The Soviet experience

This chapter and the next one are devoted to the economics of communism. In an attempt to understand how these systems work, one good place to start is with the fact that within the planning sector (comprising, for example, roughly 80 percent of the 46,000 industrial enterprises located throughout the former Soviet Union in the mid-1980s), the use of money is severely circumscribed. Thus, “in the Soviet banking system the absolute order to pay is unknown; payments from any account are made only if in agreement with the applicable rules and authorizations.” Similarly, in China prior to 1979, only currency in circulation was considered by the authorities to be money, and monetary policy consisted primarily of regulating the amount of currency in circulation. Individual households could hold savings and time deposits in banks, but not checkable deposits. The “transfer balances” of government agencies and enterprises were transferable only with explicit hierarchical approval. Before giving approval, the banks in each case had to ensure both that the transaction had received prior authorization by the proper authorities in accordance with the economic plan and that all papers relating to the transaction were in order (see Cheng 1987 for details).

Consequently, a distinction became popular between “active money” and “passive money” (Wiles 1962). Passive money (the transfer balances of enterprises) may be a decision-making criterion for the planners but not for the enterprises.

The questions

Why was Caesar assassinated? Why have some dictatorships been stable and long-lasting (those in the USSR, China, Cuba, Iran), whereas others have proved to be unstable and very short-lived (such as many of the regimes in Africa and Latin America in the 1960s and 1970s)? Why did the regimes in South Africa and the former USSR collapse? Just as important, why didn't they collapse sooner than they did? Why have countries such as South Korea, China, and Chile grown so fast in recent years? Is political dictatorship good for economic growth? Why are some regimes (Stalin's Russia, Hitler's Germany, Pinochet's Chile) extremely repressive, whereas others are less so? Why do even relatively repressive regimes have periods of thaw in which the level of repression is temporarily reduced? Have dictators such as Cuba's Fidel Castro or Iraq's Saddam Hussein stayed in office so long because of their capacities to repress their peoples, or because they are popular? Can the answer be: both? Was Adolf Eichmann, the transportation coordinator of the Final Solution to the Jewish question, himself guilty of the crimes committed by the Nazi regime, or was he just a cog in the machinery of mass murder? Should functionaries in other regimes – such as those in Argentina, South Africa, or China, which committed massive violations of human rights – be tried for the activities practiced by those regimes?

All of these questions, and others like them, concern different aspects of the behavior of dictatorships.

Introduction

This part of the book looks at some aspects of the dynamics of dictatorship – that is, its origins and some of its consequences. This chapter is concerned with political inaction – the conditions under which democratic politicians may fail to respond to or provide leadership on important political issues, thus effectively suppressing the demands of their constituents to “do something” about them. The inertia or powerlessness of democracy under certain conditions is one of the seeds of dictatorship, since dictators can act under many circumstances in which democratic politicians cannot. I show the forms of social structure which are particularly likely to result in this pathology – for example, polarized political parties, rigid political preferences, and lack of trust in politicians and in the political system.

Another germ of dictatorship is ethnic conflict and nationalism. These phenomena are modeled in Chapter 12. Ethnicity is modeled as a capital good which reduces the transaction costs of market and political exchange within the group. Investments in ethnicity have two peculiar features:

1. Much of the investment is done by parents for the benefit of their children

2. The payoff to an individual depends on investments made by others in the group and on the group's collective (political) choices.

Hence the potential for conflicts of various sorts, both between groups and between generations. I show that neither market nor democratic political mechanisms can easily resolve these conflicts.

The Cambridge series on the Political Economy of Institutions and Decisions is built around attempts to answer two central questions: How do institutions evolve in response to individual incentives, strategies, and choices, and how do institutions affect the performance of political and economic systems? The scope of the series is comparative and historical rather than international or specifically American, and the focus is positive rather than normative.

What makes citizens comply with various costly exactions of government, particularly those like military service in which citizens risk losing their lives? In a provocative effort to provide a rational choice perspective on democratic legitimacy, Margaret Levi argues that citizens will prefer to comply provided the personal costs of compliance are not too burdensome. However, she argues, citizen compliance is contingent, requiring a positive assessment of both government trustworthiness and ethical reciprocity, the likelihood that other citizens will also do their share. Her evidence is rich and varied. She shows how mutual distrust between linguistically separate subgroups during two world wars made ethical reciprocity and “fair shares” arrangements unobtainable. Moreover, institutional arrangements making government commitments credible are essential to getting people to act on the belief that any fair shares arrangements will be enforced, and variations in credibility explain differences in the success of conscription. Finally, she shows how different personal costs of obtaining the status explain varying extents to which people became conscientious objectors.

This book examines, in historical perspective, changes in the role of the state with regard to public ownership and the scope of welfare in the main industrial and transitional economies. These changes have stimulated illuminating debates on the state's size, range, and functions. They have also involved important transformations – the shifting of boundaries between the public and private sectors, the carrying out of large privatization programs, and the reevaluation of the nature and content of public welfare. These debates and transformations are of singular importance for understanding the actual and potential scope of the state in any economy.

The term industrial economies refers herein first and foremost to the main Western European countries – namely, the United Kingdom, France, and Germany – and to the United States. Whenever appropriate, the framework is expanded to include the entire so-called Group of Seven (G7) industrialized countries. The term transitional economies refers first of all to Russia and, whenever necessary, to its former Central and Southern European satellites. I believe that the developments in these Western and Eastern countries since World War I concerning public ownership and welfare present compelling correspondences, notwithstanding great differences in scope, timing, and type of system. These correspondences deserve to be brought to light and examined on a comparative basis. (The focus on West and East as defined does not mean, of course, that detailed examinations of germane reforms in other countries are of less importance or interest.)

The Underlying Issues

From the viewpoint of the twenty-first century, what are the prospects concerning the scope of the state – both in the developed industrialized countries of the West, the G7, and in the transitional economies from command-andcontrol to markets on which I have chosen to focus, namely the Russian Federation and the USSR's former East European satellites? Will the economic developments in the West lead to a further decline in the role of the state, not only with regard to public ownership and welfare but also in other respects, or will they rather tend to push toward combinations of various reductions with new extensions of the functions of the state? And as far as the indicated East European countries are concerned, will further reshaping and institutional adaptations of the state machines bring them closer to a free market economy like that of the United States, or rather to dirigiste economies in which the state always plays a decisive role as owner, regulator, and manipulator of firms that are mostly weak, though market oriented?

In order to tackle these crucial, all-encompassing questions, one must first identify the underlying issues concerning not only the actual but also the potential impact of a range of transformations that have taken place at an accelerating pace – in the West particularly since the late 1970s, and in the East since the middle to late 1980s.

This part places the various changes undergone in the industrial countries and in the former Soviet Russia with regard to privatization, welfare, and their respective connections to the state's agenda into two broad frameworks: for the West European countries considered, the framework is the group of the most advanced industrial countries, the G7; for the Russian Federation, the framework is Eastern Europe, comprising both Russia and its former East European satellites.

To begin with, I point out in Chapter 5 that the debates on the state's size and functions – which I presented in detail in Part II – are predicated on certain basic theoretical assumptions concerning the factors that determine changes in output and employment and on how these changes affect the state's agenda. In this regard, the opposition between classical economics and Keynesianism (and between their respective current offshoots) reflects vastly different views on “activist” governments and, accordingly, on the types of functions assumed by the state. To illustrate the point I present the U.S. agenda – as embodied in federal budget data – both as it might have been constituted on the basis of the classical theory and as it has actually evolved as a function of sociopolitical pressures, the requirements of economic growth, and the amplitude of technological change. A simple comparison shows that within the classical framework the state agenda would be reduced to two narrow blocks, namely general government and defense, while the modern agenda adds a variety of activities concerning economic development and social protection.

Governance by consent is extremely demanding of both governments and their citizens, but it is less costly and less dangerous than governance by coercion. While there is a strong coercive element to all governments, whatever the regime form, democracy's maintenance requires, as well, a significant degree of voluntary and active compliance. This is not the once-and-forever consent to a social contract that Hobbes elaborated, nor is it the generational and large-scale contract renewal of Locke. It is, instead, the felt and activated obligation to cooperate with the demands of government in those domains that are constitutive of citizenship and citizenship rights.

These are among the lessons of the historical events and struggles recounted here. The model of contingent consent has been endangered by observations and alternative explanations. It survives the test of plausibility and sheds considerable light on compliance and consent in democracies.

Privatization, Welfare, and the State's Agenda

As I pointed out in Chapter 3, the political and ideological upheaval brought about by Margaret Thatcher in Britain and by Ronald Reagan in the United States in the late 1970s and early 1980s aimed at liquidating the so-called postwar settlement in the first country and the Roosevelt era consensus, in the second – both viewed as embodying the ideas of activist governments preoccupied with full employment and the welfare state. The new leaders intended to redefine the role of the state, reduce its functions, and bring to an end what they perceived as the era of overcentralized, bureaucratic, and interventionist governments. Margaret Thatcher directed her attack in particular against public ownership, that is, against Labour's nationalizations and Labour municipalities' extensive power, ownership, and control. Accordingly, privatization there became a key instrument for remodeling both the state and the power relations in society. In the United States, Reagan's emphases on increased defense spending (because of the Soviet menace), along with large tax cuts, decreased welfare spending, and an eventual balanced budget – the whole denounced as “voodoo economics” by his electoral competitor and eventual partner George Bush – also aimed at redefining the scope of the state. Tax cuts – with taxes viewed as evil – and decreased income transfers became Reagan's instruments for downsizing the state and limiting its functions. The same emphases were repeated by the Republicans during and after their successful parliamentary elections of 1994. Some of their leaders reasserted Reagan's creed that taxes were not only evil but also unnecessary.

This part focuses on the policy reversals brought about in the industrial and transitional economies by critical changes concerning the role, size, and structure of the state. In the industrial countries, particularly since the late 1970s and early 1980s, debates, crucial elections, and key policy decisions have centered on the complex problems of the nature and tasks of public and quasipublic enterprises, on the scope and consequences of welfare programs, and on state policies with regard to income redistribution. On the other hand, in the former Soviet countries, multiple conflicts and confrontations – generated within Russia proper, its imperial provinces, and its satellites – have centered inevitably on the complex, interlocking issues brought about by the rapid disaggregation of the main structures of the all-encompassing Soviet party-state.

The debates for or against dismantling public and quasi-public state-owned or -supported enterprises and the actual liquidation or privatization of the most outstanding among them, notably in Great Britain, have had a great impact throughout the world. In Chapter 3, I indicate how these debates throw light on the multiple forms and purposes of public companies and off-budget statutory agencies, as well as on their use as devices for circumventing certain constraints, as alternative ways of asserting control in certain sectors and branches, as channels for moving credit in selected directions, and as instruments for coordinating government programs and plans. The debates also show the difficulties encountered at times in attempts to disentangle the frontiers between the public and the private sectors – for instance, in the case of government-oriented corporations with long-term capital supplied by the state or that are integrated into state-determined planning frameworks.

The chronicle of mass conscription in modern democracies is the story of the changing relationship between the state and its citizens, and the Great War is one of the major turning points, especially in the Anglo-Saxon democracies. The institution of conscription significantly extends the obligations of male citizens and the reach of the state. Its history offers insight into both the institutional arrangements that promote or undermine the consent of the governed and the changing bases for that consent.

The high degree of citizen support necessary for conscription hinges on the perception of an acceptable policy bargain whose terms government actors are likely to uphold. The minimal terms of the democratic conscription bargain are that government will conscript according to some legislated and relatively equitable formula.

Focusing in historical perspective on the role of the state with regard to public ownership and to welfare in the Western industrialized countries, on the one hand, and in Russia, on the other, I have tried to underline the correspondences that have arisen over time within and between these markedly dissimilar systems. Let me recall briefly the crucial moments and forms of these correspondences and their implications.

With regard to the industrial West, I pointed out that from the very emergence of the national states and the continuous expansion of market relations, the states began to exercise vast control over the types of production, openly protected and subsidized various industrial enterprises, and consolidated their own ownership and direct management over their countries' key industries. Eventually, within the mixed liberal-mercantilist and rapidly industrializing framework of the nineteenth century, the role of government decreased in some respects, but continued in certain Western countries with regard to the promotion of national industries, the subsidization of exports, and the limitation of imports. This direct role of the state expanded further during World War I and the interwar years, as well as during and after World War II. As we noted, the role of welfare also became increasingly significant from the end of the nineteenth century onward and gained in scope and importance during the interwar years and then again particularly after World War II.

Why should a private enterprise economy be subjected to any kind of government intervention and not be left entirely to the guidance of the “invisible hand” of the market? The answers to this often-repeated question have varied enormously through time under the impact of intertwined economic, social, and political considerations and of power relations within the society. Modern conservative politicians, and certain economists, contend that the more limited the economic role of the state, the better off the economy and the population at large. Other economists dismiss this contention and its theoretical underpinnings as unrealistic (as we shall see in Part II). These economists point out that the market cannot perform all the socially necessary economic functions – moreover, that it could not consistently discharge all of them efficiently. As a matter of fact, the state's (i.e., the government's) interventions in the economy have developed historically in a number of ways that could be grouped into the following basic categories: legal and regulatory, allocative, growth-oriented and/or stabilizatory, income distributive.

Building on the foundation of property laws, the first category of activities has consisted of determining the market's legal structure and regulating its processes involving coalitions and bargaining among consumers and firms. As Professor Milton Friedman, an ardent defender of individuals' freedom to choose, has pointed out (in Capitalism and Freedom), government is essential for achieving something that the market cannot do for itself, namely to act both as “a forum for determining the rules of the game” and as “an umpire to interpret and enforce the rules decided on.”

Throughout the nineteenth century states enhanced the extent and depth of their coercive capacity while also expanding the privileges and numbers of citizens. Rulers developed increasingly efficient and centralized administrative apparatuses to monitor and extract manpower from the countryside, but they had to appease citizens who were also voters and to ensure the cooperation (or at least avoid the resistance) of those whose services they sought, whether voters or not. Nearly all the European, North American, and Antipodean states – democratic or autocratic – devised new equilibrium policies to define the mutual obligations of citizens and government actors. In terms of military policy, the problem for modernizing states was how to develop an effective fighting force more embedded in national society than the absolutist armies of Europe or the local militias of the new countries of North America and the Antipodes.

The substantive focus of this chapter is on the disappearance of various forms of buying one's way out of military service if conscripted: commutation, a fee paid to government; and substitution and replacement, payment to someone else to take one's place.