During the 1990s, the countries of the former Soviet Union had a unique historical opportunity to move toward a competitive market economy based on private property rights. After decades of “experimenting” with various degrees of totalitarian socialism, this privatization moment would allow hundreds of millions of people to leap ahead in their standards of living and personal well being while fundamentally transforming their political and social relationships. Instead of an economic “miracle”, the privatization era was characterized by a new structure of cronyism wherein the formerly nationalized wealth of the Soviet Union came to be controlled by a small group of “oligarchs” and the people of the various countries were essentially politically repressed. The worst part is that this economic and political travesty took place with direct involvement by various Western and US-backed institutions and individuals, such as members of an elite advisory team from Harvard University. Below are several resources exploring the theory and experience of privatization in Russia and other former communist nations.
We learn about the exploitation of the Russian privatization by members of the Harvard Institute for International Development. We learn a couple of interesting facts about the period: the HIID advisors were not doling out pure, fundamental free market theory about how to create a competitive market economy but instead helped to build a “managed” system directly modeled on the US and other crony systems; and, many of the advisors involved in the HIID project made direct investments in industries they were advising, for personal benefit, in direct contradiction to their employment contracts and the laws of the US and Russia at the time (ie, corruption). Deeply involved in the scandal and a close friend of many of the advisors directly involved, the infamous Larry Summers does not come out looking so good.
Two money quotes:
Judge Woodlock found that, while running the Harvard Institute for International Development’s advisory program in Russia in the early 1990s, Harvard economics professor Shleifer and attorney Ha had conspired to defraud the US government, engaged in self-dealing and violated conflict-of-interest regulations.
Harvard University was in a unique position to exert a powerful influence. Post-Soviet Russia turned to the West for help in rebuilding its economy and filling the vacuum left by communism’s fall. In running Harvard’s Russia Project, Andrei Shleifer and Jonathan Hay had an opportunity to preach the importance of integrity, transparency and fairness in shaping a business culture, to work to enshrine those values in the country’s legal and financial infrastructure. Instead, their personal dealings sent a very different message.
This is a horrible tragedy for post-communist European societies, US and Russian foreign relations and for governance and culture in our own society as Shleifer paid a settlement but received no formal judicial sanction and maintained his tenure and social standing at Harvard and in the wider American economic community after playing the role of a miscreant carpetbagger.
Anne Williamson explores “the question of the many billions in capital that fled Russia to Western shores via the Bank of New York and other Western banks.” Claiming that “property is the poor man’s ticket into the game of wealth creation” (a sentiment echoed in Hernando de Soto’s The Mystery of Capital) because “the rich… have their money and their friends to protect their holdings, while the poor must rely upon the law alone,” Williamson observes that Russian economist Larisa Piasheva, building on the theory of Austrian school economist Wilhelm Ropke, had designed a “cold turkey” privatization policy which would’ve invited direct foreign investment in Russia; instead, the Harvard cabal and other Western reformers created a weak, US taxpayer-supported voucher system that relied on Western bank lending and led to widescale corruption.
She makes the further claim that “Communism had evaporated by late 1987, the year in which the Russian people were allowed to hold convertible foreign currencies.” She condemns the entire, Western-organized privatization program as a sham and part of a known political formula:
Sell assistance programs on an alleged “free market” and “humanitarian” basis by awarding government grants to those academics who can be relied upon to supply the intellectual camouflage politicians and journalists then repeat ad nauseum to a distracted public, move the IMF and the World Bank to target, induce target to raise taxes, fine tune target’s central banking operations, encourage borrowing and debt creation through the target’s government and its national banks, allowing IMF lending to pay yields if necessary; induce target to privatize national property while building a flimsy, artificial “infrastructure” for an equities market good enough to attract high risk foreign investors. Once the target nation’s government flounders, step back and watch speculators assert discipline through a run on the target’s currency. The subsequent devaluation delivers, in turn, a flood of cheap imports to American manufacturers and producers.
The finishing touch on the swindle is to confiscate more money from G-7 citizens (the lion’s share from Americans) to pay for what is said to be an “essential” IMF bailout; thereby allowing Uncle Sam’s IMF minions to entrench themselves more deeply in the target government’s. Taxes are raised, the population struggles beneath indebtedness, government funding demands and the inevitable domestic inflation and devaluation delivers. Western neo-colonialists then bully the target over its rapidly compounding debt in order to extract yet more property. Once successful, the world’s insiders then turn around and deliver cheap shares from privatizations and initial public offerings into the maw of U.S. mutual funds and portfolio investors. US taxpayers get hit coming (foreign aid) and going (bailouts) and innocent foreigners’ property is finagled away either from, or on account of, inattentive and corrupt leaderships. The big winners are the world’s increasingly corrupt and cozy governing class, international bureaucracies and global banks.
We would be wise to remember her coronation of currency speculators as “the last disciplinarians in the world’s financial system.
Reminding us of the dictum that “bad men need nothing more to compass their ends, than that good men should look on and do nothing”, Steve Sailer observes that during the Russian privatization,
Fischer was there at the creation. He had numerous chances to speak out publicly about what was going horribly wrong in a Russia that looked to him and his friends for advice.
When a person observes evil and does not speak out, particularly when he shares proximity to it, we have to question whether he is competent to recognize what he is looking at and whether he might be compromised in being a participant in it in some way.
Stanley Fischer is now the vice chairman of the US Federal Reserve System. He wields incredible power and influence over the US monetary system and economy, not to mention the world’s. The Sailer article explores his questionable judgment of the facts-on-the-ground in Russia, which he had a hand in, and his ethics in seeming to overlook the blatant corruption. The article helps us to remember that politicians of the present have a past, and that past is rarely flattering and seems to be easily forgotten. It also reiterates the theme that a golden opportunity to move Russia and other post-communist countries toward true free market thinking was squandered.
George Reisman’s Capitalism (PDF), pg. 290, “From Socialism to Capitalism: How to Privatize Communist Countries”
So, if corrupt self-dealing and crony managed economies are not the solution for privatizing former socialist regimes, how could it or should it be done? Luckily, there are real free market thinkers who have thought of possible solutions for reform. An extended section from George Reisman’s Capitalism lays out one such approach in detail. I have decided to quote it at length:
The advantages of private ownership of the means of production are so overwhelming that it is actually of secondary importance precisely who the initial private owners are and how their ownership is established. Whatever the specific method or methods of establishing private ownership of the means of production, the institution will function to the benefit of everyone—owners of the means of production and nonowners of the means of production alike. It will do so, however, only to the degree that the individual private owners possess full and secure rights of ownership.
The security of property rights means that the owners must be secure both against the possibility of any form of new confiscation by the state and against successful challenge to their ownership by other private individuals claiming to be the rightful owners. To understand the necessity of the security of property rights, the reader should imagine how his behavior would be affected if he were contemplating buying a home that he could not be certain would be his for very long. He would not be prepared to pay very much for it, and, after he bought it, he would not be prepared to put very much into it. Indeed, his incentive would probably be to let the house run down and even to sell off such things as the appliances for the sake of obtaining cash or other assets that would be more securely his. Without the security of property rights, the situation of all would-be owners of factories, farms, mines, and stores in the present-day socialist countries must be exactly the same. Such owners would be in essentially the same position as the state employees described earlier who were supposed to act as capitalists under “market socialism.” The absolute security of the owners’ property rights is essential if people are to be willing to pay proper prices for the various properties and then to stay on and improve them rather than milk them for whatever they can.
An essential aspect of the rights of ownership is the right freely to buy and sell property. This aspect of property rights is especially important in the transition from socialism to capitalism. The combinations of assets of the various enterprises of socialism and thus the combinations of assets of the enterprises that will initially exist under capitalism will almost certainly need radical change. It will be essential for the market to have the freedom literally to redefine all enterprises by changing the combinations of their assets. This means, there must be the freedom both to break up existing enterprises by selling off their assets in the manner of “corporate raiders” and to combine their assets through such devices as mergers and acquisitions.
As I say, these freedoms are essential. For a major foundation of the efficiency of capitalism—ironically, increasingly overlooked in the supposedly capitalist United States—is the ability to create business firms that possess the right combinations of assets. This ability is essential if firms are to be able to produce the right products by the most efficient methods. It must be present at all times, if the economic system is to be able to adjust to changing conditions. It is acutely necessary in the context of putting right the combinations of assets that a socialist government is likely to have thought appropriate for the various enterprises. It would be essential not only for such things as combining manufacturers with the right parts makers, and retail outlets with the appropriate warehouse facilities, but also for changing the uses made of all kinds of existing factories and land sites.
Nothing less than a radical overhaul of the entire apparatus of production inherited from socialism will be necessary if the economic system is to become efficient. Many factories will have to be closed and such of their assets as are still useable, devoted to production in different locations. Most other factories will have to undergo major changes in what they produce and the methods by which they produce. The output of innumerable factories will have to go to different users. The use that is made of innumerable land sites will have to change. All of this requires the freedom to buy and sell and to breakup and combine the assets of firms.
Along the same lines, the market would need the absolute freedom to hire and fire the managers of enterprises. This freedom too is necessary at all times and acutely necessary in the conditions of a transition from socialism to capitalism. Any managers inherited from socialism are likely to need replacement. Many of the initial managers under capitalism will also need replacement. To be effective, the transition from socialism to capitalism will need to be followed by a fall into obscurity of numerous former top managers and rise from obscurity of numerous new managers. Nothing must be allowed to impede the business takeovers and buyouts that are an essential part of this process.
In addition, of course, there must be the absolute freedom to hire and fire ordinary workers. Socialism is characterized by a massive misallocation of labor, just as it is characterized by massive misallocation of capital. This too must be put right if production is to become efficient.
A vital aspect of the transition from socialism to capitalism, that is implicit in all that has just been said and is clearly called for by the nature of capitalism, is the freedom of every enterprise to enter into the industry of every other enterprise, and, of course, the freedom of everybody to form new enterprises. In other words, the full freedom of competition must exist.
In the light of these requirements, the specific methods of establishing private ownership of the means of production can now be considered.
The simplest and most obvious method is that wherever former owners of property or their descendants are still alive, the properties should be returned to those from whom they were stolen, or to their descendants.
In Eastern Europe, this method is somewhat complicated by the fact that many of the private property owners who were dispossessed by the Communists were themselves beneficiaries of expropriations carried out not long before by the Nazis. Here the solution clearly is to return the properties to the earlier owners dispossessed by the Nazis, or to the descendants of those owners.
To the difficulty of settling claims as between two or more private claimants is added the fact that the method of returning property to former owners becomes less and less adequate, the longer is the period of time during which socialism has existed and the more ruthless were the means employed to establish socialism in the first place. This is because it becomes correspondingly more difficult to locate specific individuals with valid claims to ownership. (In many cases, everyone with a valid claim may simply have been murdered.) The major part of the problem, however, is the fact that as time has passed, numerous new plants and machines have been constructed, which no one can now claim on the basis of property rights existing before the establishment of socialism. These observations are particularly applicable to the former Soviet Union, where socialism existed for over seventy years and where over twenty million people were murdered by the Communist regime. The mass murders committed by the Nazis may pose a similar problem to the location of heirs.
In view of these facts, I propose three methods of privatization. First, as far as possible, property should be returned to those from whom it was stolen, or to their descendants. Second, in the case of agricultural land where it is not possible to locate former owners or their descendants, the land should be made the individual private property of those who now work it. That is, all the collective farms and state farms should be broken up into separate, individual private farms. Formulas could be devised allowing for differences in the amount of land individuals received based on differences in the time they had been compelled to work the land. Those who had suffered such forced labor for a longer period, would receive more of the land than those who had suffered it for a shorter period. Individuals who would otherwise receive parcels of land too small to farm might simply receive cash.
Third, in the case of all other property—factories, mines, shops, and so forth—the appropriate principle would be to place the assets on the open market for competitive bidding. Foreigners should be actively encouraged to participate in this bidding and, indeed, the bidding should be carried on in Western currencies and in gold. Foreigners should have the same full rights of ownership as citizens: they should be allowed to buy and sell property of all kinds, to form companies, and to remit dividend and interest payments to their own countries to whatever extent they wish.
Active foreign participation in the bidding creates the possibility of the average citizen of the socialist countries deriving an important immediate benefit from privatization. Namely, as the proceeds from the sale of assets came in, each individual citizen could receive his individual share of the proceeds—that is, the proceeds of the government’s sales could be divided up among the citizens. Thus, during the period of liquidation of state assets, the average citizen could receive one or more checks payable in Western currencies. He could use the proceeds to buy essential consumers’ goods that could be imported from the outside world because the means would be present to pay for those imports. This would help to tide him over during the difficult period of transition during which his country’s economic system was being reorganized and he was unemployed or not in a position to earn a significant amount by working. In this way, for the first and only time—in the process of its liquidation—collective ownership of the means of production would turn out to provide some actual benefit to the citizens: in the moment of its being liquidated for Western cash, it would enable them to obtain something of value to their lives.
It should be observed, incidentally, that the benefit to the average citizen would be the greater, the greater was the prospective security of property. Because to the extent that newly acquired property rights were expected to be upheld, the higher would be the prices that foreigners would be prepared to pay for the assets being offered for sale, and thus the greater would be the proceeds accruing to the average citizen of the formerly socialist country. Economic morality would be rewarded. (The ability of foreigners freely to remit dividends and interest payments is an important aspect of this morality and also an important foundation of the foreigners’ willingness to bid up the prices of the assets offered for sale, and thus of the ability of the average citizen of the formerly socialist country immediately to benefit from privatization.)
[…] Once the transition to capitalism was accomplished and the average citizen of the formerly socialist country was in a position to begin saving and investing on a significant scale, not only would he begin to accumulate capital within his own country, but the capital market of the entire world would be open to him, and he could invest abroad just as others had invested in his country. This is an aspect of what can be called capitalist internationalism.
In order to secure the best prices for assets being sold off, a corps of professional auctioneers and brokers should be employed, who would receive a commission based on a percentage of the sales proceeds.
The principle of distributing the proceeds from the sale of assets equally among the citizens could be modified to give greater compensation to victims of labor camps and survivors of those who have been murdered by the Communist regime. However, the primary compensation for such crimes should probably be left until after the transition to capitalism has been completed and it is thus possible to provide more substantial compensation.
There are, of course, other possible methods of establishing private property. One would be simply to make the various existing enterprises the private property of their present managements. Another would be to turn the various enterprises over to their present employees. Obviously, the two methods could be combined, with the present managers receiving a certain percentage of the ownership and the present employees a further percentage. To some extent, these methods are actually in use.
If, following the establishment of private property in these ways, there really was security of property and full rights to buy and sell assets and shares, to hire and fire managers and workers, and to compete in all branches of industry, these methods would ultimately be effective in establishing private ownership of the means of production. As time went on, all the necessary changes could take place, including changes in ownership, which would be effected by the market, and an efficient economic system would emerge. However, the appropriation of enterprises by their Communist-appointed managers will necessarily carry with it the taint of the old regime and all of its injustices, and is likely also to be accompanied by a continued large-scale ability to use political pull, based on previously established relationships with government officials. Thus, private ownership of the means of production begun in this way will be tainted by injustice, past and present, and by corresponding inefficiency. This would be a legitimate source of resentment and would constitute a potential threat to the continuation of such ownership.
Turning the ownership of each establishment over to the workers of that establishment would at best arbitrarily favor some workers over others. Those workers who happened to work in highly capital-intensive industries, such as electric-power production or steel making, would obtain ownership of far more capital than workers who happened to work in less capital-intensive industries, such as clothing factories and restaurants. The same point would apply within each industry, insofar as some plants were more modern and efficient than others. It is very pertinent, of course, that as the result of socialism’s protracted gross inefficiencies, the value of many factories and other productive establishments would turn out to be altogether nonexistent.
The problem of workers benefitting or failing to benefit by virtue of the accidental circumstances of where they worked would also exist in agriculture. The workers of collective farms with abundant, rich soil would receive more than the workers of collective farms with relatively meager, poor soil. In agriculture, however, apart from the return of former owners or their descendants, there does not appear to be an alternative to the workers’ coming to own the land. Of course, the workers on the relatively poorer lands could be given the option of sharing in the proceeds of the sale of other assets rather than accept land they had been forced to work.
To the extent that workplaces do become the property of the workers employed in them, it must be stressed that it is vital that the workers of each plant be free both to sell their ownership shares while keeping their jobs and to leave their jobs while keeping their shares. In this case, ownership and employment would eventually become almost entirely separate, as under capitalism. The ability to hold ownership and employment separately is essential for the free movement of capital and labor between industries. In its absence, workers would be reluctant to leave their employment, because they would then lose their capital, and they would be afraid to admit new workers into their firm or industry, because they would then have to correspondingly dilute their ownership. There would be no possibility of transferring capital from one industry to another, since the workers of the industry from which the capital came would simply lose it. Furthermore, the rapid separation of ownership and employment is necessary to overcome a bias that might otherwise exist against improvements in efficiency if workers as owners were in a position to reject improvements that might cost them their jobs.
Thus, at its worst, turning ownership over to the workers could mean a state of affairs in which the movement of labor and capital between the various branches of industry was made impossible. In addition, it could mean a situation in which the workers of each industry, by virtue of their possession of a monopoly on employment in their industry, were in a position to practice extortion on the rest of the economic system as the price of providing their services. Obviously, these are conditions which should be avoided at all costs.49
Provided that the essential requirements of security of property, the separation of employment and ownership, and the unrestricted freedoms to buy and sell, hire and fire, and compete, are observed, what remains is to accomplish the transition to private ownership as quickly as possible. Reasonable but strict time limits must be set for the location of former owners or their heirs, and it must be firmly established that thereafter no new claims will be heard on their account. This is an essential part of establishing the security of property. All of the assets in the hands of the state must likewise be disposed of within a strict time limit, so that no one in the market need labor under any uncertainty about what properties will be available and when and thus what plans he can and cannot make. This is essential to making the economic system as efficient as possible as soon as possible.
In the absence of the establishment of private ownership of the means of production, all other reform is meaningless. [emphasis added] For example, decontrolling prices without first establishing private ownership of the means of production and its corollary the freedom of competition, simply means giving arbitrary, monopolistic power to lesser government officials in charge of individual industries and enterprises. It is comparable to giving the postmaster general or the local postmaster the right to set postal rates. Without private ownership of the means of production, there can be no market economy or free market. Divorced from private ownership of the means of production, such notions are a contradiction in terms. Nor, of course, can there be lasting or meaningful reform in the political realm.
These articles are shared as evidence of several ideas:
- Free markets haven’t been tried, not in Russia, not in the US
- “Free markets” are a convenient and distracting cover term for what is actually corrupt crony systems because it confuses people who understand the value of free markets and it distracts those who hate them
- “Economists” are often not economists but political agents, and many of them have flawed ethical frameworks
- Harvard as an institution, specifically, has a record of questionable ethics with regards to the HIID’s involvement in the privatization of Russia
- Modern US-Russian relations are a lot more complicated than Good, Liberty-Loving America vs. the Former Red Menace
- Larry Summers is corrupt
- Stanley Fischer is corrupt
- The truth is complicated and unpopular and those who are scandalized by it have a strong incentive to cover it up, ignore it or forget about it