The Decline and Fall of Gorbachev and the Soviet State
Growing up in the Soviet Union, such early confusions are soon cleared up, for studies in Marxism were an unavoidable experience for everyone irrespective of age, class, social position, or nationality. Even the convicts in prison, including those on death row, studied the “Shining Heights” of the “great liberating teacher.” The works of Marx, Engels, and Lenin were published in the USSR in 173 languages with a total output of 480 million copies. Many of them were exported. I once met an Indian translator hired by the Political Publishing House to translate 50 volumes of the Collected Works of Marx and Engels into Malayalam. He complained the project was stalled because the Soviet propaganda officers could not find another Malayalam translator to cross check his work.
In the Soviet Union, Marxism was not thought to be just an economic theory. It pretended to be the universal explanation of nature, life, and society.1 It was also a deadly weapon to be wielded against personal enemies. As in the case of Nikolai Vavilov who was starved to death for violating Marxism because he adhered to the science of genetics, “a false science invented by the Catholic monk, Mendel.” In the name of Marxism, the death toll reached 100 million; the rivers of blood flowed from Russia to Kampuchea, from China to Czechoslovakia.
Hatred was the chief motivator of the socialist revolutionaries and their followers. Lenin regarded politics as a branch of pest control; the aim of his operations was the extermination of cockroaches and bloodsucking spiders, the myriad persons who stood in the way of his political ambitions. Yet Western hagiographers have glossed over this atrocious ruthlessness of Marxists, as historian Richard Pipes has documented.
One of the common denominators between Leninists and government interventionists in the West is the belief that the problems of monopoly are the problems of ownership: only private monopolies acting out of greed are harmful. These institutions are suppressing scientific and technical progress, polluting the environment, and engaging in other conspiracies against public well-being. Government monopolies, however, were believed to be ethical and upright; they substituted the “greed” of the profit motive with a “societal interest.” Yet group bureaucrats who manage and operate the public sector are no less self-interested than those who manage and operate private business. One important difference exists, though: unlike private entrepreneurs, they are not financially responsible for their actions and they operate without institutional constraints of cost control that private property and competition induces. The enlightened minds of planners and technocrats cannot overcome the problem of economic calculation without market signals.
The failure of socialism in Russia, and the enormous suffering and hardship of people in all socialist countries, is a powerful warning against socialism, statism, and interventionism in the West. “We should all be thankful to the Soviets,” says Paul Craig Roberts, “because they have proved conclusively that socialism doesn’t work. No one can say they didn’t have enough power or enough bureaucracy or enough planners or they didn’t go far enough.”2
In contrast to the West, where Marxist tenets were doctrines of a counterreligion, few in the Soviet Union truly believed in the official ideology: not the state managers, not the professors, not the journalists.3 It was not necessary that they do so, for Marxism was a means of political rent seeking and of coercive control, not a body of ideas held to by honest men.
The Soviet Union is now gone, as are the huge statues of Marx and Lenin that littered the East, and the good reputation of their systems of thought. This collection of articles is the Requiem for Marx and the social and economic systems created in his name. As with any funeral service, we look back on the life of Marxian ideas. But unlike the ordinary funeral, we are not looking back fondly, for Marxism is as good an example of the maxim that “ideas have consequences” as can be found. It does not speak well of the intellectual class that no body of ideas attracted a greater following in this century.4
It is beyond the capacity of economic analysis to calculate the opportunity costs of the socialist experiment in Russia. But the human death toll from Stalin’s collectivization, purges, and Gulags is estimated by Russian historian Roy Medvedev at forty-one million people. A popular Russian aphorism says: “The only lesson of history is that it does not teach us anything.”
“Despite the recent collapse of socialism and communism in Soviet Russia and Eastern Europe, socialism is alive and growing,”5 Gary Becker has said. It presents a mortal danger to economic freedom and the quality of life, and will for generations to come.
The scholars contributing to this volume write in the economic and historical tradition of the Austrian school, founded by Carl Menger with his book Principles of Economics (1875). The tradition emphasizes a deductive method, the role of choice and uncertainty in economic affairs, the power of market prices to coordinate economic activity, and the essentiality of private property for forming the basis of rational calculation. The Austrian school is also the historical bête noire of the Marxian school. Long before any other school came around to understanding the deep flaws in the Marxian approach, the Austrians had devoted an enormous amount of intellectual power to exposing its fallacies and dangers. Carl Menger refuted the labor theory of value, his student Eugen von Böhm-Bawerk demolished Marx’s views of capital, F.A. Hayek showed the incompatibility between socialism and political freedom, and Ludwig von Mises attacked the core of socialist economic theory.6
It was Mises’s criticism that has proven to be the most prescient. In his 1920 essay “Economic Calculation in the Socialist Commonwealth,” he argued that the socialist economy couldn’t properly be called an “economy” at all, since the system provides no means for rationally allocating resources. It abolishes private property in capital goods, thereby eliminating the markets that produce prices with which to calculate profit and loss. The absence of rational economic calculation, and the institutional structures that undergird it, prevents any realistic assessment of the proper uses and opportunity costs and resource allocation options. “As soon as one gives up the conception of a freely established monetary price for goods of a higher order,” Mises wrote, “rational production becomes completely impossible.” The central planners of an industrial economy will find themselves in a perpetual state of confusion and ignorance, “groping in the dark.”
“One may anticipate the nature of the future socialist society,” he said seventy years before the rest of the world was to become convinced. “There will be hundreds and thousands of factories in operation. Very few of these will be producing wares ready for use; in the majority of cases what will be manufactured will be unfinished goods and production goods… Every good will go through a whole series of stages before it is ready for use. In the ceaseless toil and moil of this process, however, the administration will be without any means of testing their bearings.”
From my life and study in Moscow, I can attest to the truth of this prediction. In an economy, nearly every consumption good requires several stages of production. The more natural resources used and the more complex the technology involved, the more stages of production are required. Yet lacking an ability to see a production process through to ends that consumers desire, Soviet socialism produced only military hardware, useless goods, goods to make other goods, while consumers were deprived of bare essentials.7
In the late 1980s, when glasnost at last permitted Soviet economists to speak out, they confirmed the death sentence that Mises had pronounced. As Martin Malia put it, “through the voices of Nikolay Shmelev, Gavriil Popov, Vasiliy Selyunin, Grigory Khanin, Larisa Piyasheva, Mikhail Berger, and subsequently Grigoriy Yavlinksy and Yegor Gaidar, they offered us a portrait of the Soviet that was in full accord with the evaluations of … Ludwig von Mises, whose book contains hardly a single figure and not a word about GNP.”8 This powerful confirmation, Malia points out, led to “methodological smuta” (“Time of Troubles” in Russian) in Western economics.
A common mistake Western observers made was to think the Soviet Union’s fundamental problem was a lack of democracy. They completely overlooked that the institutional structure of the political system cannot overcome the problem inherent in an economic system with no means of rational calculation. The Soviet Union had a number of leaders who promised political reform, but none was able to put bread on the table. In fact, the primary problem in the Soviet Union was socialism, and it is still far from being dismantled in the nations that once made up that evil empire.
The present “capitalist revolution” in Russia was best described by Russian publicist Viktor Kopin: it is a “quasi-democratic society with a quasi-market of quasi-legality and quasi-morality. The predominant conclusion out of this is that freedom leads to the destruction of spirituality, crime, pauperization of the masses, and the emergence of a class of fat cats.”
The decades-long effort to eliminate markets destroyed the work ethic, the mass misallocation of resources through centralized investment, the demolition of the base for private capital accumulation, distorted means of economic calculation, and technology so obsolete that the capital value of industrial enterprises is zero or negative. Most heavy industries were built during Stalin’s Industrialization Program in the 1930s and have not been updated since. A huge part of Russian industrial stock is as productive as an industrial-history museum.
The crisis in socialist agriculture goes back to the 1920s and ’30s, when millions of the most productive peasant households were branded as “kulaks,” and exiled to Siberia. Most of them could not survive the hardships and purges and perished there. Agriculture still has not recovered from this collectivization and blanket nationalization of property that turned owners into prison laborers. At the beginning of the century, Russia exported wheat, rye, barley, and oats to the world market. Today Russia is the world’s largest importer of grain.
Russia’s consumer prices index registered the inflation rate to be 1,240 percent in 1992, instead of the promised 100 percent. Even as the chairman of the Russian central bank blamed the government for not pumping enough liquidity into the system, Russia’s printing presses have not been able to keep up with demand. Credit markets remain centrally controlled, and serious monetary reform is nowhere in sight.
Larisa Piyasheva — the only visible economist close to the Austrian school in present-day Russia — believes that total privatization alone will not solve all the problems, but without it, there is no hope. She was fired by Yeltsin’s government due to ”budget cuts.”9
If the present looks bleak, the recent history of the Soviet Union remains widely misunderstood. No one figure represents the confusion better than Mikhail Gorbachev. In the West, he was and is considered the great reformer — witness the title of Princeton Professor Stephen Cohen’s New York Times op-ed, “Gorbachev the Great.” If Gorbachev was a reformer, he was hardly the first Soviet politician to use so-called reforms to maintain power. Lenin was a reformer too, and he resorted to extraordinary means to save communism. As a result of Lenin’s efforts to impose real utopian socialism — not the bureaucratized model that existed until recently — the entire population was dying out. Had he continued on that course, he would not have had any subjects to rule. Then he initiated the New Economic Policy, which allowed markets and private property.10
According to historian Alec Nove, Lenin
kept stubbornly on the course of all-round nationalization, centralization, the elimination of money, and above all, the maintenance of [grain requisitioning]. There was no pressure on him from his colleagues to change this policy. Events, rather than the central committee, provided a potent means of persuasion.
Gorbachev too tried to save communism through other means. That was the original point behind glasnost and perestroika (and probably why these petty measures were so heralded in the West). Even the KGB understood the need for reform. As the chief ideologue of the KGB, Philip Bobkov, has said, “The KGB understood very well, back in 1985, that the USSR would not be able to make further progress without perestroika.”
By the people in the Soviet Union Gorbachev was rightly considered to be just another Communist Party hack. His “reforms” were never fundamental, but only expedient measures to preserve the centrality of the Soviet Communist Party and to salvage what was left of the socialist system. Gorbachev was only willing to “reform” when the world was falling apart around him.
He was in a good position to know better. He was from a peasant family in South Russia, where he witnessed first hand the malnutrition, hunger, and even starvation that socialism caused. His grandfather was killed in Stalin’s purges, so he knew the brutality of Communist politics. Yet he chose to make politics his life’s work. For Gorbachev, the exercise of power has always been more important than good sense or morality.
It was a Western fantasy that the man named to be general secretary of the Communist Party would not be a devoted Communist. As in joining a street gang, you must demonstrate that you are absolutely loyal to the club (and all its associated crimes) and that your conscience can be overridden. During Gorbachev’s long political climb, he passed more than one hundred such political and security clearances.
The main difference between Gorbachev and his predecessors was that he was smarter and smoother. He was also the first one with a university education: a masters in law and a masters in agriculture. Given Soviet education, that is probably why the first thing he did was ruin the agricultural distribution system.
While he was in agricultural school in Stavropol, Russia, he was chief of the local Communist Party. His colleagues report that he ordered his professors to come from the university to Gorbachev’s office to tutor and test him.
Gorbachev became secretary of agriculture under the Yuri Andropov regime, and endeared himself to the Party Secretary by promoting a cult of Andropov. He promoted films about him and mandated that streets be named after him. Andropov returned the favor by promoting Gorbachev in the Party bureaucracy. Of course, Andropov is one of the most hardened of all Soviet leaders. As ambassador to Hungary, he ordered the invasion of that great country in 1956, and while head of the KGB in 1968, he persecuted dissidents by the tens of thousands (including Solzhenitsyn), presiding over the darkest period in KGB history.
Later, Gorbachev became secretary of ideology during the Chernenko regime, and as early as 1984, he was making overtures to Margaret Thatcher. What Thatcher did not know, or refused to believe, was that Gorbachev’s goal was to save Soviet communism (meaning the power of the Party) and given the dire circumstances he faced, that meant “reform.” Yet a reformist communist is only marginally better than an orthodox one. His goals and methods should have been condemned, just as one would condemn a successor to Hitler who claimed to be a “reformist Nazi.”
Gorbachev never learned economics in school. In all my dealings with him, I never saw even a slight flash of economic insight, or even any desire to learn more about economics. He preferred to think like a communist: everything can be done by issuing orders, no matter how perverse, contrary to human nature, and brutal they may be.
Beginning with the day he assumed power, he positioned himself as an opponent of freedom and the market. He singlehandedly destroyed what little market activity existed in the Soviet Union, wrecked the already-miserable lives of the public, presided over appalling violence against innocent people in the Baltic states, and openly supported old-guard communists. Yet the Western media decided not to be skeptical about his aims.
Gorbachev’s original theory was that the socialist system was in good working order, but the people, the cogs in the communist machine, had taken to laziness, drunkenness, and were accumulating “dishonest income” in violation of socialist ethics. His first reform was to call for “a restructuring of people’s thinking.”
The anti-alcohol campaign began right away. Party bosses sternly announced that they didn’t want any “drunks” in their country. Their enforcers began a concerted effort to discover anyone with the smell of alcohol on their breath and haul them into the police station. When the police stations became overcrowded, it became routine practice to drive thousands of people about fifteen miles out of town and drop them in the cold and dark. Nearly every night, you could see armies of so-called drunks walking miles back to town in the middle of winter.
Over 90 percent of liquor stores were closed. The Party bosses did not anticipate what happened next: sugar, flour, aftershave, and window cleaner immediately disappeared from the shelves. Using these products, the production of moonshine increased by about 300 percent in one year.
The predictable result was a heavy loss of life. From 13,000 to 25,000 people died from drinking poisonous homemade alcohol. Many more died standing in lines for five hours to get the little bit of official liquor that was left. Meanwhile, Gorbachev and loyal Party bureaucrats — who said the dead deserved their fate — would get expensive liquor from the West delivered to their homes and offices. Many families would spend up to 75 percent of their official income on alcohol. But with Gorbachev’s campaign, every other household began moonshining.
Revenues from alcohol sales (taxed up to 6,000 percent) were a major source of funding for the central government, generating enough to fund the entire medical budget. The campaign ended when the government realized it was costing too much. The government’s budget began to lose 25–30 billion rubles per year. Moreover, Gorbachev learned what previous regimes had understood: it is easier to govern people who are drunk because they withstand humiliation and abuse better. When people are sober they begin to care about politics and are not nearly as passive. So Gorbachev did an about-face and ordered a massive increase in alcohol production. And he had the government make it available to be sold everywhere, even toyshops and bakeries.
The anti-alcohol campaign did irreparable damage to the economy. With state revenues having been severely curtailed, an economic chain reaction set in that hurt every sector. The central bank began to print money, leaving too much money chasing too few goods. Consumers used to get enough to survive from state stores, but new disposable income saved from not buying alcohol was spent on goods. The end result was massive shortages. And to correct for the deficit, services were drastically cut, even while Gorbachev restricted private alternatives.
Then Gorbachev began a campaign against “dishonest income.” Like Stalin and Khrushchev before him, he declared all sources of income other than official salary to be an evil to be stamped out. For example, if a person rented a room out in his house, he received “dishonest income” and all parties would be severely punished. The problem was not a single person in the Soviet Union was untainted by unofficial economic activity. The official economy did not produce enough of anything desirable, so if a person was untainted, he was probably already dead.
Party bureaucrats bulldozed thousands of gardens in the backyards of peasant’s homes, often filled with fresh fruits and vegetables. “Illicit” farmers’ markets were closed. The bureaucrats cracked down on such activity as currency exchanges and unofficial transportation. Chaos reigned in the housing market, where the penalty for renting out an apartment for profit would be to have your whole home confiscated.
To make sure that all goods sold were licitly produced, bureaucrats enforced a system of applying certificates to all goods. To get one, a person had to prove that whatever he was selling at the market was approved ahead of time. But the system was evaded like everything else: the certificates were sold by petty bureaucrats for high bribes. Even after the Chernobyl nuclear accident, a vendor could pay a bureaucrat a fee to have food declared radiation free.
Price controls in cooperative markets were strictly enforced, so that all prices had to be the same as in state stores. For example, beef was supposed to be 4 rubles per kilo. As a working economist in Moscow, my first thought was, “all beef will disappear from the market.” But when I went to the market to see what was going on, to my surprise beef was available. It turns out that farmers were shrewdly selling 4 rubles’ worth of beef, but attached would be a huge dinosaur-sized bone that brought the total weight to one kilo. With a complex system of selling meat plus huge bones, supply and demand met and there were no meat shortages.
Things were different in the market for rabbit meat, which was supposed to sell for 3 rubles per kilo. It was impossible to find a bone heavy enough to add to the total weight that could also have plausibly come from a rabbit. Rabbit meat disappeared very quickly. The campaign against dishonest income made the unofficial economy even more unofficial and therefore less efficient. For customers it meant very high prices, because any operator remaining in the underground added a large risk premium to their products.
The most visible results of the campaign against dishonest income were an increase in bribes and a reshuffling of power in favor of the bureaucrat-led mafia. Soviet bureaucrats were always pleased when new laws were passed because it gave them a chance to extract even more bribes. It was especially helpful when the punishments for violating the law were severe; it provided an opportunity to scare people. People in higher positions could use information to control underlings, or even to leapfrog to higher positions. So many of Gorbachev’s people used their information to extract bribes and advance their careers.
Within the first year, 150,000 people went to prison for making dishonest income, 24,000 of whom were top bureaucrats. Nobody went to jail in the name of enforcing the law or the Constitution. They were sent because they were unable to evade someone else’s personal vendetta, or they were destroyed by bribes demanded by their black-market competition.
Government officials were reluctant to take cash bribes because it would mean going to prison. So they worked through intermediaries like the police. A policeman would come to visit someone in their home or office, and threaten him with severe punishment for some alleged indiscretion. The accused must come up with enough bribe money to clear his name.
I once knew a man who was head of a huge, multi-hundred-thousand-ruble furniture manufacturing enterprise. He did his best to stay away from underground activities, and on his salary he could afford to. But he had an enemy in the Party, and one day he got a visit from a policeman accusing him of dishonesty in record keeping. (Police work is a highly valued occupation because of the opportunity for receiving bribes.) Instead of paying the appropriate bribe, the man maintained his innocence. Then a team of six accountants came into his offices and combed through his records over a period of weeks. Finally, they found a 34-ruble mistake, which they said was deliberate dishonesty.
After a hearing, the state attorney threatened the man with eight years in prison. His own attorney, whom he had to bribe, told him the best solution was to pay 15,000 rubles — divided among the prosecutors, the bureaucrats, and the judge — so the affair could end. The man finally gave in and paid the bribe. Still, the judge punished him for his prior intransigence by giving him a one-year suspended sentence.
The law against dishonest income even affected academia, where many professors took bribes for good grades. After the law took effect, a tremendous reshuffling took place at universities, based on a complex matrix of exchanges of information and bribes.
It is easy to see how the campaign completely discouraged people from any kind of economic activity. Since the state sector was heavily subsidized, and price controls were enforced at cooperatives, a sizable portion of what market did exist was destroyed. And this was under Gorbachev’s hand. The campaign, begun in 1986, lasted only one year.
After wreaking havoc on the economy through his first two campaigns, Gorbachev initiated a third: in favor of “labor discipline,” that is, forcing people to show up on time and work harder. In this, Gorbachev was following a similar campaign by his mentor Andropov (who had people rounded up in the streets and destroyed their lives for not acting like slaves). Gorbachev initiated harsh measures against “lazy” people, making it easier to find and prosecute anybody the government did not like. If a person was absent for three hours, they would lose their job. Instead of giving two weeks’ notice to change jobs, employees had to give two months’. Enterprises would hold three-hour meetings, on paid time, to denounce one person for being ten minutes late to work and blame him for all problems. People out in public in midday were questioned and harassed.
This campaign came to a quick halt because it antagonized many people and did not seem to be helping the economy. In fact, the problem was not labor discipline. The problem was Gorbachev’s absurd campaigns in favor of a failed economic system.
Gorbachev’s final effort, before he began speaking about “the market,” was a short-lived campaign for new “quality” standards. The central plan had always emphasized the quantity of output, but never the quality. So 150,000 new bureaucrats were hired to oversee the “quality of output.” Every state enterprise had a special division on quality that would police the factory, providing ever more opportunities for bribes — resulting in more bribes and more failure.
That was the last attempt to resuscitate the communist world through conventional means. Yet Gorbachev still had not gotten the message. At a closing speech to the Central Committee in June 1987, Gorbachev said that he would “rebuff anyone who offers us antisocialist alternatives.”
When all else was exhausted, Gorbachev began to speak about markets — a “planned, regulated, socialist market.” He had his paid academics find quotes from Marx and Lenin to support his new idea, which is easy to do since together their work makes up 105 volumes. No one takes Marx and Lenin as gospel, but the head communist always has to justify his deeds with the Holy Writ of communism.
The first effort in the creation of this new market was to enact huge “budget cuts.” Even government propaganda reinforced the change. Films showed Party chiefs as beggars on the street, sitting with their derbies in hand, while rich, fat free marketeers generously flipped them kopeks. Everyone was paralyzed with fear that they would be fired, and so by the second half of 1987, most people simply stopped working.
The budget cuts appeared to be a reality when Gorbachev sacked 600,000 bureaucrats from central operations of the ministries — which amounts to 30 percent to 50 percent of each department. Alongside that, however, he also created a set of new mega-enterprises to substitute for the ministries. A study I did of these new enterprises at the time showed they hired 720,000 people, most of them just-fired bureaucrats, but with a generous 35 percent salary increase. Gorbachev’s “cuts” actually represented a twenty percent increase in the managerial sector of the Soviet state, which was exactly the point of the move. The old structures of the command economy began to disintegrate with all these changes, reversals, and talk of creating a market. But since no market was actually set up, everything came to a standstill.
The Law on Cooperatives — a new regulation allowing pseudoprivate ownership — seemed to be a step in the right direction. But in fact the newly created cooperatives became an organized mafia themselves, extracting and paying out bribes at an unprecedented rate. As soon as a person started a business, the fire department would arrive to close everything down and then wait for bribes. A person could sue the fire department, but he would have to pay a bribe to the judge. In the Soviet Union, people learned that it is better to pay bribes directly. Thus Gorbachev’s new “market” was not an authentic one. It piled new regulations and ministries on top of the old, and never allowed private property and real buying and selling.
A young man from a peasant family I knew had heard that market activity was legal, and decided to raise a pig to sell in the market. For six months, this hopeful entrepreneur devoted his time and money to caring for it and feeding it, hoping he would earn twice his money back by selling it. Never was a man so happy as when he took the pig to market one morning. That night I found him drunk and depressed. He was not a drinker, so I asked him what happened. When he arrived at the market, a health inspector immediately chopped off a third of the pig. The inspector said he was looking for worms. Then the police came and picked the best part of it, and left without even saying thank you. He had to pay bribes to the officials in charge of the market to get a space to sell what was left. And he had to sell the meat at state prices. By the end of the day, he earned barely enough to buy one bottle of vodka, which he had just finished drinking. This was Gorbachev’s new market in a nutshell.
Long before the coup that ousted Gorbachev, thwarted by Yeltsin and leading to the end of the Soviet Union, talk of creating a market ceased, and all real reformers had resigned their positions in the government. Gorbachev used the term “markets” — a term that Western reporters liked — as an excuse for more repression. To this end, he undertook a totalitarian effort to withdraw all 50- and 100-ruble notes from circulation, giving people only three days to turn them in, give a full accounting of where they got their money, and get very little money back. This was necessary, said Gorbachev, to eliminate “speculation, corruption, smuggling, forgery, unearned income, and normalizing the monetary situation and the consumer market.” All money unaccounted for was confiscated. Because there were no goods in the market to buy with rubles, people had stockpiled them. Gorbachev’s measures wiped out thousands of people’s life savings.
It was nothing more than an explicit attempt to wipe out the “underground economy,” which in fact was the only real market in the Soviet Union and the only source of real production. The last Soviet dictators to do this were Khrushchev in 1961, and before him, Stalin in 1947–48. Both permitted a ten-for-one exchange of old notes for new, and the result was an explosion of political oppression of the government’s enemies.
Gorbachev’s last gasp on behalf of the “market” was a onetime price reform to bring them in line with prices in the West. But it was no more an improvement than it is when the US Post Office raises the price of stamps. It was not a step in the right direction; it only indicated a continued desire to control the economy from above.
It was the first time since 1961 that the prices of basic goods changed. Yet the prices for basic goods in the Soviet Union were already extremely high. A person had to work 12 times longer there to buy beef than here, 18 to 20 times longer for poultry, seven times longer for butter, three times longer for milk, 16 times longer for a color television, and 180 times longer for a car. With the new price hikes, the required work hours multiplied by two or three times. It is easy to understand why one fifth of the population lived at the poverty line, below which meant serious malnutrition. The government said 85 percent of the new revenues would go back into raising the wages of workers and peasants, but, in fact, most of it went into government coffers to pay the military and run failed state enterprises.
The Soviets also cut subsidies to key staple goods, and that is partly why people saw this as a promarket reform. But under state ownership, in effect, all goods produced are subsidized, that is, not tested by the competitive market. Instead of directly financing production out of the state budget, they did it by arbitrarily increasing the prices for monopoly goods.
The Gorbachev government implemented the “reform” to raise revenue to pay for its fiscal shortfall. The Soviets expected revenue of 23.4 billion rubles in the first two months of 1991, but they only received 7 billion — less than one third the expected amount. The central government did not receive any of the 48 billion rubles it expected from the republics for a fund to implement the new union treaty. And the official budget deficit showed it was already higher than the figure predicted for the entire year (31.1 billion rubles compared with 26.7 billion).
Three key advisers to Gorbachev began to fear the worst: that the Soviets would not be able to pay the army, pay the welfare payments, or run state enterprises unless something was done. Finance minister Vladimir Orlov, State Bank Chairman Victor Geraschenko, and Budget Chairman Victor Kucherenko were so alarmed that they sent a note to Gorbachev saying that “the economy is on the brink of a catastrophe” — by which they meant the solvency of the central Soviet government.
Why did Gorbachev insist on hailing his price hikes as market reform? First, he wanted to impress the Bush administration and the World Bank with his intentions, which could then be turned into hard currency. Second, he wanted to fool the Soviet people who wanted reform to a free market. Third, he was anxious to discredit the idea of markets; when this plan failed, he was preparing to allow the market to take the blame.
Henry Kissinger, the Nobel Prize Committee, and many others have given credit to Gorbachev for the events of 1989 in Eastern Europe, which brought down the communist regimes there. Gorbachev’s real strategy in those countries, however, was to replace the old-guard Stalinists (with poor images) with young men like himself who drank the same brands of brandy. He hoped he could put smoother, smarter men in power in an effort to save socialism. The situation fell out of his control, largely because the KGB had misinformed him about how deep the hatred toward socialism was in those countries. The revolutions of Eastern Europe happened in spite of Gorbachev, not because of him.
What he did in the Baltic States — authorizing the Soviet military to crack the skulls of innocent people in the Baltics — qualified him to be included among history’s litany of murderous rulers, but he was never included. Even while he was heralded in the West as a great reformer, he was also running labor camps, committing human-rights violations, and sending people to prison for speech crimes. As the Soviet Union came to an end, the public had been reduced to a collective of hunter-gatherers, barely existing at a subsistence level.
Before the coup that removed him from power, Gorbachev told a reporter,
I’ve been told more than once that it is time to stop swearing allegiance to socialism. Why should I? Socialism is my deep conviction, and I will promote it as long as I can talk and work.
Western academics and media pundits found his support for socialism charming, if a little outdated. But the people who lived under the system felt differently. They knew socialism had proven itself the most destructive ideology in human history — responsible for untold millions of deaths. For those populations onto whom socialism was imposed, it impoverished them, wiped out their cultural heritage, and in many cases, resulted in massive bloodshed.
President George Bush played no small part in keeping Gorbachev in power longer than he should have been, sticking by him, and doing everything politically possible to support him. Bush lent his support to the only major world leader without a democratic mandate, a man despised by his subjects, who imposed a system antithetical to Western values. Is it an American tradition that the US president should support the head of Soviet communism in time of need? Similarly, Herbert Hoover bailed out Lenin, Franklin Roosevelt bailed out Stalin, and George Bush rescued Gorbachev.11
For six and a half years, Gorbachev straddled the fence between reform and the status quo. As part of his effort to carve out this incoherent third way, he gathered around him a group of hard-line communists. Eventually, they became his closest advisers and the most powerful people in the country — militarily, economically, and politically. It was that same old guard that tried to slit Gorbachev’s throat during the failed coup on August 19, 1991. Six of the Gang of Eight who organized the coup against him were directly appointed by him. Before he elevated them to power, they were little more than lightweight bureaucrats. Had the coup succeeded, the structure and personnel of the coup government would have been much the same as it was before. For example, Gennadi Yanayev, president for a day, was appointed by Gorbachev as secretary of trade unions and then promoted to vice president. Prime Minister Valentin Pavlov was responsible for many of the economic blunders of the previous year that inflamed the public, including the price hikes, the ruble reform, and excessive money creation. And Anatoly Lukyanov, president of the Supreme Soviet, was a close confidant of Gorbachev’s.
Gorbachev appointed and protected these six as part of his compromise strategy to placate the hardliners. They were utterly lacking in charisma, so Gorbachev assumed they could not be a threat. But they tried to be. He should have expected that communists can only be trusted to behave like communists, and for this reason, he bore primary responsibility for the coup. Had he conducted himself as he ought to have during his six and a half years in power, he could have spared himself and his country this harrowing experience.
Everyone in the higher reaches of power had known for some time that a coup against Gorbachev would be a snap. One evening in Moscow, I discussed the possibility with a friend of mine, a general in the Soviet Army. He told me that an actual coup would be the easy part. “We could take power in ten minutes,” he said. “But then what? We have no sausages, no bread — nothing to offer the people.” The Moscow junta hoped its power grab would be bolstered by Gorbachev’s low popularity. But as much as the people hated their ruler, they hated the coup leaders more. The coup government achieved only a short moment of glory. Once in power, it faced a people seething with anger at the crimes of totalitarianism and the poverty of socialism. The coup leaders also faced a hard winter, a very bad harvest, and the prospect of mass starvation. They lost their nerve, and Boris Yeltsin thwarted their efforts.
The coup attempt, ironically, illustrated that communist economic ideology had been discredited. The Stalinist leaders of the Soviet coup never spoke of Marx or Lenin, or of resuscitating the machinery of central planning and nationalization. They spoke instead of market reforms, however insincere they may have been. Any alternative rhetoric would have brought them even more unpopularity than they already had. Note that this was despite the fact that the command system had brought the people more material goods than Gorbachev’s confused system of perestroika.
At his first news conference after the Soviet coup attempt, Gorbachev promised: “I will struggle until the very end for the renewal of this party. I am a true believer in socialism.” He could not have delivered a greater insult to the Soviet peoples, who quickly resumed their demands that he resign. Conventional wisdom has long said the Russians are culturally inclined toward passivity, authoritarianism, and envy. Hendrick Smith has made a career out of promoting this idea. The heroic actions of the people during the coup and after told the real truth: the Russians are like people everywhere who want freedom from arbitrary rule. They have been the victims of a tragic past, but their desire to be free from chains of slavery triumphed. Once Boris Yeltsin assumed control of the government from Gorbachev, the Soviet Union fell apart completely. And at the age of 74, on December 8, 1991, the Soviet Union died.
Since that time, the Yeltsin government has proven another point: Gorbachevian socialism was not the only way to ruin an economy’s wealth-creating potential. During the first wave of Yeltsin’s reforms in Russia, prices soared twentyfold instead of the promised twofold. Production dropped 15 percent since last year (compared with a 13 percent drop in 1990). New foreign and domestic contracts in 1992 amount to only seven percent of the 1991 level. And 1991 was supposed to be a “bad” year, with only two percent of the new contracts in 1985. To top it off, the budget deficit exceeded 35 percent of the GDP. The outlook for the economy continued to look worse and worse. This is not because Yeltsin had not applied the advice from Western academics and World Bank bureaucrats. The problem was he took them at their word when they said flexible prices, not private property, were what the Russian economy needed.
Contrary to all the promises and beliefs of Russian Keynesians headed by the Yeltsin economic minister Yegor Gaidar, we watched a simultaneous increase in prices and a fall-off in production. Because the essence of socialism is public ownership, without dismantling this system, none of Yeltsin’s “reforms” will work. Like Gorbachev before him, Yeltsin’s government is directed at “restructuring the state regulatory mechanism.”
“We cannot link the restructuring of the regulatory mechanism to full-scale privatization,” wrote his chief economist. “If we did, we simply wouldn’t live long enough to see it.” Meanwhile, every new announcement of impending reform causes perverse public responses and every new law passed, ostensibly to increase freedom, only increases opportunities for fines and bribes.
Former communists urgently sought a replacement for archaic Marxism-Leninism, and they found it in “gosudarsvennichestvo,” or the “cult of the state.” Based on Max Weber’s theorizing, it exalts bureaucratic, hierarchical, centralized management. A series of organizations were founded to support this ideology, including the Russian National Union, the Party of Regeneration, and the Civic Union.
The sad legacy of Marxism is the mindset of certain people, both in the East and West, who believe that the state can cure all economic ills and bring about social justice. Yet a return to central management under whatever label is not the solution — but neither is the status quo. What is needed in the former Soviet Union and Soviet client states is a wholesale repudiation of the legacy of Marx. In the United States, too, Marx’s ideas influenced a generation of reformers during the Progressive Era (out of which came modern central banking and the progressive income tax), the New Deal, and the Great Society — and continues to infect departments of literature and sociology in major universities.
Remarkably, even after the fall of Soviet and East European social regimes, Marxism has not lost all its academic cachet.12 “I think it’s an exciting time to be a Marxist,” Steve Cullenberg of the University of California at Riverside told the Associated Press. He was among the 2,000 academics who attended the University of Massachusetts at Amherst conference in November 1992 entitled “Marxism in the New World Order: Crises and Possibilities.” The mass media, moreover, pays tribute to Marx’s honor every time it uses the terms “progressive” and “reactionary,” demonstrating an unwitting acceptance of Marx’s version of the historical inevitability of socialism.
In Requiem for Marx, we attempt to set the record straight on a subject clouded with economic, historical, and philosophical error. Accordingly, the essays here can be regarded as revisionist. David Gordon shows exactly how much Marx has been misunderstood in a wholesale reevaluation of Marx’s philosophical basis for socialism. Hans-Hermann Hoppe recasts Marx’s argument about the class struggle in line with an Austrian understanding of the state and economy, and arrives at entirely different conclusions from Marx’s own. Personal history is never out of bounds at a requiem, and Gary North piles on evidence that Marx’s personal habits — financial and otherwise — strayed far from the socialist ideal. David Osterfeld demonstrates that much of Marx’s view of the world rests on empirical propositions that turn out to be false and definitions that turn out to be shallow and analytically useless. The doctrine of the classes, properly understood, is a useful framework, argues Ralph Raico, but it was taken from an older and sounder classical-liberal school of 18th-century France. And finally, Murray Rothbard argues that Marx’s communist views of history, property, marriage, and much else, were rooted in the bloody millenarianism of the Middle Ages, thereby representing nothing uniquely evil in the history of thought.
Contra Marx, these essays offer another vision of what an economy needs: private property, defined as both autonomous ownership and control of homesteaded resources; free prices, which provide the means of calculating profits and loss, the measure of economic usefulness and waste; freedom of contract, which allows free exchange of privately owned resources; and the rule of law, which establishes institutional structures that protect the previous three conditions from third-party intervention. Until these are firmly in place, there can be no hope for getting back on the road to economic prosperity.
Taken together, the essays present Marx in an entirely different light than most any literature on the subject. In short, among scholarly works, this is probably the most anti-Marxist collection ever published. We are confident that many who have lived under systems constructed in Marx’s name now share this perspective.
[Yuri N. Maltsev, senior fellow of the Mises Institute, worked as an economist on Mikhail Gorbachev’s economic reform team before emigrating to the United States in 1989. This is his 1992 introduction to Requiem for Marx.]
- 1. For more on the comprehensive system see Alexander Solzhenitsyn, Mikhail Agursky, et al., From Under the Rubble (Boston: Little, Brown, and Company, 1974); Erik von Kuehnelt-Leddihn, Leftism: From de Sade and Marx to Hitler and Marcuse (New Rochelle, N.Y:: Arlington House: 1974; 2nd edition, Regnery; 1990); Paul Hollander, The Many Faces of Socialism (New Brunswick, N.J.: Transaction, 1983); David Conway, A Farewell to Marx: An Outline and Appraisal of His Theories (New York: Viking Penguin, 1987).
- 2. Paul Craig Roberts, in the Wall Street Journal, June 28, 1989.
- 3. See Marlin Malia, “From Under the Rubble, What?” in Problems of Communism, January–April 1992; Peter Rutland, The Myth of the Plan (La Salle, TIL: Open Court, 1985).
- 4. A striking example of Western infatuation with Soviet socialism is Sidney and Beatrice Webb, Soviet Communism: A New Civilization? (New York: Charles Scribner’s Sons, 1936).
- 5. Gary Becker, “The President’s Address,” The Mont Pelerin Society Newsletter, vol. 46, no. 1, February 1993.
- 6. Austrian contributions to this debate include: Eugen von Böhm-Bawerk, Karl Marx and the Close of His System (New York: Augustus M. Kelley, 1949; Philadelphia, Penn.: Orion Editions, 1984); Peter J. Boettke, “The Austrian Critique and the Demise of Socialism: The Soviet Case,” in Richard M. Ebeling, ed. Austrian Economics: Perspectives on the Past and Prospects for the Future (Hillsdale, Mich.: Hillsdale College Press, 1991); F. A. Hayek, New Studies in Philosophy, Politics, Economics, and the History of Ideas (University of Chicago Press, 1978); Trygve J.B. Hoff, Economic Calculation in a Socialist Society (Indianapolis, Ind.: Liberty Press, 1981); Hans-Hermann Hoppe, “De-Socialization in a United Germany,” Review of Austrian Economics 5, no. 2 (1991): 77–106 and A Theory of Socialism and Capitalism (Boston, Mass.: Kluwer Academic Publishers, 1989); Israel M. Kirzner, “The Economic Calculation Debate: Lessons for Austrians,” Review of Austrian Economics 2 (1988): 1–18; Don Lavoie, Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered (New York: Cambridge University Press, 1985); Murray N. Rothbard, “The End of Socialism and the Calculation Debate Revisited,” Review of Austrian Economics 5, no.2 (1991): 51–70, “Lange, Mises and Praxeology: The Retreat from Marxism,” Toward Liberty, vol. 2 (Menlo Park, Calif.: Institute for Humane Studies, 1971), pp. 307–21, and “Ludwig von Mises and Economic Calculation Under Socialism,” The Economics of Ludwig von Mises (Kansas City: Sheed and Ward, 1976), pp. 67–78; Ludwig von Mises, “Middle-of-the-Road Policy Leads to Socialism,” Two Essays by Ludwig von Mises (Auburn, Ala.: The Ludwig von Mises Institute, 1991), Socialism (Indianapolis, Ind.: Liberty Press/Liberty Classics, 1981), “Economic Calculation in the Socialist Commonwealth,” F. A. Hayek, ed., Collective Economic Planning (Clifton, N.J.: Kelley Publishing Company, 1975), pp. 87–130, and (Auburn, Ala.: The Ludwig von Mises Institute), and “One Hundred Years of Marxian Socialism,” Money, Method, and the Market Process, Richard M. Ebeling, ed. (Boston, Mass.: Kluwer Academic Publishers, 1990), pp. 215–32.
- 7. On the failure of the Soviet model, see: Zbigniew Brzezinski, The Grand Failure: The Birth and Death of Communism in the Twentieth Century (New York: Macmillan, 1989); Sven Rydenfelt, A Pattern for Failure: Socialist Economies in Crisis (San Diego: Harcourt, Brace, Jonvanovich, 1984); Nick Eberstadt, The Poverty of Communism (New Brunswick, N.J.: Transaction, 1988).
- 8. Martin Malia, “From Under the Rubble, What?”, in Problems of Communism, January–ApriI1992, p. 96.
- 9. Stolitsa No. 37, 1992, p. 4.
- 10. Peter J. Boettke, The Political Economy of Soviet Socialism: The Formative Years 1918–1928 (Boston: Kluwer, 1990).
- 11. One historical account of such activity is Joseph Finder, Red Carpet (New York: Holt, Rinehart, Winston, 1983).
- 12. For a refutation of neo-Marxist attempts to save the system from itself, see David Gordon, Resurrecting Marx: The Analytical Marxists on Freedom, Exploitation, and Justice (New Brunswick, N.J.: Transaction, 1990).