Over the years, Swedish economist Stefan Hedlund has developed an interesting corpus of work offering a rigorous and broad critique of the evolution of Russia's political economy, both in Soviet times and in the post-Soviet transition.Footnote 1 His work shows great erudition and an easy familiarity with the intricacies and nuances of Russian and Soviet history—and with a broad swath of history, philosophy, and social science theory. Few scholars (and especially few economists) are willing to offer a synthesis of such a range of disciplinary approaches. These qualities are on ample display in the current book under review, which brings together Hedlund's analysis of Russia's historical evolution and the fate of the post-Soviet economic transition.
Hedlund argues that there is a direct link between the failure of the Russian transition to a competitive market economy and the failure of Western social science to understand the dynamics of the contemporary world economy and the possibility of catastrophic failure. He bemoans the way that the discipline of economics has become compartmentalized from history and sociology. Economists build their models on the assumption that market institutions exist and the actors within them will behave in predictable ways. Drawing on the work of Douglass North, Hedlund underlines the uniqueness of the circumstances under which modern market institutions emerged in a handful of locales in late-medieval Europe (Chap. 1).
In Chapter 2, Hedlund presents a lucid and informative intellectual history of the diverging evolution of economics and sociology since the Enlightenment. He informs us, for example, that the term “social science” was first coined by one William Thomson in 1824—at the precise moment when capitalist growth was taking off in Western Europe (p. 46). Chapter 3 explains the dynamics of the Soviet economy and shows how far removed it was from the institutional environment of a market economy. Chapter 4 succinctly lays out the author's model of Russian history: a distinctive pattern of arbitrary state power unchecked by rule of law, societal pluralism, or regional autonomy. This “Moscow matrix” can be traced back to the time of Ivan the Terrible and has been reproduced and reinvigorated in successive centuries. The next two chapters develop the historical institutionalist analysis, while Chapter 7 deploys the concept of path dependency to help explain why Russia has become locked into its pattern of a bloated state and fundamentally weak market institutions.
Given this historical pattern of state formation in Russia, it was naive in the extreme of reformers to believe that a market economy could be built overnight in the early 1990s. Hedlund attributes this intellectual failure to the isolation of economists from the findings of the other social sciences.
What Would Hayek Say?
Hedlund is a pro-market economist who does not like what the pro-market economists did in Russia and to Russia. He argues that the “shock therapy” unleashed on Russia in 1992 at the behest of international financial institutions failed to take into account the realities of the situation on the ground. The “Washington consensus” policies of liberalization, stabilization, and privatization had been implemented in Latin America and elsewhere in countries that already had the basic institutions of a market economy in place. The reformers in Russia either ignored the absence of these institutions or incorrectly assumed that they would quickly evolve if the correct incentives were introduced, while the basic legal framework was copied from Western sources.
The implicit assumption was that market institutions would spontaneously self-generate. Business elites who became wealthy by engaging in trade and seizing assets during the fire-sale privatization of the state-owned economy would eventually realize that it was in their own individual and collective self-interest to develop and consolidate the institutions of a market economy.
This did not happen, however. Fear and greed triumphed over enlightened self-interest. As Hedlund and many others have noted, the reform process was hijacked by selfish elites who focused on short-run extraction of rents and who tried to capture the state in order to prevent rivals from entering the market and competing away their profits.Footnote 2
Hedlund is an admirer of Friedrich von Hayek. On the one hand, Hayek believed that the market economy is a spontaneous, self-ordering system, “the result of human action but not human design.”Footnote 3 On the other hand, he was deeply skeptical about centralized programs and the state's ability to deliver much of value to society. The idea of a package of reforms designed in Washington and implemented by the Russian state would be anathema to Hayekians. So to the extent that the Russian program was designed from outside and imposed from above, Hayek would undoubtedly have condemned the results, were he still around to witness the process.
There are other scholars of a libertarian bent, however, who see the Russian reforms as the least worst of an unpleasant set of alternatives. Leading among them is Anders Åslund, another pro-market Swedish economist who has been a resolute proponent and defender of “shock therapy” since its inception in Poland, and who was an adviser to the Russian government as the program was being adopted.Footnote 4 Hedlund chooses not to quote or engage with Åslund, which is a pity, since it would have been useful to know exactly why Hedlund thinks Åslund's interpretation goes wrong, not least because Åslund's works are by now the standard texts on the Russian transition. Whether or not one agrees with Åslund's analysis, no other author has matched his command of the details and ability to explain complex processes in clear prose.
Did the Reforms Really Fail?
From the outset, Hedlund asserts that the market reforms failed in Russia, and he seems to assume that all his readers will take this as self-evident. He does not spell out the dimensions of the failure, nor the criteria by which he judges it to have been a failure.
At least three arguments can be advanced against the failure assumption.Footnote 5 First, although Russia undoubtedly experienced a devastating economic collapse in the 1990s, this was arguably a result of the implosion of the Soviet economic system and not due to the rigors of “shock therapy.” It is important to note that the GDP decline and runaway inflation began in 1990, if not earlier: long before Boris Yeltsin's price liberalization of January 1992. There is also the problem that Soviet statistics exaggerated the value of the GDP to Soviet consumers. Hedlund himself notes that analysts revised their estimates of Soviet GDP from 68% of United States GDP to 15% in 1991 (p. 93). This means that the transition recession that the country experienced in the 1990s may have been less harsh than critics suggest.
Second, despite persisting structural problems of corruption and barriers to competition, Russia has become a functioning market economy, characterized by private ownership, market-clearing prices, and a high degree of openness to international trade. True, it is blighted by inefficiency, a bloated role for the state, and an unhealthy dependence on oil and gas exports. But other market economies also have their own flaws and foibles.
Third, there is the question of what the alternatives to shock therapy were realistically—a debate that Hedlund declines to engage (pp. 135, 165). Preservation of the old system of central planning would only have been possible with massive repression. This is illustrated by the fate of countries like Belarus and Uzbekistan, who declined to adopt shock therapy but relied on a police state to maintain core features of the old command economy. Belarus and Uzbekistan did admittedly suffer a smaller transition recession in the 1990s than countries such as Russia that had embraced shock therapy. But by the 2000s, the limits of their economic model were becoming clear—while their political model was looking even less defensible (though it survives in both countries, as of 2013).
Critics of shock therapy, such as Joseph Stiglitz, usually invoke some sort of gradual transition, where price controls are kept in place, the currency is not made freely convertible, and trade barriers protect markets for inefficient state-owned enterprises.Footnote 6 Hedlund presumably subscribes to such a view, but he does not spell out what an alternative package of policies for Russia would have looked like—nor whether such an alternative program was politically feasible.
China, of course, has managed to effect just such a graduated transition. But few of the social democratic–minded economists who advocate such a course for Russia would have been willing to endorse the political repression that China has relied on to steer its transition over several decades. China, unlike Russia, did not dismantle the ruling Communist Party; hence, it is unlikely that the Russian leadership would have been able to steer the economic transition as did its Chinese counterparts. There were also, of course, substantial structural differences between the Russian and Chinese economies as of 1990. Russia was a highly centralized industrial economy, while China was largely decentralized, with a massive pool of untapped rural labor.
Path Dependency: Iron Cage or Opportunity Set?
Mention of the continuing role of the Chinese Communist Party draws attention to one important lacuna in Hedlund's approach: the lack of an explicit concept of the political. His intellectual history concentrates on economics on one side and sociology on the other. Political institutions and political choices get short shrift in his analysis. For Hedlund, political actors are corks bobbing on the tide of history, and it seems that the only consequences that political interventions ever produce are the unintended ones. Discussing Alexis de Tocqueville's Democracy in America, Hedlund argues: “The main point is that the social system that would come to be known as ‘Western’ emerged not as a result of deliberate action but rather as a set of positive by-products of other actions” (p. 242). Tocqueville's analysis of American exceptionalism is indeed very appealing. But where does it leave other countries not blessed with America's vast resources and geographical isolation?
Path-dependency analysis usually includes recognition of the scope for political leadership at “critical junctures,” those rare but pivotal moments when society can switch tracks and move forward on a more beneficial path. Societies do change, and political leaders can make a difference. Just such a turning point occurred in Russia in 1992, and Yeltsin's team of reformers seized their chance to try to move Russia over to a market-oriented society. Even if one considers that their efforts failed, there is nothing in path-dependency analysis that would say they were “doomed” to fail.
Hedlund (and North) rely heavily on the unique experiences of Britain, where the rule of law was allegedly embedded in an elite consensus that was forged in the Glorious Revolution of 1688, which recognized the sovereignty of Parliament and the value of religious toleration (p. 42).Footnote 7 That, in turn, was a response to the strife of the English Civil War (1642–51). Precious few other countries have been able to replicate that fortuitous history, and many of those that did are former colonies of the United Kingdom (such as the United States) and, hence, indirect beneficiaries of Britain's unique historical path.Footnote 8
This emphasis on English exceptionalism leaves the present author (originally from England) uncomfortable. For one thing, it begs the question of why England came up with this near-unique solution to the challenge of building social trust and respect for the law. This tempts one into an infinite regress into the specificities of British history, tracing the origins through the Magna Carta (1215) back into the legacy of Roman law. Second, it is a rather one-sided reading of history. It overlooks the crucial role of empire in generating the wealth that fueled Britain's rise, and it downplays the role of the state in developing said empire—in funding the Royal Navy and sponsoring the East India Company, to give but two examples.
For Hedlund, Russia represents a case at the opposite end of the political spectrum to that of Britain. It is a country fated by geography and history to rely on a coercive and extractive state apparatus, manned by short-sighted, rent-seeking elites, and with a supine population who survive by colluding with their masters in bending the rules. No one who has spent any time in Russia would deny that this is part and parcel of Russia's contemporary reality. But economics would truly deserve the title of the “dismal science” if it were to insist that Russia will never escape from this pattern. Moreover, the Russian reformers of the 1990s did carve out some zones of freedom, and the value of these zones should not be overlooked.
