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Part I
Chapter 3: Command Economy and
its Legacy
ABSTRACT: The nature, structure, and functioning of the contemporary Russian market
economy has been substantially ináuenced by the legacies of its predecessor, the Soviet com- mand economy. This chapter outlines the key deÖning characteristics of that prior economic system and how they ináuenced its functioning and performance. These characteristics de- termined a structure of production and interaction, a critical mass of economic, political, and social institutions, and patterns of behavior and understanding of economic and social processes that maintained a politically e§ective if economically ine¢ cient system. That sys- tem was destroyed by the radical reforms of the 1980s and 1990s, yet it bequeathed many structures, institutions and behaviors that remain, in varying if diminishing degrees, as lega- cies of the prior economic system. Their impact lingers in the structural problems faced by the Russian economy and in the policies pursued by the Russian political leadership. Un- derstanding these legacies is important to understanding the current path of development of the Russian market economy.
Key Words: Command Economy, Central Planning, Physical Legacies, Institutional
Legacies, Behavioral Legacies, Russian Market Economy.
1 Introduction
The contemporary Russian economy has been molded by many factors. Its location and natural endowments, Russian history and culture, and the cataclysmic events of the 20th century have all played signiÖcant roles in determining the structure and functioning of the Russian economy, the nature of its institutions, and the problems it faces.
Perhaps the most signiÖcant ináuence has been the nature of the economic, social and political system which preceded that of the contemporary Russian economy. Borne of the cataclysms of World War, Revolution, Civil War, and a ìGreat Socialist O§ensiveî, the ìCommand Economyî organized the material bases of social and political life in pursuit of a utopian dream. It supplanted the developing market economy of the Russian Empire, crushing its institutions, and implanting in their place hierarchically organized and centrally directed structures striving to control all economic, as well as social and political, activity. Thus the command economy developed as a coherent, and diametrically opposed, alternative to any market (ëcapitalistí) economy. This political-economic system, in place for over two generations, profoundly altered the nature of economic (and social) development in the Soviet Union. The structure of capital, labor, and production, the location of economic activity, the nature and structure of economic interaction, the nature and sources of innovation, and how the Russian people and elites understood both the nature and meaning, the goals and objectives, of economic activity, and how it should be organized and managed, were all fundamentally changed. It is this system, and the spectacular chaos of its collapse after 1987, that provides the initial conditions for the development of the current Russian market economy. Its legacies have ináuenced, and occasionally molded, policies and institutions, constrained options, imposed barriers, and generally channelled the development of the post-Soviet economy. These legacies are both physical and systemic ó structural, institutional, and behavioral, and have played a dominant, if fading, role in the early development of the post-Soviet market economy. Many (physical and institutional) legacies have been overcome in the past decade, while others (institutional, behavioral and intellectual) remain deeply embedded in the economic system. In this chapter I present my understanding of those legacies, their source and persistence, and their impact on the Russian economic system. Section 2 summarizes the nature of the system, the Soviet ëcommand economyí, that spawned the contemporary economy in the tran-
1987; Ericson, 1990, 1991; Kornai, 1992; Ericson, 2006, 2007). For much of its existence, it provided a complete, coherent alternative to market systems, even those with substantial state ownership and strong state direction of the economy. Attempting to implement fully ërationalíhuman direction of social, political, and economic development toward achievement of a utopian state, the command economy aspired to total control over all economic activity. The impossibility of realizing such a ëtotalitarianí objective meant, in practice, that the system leadership and its implementing organs had to relinquish control outside of those areas of its primary interest, those critical to determining material production and its uses in society. And even in priority areas, much of the detail of commanded activity had to be left in the hands of poorly informed, self-interested subordinates. Still, this aspiration led to unprecedented ináuence over economic behavior, and continuing e§orts to maintain and enhance that ináuence, e§orts that in large part deÖned the command economy. The Russian version was further ináuenced by deep cultural and historical forces (Pipes, 1974; Keenan, 1986; Hedlund, 1999, 2005) that made its aspirations, its driving ideas, socially and politically acceptable. Deep rooted collectivism, accepting the supremacy of the group over the individual, supported a paternalistic, indeed patrimonial, political system in which the polity and society are legitimately controlled by a ëleaderí and his close subordinates, and reward is based on service to the state, personiÖed in the leader.^2 These cultural characteristics were reinforced by the massive role of the state and its leadership (the Party), ideologically legitimated by its deep understanding of the direction and laws of history. This leadership presumed to be uniquely qualiÖed to direct and manage the developing economy in its urgent pursuit of modernization, of the rapid growth of industrial and military potential, and the creation of the material basis for future society. Both ideology and the urgency of the situation created an ìimperative of controlî that inevitable drove the logic of the organization and structures that deÖned the Soviet command economy. (^2) It has been argued that this was necessitated by the harsh environment and perpetual external threat, placing society on the edge of survival are requiring coordinated, redistributive, social action to ensure that survival. See Keenan (1986) and Hedlund (2005).
This imperative of control over the growing economy required the centralization of (at least) all important decisions, and hence required structures making central planning, ex ante coordination, and ex post management of economic activity both feasible and e§ective. This posed an increasingly overwhelming task as the economy developed, grew in size and complexity, in the face of limited information, communication and computation capabilities of the leadership. To manage the vast amounts of information required both for planning and for the provision of operational instructions/commands to implementing agents, a complete, elaborated hierarchy, in which both information and instructions might be both aggregated to the top and disaggregated to the bottom, was found necessary. Economic activity was determined in and controlled by nested hierarchical structures, each facing a relatively simple subproblem of planning and implementation, working with aggregates at all but the lowest level. This simpliÖcation of the economic planning and management problems allowed e§ective focus on priorities and the achievement of su¢ ciently important goals. In doing so, however, it rendered decisions crude, consistent only (at best!) with respect to planning aggregates, and systematically isolated decision makers at all but the highest levels from the consequences of their decisions, a source of fundamental irresponsibility in operational decision making.^3 Further, priorities were achieved at the expense of non-priority sectors and activities, which were still subject to mandatory targets and arbitrary interventions from above, but had to fend for themselves without taking resources from priority uses or disrupting more important (from the perspective of the highest authorities) activities. Hence resulting plans, necessarily developed in haste on the basis of delayed and partial information, were always incomplete, and su§ered numerous inconsistencies which, however, could not be allowed to disrupt the achievement of priorities. Another consequence of this imperative was the destruction of markets and market in- stitutions, the foundation of any economic autonomy, and their replacement with a set of (^3) This is most vividly illustrated in the discussions of plan allocations, their implementation, and incentives for plan performance in Nove (1986).
organizations remained outside the formal state sector, necessarily operating in a (partially) monetized environment, and hence had to be dealt with through ëquasi-marketsífor labor, consumersígoods, and some agricultural produce. Here money was necessarily more active than in the state managed sectors, opening opportunities for decentralized initiative and so posing a continual threat to e§ective state control.^8 Hence its availability and use had to be subject to as strict monitoring and control as possible, a primary task of the Soviet dual monetary system. Yet, despite extraordinary controls built into this system (Garvy, 1967), the inevitable errors in planning and surprises in implementation led to growing ëliquidityí outside of centralized controls, undermining ëplan disciplineí and the ability to e§ectively manage economic activity. And this increasingly fed the growth of a ìsecond economyî outside of, if largely parasitic on, the state ëplannedícommand economy.^9 This illegitimate, in terms of the logic of the command economy, ëmarket economyíacquired an outsized im- portance in the early transition as a foundation and a functioning model of ëthe marketíand ëmarket behaviorí, behavior which was, however, quite di§erent from that which is required for a well functioning market economic system. The Soviet command economy was a system well suited, and indeed built, for ëmass mobilizationí. It was a coherent, politically driven ìshortage economy,îdefying market logic in most of its economic interactions. It was inherently economically ine¢ cient, albeit e§ective at achieving priorities of the political leadership. The Soviet system initially showed its e§ectiveness by achieving large-scale, quantiÖable regime priorities, goals so important that cost could be no barrier. Thus the Soviet industrial structure, collectivization, urbanization, war time mobilization, and structural recovery from the devastation of war and occupation were achieved in record time. But these systemic characteristics also implied an unavoidable, deep economic ine¢ - ciency in all that was accomplished. Fine cost-beneÖt trade-o§s, indeed all but the crudest (^8) See Grossman (1963). Ericson (2006) develops the threat of ëactiveímoney to the proper functioning of the command economy. 9 See the discussion of Alexeev (2007).
aggregate trade-o§s, were beyond the capability of the system. Such trade-o§s require de- tailed and precise information of particular and changing circumstances, and of Öne valua- tions of all relevant materials and activities, and hence require decentralized authority and decision-making.^10 Further, they invariably, in some circumstances, indicate that some cen- tral objectives should not be pursued; cost-beneÖt analysis implies constraints on behavior ó explicitly rejected in the Soviet approach. Therefore, economic e¢ ciency and cost had to remain a distant secondary consideration, as the central authorities had neither the capabil- ity, nor truly the desire, to let e¢ ciency considerations disrupt central planning and control over economic development. As the Soviet economy grew, became more complex and less amenable to central oversight and control, the consequences of this inherent economic ine¢ ciency became more salient, undermining e§ectiveness in achieving priorities and reducing economic growth. To counter these tendencies and restore economic dynamism, the leadership turned to numerous reorga- nizations, reÖnements in planning, incentives and controls, and numerous partial liberaliza- tions, but stopped short of challenging the essential characteristics of the command system (Schroeder, 1979). Each of these reforms disrupted the logic of the system, and were hence rendered impotent, or dysfunctional, by the systemís response, leading to their revocation or replacement by further partial reforms.^11 Thus the deÖning characteristics of the system (Er- icson, 1991) determined a coherent, stable system, one that systematically rejected partial reforms. This only changed when the characteristics were comprehensively attacked in the chaotic transition beginning with Gorbachevís Perestroika. Yet they provided the foundation of the legacies, the initial conditions, bequeathed to the Russian transition economy. In the following sections I brieáy review the most salient of these many legacies, breaking the discussion into 3 sections. The Örst, group deals with the physical legacies embedded in the inherited structure of production, assortment, and quality of economic activity, its (^10) The logic behind this is clearly laid out in Grossman (1963). (^11) For a detailed discussion of how reforms inconsistent with these characteristics were undermined and reversed, see Kontorovich (1988) on the Kosygin reforms and his broader analysis in Kontorovich (2007).
and opportunities. Only political objectives, obvious physical constraints, and engineering considerations, supported by prices that were economically arbitrary, truly ináuenced its development. The resulting economic structure was supported, and to a large extent sys- tematically hidden, by Soviet pricing that failed to reáect economic (market) valuations.^12 It was able to reproduce itself and grow, as long as each component fulÖlled its aggregate output-delivery plans, and followed orders to the maximum extent possible, given its as- signed and acquired resources. It was, however, inconsistent with any coherent pattern of economic valuation or cost accounting.^13 Thus virtually every production operation, every investment activity and location de- cision, was economically ine¢ cient, and highly wasteful in its use of resources, materials, energy, labor and capital, despite meeting critical planned ìneeds.î The inherited overall structure of production was fundamentally non-viable in any decentralized environment, where incentives and trade-o§s are based on market valuations/prices. It implied, after any true price liberalization, serious problems of cost recovery in the operation of much of indus- try, and hence the need for massive cross-subsidization to keep it operating in a decentralized, non-command, mode.^14 This conundrum lies at the heart of the physical legacy bequeathed by the Soviet Union to its Russian successor. The ìSoviet growth model,î with extensive growth built on massive input and resource use, also created a resource trap. Growth of existing, well understood, activities absorbed all free resources, starving innovation and slowing future growth. Further, productivity inexorably declined from the lack of homeostatic mechanisms, of informational ëvaluation feedbackí, needed to stop funneling resources to low productivity uses. Thus the economy (^12) This problem of pricing and its implications is discussed in Ericson (1999). (^13) The argument is developed in Ericson (1990, 1991). (^14) Why should this be a problem? The dimensions of the chains of non-viable production made shutting them down both politically and socially impossible ó these production activities were the core of the Soviet ìsocial safety net,î and there was no substitute market-oriented safety net in place. Shutdowns would snowball in these economically irrational, yet physically necessary, ëtechnological chainsí if any piece were to close, depriving an unacceptably large part of the population of employment, and most other industry of needed inputs to keep operating, unless they were in a Önancial position to import, a luxury only a few, resource based Örms enjoyed.
was dominated by resource extraction and processing, heavy industry, machine building, and industrial construction ó the ëplanableíindustrialization-priority sectors, with a large underdeveloped agricultural sector, and the small sectors providing consumers goods and services operating as residuals in the economic system. Finally, the massive commitment of resources to military-oriented industry, infrastructure, and technologies placed a large and growing burden on capabilities of the system. This hypertrophic and economically ine¢ cient military-industrial sector was a major structural legacy provided of the Soviet system (RoseÖelde, 2005, and Chapter 22 in this volume). The command economy imparted a number of other signiÖcant structural distortions, im- peding the development and proper functioning of market institutions through their impact on real economic opportunities and costs. For example, to facilitate planning, and based on a misplaced belief in (engineering) economies of scale, production activity was concen- trated in massive facilities (production plants) with sole suppliers and users (ìtechnological chainsî), eliminating the redundancy and backup inherent in market competition.^15 To keep vertical control simple and clear, subordinate Örms (ìenterprisesî) were limited to single, massive (contiguous clusters of) plants producing a very limited assortment, eliminating the possibility of organizational, scope, or non-engineering scale economies in production. These massive facilities often became the core of a ëcityí, a population center built around the enterprise with only minimal supporting activities available to the population, with the enterprise responsible for the provision of most public services and infrastructure.^16 This ìsocialist constructionî left a structural legacy of an e¢ ciency-killing social burden on en- terprises, and of ìmono-citiesî requiring substantial, sustained external support to remain viable in a market environment.^17 Firms were also highly specialized by design into techno- logically based (near) monopolies in tight technological chains, albeit with massive, wasteful (^15) See Joskow, et. al. (1994) for a discussion in the context of competition policy in post-Soviet Russia. (^16) See Commander and Schankerman (1997) and the discussion and enterprise survey data in Haaparata, et. al (2003). 17 The viability of many of these cities, and the political and human repercussions of their possible failure, was cause for serious concern in the 2009 recession. See RT.com, ìPikalyovo touches on plight of Russiaís ëmonocitiesí,î 17 June 2009.
that was innocent of real transportation, location and other opportunity costs, and hence profoundly wasteful of social resources.^23 One lasting consequence has been the continuing existence of ëclosedí cities, ëacademic cities/villagesí, and ìmono-citiesî built around one or two large enterprises employing the lionís share of the workforce. Many of these, those not involved in basic metals or energy resources production, have proved non-viable in the post-Soviet market environment, and survive only on substantial subsidies, enforced by the state.^24 These legacies were aggravated by the command economyís fundamental lack of real trade, Önancial intermediation, banking, and any market business services, or indeed consumer services beyond the most elemental, as discussed in the next section. This structural legacy of Soviet ëdevelopmentíis nowhere more apparent than in Siberia. Here the vastness of territory and resource potential, and the absence of constraints from prior development, opened the way to virtually unbounded economic waste, the repetition and magniÖcation of mistaken, wasteful and unnecessary economic activity without obvious or immediate negative impact on the rest of the economy. Thus Siberian development, inno- cent of true economic cost considerations, generated an extreme case of nonviability of much non-extractive industry, in particular of manufacturing. Siberian and Far Eastern industries further su§ered from construction, maintenance, and operational ìcosts of cold,î including massive breakdowns and weather related disruptions, phenomenal costs of transportation and communication over vast and inhospitable distances, and the maintenance cost of their infrastructure.^25 They also su§ered from the general lack of complementary economic ac- tivities that make production work smoothly and allow a reasonably comfortable life to the labor force and its families. Hence development was based on only an ëadministrative-military/securityí rationale (^23) Examples include unsustainable regional/local autarky in food production, ìinteriorî and ìnorthernî locations in extremely hostile and costly environmental conditions, and manufacturing concentrations that ignored costs of procuring inputs and disposing of outputs. Some of these are elaborated in Gaddy (2001) and in Hill and Gaddy (2003). 24 Mono-city problems were highlighted by Putinís direct intervention in PikalÎvo in 2009. See, for example, Gazeta.ru, ìRossiiskie monogoroda ne khotiat povtoriatí sudíby Pikalevo,î 20 July 2010, or Kostomarova and Blake (2009).. 25 See the study of Soviet Siberian development by Hill and Gaddy (2003).
for the extraction and exploitation of resources, without consideration of human, material, Önancial, ecological, etc., costs. As long as the command economy persisted, these costs could be ignored and borne in ignorance. With its collapse, they became an increasingly obvious, and growing burden on the transition, absorbing resources and ináicting obvious pain when not adequately dealt with. The development of, and resulting situation in, Siberia is further discussed in Chapter 36 of this volume.^26 Thus a fundamental legacy of the Soviet system was that the economic resources, the capabilities and capacities left to transitional Russia, were tied up in immensely wasteful activities in fundamentally irrational locations and conÖgurations, without the structures and institutions necessary to facilitate their reallocation toward new, value-producing economic activity. Russia inherited a micro and sub-micro structure of production ó of capital, labor, capacities [capabilities], and interactions ó largely unable to cover true costs of production, with existing economic resources overcommitment to this wasteful structure, interconnected through a fragile, thin, (ësingularí) ináexible network of (previously planned) interactions supporting ëreproductioní of this same structure. And (private) activities outside of this structure were largely marginal, parasitic extensions, feeding o§ of the irrationalities of the industrial structure and its built-in, ëplannedívaluations.
4 Institutional Legacies
The command economy similarly framed the institutional environment for transitional Rus- sia. Many of the formal institutions of the Soviet Union changed rapidly with its collapse, yet the informal institutions, the way organizations and agents operate and interact, remained largely intact, resisting the changes, and molding the operation of new formal institutions into some conformity with inherited understandings, relations, and procedures. Where new organizational forms and rules were introduced, their content and the nature of their func- tioning were initially deÖned more by attitudes and understandings inherited from the Soviet (^26) J. Thornton, ìRegional Challenges: The Case of Siberia and the Far East,î Chapter 36 below.
for existing organizations to rely on inherited networks, and to maintain inherited ties and activities, rather than engaging in entrepreneurial restructuring and market exploration.^29 Further, the Soviet economy left to Russia only a minuscule private sector, one that was largely informal. In the fall of 1991 only about 2.5% of Russiaís industrial output was non-state produced, with cooperatives comprising only about 3% of non-agricultural em- ployment.^30 In 1992 ëlegalísmall business employed just more than 10% of non-agricultural labor, and over 25% of such business was in Moscow or St. Petersburg.^31 And much of this business was under control of ëracketsí, both criminal and Party, or of entrepreneurs in the second and shadow economies.^32 As the feasibility of central planning had required sole suppliers and users, unique transportation links and wholesaling organs, and minimal inter- mediate inventory holdings, a key economic legacy was the lack of a dense and redundant set of networks for economic interaction. Furthermore, the fundamental irrelevance of money for large-scale economic, and in particular production, activity meant that there was no proper intermediating banking or Önancial system. Thus the demise of the central planning and allocation system, the disappearance of the hierarchical controlling structures of the Party and Gossnab, and the breakup of the monobank left economic agents without the trading and Önancing options essential to the functioning of a modern market system. The natural consequence was a highly personalized and politicized intermediation, aimed in large part at overcoming political barriers and extracting ërentsí for insiders. Hence economic agents were subject to opportunistic exploitation by individuals and groups with personal connections, and their intermediating networks derived largely from their prior Soviet positions, or from the Soviet criminal underground. Consequently, most markets were initially highly segmented, and quite dependent on the goodwill and facilitation of in the Jamestown Foundation Monitor, for example in its 10 August 2001 article, ìFrom Moscow to Vladivostok, Contract Killings are Common.î 29 There were of course always exceptions, particularly in the non-priority sectors where a certain ëentre- preneurshipíwas needed for success in the command ecoomy. For transition examples, see Krueger (2004). 30 31 Ivanov and Kolbasova (1992). OECD (1997). In Poland, in contrast, the private sector accounted for 29% of industrial and 40% of all employment, and 16% of industrial and 30% of overall output. See Ernst, Alexeev, and Marer (1996). 32 See Handleman (1995), Dolgopyatovo (1998), and Volkov (1999).
local and regional political authorities. And those markets that were truly national were subject to similar political ináuence at the Federal level. The conditional, politicized nature of ëproperty rightsíbequeathed by the Soviet system was also reáected in the absence of any system of corporate governance protecting the inter- ests of minority outside owners. Those with control, the new ìbossesîëowningíand running the enterprise, were initially unconstrained by law, regulation, or market tradition from per- sonal exploitation or expropriation of assets and cash áow; they became new, all-powerful ëSovietíDirectors, now unbound from ministerial superiors and Party discipline.^33 This un- dercut the foundations of new investment and any basis for broader legitimacy of business activity, making these ìownersî and their businesses more politically pliable and credibly subject to ëjustíexpropriation by political powers. These legacies were reinforced by the lack of disinterested (third party) adjudication of disputes.^34 Just as Soviet First Secretaries, administrative and Party functionaries could dictate the terms of resolution of conáict, the interpretation and implementation of plans, so political agents throughout the transition period worked to ináuence regulators and courts, rendering the outcome of property and contract disputes as much a function of political relations and ináuence as of the content of the dispute.^35 This was to a large extent just a continuation of Soviet ìtelephone justice.î Thus economic agents were forced to rely on themselves, on political or criminal ëprotectioní, to enforce agreements, contracts, and/or payment in their economic interactions. And activities most requiring a stable legal foun- dation, such as those involving Önancial assets, real estate, and the creation or liquidation of a business, initially had to operate in a vacuum, driven only by the daring of their en- trepreneurs and their willingness to resort to extra-ordinary, extra-legal means. A natural consequence was the implicit, and often overt, ëcriminalizationí of much private economic (^33) The continuation of these behaviors late into the transition period is nicely catalogued by Black, Kraak- man, and Tarasova (2000). 34 See Ryterman and Weber (1996), Hendley, et. al. (1997), and Sachs and Pistor (1997) for articles discussing the legal legacies and situation in the early transition. 35 The 2004-6 destruction of the leading private oil company, Yukos, is a late example of this.
Institutional structures protecting and stabilizing the ináuence of these foundational institutions on economic activity: legal institutions protecting property, contract, and the rights of owners againstextortion, expropriation, fraud, and violence or the threat of violence; institutions supporting the provision of public goods and the infrastructure for e§ective market intermediation; e§ective monetaryand Öscal policies and instruments (tax, spending mechanisms) maintaining a stable macroeconomic environment in which decentralized economic activity can áourish. Guiding and regulatory mechanisms, with disinterested enforcement structures, to support the regular, smooth functioning of the market system: corporate and commercial law; mechanisms for enterprisecreation (registration) and dissolution (including bankruptcy); accounting and corporate governance rules; market supporting civil and commercial codes; security and investment fund laws; anti-monopolyregulations; tax, trade and banking laws; land laws and registration mechanisms; housing and con- dominium laws; labor and employment laws; government procurement law; currency and foreign investment (capital account controls) law; etc. Institutions providing appropriate protection for society, consumers, workers, and the ëlosersíin market competition, allowing the system áevolving equilibrium. exibility to experiment, and make mistakes, as it moves toward an
Introducing the institutions of the Örst three groups required struggling against prior Soviet structures. However the collapse of Soviet institutions left a true vacuum in the place of the fourth. Mechanisms of state social support rapidly withered with government revenues and the devolution of responsibility, without funding, to regional and municipal authorities. Fur- thermore, state enterprises, responsible for much of the social support system, rapidly shed these responsibilities as their markets shrank and they ëprivatizedí, refocused on survival, and on the extraction of proÖt/rents for the ëownersí. Thus a social safety net, providing unemployment beneÖts and other temporary social support, social insurance and pension systems, and environmental and safety regulations urgently needed to be put into place. However, as transition began, most market arrangements, incentives, and behaviors re- mained formally criminalized, or legally ignored, and even when politically encouraged, were often still subject to arbitrary censure, penalty, and reversal by political organs. This contra- dictory institutional environment lasted almost a decade while awaiting the formal change in institutions, the promulgation of new laws and normative acts, and the creation of structures supporting, enforcing, and hopefully encouraging the new economic system.^37 This lack of an appropriate institutional environment, reáected in all the formal and informal institutions (^37) It was only under the Gref reforms (2001-3) that a legal foundation was fully put under the Yeltsin decrees and civil code supporting market institutions. Even in 2010 the criminal code remains market-unfriendly, casting suspicion on any unauthorized private activity (Pomerantz, 2011).
and behaviors inherited from the Soviet Union, comprised a primary obstacle to its rapid successful transformation to a modern market economy. It must be emphasized that the situation was not one of just ine¢ cient, poorly functioning or underdeveloped market institutions ó the typical situation faced by policy reformers. The Soviet system bequeathed a total lack of basic ìmarket softwareî (property rights, market experience, non-criminal initiative, civil legal protections and adjudication, etc.) going far beyond dysfunctional or missing physical institutions, such as a court system, Önancial and equity markets, tax and social support systems, factor markets, etc., that would be needed for ëjump startingía market system. Furthermore, the ìinstitutional space,î the legal and organizational ground on which new institutions must be built, was occupied by structures embodying dysfunctional ìsocial capitalî ó networks and relations built on patterns of interaction and cultural understandings that stood in the place, and blocked the generation and growth, of institutions supportive of a market economic system.^38
4.2 Political
Much of this economic institutional environment is derivative of the nature of political gov- ernance and power, a direct legacy of the Soviet system, with roots in a deeper ëMuscoviteí legacy.^39 In that system, vast discretionary authority, unchecked by law or institutional constraint other than the power of higher Party organs, resided in political and administra- tive organs, whose whim (interpretation of plans, and of their superiorsíintentions) became ëlawífor all subordinates.^40 This personalization of economic authority, political power and governance largely survived the demise of the Soviet Union. Indeed, it was enhanced by the elimination of the Communist Party and its discipline, leading to an extraordinary in- tertwining of economic and political authority and decisions. It continued the system of ìbureaucratic perquisitesîfor service to the state, going back to the idea of ëservice nobilityí (^38) See Chapter 8, ìInstitutional Performance,î for a discussion of the ëmisuseíof institutions in the post- Soviet Russia. 39 40 Keenan (1986) and Hedlund (1999). See Ericson (1991, 2007) on the economic logic of this in a command economy.
