The comparison between capitalism and socialism presented in this essay was made by one blind man.

Introduction

According to an old custom, sanctified by Marx, an essay on isms should deal with the struggles between two classes: in our time, between the capitalists who own the means of production and the workers who do not. I intend to violate this custom for two reasons: first, I do not regard the question of ownership, by itself, to be so critical; second, it has been discussed and debated to the point of boredom. Instead, I propose to divide the populace into producers and consumers and to inquire how each group fares under capitalism of the American type and under socialism of the Soviet variety, at least as it still existed in the middle 1980s. This does not imply that the people suffer from split personalities, but only that each person performs several roles and has different interests.

Introduction

Why did the Russian government emancipate the serfs in 1861? Of the several explanations offered – fear of a serf revolt (Gerschenkron), raisons d'état (Blum), cultural factors (Field), military needs (Rieber), the general crisis of serfdom (several Marxist historians) – the hypothesis most enticing to an economist was suggested by the Soviet historian M. N. Pokrovskii: the serfs were freed because serfdom had become unprofitable for the masters. It is enticing because profitability is quantifiable. In contrast to other explanations, this hypothesis can be subjected to a theoretical analysis and, with luck, to an empirical test. This is the purpose of this essay.

Pokrovskii attributed the alleged fall in the profitability of Russian serfdom to the rise in grain prices following the repeal of the British Corn Laws. To our surprise, this rather implausible explanation made more sense than one would expect: the effect on serfdom of a rise in grain prices, a more or less accidental event, will be shown to be similar to the effects produced by population growth, a much more important phenomenon. Both of these effects are analyzed in the first of our four models. Being free of specifically Russian conditions, the model may be widely applicable. Our next two models, in contrast, deal with two conditions particular to the Russian case: a limit on the serfs' labor obligations (called here “Paul's Law”) and the specific rates of exchange between the serfs' land allotments and their labor obligations (the “Inventories”) imposed by the government in several Western provinces.

The problem

The idea for this essay was suggested, unwittingly to be sure, by the Soviet Premier Alexei Kosygin in his famous speech of September 27, 1965, inaugurating the Soviet Economic Reforms. Of the several changes in directives to enterprises, which he announced, two are relevant here: (1) the greater emphasis to be placed on profits, and (2) the replacement of the output target by sales.

Taking advantage of the theorist's inherent right of simplification, I would say that the enterprise manager (or director, as he is usually called) was instructed to maximize an unspecified function of profits and sales, subject to certain planning directives and several constraints that, though important in themselves, need not be considered here. I will argue in Section II that the maximization of a weighted sum of profits and sales makes excellent sense when the enterprise is allowed to set the prices of its outputs. It is not needed, however, if prices are set by the State, as indeed they are in the Soviet Union. Under these conditions, why was the Manager not given freedom of decision and instructed to maximize profits only, in accordance with good old economic theory, and without the additional directives and constraints?

I suspect that Mr. Kosygin's solution was not based on fine theoretical considerations. Even if he sympathized with them (for which there is little, if any, evidence), he would certainly be reluctant to abolish the planning mechanism and give complete freedom to Soviet enterprise managers.

This essay tries to answer three simple questions:

1. Is a Soviet-type index of industrial production as bad as it looks?

2. Is a Federal Reserve-type index as good as it is reputed to be?

3. Is the latter index clearly superior to the former?

Introduction

The indictment of the Soviet official index of industrial production, as drawn by our experts, usually runs as follows:

1. the use of the 1926–27 weight base long since obsolete;

2. the introduction of new products into the index at inflated prices;

3. the use of value-of-output (or of price) weights instead of the more respectable value-added weights;

4. miscellaneous offenses, such as the exclusion of small-scale industry in early years, unreliable reporting of original data, arbitrary prices, use of multiple prices since 1952, if not earlier, and many others.

Of all these indictments, I will deal here with only the third – the use of value-of-output, or of prices, as weights, all others having been thoroughly discussed elsewhere. My concern with this particular item stems not from its numerical importance – if anything, our experts tend to minimize its effects as compared with those of the other transgressions and are even a bit uncertain about its sign – but from plain curiosity about an aggregate index of industrial production with such obviously wrong weights, a curiosity which has remained unsatisfied because of the scarcity of analytical literature on the subject.

For a teacher of comparative economic systems, the publication of The Capitalist System: A Radical Analysis of American Society, by Edwards, Reich, and Weisskopf, is a windfall: it presents him with 540 pages of radical attack on capitalism all in one place, including passages from Marx and Engels, Polanyi, Dobb, Baran and Sweezy, Mumford, Gintis, Fromm, Bowles, and others. The three editors wrote brief introductions to each chapter and to each selection and contributed several articles of their own. Most of the material is nontechnical and well written; it should be accessible to any intelligent undergraduate and lay reader.

An ordinary book of readings is essentially a pedagogical tool. Its editor need not agree with, or be held responsible for, the views and conclusions presented in it. But this is no ordinary book of readings. It presents almost exclusively the radical point of view. The introductions written by the editors gave them ample opportunity to state their disagreements, if any, with the contributors. Hence, the reviewer has the right to treat the book as an integrated work and to hold the editors responsible for its content.

Nevertheless, if the book's subtitle were A List of Evils of the American Economy, or something like that, I would not quarrel with it; I might even suggest a few extra ones. But what provoked me was the word “Analysis” in the subtitle.

The purpose of this essay is to present, or more correctly, to revive, a hypothesis regarding the causes of agricultural serfdom or slavery (used here interchangeably). The hypothesis was suggested by Kliuchevskii's description of the Russian experience in the sixteenth and seventeenth centuries, but it aims at a wider applicability.

According to Kliuchevskii, from about the second half of the fifteenth century Russia was engaged in long and hard wars against her western and southern neighbors. The wars required large forces that the state found impossible to support from tax revenue alone. Hence the government began to assign lands (pomest'ia) to the servitors, who were expected to use peasant labor (directly and/or via payments in kind and/or money) for their maintenance and weapons. In exchange, the servitor gave the peasants a loan and permitted them, free men as yet, to work all or part of his land on their own. The system worked rather badly, however, because of shortage of labor. Severe competition among landowners developed, the servitors being bested by lay and clerical magnates. Things became particularly difficult for the servitors after the middle of the sixteenth century when the central areas of the state became depopulated because of peasant migration into the newly conquered areas in the east and southeast. Under the pressure of the serving class and for certain other reasons, the government gradually restricted the freedom of peasants, already hopelessly in debt to their landlords, to move.

John W. Kendrick's Productivity Trends in the United States is a major addition to the long and honorable list of the National Bureau of Economic Research studies in American economic development, crowned (but let us hope, not terminated) by Simon Kuznets' recent magnum opus. Like some of its weighty predecessors, Kendrick's is an impressive book: 630 pages long, with ten appendixes, 205 tables, and 25 charts. Some of its materials came from the Bureau's previous publications; others were derived by the author from a variety of sources. The result is a vast array of data for the American economy and for a number of industrial subdivisions over the 1899–1953 period that (like most of the Bureau works) will be used (and probably misused) by economists for many years to come. As required by tradition, I shall try to quarrel and to find fault with the author's work, but the total impact of all my comments will, I suspect, amount to little compared with the sheer accomplishments of this book. I can now understand how the puppy in an old Russian fable must have felt when barking at an elephant.

There are three subjects that a reviewer of such a volume might discuss: (1) the derivation of statistical data, (2) the methodological skeleton, and (3) the most significant findings. The first subject is beyond my knowledge and time; the third will be presented, like a dessert, at the end of what promises to be a rather tedious paper; and on the second I shall concentrate.

Imagine that most of the obstacles facing Soviet kolkhozes (collective farms) today, such as output and delivery quotas, administrative interference, shortage of strategic inputs (materials, spare parts, fertilizer), depressed prices of outputs, etc., suddenly vanish, and the kolkhozes find themselves in a Lange-Lerner type of a competitive world where everything can be bought and sold at a market price, and where peasants are free to run their own affairs provided the essential structure of the kolkhoz is retained. How would Soviet agriculture, or for that matter any economic sector so organized, fare in such a wonderland?

Freed from existing restrictions and abuses, the kolkhoz would presumably revert to its prototype – a producer cooperative which utilizes the labor of its members, purchases other inputs, sells its outputs, pays a rent and/or taxes, and divides all or a part of its net proceeds among its members. The presumed democratic nature of such a co-op and its freedom from capitalist exploitation has made it highly attractive to socialists and social reformers for ages. But its popularity has not prompted its proponents to analyze it with the same loving curiosity that the “bourgeois” economists have shown toward the capitalist firm. And yet it must have been obvious, at least to some of these proponents, that co-op members are likely to be ordinary human beings bent on maximizing the benefits from their participation in the co-op.

“At the bottom of all the tributes paid to democracy,” Churchill said, “is the little man, walking into the little booth, with a little pencil, making a little mark on a little bit of paper” (speech to House of Commons, October 31, 1944). Almost everyone would agree with Churchill that democracy means rule by the people. And until recently, rule by the people would have been assumed to entail the rule of law. But in the past few decades that assumption has gone. Instead, it has become fashionable to insist that democracy is quite distinct from the rule of law, indeed hardly compatible with it.

This way of thinking about democracy is not, of course, new. Aristotle was opposing a similar view when he distinguished between just and unjust governments according to whether the rule of law prevailed. That the people decide, Aristotle argued, cannot in itself secure justice. If the people answer every question just as they please without being bound by standing rules, they are no better than a many-headed tyrant, because their decisions are wholly arbitrary. In Aristotle's world, the rule of law was rare and regularly attacked, and its friends were not likely to forget that it needed defending.

The time between the House Appropriations Committee's (HAC) creation in 1865 and its wholesale loss of institutional power in 1885 was one of nearly continual debate over the proper way to structure the appropriations process in the House. The debate started slowly, but by the late 1870s its intensity had increased substantially.

As we shall see, the debate was guided by the theoretical dynamics identified in Chapter 1, which informed the structural preferences of members and helped to determine their reform tactics. Of the dynamics identified as key to understanding structural politics, two especially stood out during the period covered in this chapter, giving rise to the most important reform attempts and ultimately shaping the form of the new appropriations process that was in place by 1885. The first key dynamic was the tension between leadership and rank-and-file preferences. With only a couple of important exceptions, the structural debate after 1865 was prompted by the dissatisfaction of the rank-and-file with the status quo; the rank-and-file frequently opposed the formal structures of centralized spending control, which leadership usually defended vigorously. The split between leaders and backbenchers was greatest among Democrats, whose southern members occasionally found themselves in direct conflict with the preferences of northern Democratic Speakers.

To what extent should we regard the most fundamental principles of a just society as the subject of an agreement, actual or hypothetical? In this essay I look at two famous recent approaches to this question. Then I suggest a more general framework for considering the problem. I begin with brief discussions of the contrasting approaches of James Buchanan and John Rawls.

I would like to focus on a basic issue at the center of both theories: Can a hypothetical choice motivated by self-interest yield unique and significant results and, at the same time, preserve impartiality? By yielding unique and significant results, I mean establishing nonintuitionist first principles (solving the “priority problem”) for either the general question of political procedures considered by Buchanan or the even broader question of the distribution of primary goods considered by Rawls.

Both the Buchanan and Tullock constitutional convention and the Rawlsian original position appeal to hypothetical self-interest under fair or impartial conditions. In each case the following problem arises: Can we know enough about our self-interest to choose one and only one first principle and, at the same time, not know so much that the choice has been biased in our own favor? I will claim, on the one hand, that the Buchanan and Tullock contractors, operating from behind a thin veil, know too much and, on the other hand, that the Rawlsian contractors, operating from behind a thick veil, know too little.

The story of the development of the budgetary process in the House between the Civil War and World War I is in many ways a stripped down version of the story of the development of the budgetary process in the House, and in Congress more generally, since 1921. The names and contexts have changed, but the basic processes and themes of reform have remained quite similar over the years. In the last few pages here, I want to revisit the basic theoretical points I outlined at the end of Chapter 1, examine how they expose certain themes in the development of budget reform politics between 1865 and 1921, and, finally, suggest ways that the events of this period can be used to elucidate reform politics during the past two generations.

One general point needs to be reiterated, however, before moving on to conclusions about specific themes of reform politics. That point is this: In order to understand the congressional budgetary system and the politics of its reform, one must begin with a clear definition of what constitutes this system. The analysis in the preceding chapters reinforces the need to define the budgetary system in terms of the relationships among the four major sets of actors that are involved in determining the dynamics of congressional politics – the rank-and-file, party leaders, committee members, and presidents.

The devolution of 1885 significantly altered the orientation of structural politics in the House. Most obviously, the new regime represented a shift in the status quo, altering the basic orientation of leaders, committee members, and backbenchers toward structure. Legislative committee members, who had previously been the old regime's strongest opponents, became the new regime's staunchest supporters; members of the traditional money committees became its biggest critics. Leaders could not openly assault the regime of 1885 since their followers obviously supported the new arrangement, but they could work quietly to effect their own wills through the appointment process and their efforts to coordinate committee decisions informally.

As I suggested in Chapter 1, however, the devolution was likely to have indirect institutional consequences as well. Most importantly, now that seven legislative committees could oversee appropriations bills, resources available to protect the new status quo were dispersed throughout the chamber. As members of these legislative committees went about their jobs, they were bound to generate support for their own institutional positions by doing favors for other members. As these favors proliferated, so too did the institutional currency necessary to withstand structural challenges. In short, membership on these legislative committees was valuable not only because members could more easily aid their own constituents, but also because members could assist the constituents of others, extracting a price in the process.

Because of largely exogenous leadership changes, most of these institutional chits never had to be called in, however.

Individual preferences, institutions, and public choice

Before the development of public-choice theory, normative writing about the public sector in general, and about democratic politics in particular, belonged to one of two broad categories. First, many critics defended or decried some particular public policy as advancing or denying the achievement of a just society, as they defined it. Both history and contemporary political life provide ample evidence of this kind of critical writing. For example, in earlier days advocates for and against slavery, the gold standard, progressive taxation, labor-union cartels, economic planning, and international isolationism dominated political discourse. And each advocate framed his argument in terms of fulfilling some vision of justice. Today many of the issues seem different, but as contemporary writers argue for or against a woman's right to have an abortion, a greater or lesser amount of income redistribution, or more or less government regulation of the private sector, the framing of argument in terms of justice, rights, and other deontological goals persists.

Second, other writers attacked or defended not the policies of government, but its structure, its organic laws, and the basis of representation, but again in terms of preconceived notions of justice or rights. Surely, such arguments are as old as the state.