: a three-month paralysis of Britain’s maritime trade, a hard border in Ireland, shortages of fresh food and medicines, and many other things. This is the central estimate, not a worst-case scenario.
One side of what passes for Britain’s Brexit debate has seized on the findings as confirming what was claimed all along: Brexit is an act of national self-harm. The other side derides them as more “Project Fear.” The government itself now claims that the report is already out of date: the government has everything in hand.
Uncertainty over the likely short-term outcome of a no-deal Brexit (or any kind is often blamed on the idea that this has never happened before. Never before has a major trading nation deliberately disengaged from deep integration with its nearest and wealthiest neighbours. But this is not entirely true. There are two precedents: 1939 and 1914. The precedents are not recent, of course. Still, they might offer something to discover.
The outbreak of World War I was preceded by what some today might call an Edwardian version of “Project Fear.” Liberally minded commentators – best known were the banker Ivan Blokh and the journalist Norman Angell – warned that war among the industrial powers would lead inevitably to disaster. They offered two predictions, one, that industrialised war would be horrible; and two, that it would prove economically and socially intolerable.
On the first prediction, Angell and Blokh were correct. Total war was horrible. But their second prediction was wrong – at least in the short term.
The industrial powers, they argued, had become so economically integrated that they could no longer tolerate the interruption of trade by war. Within a few months they would run out food – first Britain, then France and Germany. After that, they would starve and surrender. Russia might survive, based on its food surplus. But this is not what happened.
When Germany went to war in 1914, the direction of their attack was against their main trading partners. Britain alone accounted for more German trade than all Germany's allies. Russia was a major source of German food and fodder. Yet as the war dragged on the German economy did not collapse. Like Britain and France, which were even more exposed to the global economy, Germany mobilized its resources for four years of total war.
In every country the war imposed wrenching adjustments and sacrifices on soldiers and civilians alike. But the results were not intolerable, for the people tolerated them. Two forces were at work that Angell and Blokh had neglected, that prevented collapse or at least staved it off for several years. One was the basic flexibility of market economies, which enabled the industrial powers to adapt much more easily to the loss of trade and the demands of war than anyone predicted. The other was the arousal of national feeling among the peoples now at war, which led them to hate the enemy and to tolerate readily the changes and sacrifices necessary for war mobilisation to proceed.
It is true that after several years of total war the populations of Russia, Germany and Austria-Hungary gave up the struggle. But it was Russia, most self-sufficient in food, with the least industrialised economy, that dropped out of the war first. So Blokh and Angell were wrong about that too.
If the Second World War was different, it was that the great powers entered it knowing what had happened in the First. They prepared accordingly. From September 1939, the British blockaded Germany at sea and German submarines waged war on British shipping. Britain, importing 70 per cent of calories for human consumption, was as vulnerable to blockade in 1939 as in 1914. The volume of food imports into Britain halved between 1939 and 1942. Yet the economy and the people adjusted. Domestic farming expanded and prices and rationing shifted diets from meat to cereals and potatoes. The calories available for human consumption barely changed from year to year through the war.
What should we take from such experiences?
- First, market economies were generally more adaptable than government and public opinion expected. When particular goods were suddenly in short supply, it was natural for those who needed them to find substitutes and work around the shortages. As a result, shortages were usually temporary and rarely, if ever, endangered the economy.
- But second, in some countries, survival was endangered eventually, after years of war. In Germany, for example, this was much more because of war mobilization than because of the loss of trade. Still, trade had been lost, and substitutes and workarounds for missing supplies were never costless. Such costs accumulated and were added to the costs of the war. It took time for the overall costs to become evident to the point where they might drag down the war effort itself. The costs of lost trade were hidden from sight at first, partly, because the processes of market adjustment redistributed them around the economy, so that they were rarely salient and were lost in the general step-by-step erosion of everyone’s standards of living.
- Third, in the process, governments took over more and more responsibility for the basic functions of economic life. The methods of command economies were invented during World War I and were widely used from the outset in World War II. While these were usually effective in directing resources into the war effort, the consequences for ordinary people varied. In Britain, food rationing was limited to luxury foods, and was generally effective, so the nutrition of poorer households was levelled up. But where clean government and non-corrupt administration failed, food was diverted into black markets and inequality grew.
- Fourth, while the war continued, most people were motivated to accept the resulting sacrifices by leadership that provided the sense of a shared national struggle, that focused their anger at the enemy who imposed these losses on them. War leaders created an atmosphere of national unity and solidarity in which the overwhelming majority became willing to “keep calm and carry on” through years of hardship.
Since 1945 the nature of economic life and the structure of international trade have changed nearly beyond measure. Despite this, all four lessons are deeply relevant as we contemplate what will happen on 1 November, the day after Brexit.
- First, don’t underestimate the flexibility of the market economy. Any real disruption is likely to be short lived. (Unless the government makes shortages worse by adopting price controls, say.) Whatever is suddenly missing from our lives, we will adapt, find substitutes, or work around what is missing. Our lives will certainly change, but we will probably get by. If Russia and Iran can survive trade sanctions, we will survive Brexit.
- Second, adaptation and substitution will incur many minor costs, and the costs will cumulate and may well grow over time as Britain decouples from the European economy. The sharper the shock, the more trust will be broken. Since trust underpins all long-term relationships, the more our long-term relationship with Europe will be damaged.
- Third, demands for the government to “do something” about disruption and shortages will push the government to intervene more and more in our economic life. For a time at least, scarcity pricing will be regulated by public pressure if not by law. Supplies will be prioritised. Failing firms will be bailed out. Once in place, these controls will take on a life of their own. Don’t forget that food rationing, which began in Britain in 1939, did not end in 1945; the last controls were not relaxed until 1954.
- Fourth, our willingness to “keep calm and carry on” will be much less than was the case in 1939 or 1914. We are not at war. We are divided among ourselves. Our government is representative of an extreme, not of a broad national coalition. Half the country expects Brexit to be painless or quickly beneficial. The other half sees it as a self-inflicted wound. Neither of these constituencies seems likely to put up with much pain for the good of the cause.
This can change, only if the government is successful in persuading the majority that we are in fact at war, that Europe is the enemy, that pro-Europeans are the “enemy within,” and that departure from the European Union is worth any sacrifice.
June 06, 2019
Writing about web page https://soundcloud.com/980cjme_650ckom/bls-mharrison-june6
Here's my 75th anniversary tribute to D-Day. Some 15,000 Canadian troops went ashore on D-Day, around 10 per cent of the Allied total. To mark the day I was interviewed on The Brent Loucks Show on 650 CKOM in Saskatchewan, Canada. There's a disappointingly muffled recording. Alternatively, these are the notes I made beforehand, most of which we got through, although not in the same order.
- What led up to the decision to invade in June of 1944?
In the spring of 1944, three things. Britain and America were bombing Germany from the air with rising intensity. British American forces were advancing through Italy. The main action was still on the Eastern front where 90 per cent of German ground were being driven back towards Germany by the Red Army. In essence Germany was already being defeated but was still fighting hard. Final victory looked years away. The main beneficiary on the ground looked like Stalin, because his was the main action on the ground. The western Allies by now had a huge material advantage over Germany. But unless they turned that advantage into fighting on the ground in France and then in Germany, it would not be reflected in the postwar control of territory.
D-Day was hugely important. It did not cause Hitler’s defeat, because that was already under way. It did two things: immensely speed up the end of the war; and ensure that Western Europe fell into the hands of the Western Allies not the Soviet Union. For which we should be immensely grateful.
- What kind of logistics were involved behind the scenes of the invasion?
The planning took two years and was on an immense and comprehensive scale. The SHAEF headquarters tried to plan every last nut and bolt, from the choice of the beaches to the order of creation of port facilities to the rate of advance across France towards Germany to the order and priority of deliveries over time.
All these plans failed. Some landings were in the wrong places. At first the advance away from the beaches was much too slow, so there was an abundance of fuel and not enough ammunition. Then there were unexpected advances so fuel became short while ammunition piled up. But the advantage of the Allies was so great that, once established in France, they could afford a few mistakes. The mistakes also slowed down the Allied victory, but could hardly turn it into Allied defeat.
- How might the war have played out if D-Day failed?
The war would have dragged on. While it went on, probably every country – those fighting and those occupied – would have suffered more casualties than was the case. Germany would still have lost in the end, but the balance of power in Europe would have shifted away from Britain and North America towards Stalin and the Soviet Union. For that reason, postwar recovery would probably have been much more painful.
- What would Europe look like now if the war had dragged on?
Much more of Europe would have ended up under Soviet domination – Germany and Austria for sure. Italy and France might well have elected communist governments. After that, who knows?
- Would atomic bombs have been used on Germany?
What shortened the war in the Pacific was the atomic bomb, which was ready by July 1945. Used against Japan, it shortened the war and forestalled any Soviet attempt to occupy the Japanese islands. Would the atomic bomb have been used against Germany with the same intention? Who knows, but it’s clearly possible. Even as things worked out there were strong pressures to destroy German industries and reduce Germany to a country of farmers and artisans.
August 06, 2018
A great new paper by my CAGE colleague Thiemo Fetzer was in the news last week. It asks: Did Austerity Cause Brexit? Thiemo is one of those that know how to write a good abstract so, rather than try to summarize the paper in my own words, I’ll use his:
Did austerity cause Brexit? This paper shows that the rise of popular support for the UK Independence Party (UKIP), as the single most important correlate of the subsequent Leave vote in the 2016 European Union (EU) referendum, along with broader measures of political dissatisfaction, are strongly and causally associated with an individual’s or an area’s exposure to austerity since 2010. In addition to exploiting data from the population of all electoral contests in the UK since 2000, I leverage detailed individual level panel data allowing me to exploit within-individual variation in exposure to specific rules-based welfare reforms as well as broader measures of political preferences. The results suggest that the EU referendum could have resulted in a Remain victory had it not been for a range of austerity-induced welfare reforms. These reforms activated existing economic grievances. Further, auxiliary results suggest that the underlying economic grievances have broader origins than what the current literature on Brexit suggests. Up until 2010, the UK’s welfare state evened out growing income differences across the skill divide through transfer payments. This pattern markedly stops from 2010 onwards as austerity started to bite.
Thiemo’s paper has already been widely reported (e.g. hereand here). The reports have tended to sustain a simple political narrative: In 2010, as Chancellor of the new coalition government, George Osborne set the course towards austerity. Austerity provoked the rise of UKIP and anti-EU sentiment. By implication, austerity was a mistake for which we are paying now with Brexit.
Not so fast.
Thiemo’s findings should be considered in the context of another story in last week’s news. In the Financial Times on 2 August, Chris Giles reported on the latest fiscal sustainability report of the Office of Budget Responsibility The report showed that, if the economy grows and if we continue to tax and spend on pensions, long-term care, health, education, and welfare at current rates, by 2050 there will be no funding for anything else. The government will be unable to pay anything towards defence, police, transport, arts and museums, business, and local authority services such as bins, libraries, and parks.
Driving this conclusion is two problems. One, the British population is ageing. Two, the economy is growing more slowly than in the past. Spending on old age will necessarily encroach more and more on a pool of resources that is finite and will fail to keep up.
In an era of low-interest rates it is tempting to suppose that the government can simply borrow more to pay for these things. Certainly, it can do this for a while. But that can only kick the fiscal can down the road. As deficits rise and once more accelerate the growth of the public debt, the burden of debt interest payments will also grow more rapidly, tightening the screws ever more harshly.
What does this have to do with Thiemo’s paper? It affects the implications that may be drawn.
First, when slow growth makes deficits unsustainable, austerity is inevitable at some point. Certainly, this does not deprive us of all choice. For example, we can choose to have austerity now or later. But for every unit of austerity that we postpone now, we will have more than one unit down the road; that's in the nature of the accumulation of debt. As Chris Giles points out, the government’s relaxation of fiscal targets in 2016, and its more recent boost to health spending, have brought forward the point at which the government will run out of money for “other” spending by six years. We can also choose who will bear austerity’s burdens. Are welfare benefits too generous? Should graduates pay higher contributions? Should companies pay higher taxes, or their shareholders, who include both relatively wealthy households and the pension funds responsible for the retirement incomes of the middle and lower classes?
These are all choices that could have been made differently, and that we can still make. But, as growth prospects diminish, what we cannot do is choose not to have austerity at all, ever.
Second, if you’re thinking that the government should not have imposed austerity in 2010 because that policy induced people to turn to UKIP and Brexit, think again. Rightly or wrongly, George Osborne was trying to return the UK economy to fiscal sustainability by following transparent targets and rules. The purpose of such rules has been to try to bind governments, so that they do not exploit their discretionary powers to time taxing and spending decisions in order to reward supporters, win their votes, and so manipulate elections.
Which is a good thing—right?
If your present thinking is that Thiemo’s paper shows that austerity was a bad policy, ask yourself what you thought of austerity before you knew his findings. If you already had reasons to believe that austerity was a bad policy, then stick to them, whatever they were. Thiemo’s findings have not added to them.
If, perhaps, Thiemo has changed your mind—previously, you thought austerity was necessary, and now you have turned against it—then be careful. The risk you face is that you may soon get what you now wish for: a government that systematically manipulates its electoral base with fiscal generosity that must be paid for later.
October 28, 2017
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.
June 02, 2016
Writing about web page https://drive.google.com/file/d/0B7VJ1wykdp_YdXBiT3ZCT3FKNGM/view
Last week I spent a few days in Regensburg, a pretty town in Bavaria. The subject of our conference was the economic history of central, eastern, and southeastern Europe since 1800. The meeting was convened by the excellent Matthias Morys of the University of York; Matthias is editing a book on this theme for Routledge. The general standard of the chapters is going to be exceptional. (I’m not an author; I went along to hear and discuss.)
An important theme of the book will be how central and eastern Europe lagged behind western Europe in productivity and social well-being, and the varying successes and (mostly) failures of the region in closing the gap. This raised a question: Should central and eastern Europe always be judged against western European countries, as though we (the West) set the only standards that count? Shouldn’t everyone try to understand that region in its own terms, without negative preconceptions?
We had reached the interwar period of 1918 to 1939 when a commentator raised this question sharply. It’s a good question, and it brings us in a surprising direction. Think about it: what were the standards that the nation states and regimes of Central and Eastern Europe set themselves, whether in the interwar period or over the last two centuries? Often enough, the answer turns out to be, the goal that they set was to catch up with Western Europe.
At first sight this takes us back to where we started, to the standards of productivity and social well-being set in Western Europe. But this would not be strictly accurate. When the states and rulers of central and eastern Europe set out to catch up, it was not so much in average incomes or welfare, which were not even measured systematically until the middle of the twentieth century. The dimension in which they aimed to catch up was that of national power.
As it turns out, the first decades of the twentieth century were a time of great success for two of the countries of central and eastern Europe in the race to catch up and overtake western Europe in national power. These countries were Germany and the Soviet Union.
National power can be measured, although imperfectly. The scholars of the Correlates of War project set out to measure the global distribution of national power with a “composite index of national capability” (CINC) designed to capture “the ability of a nation to exercise and resist influence.” A country’s CINC score combines six indicators of its relative weight in the international system, year by year: total population, urban population, iron and steel production, energy consumption, military personnel, and military expenditure. On this measure, in 1871, the Russian and German Empires together accounted for one fifth of the total of power in the world (12 percent for Germany and 8 percent for Russia). By 1914, through industrialization and rearmament, they had pushed up their combined weight to more than one quarter (14 percent to Germany, 12 percent to Russia). And by 1940, after more expansion and more rearmament, when Hitler’s and Stalin’s regimes were temporarily in alliance, their share had risen to nearly one third (17 percent to Germany, 14 percent to the Soviet Union).
Within 70 years, in summary, the two great powers of central and eastern Europe transferred more than one tenth of global power into their own hands. This was a dramatic shift in the balance of power, and a stunning achievement.
Thinking about this, I said in the conference: You want us to celebrate the aspects in which the countries of eentral and eastern Europe led the world at the time? OK, let’s hear it for autocracy, aggression, and mass killing. I was trying to be ironic, but I wasn’t sure if something got lost in translation.
Of course, you could be central or east European and be happy. Anywhere in the region, most of the time, you could live, love, carry on a trade, make a family, make art, make science, teach, and build. You could try to lead a good life, a life no worse than the lives led by anyone to the West. Bad things might happen to interrupt these efforts anywhere in Europe, west or east. For centuries, however, if you lived to the east of the Rhine, the probability that your efforts would be cruelly ended by young men in uniform under orders from above was much, much greater.
To understand why is the challenge for Matthias and his co-authors..
March 21, 2016
Writing about web page http://www.bbc.co.uk/news/uk-england-35697546
On 5 March we marked the eightieth anniversary of the 1936 maiden flight of the Supermarine Spitfire, a fighter airplane that played a decisive role in Britain's air defence in World War II. The British affection for the Spitfire is partly for its role in our history, and partly for its elegant design. Like thousands of other boys of the 1950s (and no doubt a few girls, but this was the 1950s), I made up model aircraft from plastic construction kits. I think my first was the even more beautiful Hawker Hunter. The Spitfire was perhaps my second, and always my favourite.
A few days ago the BBC journalist Greig Watson wrote some engaging pieces on the Spitfire's anniversary, here and here. The second of these describes the Spitfire Fighter Fund, through which the public was invited to contribute to their cost. While he was preparing this piece, Greig wrote to me:
Clearly pilots were not sat around waiting for a cheque to arrive so they could purchase a new plane – so could it be argued the funds were just a publicity stunt which made no difference to the number of Spitfire in the air? Or were they in fact effective?
In his article Greig quotes me briefly – right at the bottom, if you struggle to find the place. Here's the full reply that I sent him.
From 1940 onwards, Britain had a command economy. The market economy was restricted to the sidelines: those foodstuffs that were unrationed, and the black market. For most things the government set targets and priorities, decided how money would be spent, and on what, and how much of nearly everything would be produced. That included Spitfires. Only after ensuring the supply of Spitfires did the government worry about how to pay for them. Quite right, too, that’s what you do in an existential struggle. That’s not to say they did not care how it was paid for. They did care. But still, it was a secondary care, one that came after working out how many ships and planes we should make.
From this perspective, Spitfire funds were like today’s “sponsor a panda” and “buy a metre of rainforest” appeals. In any immediate sense these make no difference to the number of pandas or the amount of rainforest. They do put money into the hands of campaigning organizations and charities. We trust them to make a difference, and we get some small satisfaction from the cloak of sponsorship.
What difference did Spitfire funds make? They did not make any difference to the number of Spitfires, because for most of the war Spitfires were a top government priority (along with ships and other planes). If you run out of money, it’s not the top priority that is at risk. It’s the bottom priority that is most likely to be neglected.
What would have happened without Spitfire funds? Two scenarios.
- Scenario 1: with less money coming in, the government might have economized on the bottom priority, which could have been, say, the rehousing of bomb victims. So more civilians would have been homeless and morale on the home front might have been that bit lower.
- Scenario 2: the government might have spent the money on the war anyway, by printing it, so more money would have been in circulation in the economy. Since most goods were rationed, the extra money might have found its way into the black market, raising prices for under-the-counter food. Because of this, some army battalion quartermaster would have been tempted to sell army rations on the black market, so more soldiers would have gone hungry and morale on the fighting front would have been that bit lower.
Thus, Spitfire funds did not pay for Spitfires, but they were still an essential part of the war effort. Without them the war would eventually have gone less well in one aspect or another. There would have been a cost.
According to Greig Watson, the total subscribed by the public was £13m. This would have covered only a small fraction of the Spitfires produced in wartime. (The total number of Spitfires produced up to 1948 was just over 20,000. Their average unit cost lay somewhere between the £13,000 of an early batch sold to Estonia in 1939 and the notional £5,000 set by the Spitfire funds appeal.) The rest was paid out of general taxation and government borrowing, both of which reached large fractions of national income.
November 02, 2015
In the spring of 2013, the British government was considering how the nation should remember the centenary of the Great War. At that time Jeremy Corbyn made some remarks on the subject, and in April the Communist Party uploaded them to Youtube. His words would no doubt have lingered in obscurity, were it not that in September this year the same Jeremy Corbyn was elected leader of Britain's Labour Party. This weekend his remarks of more than two years ago were brought under critical scrutiny. What attracted the ire of the Sunday columnists was the following words:
Keir Hardie ... was a great opponent of the first world war and next year the government is apparenlty proposing to spend shedloads of money commemorating the first world war. I'm not quite sure what there is to commemorate other than the mass slaughter of millions of young men and women, mainly men, on the western front and all the other places.
As an economic historian I was more interested in what came next:
And it was a war of the declining empires, and anyone who's read or even dipped into Hobson's great work of the early part of the twentieth century, written post-world war, that presaged the whole first world war as a war between monopolies fighting it out for markets and that's essentially what the first world war was.
My notes. "The declining empires": I'm not sure what that can mean, for in 1914 the major empires were surely at their highest moment. "Hobson's great work of the early part of the twentieth century." This is most likely a reference to J. A. Hobson work on "imperialism." Hobson (1902) argued that the capitalist industrial economies of the time suffered from underconsumption, because the big companies were raising productivity while pushing down wages. As a result, there was not enough purchasing power to buy all the output, which was accumulating as surplus capital. Faced with too much capital, Hobson argued, the capitalists solved the problem by exporting it to poorer countries. Having done that, they needed to protect their investments by bringing the poorer countries under colonial administration. So, this was a a theory of imperialism. Being published in 1902, Hobson's book was not "written post-world war" because the world war was yet to come. And it did not presage the coming war "as a war between monopolies fighting it out for markets"; that idea came along later, when the war was already in progress, and belongs to Lenin (1916). While Hobson did not predict the Great War, he did draw a clear link from imperialism to nationalism, and he opposed the war when it came.
How does the Hobson-Lenin view of the Great War stand up today? Not well. Here are two problems:
Problem #1. The surplus of capital does not explain imperialism. In the words of Gareth Austin (2014: 309):
the major outflows of capital from the leading imperial powers, Britain and France, went not to their new colonies but to countries which were either the more autonomous of their existing colonies (such as Australia) or were former colonies (the United States), former colonies of another European country (as with Argentina), or had never been colonized (Russia). Decisively, several of the expansionist imperial powers of the period were themselves net importers of capital: the United States, Japan, Portugal, and Italy.
Problem #2. The protection of business interests abroad does not explain the outbreak of the Great War. Richard Hamilton and Holger Herwig (2004) reviewed the evidence, country by country. In every case, including specifically Austria-Hungary, France, Germany, and the United Kingdom, they found that the business constituency was excluded from the decisions that led to war. Had the business leaders been consulted, they would have opposed war. (This would also have been true in Russia, a case that Hamilton and Herwig do not consider.) They conclude (p. 247):
Economic leaders were not present in decision-making circles in July 1914. And, just as important, their urgent demands to avoid war were given no serious attention. It is an unexpected lesson because many intellectuals give much emphasis to the power of big business. The logic is easy: industrialists and bankers have immense resources; anxious and deferential politicians, supposedly, must respond to their demands. But the realities were quite different. At one point a German banker, Arthur von Gwinner, “had the audacity to point out Germany’s dire ﬁnancial straits” to Wilhelm II. The monarch’s reply: “That makes no difference to me.”
In remembering the Great War, we should be careful to remember it as it really was. War did not break out in 1914, as Jeremy Corbyn seems to think, because of a money-making war machine, or because commercial interests were manipulating politics behind the scenes.
The Great War broke out because secretive, unaccountable rulers in Vienna, Berlin, and St Petersburg decided on it (I wrote about this in more detail in Harrison 2014). They feared the consequences but decided on war regardless because they believed the national interest would be better served by risking it in aggression than by remaining at peace. They believed this based on a nationalist, militarist, and aristocratic view of the national interest, in which profit and commercial advantage played no role. They decided on war in July 1914, and not in any previous crisis, because in previous crises they had been divided. They came together in July 1914 because this was a moment when Anglo-French deterrence failed, and this reduced their fear of the consequences of aggression below some critical threshold.
Thus two deeper causes lay behind the Great War. One was the ability of autocratic rulers to plan aggressive war in secret, ignoring public opinion, or taking it into account only to manipulate it. The other was the failure of the democracies to deter the aggressors. These lessons are still of value today. But to value such lessons you first need a desire to learn about what actually happened. And a political leader who bases his entire understanding of the Great War on a book published in 1902 seems to have missed that desire to learn.
- Austin, Gareth. 2014. "Capitalism and the Colonies." In The Cambridge History of Capitalism, vol. 2: 301-347. Edited by Larry Neal and Jeffrey G. Williamson. Cambridge: Cambridge University Press.
- Hamilton, Richard F., and Holger H. Herwig. 2004. "On the Origins of the Catastrophe." In Decisions for war, 1914–1917, pp 225–252. Edited by Hamilton and Herwig. Cambridge: Cambridge University Press.
- Harrison, Mark. 2014. "Myths of the Great War." CAGE Working Paper no. 188. University of Warwick, Department of Economics. Available at http://warwick.ac.uk/cage/manage/publications/188-2014_harrison.pdf
- Hobson, J. A. 1902. Imperialism: A Study. New York. Available online.
- Lenin, V. I. 1916. Imperialism, the Highest Stage of Capitalism. Petrograd. Available online.
May 14, 2015
Writing about web page http://www.bbc.co.uk/news/uk-27963675
Recently the Warwick PPE programme (that's Philosophy, Politics, and Economics) put on an event for school students. The idea was to show what each of the three disciplines--Philosophy, Politics, and Economics--can contribute on a topic of current importance. It turned out that philosophy is good at trying to understand the concept of terrorism, and the study of politics helps us to understand how western politics have influenced our concepts of terrorism. I decided to talk about why young people choose to become terrorists in terms of the economics of career choice. Here, roughly, is what I said.
Right now you are probably getting a lot of advice about career choices, so I am going to talk about terrorism as a career choice--the sort of choice that has been made recently by a number of young British people who have gone to Syria to join ISIS. First of all, what is a terrorist? Someone who kills or injures civilians with a particular purpose: to create a violent spectacle, and so to spread terror beyond the immediate victims. The motivation is political: to support political demands--maybe. I say "maybe" because for reasons that will become clear I am less certain on this point.
Where is the economic aspect of terrorism? Terrorists seem to belong to the world of politics. What do they have to do with economics? For today, the point is that the decision to become a terrorist is an occupational choice. To become a terrorist is costly. There are also benefits – but what are they? The choice can be understood using concepts from economics such as cost, benefits, and rational decision making.
Is terrorism a choice (1)?
A first step is to establish that becoming a terrorist is indeed a choice. Do people choose terrorism or are they driven into it by despair (or by voices in their heads)? My answer is that they choose.
How to we know this? From two things. One is that far more people support terrorism than take part in it. Across societies and over time support for terrorism is rarely a majority point of view, but around the world supporters do come in significant numbers that amount to sizeable minorities:
This table (from PewResearchCenter 2013) shows that support among Muslims for suicide terrorism is highly variable--widespread in some places, quite infrequent in others. (In most countries it shows a tendency to dwindle over the period shown.) But it is worth bearing in mind that the first three countries shown in the table are among the most populous on earth: Pakistan, Indonesia, and Nigeria together account for more than 600 million people. If you apply the percentages for 2013 to the working-age populations (aged 15 to 64) of the 11 countries in the table, you come up with at least 50 million sympathizers. So, support for terrorism is shown by sizeable minorities.
In contrast, those who choose a career in terrorism are tiny minorities. In 2013 there were perhaps as many as 250,000 international terrorists worldwide. I base that on a rough count of members of groups aiming to attack the United States (from U.S. State Department 2014). This is a tiny number. Among 4.3 billion people of working age in the world it is one 1 in 18,000. In the Middle East and North Africa, active terrorists number perhaps 150,000. Relative to the MENA working-age population that is one in 1,500. In short, many people sympathize with terrorists, but hardly anyone becomes one.
Is terrorism a choice (2)?
If fewer people choose to become terrorists than express support for it, the next thing to ask is whether the participants have truly had the opportunity to choose. Do they have the competence to choose? Do they have alternatives from which to choose? To both questions the answer is: Yes. These people are not driven by crazy inner urges they cannot control; study after study has shown that most are psychologically normal (starting from Merari 1998). Moreover these people do not lack alternatives. In every society the people with fewest choices are women, the elderly, the poor, and the uneducated. But the typical terrorist is male, young, relatively affluent, and relatively educated (e.g. Krueger and Maleckova 2003). These are people with more choices, not fewer. They are not compelled by their circumstances.
Is terrorism a rational choice?
So, terrorism is a career choice. Is it a rational choice? Economic thinking revolves around the idea of people as rational actors. A rational actor isn’t a good or bad person, just a person whose behaviour follows a consistent logic. A rational actor should compare expected marginal private benefits with marginal private opportunity costs. The word "marginal" emphasizes that each person should ask: What difference will my choice make? The word "private" means: the difference to me. Then, the rational person will choose the option that yields the largest net gain to him or her. The gain does not have to be monetary; it will come in any form that the person concerned values.
Choosing terrorism: marginal costs?
What if the option to be considered is “terrorist”? The young person can make a list of marginal costs and benefits, just like a list of "for" and "against." The marginal costs associated with becoming a terrorist are many and large. You have to make the effort to research the groups that are willing to recruit you and work out the differences among them in order to seek to join one of them (in economics that is called a matching problem: there has to be the right match between the group and you). This effort is a cost. You have to learn occupational skills such as violence and concealment. Learning is costly too. You have to make efforts to adopt and live a new social identity, becoming a warrior or martyr.
Any career choice is likely to present analogous costs of matching, training, and developing a new professional identity. The costs of choosing terrorism that would not arise with other choices are that you have to abandon your home, your family, and a peaceful way of life in order to risk death. And, if you survive, and decide that you made a mistake, there may be no going back. These are all things that go under "against."
Choosing terrorism: marginal benefits?
So the costs are many and large. What goes under "for"? What are the benefits that terrorists seek from their career choice?
One benefit you might think of (assuming these are indeed benefits to you) would be to achieve the declared goals of the group: usually, to unify the homeland, or to drive out foreigners, or to establish religious order. But the economist rules this one out on several grounds, each of which should be decisive on its own. First, on average, attacking civilians does not achieve declared goals (Jones and Libicki 2008; Abrahms 2011). In other words, terrorism is counterproductive.
This is not all. Even if terrorism were productive, one person more or less would make no difference, so the marginal gain from your personal participation is inevitably less than the private marginal cost that you will bear. Finally, terrorists often turn out to be quite uninformed about their own group's declared goals (and not only that; they are usually also fairly clueless about world politics and religion). For all these reasons we cannot put much weight on claims, often made many years later, that "I joined the IRA to bring about a united Ireland" (for example).
Note. A listener reminded me: Maybe people join in terrorism out of anger at Western actions. I understand, and we'll come to the beliefs that are required for participation in terrorism. But all the evidence (Abrahms 2011 again) suggests that international terrorism against civilians moves public opinion to the right and increases the likelihood of Western cross-border intervention against terrorists. In other words, again, it's counterproductive. Even Osama bin Laden could see that. When you see people persisting in very costly courses of action and the actions are known to be counter-productive, you have to ask: Why?
But … But what other benefits might there be? A clue lies in the fact that, while psychologically normal, terrorists are often excluded or isolated (e.g. Pedahzur 2005): they are young unmarried men, or young women who were prematurely widowed, or poorly assimilated migrants. Correspondingly, Max Abrahms has argued, what terrorists value above all is the comradeship and supportive ties they find in the organization they joined.
Here are some examples (from Abrahms 2008). Among 516 Guantanamo Bay detainees, knowing an al-Qaida member was a significantly better predictor than belief in jihad. Among 1,100 detained members of the Kurdish PKK, respondents were ten times more likely to say they were attracted to join “because their friends were members” than by political ideology. There are related findings from Europe based on study of the IRA, ETA, RAF, and Red Brigades.
Moreover, terrorist groups are well placed to supply intense comradeship. They provide shared dangers and extreme experiences that cannot be shared with outsiders.
So terrorism is like ... ?
This suggests a more general model for terrorism. What benefits do young people seek from work? To some, salary and prospects matter most. For others, most important is the kind of work. Suppose you want excitement and risk; you don't want work that is routine or desk-bound. Suppose you want teamwork and comradeship, not isolation. Suppose you want the opportunity for acknowledgement of your personal role; you don't want to disappear into an anonymous mass.
If you are that sort of person, you might consider competitive team sports, or becoming an outdoor adventure leader, or joining the emergency services, for example the fire brigades. Or ... you might become a terrorist.
Radicalization and beliefs
So far I've said nothing about beliefs. Yet in choosing terrorism beliefs do play a role. For only a tiny minority chooses terrorism. Most young people do not want to kill others in order to share excitement and form bonds of affection with co-workers. What can overcome this natural reluctance? Here is where beliefs matter.
As an economist, I note that beliefs shape rational choice. You cannot make a rational career choice without beliefs. Here is a minimum set of beliefs that seem to matter for young people who choose terrorism. There is the choice of identity: the very concept of self-interest is predicated on the existence of a "self" that answers the question: Who am I? (as argued by Harrison 2006). For those that choose terrorism the answer is apparently: —I am a warrior (or: —I am a martyr). Sometimes the choice of identity is fuelled by anger. But this choice alone is not sufficient; you can be a soldier or a martyr without directing your rage against innocent people.
There is also a matter of values: Specifically, when I choose how to behave in society, how much weight should I give the interests of other people, compared to my own self-interest? Here the critical answer is: —People who don’t share my beliefs have no right to be considered and don’t deserve to live. This, and only this, makes it OK for the soldier to kill them.
When some young people look for others with whom they can form social bonds, these beliefs can tip the rational choice towards terrorist groups. So to adopt these two beliefs, the identity of the soldier and the exclusion of others from the right to exist based on different beliefs or culture, must be decisive in what some authorities now call "radicalization."
- Abrahms, Max. 2008. What Terrorists Really Want: Terrorist Motives and Counterterrorism Strategy. International Security, Vol. 32, No. 4 (Spring 2008), pp. 78–105.
- Abrahms, Max. 2011. Does Terrorism Really Work? Evolution in the Conventional Wisdom since 9/11. Defence and Peace Economics, 22:6, 583-594.
- Harrison, Mark. 2006. An Economist Looks at Suicide Terrorism. World Economics 7:3, pp. 1-15.
- Jones, Seth G., and Martin C. Libicki. 2008. How Terrorist Groups End: Lessons for Countering Al Qa’ida. RAND Corporation: Santa Monica.
- Krueger, Alan B., and Jitka Malečková. 2003. "Education, Poverty and Terrorism: Is There a Causal Connection?" Journal of Economic Perspectives, 17(4): 119-144.
- Merari, Ariel. 1998. “The Readiness to Kill and Die: Suicidal Terrorism in the Middle East.” In Origins of Terrorism: Psychologies, Ideologies, Theologies, States of Mind, 192-207. Edited by Walter Reich. Second edition, Washington, DC: Woodrow Wilson Center and Johns Hopkins University Press.
- Pedahzur, Ami. 2005. Suicide Terrorism. Cambridge: Polity.
- PewResearchCenter. 2013. Muslim Publics Share Concerns About Extremist Groups. Pew Research Center Global Attitudes Project. Washington, D.C.
- U.S. State Department. 2014. Country Reports on Terrorism, 2013. Bureau of Counterterrorism.
February 27, 2015
Writing about web page http://www.ft.com/cms/s/0/92c75076-b606-11e4-a577-00144feab7de.html
On the evening of Tuesday 24 February I joined a panel discussion on "Russia Now," organized by Warwick Arts Centre's Mead Gallery. My fellow panellists were Peter Ferdinand (Politics and International Studies) and Christoph Mick and Christopher Read (History). The discussion was chaired by Mead Gallery director Sarah Shalgosky, whom I thank for the invitation. Here's what I said, roughly speaking.
Sanctions in history
The Russian economy is subject to Western sanctions. These sanctions are of two kinds. There are "smart" sanctions that aim to limit the international travel and transactions of named persons and corporations. There are also broader sanctions that aim to limit the international trade and borrowing of Russia’s financial, energy, and defence sectors.
In history, advocates of economic sanctions against an adversary have usually claimed two advantages for them. One claimed advantage is speed of action: It has often been predicted that economic sanctions will quickly "starve out" an adversary (metaphorically or literally). The other claimed advantage is cost: By attacking the adversary’s economy we can achieve our goals without the heavy casualties to our own side that would result from a military confrontation.
Are these claims justified by experience? Based on the experience of modern warfare and economic sanctions from the Napoleonic Wars through the U.S. Civil War and the two World Wars of the twentieth century to the Cold War, Rhodesia, South Africa, and Cuba, the answer has typically been: "No."
How do sanctions work?
The effects of sanctions on national power have generally been slower and smaller than expected. First, they attack national power indirectly, through the economy, and the economy provides a very complicated and uncertain transmission mechanism. If a country is refused access to something for which it appears to have a vital need, such as oil or food, it generally turns out that there are plenty of alternatives and ways around; nothing is as essential as it seems at first sight. Secondly, external measures will be met by counter-measures. In a country that is blockaded or sanctioned, soldiers will look for ways to use military strength to break ouit and so offset economic weakness. Suffering hardship and feeling unfairly victimized, civilians will become more willing to tighten their belts and fight on.
It would be wrong to go to the other extreme and conclude that sanctions achieve nothing. What have sanctions actually achieved in historical experience? Sanctions do raise the cost of producing national power. They do so gradually, so that immediate effects may not be perceptible. Nonetheless they impose costs on the adversary, and eventually these costs will tell. It is hard to show, however, that sanctions have ever had a decisive effect on their own; at best, they have been shown to have their effect in combination with other factors, such as military force. In those cases, sanctions were a complement to military power, not a substitute or alternative.
Russia: How are Western sanctions supposed to work?
The purpose of Western sanctions is clear: It is to change President Putin’s behaviour, making him more cautious and more accommodating to the demands of Western powers.
What is the mechanism that is supposed to bring this about? Western observers generally see that President Putin's political base is built on the use of energy profits to buy political support. Russia's energy sector, much of it state-owned, has provided major revenues to the Russian government budget. The Russian government uses these revenues to buy support, partly by paying off key persons, partly by subsidizing employment in Russia's inefficient, uncompetitive domestic industries. The result is that many people feel obligated to Putin's regime because without it they would lose their privilege or position in society.
In that context, sanctions have been designed to target those industries and persons that supply resources to the government and those that depend on the government for financial support. By doing so, they aim to deprive President Putin of the resources he needs to retain loyalty.
How have sanctions actually worked? In Russia, real output is falling and inflation is rising. It is important to bear in mind, however, that in recent months sanctions have been only one of three external sources of pressure on the Russian economy.
Three pressures on Russia's economy
Three factors have been at work: sanctions, confidence in the ruble, and energy prices. These factors should be thought of as semi-independent: there are obvious connections among them, but in each case the agency is different.
- Sanctions. Before the crisis over Crimea, Russian corporations had approximately $650 billion of short-term, low-interest debt denominated in foreign currency. International lenders have reluctant to lend to Russia long term because Russia's lack of protection of property rights leaves them uncertain about the security of their loans. Because this debt is short term, it requires regular refinancing. Russian firms, including organizations and sectors that have not been directly targeted by sanctions, are now unable to borrow abroad. Struggling to cover their credit needs, they have turned to the Russian government to make emergency loans or bail them out.
- Confidence in the ruble. As lenders have lost confidence in Russia, capital flight has increased. The ruble has lost half its external value in the last year, and this has doubled the real burden of private foreign currency debts of Russian corporations and also wealthy families with housing debts in euros or dollars. This has intensified private sector pressure on the government for bail-outs.
- Oil prices. The dollar price of oil has halved since this time last year, slashing Russia's energy revenues and plunging the state budget into deficit.
These three pressures all point in the same direction and complement each other. Their cumulative effect is to be seen in the deteriorating outlook for the economy as a whole and for public finance. The government has lost important revenues while spending pressures have multiplied. Arguably, therefore, sanctions have "worked," because they have squeezed the capacity of the Russian administration to satisfy the expectations of its supporters.
A learning opportunity
From a social-science perspective, we should think of this moment as a learning opportunity: How the Russian administration responds in these circumstances should reveal its type.
To benchmark the Russian response today, consider how two Soviet leaders responded to closely similar situations in the past.
- One benchmark is offered by Mikhail Gorbachev in 1985. By the mid-1980s the global energy market had reached a situation not far removed from that of today. A decade of high oil prices was being brought to an end by new non-OPEC suppliers. This put the Soviet economy under a severe squeeze. Faced with this squeeze, Mikhail Gorbachev chose policies of demilitarization and relaxation abroad and at home.
- Another benchmark is offered by Joseph Stalin in 1930. If anything, the predicament of the Soviet economy in 1930 was even closer to its situation today. Soviet exports were faced with collapsing prices as the world economy entered the Great Depression. The Soviet economy also had considerable short-term debts that suddenly could not be rolled over because international lending dried up. In response, Stalin demanded "the first five year plan in four years!" This involved accelerated mobilization and sacrifice, and ended in the famine deaths of millions of his own citizens (many of them in Ukraine).
These examples illustrate the alternative responses of a ruler under external pressure. When it becomes harder to buy loyalty the ruler can respond like Gorbachev, by moderating demands on supporters; or like Stalin, by cracking the whip over them. In 2015, faced with economic sanctions, falling oil prices, and a falling ruble, which choice has President Putin made? His words and deeds both deserve attention.
- Before sanctions, President Putin's words were of a Russia encircled by enemies and penetrated by foreign agents. His policies involved accelerated rearmament and frozen conflicts with Moldova and Georgia, capped by the annexation of Crimea.
- How did things change after Western sanctions were imposed? Putin's rhetoric shifted up a notch with talk of national traitors and a "fifth column" of enemies within. His economists began to discuss ways to shift from a market economy to a "mobilization economy." His foreign policy spokesmen incited tensions in the Baltic region and made nuclear threats against the West. The Russian military embarked on continuous large-scale exercises and increased the frequency of testing NATO defences in the Baltic and the North Sea. Russian forces and heavy weapons were infiltrated into Eastern Ukraine.
The lesson for social science is that under external economic pressure President Putin has revealed his type: He is a power-building authoritarian ruler.
It isn't working
From a policy perspective, the effect of sanctions on the Russian economy is only the tactical outcome of sanctions. Their strategic purpose is to change Russia's behaviour for the better, and that is the only true test of whether they have worked. The lesson for policy is that, despite sanctions, President Putin remains prepared to take risks with peace and to commit aggression. Sanctions are not changing his behaviour.
Now we know this, what should we conclude? A clear implication is that things could get worse. Some worry (or threaten) that, if the pressure on him grows, President Putin might became more confrontational and take additional risks rather than back down and look for compromise. It has also been suggested that, if unseated, Putin might be replaced by someone worse -- a role for which there are several candidates.
Why isn't it working?
This leads to me to a sombre conclusion. It's not a conclusion that I much like; I have thought about it a lot and I wish I could see another way out of the situation. To sum it up, I'll quote in full a letter that I wrote to the Financial Times recently in response to an article by Gideon Rachman ("Russian hearts, minds, and refrigerators," February 16). My letter appeared on 19 February:
Gideon Rachman ... writes : “Rather than engage the Putin government where it is relatively strong, on the battlefield, it makes more sense to hit Russia at its weak point: the economy.” But this neglects the incentives that arise from the time factor.
If the West plays to its strength, which is economic, President Putin will play to Russia’s strength, which is military. But the action of Western financial and trade measures is slow and cannot be accelerated. Meanwhile, Russia can accelerate its military action at will.
In playing the sanctions card while neglecting defence, the West is encouraging President Putin to raise the tempo on the battlefield and change realities quickly and irrevocably through warfare, before the Russian economy can be weakened further.
For the West, therefore, economic sanctions are not an alternative to a military confrontation that is already under way. To avoid disaster, the West must support financial and trade measures with a credible defence.
February 18, 2015
Writing about web page http://rbctv.rbc.ru/polls/list
On 27 January I was asked to join a panel on Russia's Future within the University of Warwick One World Week. (The other panel members were Richard Connolly, co-director of the University of Birmingham Centre for Russian, European, and Eurasian Studies, and the journalist Oliver Bullough.) I decided to talk about how Russians are looking to the past in order to understand their uncertain future. Here, roughly, is what I said:
Russia has many possible futures; all of them are improbable. The economy must do better, stay the same, or do worse. Relations with the West must improve, remain as they are, or deteriorate further. Adding them up, there are nine possible combinations. The probability of any particular combination is small, so each is improbable. But one of them must happen because, taken together, the sum of the probabilities is one. One of them must happen, but we have no idea which one.
Faced with an uncertain future, we often look to the past for guidance and reassurance. What was the outcome when we were previously in a situation that felt the same? At New Year, many Russians were looking to the past. I found this out when I stumbled on the website of RBC-TV, a Russian business television channel. Every day the RBC website polls its fans on a different multiple-choice question. On 30 December, the question of the day, with answers (and votes in parentheses), was:
What should Father Frost bring for Russia?
- End of sanctions (6%)
- End of the war in Ukraine (27%)
- A stable ruble (7%)
- Return of the Soviet Union (59%)
It's disconcerting to be reminded of the strength of nostalgia among Russians for the time when their country was a global superpower. The Soviet Union united all the Russias -- if anyone's not sure what that means, that's Great Russia, Little Russia and New Russia (Ukraine), and White Russia (Belarus) -- with the countries of the Baltic, Transcaucasia, and Central Asia. The Soviet Union stood for strong centralized rule, with a powerful secret police and thermonuclear weapons. The nostalgia is shared by President Putin, who said (on 25 April 2005): “The collapse of the USSR was the greatest geopolitical disaster of the [twentieth] century.”
Here's a question that RBC asked its supporters on 25 December:
Can direct controls and a price freeze save Russia’s economy?
- Yes, the free market is not up to the job (55%)
- No, that would cause insecurity and panic (40%)
- No need – no crisis (5%)
Again, the strength of support for the backward-looking answer is disconcerting. I tried to think of the last time the Russian economy was in a squeeze like today's. The last time the oil price price came down like this was the mid-1980s when North Sea and Alaskan oil broke the power of the OPEC cartel for a few years (that's the analysis of Anatole Kaletsky). The disappearance of oil rents probably contributed to the collapse of the Soviet economy.
But a closer parallel to today is 1930, when two things happened at once. The global market for Soviet exports shrank in the Great Depression. And international lending dried up, meaning that the Soviet economy could not roll over its debts. The Soviet import capacity collapsed almost overnight. Stalin responded by forcing the pace of import substitution through rapid industrialization. He demanded "The five plan in four years!" The result was a crisis of excessive mobilization that claimed millions of lives in the famine of 1932 and 1933.
Prominent in calling for an economic breakthrough today is President Putin, who responded to Western sanctions on 18 September 2014: “In the next 18 to 24 months we need to make a real breakthrough in making the Russian real sector more competitive, something that in the past would have taken us years.” Government-friendly Russian economists are talking about the need to go from a market economy back to a mobilization economy. In case the foreigners aren't getting the message, first deputy prime minister Shuvalov told those assembled in Davos on 23 January: “We will survive any hardship in the country – eat less food, use less electricity.”
A third question that RBC asked its viewers was on 19 December:
What matters most for the country right now?
- The foreign exchange rate (33%)
- Who is a true patriot and who is fifth column (56%)
- “Vyatskii kvas” (11%)
(The English equivalent of "Vyatskii kvas" would probably be Devon cider. For the reasons why it was being talked up as a solution to Russia's problems last December, click here.)
Here the strength of support for the backward looking answer is shocking. What is the "fifth column" and how does it resonate in Russian history? In 1937, Stalin saw Moscow surrounded and penetrated by enemies. This coincided with the siege of Madrid in Spain’s Civil War. In 1936 the nationalist General Mola was asked which of his four columns would take Madrid. He replied, famously: “My fifth column” (of undercover nationalist agents already in the city). In Madrid the Republicans responded by executing 4,000 nationalist sympathisers. In the Soviet Union Stalin, who was also watching, ordered the execution of 700,000 “enemies of the people.”
In recent times, the spectre of a "fifth column" was first reawakened by President Putin on 18 March 2014, when he remarked: "Western politicians are already threatening us with not just sanctions but also the prospect of increasingly serious problems on the domestic front. I would like to know what it is they have in mind exactly: action by a fifth column, this disparate bunch of ‘national traitors’, or are they hoping to put us in a worsening social and economic situation so as to provoke public discontent?"
Putin took up this theme again on 18 December 2014: "The line that separates opposition activists from the fifth column is hard to see from the outside. What’s the difference? Opposition activists may be very harsh in their criticism, but at the end of the day they are defending the interests of the motherland. And the fifth column is those who serve the interests of other countries, and who are only tools for others’ political goals."
Here you can see that Putin did affirm the possibility that opposition can be loyal. But is it possible for Russia to have a loyal opposition today? The only example of loyal opposition that Putin could bring himself to mention was the poet Lermontov -- who died in 1841.
These echoes of the Soviet past in Russian opinion today are disconcerting and even frightening. At the same time it is important to remember that, even while Russians look to the past, Russia today is absolutely not the Soviet Union. From today's vantage point it is nearly impossible to imagine how closed, stifling, claustrophobic, and isolated was everyday life even in late Soviet times. Russians in 2015 lead very different lives from Soviet citizens in 1985. They are richer, live longer, are able to visit, study, phone, and write abroad. Even today they are relatively free to search for and find information and discuss it among themselves. In all these ways, the transition from communism has not been a failure.
As Andrei Shleifer and Daniel Treisman (2014) wrote recently: "Putin’s authoritarian turn clearly makes Russia more dangerous. But it does not, thus far, make the country politically abnormal. In fact, on a plot of different states’ Polity [i.e. democracy] scores against their incomes, Russia still deviates only slightly from the overall pattern. For a country with Russia’s national income, the predicted Polity score [a measure of democracy] in 2013 was 76 on the 100-point scale. Russia’s actual score was 70, on a par with Sri Lanka and Venezuela."
To see Russia as just another middle income country helps us to identify Russia's underlying problem. In Russia, just like in Sri Lanka, Venezuela, and most countries outside “the West,” wealth and power are fused in a small, closed elite, and that is how it has always been. The fusion of wealth and power was and remains normal. Before the revolution Russia was governed by a landowning Tsar, aristocracy, and church. After the revolution Russia was governed by a communist elite that monopolized all productive property plus media, science, and education. Today Russia is governed by an ex-communist, ex-KGB elite that has once again gathered control of energy resources and the media. This fusion of wealth and power is neither new nor is it unusual among middle and low income countries.
In societies where wealth and power are fused, particular people are powerful because they control wealth and the same people are wealthy if and only if they are powerful. This is what gives politics in such societies its life-and-death immediacy. To lose power means to lose everything; when power change hands there is often violence. “All politics is real politics," write Douglas North, John Wallis, and Barry Weingast (2009); "people risk death when they make political mistakes.”
Several times in history, liberal reformers have tried to separate wealth and power in Russia and make space for public opinion. Here are some examples from the last 150 years:
- In 1864 a reform brought elected local governments – but within an absolute monarchy.
- Shaken by military defeats and popular insurrections, in 1906 the Russian monarchy introduced an elected parliament, although with few powers, and ndividual peasant landownership, although (as it turned out) with little time for implementation.
- In 1992 and 1995 Russia saw voucher privatization and "loans-for-shares," creating a class of corporate shareholders – but the outcome was crony capitalism, not free enterprise.
- In 2003, Mikhail Khodorkovskii tried to separate the governance of Yukos from the "power vertical," but he went to prison for it.
All these efforts have so far achieved only partial or temporary success. Russia has not yet found a solution to the problem of the fusion of wealth and power. Here, at last, is an aspect of Russia's future that is certain: If Russia is ever to find a solution to this problem, it will be there.
Note: I updated this column after publication to correct a date -- 2014, which appeared as 1914.
- North, Douglas, John Wallis, and Barry Weingast. 2009. Violence and Social Orders A Conceptual Framework for Interpreting Recorded Human History. Cambridge: Cambridge University Press.
- Shleifer, Andrei, and Daniel Triesman. 2014. "Normal Countries: The East 25 Years after Communism." Foreign Affairs, November-December.