XV. A New Eastern European Economics?

America's Unknown Enemy: Beyond Conspiracy

Editorial Staff of the
American Institute for Economic Research


A number of economic commentators and political analysts recently have observed that, even if the current political liberalization in Eastern Europe is allowed to proceed, the creation of Western-style economic organization may prove difficult. Most analysts now expect that economic conditions there Will deteriorate further -- perhaps for some years -- before the needed adjustments reinvigorate the Iron Curtain economies. Most assume implicitly, however, that the process of "rebuilding" the Eastern European economies is fundamentally similar to that of restructuring ailing market economies. As we discuss below, such is not the case. The Soviet Union, for example, lacks even the most elementary features of a market economy - features that evolved over centuries in the established Western economies and involved numerous conflicts. In this respect, when "instant" revolutions have been attempted, the results often have been dismal -- even in the United States. An example from our own past may suggest how difficult it could be for the newly "freed" peoples of Europe to develop progressive economies, if indeed that is what they actually want.

The recent events in Central and Eastern Europe have startled commentators of virtually all politico-economic persuasions -- from the most "radical" Western proponents of socialism to the most "conservative" exponents of free-market capitalism. The former, who for years have missed the intellectual tide that has eroded statist orthodoxy in nations under communist rule, understandably seem at a loss to respond to the latest actions of "the masses" there. At the same time, a number of the West's most-ardent champions of individual liberty, who are understandably skeptical that any significant "revolution" in human affairs will occur in the erstwhile Iron Curtain countries until the former rulers relinquish all power, say that, as yet, "nothing has really changed."

Mainstream opinion, on the other hand, apparently shares in the jubilation of the East Germans, Hungarians, Poles, and Czechoslovaks who, heady with their unexpected success in toppling the apparatus that has confined them for so many years, are publicly proclaiming their devotion to "liberty," "freer markets," and in some instances even unabashed "capitalism."

Admittedly, some media and political commentators both there and here say that the road to genuine political change and sustainable economic progress will be difficult. The Bush Administration, for example, urges that caution and restraint are necessary in all future dealings (and has encountered criticism from both sides of the political spectrum for so doing). All told, however, it is our general impression that many now believe that the path toward Western-style democratic capitalism, with allowances made for regional and ethnic differences, has been blazed. While traveling that road may be difficult for a time, its direction is clear.

The Unhappy History of Raised Expectations

In our view, significant changes have occurred in communist Europe, if for no other reason than that the people who have run things so badly for so long apparently no longer will have unrestrained authority. However, as the discussion below may suggest, the eventual outcome of those changes may be quite different from what any of the media or political pundits so far have contemplated.

Few, if any, "instant revolutions" in human affairs have succeeded over the long run. The most successful genuine revolution to date, that of our own country, proceeded only gradually throughout the 17th and 18th centuries, as the privileges of the colonial powers gradually were eroded by popular requirement. Only late in the 18th century, after more than a century and a half of not-so-subtle popular pressure for institutional political and economic change, did the opposition to repressive government erupt into general sustained conflict. Even then, it took many years before the establishment of any new authority had been completed to the satisfaction of most of those involved in the revolution ( i.e., with the ratification of the Constitution -- a governing document that has been and remains subject to continual modification by different generations).

The complex process of building an economy under the precepts of representative democracy was vastly aided here by the prior development of innumerable social and economic conventions characteristic of private market enterprise. Despite British strictures, the colonial economies in practice had been allowed to develop fairly independently according to the actual needs and capacities of the colonists themselves. Private property was an acknowledged right and was widespread; and private industry and commercial markets were well-developed, despite the Crown's efforts to impede them. In effect, the formal dissolution of the political bonds that tied Britain and the American colonies to a large extent ratified conditions that already prevailed. Even at that, the process was extraordinarily difficult, as the turbulent economic and political history of the first half of the 19th century, which culminated in civil war, attests.

Almost everywhere else -- especially in Russia itself (and in some parts of the United States, too) prior attempts to impose instantly a genuinely liberal reform that were not so underpinned turned out disastrously. In Russia, for example, the freeing of the serfs in 1862 met initially with jubilation among the reformers not unlike that of today. But the serfs usually had no capital -- either land or anything else -- to enable them to develop independent enterprise, and their lot scarcely has improved since.

Closer to home, the emancipation of American slaves during and after the Civil War similarly was greeted as the "jubilee" both by the slaves and their abolitionist patrons. It should not escape notice that, even more than the American Revolution, emancipation represented the most sweeping defeat of special privilege and victory for individual liberty that had occurred in the New World. It was widely believed among 19th-century civil libertarians that -- although the road would be rough and the going would be slow -- the freedmen could, if provided the necessary aid, successfully enter the mainstream of American private enterprise during the decades following the war.

To this end, an unprecedented effort to aid the freedmen both economically and politically was launched during the Era of Reconstruction. The slogan of the jubilee was "forty acres and a mule" - and in a number of regions of the former Confederacy rapid redistribution of landholdings was accomplished. Add to this revolution in property the educational efforts of the Freedmen's Bureau, numerous missionary societies, and the political power bestowed upon the former chattels by the 15th Amendment and the ascendancy of the Republican Party, and one might assume that a prescription for progress was firmly in place.

As events turned, however, and as even a brief reading of the history of Reconstruction and afterward shows, those efforts proved, in the words of the disillusioned northerner Albion Tourgee, to be "A Fool's Errand." Not only did the former slaves' freedom prove hollow in many respects, but the economic and political fortunes of the Old South's "underclass" of white farmers also declined in the wake of the collapse of plantation slavery. By the turn of the present century, many Southerners -- white and black -- survived a meager existence as de facto vassals of an economic order characterized by decreasing productivity, eroding markets, and chronic scarcities of the goods and services fundamental to maintaining even subsistence standards of living.

Although it remains a matter of debate, current historical research strongly implies that some slaves, and almost certainly many nonslaveholding whites known as "yeoman farmers," may have been better off physically before the Civil War than they were for many decades afterward (the emotional benefits of freedom, it goes without saying, were incalculably greater). At the same time, the pace of growth of the rest of the American economy during the so-called Gilded Age accelerated (albeit punctuated by panics and depressions).

More important for the political concerns of those who are observing the current changes, the economic debacle of the post-Civil War years was aided and abetted by the development of an authoritarian Southern political culture that by the advent of World War II was widely regarded as a uniquely American equivalent of European fascism. The genesis of that political culture, it should be noted, depended in large part on the support of precisely those elements of society that before the Civil War had been most resentful of the slaveholding plutocracy -- namely, former nonslaveholders who had assumed the status of "poor whites" by the end of the century.

The Current Analogy

It always is risky to draw too much significance from similarities between distant events and places. That said, however, the experience of American Southerners (both black and white) after the Civil War may suggest how difficult it is apt to be for the peoples of Eastern Europe today to begin the process of establishing a new liberal economic and political order (assuming that is what they genuinely desire, which is by no means clear).[1]

A principal difficulty of southern whites and blacks after the Civil War was that much of the productive capital of the South had been destroyed as a result of four and a half years of "total" conflict. However, it is hard to see how the effects of communist economic planning in postwar Europe (a kind of de factoc economic warfare) have been all that different. Reportedly, much of the "infrastructure" in the Soviet Union -- notably the railroads -- are collapsing. And the plant and equipment upon which Iron Curtain industry relies is said, if it works at all, to be pitifully inefficient by contemporary Western standards (business managers even in crucial industries still use abaci, not computers, to perform calculations).

Of more fundamental importance, across much of the Iron Curtain there simply is no provision for the private ownership of the means of production. As with the post-Civil War South, no one in the Iron Curtain countries has even begun to address the question of how land, mineral rights, existing plant and equipment, and the like might be converted to private ownership. Even those freedmen who got 40 acres and a mule had no capital with which to buy seed corn or implements with which to plant. As a consequence, most took out loans in the form of crop liens that were held by other landholders or merchants (i.e., established capitalists). Given rocky markets for their product (cotton), only a few succeeded in retaining the land; most became "sharecroppers" who by 1900 were virtual serfs to owners who in some instances had owned them as slaves a few decades earlier.

In the case of the Soviet Union and its satellites, the situation may be even worse: there are virtually no capitalists at all, which suggests that the development of those countries' resources by necessity will depend on the distribution of rights to the means of production via some arbitrary political, rather than market, process. This unavoidable circumstance is a prescription for at least short-run disaster (and which politicians will decide who gets what?).

It is worth noting that in the capitalist countries, the process of delivering productive resources into private hands in some cases has taken centuries and repeated internal and external conflicts -- and indeed has nowhere been completed yet. If they wish to establish genuinely free enterprise even on a modest scale, the Soviets and their counterparts face an unprecedented task for which there are no established rules.

Beyond this, even if by happenstance whoever is in charge succeeds in conveying the means of private production precisely to those most capable and willing, there are no established markets -- as there were none in the American slave community -- that provide reliable information to enable efficient production. For decades, the system of state allocation of production quotas has stifled information about what goods and services consumers most want. In the absence of that information, any individual attempts to decide what and how much to bring to market will be extraordinarily high-risk ventures (producer risk is much greater in limited markets than in established consumer economies, where it is distributed across a proportionately much wider range of products and purchases).

In short, the difficulties that the "freed" nations of the Soviet bloc now face, and the probability of disappointment, would seem to be incalculably greater than most commentators are willing to admit -- or even consider. Of course, the process of adjustment to market conditions and political democracy could occur quite rapidly. But if it does, it would be an unprecedented achievement that flies in the face of similar experience elsewhere where conditions seemed to be more favorable.

The opposite possibility is that, as with some prior "instant revolutions," this one too may fail. (Although it is a matter of speculation, this may be what those now relinquishing power hope and expect. Presumably, they are aware of the mess that they have created and do not want to assume the blame for further deterioration of conditions.)[2] History strongly indicates that if such happens, the chances for the survival of genuinely liberal institutions is slight. Rather, as happened in our own country little more than a century ago, a return to authoritarian political and economic organization -- even though it probably will not be called "communism" -- seems just as likely.


  1. It is far from clear that most people behind the Iron Curtain actually aspire to free-market capitalism. Although news broadcasts recently have often featured fresh-faced young people using the words "freedom" and "free market," there is little indication that they have much idea of what behavior those terms imply.
    ... Rather, recent poll' in the Soviet Union and elsewhere in Eastern Europe strongly suggest that many, if not most, people there oppose mainly those currently in power -- not "the system" itself. And while many plainly want to see an end to corruption and desire a greater say in the political decision-making process, their use of such terms as "communist democracy" strongly suggests that market determinants will continue to be excluded from the economy.
    ... For example, reportedly when asked if "lazy" industrial workers should be given greater freedom or should be subjected to greater government penalties for failure to produce according to quota, a sample of Soviet citizens revealed that only about 29 percent favored the former while 60 percent favored the latter ("the government should make people work harder"). In another instance, when asked if inefficient enterprises should be allowed to fail, an Eastern-bloc "free marketeer" responded that they should; however, when asked what then would happen to the workers who were fired, he replied "the state will take care of them."
  2. It is not beyond possibility that Mikhail Gorbachev attained "power" so easily because other, more-seasoned members of the Soviet power structure reasoned that conditions had, in fact, become unmanageable. Gorbachev's youth and idealism favored his selection -- i.e., he may have been set up as a fall guy to take the blame for the problems that his elders had created.