Last year I read in quick succession "Armageddon Averted" by Kotkin, "Collapse" by Zubok, "How China Avoided Shock Therapy" by Weber, "Democracy and the Market" by Przeworski, "Deng Xiaoping and the Transformation of China" by Vogel and came to very similar conclusions about the centrality of inflation to communist legitimacy and their failure to reform. Here is the personal note (not meant for publication but too relevant to keep to myself) on my take-away from Zubok & Weber (the two I would recommend most strongly):
When there are inefficient firms, "liberalization of wages and prices" and "allowing unproductive firms go under" are the economist's obvious answers. They are also absolute chaos to those experiencing it. Following the "big bang", prices for inputs, outputs, and labor all rise in competition with each other as each agent tries to establish its position. In theory, prices will rise until the least productive firms are unable to keep up, at which time they will become bankrupt, cease paying wages, and thus end the inflationary episode by weakening demand. Temporarily slack capacity (material, plant, labor) will be purchased by more efficient firms, now with an established market economy.
The first bankruptcies occur once firms' costs outpace their revenue. While these firms produce less than they pay, that does not mean they are totally expendable. A firm paying 5,000,000 ₽ in labor and 5,000,000 ₽ in materials to produce 9,800,000 ₽ in finished goods "should" be liquidated, but in the short term that is 5,000,000 ₽ in lost wages, 5,000,000 ₽ in lost revenue to another firm, and 9,800,000 ₽ worth of lost goods. This is a dual blow to both demand and supply, and only narrows the gap between the amount goods and the money chasing it by 200,000 ₽.
The total amount of real wages needs to fall corresponds not just to the degree of inefficient production, but to offset inflationary pressure from a collapsing savings' rate. (In the Soviet Union, savings went from ~30% to ~0% as people divested from currency-denoted assets in favor of the very hard goods whose prices needed to come down). The firestorm of inflation → rising costs → bankruptcy will only extinguish when there is so much widespread unemployment that some of the increasingly scarce goods remain unsold, making firms unwilling to keep paying ever-higher costs of production themselves. In Russia, the Harvardians Larry Summers and Jeffrey Sachs oversaw 240,000% inflation, half the nation entering deep poverty (<$4/day), and a default on the sovereign debt.
"How China Escaped Shock Therapy" argues that China almost went down this path, but benefited from choosing a more gradualist approach. China used its huge size to run actual experiments, issuing special currencies so they wouldn't cross-contaminate each other: in one county they tried the neoliberal approach (deregulating prices and replacing grain quotas with a cash tax) and in the other they made a small change to the existing system (introducing a "dual track," where the government continued buying quota grain at the specified price but farmers were free to do as they wished with the surplus). In the freer trial, grain production initially shot up to chase prices but then overproduction left farmers worse off than they started. Despite this evidence, China still almost liberalized prices in 1986 and did begin in 1988. In the dual track case, what was originally an expropriating quota gradually transformed into subsidizing price floors, buffering the newly commercialized farms from the bullwhip. The social damage this unleashed led to the PRC's worst ever crisis of legitimacy (leading to the Tiananmen Massacre of 1989). It was only saved by abandoning shock therapy, and repressing the unrest.
Instead of shock therapy China's reformers settled on a piecemeal strategy Weber analogizes to Jenga: one by one, sectors would be set up to take advantage of market logic, but without ever having a single "big bang." This would limit the opportunities for run-away inflation, and since 1989 China has done a remarkable job keeping prices stable. Weber legitimizes the interventionist approach to fighting inflation by pointing to its under-appreciated success in the West. After the brutal inflation-deflation which accompanied the transition out of the World War I wartime economy, the US took a much interventionist approach to the post-World War II economy, setting the stage for three decades of roaring economic growth.
I'm a little confused...Is this an essay speaking in favor of Communism and how to manage it? I'm asking because I've been living in "Communist" China for 15 years, mostly in the middle of the country, and it's fair to say that "no one" believes that stuff. Or, are we talking about societal reform in general, i.e., how to manage reform in normal functioning societies?
I think it’s using communist attempts at reform as a case study to inform modern reformers as to how reforms can go badly, so they can avoid similar or at least analogous failures. Looking at past attempts at reform to see what to avoid and what to do sounds like pretty reasonable behaviour if you want to introduce reforms of your own.
At least for me, it is an instructive view into a system that was bad, genuinely tried to reform, but failed to do so due to a mix of entrenched interests, ideological blindspots and prizing statist comfort over genuine progress. The parallels to modern-day europe, where I live, are impossible to ignore, even if it is not as bad yet.
Whatever it is, Communism is not a form of governance. It's an ideal, the basis for a constitution perhaps, for social planning and housing.. whatever. That belongs to what westerners call 'politics'–and has nothing to do with implementing the programs successfully and cost-effectively.
Russia was never good at that and eventually failed. China was always good at that and has always succeeded.
marketization of institutions was introduced gradually in China, with demand and state capacity growing and learning step by step. this was studied by Ang Yuen Yuen and Wang Ying Yao. The Stalin style or professional state demonstrated complete capability to marketize and modernize.
Likely all or most state forms could function with the top level of generating priorities and nurturing the state capacity below needed for modernization. for example the NRC reform in America. Congress actually came together for a simple, cogent, high level direction to reverse suppression of fissionelectric power and orient to public energy and affordability needs. The bureaus below have remained submerged in significant liberal complexes that stopped the reform for now, counteracting the efforts of ARDP and NRIC. But one can imagine the American checks, balances and federal system as is having a relationship with agencies of defining requirements and objectives for the agencies, and the agencies sorting the detailed operation, providing meaningful performance metrics and recommendations for requirement change, that provide meaningful data for the upper political system to make informed decisions, resolve partisan conflict toward better understood operation and outcome.
Inflation ripped in UK and elsewhere following Covid and yet...no protests. So general price stability, at least in an open, relatively prosperous, capitalist economy, appears not as crucial as you suggest it is in poor, closed, command economies. Effective shortages of key goods, especially foodstuffs, may be more critical than prices per se
That’s a reasonable point, but I think a major difference is that a pandemic will be recognised as extenuating circumstances by the public, whereas if it appears obvious that your reform is responsible, the reaction won’t be so understanding since people know you can do something about the reform by reversing it. Also governments around the globe did get replaced due to the backlash to inflation, so I’m really not sure that inflation during the pandemic didn’t produce its own backlash, especially since a democracy is much more sensitive to backlash. Since public opinion is much more important.
Inflation in the UK was >15% in every year 1974-80 bar one. In one year it exceeded 24%. So a long period of very high inflation. There was unrest but nothing unmanageable, so inflation was not as crucial as this piece implies. In a capitalist economy, those whose nominal wages / salaries adjust upwards with inflation can gain benefits - eg the real value of mortgage debt is reduced; this may make an immediate backlash less likely. The backlash when it came was electing Mrs Thatcher to take action, but that was a peaceful change of government (whether one approves of the action or not)
Yeah, I think that’s probably correct because a democratic system is generally less brittle than communist systems of the type this piece discusses. However, just because something doesn’t cause your entire government system to collapse doesn’t mean it can’t cause a problem for a social movement for that matter. A change in election outcome is pretty much a change in government, even if it doesn’t mean the whole system collapsing in a democracy. The reason a democracy is less brittle is because it is easier for a democracy to adjust which means that if you cause inflation through your policies, it’s pretty easy in a democracy for you to be marginalised even if the election outcome doesn’t change. Still, you make a good point, and it’s also worth noting that Russia in the 90s was able to survive much greater inflation, so clearly the communist systems were unusually vulnerable even compared to relatively authoritarian Russia, and it’s worth noting that the reformist faction did not lose power in Russia during the 90s, although there are lots of pretty credible accusations that this was in part election fraud. The vulnerability of communist systems is relevant because I suspect that part of why the government was so sensitive to inflation was because they knew that if they caused too much inflation, the whole system could come crashing down, so were not willing to take the risk.
«Edil Baisalov is a politician who began his career as a civil-rights activist, became a prominent member of Kyrgyzstan’s non-governmental organization (NGO) sector, and is now serving as the country’s Deputy Prime Minister. [...]
Baisalov: “The era of global hypocrisy is over, and the people of Kyrgyzstan have woken up. What various international institutions have taught us over the years – their lectures on how to develop an economy, how to pursue nation-building, and so forth – has been proven wrong. Throughout the 1990s, Kyrgyzstan was one of the most diligent students of the liberal policies promoted by the “Chicago Boys.”
We followed their instructions to the letter. Kyrgyzstan was the first post-Soviet country to join the World Trade Organization in 1998, and we were the first to receive normalized trade relations with the U.S. with the permanent repeal of the Jackson-Vanik amendment. All of our previous governments followed IMF conditionality dictates to the letter, especially in deregulation, mass privatization, and all the austerity programs and budget sequestrations. We were promised prosperity; that the free markets and the invisible hand would take care of everything. But it did not work. [...]”»
Dissident, participant and founder of many political clubs during the Perestroika era Vyacheslav Igrunov recalled the “ideological core” with which the young reformers began building the “new Russia” in the 1990s: https://t.me/Varjag2007/82948
“In 1989, a large group of young reformers went to Chile to learn from Pinochet's experience; there were Naishul, Chubais, Lvin, Vasilyev, Boldyrev and many others. They all came back completely delighted. In the fall of 1989 we had very hard debates on this topic.
They thought after the trip as follows: to make the population poor in order to devalue the labor force, and our not very good goods would gain competitiveness due to cheapness. Concentrate resources in the hands of a few, so that these few could compete on the international market. I told them: these methods would lead to strikes and the collapse of the country. They replied that they understood this, so the main task was to destroy the trade unions first. I objected, that you can negotiate with trade unions, but without them there will be radicals and “wild” protests. Their response to my remark stunned me: “Why, don't we have machine guns?”
People from Gaidar's team spoke in general about the destruction of the state: “The more we destroy, the harder it will be to restore the old”.
When I heard this, I realized that we were not on the same path. Their idea of a strong government is not a state, but a dictator who breaks the people over his knee and carries out reforms. The phrase “breaking over the knee” appeared quite early in this environment.”
And fear is the most infectious condition of all - more than hope can ever hope to be.
Vested interests know far too well how to exploit the fear of reforms (the unknown) in the minds of the common people.
Here's an excerpt from the obituary of Mikhail Gorbachev published by The Economist in August 2022, one that brings out the interplay between mystery, fear, and power:
"In that spirit (of glasnost or openness), in 1989 he declared the first-ever competitive elections to the Supreme Soviet. He also agreed that its debates should be televised for the first time. Millions of people saw Andrei Sakharov, a dissident physicist whom he had recalled from exile, openly challenge him. In those few days the political monopoly of the Communist Party was broken, along with the mystery of its power."
great insights into why the reforms failed in communist regimes. I particularly liked this "Where planning worked well enough, as in the USSR, it created vested interests that blocked reform. Where it failed to take root, as in China and Vietnam, there was little to lose and much to gain."
In the Chinese case, you mentioned this chain: price flexibility -> arbitrage opportunities -> higher inequality, especially by people who are willing to bend the rule -> social resentment -> political instability. I think this is a very general concern across communist regimes and perhaps under-appreciated.
"Market prices, he [Marx] wrote, were a mirage concealing the true value of goods, which was derived from the amount of labor put into them. "
Marx believed that market prices were perfect, but exploitation occurred because capitalists did not buy labor, but labor power, which was cheaper than labor itself.
Communists did not want the market, because they believed that the plan was more efficient and morally better. Which leaves very few people genuinely interested in market socialism. Of those who wanted the market, the vast majority also wanted capitalism.
Last year I read in quick succession "Armageddon Averted" by Kotkin, "Collapse" by Zubok, "How China Avoided Shock Therapy" by Weber, "Democracy and the Market" by Przeworski, "Deng Xiaoping and the Transformation of China" by Vogel and came to very similar conclusions about the centrality of inflation to communist legitimacy and their failure to reform. Here is the personal note (not meant for publication but too relevant to keep to myself) on my take-away from Zubok & Weber (the two I would recommend most strongly):
When there are inefficient firms, "liberalization of wages and prices" and "allowing unproductive firms go under" are the economist's obvious answers. They are also absolute chaos to those experiencing it. Following the "big bang", prices for inputs, outputs, and labor all rise in competition with each other as each agent tries to establish its position. In theory, prices will rise until the least productive firms are unable to keep up, at which time they will become bankrupt, cease paying wages, and thus end the inflationary episode by weakening demand. Temporarily slack capacity (material, plant, labor) will be purchased by more efficient firms, now with an established market economy.
The first bankruptcies occur once firms' costs outpace their revenue. While these firms produce less than they pay, that does not mean they are totally expendable. A firm paying 5,000,000 ₽ in labor and 5,000,000 ₽ in materials to produce 9,800,000 ₽ in finished goods "should" be liquidated, but in the short term that is 5,000,000 ₽ in lost wages, 5,000,000 ₽ in lost revenue to another firm, and 9,800,000 ₽ worth of lost goods. This is a dual blow to both demand and supply, and only narrows the gap between the amount goods and the money chasing it by 200,000 ₽.
The total amount of real wages needs to fall corresponds not just to the degree of inefficient production, but to offset inflationary pressure from a collapsing savings' rate. (In the Soviet Union, savings went from ~30% to ~0% as people divested from currency-denoted assets in favor of the very hard goods whose prices needed to come down). The firestorm of inflation → rising costs → bankruptcy will only extinguish when there is so much widespread unemployment that some of the increasingly scarce goods remain unsold, making firms unwilling to keep paying ever-higher costs of production themselves. In Russia, the Harvardians Larry Summers and Jeffrey Sachs oversaw 240,000% inflation, half the nation entering deep poverty (<$4/day), and a default on the sovereign debt.
"How China Escaped Shock Therapy" argues that China almost went down this path, but benefited from choosing a more gradualist approach. China used its huge size to run actual experiments, issuing special currencies so they wouldn't cross-contaminate each other: in one county they tried the neoliberal approach (deregulating prices and replacing grain quotas with a cash tax) and in the other they made a small change to the existing system (introducing a "dual track," where the government continued buying quota grain at the specified price but farmers were free to do as they wished with the surplus). In the freer trial, grain production initially shot up to chase prices but then overproduction left farmers worse off than they started. Despite this evidence, China still almost liberalized prices in 1986 and did begin in 1988. In the dual track case, what was originally an expropriating quota gradually transformed into subsidizing price floors, buffering the newly commercialized farms from the bullwhip. The social damage this unleashed led to the PRC's worst ever crisis of legitimacy (leading to the Tiananmen Massacre of 1989). It was only saved by abandoning shock therapy, and repressing the unrest.
Instead of shock therapy China's reformers settled on a piecemeal strategy Weber analogizes to Jenga: one by one, sectors would be set up to take advantage of market logic, but without ever having a single "big bang." This would limit the opportunities for run-away inflation, and since 1989 China has done a remarkable job keeping prices stable. Weber legitimizes the interventionist approach to fighting inflation by pointing to its under-appreciated success in the West. After the brutal inflation-deflation which accompanied the transition out of the World War I wartime economy, the US took a much interventionist approach to the post-World War II economy, setting the stage for three decades of roaring economic growth.
I'm a little confused...Is this an essay speaking in favor of Communism and how to manage it? I'm asking because I've been living in "Communist" China for 15 years, mostly in the middle of the country, and it's fair to say that "no one" believes that stuff. Or, are we talking about societal reform in general, i.e., how to manage reform in normal functioning societies?
I think it’s using communist attempts at reform as a case study to inform modern reformers as to how reforms can go badly, so they can avoid similar or at least analogous failures. Looking at past attempts at reform to see what to avoid and what to do sounds like pretty reasonable behaviour if you want to introduce reforms of your own.
OK, thanks. That's the way I want to take it, but wasn't entirely sure what the author was saying.
At least for me, it is an instructive view into a system that was bad, genuinely tried to reform, but failed to do so due to a mix of entrenched interests, ideological blindspots and prizing statist comfort over genuine progress. The parallels to modern-day europe, where I live, are impossible to ignore, even if it is not as bad yet.
"....to a mix of entrenched interests, ideological blindspots and prizing statist comfort over genuine progress."
Yes, that sounds familiar. I enjoyed reading the article, but there was a part of me that wondered if this guy was going commie.
Whatever it is, Communism is not a form of governance. It's an ideal, the basis for a constitution perhaps, for social planning and housing.. whatever. That belongs to what westerners call 'politics'–and has nothing to do with implementing the programs successfully and cost-effectively.
Russia was never good at that and eventually failed. China was always good at that and has always succeeded.
marketization of institutions was introduced gradually in China, with demand and state capacity growing and learning step by step. this was studied by Ang Yuen Yuen and Wang Ying Yao. The Stalin style or professional state demonstrated complete capability to marketize and modernize.
Likely all or most state forms could function with the top level of generating priorities and nurturing the state capacity below needed for modernization. for example the NRC reform in America. Congress actually came together for a simple, cogent, high level direction to reverse suppression of fissionelectric power and orient to public energy and affordability needs. The bureaus below have remained submerged in significant liberal complexes that stopped the reform for now, counteracting the efforts of ARDP and NRIC. But one can imagine the American checks, balances and federal system as is having a relationship with agencies of defining requirements and objectives for the agencies, and the agencies sorting the detailed operation, providing meaningful performance metrics and recommendations for requirement change, that provide meaningful data for the upper political system to make informed decisions, resolve partisan conflict toward better understood operation and outcome.
Inflation ripped in UK and elsewhere following Covid and yet...no protests. So general price stability, at least in an open, relatively prosperous, capitalist economy, appears not as crucial as you suggest it is in poor, closed, command economies. Effective shortages of key goods, especially foodstuffs, may be more critical than prices per se
That’s a reasonable point, but I think a major difference is that a pandemic will be recognised as extenuating circumstances by the public, whereas if it appears obvious that your reform is responsible, the reaction won’t be so understanding since people know you can do something about the reform by reversing it. Also governments around the globe did get replaced due to the backlash to inflation, so I’m really not sure that inflation during the pandemic didn’t produce its own backlash, especially since a democracy is much more sensitive to backlash. Since public opinion is much more important.
Inflation in the UK was >15% in every year 1974-80 bar one. In one year it exceeded 24%. So a long period of very high inflation. There was unrest but nothing unmanageable, so inflation was not as crucial as this piece implies. In a capitalist economy, those whose nominal wages / salaries adjust upwards with inflation can gain benefits - eg the real value of mortgage debt is reduced; this may make an immediate backlash less likely. The backlash when it came was electing Mrs Thatcher to take action, but that was a peaceful change of government (whether one approves of the action or not)
Yeah, I think that’s probably correct because a democratic system is generally less brittle than communist systems of the type this piece discusses. However, just because something doesn’t cause your entire government system to collapse doesn’t mean it can’t cause a problem for a social movement for that matter. A change in election outcome is pretty much a change in government, even if it doesn’t mean the whole system collapsing in a democracy. The reason a democracy is less brittle is because it is easier for a democracy to adjust which means that if you cause inflation through your policies, it’s pretty easy in a democracy for you to be marginalised even if the election outcome doesn’t change. Still, you make a good point, and it’s also worth noting that Russia in the 90s was able to survive much greater inflation, so clearly the communist systems were unusually vulnerable even compared to relatively authoritarian Russia, and it’s worth noting that the reformist faction did not lose power in Russia during the 90s, although there are lots of pretty credible accusations that this was in part election fraud. The vulnerability of communist systems is relevant because I suspect that part of why the government was so sensitive to inflation was because they knew that if they caused too much inflation, the whole system could come crashing down, so were not willing to take the risk.
I realise it isn't the point of this piece, but no review of why communism fails ever mentions Yugoslavia's communism.
As far as I can tell it worked, although I have little confidence in this assessment because I've come across so little writing about it.
«Soviet officials in the late 1980s traveled back and forth to Europe and America almost constantly. The learning curve is steep.»
The results were not always welcome:
https://timesca.com/kyrgyzstan-between-the-russian-world-and-global-chaos-an-interview-with-deputy-prime-minister-edil-baisalov/
«Edil Baisalov is a politician who began his career as a civil-rights activist, became a prominent member of Kyrgyzstan’s non-governmental organization (NGO) sector, and is now serving as the country’s Deputy Prime Minister. [...]
Baisalov: “The era of global hypocrisy is over, and the people of Kyrgyzstan have woken up. What various international institutions have taught us over the years – their lectures on how to develop an economy, how to pursue nation-building, and so forth – has been proven wrong. Throughout the 1990s, Kyrgyzstan was one of the most diligent students of the liberal policies promoted by the “Chicago Boys.”
We followed their instructions to the letter. Kyrgyzstan was the first post-Soviet country to join the World Trade Organization in 1998, and we were the first to receive normalized trade relations with the U.S. with the permanent repeal of the Jackson-Vanik amendment. All of our previous governments followed IMF conditionality dictates to the letter, especially in deregulation, mass privatization, and all the austerity programs and budget sequestrations. We were promised prosperity; that the free markets and the invisible hand would take care of everything. But it did not work. [...]”»
«Soviet officials in the late 1980s traveled back and forth to Europe and America almost constantly. The learning curve is steep.»
Here is the "smoking gun" where it turns out that the model (like for Reagan and Thatcher) was Pinochet:
https://colonelcassad.livejournal.com/8955769.html#cutid1
(machine translated)
Dissident, participant and founder of many political clubs during the Perestroika era Vyacheslav Igrunov recalled the “ideological core” with which the young reformers began building the “new Russia” in the 1990s: https://t.me/Varjag2007/82948
“In 1989, a large group of young reformers went to Chile to learn from Pinochet's experience; there were Naishul, Chubais, Lvin, Vasilyev, Boldyrev and many others. They all came back completely delighted. In the fall of 1989 we had very hard debates on this topic.
They thought after the trip as follows: to make the population poor in order to devalue the labor force, and our not very good goods would gain competitiveness due to cheapness. Concentrate resources in the hands of a few, so that these few could compete on the international market. I told them: these methods would lead to strikes and the collapse of the country. They replied that they understood this, so the main task was to destroy the trade unions first. I objected, that you can negotiate with trade unions, but without them there will be radicals and “wild” protests. Their response to my remark stunned me: “Why, don't we have machine guns?”
People from Gaidar's team spoke in general about the destruction of the state: “The more we destroy, the harder it will be to restore the old”.
When I heard this, I realized that we were not on the same path. Their idea of a strong government is not a state, but a dictator who breaks the people over his knee and carries out reforms. The phrase “breaking over the knee” appeared quite early in this environment.”
You always fear what you don't understand.
And fear is the most infectious condition of all - more than hope can ever hope to be.
Vested interests know far too well how to exploit the fear of reforms (the unknown) in the minds of the common people.
Here's an excerpt from the obituary of Mikhail Gorbachev published by The Economist in August 2022, one that brings out the interplay between mystery, fear, and power:
"In that spirit (of glasnost or openness), in 1989 he declared the first-ever competitive elections to the Supreme Soviet. He also agreed that its debates should be televised for the first time. Millions of people saw Andrei Sakharov, a dissident physicist whom he had recalled from exile, openly challenge him. In those few days the political monopoly of the Communist Party was broken, along with the mystery of its power."
Full article at: https://www.economist.com/obituary/2022/08/30/mikhail-gorbachev-did-not-mean-the-soviet-union-to-end-that-way
great insights into why the reforms failed in communist regimes. I particularly liked this "Where planning worked well enough, as in the USSR, it created vested interests that blocked reform. Where it failed to take root, as in China and Vietnam, there was little to lose and much to gain."
In the Chinese case, you mentioned this chain: price flexibility -> arbitrage opportunities -> higher inequality, especially by people who are willing to bend the rule -> social resentment -> political instability. I think this is a very general concern across communist regimes and perhaps under-appreciated.
"Market prices, he [Marx] wrote, were a mirage concealing the true value of goods, which was derived from the amount of labor put into them. "
Marx believed that market prices were perfect, but exploitation occurred because capitalists did not buy labor, but labor power, which was cheaper than labor itself.
Communists did not want the market, because they believed that the plan was more efficient and morally better. Which leaves very few people genuinely interested in market socialism. Of those who wanted the market, the vast majority also wanted capitalism.