Working on my Ph.D. (1983-1987): part III
Discovering Kornai's magnum opus, learning Russian, discovering the absence of real plans ... and the arrival of Gorbachev.
A great discovery for me was Economics of Shortage by Janos Kornai. I had spent years learning mathematical models of planning[1], but reading Kornai’s magnum opus Economics of Shortage was truly an eye opener for me. Instead of analyzing how to design optimal systems of planning, Kornai chose to understand how the “real existing socialist economy” was working. Kornai’s analysis remains to this day the most complete theory of how the socialist economy under state ownership and allocation of goods by the government’s planning office worked in reality. His starting point was the so-called soft budget constraint. The idea was that state-owned enterprises in the socialist economy were never financially constrained. They would never go bankrupt, close or even reduce their activity, because they were making losses. In other words, their budget constraint was soft, i.e. never really binding. If that was the case, then only resource constraints would prevent firms from increasing production, i.e. firms were experiencing shortage. In other words, they would have wanted to increase production beyond the actual level, and were strongly encouraged to do so by the planning system, but were not able to do so, because there was shortage of some inputs (natural resources, semi-finished goods, labor, etc.). As a consequence of soft budget constraints, firms were thus experiencing shortages. This idea provided a foundation for why shortages were omnipresent in the socialist economy, an idea he had already expressed in Anti-equilibrium. On that basis, Kornai explained in detail how firms and households behaved under shortage in the short run, medium run and long run and drew many implications from his analysis. This was the first comprehensive theory of the socialist economic system. Many people, including me, thought he should have received the Nobel prize for this. I thought his theory was even more comprehensive than that of Oliver Williamson, albeit focusing on a different object: nothing less than the overall logic of the socialist economic system. Kornai’s theory would be a great inspiration for my Ph.D. thesis, even though my starting point would be different, as I will explain later, but once one could show that shortages were the rule in the socialist economy, most of the insights from Kornai’s book would apply.
Given the object of my research, I thought I needed to learn Russian to be able to read articles and books by Russian economists. I thus decided to learn Russian. Learning a fifth language was much more difficult for me than learning English, Dutch and German. This was for various reasons. First, I was turning 30. I had learned German when I was 15, at an age when the brain is much more plastic and has a high absorption capacity. Second, I had learned languages through immersion in English, Flemish and German schools. I now had a job and a family with two beautiful babies and would not have the same socializing opportunities I had when I was younger. I first learned Russian by going through the Assimil method to learn a language by oneself. When I had finished it, I started reading daily Russian newspapers and economics articles with the help of a dictionary. It turns out that, contrary to Russian literature which is enormously rich and varied, Soviet newspapers and magazines, and economics articles had a very limited vocabulary. In a few years, I had read hundreds of articles and many books in Russian about the Soviet economy. The intellectual content was generally rather limited, but I was able to make hundreds of pages of notes related to interesting facts and ideas, parts of which I would use in my Ph.D. Those readings also gave me a feeling of the concerns of Soviet planners and managers in the day-to-day management of state-owned enterprises and the economy.
One thing that struck me was the complete divorce between the more mathematical literature on the economics of planning and the non-mathematical literature on problems facing planners and enterprise directors. There was a whole school called SOFE (system of optimal functioning of the economy) talking about mathematical models of planning, but it was obvious that they hardly had any influence on the operation of the Gosplan, the planning apparatus. The simplest method of planning, the so-called input-output tables, existed in the Gosplan for only 200 broad categories of goods, but in the mid 1980s there were roughly 2 million different sorts of goods in the Soviet economy. The input-output tables developed by exiled Soviet economist Leontieff teaching at Harvard (1973 economics Nobel prize) were a method to calculate an economic plan for any number of goods.[2] In theory, this is easy, even straightforward, but in practice it is not. I calculated in 1987 that with the most powerful supercomputers of the time, the mathematical operation (matrix inversion) to compute a balanced input-output table would take more than 2 billion years of computer time, assuming the input-output table existed and contained no mistake! The more advanced mathematical models of planning required much, much more computing time. It was thus obvious to me that there were no balanced plans in the Soviet economy, i.e, plans for which supply and demand for the different goods in the economy would be calculated to be equal. This raised of course the question of how without balanced plans and without markets, the Soviet economy was not in total chaos and had even been able to grow at impressive rates in earlier decades, a key economic questions to which I will come later and where my study of Herbert Simon proved extremely useful. In any case, one conclusion I drew from this and from Kornai’s analysis was that I would be wasting my time working further on mathematical models of planning.
Gorbachev, the new secretary general of the Soviet Communist Party in 1985.
My Russian was mostly passive and focused on reading the Soviet economics literature. A big change happened early 1985: Gorbachev. The 1970s and early 1980s were called the stagnation period (zastoynyi period). The modest 1965 reforms to try to improve efficiency in planning had been eliminated when Brezhnev took full control of the communist party, pushing the more reform-minded Kosygin aside. By the late 1970s, Brezhnev started to look more and more like a living mummy and the Soviet economy was not in greater shape, experiencing zero growth for many years. When Brezhnev died in 1982, he was replaced by Andropov who had been head of KGB but was in ailing health. He tried to impose a “discipline campaign” by introducing more repressive measures in the economy, in particular fighting worker absenteeism, but he was already in bad health with failing kidneys and died after 15 months in power. His successor, Chernenko was already half dead when he came to power in 1984 and died 13 months later. There were then two serious candidates in the Politburo to be nominated to be secretary general: Grigory Romanov from Leningrad who was seen as very repressive and likely to continue Andropov’s policies and 54 year-old Mikhail Gorbachev, the youngest member of the Politburo who was seen as a reformer. Apparently, the decisive voice in the politburo to appoint Gorbachev was that of Andrei Gromyko, who had been in charge of Soviet foreign policy for decades[3]. In the beginning, Gorbachev was constrained by the conservative leaders and started with a campaign in the style of Andropov: the anti-alcohol campaign. Alcoholism was a plague in the Soviet Union and Gorbachev made it incredibly difficult for people to buy alcohol (high prices, decreased availability and short opening hours of shops selling alcohol). This came as a shock in the Soviet Union. At the 1986 Party Congress, Gorbachev managed to replace a large part of the Central Committee and the Politburo by reform-minded people like him. He introduced economic reforms (perestroika) but mostly glasnost’ (transparency), strongly reducing repression of freedom of expression, something unheard of before in communist regimes. All this did not go unnoticed outside of the Soviet Union. Like many other people, I was very excited by these changes and decided I needed to improve my Russian so as to be able to speak and spend time in the Soviet Union to do research. I followed intensive immersion courses in Russian lasting several weeks and where only Russian could be spoken. I then took regular evening lessons and made important progress in Russian. The coming years would prove to be even more excited than I had expected.
(to be continued)
[1] This includes a famous paper by Kornai and Liptak.
[2] It is not easy to explain it in non-mathematical terms. Take a list of final goods for the economy including the number of all different consumption goods as well as investment goods. This list can be expressed by a mathematical vector. To produce one unit of any final good, one needs a certain quantity of intermediate products as well as labor, energy, etc. To take an example, think of how much coal is needed to produce one unit of a final good, but coal is also needed to produce intermediary goods. This all sounds quite complicated but these requirements can be noted in an input-output table, mathematically a matrix. Each element of the input-output table expresses the quantity of any good i to produce one unit of any good j in the economy. Once you know the list of final goods needed in the economy, a mathematical operation called matrix inversion allows to calculate the correct plan for all intermediate goods and all inputs (labor, energy, ..) in the economy. In other words, the input-output table allows to formulate a plan for all the inputs necessary to produce a list of final goods (consumption, investment).
[3] Gromyko was already the leaded of the Soviet delegation at the 1945 San Francisco meeting where the United Nations were founded.