Re: Comments on a posting by Dr. Barendse

In reply to Paul Riesz:
:
>Excuse me for answering your long posting on Keynesianism and a short
>history of historic developments in both Capitalist and Socialist countries
>with so much delay.

Thank you Paul

I much appreciate your comments, for as I'm thinking of revising the e-mail
for publication comments are welcome - better now than later.
>
>1. You define all massive government spending and especially armament
>programs as Keynesianism. Whether or not this can be corroborated from his
>writings, I am not qualified to judge, but there is a different conception,
>which considers only countercyclical spending as true Keynesianism and my
>postings were based on this idea.

No - my argument really was that it went the opposite way round
countercyclical effects were discovered through armament spending. In World
War I governments needed to build arms on a scale, which was unprecedented
in history - in the British army zone alone the British laid down more than
200.000 km of telegraph wire and the shells fired during the Passendale
offensive in 1917 alone weighed more than 250.000 tons - thus necessitating
a quadrupling or even sixfold increase in government spending and of
production. In 1918 in Britain 54% of total production was for the
government; and percentages were probably even higher in Germany, France or
Russia. This caused an increase in employment in Britain of roughly
5.000.000 new jobs and although after the First World War all governments
took some measures to reduce their expenditures, my arguments is that
because
of World War I governments and voters got used to government intervention in
the economy - which, as World War I proved, could boost both employment and
economic growth.

Of course, Keynes as a democrat and humanist did not plead for investment in
armament but the thing is that the politicians and the public were willing
to consider massive intervention into the economy because of World War I and
then World War II. The thought ran - I say in my forthcoming book - "England
in the twentieth century": 'so, why should a country which can build
thousands and thousands of tanks not be able to solve its
housing-problems?' -
and, of course, Stalinist planning also seemed to be fully warranted by the
victory in World War II.

Naturally such programs could also
>emphasize armaments, but in my opinion this would be inefficient and
>counterproductive in the long run. I suggested public works on needed
>infrastructure, planned beforehand, as the most effective and socially
>beneficial way to fight recessions.
>
Well - as I argued before this is economically probably true but from a
political angle armament spending is highly opportune because investments
in armaments have high political returns. They can be regionally
concentrated on the politically most opportune place and the armament
industry is a big donor to political parties besides.

Thus e.g. much of the US armament and space industry is located in the
sunbelt and in particular in regions which just `happen' to vote Republican
(e.g. Houston and Phoenix Arizona). Again, it's not a coincidence that much
of the naval shipyards built in the 1930's just `happened' to be located in
Belfast and that the beginning of the Northern Irish `troubles'
just`happened' to coincide with previous cuts on spending on the navy ...
Again, I don't think it is entirely coincidental that the Russian armament
industry
happened to be located in regions which featured heavy fighting during the
civil war.

Basically - if you invest in schools or roads the political returns are much
lower and not likely to be concentrated in your constituency (and only long
term besides - and as Harold Wilson used to say a week is a long time in
politics). Politicians have this particular characteristic that they have to
worry about being elected (and even old style Soviet apparachniks had to
worry about their constituency) ...

For the same reason I also am skeptical about the idea of global
Keynesianism - as I said many times before what I would LIKE to see and what
IMHO would work best to boost the global economy is a system of
income-transfers to the poor in the Third World, since apart from moral
issues that would also be the biggest boost imaginable for demand in the
First World (900 million Africans all wanting to buy a refrigerator or
TV..). However the simple problem is that nobody in the First World
is going to vote for that. Politicians are more likely to invest in
something that brings immediate political returns and, therefore, if
politicians are going to embark on a program of state-spending to boost the
economy that's likely to go to arms again. The only realistic alternative I
can see is mass-spending on `big science' e.g. a space-program, but sadly
(as I'm confident that the future of mankind indeed lies in space) it is far
more easy to mobilize electorates on some putative national thread, than on
`to boldly go where
no one has gone before'.

>2. You considered some gigantic Soviet industrial projects and especially
>Magnetogorsk as entirely justified because of their economy of scale. In my
>opinion, sound planning MUST consider freight rates; especially on bulky
>commodities such as minerals and MUST compare their impact with such
>economies. I have read a report, indicating that a prominent Soviet
>engineer objected the planning of Magnitogorsk on precisely such grounds
>and suggested to invest on several smaller smelters instead; located near
>the respective mines. This engineer was later executed because he insisted
>on his opposition; not a good sign for the effectiveness of Soviet central
>economic planning.

Sure - but I said that this `big is beautiful' was a result of an idea of
the 1930's; where countries everywhere thought that huge integrated plants (
steel comes in at one side, T-fords or tractors driving out on the
other side) had the future. This giganticism, again, seemed to be entirely
warranted by the World War I experience. Thus the `National Shell Filling'
factory in Barnbow (near Leeds) created out of nothing had 200.000 employees
in 1918 and then produced more shells in a week than the entire national
production
in a year in 1913 - and at a lower price in addition - . And since that was
the general idea in the 1930's - and apparently proven by World War I in
addition - Soviet planners can hardly be blamed for doing what was then
thought most efficient. I need only to point out that Boeing's aircraft
factories during World War II still dwarfed Magnitogorsk in their number of
employees or output...
>
>3. You argue that the failure of Capitalism in Russia was entirely due to
>structural obstacles and was unavoidable. Again I am unqualified to argue
>against your evidence; but I am under the impression, that a cleverly
>coined phrase bears much of the blame.
>When Jeffrey Sachs recommended a capitalist shock treatment for Russia, he
>said:
>YOU CANNOT CROSS AN ABYSS IN LITTLE STEPS.


In 1991 the Russian state had a budget deficit of 21%. Under these
circumstances there was simply no way  they could have started with gradual
measures since these would only have led to an even bigger deficit. The only
solution was to entirely cease with controlling prices through a system
subsidies - this obviously led to rampant inflation as Russian economists
well predicted but there was no choice. The Russian state would simply have
been bankrupt in two or three years if it wouldn't have adopted
shock-therapy (and even if the West would have adopted a massive bail-out
package for Russia, which it didn't). And I should add that certainly
Jeltsin did his best to bail out companies, since subsidies to individual
companies more than doubled under Jeltsin. I think that saying Gaidar and
his fellow `kapitalizts' merely followed the `Chicago - boys' is giving them
too much honor (or blame).

The Russian government has simply no alternative but to liberalize prices
and start `privatizing'. What the `Chicago - boys' mainly contributed was to
add some western glitter to this whole nasty process and that they allowed
Gaidar c.s. to cloth it in the language of then fashionable western `pop
economics'.

For the new Russians imitated `Chicago-economics' much as they wore Armani
shoes or Gardin suits. Of course - as the best Russian political annalist
Boris Kagarlitsky (in his hilarious `Restoration in Russia London 1995), p.
20) puts it:

"Only a new Russian, travelling abroad could with such unerring precision
have chosen the most tasteless of the thousands of objects on offer. If
Pierre Gardin had for once designed an ugly suit, you could be certain the
next day it would be adorning a Russian businessman. The knack for choosing
the worst even among the best was a sort of innate instinct among the new
Russians."

>This sounds quite convincing, nevertheless China proved him wrong with the
>creation of their special economic zones, where they were able to provide
>the basic conditions needed for applying capitalism successfully, such as
>clear rules, banks and other institutions and where they could concentrate
>their few available specialist on capitalist development. Such zones also
>served as laboratories for trying out different schemes before trying to
>apply them nationwide. They also seem to have been able to provide their
>farmers with sufficient incentives to produce enough food for their
>population, before going into major programs for privatizing industry.
>Whether a similar program could have been successful in Russia is hard to
>say, but it should have been tried.

I know very little about China, so I don't know how China's financial
situation was but I don't think Dang Shiao Peng was in any way facing the
total financial collapse the Russians were facing, their country was not in
the process of disintegrating (you can't have `clear rules' in a collapsing
country), China could export to the USA (Russia could not), China had the
wealthy overseas' Chinese communities which were also willing to invest (in
the CIS the only comparable case would likely have been Armenia.)

Russia actually tried to build `special economic zones' (e.g. Nizni Novgorod
and Petersburg) on the Chinese recipe, which were not very successful for
the simple reason that Finland or Sweden are not a Taiwan with very large
available funds, looking for foreign investment. And Germany even was
reluctant to invest in the free economic zone of Kaliningrad (its `own'
former Koenigsberg). For why should you start investing in a ramshackle
naval base in the middle of another country if you can invest in Poland,
Hungary or - with heavy state subsidies - in eastern Germany ?

And, finally, Chinese agriculture is not Russian agriculture for the simple
reason that in China you could raise productivity by simply more input of
labor (plenty of labor in the Chinese countryside) but Russia's
agriculture was suffering from a lack of at least skilled labor and the
prime thing needed was more machinery and fertilizers - so you first had to
rebuild the industry and then you could reform agriculture.

Now, I'm always reluctant to say one `should' do this or that - I'll better
leave that to the `Chief economist office of the World Bank' - but - again
very reluctantly - I think the prime things Russia `should' do on the moment
are:

a.) Immediately put severe punishments on illegal capital exports and impose
exchange controls - as I said in the 90's (even legally!) five times as much
capital was fleeing the country as was coming in; places like Cyprus and
(get this!) Bahrain were thriving as Russian tax-heavens around 1998. No
country can sustain such a massive capital flight for long periods without
getting into deep trouble.

b. )  Re-impose a working currency-system: the problem was that by 1998
nobody had any trust anymore in the rubble and practically all transactions
were being done in dollars - therefore the `black' dollar economy has to be
tackled.

c. )  Have people pay taxes and re-impose control on areas in your country
which act as heavens for tax-evasion, like Petersburg or - I'm sorry to
say - Chechnya.

Which really all boils down to:

d. ) Re-impose a working system of justice, which, I'm sorry to say too but
Russia is NOT a normal, law-abiding western country, can in Russia only be
done by the army. For the Russian crisis is mainly a crisis of central state
authority - the problem is not lack of skilled labor, lack of raw
materials, lack of plants or lack of machinery but is primarily lack of
authority. Nobody - whether Russian buzinezman or westerner - is going to
invest in a country where the only way of collecting old debts is blowing up
or shooting your former partner. And the Russian central state and to an
extent Russia as a country is constructed around the army - the army is
really the ONLY national institution  - This means that if the army is in
shambles, the Russian state is also in trouble.

Now, few western economists are of course likely to give such a recipe for
the simple reason that the Russian army was - and is - the major national
thread to the US and to the west in general.

But `happily' through the intervention in Kossovo (cras tibi...) or the
unilateral building of a national defense missile system (so, is Russia
really to believe that's directed against Saddam Husain ...) or through
Chechnya (so, do Stinger-missiles suddenly grow in the wild in the
Caucasus ...) the USA is well on its way to resurrecting the Russian army.
And
Russia has this peculiar feature that it always rises from the ashes if
confronted by a potential menace to the national existence - witness 1812,
or witness 1941. - To that extent the USA by following a policy of
systematically undermining Russia is well on its way to achieving exactly
the opposite ...

Best wishes
R.J. Barendse