Streetwise Professor

October 8, 2007

In Desperate Need of a Clue

Filed under: Politics,Russia — The Professor @ 7:05 am

This article from Radio Free Europe/Radio Liberty contains several gems. The article summarizes the thesis of a book “Forward to the USSR-2,” which describes Yuri Adropov’s plan to revitalize the USSR–a plan aborted by his death, but probably doomed in any event (for reasons discussed below):

A key part of the purported Andropov plan was to be played by the KGB’s Sixth Directorate, which was concerned with economic-intelligence gathering. This directorate had accumulated masses of classified technologies taken from Soviet innovators and stolen from the West by KGB operatives. This information would be used to spark a scientific-technical revolution that would drive the country’s modernization.

The Andropov”plan” was just a recycling of Lenin’s dictum “Communism equals Soviet power plus electrification of the entire country”: to the Soviet mind, economic progress would be achieved by the centrally directed application of the most advanced technology. Like the Bourbons, the Soviet leadership learned nothing and forgot nothing. Such schemes never result in economic growth. Centralization is antithetical to economic growth. The dynamism of an undirected market process is necessary for true economic advancement. And it is this dynamism that creates the technology in the first place–it is technology that solves problems that people really face, not the problems that bureaucrats imagine that they face. As Hayek pointed out long ago, planners never have the information–or the incentive to use the information–necessary to direct resources to their highest value use.

USSR-2 also includes the following paragraph:

It [the Russian Federation under Putin] is a clandestine state, operating covertly under a seal of secrecy. It is invisible to the West and the majority of Russia. It is a hybrid of the special services, a nearly religious order (a group of people who passionately want to create a Russian miracle), a network of high-technology projects, financial-investment structures, and a web of propaganda…. Figures from this secret state say where to invest money. They choose projects and technologies. They direct investments and plan operations to take over whole branches of industry both on the territory of the late USSR-1 and right up to Europe and the United States. A transnational business network is being built — the USSR-2.

Again, the delusion that an elite can achieve economic growth by choosing “projects and technologies.” They can choose them, all right–but it is nearly certain that they will choose them incorrectly. A priesthood of secret policemen with no true market experience whatsoever, completely isolated from the micro-information of the marketplace, largely immune from market discipline, will never create a miracle, Russian or otherwise. The incentives they face will no doubt be perverse ones. Property rights are inherently tenuous in such a framework, so the siloviki will direct resources to endeavors that maximize the potential for graft and skimming over the very short run–rather than to projects that offer the highest returns to the society at large.

Anyone inside the siloviki or without who actually believes that a centralized, secretive, state-dominated system will actually produce robust economic development is sadly deluded, and in desperate need of a clue as to where to get a clue. Although USSR-2 and the RFERL article about it both suggest that this development is a threat to the West, I actually take great comfort in these disclosures. If this truly represents the thinking of Putin and his ilk, Russia is doomed to remain merely a petro state susceptible to the vicissitudes of the prices of oil and gas. It will not truly provide an enduring threat to the West, for like its Soviet predecessor, its military and diplomatic might will rest on economic quicksand.

I do feel genuine sadness, however, for all those Russians outside the siloviki, who will pay the price for the arrogance and ignorance of their rulers–and they are ruled, not governed, make no mistake about it. Bad habits of rule die hard in Russia, as the long suffering Russian people will find out when oil and gas prices decline and bring the Russian economy down with them.

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