Streetwise Professor

June 11, 2007

Russian Economic “Reform”

Filed under: Politics,Russia — The Professor @ 3:30 am

Vladimir Putin’s domestic popularity is traceable in no small way to Russian disgust with the outcome of the economic “reforms” of the 1990s. David Satter’s Darkness at Dawn provides an illuminating discussion of this subject.

The most interesting thing to me is Satter’s characterization of the mindset of Yeltsin’s “Young Reformers.” According to his account, these would be capitalists who loudly denounced communism were in fact still in the intellectual thrall of Marxist/Soviet conceptions of the free market and capitalism. In particular, they believed that (a) capitalism requires the accumulation of large private fortunes, and (b) in the developmental stages of capitalism, all such fortunes are acquired through theft. They also believed law to be merely the handmaiden of the powerful. Thus deluded by the errors of the very theory that they purported to destroy, they turned a blind eye to–nay, encouraged–the massive theft of state property. How property came into private hands was of little matter to them–only that it did so. They paid little attention to the creation of a legal and institutional framework necessary for the operation of a market economy.

Russia paid the price for this intellectual error, and are paying it today. Their crypto-Marxist strategy of the transition to capitalism (done in the name of anti-communism) discredited the market, and paved the way for Putin’s current “vertical” strategy.

Satter’s account suggests the possibility that the intellectual–and moral–inheritance of seven decades of Soviet rule (following centuries of Czarist absolutism and the patrimonial state) made a successful transition to a market economy a near impossibility. If even the advocates of the market system in Russia were so intellectually ill-equipped to guide the transition, how could one expect better results from a more democratic system, or one led by survivors from the Old Regime. The institutions of the market economy are far more complex, and must be internalized by more than a self-identified elite, than most realize.

And as someone sympathetic to–but not a complete believer in–the Stiglerian belief that intellectual theories are irrelevant anyway, I also suspect that things would not have gone well even if Yeltsin’s economic team had not been the unwitting slaves of Marxist doctrine. The collapse of central authority and the existing economic institutions (as deformed as they were) invited rent seeking on a gargantuan scale–the wholesale grabbing of anything and everything of valuable by the strongest and most ruthless. In a society with a long tradition of autocratic, violent, and bloody rule, it was likely inevitable that in the post-Soviet state of nature, gangsterism would prevail.

Satter’s stories of the actions of managers of large corporations also provides a valuable illustration of the property rights economics concept of “residual right of control.” Oliver Hart models a residual right of control as the ability of a manager to siphon off the cash flow of an enterprise. Boy, did the directors and managers do that it a major way.

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