Sunday, November 8, 2009

The Fall and the Original Sin of Socialism

The Fall of the Berlin Wall, whose twentieth anniversary is celebrated today, signified not just the Fall of the Iron Curtain and of the whole system developed behind its shelter, but also the “Fall” in a biblical sense: Man was driven away from what many hoped, though wrongly, might be a Garden of Eden. In this vein, then what has been the “original sin of socialism”, the sin leading to the Fall.

The Original Sinners

Without doubt the original sin of socialism was committed by Nikolai Ivanovich Bukharin (1888-1938) and Rosa Luxemburg (1871-1919). They are guilty of asserting, with unforgivable arrogance, that “socialism marks the end of political economy as a science”. They were followed, as is the way with original sin, by all of socialist mankind; by Rudolf Hilferding (1877-1941), as well as by the majority of Bolshevik economists (as we are reminded by, among others, Brus 1973; see the Appendix below for citations and sources). This sin is the origin of the decisionism and the voluntarism typical of economic management in the Soviet Union and in the countries that adopted its system, that eventually led to the Fall.

The uneconomic system

Remember? In the 1920s the “genetic” school of planning, that aimed at facilitating natural economic trends, was defeated by the so-called “teleological” (or “purposeful”) school, seeing the plan as an act of war, of aggression on the economy (for a survey see Charemza and Kiraly, 1990). Priority was given to investment over consumption, to investment in heavy industry over light industry, so as to produce steel that would produce more steel and ever more steel, regardless of the needs of the population. Many other targets were given priority, and as a result nothing at all had effective priority; the actual or opportunity costs of alternative targets were ignored or neglected. “There is no fortress that a Bolshevik cannot conquer”, Joseph Stalin loved to say. “2 + 2 = 5” was the planners’ arithmetic, and in fact the first five-year plan of 1929-32 was implemented in four years – and never mind the cost. When reality could not be forced to comply, change was faked: fake genetic miracles were claimed; just as economic plans were frequently the object of fake realizations.

The ratchet principle applied: if today we produce 100 it is imperative that tomorrow we should produce 110 - an effective incentive to conceal productive potential rather than mobilize it. There was a programme of innumerable campaigns, each centered on a single objective to be promoted regardless of cost. Stakhanovism concentrated on the exceptional performance of shock workers (with the assistance of countless, nameless helpers). Tight or taught planning had an essential role: it was believed that by aiming at impossible targets one would obtain more than by lowering the sights. This strategy occasionally might actually work, but it soon reaches the point where it defies the laws of physics and becomes a losing strategy: aiming at the Moon misses all desirable targets within closer reach. By the 1970s realised socialism in Poland was boasting that “Polak wszystko potrafi” (A Pole is capable of anything). We have seen and admired the results achieved by the Polish people: it was true, but certainly not in the sense meant at the time by Edward Gierek.

In its most spectacular and damaging form, the violation of economic laws in the socialist system consists in the adoption of the impossible target of maintaining low and stable prices, while goods are available in quantities lower than those necessary to validate such prices given their demand. Hence the inevitability of shortages, queues, black markets – as well as the absolute impossibility of introducing market elements into the traditional planning system: this is why all the numerous projects of economic reform in the direction of market socialism, in the 1960s-1980s throughout the socialist bloc, failed one after another, in one country after another.

All these are the implications of the pretense that socialism should not be subject to economic laws, both in general and in the specific Soviet-type model. In general, input-output type technical relations, and the optimization of production methods, must necessarily continue to hold in any economic system, no more no less than the laws of thermodynamics. And a fortiori economic laws of market equilibrium must hold in the specific Soviet-type system in which money was still used to pay wages and distribute consumption goods, even though prices were administered and supply was not affected by consumer sovereignty, so that Bukharin et al. could legitimately claim that the “law of value” no longer held.

Gorbachev’s responsibilities

For the persistence of this economic regime of shortages, queues and repressed inflation, Mikhail Sergieyevich Gorbachev bears a major responsibility. A great statesman, a generous, courageous and charismatic leader, Gorbachev was a lawyer: in economics he was an illiterate, surrounded by economically illiterate advisors. He believed that it was possible to maintain low prices and at the same time contain demand within the narrow, inadequate limits of production and imports. He believed that market imbalance was a necessary feature of his revolution, and bought expensive time by getting into debt with foreign lenders. Which is how the Soviet Union reached bankruptcy, economic collapse, literally famine conditions (agreed the famine was due more to the inefficient distribution system than to the lack of food, but the distribution system is also an integral part of any economic system).

What if...?

Suppose Gorbachev had recognized the continued validity of economic laws under socialism, would he have managed to modernize the Soviet system instead of sinking it? He would have had to give priority to economics over politics, and at best he could have followed the examples of those other economies that managed to combine public ownership and Communist Party political control with the mobilization of market forces domestically and internationally, like China, Vietnam, Belarus, Uzbekistan ( see Nuti, 2009). An authoritarian system is a very high price to pay for economic success, but this was still a possibility – except that once such an alternative is implemented it is extremely difficult to change course, because of its inertia and resistance to change.

Admittedly, in suffering the consequences of the original sin of socialism, Gorbachev was doubly unlucky in the very bad, if accidental, timing of his coming to power: his perestroika happened at a time of world recession and a low price of his oil, and coincided with the global victory of the hyper-liberalism of Ronald Reagan and Margareth Thatcher. Ten years earlier (in 1975) perestroika would have benefited from a higher oil price that would have provided the resources necessary to stabilize the economy and avoid Russia’s default. Twenty years later – i.e. today – the crisis of the hyper-liberal model and the global crisis of 2008-2009 would have allowed the Soviet Union or its component republics to implement a different economic model. A model, that is, with a greater role for the state and public ownership, the provision of larger amounts of resources by international economic institutions, subjected to lesser conditionality constraints – as it is happening today at the global level, with the IMF e the G-20 having taken on new and surprising functions approaching those of a Global Lender of Last Resort.

What about social-democracy?

At this point, what can we say about the failure that recently struck - with the exception of Greece that confirms the general rule - the whole of European social democracy, in spite of the financial and real tsunami of 2008-2009 (probably extended to 2010 at least in terms of labour unemployment). What are the causes of the defeat of the European “Left”, at a time when they should have benefited from the crisis and harvested anti-cyclical electoral consensus? This question deserves a post of its own but, in a nutshell: Social-democracy was also tainted by the original sin of Socialism, at least until the late 1990s and the Third Way of New Labour and the Neue Mitte that, unfortunately, overshot on the rebound.

Nikolai Ivanovich Bukharin (9 October 1888 – 15 March 1938)

and Róża Luksemburg (5 March 1871 – 15 January 1919)


Brus (1973) notes that “In the course of the development of Marxist economics it was sometimes reckoned that political economy would come to an end at the same time as the capitalist system. Among those holding such views were those whose names are an integral part of the history of Marxism – Hilferding, Bukharin, Rosa Luxemburg”. Of political economy there would remain “… only technical problems, technical balance laws of production, a science of the rational organization of productive forces “.

Cohen (1980) talks of Bukharin’s conviction that “political economy and its traditional categories were not applicable to a post-capitalist society”. “As soon as we take an organized social economy, all the basic “problems” of political economy disappear: the problem of value, price, profit, and the like. Here “relations between people” are not expressed in “relations between things,” and social economy is regulated not by the blind forces of the market and competition, but consciously by a ... plan. Therefore here there can be a certain descriptive system on the one hand, a system of norms on the other. But there can be no place for a science studying “the blind laws of the market” since there will be no market. Thus the end of the capitalist commodity society will be the end of political economy”(from Bukharin 1979, cited by Cohen 1980, p. 93).

Rosa Luxemburg writes: “If political economy is a science that deals with the particular laws of the capitalist mode of production, then the reasons for its existence and its function are confined to the period of life of the latter, and the political economy will lose its basis as soon as that mode of production will have ceased to exist” (Luxemburg 1925, in Waters 1970 p. 244). “Consequently, the end of political economy as a science represents a historical world task“ (Luxemburg 1925, in Waters 1970, p. 248).

Rudolf Hilferding forcefully expressed the idea that “Centralized control of the economy on a national and eventually an international scale would allow for conscious social regulation of both production and distribution and create the objective conditions for a planned economy no longer subject to regulation by the law of value” (Mattick, 1983; see also Howard and King 2003).

Hilferding appears to believe that economic laws can be suspended even in the political struggle for socialism. According to Breit and Lange (1934) he “invented a theory of so-called political wages, arguing that, using its political strength in the democratic state, the working-class movement imposes on capitalism higher wages than those resulting from the capitalist laws of supply and demand. It turns out that this took no account of the nature of capitalist ownership. It is not possible to impose in a capitalist economy a distribution of income that is different from that determined by the automatic operation of the laws governing the capitalist economy, the laws of supply and demand and competition.”

Magdoff (1985) asks whether there exist economic laws under socialism. “The idea that objective economic laws are not present in a socialist economy was, in fact, orthodox doctrine in the Soviet Union up to the early 1950s.” It was Stalin, of all people, who maintained in his 1952 “Economic Problems in the USSR” that planning must respect economic laws. But these for him were not, say, the law of the Walrasian adjustment of price to excess demand, or the law of the Marshallian adjustment of production to the difference between price and marginal cost. Stalin’s “laws” were no more than slogans such as the "Economic law of planned proportional development” or the “Economic law of distribution according to labour”. Not to speak of the so-called “Economic Law of the ever fuller satisfaction of the constantly growing material and cultural requirements of all people through continued development and improvement of social production based on the highest technology”. In other words, pure propaganda/junk, on which even an orthodox communist like Harry Magdoff maintains evident reservations.

However Stalin recognizes that the so-called “Law of value”, otherwise known as the market, continues to hold under socialism to the extent that commodities continue to exist: this, heavily disguised, is the true and belated innovation of Stalin’s text, however contradicted and nullified by the endemic and permanent repressed inflation that blocked all market-oriented reforms attempted after his death, and therefore eventually led to The Fall.


Brus Wlodzimierz (1973), Economics and Politics of Socialism: Collected Essays, Routledge and Kegan Paul, London.
Bukharin Nikolaj Ivanovich (1979), The Economics of the Transition Period, Routledge and Kegan Paul, London.
Breit Marek and Oskar Lange (1934), “The Way to the Socialist Planned Economy”, Translated by Jan Toporowski, History of Economics Review,
Charemza Wojciech and Julia Kiraly (1990), Plans and Exogeneity: The Genetic-Teleological Dispute Revisited, Oxford Economic paper, vol. 42, issue 3, 562-73.
Cohen Stephen F. (1980), Bukharin and the Bolshevik Revolution: a political biography 1888-1938, Oxford University Press.
Howard M.C. and J.E. King (2003), “Rudolf Hilferding”, in Warren J. Samuels (Ed.), “European Economists of the early 20th century”, vol. 2, Elgar, Cheltenham.
Magdoff Harry (1985), “Are there economic laws of socialism?”, Monthly Review, July-August.
Mattick Paul (1983), “Capitalism and Socialism”, Marxism: Last Refuge of the Bourgeoisie?
Nuti D.M., "A counter-factual alternative for Russia's post-socialist transition", in Grzegorz W. Kolodko and Jacek Tomkiewicz (Eds), 20 Lat Transformacji, Wydawnictwa Akademickie i Profesjonalne, Warsaw 2009.
Waters Mary-Alice, Ed., (1970), Rosa Luxemburg Speaks, Pathfinder Press, New York.


Richard Connolly said...


An enjoyable post, as usual. I shall suggest it to those of my students that probably won't take the time to read all of Kornai.

One minor point relating to your point on oil prices and the timing of perestroika. My feeling is that high oil prices and the growth in export revenues over the 1970s really papered over the cracks that were by then already apparent in the Soviet economy. As the factor extensive model ran out of steam towards the mid to end of the 1960s, the boon provided by the favourable terms of trade shift obviated any incentive for reform.

While I quite agree that the seventies would have been a better time to engage in real reform than the mid-1980s, the oil revenue gave the Soviet leadership the opportunity to have its cake (sustain the increasingly inefficient system) and eat it (this period saw the USSR ramp up its contribution to the arms race and become more assertively internationally). In this sense, the Soviet economy displayed many of the same tendencies that we have seen, and continue to see in many of the former Soviet republics, in other resource-rich economies with poorly developed institutions. So, another example of the Soviet economy failing to defy the 'laws' of political economy.

Of course, Gorbachev undertook perestroika as the oil price dipped in 1984-5, but there is some evidence that this wasn't just a coincidence (Gaidar's 'Gibel Imperii' has some nice material on this) and that, in fact, the oil price decline played a role in precipitating perestroika. It certainly made the job of undertaking difficult reform all the more difficult.

In short, my view is that high oil prices sustained the Soviet model for longer than might have been possible had the oil shocks not occurred over the 1970s. An interesting 'what if' thought experiment might be to consider what would have happened to the Soviet economy without the oil shock. I suspect we would have seen a less assertive foreign policy, and perhaps a more gradual, but ultimately more sustained, effort at systemic reform, as the need for reform would surely have been all the more urgent. If this had been the case, perhaps the hyper-liberal model would not have then become as dominant as it did in the post-Cold War period.

Of course, we will never know, but it is something that keeps my mind occupied when stuck in supermarket queues!

D. Mario Nuti said...

Excellent point, Richard: "high oil prices sustained the Soviet model for longer than might have been possible had the oil shocks not occurred over the 1970s." I am in total agreement. Indeed I would add that the availability of Soviet oil, gas and raw materials at less than world prices prolonged the agony of the other Comecon members as well, by enhancing their competitiveness with respect to the rest of the world. Bulgaria, for instance, re-exported cheap Soviet oil at world prices. What you are describing is a special version of the so-called "Dutch disease" - the embarassment of riches.

But the point is that Gorbachev would have had infinitely better chances to succeed if he had been there in the mid-1970s instead of the Kremlin gerontocracy of that time.

It is of course possible that, if Gorbachev had risen to power earlier, at a time of high oil prices, he would not have felt the urge to launch perestroika, but I credit him with a true commitment to democratisation as well as growth acceleration.

What if the Soviet Union had not benefited from the oil bonanza of the mid-1970s? We will never know. I believe that the USSR could not have borrowed more abroad in those days (on the same scale as Poland did), and would have been forced to do some serious reforming of its planned economy. But without additional oil revenues the economic stabilisation necessarily associated with reform would have required painful belt-tightening measures. Actual or feared popular resistance would have lead to inaction and failure, as it happened with Gorbachev.

chilosi said...

A very good piece: Everything you wanted to know about real socialism and its downfall and did not dare to ask, in a nutshell.

Just a minor footnote: Breit and Lange's statement that "It is not possible to impose in a capitalist economy a distribution of income that is different from that determined by the automatic operation of the laws governing the capitalist economy" echoes Marx contention in the Critique of the Gotha Program that “any distribution whatever of the means of consumption is only a consequence of the distribution of the conditions of production themselves. The latter distribution, however, is a feature of the mode of production”. They express their opposition to Hilferding in the same vein as Marx did to Lassalle. I suppose that Wicksteed and other neoclassicals would have wholeheartedly agreed with their deterministic views negating the concrete possibility of "varieties of capitalism".

D. Mario Nuti said...

Thanks, Alberto. You are right, not just Wicksteed would agree with Breit and Lange but, say, all the neoclassical proponents of aggregate production functions à la Cobb-Douglas, where income shares are determined by the elasticities of output with respect to production factors ("by god and the engineers", Joan Robinson used to say).

However I suppose Breit and Lange criticised Hilferding's proposition that distribution can be altered by political factors through the market, rather than through transfers via the government budget.

Philippe said...

Your claim that shortages and repressed inflation prevented the market-oriented reform of the traditional socialist model is convincing. You do not mention Janos Kornai's "soft budget constraints" as a major cause of those phenomena - though Connolly mentions Kornai in his comment. Were soft budgets not the ultimate cause of shortages and repressed inflation in the Soviet-type model?

D. Mario Nuti said...

Talking about repressed inflation I deliberately left out Kornai, in spite of his two-volume 1980 "Economics of Shortage". His "soft-budget-constraints" can explain the persistence of open inflation, while repressed inflation is invariably due to administered prices fixed at a level below the level at which demand would equal available supplies.

You can think of soft-budget-constraints as equivalent to price indexation of enterprise funds. If prices balanced demand and supply to start with, such an indexation will prolong a prior open inflationary process but will not cause repressed inflation.

If there was an initial imbalance already, i.e. some repressed inflation, indexation would necessarily prolong indefinitely the state of repressed inflation, but will not be the cause of its existence in the first place.

Philippe said...

Indexation of enterprise funds is a good analogy with "soft budget constraints", but what parameters do you envisage for that indexation.

D. Mario Nuti said...

The parameters of full indexation of course: instant indexation, of 100% of enterprise funds, with unit elasticity of those funds with respect to the rate of inflation faced by the enterprise. In this way repressed inflation would only persist if it existed already at the time of indexation. Shortages/repressed-inflation would not be caused by indexation, which would only be responsible for prolonging open inflation.