Perestroika and the discovery of price signals

Written by: Stephen Hsu

Primary Source: Information Processing

I read The Oligarchs: Wealth And Power In The New Russia many years ago. A passage which I found fascinating, and still remember today, describes the explorations of reformist Soviet economists toward market economics and price signals. Imagine groping dimly most of your adult life for subtle but monumental concepts that lie far down a forbidden path of reasoning.

Some leftists in the West are still groping for (or perhaps not even seeking) these ideas. Just as the Soviet economists failed to appreciate for most of their lives the monstrous nature of state control of the economy, many on the left take for granted the miraculous fruits of the market economy.

[Chapter 4: Anatoly Chubais] … As perestroika dawned with the arrival of Gorbachev in 1985, the topics at the Leningrad seminars grew more ambitious. The participants began to broach an altogether bold idea: introducing some aspects of the market to Soviet socialism. For a long time, they intensely debated whether the economy could be saved by such reform concepts as self-financing or by decentralization, which meant allowing factory directors to make more of their own decisions. Later, as the years went on, they concluded that the existing machine was probably doomed and would have to be massively restructured. Still later, they spent many days contemplating the prospect of a “transition” to some new kind of a system. Even the notion of a “transition” was a thrilling idea.

… They had ample access to more radical texts in samizdat, the dog-eared, self-typed, or mimeographed manuscripts that were officially prohibited but widely distributed from hand to hand. …

Then came a sudden bolt of inspiration. They were profoundly inspired by a two-volume, 630-page book published in 1980 by a Hungarian economics professor, János Kornai. The Economics of Shortage, more than any other text, offered an insight into the failings of Soviet socialism. Hungary had been at the forefront of more market-oriented economic reform in the Eastern Bloc since 1968, and Kornai’s groundbreaking work was almost entirely based on his observations about Hungary. But for the young scholars around Chubais, the work opened a window as no other Soviet or Western study had done on why the economy of shortage existed and how it functioned. Kornai examined the behavior of buyers, sellers, and producers in an absence of free prices, as well as the relationship between firms and the state under socialism and central planning. [ See János Kornai’s Contributions to Economic Analysis. ]

The book first arrived in Leningrad as smuggled photocopies and instantly “became a Bible,” Vasiliev recalled. “We had some ideas initially, but the book was kind of a catharsis. It pushed our thinking forward. You met a person and you said, ‘Have you read Kornai? Yes?’ And then it was a starting point for discussion. …

But Kornai alone did not lead the Chubais team out of socialism; he just helped them see it much more clearly. The other great inspiration of those years came from the Austrian economist Friedrich von Hayek, one of the most trenchant early critics of socialism, who was especially acute in his searing denunciation of central planning. Although Hayek’s best-known work was The Road to Serfdom, a 1944 treatise about the dangers to individual liberty of socialism and central planning, Chubais took to heart a lesser-known economics text.11 It was an article that Hayek had published in 1945, “The Use of Knowledge in Society.”12 The article articulated clearly what the Leningrad scholars had been groping toward since the debate at the collective farm: that free prices were the single most powerful “indicator” to measure all the millions of decisions in a large, complex economy. …

Hayek declared that the price system was a “marvel” which could free people from the “conscious control” of the central planners. At the time Chubais read this essay in Leningrad, the Soviet Union was the world’s largest example of “conscious control,” with rigid, fixed state prices set throughout the economy. Hayek, who won the 1974 Nobel Prize in economics for his work, had taken a battering ram to the underpinnings of Soviet socialism. Amazingly, his wisdom was smuggled past the KGB on those dog-eared photocopies, and it landed in the hands of an eager young generation of knowledge-hungry Leningrad academics.

Many years later, Chubais recalled the thrill of reading Hayek and instantly gave his own example of how Hayek’s theory worked in practice in the United States. “One person is selling hamburgers somewhere in New York,” he told me, “while another person is grazing cows somewhere in Arkansas to produce meat that will be used to make those hamburgers. But in order for that person in Arkansas to graze cows, there needs to be a price for meat, which tells him that he should graze cows.” …

… “We started trying to think about real things, instead of all that bullshit we were engaged in during our formal jobs,” Glazkov said. The Gaidar-Chubais group produced a 120-page report, adapting some of the Hungarian and Yugoslav reforms to the Soviet system. They called for abandoning planning dictates and permitting some free market mechanisms. When Gaidar’s boss came back one day, he brought bad news: the plan had been rejected. “Which meant we were to give up our fruitless daydreaming” and come up with something “on a more mundane level,” Gaidar recalled. But when Gaidar went home that day and turned on the television, he heard Gorbachev deliver a speech using some of the same terms they had put in the rejected report. It was a strange time …

My samizdat.

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Stephen Hsu
Stephen Hsu is vice president for Research and Graduate Studies at Michigan State University. He also serves as scientific adviser to BGI (formerly Beijing Genomics Institute) and as a member of its Cognitive Genomics Lab. Hsu’s primary work has been in applications of quantum field theory, particularly to problems in quantum chromodynamics, dark energy, black holes, entropy bounds, and particle physics beyond the standard model. He has also made contributions to genomics and bioinformatics, the theory of modern finance, and in encryption and information security. Founder of two Silicon Valley companies—SafeWeb, a pioneer in SSL VPN (Secure Sockets Layer Virtual Private Networks) appliances, which was acquired by Symantec in 2003, and Robot Genius Inc., which developed anti-malware technologies—Hsu has given invited research seminars and colloquia at leading research universities and laboratories around the world.
Stephen Hsu

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