Aslund on the Post-Soviet Transition

ArtirKel has been writing a series of posts on the economy of the Soviet Union, including a set of "brief remarks on the transition". For anyone entirely new to the topic, the conventional wisdom is that following the fall of communism eastern Europe underwent a massive economic depression. This was not a recession of the sort that we experienced in 2008; rather, we're talking Greece-times-two double-digit-recession-for-several-years-on-end. For those of us who advocate capitalism, then, this seems like evidence either for the superiority of communism or at the very least for the need for gradualism. Immediate moves risk severe collapse.

The main point of Artir's article is that while shocks resulting from transitions to capitalism may very well exist and in the short-run be quite significant, they do little to disrupt long-run trends - and in the long-run we are all dead communism is as we all know a terrible system.

At the time I mentioned Anders Aslund's doorstopper Building Capitalism: The Transformation of the Former Soviet Bloc. Aslund makes the case in a section entitled "The Myth of Output Collapse" that the conventional wisdom is actually quite wrong about the magnitude of the collapse. Moreover, the countries which weathered the transition best were those which were swiftest to reform. Now that I have access to my copy again, it seemed worthwhile to write this post summarising Aslund's arguments in this section.

Economies were already in chaos (p. 122)

Aslund argues that the conventional wisdom ignores how weak the communist economies were at the time of their collapse. During the years 1989-91, the average former Soviet republic (FSR) economy contracted by around 11%. So to claim that without the transition there would have been no turmoil is straightforwardly false.

Changes in the way output was recorded (p. 122-4)

It's commonly believed - though I don't know if José himself would accept this - that Soviet economies had a persistent problem with over-reporting of output. The prospects for promotion of many people in the production chain depended not upon profitability but on recorded output, so there was a strong incentive to make over-exhuberant claims about the total product of one's empire. Aslund estimates, quoting some of his other research, that added around 5% to the reported GDP of the USSR.

More significantly, under capitalism there was significant under-reporting of output. There were two key reasons for this: firstly, massive expansion of the black market, which had been severely repressed under communism. Secondly, the splintering of industries into large numbers of small firms often left government statisticians unable to keep up. For example, for many years Hungarian statistics left out all firms with fewer than 50 employees, with the result that through the late 80s into the mid 90s the unrecorded economy never went below 27% of GDP.

Move to measuring Consumption over Production (p. 125-6)

When measuring GDP in market economies, we have a simple way to assess the value of a good: we look at how much people are willing to pay for it. Where the good is one that people do not pay for - policing, for example, or education, we move instead to looking at how much is spent.

The USSR had this for everything. The problem was that this allowed and even encouraged the production of many things that nobody wanted. Similarly, it encouraged excessive processing of products even when this failed to make the end-product any more useful or enjoyable. These useless products were counted as output in Soviet statistics, but if we are honest they were sheer waste. The move to capitalism merely exposed this.

Shocks to foreign trade (p. 126-31)

Communist countries traded almost entirely with each other. This meant that the distorted trade patterns which they had on a domestic level were amplified at the level of international trade. For example, under communism Hungary had a nice little export industry in machinery and buses. After the collapse of communism, suddenly no-one wanted to buy these - for reasons which will be obvious to anyone who has travelled on the Budapest Metro Line 3 (right).

Furthermore, much of the trade involved "implicit subsidies" from one Soviet nation to another, and particularly from energy producers to non-energy producers. The end of these subsidies didn't hurt the Soviet bloc as a whole, and indeed the central case of Russia it meant a substantial gain (amounting, if I'm reading Aslund right, to 17.7% of its GDP!). But it does add more knots to post-Soviet statistics.

Collapse of Military Spending (p. 131-2)

How to achieve full employment:
conscript the unemployed!

As mentioned above, when assessing the contribution of government spending to GDP we have no better option than simply to look at the amount being spent. The USSR spent an inordinate amount of its resources on the military - Aslund suggests 22% of GDP, Artir thinks it was probably about 18%. Either way, this was several times the international norm of around 3%, to which Russia reduced its spending following the collapse of communism (most other countries reduced their military spending even further).

This would lead to a massive fall in measured GDP, possibly as high as 20%. Yet with the exception of those directly employed by the military, it will have had no effect at all upon people's standard of living. This is one of the weaknesses of GDP - it is perhaps the best proxy we have for living standards, but it is ultimately only a proxy.

Wasteful Investment (p. 132-3)

The otherwise great economist Paul Samuelson predicted in 1961 that, since the USSR was pouring a greater proportion of its output into investment in further capital, it would overtake the US GDP some time in the 1980s or 90s. In hindsight this is an amusing story, but it also poses an important question: why didn't the USSR overtake the USA?

The answer is that much of the investment was simply wasted. Apart from the vast problems of co-ordination (section III), there were vast problems of theft and of managers demanding more inventory stocks than they really needed. For this reason, a lot of what was counted as investment was failing to contribute at all to future productive capacity.

How much did GDP fall? (p. 136-7)

Aslund produces a chart giving his estimates of GDP across the former USSR in 1995, indexed to 1989 levels.

There's decline in many countries. However, this decline is highly variable, and some of the most reforming countries - especially what would later be the Visegrad Group of Poland, Czechia, Slovakia, and Hungary - even grow. This strongly suggests that to whatever extent there was indeed a collapse in the economies of the former USSR following the fall of communism, whatever caused it was neither capitalism nor the shock of transition.

Government House Democracy

Grief at losing the EU referendum is causing many people on the left of British politics to wake up to something libertarians have been saying for years: democracy is kind of a stupid system. I won't go over the many problems with democracy as it is practised, although it should be noted that they go far beyond the fact that sometimes The People make stupid decisions. My concern here is to ask: why do we have a democracy, and how could it work better?

Here is a simple suggestion for why democracy is a relatively good system: people accept it. That is to say, countries which are democratic are significantly less likely than non-democratic countries to experience violent rebellions or civil wars. This applies not only to the relatively mature and open democracies of Scandinavia and the Anglosphere, but also to the corrupt tinpot democracies which dominate Africa and South America. There is no particular connection between democracy and good governance, but if you can achieve good governance then democracy makes it much more stable.

In what way does it become more stable? Primarily because people feel, rightly or wrongly, that they have a voice and are being listened to. People will be less likely to oppose a system when they feel that they have some role of authorship in it. By voting, people contribute to two things: firstly, they help fool themselves into thinking they have a significant voice, and secondly, they make it easier for others to believe this idea.

By voting, you demonstrate your buying in to this collective myth and thus your membership in (and hence acceptance of) the political community. This is a falsity, and patently so: the idea that one ordinary person can influence a polity of sixty-five million is utterly ridiculous. But so long as everyone pretends to believe it, we can get along.

Unfortunately, this does not seem to be enough. Perhaps it was never enough, and we relied upon other signals that people were being listened to for stability - the close links between trade unions and the Labour Party, for example. Perhaps libertarians have been the little boy shouting that the emperor has no clothes (I don't think we're that influential, but who knows?). Either way, the fact is that enough people are feeling unlistened to that our political culture is under threat.

What, then, can be done to recreate the myth that people are being listened to? E-petitions are a valiant attempt at this, but are aimed at a fundamentally different audience from the one that voted for Brexit. E-petitions are a tool of the young and politically engaged; Brexit, as we have all heard repeatedly, was foisted upon the young by their unemployed and uneducated elders.

MP's surgeries are probably fairly effective for those people who are aware of how to attend them and have the forethought to book a session. But my suspicion would be that a very substantial constituency is simply unaware that surgeries are a thing - they're not something that we talk about a great deal, after all. And quite apart from that, there's the whole question of whether MPs could really handle a move towards mass use of surgeries. They have other things to do with their time, after all, and do you really want to spend every single Saturday listening to people, most of whom are expressing similar concerns in inarticulate (and often in an angry, perhaps even threatening, manner), concerns which you simply do not have the power to do anything about?

I don't really have a good answer to the second problem I'm posing. How do you get disenfranchised people to feel they are being listened to? (Should we care? What will they do if they don't - more shootings, or will it just contribute to what, in a vague sense, we call "the decline of social trust"?) My hope, however, is that by putting it in terms of perceptions of listening rather than actual listening, I can move us closer to a real solution.

Links, June 2016

Considering that 90% of the sixth Harry Potter film was just about teenagers being frisky and hormonal, they could at least have done it the proper way: as a teen comedy.

The current Republican party is depressing for a number of reasons, including its positions on immigration. There was a better time, though: see this 1980 video of soon-to-be-POTUS Ronald Reagan and his soon-to-be-VPOTUS (and successor as POTUS) George H.W. Bush discussing illegal immigration.

Have you heard that "Happy Birthday" is under copyright, and can only be used in films at great expense? Turns out the copyright has been overturned! (Yes, this is old news. It was recent at the time I added it to my list of links, dammit!)

Despite its lack of Euro '16 coverage, FiveThirtyEight.com remains one of my very favourite websites. One of the reasons is its coverage of questions which are not only important, but with answers that are applicable to daily life. To wit: when should you turn up for a party?

Zilla Van Den Born's holiday to Thailand was unlike any other: it took place entirely in her flat, through the medium of Photoshop.

A review of Brighouse and Swift's Family Values, a book which argued that the imperative of social equality places strong limits upon what parents can do for their kids. The book, for me, exemplified two of the great malaises of modern political philosophy: attempting to provide essentially consequentialist grounds for essentially deontological concepts like non-legal rights, and armchair psychology presented as moral principles.
(Worryingly, these seem set to continue. I recently had a conversation with a PhD student working in this area, and trollishly suggested that egalitarian governments should intervene to encourage non-assortative mating. Obviously you can't force people to marry outside their social class, but if you can require military service why can't you require them to occasionally go on a date with someone they otherwise wouldn't? If you can subsidise marriage, why can't you give a higher subsidy to cross-class marriage? Her objection was that "it would require us to identify some people as the least attractive, and this would be harmful to their self-esteem." Presumably the collection and publication of income statistics is impermissibly harmful to the self-esteem of those on low incomes, and if some independently of the government were to come up with an objective measure of which people are least attractive then as an egalitarian this PhD would have had no further objections to my proposed measures. But I digress.)
In any case, the review is worth reading as a critique of the book on its own terms.

The Independent (to which, RIP): "Christians are the world's most persecuted people".
Salon (to which, please also die): "The Myth of Christian Persecution".
Sort yourself out, left-wing media complex!

A fascinating attempt to portray anti-suffragism as it was seen by sensible, liberal, anti-suffragists. The argument about maintaining a non-politicised sphere of society hits very close to me: people should be able to avoid politics, and the current fashion of right-ons for insisting that everyone vote is not only dangerous and misguided as a way of improving the world, but deeply depressing. If you are interested in politics and you follow one of these links, make it this one.