Prof. Bryan Caplan

bcaplan@gmu.edu

http://www3.gmu.edu/departments/economics/bcaplan

Econ 311

Fall, 1999

1. Capitalism and Socialism
1. There are many possible economic systems, and the choice of system potentially has major implications for both the level of wealth and the rate of growth.
2. Probably the most fruitful way to categorize economic systems is in terms of the role of government in the economy, from least to most.
3. At one pole, you have a purely free market economy, also known as "laissez-faire."
4. At the other pole, you have full government ownership of the economy, also known as "socialism."
5. Cases that lie in the middle are often called "mixed economies," since they have a mixture of private and government activity.
6. By 1900, most people across the political spectrum had come to see laissez-faire as discredited. Most of the major economic debates since then have been between proponents of the mixed economy and advocates of socialism.
7. All of this has radically changed since the collapse of the Soviet bloc since 1989. The terms of debate seriously changed as a result, with advocates of "socialism" disappearing or redefining the term.
8. Conversely, many have begun to seriously consider the possibility that the previous dismissal of laissez-faire was premature.
9. Question: What happened in socialist economies, and what insight can economic analysis provide into their performance?
2. A Short History of the Soviet Economy, I: The USSR Under Lenin
1. Lenin overthrows a moderate, democratically elected regime in Russia in November, 1917. A chaotic, but major civil war quickly begins.
2. Key point to remember: at this time, the Russian economy was still overwhelmingly agricultural.
1. In urban centers, Lenin embarks on a crash program of nationalization.
2. In agriculture, Lenin begins by legally recognizing peasants' seizures of land from wealthier landowners (this amounted to about 10% of the farmland in the country).
3. Quickly, however, Lenin began to implicitly nationalize agriculture by "requisitioning" large fractions of peasants crops, and imposing increasingly harsh punishments for non-compliance.
4. By the time Lenin triumphs in the civil war, Russia is in the grip of one of the most horrific famines in history. 5-10 M perish of starvation. Why? Lenin's agricultural policy destroyed both incentive and even ability to grow food. (At the same time, the recurring pattern of blaming the weather for everything first arises!)
5. In the face of military rebellion and peasant uprisings, Lenin caves in and relegalizes much of the private economy (especially in agriculture), a policy called the NEP (New Economic Policy).
6. The Russian economy rapidly recovers from the disaster. Soon after, Lenin has a stroke, lingers for a while, then dies.
3. A Short History of the Soviet Economy, II: The USSR Under Stalin
1. Stalin succeeds Lenin as dictator, allowing the NEP to continue for a few more years.
2. During this period, Stalin outmaneuvers all political rivals. Once they are all defeated, he feels ready to "build socialism." In a country that is still largely agricultural, the key thing to do is switch from private to government-controlled agriculture.
3. Stalin remembers the peasantry's fierce resistance to collectivization under Lenin, as well as the subsequent famine. So he prepares for a virtual civil war against 80% of the population who don't want to give up their farms.
4. Step 1: "Dekulakization." In 1928-9, all peasants labeled "kulaks," (better-off, potential leaders, etc.) - about 5% of the rural population - are sent to slave labor camps in Siberia along with their families. By most estimates about 6 M perish.
5. Step 2: "Collectivization." With potential sources of local resistance crushed, peasants over the USSR are forced into "collective farms" and "state farms." Mass decimation of livestock ensues, since peasants would rather eat their animals than give them to the state.
6. Step 3: "The Terror-Famine." As production declines due to lack of incentives, Stalin decides to break the peasantry by setting impossible grain delivery quotas, especially in areas perceived as hostile such as the Ukraine. An additional 6 M or more perish.
7. Why? Stalin uses the free grain to pay for "industrialization" of Russia, under his first "5-Year Plan."
8. Stalin's policies and the PPC: During this era, Stalin's statisticians publish a wealth of false data about their amazing progress. At best, there is a move along the PPC. Especially at first, the PPC probably shrinks drastically, but the balance of agriculture and industry changes even more drastically.
9. "Industrialization" is in many ways a misnomer; "militarization" is closer to the truth. Living standards remain miserable, but the USSR's military greatly increases in strength.
10. In sync with "industrialization," the empire of slave labor camps later known as the "Gulag Archipelago," becomes a major sector of the socialist economy. By many estimates, the typical population of the Gulag after 1930 is about 10 M, with death rates of around 10-30%. These slave laborers cut timber, mine gold and uranium, and otherwise harvest the untapped resources of Siberia. The threat of slave labor becomes a central form of labor discipline.
11. Hitler attacks USSR in 1941. At first Stalin's militarized economy seems destined for defeat, but he manages to hold power, and ultimately comes to control half of the Nazi empire: Poland, East Germany, Hungary, Czechoslovakia, Romania, Bulgaria... Within a few years, all of these countries have Soviet-style economies, along with more independent regimes in Yugoslavia, Albania, China, and other countries.
4. A Short History of the Soviet Economy, III: The USSR After Stalin
1. Stalin's successor Khrushchev gradually dismantles many of the harshest features of the Soviet economic model, especially the slave labor camps. But state ownership remains in place, with a few legal exceptions such as small farmers' plots.
2. Fake economic statistics continue to be published and frequently believed in the West.
3. Khrushchev tries a few crazy initiatives of his own, especially an effort to farm the desert in Kazakhstan (the "virgin lands" program). When he is deposed in 1964, the Soviet economy can be seen as attaining its final shape, best summed up in the saying "we pretend to work, they pretend to pay us."
4. There are a few efforts at "reform," but for the most part these are half-hearted. If you are committed to a non-profit structure, "decentralization" is unworkable.
5. Gorbachev takes power, pursues more serious changes than predecessors, and the whole system soon collapses.
5. Incentive versus Knowledge Problems of Socialism
1. What was wrong with Soviet-style economies?
1. Incentive problems
2. Knowledge problems
2. Soviet-style economies did use incentives, contrary to the popular view. The problem was that they provided a lot of incentives to be effective secret policemen, border guards, nuclear weapons technicians, etc., but little incentive to produce useful goods and services.
3. This reached its height in agriculture, where 1/3 of the food was produced on the 3% of the privately-owned land.
4. The problems of the "quota system": even when you can't lie, you can adjust quality.
5. "Knowledge problems" were also important - it is simply very difficult for a central planner to know what to do. There is a lot of local knowledge that planners wind up disregarding, and without prices it is hard to know whether something is worth doing. (The tale of the Sears catalog).
6. State Ownership and AS
1. Going back to our AS-AD analysis of government output, it is fairly easy to analyze the Soviet economy.
2. Much of the government "production" was useless - railroads through Siberian wasteland, the world's biggest X factory that never winds up producing anything, etc. There is a strong argument for counting Soviet military production in this category too.
3. Other government production was useful, but production in an extremely inefficient way.
4. Soviet R&D sector was likewise inefficient. Most progress confined to military and space technology.
5. In combination, these factors meant AS much lower than it would have been with private production, plus a slower rate of growth.
7. Rationing, Black Markets, and AS-AD
1. Another peculiar aspect of Soviet-style economies was persistent rationing, with predictable features: long lines, favoritism, and black markets. What was going on here?
2. State set prices way below the market-clearing level, even for consumer goods. Result: permanent shortages of goods, long lines, and a surplus of rubles.
3. (There was also a special set of stores reserved for Party members - rationing by status rather than waiting in line).
4. The black market took on many forms. Partly people were re-selling goods they got to buy for below-market prices. Partly this was illegal private enterprise. Partly it was "theft of socialist property."
5. The black market is the one main way official statistics UNDER- estimated Soviet bloc living standards. Prof. Gregory Grossman of UC Berkeley estimated that the black market added 1/3 to Soviet GDP.
6. Note that post-collapse statistics work the other way. Now that people have to pay taxes, they under-state production to avoid taxes instead of over-stating it to meet quotas.