Why Gorbachev is worried.

'THE SOVIET UNION is facing a very serious crisis," Marshall Goldman says at the outset of his recent book, USSR in Crisis. "This immense rich country is in serious trouble," Washington Post national editor and former Moscow correspondent Robert G. Kaiser wrote in that paper one year ago. "That the Communist economies are inefficient and unproductive is known to every reader of the daily press," Richard Pipes wrote in Survival Is Not Enough, his recent book about the Soviet Union.

It is difficult for us to remember today how high the hopes once were for the Soviet Union and its economy. Communism would "bury" us. History was on its side. "Who is encircling whom now?" Nikita Khrushchev asked a Figaro correspondent at a Kremlin reception in 1958. "When I really feel gloomy I think that five years from now [the Soviets] will be obviously superior to us in every area," said Jerome Wiesner of MIT in 1957. "But when I am optimistic I feel it will take ten years for them to achieve this position."

Returning from an inspection tour of the Soviet Union in 1961, Norman Cousins declared that "the Iron Curtain has become the Red Magnet. The Russians have little hesitation now about bringing people in and displaying their gains. They welcome not just Western scoffers but Asian and African visitors whose own countries are confronted with the need to industrialize in a relatively short time."

Cousins found in the Soviet Union a "mammoth exuberance," a tremendous ongoing celebration, whose raison d'etre he passed on to his Saturday Review readers: "What was being celebrated--along with Sputnik and nuclear energy and modern apartment houses and chromium-plated new cars and television sets and wristwatches and cameras and savings banks and vacation resorts and modern universities--was the culminating proof that the Russians had finally and indisputably arrived as a great nation. Moreover, they had made it on their own."

1961 was also the year when Khruschev, at the 22nd Communist Party Congress in Moscow, promised that Communism would be "built" and in place by 1980. By then "public wealth" would "gush forth abundantly." The Soviet GNP would have multiplied y five, production would be double that of the United States. Every Soviet family would have a free apartment with free utilities and "all that a man could reasonably want." The working week would be 35 hours --thirty for those with "underground jobs" (i.e., in the salt mines). Public transportation would be free. So would midday meals. And for those who wanted "rest in an out-of-town environment" there would be holiday homes, country hotels, and tourist camps "at a discount or gratis."

Pig Iron Galore

ALL THIS seemed plausible at the time. People believed Khrushchev when he enunciated "the chief law of the day--the tempestuous process of growth and strengthening of the life forces of the world socialist system." In short (a poignant note in 1985), "all the difficulties and hardships borne by the Soviet people in the name of its great cause will be rewarded a hundredfold."

As for us, monopoly capital had "doomed bourgeois society to low rates of production and growth." We were said to be suffering "want in material goods."

The Left of course heralded the coming socialist triumph. But some on the Right also saw it as a likely outcome, however detestable. After all, it was said, their system was planned and "rational" compared with our higgledy-piggledy, wasteful affair. We produced electric toothbrushes and mounds of junked cars. They had output, goals, steel mills, plans, and pig iron galore. And the economic statistics were far from promising. "The Soviet economy has been growing, and is expected to continue to grow through 1962, at a rate roughly twice that of the United States," CIA Director Allen Dulles said in an oft-repeated statement in 1958. Some months later he added that for seven years Soviet industry had been growing at an annual rate of 9.5 per cent. (The annual growth rate of the U.S. economy in the Eisenhower years was 2.4 per cent.)

Of course the figures were all wrong, and they still are today. No one challenges them, however. But consider this. According to CIA data, Soviet GNP in 1982 was a larger percentage (57) of U.S. GNP than it was in 1960 (48). Moreover, GNP per capita (in 1982 dollars) is said to be higher in East Germany ($10,510) than in Japan ($8,860)--a grotesque claim. Per-capita income in Rumania ($4,460) is said to be almost three times higher than in South Korea--a country that now exports cars in direct competition with Detroit. Rumania in recent months has been unable to generate electric power in its capital at night.

Former Assistant Secretary of the Treasury Paul Craig Roberts, whose doctoral thesis dealt with the Soviet economy, says that the field was in the Sixties, and probably still is, dominated by economists hostile to the market system. (There have been important exceptions, notably Michael Polanyi in England and Warren Nutter at the University of virginia.) Soviet GNP figures are misleading for important applying also to U.S. GNP statistics. Government spending, however wasteful it may be, is called "production" and is added to GNP, with the same weight as private investment. The $435 that the Pentagon paid for a claw hammer also added $435 to our GNP; the Soviet economy is replete with such distortions, since its equivalent of the Pentagon in fact controls so much of the productive activity in the country. "It's basically a war economy," said Craig Roberts, "with all production organized to achieve military supremacy."

Reckoning by GNP, the Soviets are said to have the second largest economy in the world. But this is not the case by any means. Malcolm Baldridge, the Secretary of Commerce, got it right when he described Japan as "the world's second largest industrial power." It is Japan and the U.S., not the Soviet Union and the U.S., that are "the two superpowers." Soviet GNP statistics would be closer to the mark if divided by ten.

If you go back 25 years or more, you will find that one of the great appeals of the Soviet system (Communism) was that it conferred upon those in charge the unchallenged right to solve economic problems by force. "A dictatorship can order that more steel mills or machinery plants be built," Senator William Benton said upon returning from his trip to the Soviet Union in 1955 (described in his book This Is the Challenge). "In the free world, the consumer and his wants must largely provide the impetus for increased production and economic development."

Savings could be coerced by paying laborers less than their due and using the residue to build steel mills. That was it--economic growth could be forced, like broiler-chickens. All you had to do was alienate the workers from the fruits of their labor. We might not like it. Eggs would be broken. But in the end there would be omelets aplenty. "When men do not know what to do," Robert Heilbroner wrote in The Future as History (1960), "then men must be told what to do." Capitalism, on the other hand, could only grow slowly--if indeed it could grow at all in the modern world. But unlike collectivism, it could not be imposed. "Peasants, money lenders, petty bureaucrats can be told--ordered--to do what must be done."

That was the appeal--the efficacy of force. "Every emergent nation, in beating its way to progress," Heilbroner wrote, "must adopt a greater or lesser degree of centralized control over its economy." They would in any event, he predicted (and he was right there), because of their "bitter past experience with laissez-faire" and their "susceptibility to Marxian optimism." Senator Benton echoed this theme, heard in those days from every quarter. Soviet "technicians," he said, were the "new-type front-line troops." Through them the underdeveloped nations were being given a "potent example of how to pull themselves up by their boostrapts."

The magnitude of the intellectual change in two decades is illustrated by three quotations from Heilbroner. "Taking the long perspective of the decades ahead," he wrote in 1960, "it is difficult to ignore the relative efficiency of authoritarian over parliamentary regimes, or the truly remarkable growth rates which, thus far at least, have only been attainable under the radical social reorganization of Communist collectivism."

"What is clear," he wrote a few years later in The Great Ascent (1963), "is that everywhere in the underdeveloped world the word [socialism] has a charismatic ring. And it is not merely the clarion syllables, with their overtones of the social justice, which account for the ubiquity of the socialist term, but also a common functional idea--the superiority of a planned to an unplanned economy as a vehicle for providing rapid economic growth."

But in 1982 Heilbroner wrote in The New York Review of Books: "The collapse of the vision of socialism is one of the great intellectual traumas for the West . . . As inefficiencies and indecencies have become evident in the Soviet Union, Cuba, China, East Germany, Poland, not to mention Yugoslavia itself, the once hallowed term 'socialism' has become emptied of content. Moreover, as we look at the ideas of socialism apart from the forms it has taken in specific countries--ideas of central planning, nationalization, the 'dictatorship of the proletariat'--we find the same sickening sense of vanishing ideals, empty slogans, terrible mistakes."

Ideological Disinvestment

FEW HAVE been as candid as Heilbroner, but his recantation is but one outward sign of a severe loss of faith in Soviet-style "scientific" socialism--the materialistic ideology that failed to deliver the material goods. Only the other day John Kenneth Galbraith must have startled a Stanford audience by saying: "The lessons from China and the Soviet Union do not easily pre-empt self-cultivated farms. It's not entirely accidental that two of the countries worst affected by famine in recent years, Mozambique and Ethiopia, have been experimenting with a socialist agricultural model."

Now comes Mikhail Gorbachev, who must somehow come to terms with this loss of faith. The ideology by which he must rule was after all imported from the West,, and since 1917 Soviet rulers have undoubtedly drawn much succor and comfort from the perdurability of the socialist faith in the Western capitals. The collapse of this faith must surely be a blow to Kremlin morale. Moreover, it is now clear to almost everyone, as it was not ten years ago (or less) that Soviet socialism exists not for the benefit of workers or unions (Solidairty), but of a privileged ruling class (Nomenklatura). That has really sunk in, and it has probably been as damaging in its way as Solzhenitsyn's exposures of Gulag in the 1970s.

Of course, collectivist ideology is still far from dead in the West. In some respects it is stronger than ever. But it is rapidly "disinvesting" in the Soviet Union, which is perceived by latter-day collectivists as being almost as bad as America: centralized, "scientific" (far from reassuring to today's Left), and tyrannical. Contemporary utopians--in D.C., for example, I am thinking of Jim Wallis of Sojourners and Mitch Snyder of the Community for Creative Non-Violence, and there are many such communitarians all over the U.S. today--tend to model their communities on heretical Christian sects of past centuries: the Albigensians, the Diggers, the Levelers. Talk to Wallis, Snyder, and their followers and you will find them anti-American but not pro-Soviet. In general they are alert to the dangersof coercion and of state power.

Discipline and Order

It seems most unlikely that Gorbachev will be able to revive the Soviet economy, and with it the flagging faith of Western collectivists. The problem for him is that the system cannot work as designed. It can only be made to work by circumventing its obstructive design features. By far the most importnat of these is the centralization of power and authority in the command centers and planning bureaus in Moscow. The problem of course is that dismantling these features would amount to a repudiation of Communism itself, and it is most unlikely that Gorbachev will try anything so drastic, or would be permitted to carry it out if he did try.

At present, very little of this seems to be understood by commentators and "experts" in the West, whose opinions and recommendations, although aimed at Western audiences, are probably given careful attention in the Kremlin. It was striking, for example, that when Gorbachev was promoted to the top position in February, so many commentators expressed the thinly veiled hope that this more youthful man (the same age as Lenin at his death) would be able to reinvigorate the Soviet Union. ("Gorbachev's Vigor Raises Expectations: NEw Soviet Leader Focuses on Economy"--Washington Post headline.)

By implication, the Communist system had not been working so well of late because there had been a succession of men at the top who lacked the necessary youth and vigor. This is an interpretation, obviously, that constitutes an endorsement of the system itself--provided it is guided by a skillful and vigorous elite. There's a good possibility that Gorbachev will accept this interpretation at face value and try to increase the use of force to make the system work by the book. In his recent interview with Time he said as much, promising a restoration of "discipline and order" and a recentralization of the economy. (Leonid Brezhnev is perceived, perhaps correctly, as having tolerated a certain amount of de facto decentralization.)

If Gorbachev institutes suc a crackdown, and actually gets people to work by the rule book for a while, then the economy will decline still further. Cracking down on "Corruption" can only make things worse becasue corruption is simply the name given to voluntary economic transactions that take place without government permission. For a while Gorbachev was in charge of agriculture, and he seems to have cracked down hard. Grain production declined dramatically--from 237 million tons in 1978 to 170 million tons in 1984. (A slight increase is reported this year--"good weather" for a change; or perhaps Mr. Gorbachev was replaced by a less zealous man who turned a blind eye when people were growing things illegally and exchanging them in illegal markets.)

Notice that after the grain debacle Gorbachev was promoted. That's why he might be tempted to crack down again. IF he does, he will certainly be applauded by the bureaucracy, whose jobs depend on the maintenance of the system as Lenin and Staling conceived it. (Not for nothing does the Central Committee include a "chief ideologist.")

On the other hand Gorbachev could try to decentralize decision-making, and in the Time interview he promised this, too, using "such tools as profit, pricing, credit, self-sufficiency of enterprises." If Gorbachev managed to implement this change, his headaches would be gone. But his designs in this respect are most likely to be frustrated by the bureaucracy, as were similar proposals from Brezhnev and Andropov. This point, at least, is increasingly understood by our press: Decentralization may be economically desirable but institutionally unattainable. "It may prove impossible," David Ignatius pointed out in the Wall Street Journald, "both to increase the independence of individual Soviet enterprises and retain full central control of the economy."

Output, Output, Output

WHY CAN't the system work the way it was supposed to work? This question was answered years ago by the Austrian economist Friedrich A. Hayek. Unfortunately, no one was listening. The central authority cannot give wise commands to the managers of factories and enterprises becasue the central authority doesn't know what is going on in the rest of the country. It is as simple as taht. The planners don't know what commands to give. The idea that Godlike knowledge can be concentrated at one point was simply a fantasy of nine-teenth-century socialists who did not believe in God.

It is difficult and usually expensive to transfer a lot of information to a central point. Try to get a message onto President Reagan's desk in the Oval Office if you don't believe me. The job is normally done by a combination of bureaucracy and White House staff who decide that some things are more importnat than others and bring only the most important to the President's attention. There are other ways --as a rule expensive. Michael Deaver charges good money for his services. And remember this is a largely decemtralized economy, where factory managers don't have to await decisions and permission from Washington. Now imagine that you are a deputy commissar in Ukraine, and you need Moscow's permission to switch a trainload of fertilizer from A to B. You can wait, and wait . . . and ruin the harvest . . . or you can accept a little favor from the man who wants the fertilizer . . . and there you have corruption again! And no doubt profit! Mr. Gorbachev will be cracking down on you with his whip.

It is as easy to move a lot of information to central command as it is to roll a lot of ball bearings into a small central hole. They can only go in one at a time. Hayek's point was simple and indubitable. Nonethelss you can go to a university library and read a hundred books about socialist economies and not see it raised even once.

There's another important difficulty, described as long ago as 1920 by another Austrian, Ludwig von Mises. Notice that Mr. Gorbachev told Time he would like to make greater use of prices, which in turn determine how much of something we want, and how much we might decide to produce. Mises pointed out that government officials cannot know how much to pay for things they want because they are not paying with their own money. Their goal is not to make a profit (i.e. produce something that is more valuable than its component parts) but to fulfill a government order, or quota. Think of the problem the Pentagon has knowing how much to pay for hammers or screwdrivers (or finding out how much it is paying). It seems obvious to us what the price of tools "should" be, and that the Pentagon often pays too much for things, but this is only because these things already have prices--established in a free market.

But if the government controls the entire economy, as in the Soviet Union, no independent benchmark can be established, and procurement officials have no idea how much to charge or to pay. the problem of establishing prices in a socialist economy can be likened to palying poker with Monopoly money. Unlike (say) bridge, it cannot be done, no matter how hard the players try, because the clacultion that goes into the players' bets of necessity involves the possibility that they will win or lose real money. If the money is not real--or not theirs, as in the case of a transaction between two Soviet bureaucrats--the act of calculation becomes impossible and bets become meaningless.

Mises made what amounted to one of the great economic predictions of the twentieth century--long before any evidence from the Soviet Union was available: Socialism could nto work because without prices you can only allocate resources in the crudest way; and prices in turn can be established only if people are permitted to own what they buy and sell. But socialism by definition abolishes property rights. Hard as it may be to believe, you can also go to a university library and read a hundred books about socialist economies without encountering any mention of ownership or its role in economic calculation. What you will find described, ad nauseam, is something called "output": tons of steel; kilowatt hours of electricity; metric tons of grain--an array of aggregates as irrelevant as they are inaccurate.

Bankers and Generals

SO MR. GORBACHEV will not be able to use the price mechanism to restore the Soviet economy. (Many times has this been promised in the past by hopeful Soviet Reformers.) And he is most unlikely to be able to revive it in any other way. The truth is it would take an outright repudiation of all that Marx and Lenin believed in order to make the Soviet economy competitive with the market economies. And it is inconceivable that Gorbachev would accept the ideological defeat implied by such a change. Therefore, the Soviet economy will continue to stagnate, and within ayear or two it will become clear to all that age and vigor never did have anything to do with the issue.

One hesitates to say that a Communist economy cannot be reformed from within, however much the man at the top may want to change it. China is obviously making a real effort to struggle out from beneath the dead hand of central planning. But plaintly it is difficult to ge rid of Communism once it is in place. Doing so is like trying to demobilize an army, lacking any civilian oversight, whose officers and other ranks fill every nook and cranny of society. Sergeants must tell privates, and lieutenants must tell sergeants, that they no longer have to be obeyed. The commander-in-chief can resolve that such a demobilization order must be transmitted down the ranks, but it is difficult for him to ensure that it is subsequently carried out.

The stagnation of the Communist bloc was obscured in the 1970s by at least $80 billion in bank loans and credits from the West. In particular it was hidden from the PArty Elites behind the Iron Curtain, because they were able to use this capitalist money to buy themselves cars and Western merchandise from the special stores that are open only to them. But this capital transfer must by now have been well and truly consumed. We can be sure that they will be back again this fall, knocking on the doors of our generous bankers. This time, however, it will not be so easy to extract the money because the Communists will be competing with so many other improvident beggars. (Nonetheless, David Rockefeller will host a luncheon for General Jaruzelski, the Polish strongman.)

ARguably, the Soviet Union will become more dangerous as it becomes clearer to everyone that the capitalist societies are leaving the Communists further and further behind. (The growing gap between North and South Korea, and between Mainland China and Taiwan, is hard to ignore.) As the Soviet "superpower" status is reduced to nothing more than a brazen willingness to rattle missiles and broadcast threats from Radio Msocow, Kremlin arguments in favor of using these missiles are likely to strengthen. That, at any rate, seems to be the State Department's unacknowledged view of the situation. (In its Background Notes on the USSR, the State Department Bureau of Public Affairs cravenly identifies the Soviet "type of government" as "federal union"; its "constitution" as dating from 1977; its "branches of government" as "executive, legislative, and judicial"; and its "suffrage" as "universal over 18.") And that is why the Reagan-Gorbachev summit may well include proposals for further U.S aid disguised as trade.

Prognostication about the course of Soviet events has in the past been consistently wrong. Conservatives have frequently predicted the collapse of the Soviet economy. But it collapsed long ago, in the 1950s and 1930s. Likewise, liberal predictions about "convergence" between the Soviet Union and the United States have proved to be wrong. Perhaps the only safe guess is that no one in the future is likely to repeat the erroneous analysis of the Soviet system that was so common in the years following the launching of Sputnik.