“How Capitalism Was Built” by Anders Aslund – Chapter 1: Communism & Its Demise

“How Capitalism Was Built” by Anders Aslund – Chapter 1: Communism & Its Demise (NOTES)

  • Real Socialism
    • Communist system was the most thoroughly politicized system the world has seen
      • Political structure, undivided power or party & inter-penetration of party of party & state, suppression of all forces that depart from or oppose the party’s policy
    • Nationalization of the means of production was carried out zealously
      • Industry, trade, transportation, infrastructure & banks were nationalized
      • Agriculture, handicrafts, etc. were initially collectivized & gradually nationalized
    • Centralized bureaucratic allocation replaced market allocation
      • Communist state set physical targets for all major goods & enterprises through thousand of “material balances” compile by the State Planning Committee (Gosplan)
      • Central commands constantly altered at will by political leaders & is called a “command economy”
    • Economic policy was strictly hierarchical
      • Politburo made key decisions
    • Prices were subordinated because physical output was the central objective
      • Prices were fixed – cost plus regulated markup
      • Pricing system encouraged intentional lowering of quality
    • There was no real money
      • National currency was several separate currencies because different people & enterprises had access to separate market outlets with varying prices & supplies
    • Mobilization of resources
      • Socialist state tried to mobilize all resources for long-term economic groth
      • organized jobs for unemployed & women, & labelled unemployment as “parasitism”
      • public savings used to boost heavy industry but limited private consumption
      • gigantic construction projects a Soviet fetish
    • Building of a strong military industry
      • Stalin aimed for military strength, not economic welfare
      • Embraced unbalanced growth, allocating disproportionate resources to steep up economic development
      • Heavy industry (steel & machines) favored, while agriculture was seen as backwards & reactionary (very little value)
      • Minimal investment in transport & housing
    • Wages & Private consumption held back to benefit of investment in military expenditures – standard of living slipped
      • shoddy work, poor quality, low efficiency & demoralization
    • Investment in human capital
      • Most positive aspect
      • Good education, general literacy, math & engineering
      • Ignored economics, law & foreign languages for ideological reasons & discouraging foreign influences
    • Each communist country has a system aiming at autarky
      • foreign trade isolated from domestic economy by government monopoly to prevent arbitrage
      • CMEA – socialist foreign trade system between Soviet bloc countries – too bureaucratic & useless
    • Shortages
      • Macro – volume of money exceeded volume of good at given prices
      • Micro – people demanded goods other than was supplied
      • Enterprises were given bargained-for subsidies
      • Political & personal relations were more important than performance
    • High growth rates
      • Double-digit growth percentage in 1930s during the Capitalist Great Depression, accomplished by mobilization of resources, high savings, public education
      • Soviet figures are untrustworthy because they were politically charged & subject to being distorted for the sake of propaganda
  • Decline & Fall of Socialism
    • Brief timeline of events:
      • 1919 – Ludwig Mises publicly declared its principles unsound
      • 1953 – Stalin died – terror of his rule ended
      • 1956 – Hungarian revolt – first open challenge to Communism
      • 1968 – Invasion in Prague – discredited its humanity
      • 1956, 1970, 1976, 1980 – Polish worker uprisings
    • Institutions were the main problem
      • Overcentralized, economic distortions of command economy, USSR couldn’t keep up with US in military technology
      • Economic reform didn’t improve growth & delegitimized the socialist system
    • Falling growth rates
      • All Soviet block countries from 1960s on reported falling growth rates
    • Challenges in arms race & information technology
      • Even in the late 1980s, USSR thought it could keep up with the US in the arms race
      • It increased military expenditure even year until 1988 (25% of GDP)
      • Reagan’s Star Wars program exposed Soviet technology & economic weakness
      • Hierarchy couldn’t handle the economy
    • Delegitimization of Communist ideology
      • Declining growth rates cause reform to generate growth but it contradicted communist ideology (social democracy is the enemy of communism)
      • Claims of moral superiority destroyed
    • Decentralization of power
      • Truly totalitarian under Stalin
      • Afterwards, Nomenklatura (1% of population)
      • Under Khrushchev the Politburo controlled things
      • Brezhnev used the Nomenklatura but decentralized power to lower levels of the party & state to regional levels
      • Gorbachev got little respect ministries his reforms came about because of political resistance to the elite – economic power in state enterprise managers accountable to no one
    • Aggravated political illegitimacy
      • No country chose Communism & its support came from political elite – Nomenklatura
      • Khrushchev’s denunciation of Stalin cause people to see Communist dictatorship as illegitimate
      • Various communist countries had constant civil unrest that could only be contained by crushing it
    • Rising Soviet fiscal deficits
      • Fiscal discipline varied
      • Usually paid for by hyperinflation (100%/year)
      • Governments lost control of price/wage increase
    • Excessive foreign debts
      • Could only alleviate fiscal problems by borrowing – only Czechoslovakia & Romania had little to none
    • Falling oil prices
      • Soviet oil production plunged & world oil prices fell
      • Soviet Union lost control over its budget & run out of international financing by 1986
  • Demise of Communism in Central Europe
    • Each country had its own story
      • Mostly, with end of hardline Brezhnev clampdowns (e.g. Prague in 1968), Gorbachev declared all countries had a freedom of choice (in 1988)
    • Negotiated transition
      • Poland
        • Solidarity trade union & Catholic Church opposed government
        • Democratic elections in 1989 – Anti-Communists won
      • Hungary
        • Government made many reforms & eventually agreed to full democratization in 1990 with free elections
        • Christian & rural movements led the way
    • Popular Revolt
      • East Germany
        • Soviet & Eastern bloc reforms caused internal pressures
        • Hungary’s decision to opens its border with Austria cause many East Germans to go there & then on to West Germany
        • In 1989, leaders opened the Berlin Wall to the West
        • It reunited with West Germany in 1990
      • Czechoslovakia
        • 1968 invasion left a huge mark
        • Students staged demonstrations leading to larger one & demanding the ouster of leaders
        • Elections held in 1989 & 1990
    • Communist Coups
      • Bulgaria
        • Government took little reform
        • 1 day after, dictator, Zhikov was oustered in an internal coup
        • Democratization led by Communist
        • Communists renamed to Socialists & won elections
        • Transition was peaceful but mostly run by Communists & badly so
      • Romania
        • Only satellite country left, under Ceausescu who ran the country with his family
        • Demonstrations occurred in the Palace Square as Ceausescu spoke to them
        • He fled by helicopter, was caught & executed
        • Disgruntled party members won 2/3 of parliament in 1990
        • Communist established legitimized power by executing Ceausescu & held onto power
  • Collapse of USSR
    • 15 current countries made up USSR with cultural, historical, political & economic differences
      • 6 were Muslim-oriented, 9 were Christian-oriented
    • National causes were divisive in the Baltics & Ukraine
      • Gorbachev allowed forbidden questions on nationalism to be asked & he has no answers
    • Democratization was faster at the local/national level than at the Union level
      • 1990 – some national parliaments were democratically elected without Gorbachev contesting results
      • 1991 – Yeltsin elected in Russian Republic
      • Many republics refused to send in tax money, staving USSR treasury – deficit ballooned
        • Yeltsin’s administration was seen as the only legitimate one in the USSR & he abolished the Communist Party of the Soviet Union –> Most republics declared independence
    • Russia – attempt at Democracy & radical reform
      • Russian abortive coup attempt at democracy in August 1991
      • Yeltsin focused on economic reform & appointed a new government
      • Attempted radical reform but unfinished democratic reform allowed unelected parliament to resist
      • Deputies were incompetent & communist
      • 1st 2 years of transition had constitutional crisis that led to a failed uprising in 1993
    • Baltic States – Determined Radical Reform
      • All 3 had strong anti-communist movements tied together with nationalist & independent desires
      • Lithuanian & Estonian Communist Parties wanted to keep up with nationalists as Poland tried to
      • Latvian Communist Party was between communism & nationalism
      • Nationalist parties won 2/3 of parliament seats & declared independence – USSR recognized it after failed August 1991 coup
      • Countries were determined to turn away from Russia & towards the West
    • Ukraine & Moldova
      • Communist stayed in power as nationalists – both had strong nationalist movements but not enough to win majorities
      • Communist leaders there embraced nationalism when it was clear USSR was going to fold
      • They won nationalist support & the old Nomenklatura stayed in power
      • Economic reforms were barely even discussed
      • No majority to agree on anything excluding nationalization so that was the only change made
    • Caucasus
      • Political disputes had always been a problem between nations here
      • Threat of war put any economic & political reform
      • Georgia
        • Political demonstrators were fired upon & led to answer.
        • New government couldn’t control other regions within borders & was overthrown
        • Former USSR No. 2, Shevardnadze, took control & remained in power until 2003
      • Armenian & Azerbaijan – always at each other’s throats. Full-scale war broke out in 1992
      • Armenia
        • Communist Party discredited for not defending itself against Azerbaijan
        • Non-Communists won 1990 elected but it suffered from embargo by Turkey & Azerbaijan
      • Azerbaijan
        • Had harsh dictatorship with no opposition
        • Nationalistic movement blamed for a pogrom of Armenians
        • Soviet troops killed 100s
        • Soviet leader Aliyev was dictator with no democratic or economic reform with family running the country
      • Belarus & Central Asia – continued authoritarian rule
        • Belarus
          • Most militarized, sovietized, russified Soviet Republic with little dissent, harsh repression & solid Communist Party
          • Accidentally won independence in 1991
          • Communists still ran until 1994
          • Lukashenko destroyed Democracy without economic reform ever done
        • Kazakhstan, Turkmenistan & Uzbekistan
          • No real democratization, Nomenklatura still run the country with clan networks
          • All countries’ rulers appointed by Soviets to impose communist control in 1980s & are still there
          • Kazakhstan softened slightly but Turkmenistan & Uzbek still with severe dictatorships based on cult of personality
        • Kyrgyzstan
          • elite jolted by violence between Uzbeks & Kyrgyz in 1990
          • led to an ouster
          • Liberal communist dictatorship installed but little democracy, but with open politics & some economic reform
        • Tajikistan
          • poorest Soviet Republic & is still so
          • Was in a civil war in 1992 between communists & Islamists
          • Russian intervened & Rahmonov installed
          • Little stability & no economic reform

 

[Aslund, Anders. How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, the Caucasus, and Central Asia. Chapter 1. Cambridge University Press, 2007.]

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