One of the best write ups on this subject I have ever read!

Re-Post from Gary North’s Specific Answers – July 05, 2014

At the age of 72, I look back at my life, and I ask a question: “What was the most significant event of my lifetime?”

I go back and forth between two events, but in fact they were the same event. The first was the decision of Deng Xiaoping in 1979 to begin to remove economic controls over agriculture in China. That led to the greatest period of economic growth over the largest area in the history of man.

The second was the collapse of the Communist Party of the Soviet Union in late August 1991. This was followed by the decision of the Soviet government to shut down the Soviet Union in the final week of 1991. This was the largest empire in history geographically. The Russian component spanned 11 time zones. Through its satellite nations, it extended into Western Europe. It had been in operation for over 70 years. It had the most extensive system of control over thought and activities of any large society in the history of man. Yet, in one week, without any bloodshed, the leaders of the USSR simply abandoned it. Nothing like this had ever happened before.

Those of us who lived through it could barely appreciate the magnitude of it. That is because it was bloodless. There was almost no warning. The West had been involved in a great competition between the two systems from 1946 until 1991. Then, without warning, that competition ended. It caught Russians by surprise. It caught Westerners by surprise.

Communist China and Communist Russia were loosely connected by ideology. Each system was far more rigorous than anything in the West. The West was committed to a vague faith in democracy as a political system, but with all kinds of economic opinions and religious opinions tolerated or promoted. The Communists were very different. They had a consistent ideology. It involved a specific view of God, man, law, causation, and the future. There was no toleration of supernatural religion. There was no official toleration of capitalism, although the black market was always allowed to exist, because without the black market, both systems would have completely collapsed. There was a name for it in the USSR: “blat.” There was also a phrase: “Blat is higher than Stalin.” Yet for all of the centralization, for all of the tyranny, and for all of the interference with civil liberties, both systems ended. They did not end with a bang. They ended with a whimper.

There was no collapse. The Chinese economy began to boom almost immediately in 1980. The Russian economy did go through some withdrawal pains, and these lasted for about 10 years. But it has recovered remarkably. Today, Russia is the dashboard camcorder capital of the world. When we watch YouTube videos of spectacular car crashes, a large percentage of them took place in Russia.

MISES PREDICTED THIS

All of this was predictable in general. More to the point, all of it had been predicted. It was predicted in 1920 by Ludwig von Mises, in an essay: Economic Calculation in the Socialist Commonwealth. In 1922, he extended that essay into a comprehensive treatise, Socialism. Mises made it clear that it would not be possible for any socialist commonwealth to implement its theory of socialism. If any government attempted this, the economy would end in chaos and economic breakdown. Without capital markets, and without the private ownership of the means of production, it is not possible to find out what anything is worth or what anything costs. Without a price system, there is nothing but economic blindness.

The socialists did their best to ignore this essay for the next 70 years, but in the end, it was obvious: Mises was right. The socialist multimillionaire economist Robert Heilbroner finally admitted it in an article in The New Yorker in September 1990. He literally said it: “Mises was right.”

What we have here is a combination of general theory and events in history. From the standpoint of general economic theory, the breakdown of both the Soviet Union and Red China was inevitable. In the case of China, there was no collapse, because the economy was so poverty-stricken in 1979 that the reform instituted by Deng Xiaoping could not possibly have collapsed it. In the case of the Soviet Union, which was a far more advanced economy, and which had been copying Western prices for half a century, just as Mises said socialist planners would have to do, the transition was more painful economically. But it was a major recession, not a collapse.

In Ernest Hemmingway’s novel, The Sun Also Rises (1926), we read this:

“How did you go bankrupt?” Bill asked.”Two ways,” Mike said. “Gradually and then suddenly.”

That was what happened in the Soviet Union. It was bankrupt morally and spiritually from the October Revolution of 1917. But it took 74 years for the implications of that bankruptcy to play out.

STEP BY STEP

If I ever write a history of the decline and fall the Soviet Union, I will start with Georgy Malenkov, who replaced Stalin in 1953. He is the archetype, and he is virtually unknown in the West today. He held the reins of power briefly, but he was replaced by Khrushchev in early 1955. He disappeared. He was not killed. The Soviet leaders had learned their lesson under Stalin. They knew that their reign would not last forever, and they all wanted a life insurance policy. So, they let him live. He died in 1988. The weakening of central power began in 1955.

The next event was Khrushchev’s supposedly secret speech to the Soviet leadership, which he delivered in 1956. He attacked Stalin’s cult of personality. Everyone in the room knew that he had been Stalin’s henchman, a mass murderer in the Ukraine. That speech, when translated and distributed the West, led to the defections of Communist Party members all over the West.

A dozen years later, the Soviet invasion of Czechoslovakia led to another wave of defections in the West. But this did not seem to affect the stability of the Soviet Union. There was no sign of weakness.

In August 1978, after 33 days as Pope, Pope John Paul I died. In October, he was replaced by John Paul II. This completely unpredictable turn of events soon led to a confrontation in Poland between the existing Communist hierarchy and the moral authority possessed by John Paul II. He had come to adulthood under the Nazis, and then served as a priest under the Communists after 1945. He had been trained by an anti-Communist cardinal who understood the limits of power, and who understood how to beat the system. The Pope knew the weaknesses of the Communist Party in Poland. His visit in June of 1979 helped create the moral basis of Polish resistance, which escalated in 1980.

In 1979, the Soviet Union rolled tanks down the highway that the American government had paid for in 1966. The Soviets were trying to prop up a puppet ruler in Kabul, and they soon found themselves in the quagmire for the next decade. They could not get out and save face. But they could not win.

In 1980, a pair of events took place which undermined the legitimacy of Communism as nothing else had before. They were both associated with the Olympics. The Olympics were held in Moscow, which were boycotted by the United States in the name of upholding the independence of Afghanistan.

From around the world, Westerners came to see the sports events. They came with their suits, their watches, their fine shoes, and their confidence. Every Soviet leader saw them. Every Soviet leader knew at that time, beyond a shadow of a doubt, that they would never be able to equal the wealth of the West. For all their power, for all their special privileges, for all their access to special department stores where a few Western goods could be purchased, they realized that they were second-class citizens economically. The leadership never recovered.

In Poland, the peculiar event of the discovery in July of meat in cans labeled “fish” led to a series of strikes. The meat was about to be sent to Moscow for Westerners who were attending the Olympics. A strike took place in the railway yard where the meat was discovered, and within weeks, the Solidarity movement was founded. From that point on, Poland began to move out of the Soviet orbit.

In 1980, Ronald Reagan was elected. He was an anti-Communist. He seemed youthful. Shortly after his election, there was an assassination attempt, but he survived. From that point on, he was in control. He broke the PATCO strike. The Soviet leaders wanted to know whether he had the gumption to stand up to the union, and he did. He smashed it. Then there were the television broadcasts of Reagan at the ranch, riding horseback, putting up fences. These were not staged events. This was what he really liked to do. The aging bureaucrats in Moscow were reminded constantly that they were not long for this world.

Then came the deaths in short succession of Brezhnev (1982), Andropov (1984), and Chernenko (1985). Gorbachev came into power. He began to reform the economy by allowing more decentralization. He began to free up public discussions in the press. In other words, he allowed more free market activities, and he allowed more freedom of speech. Yet the economy was in ruins, and it kept getting worse.

Then there was the fearful anniversary: 1988. This was the 1000th anniversary of the founding the Russian Orthodox Church. It had not been stamped out.

By that time, Gorbachev was touring the Western governments, begging for financial support. He did not get it.

In 1989, the Soviet Union pulled out of Afghanistan. It was a visible testimony to the inability of the Soviet military to maintain control in a nation on its border.

In 1991, its client state Iraq lost to the United States. Its military hardware was simply no match for Western technology. Its planes were shot out of the sky before they even detected the presence of an American fighter jet. Its tanks were blown up in the desert. That was in February. By the last week of December, the Communist Party and the Soviet Union were no more.

These events could not have been predicted individually, but the overall development had been predicted by Mises in 1920. The West was able to avoid a military confrontation directly with the Soviet Union, and the clock continued to tick. The West did not perceive how accurate Mises had been. But the scenario played out just as he said it would. The socialist economies of Red China and the Soviet Union were unable to compete with the West. The classic statement of this was made by Richard Grenier, who described the Soviet Union in three words: “Bangladesh with missiles.”

PAUL SAMUELSON: USEFUL IDIOT

The premier university economist in the second half of the 20th century, Paul Samuelson, wrote in the 1989 edition of his best-selling textbook, Economics, that the Soviet Union was proof of the efficiency of central planning. Mark Skousen has traced Samuelson’s comments on the USSR in the various editions.

In very early editions, Samuelson expressed skepticism of socialist central planning: “Our mixed free enterprise system … with all its faults, has given the world a century of progress such as an actual socialized order–might find it impossible to equal” (1:604; 4:782). But with the fifth edition (1961), although expressing some skepticism statistics, he stated that economists “seem to agree that her recent growth rates have been considerably greater than ours as a percentage per year,” though less than West Germany, Japan, Italy and France. (5:829). The fifth through eleventh editions showed a graph indicating the gap between the United States and the USSR narrowing and possibly even disappearing (for example, 5:830). The twelfth edition replaced the graph with a table declaring that between 1928 and 1983, the Soviet Union had grown at a remarkable 4.9 percent annual growth rate, higher than did the United States, the United Kingdom, or even Germany and Japan (12:776). By the thirteenth edition (1989), Samuelson and Nordhaus declared, “the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive” (13:837).

Samuelson’s reputation did not suffer, but by 1989, he had proven himself to be a useful idiot — to use Lenin’s phrase. From 1961 on, he had been completely taken in by fake Soviet statistics. Naum Jasny had been warning for years that the statistics were bogus, but Samuelson ignored this warning. He was given a free pass by academia, which had assigned his textbook to hapless students ever since 1948. They had been taken in by him, beginning in the 1961 edition, as surely as he had been taken in by the USSR, and they chose not to admit it.

In 1968, my first book appeared: a book on Karl Marx and Communism. I keep the 1988 reprint online for free downloading: Marx’s Religion of Revolution. In an appendix on soviet economic planning, I cited Jasny’s insights. The Soviet Union achieved statistical expansion by suppressing its people on a scale never seen in modern history. It looted them. It was this ruthless suppression of rights and a massive confiscation of private property that allowed the USSR look as though it was growing. I could see that Jasny was right. I was just a grad student, but I could see it. Samuelson denied it until the whole experiment went belly-up over two decades later. Yet the academic world took Samuelson seriously. It still does.

The most respected economist in the second half of the twentieth century was utterly snookered by a bunch of Soviet statisticians who feared reassignment in Siberia for not goosing the statistics. The premier Keynesian economist could not see through this charade. Keynesian economics blinds bright men. They refused to believe Mises, 1920 to 1991, so they were forced to believe hack statisticians who feared for their lives. They never fessed up — Heilbroner excepted. In retrospect, they were a bunch of suckers with Ph.D. degrees — men who could not perceive reality. Hans Christian Anderson wrote a tale about them: the emperor’s new clothes. Mises was the kid who announced in 1920 that the emperor was naked. For the next 50 years, he was shunned by academia for his lack of etiquette.

The intellectual heirs of those who did the shunning are still in charge.

Be patient. They are the blind leading the blind into the ditch.

Try to avoid the ditch.

CONCLUSION

What are the lessons of all this? First, there is a science of economics. Mises understood this. His critics did not. His critics were legion. But his assessment in 1920, three years after the October Revolution, proved to be accurate in Red China and the USSR.

Second, the inevitable economic failures of socialist societies gave the West time. There was no nuclear conflagration. By holding to peace, the West won. But because the West never believed Mises, it lacked confidence in its task. There were men in high places who said the two systems would merge. The systems did not merge. One of them simply folded up shop and disappeared. The other adopted Western policies of central bank financing, mercantilism, and Keynesian bubble inflation. It is crony capitalism on a massive scale. Its bubbles will pop. Be patient.

Communism lost. The West gave it time. Time proved Mises correct.

Keynesianism has not yet lost. Give it time.

There need not be a social collapse or an economic collapse in order to make possible a transition to a non-Keynesian economy. It is possible for the system to go belly-up at the top, yet not bring down the social order. We have seen this twice since 1979.

The United States government will go bust at some point. It will default. It will break its promises. At that point, the voters will get a lesson in economics and civics.

It is our task to prepare the educational materials required to make the case for liberty when Washington’s checks bounce.

Currency changes are now in place