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Weekly UpdatesINTRODUCTION
Economics develops as a result of the application of new techniques, such as game theory or experiments; purely internal developments, for example, the development of imperfect competition theory; attention to long-standing issues that previously had not attracted much theoretical attention, for example, the new economic geography; interdisciplinary cooperation, for example, behavioral economics; and new economic issues that require analysis, for example, the Great Depression and the collapse of Soviet socialism. New issues can give rise to new branches of economics. The Great Depression gave rise to macroeconomics. The collapse of Soviet socialism gave rise to transition economics. The backwardness of at first south-east Europe and then of the ex-colonial world gave rise to development economics. The existence of the USSR with its distinctive non-market economic system, the worldwide spread of Soviet-style socialism, and its attractiveness throughout the world also gave rise to a new branch of economics, often known as economic Sovietology. This comprised a prolonged and intensive study of the Soviet economy, particularly in the USA, between the end of the Second World War and the collapse of the USSR.
These new branches of economics naturally applied many mainstream economic ideas to their new study-objects. However, they encountered many phenomena not previously studied by mainstream economics. These new phenomena, and their analysis, in turn contributed much to mainstream economics. This has been explained, with reference to development economics, by Bardhan (1993). The purpose of this paper is to make a comparable argument for economic Sovietology. (1)
THE UNIVERSAL APPLICABILITY OF ECONOMIC LAWS
A fundamental issue raised by the existence of the USSR, with its distinctive economic system and explicit rejection of 'bourgeois political economy', was whether or not the propositions developed in mainstream economics were of universal validity or only valid in a particular economic system under certain historical circumstances. As Bergson et al. (1964) clearly stated:
'Modern economics has been bred chiefly in Western Europe and the United States, and despite its aspirations towards generality it bears the stamp of institutions and issues characteristic of these areas.
But the economic world no longer revolves about London and New York. Dozens of new nations are struggling toward economic independence and economic growth under institutional arrangements quite unlike those of the West. Economies of a new type also extend eastward from central Europe to the Bering Strait and have been busily developing their own principles as a by-product of administrative experience. It is asserted that "'Western economics" has only limited analytical value in these other countries.
The problem of the content and relevance of economics thus arises inescapably. Are the economic principles taught in the West really susceptible of general application? Or are they culture-bound and relevant mainly to industrial capitalist economies? Is it possible to create a general economics which would be as useful in Poland or India as in Canada or France? Or must we be content with several species of economics which will remain distinct in intellectual content and applicability?'
Already prior to the emergence of the Soviet Union, what became mainstream economics proclaimed its universal validity. Just as the laws of physics were the same in all countries, so, it was argued, the laws of economics were the same in all societies. In his well-known History of Economic Analysis, Schumpeter (1954; 1986, p. 257) observed in connection with 19th-century English economics that, 'if the [Malthusian] proposition about unchecked multiplication were valid, it would evidently come near to being a "natural law" in the strict sense of the term. Most of the English economists of the subsequent hundred years accepted it as such--as formulating an inexorable quasi-physical necessity. The same economists were in the habit of claiming similar necessity and universal validity, not only for those economic propositions that are nothing more than applied logic, but also for others such as their "law of wages"'. This view was not confined to 19th-century English economists but has remained central to mainstream economics. In 1991, the then chief economist of the World Bank (Lawrence Summers) said (2) 'Spread the truth--the laws of economics are like the laws of engineering. One set of laws works everywhere'.
Study of the Soviet economy produced cases where this was true and cases where it was false. For example, it is a standard proposition of public finance that goods have varying price elasticities of demand and that to generate large revenues indirect taxes should be levied on goods with a low price elasticity of demand. This is the inverse elasticity rule, which derives from Ramsey (1927). This proposition of mainstream economics was equally valid in the USSR. There a large share of tax revenue came from vodka, which it was possible to sell in large quantities at prices far above its production cost. This generated a very substantial income for the state budget, as Sovietology observed (Treml, 1982). On the other hand, the mainstream view that shortages could be overcome by raising prices was somewhat problematic under state socialist conditions. An important example of this concerns the use of food price increases to reduce the notorious food shortages and queues for food. Although this seemed a straightforward application of mainstream economic reasoning, it turned out to be a hazardous and generally ineffective method of overcoming shortages. The reasons for this were as follows.
First, workers could sometimes obtain compensating, or more than compensating, wage increases, for example, by organising strikes. The importance--both economic and political--of this phenomenon was demonstrated several times in Poland. In the USSR, fear of such strikes--what Prime Minister Pavlov scornfully called 'the Novocherkassk syndrome' (3)--played an important role in the unwillingness of the authorities in the Brezhnev, Andropov and early Gorbachev periods to raise food prices. Second, as Kornai (1980, Chapter 19; 1985) pointed out, planners might respond to a reduction in consumer demand by measures that maintained the 'normal' level of shortages. Third, as Podkaminer (1982, 1986, 1987, 1988) pointed out, the fundamental cause of disequilibrium on the consumer goods market was not the low price of food but the low price and limited availability of durables and services. It follows from this line of argument that what was necessary to restore equilibrium on the Soviet consumer goods market in the 1970s and early 1980s was primarily an increase in housing rents and in the price and availability of consumer durables and services. (4)
Although shortages had existed and played an important role in the Soviet economy since the late 1920s, it was only in the late 1970s and 1980s that they became objects of theoretical analysis and academic debates in the English-speaking world (Portes, 1979; Portes and Winter, 1977, 1978, 1980; Davis and Charemza, 1988). It is noteworthy that Kornai and Podkaminer, who made the main contributions in this area, were both Central Europeans acutely aware from their daily experience of the importance of this issue. One developed an original theoretical analysis, the other a novel application of mainstream demand theory. That US economic Sovietology did not make much of a contribution here is not surprising since US economic Sovietology was predominantly descriptive (Millar, 1995, p. 242) rather than analytical. Economic Sovietology devoted much effort to describing Soviet economic institutions. A classic work in this area was by Levine (1959), the first clear explanation of the working of the supply system (the core of Soviet 'economic planning') in English. This descriptive work was very useful. It provided a basis for understanding the functioning of the Soviet economy. However, it was largely untheoretical. Nevertheless, in the 1980s some US specialists in 'centrally planned economies' did make a useful contribution to the theoretical discussion about shortages. For example, Collier (1985, 1986) made an important contribution to the analysis of shortages by his work on the GDR. He combined a knowledge of the GDR with a knowledge of mainstream demand theory, and was able, by combining them, to produce plausible estimates of the loss in consumer welfare resulting from the ubiquitous shortages.
Of these three above-mentioned reasons for the inapplicability of an apparently basic proposition of mainstream economics (the ability of price increases to overcome shortages), the first two concern phenomena (the Novocherkassk syndrome of politicians and the conscious maintenance of shortages by economic policymakers) outside the scope of mainstream economics, and the last concerns phenomena (cross-elasticities of demand) that are an integral part of mainstream economics but are sometimes forgotten when policy conclusions are drawn.
A wider area in which mainstream economics produced harmful policy proposals for the USSR concerned what was known as 'economic reform', that is the introduction of market elements within the 'administrative-command economy', to use the pejorative Gorbachiev-era label, itself much influenced by the Sovietological literature (Grossman, 1963). One well-known Sovietologist (Grossman, 1963, p. 114) anticipated negative effects from economic reform, (5) but most economists, with more knowledge of the principles of economics than of Soviet institutions, expected economic reform to have positive results. As has been noted with respect to the 'reform' of the foreign trade system in the perestroika period, which played an important role in the destruction of the Soviet economic system (Kurierov, 1998, p. 276), 'It was inspired not so much by the immediate economic needs of that system [i.e. the Soviet system], as by abstract ideas, based on the experience of a fundamentally different economic system, of how foreign economic relations should be organized in a contemporary "civilized" state'. Its negative economic results--like those of the 1965 Kosygin reform (Kontorovich, 1988)--were unexpected by those who assumed that the policy recommendation of mainstream economics, such as trade liberalisation, were universally applicable. (6)
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