All 26 entries tagged History

Which Dead Economist Must I Follow?

Writing about web page http://politicsatwarwick.net/2013/11/13/economics-and-the-crisis-which-dead-economist-must-i-follow/

^{I contributed recently to the Politics at Warwick blog, which I thank for its hospitality. My post elicited a comment to which I'd like to respond; my response is longer than my original post so I decided to include it here. First I'll put up my original post, dated 13 November 2013. Then I'll quote the comment and respond to it.}

How should the economics curriculum respond to the global financial crisis and ensuing recession? Community activists and students have become vocal in this discussion, as recently described by journalist Aditya Chakrabortty and Matthew Watson.

Events have prompted questions about economists’ understanding of financial markets; the same events have generated a deluge of new data. How should economists respond? Economic research has already responded; hundreds of new articles have analysed global imbalances, market efficiency, corporate behaviour, regulation and deregulation, policy rules, the politics and economics of past crises, and the relative fragility of economic and political institutions in history.

The core curriculum has been slower to change. Here are two reasons. The first is that we no longer teach from handwritten notes and a chalkboard; students and teachers demand comprehensive textbooks with instructor manuals, PowerPoint slides, and websites. These take years to develop (and revise). Although slow, change is already visible. Because change is slow, there is more to be done. Change will probably accelerate through initiatives like the CORE (Curriculum Open-access Resources in Economics) project.

A better reason for inertia in the curriculum is our foreknowledge that the full meaning of recent events will take decades to establish – although many people believe that they are already obvious. To illustrate, today we continue to make new findings about the last Great Depression, which began in 1929, although many who lived through the 1930s were so certain of the answers that they were willing to kill and die on that basis.

How should the core curriculum change? A common complaint is that economics is dominated by a single school of “neoliberalism” or “market fundamentalism.” There are calls for more diversity in economics; some students want more access, specifically, to Keynes and Marx.

It is simply untrue that mainstream textbooks reflect principles of market fundamentalism. I can’t think of a principles text that doesn’t follow the initial explanation of market equilibrium with an immediate, detailed discussion of the varied sources of market failure and the regulatory interventions that might follow.

While one may learn from both Keynes and Marx, what is to be gained from taking them outside their historical settings? A Keynesian model focuses on flows (of income and employment) while neglecting stocks (of capital and debt). Yet capital and debt are very important! Keynesian principles are linked to a model of household behaviour (the “marginal propensity to consume”) that half a century of applied research has comprehensively invalidated. A Marxian model simplifies the continuum of capital ownership into a two-class society; additionally it throws out efficiency and substitution, so distribution is all that remains. In the context of today’s mainstream, each of these is now a stagnant, oxygen-starved backwater.

The importance of competing traditions is much overrated. Those that wish to organize the curriculum around them seem to believe that the major decision each economist must make is “Which dead economist must I follow?” and after that her research findings and policy recommendations will follow. This may be a natural reaction to the fact that mainstream economists are often unenthusiastic about policies that gather widespread popular support, for example rigid immigration controls, employment protection, and double taxation of corporate income. It might be easier for the supporters to say “Oh, those economists are all neoliberals who are ignorant of Keynes and Marx” than work patiently back through the evidence that fails to confirm their biases.

“Economics ought to be a magpie discipline,” writes Chakrabortty. But Economics is a magpie discipline. Most non-specialists – and most journalists – think public and private finance are all we do. They are amazed when I describe the sheer diversity of research that is done just in my department (here and here). We suck up topics and data from any time and place; we don’t care what discipline claims to own them. Then they backtrack and say, “Of course, I didn’t mean to criticize you (or Warwick), I meant Friedman (or Chicago).” The fact is there are no clear intellectual boundaries among schools of thought; we should all mingle in the same fluid mainstream, which is broader, deeper, and faster than you think.

Concluding, Chakrabortty reports a lament for the good old days. Tony Lawson recalls the Cambridge economics faculty in the time of Nicky Kaldor and Joan Robinson: “There were big debates and students would study politics, the history of economic thought.” I remember; I was there too, as a student. The big debates were an exercise in identity politics, not economics. Hostile clashes between intolerant armed camps ended in a war of attrition that benefited no one, least of all students. There is a warning here: be careful what you wish for.

^{On the day that my post appeared, the anonymous blogger Unlearning Economics posted a comment which you can read in full here after scrolling to the bottom. Here's my response, with excerpts from the comment inset.}

Unlearning Economics quotes me and comments:

“A Keynesian model focuses on flows (of income and employment) while neglecting stocks (of capital and debt).” First, Keynes didn’t ignore capital or debt at all; that is simply false ... Keynes carried over some silly marginalist concepts like the efficiency of capital (clearly he mentioned capital once or twice).

My response: It is useful to distinguish between “things Keynes wrote about at various times” and “things that are core principles of the Keynesian model.” Of course we could argue about the division, but it seems to me capital and debt belong to the former, not the latter. The point is exemplified by Keynes’s model of consumer behaviour (more below), in which capital and debt play no role, although they were fundamental to other models available at the time. As for the marginal efficiency of capital, Keynes introduced this to rationalize his discussion of investment (a flow), not to understand the behaviour of the capital stock.

Again, Unlearning Economics quotes me and comments:

“Keynesian principles are linked to a model of household behaviour (the “marginal propensity to consume”) that half a century of applied research has comprehensively invalidated.” Which research would this be? “People don’t consume all of their income” is hardly a false statement.

My response: Yes, it's true that “people don’t consume all their income,” but that isn’t the issue. The issue is whether the main thing in consumption is a stable proportion between household consumption and current income at the margin, as Keynes believed. I should add that he not only advanced this idea in theory but also applied it in practice, for example in his writing about how to pay for World War II. Franco Modigliani, Milton Friedman, and others investigated this idea after the war and failed to find it in the data. They did identify a stable relationship between consumption and wealth, or lifetime (or "permanent") income, to which changes in current income make a small or negligible contribution. Because permanent income is uncertain, the future (including expectations of inflation and the real interest rate) are fundamental. Modern new-Keynesian models drop the marginal propensity to consume (and the multiplier) and focus exclusively on intertemporal substitution intended to smooth consumption over time. Which takes me on to our next point.

Unlearning Economics adds:

Second modern post-Keynesian is *all about* stock-flow consistent models ... people like Godley, Keen etc have updated [Keynes’s] work.

My response: Yes, certainly. Here another distinction arises, between Keynes and the post-Keynesians (or Marx and the post-Marxists). Naturally, there is development in the Marxian and Keynesian traditions. I could not dispute that, when a great economist produces an insight that turns out partial or incomplete or defective in some respect, it may be fixable. There is evolution. Evolution has produced neo-Keynesians and post-Keynesians (and Marxists). Evolution is better than stagnation. At some point it generates new species. Every year I help teach a “new-Keynesian” model of the macroeconomy to Warwick undergraduates, and every year I (and I hope they) learn something new. Yet the label “new-Keynesian,” like George Box’s economic models (more below), although useful, is also wrong. Would Keynes recognize it as his? It’s debatable. Does it matter? Only if you want to claim ownership over Keynes’s legacy.

Unlearning Economics quotes me and comments:

“A Marxian model simplifies the continuum of capital ownership into a two-class society; additionally it throws out efficiency and substitution, so distribution is all that remains.” Marx spent a lot of time talking about the difference between financial capital and industrial capital; Lenin updated his work in the context of ‘globalisation’ (imperialism). I also have no idea how you got that Marx “throws out efficiency and substitution”: he continually praised the efficiency of capitalism, and substituting capital for labour is the main driving force behind the tendency of the rate of profit to fall.

My response: I considered proposing that “efficiency of capitalism” belongs to “things Marx wrote about at various times” rather than “things that are core principles of the Marxian model.” On reflection, however, I am not convinced that Marx had a concept of efficiency at all, not in the sense that economists use it today (when you can’t reallocate resources without using more of some input or consuming less of some output). Marx did write a lot about the productiveness of capitalism, but I do not think he was thinking about total factor productivity.

Similarly, I do not think Marx had a concept of substitution in the sense of a choice between alternatives that varies with their relative price. Yes, it’s possible to rewrite Marx’s idea of the organic composition of capital (the constant/variable capital ratio) as capital/labour substitution, but that is not at all how Marx described it. His idea (Capital III, chapter 13) was that over time the ratio of constant and variable capital in value terms will tend to rise, but that seems to be driven by the accumulation of capital, not by relative factor prices. What is described is a process that piles capital up faster than labour; there is no process that allows substitution between them along a frontier. With labour the only source of surplus value, the rate of profit on capital must tend to fall.

Since Unlearning Economics charges me at the outset with “complete ignorance of Keynes and Marx,” I thought I had better come up with a test of Marx’s understanding of substitution. When I teach the subject of economic warfare I put a lot of emphasis on substitution. People who are not mainstream economists (military commanders, for example) often make biased predictions about the effectiveness of blockades and sanctions, and this is because they lack a concept of substitution. They expect a blockade to curtail production and so to cause the rapid downfall of the blockaded economy. In history, the curtailment of trade has generally brought about relative price changes that stimulate substitution and in turn this will make the blockade less effective than expected. So I looked to see how Marx wrote about blockades.

In 1861 the American Civil War led to a blockade of the Southern ports. The Confederacy responded with a cotton embargo; they thought this would trigger such a crisis in Britain’s textile industry that London would have no choice but to intervene on the Confederacy’s behalf. In the autumn of 1861 Marx wrote (in several places including here, for example) predicting that the stratagem would succeed: “England is to be driven to break through the blockade by force, to declare war on the Union, and thus to throw her sword on the scales in favour of the slave-owning states.”

It did not happen. In Britain the price of raw cotton shot up (which Marx could see), and this stimulated a search for alternative supplies, soon found in Egypt and India (which Marx entirely discounted). He had made the characteristic error of someone who does not get substitution.

Back to George Box, who wrote that “all models are wrong, but some are useful.” The models you can find in Keynes and Marx are no different; they are all wrong in the Boxian sense. Are they useful? Sometimes, yes. Marx’s idea of surplus extraction is useful for understanding societies with closed elites and extractive economies, although not modern capitalism. Keynes’s idea of animal spirits gives insight into modern capitalism as a nice corrective to the idea of rational expectations. But, why should I, or you, or anyone confine themselves to the limits of any “wrong” model by declaring that I am a Keynesian or a Marxist? When scholars do that, it surely tells us more about the politics of identity than about their scholarship.

In fact, I fear that the tone of this discussion may exemplify my final point: when social science is polarized into schools of thought, s/he who is not with me is against me and personal rancour is the likely product.

Mark Harrison : 15 Nov 2013 09:11 |  Tags: Economics History Keynes Marx |  Comments (2) |  Close comments |  Report a problem

History suggests intervention in Syria will be bad for business

Writing about web page http://theconversation.com/history-suggests-intervention-in-syria-will-be-bad-for-business-17611

Since last week’s gas attack on a Damascus suburb, the political class has been gripped by the idea that “something must be done.” Meanwhile Wall Street, already declining through early August, fell further as this week began. At the same time oil prices have ticked up sharply, not because Syria is a significant oil producer, but in response to fears for Middle Eastern supplies generally.

A military attack on Syria would clearly affect stock values. War diverts trade: some businesses lose while others gain. Is war good for business in the aggregate? Not likely. When an economy is depressed, and the fighting is at a comfortable distance, additional military spending might give a short-run stimulus to business for everyone. In the long run, however, war is a wealth-destroying activity. Because stock values reflect long-run profit expectations, the chances of a positive aggregate effect from hostilities are vanishingly improbable.

It is a somewhat different question whether the launching of an attack will move stock values on the day. Cruise missiles rarely come from a blue sky. Those for whom war has clear implications will usually have looked into the future and hedged their bets.

On the day the fighting starts, it is true, war changes from a probability to a certainty. But if the probability was already seen as close to 100%, the impact on asset values will inevitably be small. Only a true surprise would move them by much.

Economic historians first became interested in this topic in connection with World War I, the outbreak of which was a surprise to many. Niall Ferguson (in the Economic History Review 59:1 (2006)) and others (Lawrence, Dean, and Robert in the Economic History Review 45:3 (1992) have documented that as the war began European bond prices fell and unemployment rose in London, Paris, and Berlin. The panic on Wall Street was so great that the New York Stock Exchange was closed for the rest of the year.

To update the record across the last 100 years, the chart below shows closing values of the Dow Jones Industrial Average in New York for the ten working days before and after eight war onsets (the value on the day itself is omitted).

Source: Mark Harrison, "Capitalism at War," forthcoming in The Cambridge History of Capitalism, edited by Larry Neal and Jeff Williamson for Cambridge University Press. [Thanks to Christopher Renner for drawing my attention to a misprint and a small error in the first version of this chart.]

The days shown are:

• September 11, 2001: Al-Qaeda attacks American cities
• August 2, 1990: Iraq invades Kuwait
• August 7, 1964: Gulf of Tonkin Resolution
• June 25, 1950: North Korea invades South Korea
• December 7, 1941: Japan attacks Pearl Harbor
• September 1, 1939: Germany invades Poland
• March 1, 1917: The Zimmermann telegram published
• July 28, 1914: Russia mobilises against Germany

Only two of these events saw stock prices climb, and then only slightly. In five cases they fell, and in two the stock market was closed (for more than four months after the outbreak of World War I in Europe, and for four days after 9/11).

Notably, although stock prices rose a little after Hitler’s attack on Poland in 1939, they fell thereafter. When Pearl Harbor arrived, they remained below the level recorded two years earlier. The median change in stock prices over the eight crises was a 5.3% decline.

Contrary to commonly held opinion, war has also been bad news generally for the very rich. Tony Atkinson, Thomas Piketty, and Emmanuel Saez have collected historical data on top incomes in many countries across the twentieth century. These show sharp wartime declines in the personal income shares of the very rich in every belligerent country for which wartime data are available.

This does not rule out the idea that a few corporations gain business, and a few people become richer as a result of conflict. It just tells us that the average effect goes the other way. Besides, war is always first and foremost a political act. If Western bombs fall on Damascus in the next few days, it will be because someone decided it made good politics, not good business.

Mark Harrison does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published at The Conversation. Read the original article.

Mark Harrison : 29 Aug 2013 09:46 |  Tags: Economics History Politics Syria |  Comments (0) |  Close comments |  Report a problem

Unlearning the History of Communism

Writing about web page ttp://www.pieria.co.uk/articles/men_make_their_own_history_but_they_do_not_make_it_as_they_please

On the Pieria magazine website there has been an exchange of views on capitalism and socialism. I guess it is my fault; on 28 June I contributed a summary of some remarks on the subject. I concluded:

Liberal capitalism isn’t perfect, but it has done far more for human welfare than communism. It has been the solution more often than the problem. Last time capitalism experienced some difficulties, many countries went off on a search for alternatives. That search for alternatives led nowhere. It wasn’t just unproductive. It was a terrible mistake that cost many tens of millions of lives. Lots of people have forgotten this history. Now is a good time to remember it.

On 31 July, the blogger UnlearningEconomics responded:

In my opinion, this view rests on a highly selective interpretation of events. It requires that we gloss over two major historical points: first, the historical circumstances of existing communism; second, the history of capitalist countries. It fails to acknowledge the fact that existing socialism occurred primarily in undeveloped countries, which we would naturally expect to exhibit lower standards of living than developed ones. It ignores the deliberate campaign of destruction and sabotage toward the socialist states by the capitalist states, a process comprehensively documented by US foreign policy critic William Blum (Blum, 2003). It also requires that we define past and present abuses of capitalist states as somehow 'outside' capitalism, in order to place ourselves above the (real or imagined) abuses of the communists.

I do not hope to defend anyone's atrocities, though I am happy to refute some of the absurd exaggerations that sometimes pervade these debates. In any case, my main aim is to show two things: first, the abuses of existing socialist states are better explained by their political circumstances than their innate evils of the ideology; second, capitalist countries have a similarly abhorrent record, one which is not so easily explained by political necessities. My rendition will definitely annoy capitalists and anti-communists by being too sympathetic toward communism, which is a dirty word for many. It will also potentially annoy communists and socialists by not being sympathetic enough and repeating some of the more simplistic mainstream narratives. However, the important thing is that we examine the history of both systems in context, rather than lazily parading the kill count of the other side to try and shut down debate.

UnlearningEconomics (below I'll call him or her "UE") goes on to present "brief" (but, for a blog, quite lengthy) histories of both communism and capitalism. The general story is that if communism has had a bloody history it is mainly because communist revolutions occurred under unfavourable circumstances and had to struggle against the encirclement and aggression of the surrounding capitalist states; as for capitalism, it has its own bloody history, which is too often ignored.

What is there here that we can agree on? Perhaps we might agree that twentieth century warfare was terrible enough that it could damage social norms and other institutions of a relatively poor country like Russia or China; in such conditions organized minorities with unscrupulous leaders could seize power and use it to do terrible things. The efforts of other countries to intervene and prevent this, then as now, were largely fruitless or even counterproductive; perhaps they should not have tried, although politicians are not generally selected for lack of ambition and public opinion too often demands that something must be done.

UE goes beyond this to suggest that somehow history has been unfair to those same minorities and psychopathic leaders by allowing them to seize power only under terribly adverse circumstances. We owe it to them (the argument seems to go) to compensate them for their disadvantage; we should allow them at least a few decades of unchallenged power, so that they have a fair chance to show what they can achieve. But this seems completely unhinged.

In bringing up my children, I tried to teach them that people show their inner qualities when things go badly. It is easy to look good when things go well. Only good people will still be good when things go badly; adversity reveals character. I believe this rule can also be applied to politics. It is when things go badly that we see political leaders and their programmes and ideals put to the test.

Can systems be blamed for atrocities of whatever kind? It is not systems that take food from the mouths of the hungry or put bullets into the back of anyone’s head. People do this. But the system matters, nonetheless. What the system does is to leave more or less scope for the concentration of power in the hands of people who are inclined to exploit it without restraint. Liberal capitalism at least allows the separation of economic power from politics and decentralizes decisions to firms and households in markets. This is because, in the words of North, Wallis, and Weingast (2011), it is an “open-access order.” Communism is a “closed-access” order that restricts who may exercise political power and concentrates control of the economy in the hands of that privileged elite. Given that, ask which of these systems is more likely to permit the abuse of power and allow abuses to be hidden from the public gaze?

When general outlooks clash, it is not always enough to stay with generalities. Sometimes we have to get down with the particular facts. History is full of good stories, and UE tells some of them well. The problem is that not all good stories are true, but this becomes evident only when they are confronted with the detail. So, I will confront some of UE's history with the detail. I will not cover everything; I will focus for the most part on the "brief history" of communism, where I think I have more to offer.

• UE says: Unfavourable views of communism ignore “the fact that existing socialism occurred primarily in undeveloped countries, which we would naturally expect to exhibit lower standards of living than developed ones.”

This is seriously incomplete. Existing socialism occurred in relatively few undeveloped countries, and generally only in those weakened by war (Russia, China, Korea, and Indochina). Central Europe would scarcely have counted as undeveloped; there the precondition was war followed by military occupation. Cuba may be the only example of a country that had a communist revolution without a foreign war. In 1945 in several places the boundary of “existing socialism” was laid down in the middle of a region that was previously economically and ethnolinguistically integrated. As well as showing that warfare counted for more than lack of development, these examples also provide natural experiments for the long run consequences of system change. Think of Estonia versus Finland, East versus West Germany, and North versus South Korea. For discussion see Harrison (2013).

• UE says: Unfavourable views of communism also ignore “the deliberate campaign of destruction and sabotage toward the socialist states by the capitalist states” (citing William Blum).

Again, seriously incomplete. The UE view of postwar history rests on selection, overstatement of the capacity of outsiders to intervene in Russia and Eastern Europe, exaggeration of popular support for communism (the most popular communist party in Europe at the end of the war was probably the French party with no more than a quarter of the popular vote), and ignorance of the documented process whereby Stalin’s secret police entered Eastern Europe in 1944 and 1945 “embedded” with the Red Army and armed with a template for dictatorship that they began to apply immediately, regardless of whether or not communists were in the government (Applebaum 2012). Far from resenting western "sabotage," millions of Central and East Europeans felt abandoned by the West as Stalin crushed their hopes for national self-determination. Finally, it forgets that the one American initiative that could have decisively altered the trajectory of Eastern Europe was not “destruction and sabotage” but Marshall Aid, which Stalin instructed his allies to reject.

• UE says: The unfavourable conditions of the Russian Revolution are shown by the fact that “Russia had suffered the worst losses out of any country during the war.”

No. It is hard to imagine that Russia would have suffered the Revolution without three years of world war, and it is true that battle and non-battle deaths of Russian soldiers up to 1917 were heavy (1.8 million). At the same time Russia's losses were fewer than Germany’s absolutely, and (given Russia’s large population) were proportionately fewer than of those of Britain, France, Italy, Serbia, Rumania, Austria-Hungary, Bulgaria, and Turkey (Broadberry and Harrison 2005). Russia’s economic loss of GDP per head up to 1917 was less than that of Austria, Finland, France, Germany, Greece, Hungary, and Turkey (Markevich and Harrison 2011). The latter conclude: “We have seen that the economic decline up to 1917 was not more severe in Russia than elsewhere. In short, we will probably not be able to explain why Russia was the first to descend into revolution and civil war without reference to historical factors that were unique to that country and period.”

• UE says: “By the time Joseph Stalin took (absolute) power in 1929, many – including, perhaps, himself – believed the threats the USSR faced were justifications for his purges and the Gulags.”

Seriously incomplete. There is no “perhaps” here: Stalin had a precise understanding that is now well documented (e.g. Khlevniuk 1995; Simonov 1996; Davies et al. 2003; Harrison 2008; Velikanova 2013). In 1921, 1924, 1927, and 1929 there was no foreign threat. But rumours of war were frequent, because the Soviet Union’s strategy of inciting revolution and mutiny abroad kept Soviet foreign relations in a state of continual tension. In domestic society, Stalin's secret police told him, every rumour was destabilizing; peasants and workers started to wonder when the chance would come to get rid of the Bolsheviks. Stalin was aware that above all he had to secure the regime internally and externally and that drift could only weaken him. This is why he launched Soviet society simultaneously on the courses of forced industrialization, mass collectivization of the peasantry, and political violence. Justification? Yes, of course, if taking power and holding it are sufficient motivations. Not otherwise. Khrushchev was personally responsible for tens of thousands of killings under Stalin, and this left him with a bad conscience. In trying to come to terms with it he blamed Stalin many times but not Hitler, the CIA, or anyone else outside the country.

• UE says: “The country did face a very real Nazi threat that, failing industrialisation, it would not have been able to overcome.”

No. Stalin changed course towards industrialization, collectivization, and mass violence in 1929, when there was no significant external threat. The Nazis came to power in 1933, and no European leader (including Stalin) recognized the threat from Hitler before 1935. Before Hitler, a threat to Siberia appeared from the East in 1931 with the Japanese annexation of Manchuria. These threats came after, not before, Stalin’s “revolution from above.” As for whether the Nazi threat justified Stalin’s policies after the event, I have written about this in many places (most recently Harrison 2010).

• UE says: “This reasoning is consistent with the fact that once Stalin died and the more immediate western threats disappeared, ‘de-Stalinisation’ took place: the Gulags were softened and reduced in size; the cult of personality was dismantled … things certainly improved once the Nazi threat had been eliminated.”

No. The Nazi threat was eliminated in 1945. The softening of the Soviet regime after 1953 had everything to do with Stalin’s death and nothing to do with the disappearance of “immediate western threats.” De-Stalinization took place not because of the disappearance of western threats but because the entire Soviet leadership was tired of living in fear of their own lives, and then went further because Khrushchev and Mikoyan had bad consciences about their own responsibility for past mass killings. The Gulag was dismantled immediately, not because of the disappearance of western threats but because Lavrentii Beriia had long before determined that it was an economic drain and a source of social contagion but Stalin had prevented him from acting on his findings. There was bitter resistance to dismantling the cult of Stalin from other communist leaders (especially Mao), not because of western threats but because it threatened their own legitimacy (and their own cults). The cult of Stalin was dismantled but was soon replaced by the cult of Khrushchev.

• UE says: “The Great Leap Forward (GLF) … undoubtedly caused a large degree of famine, surely because of the over-centralised and inflexible nature of the policy.”

Seriously incomplete. A centralized, inflexible policy was enough to start a famine, but it does not begin to explain explain how the famine proceeded, nor does it explain the secrecy that then shrouded it for decades.

Think about what is required for an act of policy to cause millions of famine deaths. Here is the problem: When people starve to death, they do not die suddenly and unexpectedly. It takes them months, even many months to weaken, become sick, and die. Some die before others. Some die of hunger; some are carried off by diseases to which they lose immunity. Some die at home; some drop dead in the street. Some die passively; some steal or even kill for food; a few turn to cannibalism. In other words, a policy that causes millions of famine deaths (such as in the USSR in 1932 to 1934) or tens of millions (in China in 1958 to 1960) cannot go unnoticed by those carrying out the policy.

In fact, in both the USSR and China, the famine process worked like this (Davies and Wheatcroft 2004; Chen and Kung 2011). First, the leaders issued quotas for the collection of food, province by province. They also gave the provincial leaders to understand that their future depended on meeting the quota. The provincial leaders competed to raise more grain than their neighbours in order to show loyalty and to save their own lives and the lives of their families. And they passed these incentives down the line to their subordinates charged with doing the actual work. When some people reported that the quotas were too heavy, or they resisted or dragged their feet, they were arrested and others took their place. Food collections began and the first people started to die. When some people reported that other people were dying, they were told that this was just “simulation or provocation”: enemies were maliciously withholding food and starving their own children to cause trouble (Davies and Wheatcroft 2004, p. 206).

While the first ones were dying, the people responsible for extracting grain from the villages had to go deeper and deeper into the countryside to find food and take it by force. On every journey along all the different routes they took, they had to go past the people from whom they had already taken food, who were now dead or dying, to find more food that they could take. In China, the provincial leaders of lower rank had more to prove and Chen and Kung (2011) show these people tried harder, so that more grain was collected and more people died in their provinces. Returning from every journey past the already dying and dead people, they sometimes reported what they had seen (although it was sometimes “forbidden to keep an official record”) but in public they had to remain absolutely silent about, not just at the time but for the rest of their lives. The same applied to everyone with business that required them to move around the countryside. While they were doing this, others had to be ordered to stop some of the dying people who were not dead yet from moving out in search of food elsewhere. They had to be ordered to stop them because the food that had been collected and stored elsewhere was destined for others; if the dying people were allowed to eat it, it would not be available to feed Stalin’s Great Breakthrough or Mao’s Great Leap Forward. A particular reason for these orders is that when hungry people are allowed to mix with people that have enough to eat, it is extraordinary difficult to stop kind people from giving some of their food to starving families; the Germans found this in occupied Europe when they tried to cut Jewish communities off from food, and this is one reason why they first herded Jews into ghettoes and later decided to accelerate the Holocaust (Collingham 2010, pp. 205 ff). Finally, both at the time and later, the surviving victims and perpetrators alike learned never to talk about it, perhaps not even to their children. As a result, witnesses of terrible things (such as Yang 2012) often concluded the events they had seen were isolated and exceptional.

In other words, the “over-centralised and inflexible nature of the policy” was enough to start a famine, but further deliberate actions were required to ensure government priorities for food supplies when millions of people were dying of hunger. All this must be read into the “over-centralised and inflexible nature of the policy,” and it suggests why those words do not begin to provide a full explanation.

• UE says: “It is also worth noting that the remaining Cold War paranoia was certainly not a USSR-only phenomenon, with McCarthyism and the red scare in the US reaching levels which now seem ridiculous to most.”

No. McCarthyism was ridiculous and, partly as a result of it, the FBI missed many Soviet agents that were actually at work in American government and society after the war (Moynihan Commission 1997).

• UE says: “In Poland, the popular party Solidarity wanted some form of worker ownership – in other words, socialism – until, in desperation, they had to turn to the IMF, who made capitalist policies a condition for any aid. In Russia, Boris Yeltin’s ‘free market’ reforms were resisted, which was met with force; similarly, in China, the Tienanmen Square massacres were not made in favour of capitalism but in favour of democracy and worker control” (citing Naomi Klein).

No. None of us can possibly know what demonstrators in China or elsewhere “really” wanted. Politics is the art of the possible, and for this reason people tend to express their choices strategically, in the light of the constraints they perceive and the choices they expect others to make. I saw this myself in Russia: As long as the communist party was in full control, many dissenters preferred to limit their demands by appealing to rights guaranteed by the Soviet constitution, asking for a return to “true” Leninism, calling to rehabilitate Old Bolsheviks like Trotsky and Bukharin, and so forth. Only when the communist monopoly gave way did it become politically and psychologically possible for free thinkers to go further; some didn't but many did. UE refers to IMF conditionality in a disparaging way; but why would a responsible aid donor give aid without wishing to rule out uses of its resources that would be damaging or counterproductive? UE relies on Klein’s Shock Doctrine as a source; on its use of evidence see Harrison (2009).

• UE says: “While estimates of deaths from Mao’s GLF are exaggerated using dubious estimation techniques (which effectively allow the demographers to pick the number arbitrarily), little to no cover has been given to the increase in Russian deaths during the ‘transition’ to capitalism, which, by a reasonable estimation method of simply counting the increase in death rates, claimed 4 million lives between 1990 and 1996” (citing Utsa Patnaik).

No. UE (or perhaps Utsa Patnaik) seems to confuse demographic studies with the literary and journalistic accounts written by people who do not have a good understanding of error margins. Demographers know that when people die in numbers so large that they are not recorded individually there is always an error margin. The error margin has several sources: mismeasurement of the population before and after the shock, imputation of normal mortality during the shock (required to infer excess mortality), and correctly apportioning the birth deficit between babies not born (or miscarried) and babies born and died within the famine period. In other words the best available estimation techniques give rise to ranges rather than point estimates, and it is from these ranges that nonspecialists feel entitled to pick and choose.

As for the cause of Russia’s mortality spike in the transition years, the research attributing it to mass privatization (Stuckler and McKee 2009) has been widely disseminated; less well known is that it has also been thoroughly criticized (Earle 2009; Earle and Gehlbach 2010; Brown, Earle, and Telegdy 2010; Battacharya, Gathmann, and Miller 2013; see also reply by Stuckler and McKee 2010). In the last years of the Soviet Union Gorbachev’s anti-alcohol campaign temporarily prevented millions of Russians from drinking themselves to death. However, it did not alter their desire to drink. Their deaths were postponed and so stored up and waiting to happen when alcohol became cheaper again and more easily available. Thus, the increase in Russian deaths during transition is more plausibly attributed to an increase in the availability and collapse in the price of alcohol.

I’ll conclude on the subject of atrocity. UE writes: “I do not hope to defend anyone's atrocities, though I am happy to refute some of the absurd exaggerations that sometimes pervade these debates … the important thing is that we examine the history of both systems in context, rather than lazily parading the kill count of the other side to try and shut down debate.” I noticed that the UE blog goes further, wishing to move debate on from “disingenuous ‘Black Book of Communism’-style kill count porn” (the "Black Book" reference is to Courtois et al. 1999).

This shocked me. Is there room for debate over the scale, causes, and significance of the excess deaths that arose around the world from communist policies? Absolutely. Should any figure in the Black Book of Communism be above discussion? Of course not. But kill count porn? The demand for these people to be remembered and their suffering acknowledged comes from the victims themselves. “We were forgotten. For our broken lives. For our executed fathers. No one apologized. If we don’t preserve the historical memory, we shall continue to make the same mistakes” (Fekla Andreeva, resettled as a child with her “kulak” family, whose father was executed in the Great Terror, cited by Reshetova 2013; see also Gregory 2013).

References

• Applebaum, Anne. 2012. Iron Curtain: The Crushing of Eastern Europe 1944-56. London: Allen Lane.
• Bhattacharya, Jay, Christina Gathmann, and Grant Miller. 2013. Gorbachev’s Anti-Alcohol Campaign and Russia's Mortality Crisis. American Economic Journal: Applied Economics 5(2): 232-60.
• Broadberry, Stephen, and Mark Harrison. 2005. The Economics of World War I: an Overview. In The Economics of World War I: 3-40. Edited by Stephen Broadberry and Mark Harrison. Cambridge: Cambridge University Press.
• Brown, J. David, John S. Earle, and Álmos Telegdy. 2010. Employment and Wage Effects of Privatisation: Evidence from Hungary, Romania, Russia, and Ukraine.”Economic Journal 120, no. 545: 683-708.
• Chen, S. and Kung, J. (2011), ‘The Tragedy of the Nomenklatura: Career Incentives and Political Radicalism during China’s Great Leap Famine’, American Political Science Review, 105(1): 27-45.
• Collingham, Lizzie. 2010. The Taste of War: World War Two and the Battle for Food. London: Allen Lane.
• Courtois, Stephane, Mark Kramer, Jonathan Murphy, Jean-Louis Panne, Andrzej Paczkowski, Karel Bartosek, and Jean-Louis Margolin. 1999. The Black Book of Communism. Ed Cambridge, MA: Harvard University Press.
• Davies, R. W., and Stephen Wheatcroft. 2003. The Industrialisation of Soviet Russia, vol. 5: The Years of Hunger: Soviet Agriculture, 1931-1933. Basingstoke: Macmillan.
• Davies, R. W., Oleg Khlevniuk, E. A. Rees, Liudmila P. Kosheleva, and Larisa A. Rogovaia, eds. 2003. The Stalin-Kaganovich Correspondence, 1931-36. New Haven, CT: Yale University Press.
• Earle, John S. 2009. Mass Privatisation and Mortality. The Lancet 373 (April 11), p. 1247
• Earle, John S., and Scott Gehlbach. 2010. Did Mass Privatisation Really Increase Post-Communist Mortality? The Lancet 375 (January 30), p. 372.
• Gregory, Paul R. 2013. Women of the Gulag. Stanford: Hoover Institution Press.
• Harrison, Mark. 2008. The Dictator and Defense. In Guns and Rubles: the Defense Industry in the Stalinist State, pp. 1-30. Edited by Mark Harrison. New Haven: Yale University Press, 2008.
• Harrison, Mark. 2009. Credibility Crunch: A Comment on The Shock Doctrine. University of Warwick. Department of Economics.
• Harrison, Mark. 2010. Industry and the Economy. In The Soviet Union at War, 1941-1945, pp. 15-44. Edited by David R. Stone. Barnsley: Pen & Sword.
• Harrison, Mark. 2013. Communism and Economic Modernization. In The Oxford Handbook in the History of Communism. Edited by Stephen A. Smith. Oxford: Oxford University Press.
• Khlevniuk, Oleg. 1995. The Objectives of the Great Terror, 1937-38. In Soviet History, 1917-1953: Essays in Honour of R. W. Davies: 158-76. Edited by J. M. Cooper, Maureen Perrie, and E. A. Rees. New York, NY: St Martin's.
• Markevich, Andrei, and Mark Harrison. 2011. Great War, Civil War, and Recovery: Russia’s National Income, 1913 to 1928. Journal of Economic History 71:3, pp. 672-703.
• Moynihan Commission. 1997. Report of the Commission on Protecting and Reducing Government Secrecy. Senate Document 105-2 Pursuant to Public Law 236, 103rd Congress. Washington, United States Government Printing Office.
• North, Douglass C., John Joseph Wallis, and Barry R. Weingast. 2011. Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History. Cambridge: Cambridge University Press
• Reshetova, Natalia. 2013. Women of the Gulag. Hoover Digest no. 3, 108-115.
• Simonov, Nikolai S. 1996. "Strengthen the Defence of the Land of the Soviets: the 1927 War Alarm and its Consequences." Europe-Asia Studies 48(8): 1355-64.
• Stuckler, David, Lawrence King, and Martin McKee. 2009. Mass Privatisation and the Post-Communist Mortality Crisis: a Cross-National Analysis. The Lancet no. 373 (January 31, 2009): 399-407.
• Stuckler, David, Lawrence King, and Martin McKee. 2010. Did Mass Privatisation Really Increase Post-Communist Mortality? – Authors’ Reply. The Lancet 375 (January 30, 2010), pp 372-74.
• Velikanova, Olga. 2013. Popular Perceptions of Soviet Politics in the 1920s: Disenchantment of the Dreamers. Basingstoke: Palgrave.
• Yang Jisheng. 2012. Tombstone: The Untold Story of Mao’s Great Famine. London: Allen Lane.

Mark Harrison : 08 Aug 2013 15:02 |  Tags: China History Politics Russia Stalin |  Comments (3) |  Close comments |  Report a problem

Mordor: An Economic History

Writing about web page http://lectures.gaidarfund.ru/articles/1698

When I visited Moscow in April, Ilya Venyavkin of the Gaidar Foundation was kind enough to interview me. The interview has just appeared in Russian on the Gaidar Foundation website. Here I've translated it back to English.

***

Mark Harrison: “When people said they’d prefer a strong leader to democracy, as an economic historian I say: I’ve heard that before somewhere." A professor of economics at the University of Warwick, Mark Harrison recalls his attraction to communist ideas and explains why we need economic historians, and why the USSR reminded him of Tolkien’s Mordor.

• Gaidar Foundation: Why did you become interested in the Soviet economy?

Mark Harrison: I’m a child of the Cold War - my parents followed events in the Soviet Union closely and felt the fear of nuclear war. At the age of six or seven, I already knew of the Soviet Union as a threat. An incident when I was in school had quite an influence on me: during English class we had to demonstrate correct usage of an idiom, “a household name” (“a person that everyone knows”). When my turn came, I said: “Khrushchev.” Then my problems began. First, the teacher began to ask me why I named Khrushchev and not, for example, Kennedy; then my classmates teased me that I was a communist. At the time I had no idea what that meant, and in the end I decided to find out. A few years later I began studying economics, and one of the reasons I became interested in it was Karl Marx’s Communist Manifesto. I read it and asked my father if what was written there was true. My father said he didn’t know, and then I decided to look into that too.

The end of the 1960s, when I went to university, was a time when youth culture and student movements flourished: we were all revolutionaries and socialists. I studied at Cambridge and we had lectures from Charles Feinstein, one of the leading economic historians of the twentieth century. Charles was born in South Africa and was a member of the Communist Party of South Africa. In his homeland he faced a choice: leave the country or go to jail. He ended up in England and I learned a lot from him. Another of my teachers was Maurice Dobb: he was a member of the British communist party, and he wrote the first serious (although somewhat biased) history of the Soviet economy. All this led me naturally to the idea of studying the Russian economy.

• GF: And you also became a leftist?

MH: Yes, and I stayed on the left for quite a long time.

• GF: Were you hoping to find in the USSR a model of a more just social and economic order?

MH: That’s what I hoped, but it’s not what I found. I can describe clearly the impact on me of visiting the USSR in 1972. I brought two thick books: one was the works of Jane Austen, and the other was The Lord of the Rings in three volumes. I read Jane Austen first, and that was great because it was a complete escape from life in the Soviet Union. Then I started to read The Lord of the Rings, and a depression descended on me because I saw something just like the Soviet Union: border guards, barbed wire, a secret police ...

To live in the Soviet Union was both frightening and interesting. As a foreigner I lived a privileged life - we always knew that nothing would happen to us, unless we did something really stupid. We knew we were living in a police state, and we quickly learned the simple rules – for example, always to call only from a phone booth, if possible, and not to tell anyone about one’s plans.

• GF: Did you come across the secret services during your first visit?

MH: Not directly. But I’ll tell you a story: before going to the USSR (our student trip fell under an intergovernmental agreement), we attended a meeting at the Foreign Office where a diplomat, who was in charge of the meeting, told us:

You are going to Moscow to study and that’s fine. But be careful, because the KGB will be interested in you – they may follow you, see who you are talking to, or even try to compromise you by using alcohol or drugs to put you under pressure. If that happens, come to us and we’ll help you.

Last year, I chanced on a document in the archives of the KGB, dating back to the end of the 1960s. The document says that the British Foreign Office is advising everyone who visits the Soviet Union about the working methods of the KGB. It goes on to detail all the advice that our diplomat gave us. I was reading the paper and I was wondering what they would write at the end – would they say that this was pernicious anti-Soviet propaganda? But in the last paragraph I found the words:

We circulate this information to all operative staff so that they can be aware that our working methods are known.

• GF: Do you remember exactly when you became disillusioned in the system?

MH: I continued to believe in the possibility of a more just world order and I was attracted by the idea of Euro-communism – the ideas of reform communism that arose in Italy, France and Spain. With many friends I was very excited when Gorbachev came to power. We hoped that he would be able to combine the ideas of socialism and democracy. But this did not happen. That was when I realized that I needed to move on – the stage of my life that began in 1970 came to an end in 1991.

I think it’s a very interesting example of how each new generation came to the Soviet experience with new knowledge and new hope. New knowledge meant an understanding of how terrible everything could be, but there was always the hope that it could all still be put right, and Khrushchev had that, and then the Eurocommunists, and then Gorbachev. Today what I believed then looks completely crazy, but nonetheless I believed it wholeheartedly.

• GF: How did you react to the rejection of socialist values in the 1990s?

MH: I think that at that point I was already becoming a liberal. I am very grateful for my experience of the 1990s, because I was able to see how a colossal system broke down as production stopped, money lost its value, and law and order stopped working. I understand that the transition period was very difficult, although I don’t accept (as some do) that it was because of this that millions died.

Another issue is the growing nostalgia today in Russian today for the days of Brezhnev or Stalin. But it is very useful to compare this situation with that of Germany: After the fall of the Berlin Wall, all the opinion polls showed that residents of the former East German state were very happy to get rid of self-censorship and constant surveillance by the Stasi. Today, people have had time to forget about what it was like for them, and nostalgia for the GDR is growing.

• GF: What do you think of Gaidar’s reforms as a scholar?

MH: I’m not sure I have an easy answer. I have a few answers. First, he was a brave man. Secondly, I am not sure that at that moment he had a lot of choice. The state was collapsing and in such a situation it’s not particularly important what policy you choose, or whose advice you listen to, because you have only a very limited ability to influence the situation. The collapse of the Soviet Union had begun under Gorbachev and by 1991 has already gone so far that, it seems to me, the trauma of transition was unavoidable. As you know from my lecture, I’m not one of those who believe that the Soviet Union could have followed China’s path.

The main problem of the transition period in Russia was the oligarchy that emerged from privatization and the loans for shares deal; many people both here and in the West believe that there was dirty dealing. This is the original sin of the Russian reforms, which continues to define the nature of the economic and political system in Russia.

I could imagine a different version of events in which the Russian companes could have been sold off in open international auctions. In this case, the Russian government would have been able to recoup much more money, and then a limited stratum of extremely rich people would not have been created. But that raises another question: could the Russian government at that moment have afforded to sell the most important industrial companies to foreigners?

Now I think a lot about the disastrous consequences of nationalism, and this is another example of how nationalism hinders the government from making the right choices.

• GF: Was it possible to avoid the collapse of the Soviet Union?

MH: No, I think not. Gorbachev’s decisions were very important. You can quite easily imagine that if Andropov lived a little longer, he would have used repressive methods, and they would most likely have had some effect.

When the miners went on strike in 1989, Gorbachev gave a very clear signal that the old repressive methods would not be applied. It was Gorbachev’s personal decision and everything followed from that. It is easy to imagine how Andropov might have decided otherwise. In that case the Soviet Union would have survived longer, although it would not have become a prosperous state, just there would have been some more time before it collapsed.

• GF: What issue in the economic history of Russia do you think is most interesting?

MH: There are areas of research that I think are extremely promising. My co-author Andrei Markevich is working currently in one of them – to reconstruct the economic history of pre-revolutionary Russia. The point is that what we know about this period is based on various assumptions with little idea of how they correspond to reality. Now Andrei is building regional statistics, and this should give us a much better idea of how Russian agriculture was organized and how effective were the measures to reform it. I think that in 10 or 15 years we will have very precise answers to these questions.

A second major theme, one that I am engaged in now, it is the question of how the security system worked in the Soviet Union and how it influenced the Soviet economy.

• GF: What is going on today in economic history as a discipline?

MH: I think economic historians are currently doing two things that are important both for science and for society. [One is that] they are giving much attention to the long-term. My colleagues are working on the national accounts of England and Holland and tracking them back to the eleventh century so that they can make use of a thousand years of data. Tracking and comparing data in the long term, we can think much more clearly about the nature of economic growth. For example, we find that medieval Europe was much richer than many modern countries, and that the conditions for the industrial revolution matured over several centuries. Such studies are extremely important and of significant interest to the public. This, incidentally, is an additional complexity facing economic historians: in contrast to more traditional historians, it’s more difficult for us to tell a compelling story and attract public attention.

Another important task of modern economic history is to tell people about the economy in historical perspective. Today the world and, especially, the Western capitalist countries are going through an economic downturn and people are in a panic because they have not lived through a similar crisis before. But economic historians can say: Look at the Great Depression of the 1930s for other examples of economic crises – what's going on is not new.

This is an important lesson. Currently many people are saying: Look at the disastrous results of democracy and the free market economy, the government should step in. Maybe we need less democracy and more strong leaders! As an economic historian, I say to myself: I’ve heard this before somewhere. In the 1930s it was just the same. Then, it seemed, liberal democracy had failed and many countries turned readily to communism and fascism. This was a real disaster, ending in the Second World War and 50 million deaths. We shouldn’t do it again.

***

Video presentation and transcript of Mark Harrison’s lecture: “Stumbling Bear, Soaring Dragon: Could the Soviet Union have Followed the Chinese Road?”

Mark Harrison’s three must-reads for those that are starting out in economic history:

• Lizzie Collingham, The Taste of War: World War II and the Battle for Food(Allen Lane, 2011).
• Jared Diamond, Guns, Germs, and Steel: The Fates of Human Societies (Norton, 1997).
• Paul Gregory, Terror by Quota: State Security from Lenin to Stalin (an Archival Study) (Yale University Press, 2009).

Mark Harrison : 12 Jun 2013 13:14 |  Tags: Communism History Politics Russia |  Comments (0) |  Close comments |  Report a problem

When the USSR Collapsed: What do Russian school students think?

Writing about web page http://gaidarfund.ru/articles/1693

What do Russian school students think about the collapse of the USSR? On 28 May the Gaidar Foundation published excerpts from an essay competition among Russian school students, in which they write about their impressions and the family histories that have been passed down to them.

With permission, here is my translation of the article on the Gaidar Foundation website. I've kept as close to the orignal as I can; any words that I inserted for clarity are in [square brackets]. An important Russian word is perestroika, which literally means "restructuring" or "conversion." Mikhail Gorbachev did not invent it; in fact it was a common Stalinist buzzword for reorganization. But he used it to describe the package of economic and political reforms that he developed in the late 1980s, which turned out to point the way to the dissolution of the Soviet Union, and that's how most people know it today. I have left it as perestroika, capitalized or not as in the original, except in one case where the writer clearly has a double meaning in mind.

Anywhere, here it is.

What do students think about Perestroika and the collapse of the USSR?

May 28, 2013

Excerpts from essays by students who participated in the historical game “The Last Russian Revolution (1989-1993),” organized by the "Memorial" Society in conjunction with the Yegor Gaidar Foundation under the competition for schools “The Person in history: Twentieth-century Russia.”

In April 2013, the winners of the Fourteenth All-Russian senior school students’ historical research competition organized by the “Memorial” Society came to Moscow. On one of their days in the city, they took part in an historical game jointly organized with the Yegor Gaidar Foundation, dedicated to events of the late 1980s and early 1990s.

During the game, students listened to two expert lectures, went round a historical exhibition, and took part in a debate. The players were formed into teams, and with the help of an adviser each had to formulate its own response to the questions of the time in mid-1991: Should we keep the Soviet Union? Should we move from a command economy to a [market] economy? On which countries should Russia focus its development? In addition, each team had to support the perspective of one of the social forces influential in the early 1990s. They had to defend this point of view in debate.

Before the game started, the competition winners had to write a short essay on Perestroika and the collapse of the Soviet Union. Below are the most vivid excerpts from these works, which form an interesting picture of the younger generation's [attitudes to] the events of 20 years ago.

Why did the Soviet Union collapse? What leading characters and events determined the course of Russian history of the late 1980s and early 1990s?

I do not know exactly, but I think the Soviet Union fell apart because there was a power struggle. I think that's what happened in 1991.

***

In my opinion there are several reasons. First was the weakening of central authority. Second was ethnic conflict. As we know, republics could not secede from the USSR. The third reason was the deep economic crisis after the Great Patriotic War, the “Cold” War, and the arms race. Resources went to build nuclear weapons and heavy industry, and the social sphere was left with tens of percents. The fourth reason was dissatisfaction with control over all spheres of society – people were becoming more active in political life.

***

The words Gorbachev and Perestroika are inextricably linked. Gorbachev was young enough when he came to power, and he had a birthmark on his forehead. Everyone said that he was a marked man, that he would do either much good or much bad, but he leaned more to the bad side. The result was Perestroika.

I think change was necessary! Gorbachev's ideas were not bad. But at the same time there was no clear plan or support team.

***

Before I begin my story of Perestroika, I will say I am neither “for” nor “against” perestroika. Yeltsin, Sobchak, Gorbachev are the main heroes and villains of this comic book called “perestroika.” There are many nuances, so I will not come to straightforward conclusions. My parents were all ardent activists for perestroika and yes, in many ways, I understand them. Communism sounds good, but how many plans were there and what was the outcome? Nothing, it was all beautiful on paper. My grandmother used to say: “in childhood we were all dreamers, we all lived with the idea that we would live better than anyone.” And in fact humanity was the last thing they thought about. In criticizing and condemning communism, I don’t say that democracy is better. No, since then, little has changed. My friends, we are just as hidebound. The only thing is that we can move forward freely.

Why did the Soviet Union collapse? Because “empires” don’t last forever. Each republic wanted independence, something I understand, but they forgot that it would go hard for them without our support. It’s enough to recall the gas dispute between Russia and Ukraine, which actually led to the breakup.

But there is something else. Our top elite wanted wealth, because under communism everyone had to be equal. That's the reason. My grandmother used to say this and I say the same. You watch how the Olympics went, and our overall score faded out at fifth, and then add on the medals of the former Soviet republics, and that’s when nostalgia hits you ...

I cannot judge from the records and books of Perestroika, I just had to live through it. My mother and grandmother living in Kyrgyzstan were literally thrown out back to Russia, they carved out entire neighbourhoods of Russians. My grandmother's girlfriend was raped right there in a summer house. This tells you that it was not just the political elite that wanted the collapse, everyone wanted it. My family had to flee. And there was a huge number of such cases. Now look at life today and you wonder if the restructuring [perestroika] is over. You know the answer.

***

When people talk about the USSR, there is not a very happy picture in my mind: harassed people go to work / school / college, life under continual oppression, it is not clear whether you're a citizen of your own country or a slave of the totalitarian system. It seems that people living in the USSR had little no joy in life. Even when these events come to mind, everything appears in a grey-brown color. For me, it is not surprising that the Soviet Union collapsed. What’s strange that this did not happen earlier. Fifteen countries could not coexist under a single rule. The USSR united the unreconcileable, having built its system on the bones of people, and paid for it by its collapse.

***

From the 1960s, the foundation of the state budget was so-called “piss money” that the state alcohol monopoly brought in. The more Russian people drank, the greater was the revenue to the treasury. Drunkenness was instilled in the Russian people as a tradition, and one of the world's once most sober people became the most drunken.

In 1985, Gorbachev introduced prohibition, betting on oil to be the main source of revenue to the treasury. But Saudi Arabia, evidently at the request of the United States, pumped the oil harder, and this led to a sharp drop in the price of “black gold” and the collapse of the Soviet economy.

***

In this matter are encapsulated the fates of the peoples, and of the whole world, and of course the fates of ordinary people drawn into the vortex of history. There was no single cause of the collapse of the Soviet Union. There was an entire complex of reasons, and they all played their own significant parts in the history of our country.... Now there are active discussions on the issues of perestroika, the collapse and the whole Soviet period of our history. The people and the Russian authorities have finally to determine their attitude to the country’s past. On this depends the future of our common motherland, Russia.

***

It's hard to express my thoughts on this topic, since I myself personally did not catch the collapse of the USSR, and the views of those around me like teachers and relatives are very mixed. For example, my family was affected by inflation. If, as my grandmother said, with yesterday’s family savings they could buy two new cars, the day after they could not afford anything with the same money. But generally after the revolution from 1989 to 1993, people could live more easily and better. Interesting films began to appear on TV, anti-religious propaganda stopped, and there was openness. The rules and traditions of that time had outlived themselves. Reflecting on this topic, the movie Born in the USSR comes to mind. This film is evidence that people’s lives have changed for the better.

***

M. S. Gorbachev wanted to make his country and the people living in it, happy. Yes, on one hand he did it: he opened the iron curtain and ended the American threat hanging over Russia (the atomic bomb), but on the other hand, there were endless queues in stores where the shelves were half empty.

How did perestroika and the events of the 1990s affect your family's life?

My associations with perestroika are like movie clips where crowds of people with banners and swords move onto a government building, and also the ballet Swan Lake which was being broadcast on TV.

***

Until now I had no interest in conversations at home about the 1990s. What did it have to do with me, a child? But growing up, I began to realize that my parents have a different perspective on the 1990s. Oh, and mum and dad were affected by shortages of goods, political instability, and the collapse of the Soviet Union ... But now, after a while, which gave them a chance to reflect on a lot of things, they get into arguments. Mum likes to live in a brand new country where she isn’t worried about the future, where she can buy what the children need, of course, if she has earned it. But dad regrets [the passing of] the USSR. And he is very negative about Gorbachev, [he thinks] he alone is to blame for the breakup of the USSR. In my view it was not only his fault.

The life of my family in the 1990s came down to one thing: you need to find ... I see it now as a kind of struggle to survive. To feed the family at that time my grandmother travelled to Moscow for groceries. They brought cakes, sweets, and … oranges, even! It was bliss!

I'm not used to that. I live in a quiet time. And the events of those years reach me only through stories. “You know, Olga,” mother says, “when the economy looked up and children's dresses appeared in the shops, I go there one day, and there’s satin in ribbons, just lovely! And it was 580 rubles! I found the money and bought it. And you looked just wonderful in it.” Sometimes it’s better to understand our country’s history through a connection like that than through the textbooks.

***

My mother's parents were laid off from work and she was left without means of support. Dad was in a children’s home. They had very harsh rules. The children stole to feed themselves because the home did not feed them enough and they were always looking for something tasty. Some were put on trial, marking them for life as convicts just for petty theft. There were shootouts where my dad was involved, but he was just a pawn. My mother's parents were trying to get work, but no one would take them on; they got by on moonlighting, but that was unstable.

Now I think that I was lucky that I was not born at that time. But my parents worse luck than me and my sister. When I ask about the time when the Soviet Union collapsed, my parents make excuses or laugh it off, and won’t tell me. Some of my friends who were alive at the time say that for them it was a great time, but I don’t think so.

***

On the slide before me now I see a white, blue, and red flag flying over thousands of heads. I would not want to change the flag. Also, I do not think it is possible to get rid of it altogether. But this is not a flag that can be a symbol of a generation, not one that can be raised so high. I do not love it. It’s so simple and stupid, but also infinitely important. I am one of those to whom (they say) the country's future [is given] – [yet] I do not love it. And how can I love a symbol of the new world, if I have such pride in the old one?

***

I was born in the Russian Federation. I cannot fully understand how life was in the Soviet Union, so I settle for the recollections of those alive at that time. I understand that perestroika was a step, a step for the better. Now I live in a country that seeks to promote democracy, civil society and a law-governed state. I am glad that my voice has political importance, that I have not just rights but a guarantee of their realization. The only thing I regret is the very process of perestroika and the events of the 1990s. This time it was very hard for everyone. Were there better ways to get it all more easily? I’d like to believe that. But history is born at the crossroads of ideas. I believe that our new country, which until now has been rising and recovering from the events of the 1980s and 1990s, will become a democratic model, and will be a country where the ideas of human rights will stand above the personal ideas of political leaders, and a strong but not harsh state.

Mark Harrison : 31 May 2013 13:48 |  Tags: History Russia |  Comments (0) |  Close comments |  Report a problem

North Korea: Dangerous, but Not Crazy

Follow-up to From 1914 to 2014: The Shadow of Rational Pessimism from Mark Harrison's blog

Is the North Korean regime crazy or calculating? Here is a timeline of North Korea's actions since March 10, when I wrote last.

• March 11: North Korea revokes the armistice ending the Korean War in 1953.
• March 12: Kim Jong Un places the North Korean armed forces on maximum alert.
• March 20: Attacks on South Korean news and banking websites, possibly from North Korea.
• March 27: North Korea cuts a military hotline to the Kaesŏng special region (a joint economic project with South Korea).
• March 29: Kim Jong Un places the North Korean armed forces on standby to strike U.S. territories.
• March 30: North Korea warns of a state of war with South Korea.
• April 2: North Korea will restart weapons-related nuclear facilities.
• April 3: North Korea closes entry to the Kaesŏng special region.

In various ways, these are all costly actions. Some are financially costly to Pyongyang, such as restarting nuclear facilities and disrupting Kaesŏng-based production and trade. Other are reputationally costly, because they stake out positions that are hard to retreat from without loss of face. All of them have a common element of danger -- the risk of triggering a ruinous catastrophe.

Why is North Korea doing these things if they are so costly? In a common interpretation, the North Korean regime is crazy. They don't understand the world or know what is good for themselves. I think this is unlikely.

On the basis that the North Korean leaders are not insane, there are several possible ways to think about their actions and understand them, but in the end they all point to the same outcome.

Opportunity cost. While the measures listed above are costly, North Korea believes that it would not find a better alternative use of the resources consumed or put at risk as a result of their actions. There are few profitable opportunities for production in the world's worst economic system. Investing in confrontation may well be, for North Korea, the better alternative.

Diminishing returns.In the past, North Korea has extracted billions of dollars of aid from South Korea and the West by holding its own people hostage and showing a willingness to play with fire. The problem with this strategy is that Western countries and their Asian partners have learned how it works. As a result, the North Korean strategy has run into diminishing returns. Pyongyang can continue to extract an advantage only by going to greater and greater lengths. This means taking greater and greater risks with peace.

Rational pessimism (That's what I wrote about here). North Korea's leaders see two scenarios. In one, there is a peaceful future in which their regime will inevitably disintegrate and howling mobs will drag them into the street and tear them to pieces. In another, there is a high probability of war in which millions might perish but there is some faint chance of regime survival. You wouldn't jump at either, and you might not rush to make a choice. Still, ask yourself: If you were Kim Jong Un, and push came to shove, which would you prefer?

Mark Harrison : 03 Apr 2013 12:55 |  Tags: Economics History North Korea War |  Comments (2) |  Close comments |  Report a problem

From 1914 to 2014: The Shadow of Rational Pessimism

Writing about web page http://www.ft.com/cms/s/0/e29e200a-6ebb-11e2-9ded-00144feab49a.html

China’s territorial claims and bellicose actions in the Western Pacific have aroused concerns about where this process could lead. In The Shadow of 1914 falls over the Pacific (in the Financial Times on 4 February), Gideon Rachman asked whether we are watching a re-run of events that led to the outbreak of World War I in 1914.

Then, a rising power (Germany) was challenging the established power (Britain) for a say in world affairs and a share in the world's colonial territories. It was not Germany's plan to make war on Britain; German leaders wanted only a say and a share. The economic, military, and naval power that they built was not made to go to war, only to prevent Britain from blocking Germany’s demands. They wanted to ensure peace and to command respect. The war that then came about was not meant to happen. The war would not have happened at all if allies, agents, proxies, and third parties beyond their control had not helped to bring it about.

Replace Britain by the United States, Germany by China, and Austria-Hungary, Russia, and Serbia by Japan, Vietnam, and North and South Korea, and you have Rachman's story in a nutshell. Rachman's conclusion is hopeful, however: China's leaders have tried to learn from history. That, and the inhibitions added by nuclear weapons, will help to avert war.

What was the role of calculation in the outbreak of World War I? Rachman writes as though the war was not calculated at all:

Leaders on all sides felt helpless as they were swept towards a war that most of them did not want.

But something is missing here. While the war was in some sense unwanted, the leaders were not helpless: they chose war. It was a calculated decision, and it was not a miscalculation: those who favoured war correctly estimated that victory was far from certain. They had a war plan for a quick victory over France that relied on a high speed military manoeuvre on a colossal scale, a decision by Britain to abstain, and a Russian mobilization that would obligingly wait until the German Army was ready to switch its focus from West to East. They knew it was an outrageous gamble.

Critical to this story was something that I will call rational pessimism. By 1912, Germany no longer felt itself the confident, rising power once led by Bismarck. Germany’s leaders had come to fear the future. Their own attempts to secure Germany’s rightful place in the sun, they feared, were leaving Germany ever weaker.

These fears were well founded. Externally, the balance of power was tilting away from Germany. More countries were adhering to the anti-German alliance of Britain and France. Britain and Russia were rearming at a pace that nullified Germanys’ own efforts. Given time, Germany would only become weaker. Within Germany the balance was tilting away from monarchism and conservatism towards parliamentary socialism. The fiscal demands of rearmament were opening up new social divisions. Germany’s Prussian bureaucracy and aristocracy felt itself more and more besieged.

Increasingly the calculation became: If we fight, we may lose but at least there is a chance that we win. If we remain at peace, we certainly lose. From this point of view the war was a gamble, but it was not a miscalculation. It was simply the choice with the highest expected value. For this reason the leaders of the Central Powers went to war full of foreboding, but they went to war anyway.

In July 1914 the German chancellor Bethmann Holweg confided in his friend Kurt Riezler, who wrote in his diary:

Russia’s military power growing fast … Austria grows ever weaker … This time things are worse than 1912, because now Austria is on the defensive against the Serb-Russian agitation. … The future belongs to Russia, which grows and grows into an ever great weight pressing down on our chest.

The chancellor is very pessimistic about Germany’s intellectual condition. Frightful decline of our political niveau. Individuals are becoming ever smaller and more insignificant; nobody says anything great and honest. Failure of the intelligentsia and of the professors.

This pessimism was general. When Germany’s Wilhelm II was informed of the Austrian ultimatum to Serbia, he wrote:

Now or never.

In Vienna, Kaiser Franz-Josef wrote:

If we go under, we better go under decently.

(The latter quotes are from Holger Herwig’s The First World War: Germany and Austria-Hungary, 1914-1918, published in 1997 by Arnold).)

From this perspective it becomes crystal clear why North Korea’s predicament is so dangerous. Day by day, North Korea is provoking enemies and losing friends. The tensions within the country are largely unknown but surely increasing. What insider would predict a peaceful future for the Pyongyang regime that is better than today? What does Kim Jong-Un have left to lose from gambling on conflict, no matter how poor the odds? Rational pessimism is surely tilting North Korea’s choices towards war. Still, we are not there yet.

As for China itself, the threat of war should be thought of as one for the future. It seems unlikely that China’s leaders would ever choose to gamble everything on a major war as long as they expect to gain more from a continuation of peace. Their optimism is a bulwark against war.

The risk is that optimism is fragile. China faces many problems that could sap the confidence of its leadership. Edward Luttwak (in The Rise of China vs the Logic of Strategy, published in 2012 by the Belknap Press of Harvard University) has written that China is pursuing an impossible trinity of prosperity, diplomatic influence, and military power. China’s economic growth may falter. Even if economic growth is sustained in China, the chances are that at some stage the West will recover its prosperity and technological leadership. Meanwhile China’s rearmament and territorial claims are losing it friends in Japan, Vietnam, and India. At home, there are protests over a range of issues that widens continually: the rule of law, corruption, censorship, inequality, wages and working conditions, land grabs, and pollution. China’s rulers rely on xenophobia and stories of foreign encirclement and penetration to manage these threats to their legitimacy.

Putting all this together, it is not hard to envisage a future in which China’s leaders would become rational pessimists. Would they then be held back by knowledge of history and by the possibility of nuclear war? Maybe. Is Kim Jong-Un restrained by these things today? So far, yes. If Germany’s rulers in 1914 could have seen the future, would they have chosen differently? Perhaps. Unfortunately, we can’t be sure.

Mark Harrison : 10 Mar 2013 19:28 |  Tags: China Germany History North Korea War |  Comments (2) |  Close comments |  Report a problem

Alternatives to Capitalism: When Dream Turned to Nightmare

Writing about web page http://cpasswarwick.wordpress.com/overview-2/peking-conference/proposed-topics/

On Friday evening I found myself debating "Socialism vs Capitalism: The future of economic systems" at the Peking Conference of the Warwick China Public Affairs and Social Service Society. The organizers also invited my colleagues Sayantan Ghosal, Omer Moav, and Michael McMahon, who spoke eloquently. The element of debate was not too prominent because we all said similar things in different ways. I'm an economic historian and the great advantage of history is that it gives you hindsight. Anyway, here is what I said:

Let’s start from some history. There was a time between the two world wars when the capitalist democracies, like America, Britain, France, and Germany, were in a lot of trouble. In 1929 a huge financial crisis began in the United States and went global. There was a Great Depression. Around the world, many tens of millions of farmers were ruined. Tens of millions of workers lost their jobs.

As today, people asked: What was the cause of the problem? One answer they came up with was: Capitalism is the problem. Lots of people decided: the problem is the free market economy! The government should step in to take over resources and direct them! The government should get us all back to work! The government should get us building new cities, power stations, and motorways!

Another answer many of the same people came up with was: Democracy is the problem. Lots of people decided: the problem is too much politics! We need a strong ruler to stop the squabbling! Someone who can make decisions for the nation! Someone who can organize us to build a common future together!

So there was a search for alternatives to capitalism. Different countries tried different alternatives. The alternatives they tried included national socialism (or fascism) and communism under various dictators, like Hitler and Stalin.

What happened next? On average the dictators’ economies did recover from the Depression faster than the capitalist democracies.

(Here's a chart I made earlier to illustrate the point, but I did not have the opportunity to use it in my talk. Reading from the bottom, the democracies are the USA, France, and the UK; the dictatorships are Italy, Germany, Japan, and the USSR. You can see that Italy does not conform to the rule that the dictators' economies recovered faster. Without Italy, the average economic performance of the dictatorships would have looked even better.)

But solving one problem led to another. Before the 1930s were over the dictators’ policies had already caused millions of deaths. A Japanese invasion killed millions in China (I'm not sure how many). An Italian invasion killed 300,000 in North Africa. Soviet economic policies caused 5 to 6 million hunger deaths in their own country and Stalin had a million more executed.

And another problem: As political scientists have shown, democracies don’t go to war (with each other). Dictators go to war with democracies (and the other way round). And dictators go to war with each other. The result of this was that in the 1940s there was World War II. Hitler, Mussolini, Tojo, and Stalin went to war -- with the democracies and with each other. Sixty million more people died.

After the war, capitalism recovered. In fact, far from being a problem, it became the solution. By the 1960s all the lost growth had been made up. Think of the economic losses from two World Wars and the Great Depression. If all you knew about capitalist growth was 1870 to 1914 and 1960 onwards, you’d never know two World Wars and the Great Depression happened in between.

(To illustrate that point, here's another chart I made earlier, but did not use. It averages the economic performance of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Netherlands, New Zealand, Norway, Sweden, Switzerland, the UK, and the USA.)

After World War II fascism and national socialism fell into disrepute, but communism carried on. In China, Mao Zedong’s economic policies caused more deaths. In 1958 to 1962, 15 to 40 million people starved. Communist rule led China into thirty years of stagnation and turmoil. After that Deng Xiaoping made the communist party get its act together. And the communists forgave themselves for their past and agreed to forget about it.

Here's the takeaway.

Liberal capitalism isn’t perfect, but it has done far more for human welfare than communism. It has been the solution more often than the problem. Last time capitalism experienced some difficulties, many countries went off on a search for alternatives. That search for alternatives led nowhere. It wasn’t just unproductive. It was a terrible mistake that cost many tens of millions of lives. Lots of people have forgotten this history. Now is a good time to remember it.

Postscript. At one point I thought of calling this blog "Alternatives to capitalism: the search for a red herring" (a "red herring" is something that doesn't exist but people look for it anyway.) But I realized that would have been wrong, because alternatives to capitalism have actually existed. The problem with the alternatives is not that we cannot find them. It is that the people who went searching for them fell into a dream and woke up to a nightmare.

Mark Harrison : 04 Feb 2013 08:34 |  Tags: China Economics History Mao Politics Russia Stalin |  Comments (7) |  Close comments |  Report a problem

Afghanistan: Tragedy, History, and Foresight

Writing about web page http://www.publications.parliament.uk/pa/cm201213/cmselect/cmintdev/403/40302.htm

The House of Commons International Development Committee has reported this morning that:

The future of Afghanistan is uncertain [...] The UK Government may have to recognise that a viable state may not be achievable in Afghanistan.

Is this depressing judgement realistic? It depends partly what you mean by a viable state. Afghanistan had a monarchy until the king was overthrown by a coup in 1973; this was followed by a communist insurrection in 1978. Although not a clean, non-corrupt democracy, the Afghan state was viable at least until 1973. Although some terrible things have happened between then and now, history suggests that a viable state in Afghanistan is not an impossible aspiration.

What the British government means by a viable state is more ambitious than this, however. It is expressed, for example, in DFID targets for popular approval, electoral turnout, spending capacity, and civil service reform. In other words, our own government's goal for Afghanistan is not just a viable state but a stable, clean, non-corrupt democracy.

A stable, clean, non-corrupt democracy: This is what the parliamentary report says will not happen in Afghanistan. For anyone who knows a little history, it is laying claim to the bleeding obvious.

I don't mean just that it is obvious now, after ten years of blood spilt and treasure lost. It was obvious beforehand. Here are things I wrote in 2001 on December 4, updated in 2002 on January 9, and in 2009 on July 18 and August 30, in 2010 on January 1, and in 2011 on October 27. It may seem like I'm bragging, but I'm not. I'm sure I've been wrong about lots of things. I'm not an expert on counter-insurgency and I've never been to Central Asia. I'm saying that even an idiot like me could work this one out.

Even an idiot is helped by knowing a little history. The history I know tells me three things.

• In the past it took hundreds of years to build and agree the rules of the game that we call democracy. Maybe we can compress that a bit, perhaps to within a generation or two. But we cannot shorten it to less than the lifetime of a Westminster government. Note: I am not giving this as a reason to do nothing. On the contrary, a long time horizon is a reason to start immediately! But it is also a reason to set realistic goals, not goals that are so unrealistic that they destroy our chance of ever meeting them.
• Modern liberal capitalism and competitive democracies did not emerge from nothing, by an act of will. They resulted from a long historical evolution. This evolution was not steady and it was not non-violent. But there were staging posts. Many of those staging posts fell short of what we would today consider to be democracy, but they still offered more rights to the citizens than existed before.
• In the world today some societies are so weakened that they cannot choose democracy over non-democracy or clean government over corruption. The best they can hope for is a fairly corrupt, not-very-democratic government that offers stability and shares some of the spoils through basic public goods such as highways, policing, and education. Of course, many societies should work for more: Russia and China for example. But some societies are in such a bad state to begin with that the only alternative to a fairly corrupt, not-very-democratic government is civil war. It's a matter of judgement which places belong in this category, but Afghanistan is one.

In other words, living under what I once called "the right kind of feudalism" Afghan citizens would have only limited rights but they would still have more rights and make more progress than under any feasible alternative. There would still be a loot chain, but a stable loot chain can be consistent with modest prosperity and confer benefits compared with a perpetual struggle of each against all.

Setting the wrong goals for Western involvement in Afghanistan has left a trail of blood and broken promises. There will be more of this before we're through. But the roots of a viable state for Afghanistan must be found in the history of Afghanistan, and nowhere else.

Mark Harrison : 25 Oct 2012 10:20 |  Tags: Afghanistan Corruption History |  Comments (0) |  Close comments |  Report a problem

Markets versus Government Regulation: What are the Tail Risks?

Writing about web page http://ideas.repec.org/a/aea/jeclit/v45y2007i1p5-38.html

Tail risks are the risks of worst-case scenarios. The risks at the far left tail of the probability distribution are typically small: they are very unlikely, but not impossible, and once or twice a century they will come about. When they do happen, they are disastrous. They are risks we would very much like to avoid.

How can we compare the tail risks of government intervention with the tail risks of leaving things to the market? Put differently, what is the very worst that can happen in either case? Precisely because these worst cases are very infrequent, you have to look to history to find the evidence that answers the question.

To make the case for government intervention as strong as possible, I will focus on markets for long-term assets. Why? Because these are the markets that are most likely to fail disastrously. In 2005 house prices began to collapse across North America and Western Europe, followed in 2007 by a collapse in equity markets. By implication, these markets had got prices wrong; they had become far too high. The correction of this failure, involving large write-downs of important long term assets, led us into the credit crunch and the global recession.

Because financial markets are most likely to fail disastrously, they are also the markets where many people now think someone else is more likely to do a better job.

What's special about finance? Finance looks into the future, and the future is unexplored territory. Only when that future comes about will we know the true value of the long-term investments we are making today in housing, infrastructure, education, and human and social capital. But we actually have no knowledge what the world will be like in forty or even twenty years' time. Instead, we guess. What happens in financial markets is that everyone makes their guess and the market equilibrium comes out of these guesses. But these guesses have the potential to be wildly wrong. So, it is long-term assets that markets are most likely to misprice: houses and equities. When houses and equities are priced very wrongly, chaos results. (And in the chaos, there is much scope for legal and illegal wrongdoing.)

When housing is overvalued, too many houses are built and bought at the high price and households assume too much mortgage debt. When equities are overvalued, companies build too much capacity and borrow too much from lenders. To make things worse, when the correction comes it comes suddenly; markets in long term assets don't do gradual adjustment but go to extremes. In the correction, nearly everyone suffers; the only ones that benefit are the smart lenders that pull out their own money in time and the dishonest borrowers that pull out with other people’s money. It's hard to tell which we resent more.

If markets find it hard to price long term assets correctly, and tend to flip from one extreme to another, a most important question then arises: Who is there that will do a better job?

It's implicit in current criticisms of free-market economics that many people think like this. Financial markets did not do a very good job. It follows, they believe, that someone else could have done better. That being the case, some tend to favour more government regulation to steer investment into favoured sectors. Others prefer more bank regulation to prick asset price bubbles in a boom and underpin prices in a slump. The latter is exactly what the Fed and the Bank of England are doing currently through quantitative easing.

Does this evaluation stand up to an historical perspective?

We’re coming through the worst global financial crisis since 1929. Twice in a century we've seen the worst mess that long-term asset markets can make -- and it's pretty bad. A recent estimate of the cumulative past and future output lost to the U.S. economy from the current recession, by David H. Papell and Ruxandra Prodan of the Boston Fed, is nearly $6 trillion dollars, or two fifths of U.S. output for a year. A global total in dollars would be greater by an order of magnitude. What could be worse?

For the answer, we should ask a parallel question about governments: What is the worst that government regulation of long term investment can do? We'll start with the second worst case in history, which coincided with the last Great Depression.

Beginning in the late 1920s, the Soviet dictator Stalin increasingly overdid long term investment in the industrialization and rearmament of the Soviet Union. Things got so far out of hand that, in Russia, Ukraine, and Kazakhstan in 1932/33, as a direct consequence, 5 to 6 million people lost their lives.

How did Stalin's miscalculation kill people? Stalin began with a model that placed a high value (or “priority”) on building new industrial capacity. Prices are relative, so this implied a low valuation of consumer goods. The market told him he was wrong, but he knew better. He substituted one person’s judgement (his own) for the judgement of the market, where millions of judgements interact. He based his policies on that judgement.

Stalin’s policies poured resources into industrial investment and infrastructure. Stalin intended those resources to come from consumption, which he did not value highly. His agents stripped the countryside of food to feed the growing towns and the new workforce in industry and construction. When the farmers told him they did not have enough to eat, he ridiculed this as disloyal complaining. By the time he understood they were telling the truth, it was too late to prevent millions of people from starving to death.

This case was only the second worst in the last century. The worst episode came about in China in 1958, when Mao Zedong launched the Great Leap Forward. A famine resulted. The causal chain was pretty much the same as in the Soviet Union a quarter century before. Between 1958 and 1962, at least 15 and up to 40 million Chinese people lost their lives. (We don’t know exactly because the underlying data are not that good, and scholars have made varying assumptions about underlying trends; the most difficult thing is always to work out the balance between babies not born and babies that were born and starved.)

This was the worst communist famine but it was not the last. In Ethiopia, a much smaller country, up to a million people died for similar reasons between 1982 and 1985. If you want to read more, the place to start is “Making Famine History” by Cormac Ó Gráda in the Journal of Economic Literature 45/1 (2007), pp. 5-38. The RePEc handle of this paper is http://ideas.repec.org/a/aea/jeclit/v45y2007i1p5-38.html.

Note that I do not claim these deaths were intentional. They were a by-product of government regulation; no one planned them (although some people do argue this). At best, however, those in charge at the time were guilty of manslaughter on a vast scale. In fact, I sometimes wonder why Chinese people still get so mad at Japan. Japanese policies in China between 1931 and 1945 were certainly atrocious and many of the deaths that resulted were intended. Still, if you were minded to ask who killed more Chinese people in the twentieth century, the Japanese imperialists might well have to cede first place to China's communists. However, I guess there is less national humiliation in it when the killers are your fellow countrymen than when they are foreigners.

To conclude, no one has the secret of correctly valuing long term assets like housing and equities. Markets are not very good at it. Governments are not very good at it either.

But the tail risks of government miscalculation are far worse than those of market errors. In historical worst-case scenarios, market errors have lost us trillions of dollars. Government errors have cost us tens of millions of lives.

The reason for this disparity is very simple. Markets are eventually self-correcting. "Eventually" is a slippery word here. Nonetheless, five years after the credit crunch, worldwide stock prices have fallen, house prices have fallen, hundreds of thousands of bankers have lost their jobs, and democratic governments have changed hands. That's correction.

Governments, in contrast, hate to admit mistakes and will do all in their power to persist in them and then cover up the consequences. The truth about the Soviet and Chinese famines was suppressed for decades. The party responsible for the Soviet famine remained in power for 60 more years. In China the party responsible for the worst famine in history is still in charge. School textbooks are silent about the facts, which live on only in the memories of old people and the libraries of scholars.

Mark Harrison : 15 Oct 2012 12:22 |  Tags: China Economics History Politics Recession Russia Stalin |  Comments (0) |  Close comments |  Report a problem