Saturday, March 19, 2016

Jehu — The Great Unsolved Mystery of the 20th Century: Why did the Soviet Union collapse?

Despite its devastating impact on global relations between the proletariat and the bourgeoisie within the world market, the sudden collapse of the Soviet Union remains mostly unexplained. A large body of literature has been produced to explain the collapse, but, to my mind, very little of it provides a satisfactory explanation.
So I took up reading this paper, recommended by someone on ask.fm, A Reassessment of the Soviet Industrial Revolution, by Robert C. Allen, without the expectation it would add much to the subject.
I was wrong. I now think it is a must read.
The USSR was actually very successful and could have beaten the capitalist West. Why didn't it.

My answer — most probably Pournelle's Iron Law of Bureaucracy.
Pournelle's Iron Law of Bureaucracy states that in any bureaucratic organization there will be two kinds of people: those who work to further the actual goals of the organization, and those who work for the organization itself. Examples in education would be teachers who work and sacrifice to teach children, vs. union representative who work to protect any teacher including the most incompetent. The Iron Law states that in all cases, the second type of person will always gain control of the organization, and will always write the rules under which the organization functions.

15 comments:

Neil Wilson said...

"The Iron Law states that in all cases, the second type of person will always gain control of the organization, and will always write the rules under which the organization functions."

And that's why organisations should not be long lived and should be shattered and reconstructed in some way on a regular basis. To stop this entropic build up.

Bob Roddis said...

The socialist calculation problem is what did them in. It's the same phenomenon that afflicts Keynesianism. You guys are in denial about that.

Bob Roddis said...

The man who told the truth:

http://reason.com/archives/2005/01/21/the-man-who-told-the-truth

Matt Franko said...

They try to turn production organizations into a Job Guaranty...

The organization has to run efficiently and then have a separate Job Guaranty outside the organization...

Ryan Harris said...

Maybe it was BoP problems, dutch disease, that allowed Russia to develop without technology and consumer goods production they could buy from Europe more cheaply instead, and they got along fine until oil prices fell, low ag prices and bad harvests caused a calamity as their exports were no longer large enough to buy even staples? Sure there was inefficiency but that was always there...but what changed in the 1980s specifically that caused the demise, I don't think the US rust belt Automobile analogy works very well. The US auto industry did upgrade and retool and still exists today with global operations.

Tom Hickey said...

"The Iron Law states that in all cases, the second type of person will always gain control of the organization, and will always write the rules under which the organization functions."

And that's why organisations should not be long lived and should be shattered and reconstructed in some way on a regular basis. To stop this entropic build up.


That's the message of Schumpeter with "creative destruction," and the Austrian business cycle in general. Economic liberalism is self-correcting when allowed to do its work in dealing with malinvestment.

Kristjan said...

"The socialist calculation problem is what did them in. It's the same phenomenon that afflicts Keynesianism. You guys are in denial about that."

I don't think It was the socialist calculation problem that played a major role here. soviet economy did grow until 1980-s. Without looking at the numbers at all, the soviet socialism brought millions of people out of poverty. I don't think the price mechanism is that important as Austrians tell you.
It was rather the lack of private ownership and the lack of motivation to make a profit. So human nature. During Soviet times they had reasonable control mechanisms that prevented embezzlement from state owned companies. Gorbachev allowed private enerprises, they were called cooperatives but there was practically no control over them at all, control mechanisms were not created. During the 80-s these enerprises were small first. For example Hordokovsky's cooperative sold waffles in Moscow. Soon the empting of state companies started. I guess it would have been possible before but there were no private means of production before. You had no use for trucks or tractors or manufacturing equipment since private individuals were not allowed to own them before. The reason Gorbachev allowed private cooperatives was because there were serious shortages in stores. Not the bread lines at that time that they showed in American television but economy was stagnating. Why was it stagnating, I have no idea. Probably corruption. All of the sudden the state stores were empty, you could buy stuff from private markets at much higher prices. Soviet political system was kind of static, they opened up private oportumities but created no mechanisms to control them. For example, the Central Bank of Soviet Union announced foreign currency rates once a week and sold foreign currency at that rate to the first private banks, currencies were traded in private black market also, so the private banks made a fortune with this. Many other such loopholes were available and it was legal.

John said...

Kristjan: "soviet economy did grow until 1980-s."

Analysts at the CIA were informing the White House and Congress that the Soviet Union would implode in the late seventies and early eighties. They were moved to other positions: it was not what Washington wanted to hear. Washington replaced these competent analysts with fantasists who claimed that the Soviet Union had a huge technological lead over the US and was close to world domination if Washington did nothing about this. Washington boosted military spending and cranked up the jihad in Afghanistan. That was the end of the USSR, not that it would have lasted much longer in any case, just as the competent analysts were predicting.

Washington's further military spending was just more corporate welfare to the huge corporations, further cement Washington's hegemonic world status and a way to subsidise the new information technology.

The Rombach Report said...

"...but what changed in the 1980s specifically that caused the demise...?"

Ronald Reagan

The Rombach Report said...

From 'A Gold Polaris' by Jude Wanniski, March 9, 1995

http://polyconomics.com/essays/esy-950309.htm

"The floating of the dollar caused financial tremors throughout the world, but its one great contribution, made unwittingly, was the collapse of the communist experiments in the USSR and China. The communist experiments relied on the fixed reference point provided by the dollar. Which is to say the central planners needed a stable unit of account against which they could calculate wages, prices and capital allocation. As long as the dollar was tied to gold and the ruble defined in terms of the dollar, these calculations could be made. When the dollar floated, the markets of the West were capable of managing the chaos, but the central planners in Moscow and Beijing were lost. The price relationships that had originally been set in 1928 no longer were close to reality as domestic and international prices widely diverged.4 Had Marx been alive at the time, he would surely have advised the Kremlin to cut loose from the floating dollar and fix to gold, in which case the West well may have lost the Cold War. To put it another way, market capitalism without a Polaris is less efficient than a command economy with one."

Ben Johannson said...

Tom,

Allen's book 'Farm to Factory' is one of if not the most interesting investigation of this topic. Allen makes a good argument that resource exhaustion (due to the USSR's need for self-sufficiency) and massive investments needed in Siberia fatally wounded economic performance after 1975.

Tom Hickey said...

@ The Rombach Report

Russia and China seems to be have figured that out and are reverting to gold. Lots being written on this now.

Tom Hickey said...

Gold is the numeraire across history. It is the simplest way to access relative values historically. If I were an economic historian, it's the Polaris I would be using. It is the bridge to understanding the financial and the economic.

Bob said...

I wasn't paying attention when the USSR collapsed. There was glasnost, and then there was Yeltsin. I remember he could dance.

Tom Hickey said...

I was paying attention and my conclusions were pretty much echoed by people that were there then and are now in the US. Perhaps some here can corroborate or add to it.

It seemed that in post Khrushchev the leadership got crystallized on one hand, more interested in preserving the nomenclature and dependent on the siloviki to maintain order, than in innovation other than military. Management not only became rather sclerotic but the leadership lived in a bubble world that the people were not even aware of. Nor were the leaders connected with the people.

Talking to some of the people that left afterward, they said that they were inspired by socialist ideals they learned as students but grew up to find that they were merely ideals without substance in the society. Some of them also said that they were inspired by Western ideals but after being in the US for some time were not surprised to find that these, too, were only ideals and that the top level also lived in its own bubble, isolated from the "little people." But they did appreciate the freedom in the West, even it it was largely negative. At least they didn't have to be concerned with the siloviki — before 9/11, that is.

This is actually pretty much the same now in the US, where the bipartisan Establishment exists chiefly to perpetuate itself and its power and influence nationally and globally. None of these people know how much a gallon of milk costs. They live in a bubble world and serve those living in more rarified bubbles, with the superrich at the top. Problems that arise are ignored or not even noticed.

The result is disconnect. This eventually translates into societal dysfunctionality. Discontent rises. Then breakdown becomes predictable.

So I see it as a result of the iron law of bureaucracy on one hand and rampant inequality on the other. The leaders of the former USSR and satellite countries pretty much sold out the revolution.

The leaders of Western liberalism are now doing pretty much the same, with predictable results. Discontent is rising as the popularity of Sanders and Trump shows.