Was Stalin Necessary for Russia's Economic Development?

Some of the he-was-a-baddie-but-at-least-he-modernized-the-place say "yes"*. New research by a team of Russian economists says "no":

This paper studies structural transformation of Soviet Russia in 1928-1940 from an agrarian to an industrial economy through the lens of a two-sector neoclassical growth model. We construct a large dataset that covers Soviet Russia during 1928-1940 and Tsarist Russia during 1885-1913. We use a two-sector growth model to compute sectoral TFPs as well as distortions and wedges in the capital, labor and product markets during the two periods. We find that most wedges substantially increased in 1928-1935 and then fell in 1936-1940 relative to their 1885-1913 levels, while TFP remained generally below pre-WWI trends. Under the neoclassical growth model, projections under these estimated wedges imply that Stalin's economic policies led to welfare loss of -24 percent of consumption in 1928-1940, but a +16 percent welfare gain after 1941. A representative consumer born at the start of the Stalin's policies in 1928 experiences a reduction in welfare of -1 percent of consumption, a number that does not take into account additional costs of political repression during this time period. The projected performance under both Tsarist' and Stalin's wedges is much worse than the economic performance of Japan, which in 1885-1913 had similar levels of per capita GDP and distortions as Tsarist Russia, but experienced a rapid acceleration of non-agricultural TFP during the interwar period. Relative to this benchmark, the welfare loss of Stalin's policies are about -31 percent of consumption.

Via Cheap Talk, who notes that one of the economists -- Sergei Guriev -- has just left the country under duress from public officials.

The story that Russia's development was impossible or unlikely absent Stalin's repression always seemed unlikely to me. Other places have developed without those levels of repression (e.g. Japan, as the authers note, but not just), or have had repression without growth. The repression-growth relationship is not strictly positive and linear, in other words, so any story about Stalin and development has to be particular to Russia. And, frankly, I've yet to hear one that's had any solid theory behind it. (Perhaps someone could point one out to me in the comments.) I've heard mumblings that "Russia was a backwater hellhole" -- this was more or less Marx's view, although it's not true that Marx believed that socialism could not work there -- but every place is a backwater hellhole before they develop. Yes, Tsarism was bad, but plenty of regimes were bad in the 19th century.

I'd never really considered the possibility that all those supposed gains under Stalin didn't actually happen and in fact made things worse. It puts a new spin on the Cold War races for economic, military, and technological superiority.

I'm not sure I fully believe the two-sector growth model the authors use, which is pretty standard as these things go, but even the descriptive evidence is useful.

P.S. Here are some pictures of Soviet life in the 1950s.

*Terry Eagleton is of this sort, in his execrable recent book which manages to both misunderstand Marx and his critics at the same time. One relevant bit is quoted here.

The 2013 Warwick/RIPE Debate

You can find the video here. The main figures are Cornelia Woll -- one of the editors of the Review of International Political Economy -- and John Hobson -- who has two historiographical articles [1, 2] on IPE in the 20th anniversary issue of RIPE.*

It's an interesting discussion of the sort that you would never hear in most mainstream American IPE departments. Perhaps for that reason they could have done more to highlight criticisms of OEP from within the American IPE tradition (other than Cohen), especially since the stated mission of RIPE is to promote a dialogue among the various strands of IPE. Obviously the Reductionist Gamble is what I have in mind, but it's not the only one. This "debate" did basically none of that.

One of the questioners kind of got at this. If RIPE is going to be heterodox, then what does that mean? Just a constructivist alternative to the rationalist approaches published in IO? Woll said that she didn't know what the orthodox was so she couldn't be sure of what the heterodox would be, but earlier she singled out OEP particularly. Hobson drove that nail in. So then the heterodox would just be anything that isn't OEP? It's not clear.

Neither Woll nor Hobson even hinted at the possibility that a broadly positivist alternative to OEP was conceivable, or that it could be an ally for non-positivist approaches. This is (a) problematic.

On Hobson's presentation I have two thoughts: a) He is almost surely correct about the history; b) I'm not really sure how much that matters for forward-looking analyses. But I'll need to read the articles first to be sure.

*The issue has not been released yet, I don't think, but Hobson's contributions are available on early view at the links above.

US-EU Trade Negotiations Are Not Driven by Ideational Factors

Reading this update on the possible US-EU trade deal that Sarah and I wrote about previously, I am struck by two things:

1. French film subsidies are not going to ruin the chances of a deal, particularly since the US film industry takes advantage of tax credits and other subsidies as well (albeit at the state level, not the federal level). I have no idea why the FT led with that, except that . The biggest potential roadblock for this deal has always been agriculture, and it remains agriculture. That said, even these issues can be overcome. US agriculture wants to sell GMOs and hormone-pumped meat to Europe. Europe doesn't want that, and is unlikely to change its mind. So? Currently, EU law bans European growth of GMOs, but allows some imports. This is an okay position to be in for American farmers which grow GMOs. So all that has to happen is that the status quo is maintained, and this issue can be resolved as well.

Some of the rest of this just sounds silly. US wants Europe to not insist on "geographical indications" being allowed on cheese? I presume this means labels such as "A Product of France". This, again, is an issue which can be overcome fairly easily: just remind American cattlemen that if this becomes a precedent they won't be able to advertise "U.S. beef" and they'll balance the cheesemakers' right out.

2. Nothing in the proceedings suggests that the ideational turn in IPE studies of trade politics is beneficial for understanding real-world events. Instead, we see interest groups lobbying their representatives to get their concerns on the agenda, while the broader public barely notices. We see these groups forming along factoral and sectoral grounds, just as we'd expect. The standard materialist story works far better than... whatever sociotropic story is supposed to have replaced it.

*Yes, the link in that sentence goes to something called Beef Magazine. No, I wasn't aware that existed until now.

A National Disgrace

How is this even possible? Canada is advertising in Silicon Valley the fact that they're giving away visas and otherwise incentivizing highly-skilled immigrants to go to the land of milk and honey doughnuts and syrup, while the U.S. refuses entry. And the "pivot" language indicates that they are targeting Asians particularly, which is a part of the trans-Pacific diplomatic project.

So, so stupid.

P.S. In case it isn't clear, this post should be read as complimenting Canada.

(Ht somebody on Twitter.)

Marginalia

Corey Robin has written a long article arguing that Austrian economic thought and marginalism in general is descended from Nietzsche. Hence, Hayek et al are a bunch of aristocrats dedicated to oppressing society. I'd be happy to be persuaded that the marginalists -- at least as Robin uses the term, which isn't the only way -- are Nietzschean, but Robin's article didn't do it. Too many strong assertions based on tenuous evidence, and Robin is not exactly an impartial observer. This follow-on John Holbo post -- while exceptional in many ways -- doesn't do it either. Partially because it rests so heavily on a peculiar (I think) reading of this quote from Hayek in The Constitution of Liberty:

To grant no more freedom than all can exercise would be to misconceive its function completely. The freedom that will be used by only one man in a million may be more important to society and more beneficial to the majority than any freedom that we all use.

This does not have to mean that "some people’s freedom is a lot more valuable than other people’s freedom", as Holbo wrote in a previous post and quotes here. In light of the rest of Hayek's work (or even the rest of the passage from which this quote is pulled: see below) it is strange to argue that this passage means anything like what Holbo thinks it means: "Ideally, we would find that one man and even make all others his slaves, if that is what it took to let him exercise his freedom to the fullest. Hayek thus affirms a freedom monster argument somehat analogous to the classic pleasure monster reductio."

The Hayek quote refers to the exercise of liberty, which may not be universal even if the liberty is extended universally. Hayek is arguing that it does not follow from the fact that the exercise may be non-universal that the liberty should be restricted. Instead, those who would exercise their liberty should be free to do so. In fact, there are a million liberties. None of us can act on all them, but all of us will act on some of them. Restricting liberties that the majority isn't exercising may be tempting, but it would be wrong to do so since the exercise of liberties leads to the improvement of society. That's the argument.

To get from Hayek to Holbo's interpretation of Hayek you have to take a few steps. First you'd have to ignore the footnote on the very passage Holbo pulls, which contains this quote (from some people I've never heard of): "If there is to be freedom for the few who will take advantage of it, freedom must be offered to the many." How does that imply enslavement of the masses for the benefit of one? Suppose I proposed universal suffrage while acknowledging that many people will stay home on election day. Would that make me anti-democratic? It's a strange argument.

Hayek believes that social progress occurs partially through experimentation, the results of which are ex ante unknowable. The "unknowable" part is extremely important for Hayek. It's how he can simultaneously support a welfare state and public provision of public goods while opposing egalitarian redistribution and social ownership of the means of production. "Knowable" advances can be socially planned, and Hayek was fine with using the power of the state to do so. ("It is the character rather than the volume of government activity that is important.") Unknowable advances cannot be planned but are nevertheless desirable, thus experimentation must be allowed through constitutionalization and encouraged by the preservation of (market) reward for experiments that succeed. Holbo is correct that this is Millian -- J.S. Mill's "utilitarianism" is dynamic, not static: society benefits at time t+1 from the exercise of individual liberty at time t. Whether this is actual utilitarianism or something else is, I suppose, the question -- but wrong when he implies that Mill, by way of Hayek, was Nietzschean.

Hayek seems to believe that the majority of society will choose not to experiment because they are risk averse -- "The freedom that will be used by only one man in a million..." emphasis added -- or because they are exercising some other liberty, but it is socially optimal to have somebody doing some experimenting. Those who are interested in doing so, those who will exercise their liberties while others do not, should be allowed to do so, since society will benefit if they succeed. The rest of the passage in The Constitution of Liberty quote above goes:

The less likely the opportunity, the more serious will it be to miss it when it arises, for the experience that it offers will be nearly unique. It is also probably true that the majority are not directly interested in most of the important things that any one person should de free to do. It is because we do not know how individuals will use their freedom that it is so important. If it were otherwise, the results of of freedom could also be achieved by the majority’s deciding what should be done by the individuals. But the majority action is, of necessity, confined to the already tried and ascertained, to issues on which agreement has already been reached in that process of discussion that must be preceded by different experiences and actions on the part of different individuals. 

The benefits I derive from freedom are thus largely the result of the uses of freedom by others, and mostly of those uses of freedom that I could never avail myself of. It is therefore not necessarily freedom that I can exercise myself that is most important for me. It is certainly more important that anything can be tried by somebody than that all can do the same things… What is important is not the freedom that I personally would like to exercise but what freedom some person may need in order to do things beneficial to society. This freedom we can assure to the unknown person only by giving it to all.

How can one (e.g. Holbo) read this and come away thinking Overman? It's more like the open source movement. Which makes sense, since Hayek's view on this goes back to his 1945 essay "The Uses of Knowledge in Society". He argues there that because much knowledge is local, and centralized planning cannot incorporate local knowledge, that centralized planning will fail. This argument is what he's drawing from to say that the exercise of liberty by some -- who are in possession of local knowledge not available to all -- is not suboptimal.

Now, possibly you could argue that Hayek's view of the masses is too dim (even though he includes himself in them) and that is where the aristocracy comes in and takes us to Nietzsche. Or possibly you could argue that the "knowable" advances are greater than the "unknowable" advances. Indeed, this is the argument against which Hayek dedicated himself to in writing The Constitution of Liberty, which was published in 1960 -- a time after Sputnik when Paul Samuelson was predicting that the USSR's GNP per capita would surpass the US's within a generation or so -- so you'd at least be meeting him where he is. The question Hayek is trying to address is whether society will benefit more from planning or from spontaneous emergence. He obviously believes it is the latter. He may be wrong, but not because he's a Nietzschean.

The better argument is the one made by Amartya Sen: it is not necessarily local knowledge which precludes some from exercising certain liberties, but rather material opportunity. It may not be that some will not exercise their ability but that they cannot do so. In this case they are not free. Hayek says almost nothing about this directly, but does say that just because some are free does not mean that all should be enslaved. Those who can exercise their freedom should do so, as this will provide benefit for society.

This is the point, I think, that Hayek goes astray. His argument about the importance of local knowledge and decentralization falls apart when those with local knowledge cannot employ it and opportunity is centralized. His claim that innovations by the few will benefit the many is empirical: sometimes they do, often they do not. His argument that order is spontaneous is contingent, in other words, not a law of nature. Complex systems can, and do, break down. To simply admit does not require giving anything else up.

But, again, this is not Nietzschean. Which is why Objectivists do not like Hayek. This is an argument that Hayek should revise his beliefs to include a role for a marginally bigger -- although not fundamentally different -- state, or some other redistributionary apparatus. This is doable using Hayekian language, even if Hayek himself and many of his supporters recommend a minimalist state. Hayek is reconcilable with somewhat-modest forms of social democracy, in other words, and social democracy is reconcilable with a deregulated-but-redistributionary political economy.

But to do that you'd have to admit that Hayek was not quite a moral monster. Corey Robin is dedicated to showing that the right wing is authoritarian in all its guises. He believes that when Hayek writes "Why I Am Not A Conservative" he simply cannot be trusted: he's a reactionary like all the rest, and all the rest are motivated first and foremost by a lust for exploitation and oppression. There is nothing inherently wrong with this intellectual project, and I've learned a lot by following it. But it is inherently limiting at the same time, and it commits one to answers before questions have even been asked.

The Conservative Left

Henry Farrell's article on the plight of European democracy in the face of "technocratic" management is very good reading. 

Tangentially related is this bit from Thatcher making a similar argument ex ante: 

Which is not to say she was anti-Europe. She wasn't. Alex Harrowell put it well:

[T]he European Union has not turned out to be the nice alternative to Thatcherism it was sold as in the 1990s. ... 

The policies it delivers – open trade, austeritarian macro-economics, open capital flows, no real redistributive budget, and a permanent war on inflation – are basically nothing Margaret Thatcher would not have welcomed. ... 

Thatcher was a European; it’s Europe that’s the problem.

Except that Thatcher rejected the central bank, which is Europe and thus the problem. Harrowell says truthfully that the UK was pegging to the German mark for much of Thatcher's tenure, but that was a choice which was easily reversible (and was in fact reversed) as soon as it became disadvantageous.

The longstanding left political project -- internationalism plus a strong welfare state funded by capitalism -- contains as many contradictions as capitalism itself. So what's the left to do? It's adopting the tone of the right. By the end of his life Tony Judt couldn't really be more conservative. Farrell's essay suggests that this is the only plausible path forward, and it's not a good one.

There Is No Technocracy: Stop Worrying About Aggregate Demand

Is "aggregate demand" really what anyone cares about? I don't think so. We care about the quality of peoples' lives. And new research is starting to look at what sorts of fiscal policies matter for improving well-being whatever the macroeconomic aggregates say. Evan Soltas describes some of this work and interviews the authors:

Tax revenues fall automatically in recessions, and governments back that up with lower tax rates and/ or new credits and deductions. On the spending side, extra outlays on unemployment benefits and other transfers greatly exceed extra outlays on infrastructure and other purchases. This modern kind of fiscal stimulus is supposed to work by stabilizing disposable income. Stabilize that, the thinking goes, and you stabilize output and employment. 

But is that right? In a new working paper, Ricardo Reis of Columbia University and Alisdair McKay of Boston University say no. They find that stabilizing aggregate disposable income plays a “negligible role” in stabilizing the economy as a whole. Transfer payments can indeed stabilize output, they find, but mainly through a different channel -- not by changing disposable income in the aggregate, but by changing its distribution. Fiscal policy, in other words, is all about inequality.

“It’s the redistribution that has a lot of kick,” Reis said in an interview. “The usual argument for transfers is basically Keynesian. We find that has very low impact in our model.”

More on the fiscal side here. What about the monetary side? Marc Chandler, a Wall Street manager writing in the Jacobin, describes the relationship between monetary policy and distribution.

Central bank independence was never what it was cracked up to be. During “normal” times, central banks protected the interests of the owners of capital. Paul Volcker is often cited as the epitome of the independent central banker, but surely his tight monetary policy, justified in terms of some technocratic money supply target created winners and losers. The owners of capital were among the winners, while those who did not own capital were losers (through such things as higher unemployment and downward pressure on real wages). ... 

The setting of monetary policy was never simply a technocratic exercise as the [central bank independence theory] pretends. There were always those interests that benefited and those who did less well. Few cried of a loss of central bank independence, for example, when the Bundesbank would threaten tighter monetary policy in reaction to unions seeking a sharp increase in wages.

Much more here. Both the commentariat and academia have focused too long on the supposed technocratic features of policy: whether unemployment is at its "natural" rate, whether output is at "potential", whether central banks are "independent", whether inflation is "low and stable". None of these concepts exist in nature. None of them are even definable quantitatively, although they may be described quantitatively. Hence, they are not scientific concepts but terms of art with important distributional ramifications.
 
I have a paper forthcoming which looks at how banks respond to monetary arrangements. It turns out that monetary politics goes well beyond central bank independence. I'll post a link when it's available.

Boston Review Forum on Labor Rights and MNCs

A forum on labor rights and multinational corporations. Here is Richard Locke's lead essay. Here is Layna Mosley's contribution. Many other interesting contributions, too. Have a look.

Rogoff: Not An Austerian

I haven't said anything about the Reinhart and Rogoff affair because I've been busy. It's certainly horribly embarrassing, and not just because of the errors: when your research method is finding means and medians among arbitrary clusters of units across disparate time periods by copy-and-pasting Excel, it doesn't say much about your methodological (or theoretical) chops. I never took the 90% threshold all that seriously, either as a causal relationship or a even a deterministic association. If you'd like to check, here's what I wrote about the paper at the time. I do now flinch at the part where I call R&R "very good empirical economists" but otherwise I think my tone is appropriately blasé concerning the central findings. And, from what I can gather, the follow-up studies make the 90% threshold go away but not the general relationship: high debt is associated with low growth at basically all levels, although it is not statistically significant at very high levels (almost surely because of the small number of observations at very high levels). This of course says nothing about the causal relationship which, I'm quite certain, runs in both directions.

At the same time, I thought then that anti-austerians were pushing R&R into a corner. I never felt that R&R were austerians, but then folks recently dug up some quotes, maybe out of context maybe not, where Rogoff said he thought that beginning to move towards fiscal balance is the right decision for the U.S. Doesn't necessarily make him an austerian, at least of the "expansionary" sort, but I had updated my beliefs accordingly with no regret (I've got nothing at stake here), only to be reminded -- by Robert Kuttner (of all people) in a positive review of David Graeber's book (of all things) in the New York Review of Books (of all places) -- that Rogoff is totally not an austerian:

Carmen M. Reinhart and Kenneth S. Rogoff, whose 2009 book, This Time Is Different: Eight Centuries of Financial Folly, was reviewed in these pages by Krugman and Robin Wells, are best known for demonstrating that the most severe downturns of the entire economy typically follow financial crashes. In passing, This Time Is Different mentioned a provocative concept, “financial repression.” The idea was that when debt is strangling an economy, it may make sense to hold down interest rates, and let inflation decrease debt, or otherwise constrain financial burdens on families and companies to help the rest of the economy realize its potential. The Federal Reserve, under Ben Bernanke, has kept interest rates exceptionally low, incurring criticism that it is risking inflation. Rogoff, formerly chief economist of the IMF, goes further. He would have the Fed deliberately set as a target an inflation rate of 4 or 5 percent as an open strategy of reducing debt burdens by inflating them away, an idea that horrifies the bond market.

Reinhart, in a subsequent paper co-written in 2011 with M. Belen Sbrancia,5 reviewed the experience between 1945 and 1980, and found that there had been continuing financial repression. Real interest rates (i.e., adjusted for inflation), they calculated, were negative on average for the entire period, helping to “liquidate” public debt, partly because the Federal Reserve had a policy of financing the large expenditures of World War II at low costs. During the same era, tight regulation limited speculation by large financial institutions and other investors, so that cheap credit could flow to the real economy without inviting financial bubbles. The 1933 Glass-Steagall Act, for example, prohibited commercial banks from underwriting or trading securities. Yet despite a controlled bond market whose investors suffered negative returns of -3 to -4 percent, the years between 1945 and 1980 were the era of the greatest boom ever.

These findings defy a core precept of conservative economics, the premise that economic growth requires financial investors to be richly rewarded, an idea disparaged by critics as trickle-down economics. The postwar era, by contrast, was an age of trickle-up. Some creditors lost in the short run, but broadly shared prosperity stimulated private business. Eventually, the rising tide lifted even the yachts.

This is not what the Confidence Fairy moralistas are demanding. It is not the position of the GOP. It's not what Alesina's advocating. It would hurt creditors and benefit debtors. It is the sort of monetary policy that center-left folks have been pushing for years. As Scott Sumner continually points out, using monetary policy to re-inflate the economy is a position that Krugman has advanced repeatedly, both in his academic work and in his punditry.

What's the point of this? The same point I've been trying to make in several other recent posts [1, 2] which I hope to extend in the future: if "austerity" is taken to mean anything at any time other than guns-blazing fiscal Keynesianism then it will ultimately lose its usefulness as a political economy concept and therefore its salience as an object of critique. I fear that this has already started to happen.

But more than anything else, I think the obsession with outing anyone to the right of Krugman as an austerian and therefore worthy of public ridicule of the highest sort is making us lose sight of the actual politics. I get the sense of satisfaction that comes from it, but is it really worth it? Krugman could be right about all the economics, although I'm not at all convinced... the US has been posting normal growth rates while he's been saying we're in the 1930s, but he's definitely got the politics wrong. At the end of the day which one is more important?