New Evidence on the Second Economy

In December 2007 KOMEP, the theoretical and discussion journal of the Greek Communist Party held a Symposium on Socialism in Athens, Greece. The Greek Communist Party is updating its theses on the downfall of European socialism in 1989-91. KOMEP invited Marxist scholars from around the world. This was the US contribution. We will publish more as they become available. 


In 2004, Socialism Betrayed: Behind the Collapse of the Soviet Union was published.  In it we tried to use the tools of Marxism-Leninism to understand the counter-revolution that overthrew socialism in the Soviet Union. 

In this paper, we would like to do five things:
  • Recapitulate the major argument of the book.
  • Discuss research in addition to what we cited in the book that reinforces, deepens or extends the argument about the second economy.
  • Reply to critics.
  • Discuss the implications of our study and the response to it.
  • Suggest areas for further research.

In working on Socialism Betrayed we carefully studied KKE's 1995 theses, available on the Internet in English.  We greatly admire your draft 2007 theses, and their single-minded adherence to a historical materialist method. This conference's organizers kindly shared a translation with us.

KKE’s new draft theses express doubt about the usefulness of the phrase "Soviet collapse." We agree. We used the phrase "Soviet collapse” simply in order to be understood. In English, the phrase "Soviet collapse" is used in  most writing on 1985-91. The term “dismantle” (meaning to disassemble, or to take apart), is in many contexts superior. It is not surprising to us that KKE has expressed interest in our work on the second economy because it complements KKE's own investigations.

Our Argument on the Soviet Collapse
The most important and perhaps novel contribution of our book was our answer to this question: why did Gorbachev adopt these revisionist policies and why did they gain widespread acceptance even though they led from one disaster to another?  In short, we asked: What was the material basis for Gorbachev’s policies?  

Before turning to our answer, it is necessary to underscore the idea that the downfall of the Soviet Union, the first and most deeply rooted socialist state, was the greatest enigma of all the unforeseen disasters of 1989−1991. A British journalist described the mystery in this way:

What needs explanation is that an international system of states collapsed in the absence of the most evident forms of threat….What occurred … was that the leadership of the most powerful state in the system decided to introduce a radically new set of policies   within the USSR and within the system as a whole.

In 1985 in the USSR, none of the earmarks of an economic or political crisis existed:  there was no economic slump, no unemployment, no inflation, and no mass unrest. There were no strikes, no demonstrations, and no riots. The most that can be said is that there was a long-term slowdown in the Soviet economic growth rate. Slowdown, not decline. According to a Swedish bourgeois economist Anders Aslund in the early 1980s average yearly Soviet economic growth was 3.2 percent, a matter for concern to be sure (because it was below earlier, higher growth rates) but no crisis. 

Our argument about the cause of the collapse has three components.  First, we argue that certain economic, political and international problems existed under Soviet socialism  notably a shortage of consumer goods, particularly high−quality goods, and decelerating labor productivity and economic growth. These problems did not bring down the system, but Gorbachev’s attempt to resolve these problems did undermine the system.

Second, we argue that two main traditions existed in Soviet politics for dealing with the problems that arose under socialism.   One tradition, which had a forerunner in the ideas of Bukharin and the period of the New Economic Policy (NEP) from 1921 to 1928 and also resembled many of Khrushchev’s policies, saw the solution to socialism’s problems in the adoption of certain capitalist ideas, that is, encouraging markets, competition, decentralization, and private enterprise, as well as more relaxed methods of Party rule. This could be termed the revisionist trend.  The other tradition saw the solution of socialism’s problems in more socialism, that is, in greater state ownership, better planning, greater discipline, greater class consciousness, a heightened role for the CPSU, and so forth.  This was the orthodox path associated with Stalin, Molotov, Andropov and others. 

Brezhnev tried to avoid a conflict between these two traditions by steadfastly avoiding any radical initiatives or reforms.  By the time Gorbachev came to power in 1985, the number and severity of chronic problems had accumulated. A widespread desire for reform existed.  At first, Gorbachev tried some orthodox policy initiatives and called for “more socialism,” but as months passed, Gorbachev’s talk of socialism became more and more empty rhetoric. He increasingly adopted revisionist policies that fostered markets, decentralization, and private enterprise. His policies undermined the Party and the economy and eventually overthrew socialism and fragmented the Soviet Union.

Third, we argue that the reason Gorbachev adopted revisionist policies was due to the development  of a second economy of legal and illegal private entrepreneurship.  Soviet leaders since Stalin had openly encouraged, tacitly tolerated or ignored the second economy.  Consequently, the second economy developed under Khrushchev, grew stronger under Brezhnev and exploded under Gorbachev.  It accounted for a substantial amount of economic activity, embraced millions of people, corrupted the Party and the government, and created a variety of other social, economic and moral problems.  Most importantly, the second economy recreated a class of petty bourgeois entrepreneurs as well as a penumbra of Party and government officials (not to mention private citizens) who economically profited or otherwise benefited from this second economy.  This numerous and growing group of people had a material interest in the very revisionist policies that Gorbachev championed, and in them he found a ready-made base of support.

More Evidence on the Second Economy
A large number of scholarly studies besides those mentioned in the book support the  argument that the second economy was large and growing and enjoyed official toleration or encouragement.  For example, Steven L. Sampson said the “output of collective farms’ personal plots” constituted 30 to 42 percent of the total agricultural output in the USSR. Sampson gave a telling example of a study of a biscuit factory in Soviet Georgia, whose owners bribed government functionaries to obtain enough ingredients to produce four times the amount of biscuits allowed in their plan.  This surplus was sold at a discount to retail outlets, which involved “bribes to virtually the entire police department of the region.”  On the basis of a study of the Soviet press published in 1980, Dennis O’Hearn estimated that over 80 percent of Soviet gas for automobiles ended up in the black market.  Eighty percent of the total take of furs (muskrat) and 25 percent of the total catch of inland fish were due to poachers and ended up in the second economy.  Twenty-five percent of the production of alcohol occurred illegally. In joscow, 70 percent of home repair and decoration was performed in the second economy, and the percentage was even higher in Georgia. Two Soviet sociologists estimated that the second economy had reached such a great size in the 1980s that “83 percent of the Soviet population employed the shadow economy to obtain necessary food and services.”

The official attitude toward the second economy was far from vigilant.   A study by William A. Clark of the punishment of 855 Soviet officials convicted between 1965 and 1990 found that in spite of widespread evidence of “informal and illegal entrepreneurial activity,”  there were “very few instances of officials being punished for such behavior.” A separate study by F. J. M Feldbrugge of crime reported in the Current Digest of the Soviet Press for the years 1982 and 1983 found that aside from harsh penalties meted out to officials convicted of making exorbitant amounts of money through bribes, stealing or embezzlement, the majority of illegal activity associated with the second economy was met with toleration, moderate punishment or even encouragement.  Feldbrugge’s data, moreover, reinforce our conclusion about the thwarted promise of Andropov’s leadership. According to Feldbrugge’s analysis, officials showed greater tolerance and even encouragement of economic crimes under Brezhnev than under Andropov.  According to Feldbrugge, in the last year of the Brezhnev government, the courts viewed eight cases of economic crimes as “normal” and twelve cases as “useful or morally praiseworthy.”  Under the first year of the Andropov government, however, the courts viewed no cases of economic crime as “normal” and only three cases as “useful or morally praiseworthy.”

We would like to reinforce and deepen this analysis of the second economy that was in Socialism Betrayed by addressing three questions. The first question is: why did a second economy arise? Was the development of a second economy a sign of serious flaws in the first economy, that is, serious problems with socialism itself?  The answer to that question is complicated.  It might seem obvious that if socialism had been delivering high incomes, high-quality goods and services, and rising standards of living, the Soviet people would have had no need to engage in a second economy as sellers or buyers, employers or employees.  Yet, even in the United States, a country with higher incomes and a greater profusion of goods and services than much of the world, a second economy in drugs, prostitution, and the employment of twelve million illegal immigrants flourishes.  Still, it must be granted that  the second economy was rooted in the features specific to the Soviet system, but not necessarily endemic to socialism. 

Most scholars agree that, before Gorbachev, the second economy thrived most under Brezhnev. Arguably, the growth of the second economy was the by-product of the two most prominent features of the Brezhnev policies, first, the decision to achieve military parity with the United States and second,  the decision to avoid any major economic reforms or political shakeups, while gradually increasing the incomes of Soviet workers. Brezhnev’s policies could be summarized as struggle abroad, peace at home. On its own terms, Brezhnev’s policies achieved the desired results.  The Soviet Union achieved military parity and was generous in its support of revolutionary and national liberation struggles abroad, including the South African struggle against apartheid and the Cuban revolution. The Soviet economy grew slowly but steadily, standards of living rose, domestic tranquility prevailed. 

Yet, increased military expenditures and support for struggles abroad naturally diverted money that the Soviets could have otherwise used to increase the quantity and quality of consumer goods.  Consequently, while Soviet incomes increased, a commensurate increase in consumer goods did not occur.  The gap between demand and supply, more than anything else, fostered illegal private enterprise, and Brezhnev’s avoidance of domestic strife resulted in an absence of ideological and political struggle against the second economy and vigorous legal action against it. One scholar James R. Millar called this arrangement "the Brezhnev 'Little Deal.'” He characterized it as “a new but tacit bargain with the urban population:  to tolerate the expansion of a wide range of petty private economic activities, some legal, some in the penumbra of the legal, and some clearly and obviously illegal.”

Few partisans of the Soviet Union and international working class solidarity would fault the Brezhnev leadership for its decisions on military policy and foreign aid.  In light of subsequent events, however, it is necessary to question the wisdom of tolerating or encouraging the second economy, at least to the extent and in the way that occurred.

Hence our second question:  Would it have been possible for the Soviet Union to have pursued military parity with the U.S. and to have aided struggles abroad without the “Little Deal”?  Without attempting a utopian re-write of history, one can imagine different courses of action than the one pursued.  We argue that Andropov offered a different and promising course that was cut short by his untimely death.  Moreover, like the Cuban leadership, the Brezhnev leadership might have admitted that the path toward socialism was taking a temporary detour, that a “special period” was necessary in order to protect itself militarily. In this period, the country would increase its sacrifices, class consciousness, and discipline, while allowing some private enterprise to thrive temporarily, under strict limitations and vigilant legal enforcement.  Such a course would have had its own dangers, as the Cubans are discovering, but it would have been better than the course Brezhnev did follow.

A third question arises from our treatment of the second economy.  On the one hand, we suggest that the paucity of study and data on the second economy by Marxists, stemmed from the lack of official recognition of this phenomenon, except as a vestige of the old regime.  On the other hand, we suggest that the Brezhnev leadership consciously encouraged some aspects of the second economy, and tolerated others.  Could both things be true? Could the Brezhnev leadership have both officially ignored the second economy while encouraging and tolerating it?  Absolutely.  Indeed, the decision to overlook the second economy officially while encouraging or allowing it unofficially was an intrinsic part of Brezhnev’s “Little Deal.”  It was an attempt to reap some benefits from private enterprise, to satisfy some consumer demands and prevent social discontent, while not acknowledging the conflict with official ideology and the problems posed by these practices.  One can appreciate the problems that Brezhnev confronted and sympathize with his goals without embracing the ultimately self-defeating means that he chose to achieve them.

Critical Reactions 
Bourgeois critics ignored Socialism Betrayed entirely. Interestingly, our critics within the Left and within the Communist movement in particular offered little or no challenge to our findings on the size, nature, and effects of the second economy. Rather, they focused on our refusal to demonize Stalin, and also our refusal to adopt the widely held theory that the USSR downfall was primarily the  result of a lack of democracy and  the overcentralization of the economy.

Consider briefly the criticisms of Socialism Betrayed in the two main Marxist scholarly journals in the US, Science & Society and Nature, Society, and Thought.  To counter our explanation, one critic explained the Soviet demise by conjuring  up the idea of a “Stalin deformation.” He claimed that in the decade before 1986 the conditions for the best forms of central planning did flower, but they were “overcome” by two wholly immaterial, entirely subjective factors: 1) “the accumulated hostility and disorientation resulting from Stalin-era repression, a “Stalin deformation,” and 2) the failure to address that deformation from 1953 to 1985. This explanation inverted Marx, since in essence he was asserting that social consciousness determines social being. Hegel would have loved this theory, so close to Trotsky’s "degenerated workers’ state." The ghostly notion of “Stalin deformation," enables this critic to admire Soviet central planning  while simultaneously admiring Gorbachev, the destroyer of planning. This is the kind of absurdity to which anti-Stalin righteousness can lead.

Another Marxist critic held that “a balanced view” of 20th century socialism will come from a re-interpretation of the NEP period. He considers the NEP to have been an idyllic “road not taken,” a path of correct socialist economic development cut short by Stalin’s arbitrary and murderous decision to speed up industrialization and farm collectivization. This critic accepts at face value many of the standard  anti-Communist slanders  of  Stalin, and he blames the Soviet and East European collapse in 1989-91 on the intrinsic weaknesses of central planning, which he claims was begun prematurely. The underlying motive for this rewrite of Soviet history is to provide a justification of People’s China’s "socialist market economy." Like the previous explanation, this one too relies heavily on a demonization of Stalin.

Implications of Our Study and the Response to It
Our study and the response to it contain several implications for the future.  First, the nature of the two leading critiques of our book suggests that one of the greatest obstacles to clear thinking about the Soviet past is dogmatic anti-Stalinism.  With new archival information available, the blanket condemnation of Stalin is even less justified now than it ever was. According to Cambridge University’s Dr. Aileen Kelly, new studies are narrowing the estimates of the scale of repression. Second, they are downplaying Stalin’s personal responsibility in the repression. Third, they are asserting that support for repression in the late 1930s was widely distributed in Soviet society.  The new bourgeois post−1991 writing has not abandoned anti-Sovietism and anti-Communism, but it is providing a fuller, more objective and more complex view of the Lenin and Stalin eras than we ever had.  Given the present state of our knowledge, our Stalin-hating critics might re-consider the wisdom of the German Communist philosopher Hans Holz:

A purely moral condemnation of the despotic aspects of Soviet communism in the years of encirclement of the Soviet Union may have honorable motives, but does not lead to comprehension of historical processes, which is necessary to understand them and to avoid their errors in the future.

Another implication is that historical materialists should be unabashedly critical of idealist explanations of the Soviet collapse, and intolerant of them in the Communist movement. We must not accept a plurality of incompatible answers, nor the excuse that they are unresolved and "under discussion." There is an urgency to this ideological struggle. Debate on "21st century socialism," so called, has already begun. But we have to have a scientific understanding of the downfall of much of 20th century socialism before the debate on 21st century socialism can bear any fruit.

The dominant explanation of the Soviet demise since 1991 resembles and continues the opportunism of anti-Soviet vilification before 1991. The Lack-of-Democracy-and- Economic-Overcentralization thesis, now the main reformist and revisionist explanation of the Soviet collapse, was the main content of anti-Soviet propaganda before the collapse.  Moreover, before and after 1991, idealist methods are used by opportunism to make its case.  This is not new. Those of us of a certain age will remember that the Eurocommunists, echoing social reformism, did not criticize the Soviet Union for its second economy. Yielding to the ideological pressure of the then all-pervasive Cold War anti-Sovietism, and abandoning a class-based understanding of democracy, they unfairly criticized the USSR for failing to live up to their idealized notions about bourgeois democracy in “the West.”

Suggestions for Further Research
An unfinished task is to extend the analysis concretely to the East European socialist states, and the specific causes of the downfall of socialism in each, including the role of the second economy. Its role may be large or small. In our book we offer some general observations, but the task was too ambitious for us. Perhaps it is not for researchers from this part of Europe.

A deeper study of opportunism by Marxist-Leninist theorists is needed. Opportunism in socialist construction took the form of an accommodation rather than struggle with capitalism, domestic or foreign. It appeared in the Gorbachev era as an advocacy of “respecting realities,” rather than struggle to change them, a one-sided evolutionary approach to building socialism, a yielding to objective circumstances. It sought a quick and easy path to socialism by the path of least resistance.  It overestimated the automatic, spontaneous nature of the process of building the new system. It laid too much stress on the buildup of the productive forces as the key to socialist construction.  It downplayed the perfecting of socialist relations of production -- the abolition of classes.  Under Khrushchev, the explicit denial of the possibility of opportunism in socialist construction began, precisely when it was getting under way in earnest.

Lenin devoted much of his life to the struggle against opportunism. His followers have failed to live up to his example. The failure has had consequences. Since 1917, the world Communist movement, ostensibly, has sought to uphold his analysis of opportunism, and Leninist standards of party organization. Yet, this did not prevent the opportunist degeneration of European socialist states. It did not prevent the opportunist degeneration of the mass Communist parties of Western Europe, a development so similar to what happened to the German Social Democrats in the years before 1914. Old mistakes recur. Opportunism is beaten back only to arise again and again. Given this sorry history of 20th century failure, we pose a question, without presuming to have a full answer to it: is it necessary for the world movement to consider an across-the-board intensification of the struggle against opportunism, perhaps by revising upward those Leninist standards of party organization, above all in the countries of developed capitalism where opportunistic pressures are strongest?

What is the class nature of the new post-socialist states? Are they stable? What are their strengths and weaknesses? Our thesis can shine a light on a correct formulation of a strategy for socialist restoration, a task we never foresaw. A new capitalist ruling class has emerged, composed of such diverse social groups as organized crime figures from the second economy, corrupt CPSU and Komsomol officialdom, erstwhile Soviet enterprise managers, parts of the intelligentsia, and at its core the ‘oligarchs’ who under Yeltsin acquired monopoly ownership positions in privatized state industries.

What is a correct strategy for wresting state power from this class and regaining working-class state power? In each post−socialist state the new ruling class has its own concrete features. In the former USSR, for example, in contrast to normal capitalist development, capitalism was imposed from above and with the help of imperialism. Ownership of large-scale industry is lopsidedly foreign. The new capitalists are  mostly financial swindlers. If a new capitalist ruling class has formed, theory tells us revolutionary change will require smashing the new state, the organ of its class rule. The burden of proof is on any who claim a peaceful parliamentary road to socialist restoration is open.

At least in outline, a solution of the historical puzzle of the downfall of the USSR now exists, thanks to the collective work of people in this room and others. We welcome criticism that engages our arguments, points out any logical contradictions, factual errors, and one-sided judgments, or suggests a causal nexus that we may have wrongly estimated, or omitted. The debate will not go on endlessly, nor should it.  This is modern history. Data are available to draw scientific conclusions with confidence. It has taken time to recover from the catastrophes of 1989−91. But there is a precedent. As early as 1922 a new phenomenon, fascism, was winning power, but it was only in 1935, 13 years later, in the famed Dimitrov report to the Communist International that a self-critical revolutionary movement achieved a correct and lasting analysis of fascism's class nature and prospects.

Among Marxist−Leninists, historical research does make progress. To be sure, there will be new studies that fill out the corners of the historical canvas of 1989-91.  But we like to think that the second economy will become the common sense explanation of the primary material roots of the late 20th century counterrevolution. This is normal in science. For example, a sympathetic reader of Socialism Betrayed recently invoked common sense. She asked: isn’t the most obvious evidence of the reality, size and strength of the second economy the Russian "gangster capitalism"  which sprang up before our horrified eyes in 1991 and which has dominated that economy ever since? Where did the “gangster capitalism” of the last sixteen years come from?  Did it spring up suddenly at the moment the red flag was hauled down from the Kremlin? Obviously not. The cancer had spread for decades before.

To sum up, in our own study we arrive at the conclusion that the downfall of Soviet socialism was not inevitable. Historical materialism can fully and satisfactorily explain the cause of the calamity. Our work convinced us of the undiminished explanatory power of Marxism-Leninism, which sees social and historical development as a law-governed process. Behind the messy details of concrete history, we can discern the general laws identified by historical materialism. Of course, concrete history, with its zigzags, setbacks, and leaps is much richer and diverse than theory.  Nevertheless, there is an objective logic to history.

Making a point about history’s progressive direction, two Soviet philosophers in their book on historical materialism put the matter poetically, saying “the river of history still only flows in one direction, downward and to the sea." But the wild river of 20th century history twisted and turned more than any of us foresaw or wished. The river had jagged rocks lurking just below the surface, and whitewater rapids, and whirlpools. In 1989-91, our vessel plunged over a cataract the size of Niagara Falls. Disastrous losses followed. But our movement is still here. Let us resolve to master the lessons of socialist construction in the tragic century just past and to draw a more accurate map of the river's dangers, so that the rest of our river journey is not so costly.


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