Russian Economics and Drama

BOOK REVIEW

Adam Smith Goes To Moscow
by Adams and Brock


David C. Long
(198480)


Carleton University
Economies in Transition: USSR 43.371*
Instructor: C. H. McMillan
December 2, 1994



Economic problems are often trivialized and easily solved with models and mathematical solutions that conveniently ignore real world dilemmas with such words as, 'assuming'. The situation in the former Soviet Union faced by political leaders and economists has all but eliminated these 'utopian' models and disillusioned the most pompous of transition-specialist economists. Walter Adams and James W. Brock are the two authors of the book "Adam Smith Goes to Moscow", published by the Princeton University Press in 1993, a date well into the transitionary period. Together, they have created a brilliant synopsis of the problems facing the transition economies of Russia and its newly formed sister states. The major issue examined by the book is the question as to whether a gradualist approach to the transition should be implemented or a policy of abrupt and extensive change. Both approaches are laced with problems that make them difficult at best, and downright impossible at worst. Perhaps its greatest strength is the fact that virtually every aspect of the transition known to us today is at least touched upon. The problems, some possible solutions, and their inherent dangers are thoroughly examined. Within the framework of a diametrically-opposed, two-person dialogue, solutions are evasive and inconclusive. In fact the only conclusion the play seems to purport is that there are no solutions, and the road to economic prosperity will be a dynamic learning process, where hastily implemented economic models and gradual sociological change will be tempered, one with the other.
Before the actual topics of transition are discussed, the first thing that strikes the reader is the structure of the book. Surprisingly, it is a piece of dramatic prose. Certainly a departure from traditional economics literature, the author of the introduction coined it the "rara avis in economics books" (Adam xvii). The book presents problems in a fashion that is both riveting and universal. Its value as a play may be questionable to the scholastic literary elite, but its structure can involve and intrigue even the most economically uninformed reader, save the problem of terminology. One of the ways it achieves universality is through the use of wit, available to the dramatic author, but completely absent in economic theory and non-fiction. In this sense it is both valuable and important. The need, particularly in the new Russia, for understanding of economics to motivate political support and to facilitate a new information-rich capitalist economy, is well served by a book that interests everyone. That is to say that as far as being a learning tool for economics, and not literature, this play works.

The two characters in the play are unnamed but play specific roles against one another. This play is about the points of discrepancy and intersection between economics and politics. The "Prime Minister" is politically inclined towards a gradual change approach. He seems to understand that if people don't realize the need for sacrifice, he will lose support and his ability to implement change will diminish. He is empathetic to the plight of the people, but also open-minded enough to understand that abrupt change may be necessary in order to entrench a new system before it can be overthrown. The other character, the "Advisor", is not so open-minded, but rather adamant in his blind faith to economic theory. He seems to ignore the sufferings of an economically bereft people in favour of a 'get it over with quickly' approach. Nonetheless, his suggestion that economic institutions are interdependent and must all emerge together is true. Both characters make valid points on all of the major transition categories that must be examined.
The chapters of the book are divided into seven 'days' of dialogue, each representing a different topic of the imminent reform, as follows: the agenda, marketization, the monopoly dilemma, privatization, stabilization, government and the market, and lastly, inherent tensions. These topics are not fictitious. Some of these things have already occurred, such as privatization through voucher auctions, and certainly hold true to what has been observed in reality. The book opens with a chronology of actual historic events that have occurred to date. Placing the book in such a historical context lends credibility to the characters, as they frequently use actual events and statistics to reify their arguments.

The 'agenda' chapter presents much more than a mere outline of what is to come. In addition, one other major point emerges. The economic problems posed by universal institutional shortcomings, allow universal models that solve these problems to be developed. This point is refuted by the fact that every economy has a history unique to itself. Therefore there are unique conundrums that the universal model did not consider and cannot contend with. The Advisor maintains that "the basic principles of economics are applicable in all nations. The most essential of these principles is the relationship between economic prosperity and private property rights" (Adam 5). The Prime Minister argues: "You seem to be saying that the same...advice is relevant to all nations, irrespective of their history, culture, traditions, or stage of development - that there are iron laws of economics, which are universal and eternal. I don't believe that" (Adam 5). The Prime Minister reminds us that the transition "is not taking place in a vacuum" (Adam 7). He proceeds to list military crises, crises arising from ethnic and nationalist strife, and constitutional crises whereby there is a lack of a legal infrastructure in which private property is legitimized. He points out that "After decades of communist rule, few people have any idea what private property means" (Adam 9). The agenda chapter suggests that history and similar economies provide economic concepts, albeit concepts that must be altered to meet the needs of a specific country.
The Advisor lists the components of the transition model according to the International Monetary Fund in the first chapter. The first component discussed is 'marketization'. The Advisor outlines the model of the market, described by Adam Smith as the 'invisible hand'. He says, "we can depend on free market forces of supply and demand" and extends with an example of tractor production (Adam 24). He argues that overproduction will cause excess supply for which producers will compensate by lowering prices to sell unsold inventories and in turn, reduce current production. He rationalizes that an increase in demand for steel, by manufacturers other than tractor producers, "will trigger a rise in steel prices, in order to allocate now scarce steel supplies among buyers who value them most, who can put them to the most profitable use, and hence who are willing to pay the highest price for them" (Adam 25). He insists that this calls for the elimination of ineffective government control plans over production decisions. "You must eliminate state planning, which tries to balance more than fifty thousand inputs...a task requiring the handling of some seven million documents annually, and some eighty-three million calculations, half of which subsequently have to be changed" (Adam 10). He continues, "You must eliminate the State Price Committee, which sets about two hundred thousand prices per year - some at ... perversely ridiculous levels" (Adam 11). His argument for the freeing of prices is justified by his faith in the working market model.
The Prime Minister is hesitant to accept the practical reality of such a proposal. He realizes that such a policy "would ignite skyrocketing price inflation: Our state has held prices low for decades; a sudden and precipitate abolition of these state controls would trigger an explosion of prices...pushing our people into literal starvation" (Adam 36/40). "These are people struggling to survive - citizens capable of inciting political insurrection" (Adam 41). He cites "Price liberalization by Latin American nations during the 1970s" as a real life example (Adam 36).

The Advisor, of course, has a rebuttle. He insists that inflation would not increase so much as it would change from repressed to overt. He exemplifies his idealism with a maxim: "You can't cross a chasm in two jumps. Piecemeal price decontrol would inevitably become politicized ... The result would be ... continued obstruction ... and undermine your efforts to restructure" (Adam 40). His argument here is valid but perhaps somewhat impractical. The debate is unsettled as they move on to the next day.
The third day of the dialogue is an explanation and discussion of 'the monopoly dilemma'. The prime minister is quite explicit as he explains that, "Supply and demand will operate in the public interest only in a competitive framework - ... no barriers to the entry of newcomers, ... no collusion ..., and if firms do not wield monopoly power over markets" (Adam 46). He quotes Nikolai Petrakov: "the first thing to do before deregulating prices is to create the right conditions for competition, without which there can be no price freedom. One of the first measures to be taken is therefore to demonopolize our economy, which is the most highly monopolized in the world" (Adam 54). The model for transition is once again clear, but questionable as to its viability.
The Prime Minister cites another true example as "the nub of the problem": "Our major manufacturing industries are totally devoid of competition. Our industrial landscapes are densely populated with giant monopolies" (Adam 46). He knows that "Breaking up such monopolistic enterprises will be one of the most difficult challenges in our transition" (Adam 52). In reality, the dilemma seems insurmountable.
Once again, the Advisor is more optimistic. First he suggests that "monopoly prices are preferable to prices controlled by the state. Such prices will clear markets" (Adam 54). He also suggests that competition may emerge if some of the monopoly enterprises could "broaden their product lines", as well as allowing the entry of foreign markets (Adam 58). The Prime Minister is quick to list the destruction of inefficient domestic industry by foreign competition, price conspiracies, boycotts of firms by suppliers, and the fact that "In some of the former Soviet republics, the cartels are essentially mobsters", as barriers to such a plan (Adam 61). Again, the problem remains unresolved as they move to the next component.
'Privatization' is the topic of discussion on the fourth day. The advisor explains that "The simple fact is that no economic system can provide proper economic incentives unless individuals have the right to buy, own, and sell property as they see fit. Self-interest and voluntary exchanges won't be successful motivators unless there is private ownership of the means of production" (Adam 71/72). He mentions the two general theoretical methods of privatization. "The first is privatization 'from above', by which enterprises operated by the state are transferred to private ownership and control. The second is privatization 'from below', by which completely new, privately owned businesses are encouraged to form" (Adam 77). Both methods are only concepts, however, and not practices.

The Prime Minister sees "the enormity of the challenge that privatization presents" (Adam 76). He presents the example of "the total number of all state enterprises privatized in all countries around the entire world since 1980" at 6800 (Adam 77). His logic is somewhat irrelevant, however, as it can be noted that no intentional massive privatization programs had been undertaken during this period.
The ownership discussion is a 'tennis match' of arguments and rebuttles between the two characters. On privatization from above, the Advisor suggests giving away ownership to the populous. "Assign the ownership of each enterprise to its current workforce" (Adam 78). The Prime Minister is appalled. Inequity and riots would emerge out of firms that are more modern and competitive than others. There is a problem with dividing up working capital amongst individuals, such as dividing up thirty tractors, designed for cultivating vast tracts of land, to thirty families. 'Apparatchiks', those most advantaged in spontaneous privatization, would write the rules to advantage themselves most. Moreover, the idea of giving the ownership away does not begin the implementation of a price system.
The Advisor suggests the selling of state enterprises to which the Prime Minister inquires, by whom? The state, as owner, is no longer defined as either the people or the government. Holding true to economic rhetoric, the advisor says, "let's assume someone or something owns them", and continues to describe an auction much like the voucher auctions that have actually been carried out in the former Soviet Union (Adam 83). He foresees an automatic price development. "Ignore the value of the enterprises carried on the accounting books ... The top bid is the only relevant economic value" (Adam 85). This ideology conveniently ignores the problem that the top bid may be worthless in a matter of hours in the face of hyperinflation.

The issue of privatization from below is equally problematic. The Advisor sees the process in overly simplistic general terms. "All that's required is for your government to get out of the way", a task easier said than done (Adam 89). He proceeds, "Dismantle the bureaucratic barriers that obstruct private enterprise, abolish the misguided measures you enacted in the past to suppress the private sector, and private firms will sprout like mushrooms" (Adam 89). The Prime Minister is not convinced, and retorts, "powerful appartchiks will ... retain ... control over key materials and sources of credit ... they will refuse to make those resources available to independent entrepreneurs, who may compete with them and erode their profitability" (Adam 89). He adds, "the financial holding companies ... may refuse to lend funds to new firms, which might compete with their clients and reduce the value of their stock holdings" (Adam 89). The Advisor concludes the chapter on a less-than-encouraging point: "the alternative of not privatizing is far worse", and continues his belief that government must avoid microeconomic planning into the next chapter (Adam 91).
The subsequent two chapters deal with government intervention with the market. The first intervention is of a directly economic nature dealing with fiscal and monetary policy in the chapter entitled 'stabilization'. The Advisor says, "You must move away from detailed, intricate microeconomic controls, and to broad macroeconomic controls" (Adam 93). "You must adopt a stringent fiscal and monetary policy to avert ... hyperinflation ... (and) budget deficits" (Adam 15). The Prime Minister is concerned that "If we agree to balance the budget in economies that have produced virtually no wealth in years, half our people will starve" (Adam 16). It is interesting to note his reliance on theoretical models in this case. The former Soviet Union has produced wealth, albeit not much, that has been hidden under government deficits, much like in Canada today. His argument is only valid if the region was totally devoid of productivity, as he suggests, which it has not been.
The Advisor explains the concept of fiscal policy. "Government expenditures and taxes affect total employment and production by influencing the total volume of spending for goods and services ... stimulating consumption and investment" (Adam 94). He speaks of the need for government to increase or decrease its expenditures in order to stabilize the economy at full employment and output. The Prime Minister says that there is a practical paradox which makes this tool impossible. The state firms which were "cash cows" for government revenues are virtually all gone. There is no form of income or sales tax, and implementation would be undermined by tax evasion as privatization spreads. Therefore it would be impossible for the government to make an expenditure injection without increasing the stifling national debt as there is currently no government revenue, save that which is borrowed. The Advisor can only agree, "Sure it's difficult" (Adam 96).

Monetary policy is a stabilization tool which is not exempt from similar dilemmas. Defined by the advisor as "all government actions affecting the liquidity of the economy and the availability and cost of credit", the increase or decrease of available credit will act as expansionary or contractionary policies to the economy respectively (Adam 96). The Prime Minister discusses the traditionally "negligible role" of credit as a "bookkeeping" function. He calls financial markets and instruments "woefully undeveloped" (Adam 97). He continues to describe "pseudocredit": an interdependent system of credit amongst firms that is never collected. The Advisor prescribes the "hard budget constraint" as the remedy. "Allowing ten major bankruptcies should make the point" (Adam 98). Of course, this remedy is, again, a quick route to massive unemployment and riots.
The stabilization chapter ends with the perennial economic joke, which, with invective wit, exemplifies the uncertainty of economics. The Prime Minister poses a seemingly simple question as to which policy tool, fiscal or monetary, is most effective. The response of the Advisor is unsatisfying as he flounders in it. He explains that it is an issue amongst economists presently up for debate, and concludes with a 'fence-sitting' answer that they are both effective together. The Prime Minister chides, quoting Truman: "Frustrated by economists framing their advice with 'on the one hand' and 'on the other hand', he expressed longing for a 'one-armed' economist" (Adam 99).
The discussion on government intervention is maintained in the following chapter, entitled 'government and the market'. The Prime Minister outlines the role of government as prescribed by Adam Smith. These duties include national defence, justice, and public works. The major topic in the chapter obviously deals with welfare economics. Amongst the specifics within these topics are economic welfare problems common in our advanced market societies. They discuss consumer protectionism, and how the market may be more effective than government due to competition. The Advisor describes the internalization model for pollution, that maximizes social welfare, and imposes a price on the right to pollute. They discuss the problem of 'free riders' on public goods, and lastly the problem of state enterprises no longer financing social safety nets. The chapter concludes on an ironic note put forward by the Prime Minister: The ultimate objective is to create an economy where government has very limited powers, but to achieve the reforms advocated requires a government of almost unlimited powers.

The last day of the dialogue is a further discussion of some of the 'inherent tensions' mentioned contextually in previous chapters. The economic transformation is described as "a struggle to determine who will control resources, who will allocate them, and who will employ them for what purposes" (Adam 143). All this occurring in a society that has been "taught for decades to believe that private ownership of the means of production is the root of all evil" (Adam 71). The Prime Minister sums up his concerns by saying, "I am beginning to wonder if it's really possible to achieve ... in the midst of ... hyperchaos" (Adam 91). This statement poses a striking contrast to the optimistic faith of the Advisor: "Because you are starting from scratch in building your political, economic, and social structures, your postcommunist society has a unique opportunity to lead the way in this endeavour for the rest of us" (Adam 147). Clearly, this is "a time of conflict between theory that plays fast and loose with practice and theory that learns from practice" (Adam 149).
The play enacts the real life economic problem of models and plans leading to further questions and speculations, rather than the pure, market-clearing solutions that static economic models often suggest. It also takes into account the fact that the transition is not occurring in a vacuum, but rather in a politically motivated and sociological atmosphere, where people and welfare are qualitative as well as quantitative. Every solution offered in the book is almost immediately tempered with a subsequent problem. Every philosophy is equally thwarted with a model that solves it. The book is most effective, because it discusses the entire situation without bias. The conclusion it comes to is that there is not a utopian solution that should be implemented, but rather a set of possibilities that must be explored. The feeling the reader is left with is that we are not at the beginning, and we are never at the end, but we are always in the middle.


BIBLIOGRAPHY

Adams, Walter and Brock, James W. Adam Smith Goes To Moscow. Princeton: Princeton University Press, 1993.