ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES

CAPITALISM IN BUSINESS,
POLITICS AND SOCIETY

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ECONOMIC ISSUES, PROBLEMS AND PERSPECTIVES

CAPITALISM IN BUSINESS,
POLITICS AND SOCIETY

EUGENE N. SHELTON
EDITOR

Nova Science Publishers, Inc.

New York
Copyright © 2011 by Nova Science Publishers, Inc.

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 CONTENTS

Preface vii
Chapter 1 Experimental Capitalism in the Former USSR: Bitter Lessons 1
Soltan Dzarasov
Chapter 2 Reflections on the Structural Function of Industrial Design
in Capitalism through Development Experiences of NICs 59
Ju-Joan Wong
Chapter 3 Who was the White Collar Criminal? White Collar Criminals
in Sweden, 1865-1912 77
Tage Alalehto and Daniel Larsson
Chapter 4 Work and War in the Evolution of Capitalism 93
Wilson de Campos Vieira
Chapter 5 Political Action Committees and the Expropriation of the Common 105
Charles H. Cho and Crawford Spence
Chapter 6 Dysmorphic Capitalism and the Aberrant Development
of Creative Intelligence 119
Don Ambrose
Chapter 7 Social Status, the Spirit of Capitalism, and the Term Structure
of Interest Rates in Stochastic Production Economies 131
Liutang Gong, Yulei Luo and Heng-fu Zou
Chapter 8 Surplus Allocation and Development under Global Capitalism 153
Cem Somel
Index 177
 PREFACE

The iconic economist-philosopher Adam Smith lauded capitalism as a system for

distributing opportunity and prosperity widely, and for freeing populations from the
oppression they suffered under the European aristocracy of his time. This book presents
current research in the study of capitalism and its relation to business, politics and society.
Topics discussed herein include experimental capitalism in the former USSR; industrial
design in capitalism through development experiences of newly industrializing countries;
dysmorphic capitalism and the aberrant development of creative intelligence; capital
accumulation and equilibrium interest rates in stochastic production economies with the
concern of social status; and surplus allocation and development under global capitalism.
Chapter 1 - In all the post-Soviet states, the transition in the early 1990s from a planned
to a market economy proceeded with enormous pomp. It was accompanied by noisy
propaganda depicting the huge promise of the market and private property. Meanwhile, the
planned economy and socially-owned property were given very low marks, as the main cause
of our misfortunes and suffering. While requiring great expenditures of labour, materials and
organisational effort, we were told, planning yielded meagre results, while the market
possessed such an ideal mechanism of self-regulation that at minimal expense it permitted
spectacular outcomes. The situation justified the use of shock therapy (free price formation
and the rapid privatisation of property) to introduce free market entrepreneurship, since we
would soon find ourselves in paradise, achieving the heights of prosperity of the developed
countries.
Many of us knew, however, that the source of this developed status lay not so much in
private property as in a different culture and civilisation, and that the problem could not be
solved simply by substituting one form of property for another. The reason for the different
levels of development of the countries of North and South America lay not in the existence of
the market and private property in one case and not the other, but in the position which the
US and Canada occupied within the world economic system compared to the countries of
Latin America. The reason why many of us at that time reacted with caution to the urgings of
the IMF and the World Bank that we adopt a neoclassical model of the market was not
because we were retrograde Marxists, but quite different. For decades we had studied and
taught the history and theory of capitalism not only according to Marx and Lenin, but also
according to Smith, Ricardo, Mill, the Austrian school, Weber, Keynes, Samuelson and many
other Western economists. Their works had been translated into Russian and were well
known to Soviet scholars. From them it was clear that the market and capitalism were the
viii Eugene N. Shelton

very complex outcome of prolonged historical development. To retrace this path in a few
days, as we were urged at that time to do, was impossible. It required no great wisdom to
grasp that in a country without traditions of private entrepreneurship, there was no way that
skilled, efficient property-owners would appear in the blink of an eyelid and quickly raise our
economy to the level of more developed countries.
This was especially evident since from the heights of the Marxist vision of capitalism it
was clear that the system was sliding into something like a rerun of the Great Depression. It
was no secret that speculation in securities had taken on vast proportions. True, no-one at that
time knew precisely when or how this would end. But such expert observers of capitalism as
John Kenneth Galbraith (1961) and Hyman Minsky (1986) spoke of ―financial instability
hypotheses‖ very remote from the alluring pictures we were being presented with. Moreover,
the Reaganomics and Thatcherism which were then in vogue, and which promised to remove
all bounds to the expansion of capital and of its manoeuvrings, seemed to us to contain the
seeds of future problems in each country and internationally. In the circumstances, any
unprejudiced individual should have been wary of the journey we were about to take into
uncharted territory.
Sober reflection on the situation, however, was not in fashion at the time. Speculative
profits were seen as a mark of healthy success, and capitalism was presented to us as the way
to escape from the hell of shortages into the heaven of abundance. To this end, a system of
total brainwashing was applied. With the help of propaganda on a massive scale, it was now
possible to convince people that black was white, and the reverse. This was done, and large
numbers of people came to believe that once we had surrendered our right to property and our
accumulated savings to individuals who had appeared as if from nowhere, we would start to
live better.
Twenty years have passed since those days, and our grasp of reality has improved no end.
The lessons we have learned have been bitter, but instructive, and deserve to be paid wide
attention. It is on the basis of these experiences that the present arguments are set forward.
Never before in history has there been anything along the lines of what has happened to us. In
the first place, capitalism has never before been established on the basis of preconceived
plans. In other societies, it arose through evolution or revolution, but always in natural
fashion. In our case, it was constructed in line with the projections of international
organisations themselves created in accordance with the postulates of neoclassical orthodoxy
(the Washington consensus). Secondly, and unlike the case in the countries of classical
capitalism, we now possess not only a twenty-year experience of the market and capitalism,
but also the experience over many decades of a planned economy operating on socialist
principles.
Due account must also be taken of the fact that in most post-Soviet states the regimes that
came to power were authoritarian, and remote from democracy. The ―orange revolutions‖ in
Ukraine, Georgia and Kirghizia were the result of popular dissatisfaction with the market
reforms. We have not received the prosperity and democracy we sought. Instead, we have
received what we did not seek – intensified material inequality, and increased poverty, crime
and corruption. This is far from what the people of the post-Soviet states were counting on
when they set out on the road of developing the market and democracy. People see that the
enrichment of some has occurred on the basis of the impoverishment of others, and this
arouses discontent.
 Preface ix

In these developments there is a great deal that needs to be examined and reconsidered,
especially in light of the impressive successes of China, which rejected the Washington
Consensus and found a model of development that corresponded to its needs. The Chinese
successes, and the failure of our market-capitalist experiment, testify to the need for us to rid
ourselves of numerous stereotypes that were imposed on us in the past and beneath which we
still labour.
This is easy enough to say, but much harder to achieve in practice. In Soviet times we
were subject to a range of Marxist dogmas which prevented us from realistically assessing the
situation in our country and in the world. Now, however, we find our Western colleagues
captive to dogmas of their own. They too have preconceived notions of what socialism and
the planned economy represented.
Without question, Soviet socialism suffered from major vices that brought about its
downfall. At the time, I wrote a good deal on these topics. Now, however, the pressing task is
to analyse the experience of twenty years of the market capitalist experiment in the post-
Soviet states, and it is this experience that is the topic of the present article. I have tried to
present this experience in readable fashion, and as objectively as possible. Consequently, a
fundamental role is given to factual data including tables and figures, which are more
eloquent than words. They are submitted for judgment by the reader along with the subjective
views of the author.
In line with the aim stated above, the second section contains a brief account of the
course of the market reforms and of the context that surrounded them, while the second and
third sections include tables and other data pertaining to the twenty-year experiment. The fifth
section examines the fate of democracy, or more precisely, how the requirements for seizing
property prevailed over the interests of democratic rule. The final two sections are devoted to
a critique of neoclassical theory, and to the need for a post-Keynesian alternative as best
corresponding to the interests of the post-Soviet countries.
Chapter 2 - Industrial design is the offspring brought about by the marriage of art and the
industry; this profession not only brings huge profits for corporations, but also is the
intermediary of modernization experiences, promoting living standards of the vast majority of
the population. However, the realization of this historical process in Taiwan was developed
by foreign capital and local state through their dynamic intertwining under the post-war new
international division of labor.
After the Second World War, various countries commonly applied Keynesianism, using
high wages and high consumption to promote post-war economic recovery, counter inflation,
and batter price hikes. As a result, wage differences among individual countries gradually
became the factor that influences the international competitiveness of products. Labor-
intensive industries that had become profitless in developed countries largely relocated to
developing countries. Under the cold war structure between eastern and western camps, based
on the strategic thinking of international geopolitics, Taiwan was incorporated into the system
of global division of labor since the 1960s, accumulating huge amounts of foreign exchange
through export-oriented economic policies, creating the world-renowned economic miracle.
In the stage of economic growth, Taiwan was actually the offshore assembly plant for
American and Japanese multinational corporations, the so-called ―international processing
base‖. Industrial design was tamed and used by the ―developmental state‖, entrusted with the
great responsibility of promoting exports, creating foreign exchange, and eliminating the
stigma of counterfeiting that stuck to MIT (Made in Taiwan) products in the international
x Eugene N. Shelton

market. Above all, Taiwan withdrew from the United Nations in 1971 and cut diplomatic ties
with several countries, gradually disappearing from the international political stage, and MIT
products instead created Taiwan‘s political identity in the economic realm.
In the mid-1980s, the ―Plaza Accord‖ signed by international economic powers brought
huge impacts to international trade, the exchange rate of the Taiwan Dollar gradually
appreciated following the appreciation of the Japanese Yen and the Deutsch Mark. After the
―Washington consensus‖ was addressed in 1989, advanced capitalist countries further raised
the slogan of free trade, forcing newly industrializing countries (NICs) to adopt measures, e.g.
lowering tariff and import liberalization to balance their trade deficits. Nation states retreated
and protectionist policies were abandoned; as a result unscrupulous global capital cooperated
hand-in-hand around the globe. And while local industries were battling with transnational
corporations, industrial design moved deeply into the war of market competition and created
competitive advantages in the close combat between local and imported products, saving
production lines that were almost brought to a halt in local businesses, resolving the crisis of
industrial development. The expressing of the structural function of industrial design not only
mediates the gap between production and market in capitalism, but also reflects the historical
process of the dynamic tugging between state and capital in developing countries.
Chapter 3 - Who is the white collar criminal? During the last few years this question has
been an increasingly popular topic in the field of white collar crime. But very few have asked
who the white collar criminal was in the past. Our aim is to investigate the demographic
character of the white collar criminal during the first industrial revolution and the
implementation of capitalism in Sweden (1865-1912). Data comes from Statistics Sweden‘s
historical statistics record regarding a section of the law that concerns offenses in bankruptcy.
The hypothesis put forward is that the impact of industrialism and capitalism changes the
socio-demographic profile regarding offenders of bankruptcy. The results, however, indicate
that the profile did not change, which implies that the impact of capitalism and industrialism
during the first period in Sweden did not have any impact on the characteristics of the
offenders. This is in line with recent research showing that there is no correlation between the
number of bankruptcy offenses and industrialization during this period. Furthermore, the
results show that there are great similarities in the socio-demographic profile during this
period with the same profile today. This result clearly contradicts the common understanding
among many researchers in the field that modern white collar crime has its roots in capitalism
and industrialization. Rather, the result shows that the socio-demographic profile is stable and
related to other factors. In the conclusion, we discuss the results from the point of view of
general understandings of theories such as Wheeler‘s ―fear of falling‖, Gottfredson and
Hirschi‘s self-control theory, and Hirschi‘s theory of social bonds.
Chapter 4 - The ―spirit of Capitalism‖, as characterized by Max Weber, was initially
associated, in Protestantism, with the belief in life after death. Even after the weakening, as of
the second half of the 19th century, of such belief, the ―spirit of Capitalism‖ has been able to
function as a defense against the reality of death, because it fulfills a displacement from an
existential temporality to another temporality ruled by incessant work, parsimony and
accumulation of wealth. This defense is not suitable for the soldier, however, it is he who
comes closest to the reality of death. Since states need soldiers, they use other forms of denial
of death, mainly those states with war programs. In World War I there was a revitalization of
the simple belief in life after death. When that belief was shaken by a close encounter with
death, the soldier developed mainly symptoms of conversion disorder (formerly hysteria). In
 Preface xi

World War II the Nazis applied a technique based on the ―obsessive-compulsive disorder‖ by
displacing the fear of death, in the soldier and in the population, to the evil of contagion. The
contagion factor was attributed mainly to the Jewish people. It would suffice to isolate or
eliminate them in a ritual purification of the race (Aryan). Nowadays, especially in the USA,
one tries to conceal the drama of death by placing it as a secondary subproduct of the
excitement of the fight of good against evil. Before they are informed, when and if they are,
of the reality of natural or accidental death, children have already learned to dilute death in
the excitement of the fight. The excitement of the fight for justice, vengeance, freeing
someone, dissipates the drama of death. The cinema has been the main diffusion source of
this formula. Videogames are the latest generation. Normally these fictions decrease with age.
Soldiers, however, can sustain them to defend themselves from the reality of war, applying
them to this reality by performing what Roger Caillois called ―corruption of games‖, that is,
making the game transpose its own space and invade reality. However, the terrible reality of
death can destroy the game and lead soldiers to develop what is nowadays the most common
psychopathology, as of the Vietnam War, the so called ―post-traumatic stress disorder‖.
Chapter 5 - This chapter analyzes the dynamics of U.S. political action committees
(PACs) in the oil and gas industry. The authors find that PACs were used strategically in
order to try and influence legislators to open up the Arctic National Wildlife Refuge (ANWR)
to hydrocarbon exploration. Drawing from a revised political economy theory, the authors
contend that PACs are thus employed in order to facilitate an ‗expropriation of the common‘.
Further, in examining the financing of PACs the authors find that labor constitutes the major
donor group. The authors thus conclude that PACs represent means through which to capture
the regulatory process as well as to simultaneously exert subtle forms of employee control.
Moreover, the chapter makes a theoretical contribution by arguing that such forms of
employee control have become more prevalent due to the advent of immaterial labor and the
attendant crisis of accounting that immaterial labor induces.
Chapter 6 - The iconic economist-philosopher Adam Smith lauded capitalism as a system
for distributing opportunity and prosperity widely, and for freeing populations from the
oppression they suffered under the European aristocracy of his time. In spite of its early
promise and later achievements, capitalism has been transforming in undesirable ways in
recent decades. Prominent scholars in various disciplines have lamented the ways in which
overextensions of neoclassical economic theory and neoliberal ideology have been
transmuting capitalism into a utopian ideology in which egocentric economic freedom trumps
all other considerations. The consequence is a system in which the short-term, trivial wants of
a few consistently override the desperate needs of the many as well as the long-term
sustainability of the environment. These trends have implications for the development of
creative intelligence. If the new, mutated form of capitalism reaches its logical endpoint, the
aspiration growth and talent development of a privileged few gifted young people will be
warped, leaving them acutely narcissistic, hyper-materialistic, and ethically vacuous. In
contrast, the aspiration growth and talent development of gifted but deprived young people
will be stunted or crushed.
Chapter 7 - This paper studies capital accumulation and equilibrium interest rates in
stochastic production economies with the concern of social status. Given a specific utility
function and production function, explicit solutions for capital accumulation and equilibrium
interest rates have been derived. With the aid of steady-state distributions for capital stock,
the effects of fiscal policies, social-status concern, and stochastic shocks on capital
xii Eugene N. Shelton

accumulation and equilibrium interest rates have been investigated. A significant finding of
this paper is the demonstration of multiple stationary distributions for capital stocks and
interest rates with the concern of social status.
Chapter 8 - Mainstream thinking in economics currently tends to describe the problem of
economic development as one of differential economic growth across space; a differential
which is ascribed to seizing or missing opportunities to solicit foreign investment, to attract
subcontracting orders, to upgrade activities in value chains and to grow by exporting. This
approach to development overlooks the mounting case-by-case evidence on the lope-sided
distribution along value chains. The evidence raises questions concerning the international
distribution of the ‗gains from trade‘ and suggests that, if international growth differentials
are driven by international distribution mechanisms rather than the other way round, then the
development issue demands greater attention to global distribution mechanisms.
Economic development involves fixed capital accumulation. The capacity to undertake
fixed investment in underdeveloped countries that import capital goods depends on these
countries‘ terms of trade, as much as on their efforts to save and export. Institutionalist
economists, aware of the importance of the terms of trade for accumulation, have been careful
to qualify their own recommendations for strategic trade and industrial policies in that such
policies might be self-defeating at the global level, since implementation of export-based
upgrading policies among many underdeveloped countries may cause a general deterioration
of the terms of trade .
Hence a framework apposite for studying the global distribution of investible resources is
necessary to understand the sustenance of differences in per capita incomes between
countries. Such a framework should preferably take the global social product as given, and
focus on attempts of firms and governments to extract the maximum surplus out of the social
product, on the struggle between social groups and nations to appropriate the generated
surplus, and on how the surplus is used.
This essay is an endeavour to understand and assess the developmental consequences of
global economic integration by focussing on the generation, transfer and utilization of the
global surplus. It tries to address the following questions: (1) How does globalization affect
surplus generation? (2) Where does the global surplus accumulate? (3) How is the global
surplus absorbed? (4) What prospects does this pattern of absorption hold for the capital
accumulation needs of poor countries? The essay continues as follows: the second section
presents a brief description of the surplus concept, and questions whether the tendency for the
share of the surplus in GDP to rise has abated under globalizing capitalism. The third section
discusses at an abstract level how the surplus is generated and allocated in internationally
organized production. In the fourth section empirical clues on the last question are
investigated, which seem to indicate an increasing flow of surplus from periphery to core. The
fifth section takes up the problem of surplus absorption and juxtaposes the rising consumption
of the surplus in the core with the fixed capital formation in the periphery. Section six
concludes.
In: Capitalism in Business, Politics and Society ISBN 978-1-61122-547-1
Editor: Eugene N. Shelton © 2011 Nova Science Publishers, Inc.

Chapter 1

EXPERIMENTAL CAPITALISM IN THE FORMER

USSR: BITTER LESSONS

Soltan Dzarasov
Russian Academy of Sciences, Russia

1. INTRODUCTION
In all the post-Soviet states, the transition in the early 1990s from a planned to a market
economy proceeded with enormous pomp. It was accompanied by noisy propaganda
depicting the huge promise of the market and private property. Meanwhile, the planned
economy and socially-owned property were given very low marks, as the main cause of our
misfortunes and suffering. While requiring great expenditures of labour, materials and
organisational effort, we were told, planning yielded meagre results, while the market
possessed such an ideal mechanism of self-regulation that at minimal expense it permitted
spectacular outcomes. The situation justified the use of shock therapy (free price formation
and the rapid privatisation of property) to introduce free market entrepreneurship, since we
would soon find ourselves in paradise, achieving the heights of prosperity of the developed
countries.
Many of us knew, however, that the source of this developed status lay not so much in
private property as in a different culture and civilisation, and that the problem could not be
solved simply by substituting one form of property for another. The reason for the different
levels of development of the countries of North and South America lay not in the existence of
the market and private property in one case and not the other, but in the position which the
US and Canada occupied within the world economic system compared to the countries of
Latin America. The reason why many of us at that time reacted with caution to the urgings of
the IMF and the World Bank that we adopt a neoclassical model of the market was not
because we were retrograde Marxists, but quite different. For decades we had studied and
taught the history and theory of capitalism not only according to Marx and Lenin, but also
according to Smith, Ricardo, Mill, the Austrian school, Weber, Keynes, Samuelson and many
other Western economists. Their works had been translated into Russian and were well
2 Soltan Dzarasov

known to Soviet scholars. From them it was clear that the market and capitalism were the
very complex outcome of prolonged historical development. To retrace this path in a few
days, as we were urged at that time to do, was impossible. It required no great wisdom to
grasp that in a country without traditions of private entrepreneurship, there was no way that
skilled, efficient property-owners would appear in the blink of an eyelid and quickly raise our
economy to the level of more developed countries.
This was especially evident since from the heights of the Marxist vision of capitalism it
was clear that the system was sliding into something like a rerun of the Great Depression. It
was no secret that speculation in securities had taken on vast proportions. True, no-one at that
time knew precisely when or how this would end. But such expert observers of capitalism as
John Kenneth Galbraith (1961) and Hyman Minsky (1986) spoke of ―financial instability
hypotheses‖ very remote from the alluring pictures we were being presented with. Moreover,
the Reaganomics and Thatcherism which were then in vogue, and which promised to remove
all bounds to the expansion of capital and of its manoeuvrings, seemed to us to contain the
seeds of future problems in each country and internationally. In the circumstances, any
unprejudiced individual should have been wary of the journey we were about to take into
uncharted territory.
Sober reflection on the situation, however, was not in fashion at the time. Speculative
profits were seen as a mark of healthy success, and capitalism was presented to us as the way
to escape from the hell of shortages into the heaven of abundance. To this end, a system of
total brainwashing was applied. With the help of propaganda on a massive scale, it was now
possible to convince people that black was white, and the reverse. This was done, and large
numbers of people came to believe that once we had surrendered our right to property and our
accumulated savings to individuals who had appeared as if from nowhere, we would start to
live better.
Twenty years have passed since those days, and our grasp of reality has improved no end.
The lessons we have learned have been bitter, but instructive, and deserve to be paid wide
attention. It is on the basis of these experiences that the present arguments are set forward.
Never before in history has there been anything along the lines of what has happened to us. In
the first place, capitalism has never before been established on the basis of preconceived
plans. In other societies, it arose through evolution or revolution, but always in natural
fashion. In our case, it was constructed in line with the projections of international
organisations themselves created in accordance with the postulates of neoclassical orthodoxy
(the Washington consensus). Secondly, and unlike the case in the countries of classical
capitalism, we now possess not only a twenty-year experience of the market and capitalism,
but also the experience over many decades of a planned economy operating on socialist
principles.
Due account must also be taken of the fact that in most post-Soviet states the regimes that
came to power were authoritarian, and remote from democracy. The ―orange revolutions‖ in
Ukraine, Georgia and Kirghizia were the result of popular dissatisfaction with the market
reforms. We have not received the prosperity and democracy we sought. Instead, we have
received what we did not seek – intensified material inequality, and increased poverty, crime
and corruption. This is far from what the people of the post-Soviet states were counting on
when they set out on the road of developing the market and democracy. People see that the
enrichment of some has occurred on the basis of the impoverishment of others, and this
arouses discontent.
 Experimental Capitalism in the Former USSR 3

In these developments there is a great deal that needs to be examined and reconsidered,
especially in light of the impressive successes of China, which rejected the Washington
Consensus and found a model of development that corresponded to its needs. The Chinese
successes, and the failure of our market-capitalist experiment, testify to the need for us to rid
ourselves of numerous stereotypes that were imposed on us in the past and beneath which we
still labour.
This is easy enough to say, but much harder to achieve in practice. In Soviet times we
were subject to a range of Marxist dogmas which prevented us from realistically assessing the
situation in our country and in the world. Now, however, we find our Western colleagues
captive to dogmas of their own. They too have preconceived notions of what socialism and
the planned economy represented.
Without question, Soviet socialism suffered from major vices that brought about its
downfall. At the time, I wrote a good deal on these topics. Now, however, the pressing task is
to analyse the experience of twenty years of the market capitalist experiment in the post-
Soviet states, and it is this experience that is the topic of the present article. I have tried to
present this experience in readable fashion, and as objectively as possible. Consequently, a
fundamental role is given to factual data including tables and figures, which are more
eloquent than words. They are submitted for judgment by the reader along with the subjective
views of the author.
In line with the aim stated above, the second section contains a brief account of the
course of the market reforms and of the context that surrounded them, while the second and
third sections include tables and other data pertaining to the twenty-year experiment. The fifth
section examines the fate of democracy, or more precisely, how the requirements for seizing
property prevailed over the interests of democratic rule. The final two sections are devoted to
a critique of neoclassical theory, and to the need for a post-Keynesian alternative as best
corresponding to the interests of the post-Soviet countries.

2. THE RUSSIAN REFORMS: PROPERTY DISTRIBUTION

AND ECONOMIC COLLAPSE

In earlier times in the Soviet Union, the number of people who even considered the idea
of rejecting collective property and of replacing it with private ownership was minuscule.
Democracy was different; we dreamt of it constantly. Within the ruling party small opposition
groups demanding democracy appeared at one point or another, but they had no success.
During the Brezhnev years the dissident movement, calling for democratisation of the
country, arose outside the Communist Party. None of the dissidents, however, demanded the
restoration of capitalism or rejected collective property ownership, and still less did they call
for property to be privatised and handed over to mysterious unknown figures. The demand
was for observance of the Soviet Constitution, in which rights and freedoms were spelt out,
but whose provisions were not put into effect. Andrey Sakharov spoke of a convergence of
the two systems, by which he understood the combining of Western democracy with socialist
planning. No-one at that time imagined that through the decrees and verbal commands of one
person sitting in the Kremlin the gigantic assets created through the collective labour of a
series of earlier generations would be transferred to individuals as private property. Even to
4 Soltan Dzarasov

conceive of such savagery was impossible, but this was what was in store for us. As for
democracy, Gorbachev‘s perestroika promised a decisive step in this direction, and at first
this was supported by the majority of the population. Perestroika was conducted under the
slogan, ―More socialism, more democracy,‖ and there was no suggestion that socialism might
be rejected.
Unfortunately, the reforms in the post-Soviet states were carried out in diametrically
opposite fashion. All the efforts of the reformers were switched over to seizing public
property, and the affirmations of democracy were reduced to near-meaningless formalities.
Only in the Gorbachev period did we see real elections with a choice of alternatives; since
then, elections have been so much a formality that the outcome is known in advance. Real
power now lies in the hands of a party that represents the interests of oligarchic capital, and
which does not shrink from calling itself the ―party of power‖, since it is not about to
relinquish power to any of the parties that exist to provide an imitation of democracy. Such
was our old Byzantine tradition: whoever attained power fought with tooth and claw to hang
onto it, with no intention of yielding it to anyone.
Unfortunately, that tradition continues to this day. In place of democracy we received
market reforms whose purpose lay in the distribution of property. The market, as noted
earlier, was depicted as a horn of plenty from which benefits would flow in a broad stream,
allowing us to live happily with minimal effort. Of crises, unemployment, high prices for
vitally important services, and other realities of capitalism there was not even a hint.
Meanwhile, generations of people had been born and raised in the Soviet period; unfamiliar
with real capitalism and its burdens, they nevertheless encountered a multitude of everyday
discomforts, and under the impact of these came to accept the rosy-coloured depictions of the
far-off capitalist world. The main arguments advanced for switching from a planned to a
market economy were based on the examples of developed capitalist countries which had
achieved higher levels of economic output and prosperity than the USSR and other socialist
countries. Meanwhile, there was no effort to raise the countervailing question: if the reason
for the difference was that some countries had the market and others a plan, why were the
impressive successes in some countries of the market-capitalist world not to be observed in
others?
By that time the mass media, and above all the television channels, had passed into the
hands of people who were intent on seizing public property, and who used tales of an easy
and agreeable life under capitalism to beat down any sobering talk of the difficulty of
carrying out the proposed changes. The heroes of the day became various shady figures, in
particular fawning journalists, who for generous rewards extolled the market and capitalism
as the model for an ideal society. In advertising spots, numerous stars of stage and screen set
out to convince television viewers that capitalism was a paradise in which life was relaxed
and pleasant. It was enough for people to hand over their savings to one of a multitude of
newly-arisen companies (later, they all turned out to be financial pyramid schemes), and their
money would increase to the point where they could easily acquire a house in Paris or a villa
in Hawaii. Amid the general mood of intoxication with the splendid future, no-one wanted to
hear the bitter truth that replacing one social and economic system with another was an
exceedingly difficult task, resulting in losses as well as gains, and which could not proceed
smoothly or to the uniform advantage of all. To express such thoughts when faced with
expectations of the radiant future was evidence of conservative blindness.
 Experimental Capitalism in the Former USSR 5

Contributing in no small measure to this mood was the collapse late in 1991 of the USSR,
which had earlier seemed indestructible. This was an unexpected blow which stunned citizens
and threw them off their accustomed balance. It was not only ordinary citizens who were
shocked and confused, but also the Communist Party that had ruled the party for seventy
years, and which had shown a complete inability to take effective measures to lead the
country out of crisis and carry through democratisation. Nor was any other political force
adequate to these tasks. Amid the general confusion, self-interested people were always on
the look-out for opportunities. The result was that at this critical moment of our history power
fell into the hands not of people who wanted democracy, but of those whose goal was to seize
control of wealth. These people were members of the Communist nomenklatura who had
been quick to abandon the sinking ship, and representatives of criminal business, who
emerged from the shadows to become the main reserve strength of the new authorities. The
demagogy of these people about the beneficent effects of transferring collective property to
private hands was accepted by the masses as life-saving wisdom. This blocked any possibility
of calmly evaluating the situation, and of having qualified experts map out and think through
the decisions that were taken.
In these circumstances, the Russian government of Boris Yeltsin thought it advisable to
appeal to the US White House for help. In effect this was a voluntary capitulation by
Carthage to Rome, in the illusory hope of political mercy and financial assistance. Instead,
Washington urged on us a neoclassical economic model, showing not the slightest interest in
whether this might conflict with the particular nature of our civilisation. In accepting this
model, we also accepted the authority of such international organisations as the IMF and the
World Bank, behind which the guiding hand of the US administration is always to be
detected.
In none of the countries of the former USSR was the appropriateness of the neo-liberal
model to the conditions of their development the subject of sufficiently free and serious
discussion, either in the legislative organs or in scholarly circles. The question here is not of
formal and bureaucratic decision-making, but of a failure to weigh up the factors for and
against. As noted earlier, the reforms were implemented amid inflated expectations of a rapid
(measured in hundreds of days) onset of unprecedented happiness. The main decisions on
transforming the economy (the liberalising of prices and foreign trade, and the privatising of
state assets) were taken in the seclusion of the cabinet-room, out of sight of the population
and the scholarly community, by people whose competence was doubtful but whose pursuit
of their own self-interest was fully apparent. The fact that the people who took these decisions
became conspicuously wealthy speaks volumes about the goals they were pursuing.
There is no disputing that the theoretical basis corresponding to these goals – neoclassical
orthodoxy – was adopted along with the model. Our traditional submissiveness in obeying
whatever comes from above prevailed once again. We did not engage in a polemic even
though Soviet economic thought, which rested on the classical tradition, had a considerable
arsenal at its disposal that might have been used to resist the destructive effects of the
neoclassical doctrine. We also accepted the neoliberal ideology without opposition, like
aborigines of colonised territories accepting the Christian faith.
From the beginning of 1992, abrupt ―shock therapy‖ measures were applied in order to
transform the planned economy into a market-based one. Prices were immediately freed from
state control. This was followed by the opening of the borders for the import and export of
goods (liberalisation of foreign economic activity). The same period saw the initiation of the
6 Soltan Dzarasov

most important change, the privatising of state property. This was a real shock – with the
shortage of goods on the market at that time, prices began growing not by the day, but by the
hour. Inflation spiralled steeply upward, reaching 1500 per cent per month in the first months
of liberalisation. True, its tempi later declined, but throughout all the years until the present
crisis it remained in double figures. In an instant, the inflation wiped out the savings the
population had accumulated over many years, and the growth of wages fell significantly
behind the rise in prices.
Amid this chaos the privatisation of state property – a process deservedly likened to an
avalanche – was begun. Its sole legal basis lay in decrees issued one after another by the
president. Even these decrees were implemented in whatever fashion the people responsible
for fulfilling them chose. Arbitrary seizure of enterprises in collusion with local
administrations, shoot-outs between rivals in the predation, and the murder of competitors
became everyday events. In wave after wave, massive privatisations rolled across the vastness
of Russia, accompanied by the wholesale criminalisation of society. There is no room here to
detail this corruption, which dwarfed anything seen in the construction of the Panama Canal.
In 2004 the Accounting Chamber of the Russian Federation published the results of an
official investigation it had carried out; the document abounds in facts and figures testifying
to criminality on an unprecedented scale.
From this wealth of material just one fact, casting light on what occurred at that time, will
be cited here. Soon after the beginning of privatisation it was discovered that the flow of
revenues into the budget had declined to such an extent that the state could no longer meet its
obligations, even though considerable numbers of enterprises with large assets remained in its
hands. For the next round of predation on state property, an ingenious device was therefore
dreamt up: so-called ―mortgage auctions‖ would be held. With shares in enterprises still in
state hands acting as security, the state would be provided with credits from commercial
banks selected by the ruling elite. The racket consisted in the fact that the banks issued credits
using the same state funds that had been placed with them. Since the state could not pay back
these credits (something which had been foreseen all along), the enterprises became the
property of the creditors. In the Accounting Chamber report mentioned earlier, it is noted that
―the transactions in which credits were provided to the Russian Federation on the basis of
security consisting of shares in state enterprises can be regarded as a sham, since the banks in
practice were ‗crediting‘ the state using the state‘s own money. The Russian Ministry of
Finance had earlier placed in the accounts of the banks participating in the consortium funds
practically equal to the credits; then, this money was transferred to the Government of the
Russian Federation as credits, with the security consisting of shares in the most attractive
enterprises. The result was that the banks which had ‗credited‘ the state were able directly or
through affiliated entities to become owners of the parcels of shares in state enterprises that
had been lodged with them as security‖ (Stepashin, 2004, p. 62).
There were innumerable cases of this kind, and out of them, the Russian market economy
took shape. The result was the creation in Russia of entrepreneurs of a type profoundly
different from those in the West. The Russian analogue of the Western entrepreneur emerged
not as a result of competition and natural selection, but from the forcible appropriation of
other people‘s property, and there ore knew nothing of any other method of struggling for his
or her place in life. Honest competition is inconceivable to such people, and they are
incapable of it. If they encounter competitors, Russian entrepreneurs do not try to surpass
them in performance, but to remove them from the scene with the help of hired killers or
 Experimental Capitalism in the Former USSR 7

applying other criminal means. So it was that a huge wave of murders, in which property-
owners killed other property-owners, began along with privatisation. Property became
concentrated in the hands of the winners in this slaughter.
The consequences of forcible privatisation and monopolisation of the market will be
examined later, but here it should be noted that the gory hue of privatisation began glowing in
our skies from the very first. It was only after two years of the changes, however, that society
began to understand their ominous significance. At that point, privatisation began to meet
with serious resistance from the then democratically-elected parliament, the Supreme Soviet
of the Russian Federation, which refused to meekly put its stamp on the relevant decrees of
the president. Acclaimed by Western leaders as the democratic leader of Russia, President
Boris Yeltsin then ordered a tank division to surround the building of the Supreme Soviet,
and on that clear, sunny day, October 4, 1993, in view of the whole world, to open fire on it. I
stood in the crowd observing what was happening, and with my own eyes saw the tanks shell
the White House (so called because of the colour of its stone facing) in which the deputies of
the Supreme Soviet were assembled. From the resulting fire and soot, the White House soon
turned black. It was a glaring example of the falsehood of the widespread notion that
anticommunism is identical to democracy. Of the people who had gathered to support the
Supreme Soviet, large numbers were killed and wounded; to this day, the number of victims
is not precisely known. The surviving leaders of the legislative branch of government were
arrested before the eyes of the entire public. The picture was shown by all the television
companies of the world, which did not prevent a crucial decision from being made: by
presidential decree, the criminal privatisation received the green light. At the same time the
Constitutional Court, which had characterised the president‘s actions as unconstitutional, was
dissolved. Democratic processes of decision-making were thrown overboard.
Unfortunately, neither this vandalism nor the essence and consequences of privatisation
have received the necessary attention in scholarly literature either in Russia or the world at
large. Even now that the misfortunes of our economy have become apparent, there is no
serious analysis of the theoretical origins of the economic models which we accepted. Now as
in the past, a major weakness of our economic science is the conformism of scholars, who for
the most part have preferred to accommodate themselves to the existing system. Because of
this, objective analysis and evaluation of our situation is still failing to influence broad public
opinion.
It is not surprising that an economy which arose in such a manner and which functions
according to principles of complete arbitrariness cannot succeed. The Soviet economy,
whatever assessment one might now make of it, developed at high rates throughout its period
in operation. Here, however, we shall not be diverted to examining this question, instead
referring the reader to a work (Ofer, 1987) which unusually for the West, provides an honest
account of these matters. Here we shall take advantage of a unique opportunity to compare
the results of twenty years of development on the market road with the record of the previous
twenty years of planned development. To this end, we shall examine above all the data in
Table 1; these detail the development of the Soviet economy over the twenty years up to the
beginning of market reforms on the neoclassical model.
According to these figures, during the twenty years prior to the reforms the national
income of the USSR rose by 130 per cent; industrial production by 150 per cent; agricultural
output by 120 per cent; investments by 130 per cent, and so forth.
8 Soltan Dzarasov

Table 1. Main indicators of the economic growth of the USSR, 1970-1989

Years

Units
Indicators
1970 1975 1980 1985 1989
Produced National Income Billion rubles 289,90 368,30 462,20 578,50 673,70
As a percentage of figure for 1970 %% 100,00 127,00 159,00 202,00 232,00
Industrial Production Billion rubles 374,30 511,20 679,00 811,00 928,00
As a percentage of figure for 1970 %% 100,00 136,00 181,00 216,00 248,00
Agricultural Production Billion rubles 108,40 112,80 187,80 208,60 225,10
As a percentage of figure for 1970 %% 100,00 104,00 173,00 193,00 207,00
Capital Investments Billion rubles 80,60 112,90 150,90 179,50 228,50
As a percentage of figure for 1970 %% 100,00 140,00 187,00 222,00 283,00
Basic assets brought into operation Billion rubles 76,40 105,60 148,90 172,60 197,40
As a percentage of figure for 1970 %% 100,00 138,00 195,00 226,00 258,00
Volume of retail trade Billion rubles 159,40 215,60 277,50 324,20 404,50
As a percentage of figure for 1970 %% 100,00 135,00 174,00 203,00 251,00
Table compiled on the basis of data from Narodnoe Khozyaystvo SSSR. Statistical annuals for the
years concerned.

Table 2. Major types of industrial and agricultural production 1970-1990

(natural indicators)

No. Types of production Units of 1970 1975 1980 1985 1990 1990 x
measurement 1970
1 Electrical energy Billion kilowatt- 741 1038 1294 1544 1726 2,3
hours
2 Oil (including gas Million tonnes 353,0 490,8 862,8 851,3 816,2 2,3
condensate)
3 Gas Billion cubic 197,9 289,2 435,0 643,0 815,0 4,1
metres
4 Coal Million tonnes 624 701 716 726 703 1,1
5 Steel Million tonnes 115,8 141,3 148 155 154 1,3
6 Metal-cutting machine Thousands 202 231 257 218 157 0,8
tools
7 Metal forging and Thousands 41,3 50,5 57,2 52,7 42,2 1,0
pressing machines
8 Including automatic and Units 579 736 814 1084 1057 1,8
semi-automatic machines
9 Excavators Thousands 30,8 39,0 42,0 42,6 37,7 1,2
10 Bulldozers Thousands 33,5 51,1 45,5 41,3 37,1 1,1
11 Tractors Thousands 459 550 555 585 495 1,1
12 Trucks Thousands 524 696 787 823 774 1,5
13 Trolleybuses Units 2238 1900 2015 2467 2393 1,0
14 Mineral fertilisers Million tonnes 13,1 22,0 248 33,2 31,7 2,4
15 Cement Million tonnes 186,8 140,1 176 178,4 218 1,2
16 Grain Million tonnes 12,3 15,0 15,1 17,1 20,1 1,6
17 Meat Million tonnes 83,0 90,8 90,9 98,6 108,5 1,3
18 Milk Million tonnes 95,2 122,0 125,0 130,7 137,2 1,4
19 Textiles Millions of 8,8 10,0 10,7 12,0 12,7 1,4
square metres
20 Footwear Million pairs 679 698 743 788 843 1,2
Compiled from sources:
Narodnoe khozyaystvo SSSR za 60 let. Moscow, Statistika, 1977.
Narodnoe khozyaystvo SSSR za 70 let. Moscow, Finansy i statistika, 1987.
Narodnoe khozyaystvo SSSR v 1990 g. Moscow, Finansy i statistika, 1991.
 Experimental Capitalism in the Former USSR 9

However, quantifying economic growth in terms of money has the potential to distort the
real picture if price levels change, and as a result, the figures for Soviet growth have at times
been regarded by some Western experts as exaggerated. To obtain a truer picture of the
relationship between the physical volume of production and value-based measurements,
natural indicators will be cited for twenty major types of industrial and agricultural
production.
As can be seen from Table 2, peak Soviet growth was attained in the mid-1980s; by 1990
output of many types of production had begun to decline, testifying to the beginning of a
crisis in the Soviet economy. Nevertheless, the twenty-year period preceding the Russian
reform is marked by the growth of output in almost all categories. Growth rates are
noticeably lower when measured by natural indicators than by those of value. As noted
earlier, this difference may result from the distorting effect of price rises on value-based
indices. Nevertheless, it seems to me that the doubts concerning the accuracy of the growth
figures cited lack sufficient foundation. Account should be taken of the fact that in almost all
cases Table 2 shows the trends for traditional types of production, which usually grow more
slowly than newer types. The table does not, for example, include data for the production of
aluminium and aircraft; non-ferrous metallurgy and aircraft production were quickly
developing sectors in the USSR. Nor are figures available for the various types of military
technology. If we are to regard value-based figures for Soviet growth as exaggerated, then a
correction should also be made for the absence of data on many types of production which the
Soviet leadership concealed on the basis of state secrecy.
These imprecisions (secrecy on the one hand and exaggerations of value on the other)
probably more or less balance one another, from which the conclusion follows that the data
presented in Table 1 are more than likely close to reality. Doubts on this score should,
moreover, be dispelled by the fact that if growth rates had not been this high the Soviet Union
could not have attained levels close to those of the developed countries in such indicators as
death rates, education, and also life expectancy. That is not to speak of the fact that without
such growth it would have been impossible to achieve military and strategic parity with such
a superpower as the US, and to reach space first. If the CIA, which studied developments in
the USSR intently, had believed Soviet growth was stagnating, then the Soviet Union would
not have aroused such special concern on the part of the US, and we would have lost the Cold
War much sooner.
The fact that economic growth rates in the USSR were comparatively high does not,
however, mean that this growth was smooth and regular. Over time, growth rates began to
decline, and concealed behind the quantitative growth were shortcomings of a qualitative
nature. The most important of these shortcomings was the increasing technical-economic lag
of the USSR behind the developed countries. But whatever the case, an increase of more than
100 per cent in the main indices of economic development during these years cannot be
interpreted as necessarily leading to collapse.
These data will now be compared with those characterising the present state of the
Russian economy after twenty years of market reforms, which supposedly have brought about
a shift to a higher level of development.
These data should not be seen as indicators of normal economic growth. They are the
results of an experiment conducted in Russia (and, in approximately the same fashion, in the
other post-Soviet states) in establishing the market and capitalism in line with the postulates
of neoclassical orthodoxy. As a result of the switch to market development of the economy,
10 Soltan Dzarasov

the tables show, the market not only failed to grow, but shrank in 1998 to 55.7 per cent of the
initial figure in terms of GDP; to 43.2 per cent in the area of industrial production; to 53.9 per
cent in agricultural production; and to 25.9 per cent in investments. Following the default of
1998 GDP started growing, and by 2007-2009 had reached the level of twenty years earlier.

Table 3. Main indices of Russian economic development, 1989-2009

(1989=100)

Indices
Gross Investments
Domestic Industrial Agricultural in basic Volume of
Product Production Production capital assets retail trade
1990 91,0 98,8 96,4 100,1 112,4
1991 92,2 90,0 92,1 84,6 107,1
1994 62,8 51,1 70,1 34,1 109,3
1995 60,2 48,7 64,5 30,6 102,5
1996 58,0 45,0 61,2 25,1 102,8
1997 55,8 45,4 62,1 23,8 107,8
1998 55,7 43,2 53,9 20,9 104,4
Years

1999 59,3 47,0 56,1 25,9 98,3

2000 65,2 51,1 60,4 28,5 107,1
2001 68,5 52,6 64,5 28,5 118,9
2002 71,7 54,2 65,5 29,3 130,0
2003 76,9 59,0 66,5 33,8 141,4
2004 82,4 66,9 68,6 38,4 160,2
2005 87,7 66,9 70,0 42,6 180,7
2006 94,2 71,1 72,5 48,4 205,8
2007 101,8 75,6 74,9 58,6 238,9
2008 107,5 77,2 83,0 63,9 270,9
2009 99,0 68,9 84,0 53,0 255,2
Source: A. Frenkel‘ and L. Roshchina, ―God neopredelennosti‖. Voprosy Statistiki, 2009, No. 3, p. 51.

To be truthful, there is little reason to be pleased with the results of the shift to the
market. While Gross Domestic Product in 2009 was roughly at its earlier figure, industrial
production, agricultural output and investment remained below their levels of decades before.
Depression had been replaced by growth, but contrary to the dogmas of neoclassical
orthodoxy, the upturn had stemmed mainly from the flood of wealth that resulted from the
surging prices of the oil and gas which Russia was selling on world markets. The price of a
barrel of oil, for instance, rose from a barter price of $22 in the early days of the reforms to
$85-95 in 2005-2006. It was only thanks to this that GDP in 2008-2009 reached the levels of
twenty years before.
These outcomes were, of course, the direct opposite of what had been expected. If Karl
Popper (Popper 1966, 2002) had been alive, he might have said that the market reforms in the
 Experimental Capitalism in the Former USSR 11

Russian economy, as in other post-Soviet countries, provided a unique experiment putting the
scientific validity of the whole neoclassical edifice to the test. The strikingly negative results
of this test give the lie to the claim of the neoclassical school that its major tenets are
universally valid. Meanwhile, the persistent attempts by Russian liberals and Western
specialists on Russia to explain away the country‘s problems on a wide variety of bases – the
legacy of Communism, the authoritarianism of Putin, the supposed inferiority of Russians, on
any basis, in fact, except the failures of the neoclassical school itself – is, to use Popper‘s
term, pure ―immunisation‖.1 (1)

3. SEVEN GRIEVOUS CONSEQUENCES

OF THE MARKET EXPERIMENT

The general figures on the economic development of Russia cited above serve to
illustrate limited, though important, aspects of the tragedy brought about by the market
reforms in the post-Soviet states. Hidden behind these data are more far-reaching effects, also
of a negative character.

A. The Degradation of the Economy in Scientific and Technical Terms

Arguably the most grievous outcome of the market reforms has been the decline in the
scientific and technical level of the economies of the post-Soviet states, a decline which has
set these countries on the road to de-industrialisation. If we do not limit ourselves to the
general indices of value presented in Table 3, which are subject to the distorting effects of
inflation, but instead turn to material indices which characterise the situation in various
sectors of manufacturing industry, we receive a more objective picture of the economic
dynamic. To this end, we shall compare the trends of various types of production, as
expressed in this more concrete form.
The figures in Table 4 reveal a catastrophic situation. The problem is not just that the
Russian economy throughout its twenty years on the path of market development has been
marking time at a level below its starting-point. The problem is that such negative changes
have taken place in the structure of the economy that it has veered from the path of gradual
improvement onto that of accelerated degradation. This is shown by the collapse in output of
the most important types of machines and equipment. Production of diesel motors and diesel
generators has fallen by a factor of 10.5; that of metal-cutting lathes by a factor of 15.5; and
that of automatic and semi-automatic metal-working and machine-building lines by a factor
of 139, which is equivalent to shutting down production of this type of equipment. Production
of weaving looms fell from 18,341 units in 1990 to 43 in 2008, that is, by a factor of 426.5.
This signifies the collapse not only of the machine-building industry, but also of the sectors
which it supplied with essential equipment. Output of many types of product, including
cotton, woollen and silk textiles, has fallen to a fraction of earlier levels.

1
As employed by Popper, the term ―immunization signifies the lack of a conscientious adjustmentof theory to
make it less susceptible to criticism.
12 Soltan Dzarasov

Table 4. Production of Various Types of Machines and Equipment in Russia

1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008
Diesel motors and
diesel generators,
thousands 23,2 4,1 4,8 4,3 4,3 3,5 2,3 2,0 1,9 2,5 2,2
Turbines, million
kW 12,5 5,1 2,1 1,8 3,9 4,0 5,0 5,0 4,7 5,6 8,0
Wheeled tractors,
thousands 92,6 10,8 6,9 6,3 3,1 3,4 3,4 4,5 5,5 7,7 11,2
Caterpillar
tractors, thousands 147 143 121 10,4 12,4 7,9 6,0 4,7 5,0 4,1 5,4
Metal-cutting
machine tools,
thousands 74,2 18,0 8,9 8,3 6,5 5,7 5,4 4,9 5,1 5,1 4,8
Automatic and
semi-automatic
machine-building
and metal-
working lines,
units 556 57 11 5 2 1 2 1 5 4 4
Excavators,
thousands 23,1 5,2 3,4 3,6 3,2 2,9 3,5 3,6 4,0 6,3 5,5
Bulldozers,
thousands 14,1 2,4 3,0 2,7 1,7 1,8 1,8 1,8 2,2 3,3 3,1
Weaving looms, 1834
units 1 1890 95 187 315 161 188 95 173 89 43
Trolleybuses, 651 778
units 2308 340 498 657 493 376 369 812 530
Trucks, thousands 665 142 184 173 173 193 200 205 245 285 256
Source: Rossiyskiy statisticheskiy ezhegodnik, 2009. Statisticheskiy sbornik. Moscow, Federal‘naya
sluzhba gosudarstvennoy statistiki (Rosstat), pp. 401-403.

As a result of this, Russia‘s dependence on imports of machines and equipment, of

foodstuffs and of light consumer manufactures has grown to the point where it far exceeds
what is consistent with ensuring the country‘s security. If the present dependence on imports
persists, any serious international falling-out will render our situation extremely vulnerable.
A further example will confirm what has been said about our technical and economic
degradation. Next to my home in Moscow during the Soviet years was a huge machine-
building combine with highly developed infrastructure. It included laboratories for testing and
experimental work, design and construction bureaus, a scientific research institute and
numerous other subsections. Its staff included specialist engineers and highly qualified
scientific experts, and it was rightly considered the standard-bearer for Soviet machine-
building. After the combine was privatised, incompetent people sold the unique equipment for
scrap. The qualified experts were sacked, and the areas where production had been carried on
were sold or rented out. Now the site is occupied by shops, cafés and a concert hall. And how
many changes of this type there have been throughout our giant country! This is what is
hidden behind the indices of the manifold reduction of output of the most important types of
machinery and equipment.
At the same time, the equipment installed during the Soviet period in industry and other
sectors has become hopelessly out of date, and the rate at which equipment is being replaced
is far below that at which it is becoming obsolescent. A study of this question reveals that
 Experimental Capitalism in the Former USSR 13

51.5 per cent of the equipment in Russian industry has been in service for more than twenty
years (Kornev, 2009, p. 147). Ten years ago the share of technically advanced equipment in
the total value of equipment was still 7.1 per cent; by the end of 2009 this had fallen to 4.3 per
cent (Borisov and Pochukaeva, 2009, p. 42).

B. Raw Materials Orientation of the Economy

The collapse of manufacturing industry brought about an inevitable reorientation of the

economy toward the raw materials sectors, instead of an acceleration of scientific-technical
progress and modernisation. The reason was that the prices for energy sources (oil and gas)
and metal ores during the reform years increased many times over, allowing higher earnings
of foreign exchange to compensate, at least in part, for the losses suffered due to the collapse
of the economy.
No-one in Russia thinks of the one-sided raw materials character of the economy as
positive. In the addresses by Presidents Putin and Medvedev to the Federal Assembly over the
past ten years this fact has invariably been described as a negative consequence of the
reforms, and calls have been made for setting the economy back on the path of innovation and
modernisation. Numerous consultations, conferences and discussions have been held,
involving top state leaders, with a great deal said about accelerating scientific and technical
progress and modernising the economy. The effect, however, has been negligible; the
situation has not improved. The greater the time since the beginning of our market
experiment, the greater the volume of data that accumulates testifying to its failure rather than
its success. Our technical and economic lag behind the advanced countries is becoming even
greater than before.
Unfortunately, this bitter truth is going unrecognised not only by business but also by the
authorities, who are supposed to feel the primary responsibility for the country‘s future. Our
traditional inclination toward change of an abrupt rather than gradual nature is making its
effects felt. When the vice of rigid centralisation in planning began to tell on the Soviet
economy, the leadership invariably stuck with its dogma to the effect that the plan was always
better than the market, never breaking with this fixation in favour of a relative market
freedom and expanded independence for the local links in the economic chain. The result was
as discussed earlier: economic growth rates declined, and our technical backwardness
emerged in the most visible fashion. When it became clear that continuing in this way was
impossible, and that changes were needed in favour of the market, we spurned a gradualist
approach, preferring our habitual revolutionary strategy. This time, it went by the name of
―shock therapy‖. Privatisation was carried out at one stroke, but efficient property-owners
failed to appear.
The real proof of the ineptitude of the Russian entrepreneurial class is the state of their
best-loved economic sectors, on which their prosperity is based. Descriptions of the Russian
economy often speak of its one-sided development, with a bias in favour of the raw materials
sectors, so the impression might arise that these sectors have undergone rapid development
during the reform period. Nothing of the sort! The talk of one-sidedness is valid only in the
sense that to a large degree, we now live at the expense of the extractive sectors. But here too,
development has failed to take place. The material and technical base of these sectors has
deteriorated dramatically, and the talents of the private owners have sufficed only for the
14 Soltan Dzarasov

levels of output to reach those attained under the Communists. No more than that! The
following table lists the key figures.

Table 5. Production of energy and energy sources in the Russian Federation,

1990-2008

Types of Units. 1990 1995 2000 2005 2006 2007 2008

production
Coal Million 257 177 172 223 234 242 246
tonnes
Oil (including Million 516 307 324 470 481 491 488
gas condensate) tonnes
Natural gas млрд.куб.м 641 595 584 641 656 653 664
Billion cubic
metres
Electricity Billion KW- 1082,2 860,0 877,8 953,1 995,8 1015,2 1040,4
hours
Source: Rossiyskiy statisticheskiy ezhegodnik 2009, pp. 388-389, 404.

As can be seen, during a little less than twenty years on the reform road the same picture
has emerged as was seen in Table 3. After a sharp decline in the production of energy
resources during the 1990s, growth resumed in the following decade. Only in the case of gas,
however, was the level of output in 1990 again achieved. It is impossible to imagine anything
like this occurring under Soviet planning. For all the shortcomings of that system, we would
have seen significant growth over twenty years.
Once again, the point is that the equipment being used during these years was badly
obsolete and worn-out; its indispensable renewal was not taking place. The new owners
showed too little concern for the technical modernisation of the extractive sectors, or for job
safety in the mines and on the drilling sites. As these words were being written, the radio and
television were reporting a methane explosion in the Raspadskaya mine in Kemerovo
Province. Sixty people were killed, with forty more unaccounted for and probably also dead.
In all, the television program Postscriptum reported on 29 May 2010, there had been thirty-six
mine accidents in Russia over the preceding two years, with 450 deaths. A year earlier, an
accident at the Sayano-Shushenskaya hydropower station took the lives of more than seventy
people. Accidents of this type, costing the lives of large numbers of people in diverse places,
have one and the same underlying cause: a mindless pursuit of profits, together with a
reluctance to spend money on safety equipment or on observing safety rules. As a rule, the
commissions appointed to investigate the causes of disasters do not find anyone responsible,
being unwilling to haul wealthy and influential transgressors out into the daylight.

C. Capital Flight

Together with the liberalisation of foreign economic activity, the export orientation of the
raw materials sectors has opened the doors wide for another negative phenomenon: the flow
of Russian capital out of the country.
 Experimental Capitalism in the Former USSR 15

The monopoly of foreign trade that existed during the Soviet period, when only specially-
created state companies and not the suppliers of goods and services themselves had the right
to operate on the foreign market, had no justification in economic science. It was a
manifestation on the one hand of the uncompetitiveness of the Soviet economy, and on the
other, of the mistrust felt by the country‘s political leaders for enterprise chiefs, whose
readiness to conduct business honestly with foreigners was regarded with skepticism. After
the collapse of the Soviet system, this set of rules could not endure. The decisions to expand
the freedom of action of entrepreneurs, and to abolish the monopoly of foreign trade, were
fully justified.
As in all other cases, however, what was needed here was not an abrupt shock but a
gradual transition, as our people accumulated experience, to the new conditions under which
business with foreign firms was to be conducted. It is not hard to see why this course needed
to be followed, if the interests of the country were to be put first. But nothing of the kind was
done; priority was given to private profit, and best suited for this was an absence of control
over the conduct of foreign economic dealings, termed liberalisation. This was defended on
the basis that it would open the way for foreign investments in the Russian economy. On no
basis whatever, it was asserted that once the barriers had been removed foreign capital would
flood into Russia, pouring into the technically advanced sectors and modernising the
economy. There was no way anything like this could happen, and nor did it.

Table 6. Relationship between foreign investments in Russia and Russian investments

abroad (million dollars)

1995 2000 2004 2005 2006 2007 2008

Foreign investments in 2983 10958 40509 53651 55109 120941 103769
Russia
Russian investments 226 15154 3373 31128 51978 74630 114284
abroad
Russian investments 7,6 130,6 83,4 76,8 94,3 61,7 110,1
abroad as a percentage of
foreign investments in
Russia
Compiled from data in: Rossiyskiy statisticheskiy ezhegodnik 2009, pp. 261, 264.

As shown by this table, the amount of capital that has entered Russia is only a little more
than the quantity that has departed. More will be said about this later, but here it will be noted
that foreign capital has avoided, like the plague, the sectors that would permit the technical
modernisation of the economy, and has sought out only those areas of investment where
quick profits are available. That foreign capital is not taking part in modernising the Russian
economy is not so surprising. Far more worthy of attention is the fact that Russian capital is
not doing this either, something that has definite links to the illusory hopes that were sown at
the outset of the reforms. As subsequent events have shown, removing the barriers to the
movement of capital was required not so much for attracting foreign investment, as for
allowing Russian capital to flee across the borders and to be accumulated abroad.
In the course of the liberalising of foreign economic activity, the balance of payments of
the Russian Federation came to include items relating to credits and advances provided to
foreign partners, and also to advances that had not been paid back. In addition, Russian firms
16 Soltan Dzarasov

received the right to establish subsidiaries in offshore zones of other countries, to which any
sums could be freely transferred. This was no longer a case of Russian companies transferring
funds to foreign banks in order to pay for imported goods; no-one was interested in the
relation between the sums transferred and the quantities of goods purchased. Many other
illegal methods were devised for channelling Russian capital abroad. Each year from the
beginning of the reforms, the sums that were not returned were of the order of $12-15 billion.
By 2008, the total volume of Russian capital secreted abroad was in the region of $1.3
trillion, comparable in value to Russia‘s entire basic productive stock (Navoi, 2009, p. 31).
The above-cited data on the massive flight of capital from Russia beg the question of
what social and psychological motives drive the behaviour of the Russian property-owning
class. Why do they act in this fashion? More than likely, they are fully conscious of being an
alien growth on a society to which they have brought nothing except the plundering of
popular assets. Weighing upon them is the possibility of being charged with having privatised
their property illegally. All in all, it is clear that the Russian possessing class see their future
as lying not with their own country, but with others where their right to the wealth they have
obtained is recognised. That means the countries of the West. In their own country, the
Russian oligarchs only conduct business; most of the time, they and their families live in the
West, where they keep their capital. Their wives give birth to their children there, most often
in the US, so as to strengthen their claim to citizenship. The prominent businessman Mikhail
Khodorkovsky, now in jail for his illicit dealings – a rare case in Russian practice – has
admitted openly in a letter that the oligarchs view Russia as no more than ―a hunting-ground
and a place to collect trophies‖, not as a country to which they tie their future.
Needless to say, such a property-owning class has not been able to evoke trust in the
market and capitalism from a population traditionally hostile to bourgeois values. Showing a
complete disregard for the development and modernisation of the national economy, this class
has also squandered the faint hopes which arose during the propaganda campaign for market
reforms. Nevertheless, the authorities try as they may to present the population with a positive
image of Russian oligarchic capitalism, creating the appearance of prosperity in the country.
Overall priority is given to insuring the property-owning class against untoward
developments. To this end, the gold and foreign currency reserves of the Central Bank were
built up during the years when the influx of foreign currency was high; a sort of safety
cushion was created, in the shape of a stabilisation fund. By the beginning of 2008 it
contained $455.7 billion dollars. In the same year, according to the journal Forbes (no. 5,
2010, p. 108), the government hived off an $11 billion chunk of this hoard to be used for
refinancing the foreign debt of Russian companies.
In reality, this ―cushion‖ does more harm than good. As an addition to exported capital it
has little useful function. Like other exported capital it is kept on the accounts of foreign
banks, and plays no role in the technical or economic modernisation of Russia. While the
need for modernisation is preached from every pulpit, the Russian firms that are entreated to
carry it out ignore the summonses. Indeed, there is nothing along these lines that they can do.
They continue fulfilling the function for which they were set up – multiplying the personal
fortunes of their owners, who have given themselves over to parasitism and waste, building
expensive offices and villas in diverse parts of the world, investing in sports clubs in other
countries, buying the world‘s most expensive yachts, aircraft and cars, diverting themselves
in prestige resorts, and so forth.
 Experimental Capitalism in the Former USSR 17

Making use of the inflow of foreign currency of the early years of the century, the state
reduced its foreign debt from $139.3 billion in 2001 to $40.9 billion at the start of 2009
(Rossiyskiy statisticheskiy… 2009, p. 582). Private companies, by contrast, increased their
indebtedness to foreign creditors to a total of $498 billion at the beginning of October 2008
(Navoi, 2009, p. 31). Since private borrowings are of a short-term character, for about three
years, the risk that these debts will not be paid back on time means that the possibility of
keeping the country‘s stabilisation fund in line with the scale of the borrowings is placed
under threat.

D. The Rise of Mass Unemployment

The flight of capital abroad has extremely severe consequences for the Russian economy,
which is choking for lack of investment. The twenty-year stagnation of the Russian economy
has caused a dramatic narrowing of the country‘s productive potential.
As well as reflecting the lack of capital, increasingly exported abroad, this has resulted
from the hyperinflation set off by the shock transition to free price formation. People lost their
savings overnight, and the real wages of the bulk of the population plummeted, bringing
about a contraction of aggregate demand. As Keynes would have noted, such a situation can
be expected to have two negative outcomes: an increase in unemployment, and an
undermining of the sources of economic growth. So it was in Russia. Once the new owners
had acquired substantial state assets at nominal prices, they began firing large numbers of
workers, considered unnecessary from the point of view of increasing profits, from the
privatised enterprises. This step, natural from the capitalist point of view, led to the
previously unknown mass unemployment of a significant sector of the able-bodied
population. The following table gives some idea – though by no means a complete one – of
the scope of this phenomenon.

Table 7. Numbers of the economically active population employed and unemployed

(thousands of people)

1992 1995 1998 1999 2000 2005 2008

1. Numbers of the 74946 70861 67339 72175 72332 73811 75892
economically active
population
Numbers employed in the 71068 64055 58437 63082 65273 68603 70603
economy
2. Unemployed 3877 6684 8902 9054 7059 5208 5289
3. Unemployed, registered 578 2327 1929 1263 1037 1830 1522
with state instrumentalities
Of these, numbers receiving 371 2026 1756 1090 909 1570 1253
benefits
4. Recognised level of 5,3 9,4 13,2 12,6 9,9 7,0 7,0
unemployment (%)
Source: Rossiyskiy statisticheskiy ezhegodnik 2003, p. 129.
Rossiyskiy statisticheskiy ezhegodnik 2009, p. 129.
18 Soltan Dzarasov

This table suffers from incomplete data on the unemployed, since it does not include a
rather significant number of effectively jobless people in small towns and rural localities. In
addition, many people have also lost their jobs since the collective and state farms were
turned into privately-owned enterprises. A certain number of these people have headed off to
other places in search of work, but most have remained where they were, and carrying on
with their traditional way of life in their own homes, are not about to move elsewhere. At the
same time, there is no prospect of new jobs appearing, so these people do not see any point in
registering as unemployed. Consequently, there are good grounds for supposing that the real
level of unemployment is at least twice that shown by the figures in the official table.
For all the importance of making a quantitative assessment of the problem, it seems to us
that the most important requirement for understanding this question lies elsewhere.
Unemployment in the post-Soviet states cannot be equated with its analogue in the capitalist
countries. There, it has become an inseparable part of the way of life, and people have grown
used to regarding it as a natural phenomenon. Here, not only the present generation, but even
their parents and grandparents have never before experienced unemployment. This peculiarity
of post-Soviet life has not been understood in the West. Everything that happened under the
Soviet system is assessed negatively, just as in Soviet times we reacted to capitalism. But if
we have overcome our prejudices and recognised the value of many features of the market
and of private enterprise, the same cannot yet be said of our Western colleagues. They regard
even the virtues of socialism through the prism of its shortcomings. There were of course
plenty of the latter, but if we take a scholarly viewpoint, they cannot be regarded as the
totality of the Soviet experience.
Here, it is instructive to consider the book by the Hungarian economist Janos Kornai The
Socialist System. Though popular in the West, this work is far from taking an objective
approach. Kornai uses the shortcomings of socialism to obscure its achievements, to the point
of coming up with an overall negative picture. Hence, full employment of the able-bodied
population (the absence of unemployment) under socialism is depicted for the most part as an
evil. According to Kornai, full employment is the reverse side of the ―shortage of labour
power‖. Socialism is unique, he writes, ―as the only system in which full employment and
chronic labour shortage persist so long‖ (Kornai, 1992, p. 219).
Kornai recognises the value of full employment and of the absence of joblessness:
―Permanent certainly is a fundamental achievement of the classical system, in terms of
several ultimate moral values. It has vast significance, and not simply in relation to the direct
financial advantage in steady earnings. It plays additionally a prominent part in inducing a
sense of final security, strengthening the workers‘ resolve and firmness toward their
employers, and helping to bring about equal rights for women‖ (ibid, p, 210). Nevertheless,
he studiously avoids the question of how all this might be achieved. His study of the question
of full employment is diluted with discussion of secondary issues, and is reduced to
examination of the efforts of bureaucrats to distribute labour power. This is a significant
matter, but not of primary importance. Most crucial, however, is something that is not even
mentioned in the book: the fact that in a planned economy investment can be linked directly
to employment. What Keynes urged in his 1936 book had long since been accomplished in
the Soviet Union, on a different basis and in greater measure.
With their prejudice concerning socialism, Western economists have unfortunately failed
to perceive or evaluate this link, and Kornai follows their less-than-creditable example. In his
chapter on investment he specifies numerous priorities, but ensuring full employment is not
 Experimental Capitalism in the Former USSR 19

even mentioned. Meanwhile, there cannot be a hundred priorities. There must be one or at
most two; the eleven priorities that Kornai distinguishes are simply the major areas of
investment. The fundamental task which the distribution of investment was required to carry
out in the USSR was always one and the same: ensuring employment and earnings to the
whole able-bodied population. Everything else which Kornai discusses (apart from defensive
capability, which is a separate question) was regarded in the practice of planning as
productive within the context of the fundamental purpose of the economy – ensuring the
employment of the population and on this basis, the improvement of their material and
cultural level.
To confirm this, here is a typical example. In the Soviet Union at one point, the question
had to be decided of where to build a new aircraft plant. There were five contending cities,
which included Tashkent. Studies suggested that it would be most advantageous to build the
factory in Kharkov or Sverdlovsk, where suitable land was available with established urban
infrastructure. Nothing of the kind existed in Tashkent, and providing communications,
housing, hospitals and polyclinics, schools and care centres for the workers‘ children, and a
technical training centre for the plant would more than double the cost of construction. Basing
their claims on planning calculations and projections, the authorities in the other cities argued
that the factory should be built on their territory. The discussions within the economic bodies
(Kornai describes such normal debates as ―wrangles‖) extended to the highest organ of
power, the Politburo, which had to make the final decision. After listening to all the pros and
cons to the point of exhaustion, the then head of the Uzbek Republic, Rashidov, posed the
question in this manner: ―What advantage are we talking about?‖ If it was the advantage of
the state, then the factory should be built in Kharkov or Sverdlovsk. But if the advantage of
the people was more important, then it should be built in Uzbekistan. The Fergana region of
his republic, Rashidov continued, had a high population density and birthrate; if jobs were not
created in timely fashion there would be unemployment, something incompatible with the
Soviet system. Rashidov was a writer, not an authority on the political economy of socialism,
while Brezhnev and other members of the Politburo knew even less about it. But they were
familiar with Soviet tradition and practice, and the threat of unemployment settled the
question in favour of building the factory in Tashkent.
It is clear that the question could have been decided in this way only where the question
of efficiency was approached less from the economic (obtaining of profits) point of view than
from the social one, that of guaranteeing jobs and wages. The fact that this example was not
unique can be seen from the fate of numerous single-enterprise towns in Russia. These are the
places in which planned investments in the construction of industrial enterprises and
institutions of a socio-cultural nature (polyclinics, hospitals, maternity homes, kindergartens,
sports clubs, stadiums, etc.) were made exclusively in order to provide people with work and
incomes. Following privatisation, however, the new owners turned everything upside down.
They shut down many of these factories, along with the social institutions which the
enterprises had earlier financed. The result was that people lost not only their wages, but also
their access to medical facilities. When a woman in such a town is about to give birth to a
child, for example, she often has to travel to some remote place. The shift to the market has
created numerous such problems in small centres where the conditions of life in earlier times
were quite reasonable.
These unwelcome developments are not going unopposed. Protests again the changes
long ago took on a mass character. Most famous have been the events in the modest town of
20 Soltan Dzarasov

Pikalevo in Leningrad Province, evidently because Prime Minister Vladimir Putin played an
active role in dealing with the problems that arose there. The clay-processing and cement-
making enterprises in this town were privatised by Oleg Deripasko, a member of the Yeltsin
―family‖2 who became one of the most powerful Russian oligarchs, with a fortune of many
billions. To increase his profits Deripasko re-equipped one enterprise while shutting the
others down altogether, laying off large numbers of workers. To the same end he stopped
financing the local hospital and polyclinic, putting their continued existence in question. For
months he did not pay his workers, running up a wage debt of 41 million rubles. The workers
began going on strike and calling meetings where they demanded that the privatised
enterprises be re-nationalised. No-one paid them any attention until they decided on a
desperate step: they blocked the rail line and highway that pass through the town. After that,
the strike resounded throughout the country. Putin came, accompanied by a multitude of high-
ranking Moscow bureaucrats. Deripasko was summoned, and together with a dressing-down
from the government, received financial assistance of $150 million (Argumenty i Fakty, no.
24, 2009; Novaya Gazeta, 8 June 2009; Maksimov, 2010). Under a hail of criticism from
Putin the oligarch paid his workers, promised other concessions, and to some degree relaxed
the pressure. How long this will be the case remains to be seen.
It should be noted that the strikers recalled very well the Soviet practice under which the
right to wages was sacred, and no-one dared violate it. Everyone was guaranteed a job, and a
delay in the payment of wages of more than three days was considered a crime, for which the
guilty parties were subject to punishment. Now we have a conflict between economic
expediency and social needs. It is easy enough to condemn this situation, but probably, the
best thing for us would be to discuss it in unprejudiced fashion with Western colleagues. This
is something of which we in Russia have a great need.

E. The Intensifying of Social Inequality

Another burdensome consequence of the market reforms has been a sharp increase in
social inequality and differences in property ownership. Here too the contrast with the Soviet
period is striking. Social differences, of course, existed then as well. The highest-paid
categories of workers then were miners and steelworkers, whose wages reached levels of 600
to 700 rubles a month, compared to an average of 180 rubles – that is, a ratio of three or four
to one. The privileges of the bureaucracy consisted not so much in wages (the differences
here were not great) as in unpaid services of higher quality. The bureaucrats were treated in
better hospitals, spent their vacations in better sanatoriums, had the use of personal cars at
state expense, and enjoyed greater access to goods that were in short supply. But what is all
that now, compared o the B zantine luxury of today‘s oligarchs?
The privatisation of state property fundamentally altered the situation. The tastiest
morsels of popular wealth were appropriated at a discount by the people who were in power
and by those near to them. The well-known researcher of the Russian economy Stanislav
Menshikov writes:

2
This is the name acquired by the large clan of business entrepreneurs and politicians grouped around the first
president of Russia, Boris Yeltsin.
 Experimental Capitalism in the Former USSR 21

―At the end of 1997, privately owned fixed assets were worth an estimated 7.321 trillion
rubles. Yet the state had received only 34.8 billion rubles from privatizing this property, or
less than .05 percent of its value. Even after adjusting for the subsequent revaluation of assets
due to inflation, the government‘s earnings equaled no more than 2 percent of the property‘s
value. Thus, private capital acquired formerly state-owned assets as property, or obtained
control over them, virtually free of charge‖ (Menshikov, 2007, p.42). 3

The real source of the great fortunes of the Russian oligarchs was, and remains, not their
entrepreneurial talents or creative energies (of which they have not even a trace), but their
position and connections at the moment of privatisation, combined with their gift for latching
onto the property of others. The best indication here is provided by the initial increase to
$24.5 billion, and now the decline to $10.7 billion, in the fortune of the above-mentioned
Oleg Deripasko. As a member of the Yeltsin family in both the direct and figurative senses
(he is married to the daughter of Yumashev, who in turn is married to Yeltsin‘s daughter
Tatyana), he privatised incalculable wealth for nominal sums in diverse sectors of the
economy. Connections he possessed, but not managerial talents. As a result, he lost 60 per
cent of his fortune in short order. Other members of the ―Yeltsin family‖ were Roman
Abramovich and Boris Berezovsky, who once held top spots in the ―golden hundred‖ of
Russian billionaires (capable only of squandering what fell within their grasp, they were later
forced out by other, more successful oligarchs). The richest woman in Russia is Yelena
Baturina, whose has a fortune of $2.9 billion thanks to the fact that she is the wife of Moscow
Mayor Yury Luzhkov. The all-powerful mayor, who ―democratically‖ attained his post more
than eighteen years ago, is the poorest of poor functionaries, owning little more than the shirt
on his back. But such are the ways of Russian capital that as soon as the penurious husband
quits his mayoral armchair (this must happen at some point), we can expect to see his wife
begin to suffer from the attacks of emboldened competitors, and her riches will start melting
away before our gaze.
Most of the other wealthy Russians accumulated their hoards through connections of
various types, through underhand deals, and through machinations within the structures of
power. Not only among the hundred richest people in Russia, but also among the second and
third hundreds, it would be difficult to find even a single honest individual who acquired his
or her fortune other than by criminal means. Honesty is an unknown concept in Russian
business. While Western capitalists are not always models of probity, they are nevertheless
the products of lengthy historical development and selection. By contrast, Russian capitalists
have acquired fabulous riches at lightning speed through mafia rackets and other means
unknown to their Western counterparts. It is because of this that the Russian mafia is so
sinister a force on the Russian and world scenes.

3
Some researchers were misguided by this underestimation of the state property. Thus, Robert Skidelsky – the
author of an excellent biography of J. Keynes – writes: ―In due voucher auctions of the early 1990s, the whole
of Soviet industry was valued at $5 billion – the price of one of the United States‘ larger companies. That
valuation was much too low, but it shows the enormity of the gap between the two countries‖ (Skidelsky,
1995, p. 105). It seems that it never occurred to R. Skidelsky that a country with industry worth the assets of
even the largest US company was hardly able to pose such a threat for the West, as the Soviet Union did.
Thus, the evaluation he refers to, shows only the ‗enormity‘ of a windfall benefits granted by Yeltsin‘s regime
to the nascent oligarchs at the expense of the whole society.
22 Soltan Dzarasov

The concentration of wealth in the hands of a narrow circle of people has been
characteristic not just of the initial period of development of Russian business, but of
subsequent years as well. Throughout the two decades since the market reforms began, the
gap between rich and poor in current incomes, and hence also in their property holdings, has
continued to grow. Aiding this has been our tax system, resolutely defended by
representatives of the oligarchy in the Duma and in Vladimir Putin‘s government. Income tax
in Russia is the lowest in the world at 13 per cent for everyone, from modestly-paid workers
to mighty oligarchs with multimillion-dollar incomes, and the authorities explain this as the
result of a peculiar necessity. If it were not so, the argument runs, entrepreneurs would
conceal their incomes, and the flow of revenues to the state budget would be less.
Entrepreneurs hide their profits as commercial secrets, while suffering no retribution. Any
attempt to monitor their activities is perceived by them as a breach of property rights.
The result has been massive inequities in the distribution of incomes and in the property
holdings of citizens. Table 8, below, shows this with particular clarity.

Table 8. Distribution of money incomes by 20-percent cohorts of the population

1992 1998 2000 2003 2005 2006 2007 2008

Money incomes – percentage 100 100 100 100 100 100 100 100
In 20-percent cohorts of the
population:
First (with lowest incomes) 6.0 6.0 6.0 5.5 5.4 5.3 5.1 5.1
Second 11.6 10.4 10.4 10.3 10.1 9.9 9.7 9.7
Third 17.6 14.8 14.8 15.3 15.1 14.9 14.8 14.8
Fourth 26.5 21.2 21.2 22.7 22.7 22.6 22.5 22.5
Fifth (with highest incomes) 38.3 47.6 47.6 46.2 46.7 47.3 47.9 47.9
Including the 10% of the
population with the highest
incomes - - - 29.7 30.1 30.6 31.1 31.1
Gini coefficient 0.289 0.399 0.399 0.403 0.409 0.416 0.423 0.423
Assets coefficient (multiples) 8.0 13.8 13.8 14.5 15.2 16.0 16.8 16.9
Decile coefficient (multiples) - - - 6.7 7.0 7.2 7.5 7.5
Sotsial'noe polozhenie and level 'zhizni Rossii naseleniya 2,001th Statisticheskiy Proceedings, p. 130.
Sotsial'noe polozhenie and level 'zhizni Rossii naseleniya the 2009th Statisticheskiy Proceedings, p.
134.

Using the data in this table, it is possible to detect a tendency for the gap in incomes
between various strata of the Russian population to increase, even if this is not expressed
precisely. Hence, at the beginning of the reforms in 1992 the Gini coefficient stood at a figure
of 0.289 (earlier data put it at 0.260 – see Rossiyskiy statisticheskiy…, 1999, p. 155), which
can be taken as the level of the pre-reform period. By 1995 it had risen to 0.387, and by 2000
to 0.399. By 2008, the table shows, the Gini coefficient had reached 0.423. The increase in
the decile coefficient from 6.7 in 2003 to 7.5 in 2008 reflects the same tendency.
Nevertheless, these data do not reveal the whole extent of the polar contrasts in property
ownership. For an accurate picture, it is necessary to use a more detailed breakdown of the
population than that employed in the above table, where the grouping of each fifth is too great
to be homogeneous. This is particularly true of the fifth cohort, which includes the most
prosperous sector of the population. Within this sector is a very narrow stratum which has
succeeded in concentrating Russia‘s maj in its hands. The reality of the distribution
assets
of wealth in our country is best characterised by the position of this stratum, and not by that
 Experimental Capitalism in the Former USSR 23

of the whole 28.4 million people in the top fifth. The extreme concentration of wealth in
present-day Russia is a notable feature of the country, as can be seen from the following
table:

Table 9. Nationality of the world’s 100 richest billionaires, and coefficient

of oligarchy in 2007

Country Number of Average Total wealth Share in the total Wealth of billionaires
billionaires age (years) (billions of US wealth of the as a share of GDP of
(individuals) dollars) selection (%) country (%)*
Russia 14 45.5 167.8 11.7 17.0
US 38 66.4 567.6 39.7 4.3
Canada 2 57.5 29.9 2.1 2.4
Egypt 1 52.0 10.0 0.7 9.3
France 5 73.3 81.2 5.7 3.6
Germany 9 67.4 106.9 7.5 3.7
Greece 1 60.0 11.0 0.8 4.5
Hong Kong 3 78.5 55.0 3.8 29.0
India 8 53.7 122.9 8.6 13.6
Italy 3 73.7 33.3 2.3 1.8
Kuwait 1 63.0 11.5 0.8 14.2
Mexico 1 67.0 49.0 3.4 5.8
Saudi Arabia 4 62.5 43.2 3.0 13.9
Spain 3 66.0 40.3 2.8 3.3
Sweden 4 75.8 71.4 5.0 18.5
Switzerland 1 41.0 8.8 0.6 2.3
UAE 1 53.0 8.0 0.6 6.2
Great Britain 1 55.0 11.0 0.8 0.5
Total 100 - 1428.8 100 -
Source: E.V. Balatskiy. Oligarkhichnost‘ rossiyskoy ekonomiki v usloviyakh globalizatsii.
Kapital strany (Zhurnal ob investitsionnykh vozmozhnostyakh Rossii), Internet-resurs, http://www.
kapital-rus.ru/articles/article/962/, accessed 23 May 2010.

It turns out that as a result of three hundred years of the development of capitalism in the
US thirty-eight extremely wealthy families have emerged, with 4.3 per cent of Gross
Domestic Product concentrated in their hands. In Russia, with a population less than half that
of the US, in the course of twenty years 17 per cent of the country‘s GDP has finished up in
the hands of twenty-four people. In India, where capitalism has existed for well over a
hundred years, and where the population is more than eight times greater than that of Russia,
only eight families fall into the wealthiest group. Great Britain, the originator of capitalist
development, has only one such person.
To judge from these data, the ―golden hundred‖ richest people of Russia, whom the
journal Forbes considers the champions of Russian business, control about a third of gross
product. If we were to go further and to calculate the total assets of the thousand wealthiest
business entrepreneurs and bureaucrats in Russia, including the sums that are hidden or put in
the names of figurehead owners, the result would probably come to no less than three quarters
of the national wealth and income. What remains for the rest of the population? Nothing like
this situation exists in any civilised country. The capitalist experiment in Russia has resulted
in capital becoming concentrated on a scale and with a rapidity unprecedented in history.
Economic science is left to try to explain why this has happened.
24 Soltan Dzarasov

How could such a thing have occurred, considering the data in Table 3? While the main
economic indicators were plummeting, at the same time the rich were becoming richer and
the poor poorer. A single answer forces itself upon us: the reforms were implemented on the
initiative of a handful of people who were acting in their own interests, and who to this end,
set the market mechanism in motion by unrestrainedly concentrating wealth in their own
hands. Such a redistribution of wealth to the advantage of a few people could not occur
except to the detriment of others. Along with their right to property, these ―others‖ have also
lost their sources of support, and their standard of living has fallen precipitately.

F. From Population Growth to Population Die-Back

As a result of what has been described here, the previous growth of the population and
increase in its level of prosperity have been replaced by impoverishment and population
decrease. This outcome must be viewed as the next grievous consequence of the market
experiment. Once again the facts and figures will be allowed to speak, relating what has
occurred more eloquently than words could ever do.

Table 10. Coefficient of mortality in the USSR-Russia and various developed countries,
1970-2008

1970 1980 1990 2000 2005 2008

USSR-Russia 8.2 10.3 10.3 14.7 16.1 14.6
US 9.4 8.7 8.8 8.7 14.0 -
FRG 9.4 8.7 8.8 8.7 10.8 10.3
Great Britain 11.8 11.8 11.5 10.9 12.0 9.4
France 10.7 10.2 9.0 9.1 12.7 8.5
Japan 6.9 6.2 6.4 7.4 8.4 8.6
Source: Narodnoe khozyaystvo SSSR 1922-1982gg., Moscow, pp. 28-29; Narodnoe khozyaystvo SSSR
b 1975 g., Moscow, pp. 42-43; Norodnoe khozyaystvo SSSR za 70 let, pp. 406-407, 710;
Narodnoe khozyaystvo SSSR v 1990g., p. 665; Rossiyskiy statisticheskiy ezhegodnik, Moscow,
2001, p. 104; Rossiyskiy statisticheskiy ezhegodnik, Moscow, 2009, p. 737.

As can be seen from Table 10, during the twenty years preceding the reforms (1970-
1990), the death rate of the Soviet population was comparable to the figures for the developed
countries cited, with the exception of Japan. If we take into account the USSR‘s lag of around
50 per cent in GDP per capita compared to the developed countries – and of about 25 per cent
in consumer spending compared to the US – these results testify to the virtues of the social
system that existed here. It is true that as time passed changes in the age structure of the
population (an increase in the proportion of people in the older age categories), together with
negative phenomena during the 1980s in the economy and social sphere, caused the death rate
in the USSR to increase somewhat. Nevertheless, it remained broadly similar to death rates in
the developed countries.
Why was it that with a lower per capita GDP, the USSR succeeded in matching more
developed countries in the death rate and life expectancy of its population? The reason is
clearly that the Soviet Union was a socially-oriented society. The USSR was a pioneer in
introducing free medical care for the whole population, irrespective of people‘s material and
 Experimental Capitalism in the Former USSR 25

social positions. The Soviet Union established a system of sanatoriums and prophylactic
medicine accessible to all layers of society, something which did a good deal to improve
people‘s health. It is not surprising that the high death rates of earlier times fell dramatically,
with the result seen in Table 10. Now, the main elements of the system of free medical care
have been done away with, on the principle of implementing market relations in every sphere
of life. Quality medicine is now on a fee-for-service basis, while the free health care is too
low-grade to hold back the increase in the death rate.
The free provision to the population of medical care, education and other important
services was an important reason why the Soviet Union, like other socialist countries (with
the exception of the GDR) rated higher in terms of the Human Development Index (HDI)
than of GDP per capita. Here it should be noted that the HDI index does not take into account
such benefits, unique to the socialist countries, as guaranteed employment and free housing
(rents in the USSR were so low that they could be considered symbolic).

Table 11. Country rankings for Human Development Index and per capita GDP, and
the difference between these rankings in 1987 and in 2007

HDI ranking Per capita HDI Per capita

(A) GDP ranking B-A ranking (A) GDP B-А
(B) ranking (B)
1987 2007
Czech Republic 25 29 4 36 37 1
(1)
Hungary 30 44 14 43 46 3
Russia (2) 26 30 4 71 55 -16
GDR 21 16 -5
Bulgaria 27 32 5 61 69 8
Yugoslavia 31 41 10
Poland 33 48 15 41 53 12
Albania 47 70 23 70 93 23
Romania 41 47 6 63 64 1
USA 19 2 -17 13 9 -4
Great Britain 10 18 8 21 20 -1
FRG 12 11 -1 22 24 2

1. In 1987, Czechoslovakia. 2. In 1987, USSR.

Calculated from: Human Development Report 1990, New York, Oxford, 1990, p.119; Human
Development Report 2009, Basingstoke, New York, 2009, pp.171–173.

In GDP per capita, the USSR in 1987 held thirtieth place in the world, and in terms of
HDI, twenty-sixth place – that is, four places higher. The same pattern can be seen in the
cases of other socialist countries, and it provides a reliable indicator of their social character.
Now, as a result of the market experiments, this characteristic of Russia‘s economy has been
lost. Russian GDP per capita has plunged to fifty-fifth, and its human development index still
further, to seventy-first place in the world. This reflects the substantial worsening in living
standards, and the rise in the death rate seen in the preceding table.
As a result of the dramatic decline in living standards, the growth of unemployment and
crime, and the increased death rate, the previously steady rise in Russia‘s population has been
replaced by absolute decline. This is shown in Table 12.
26 Soltan Dzarasov

The figures in this table are rounded and only approximate, but they nevertheless deserve
very serious attention. They show that it is the increased death rate that is the cause of the
decline in the Russian population. Even the compensating factor represented by the influx of
refugees from other republics of the former USSR has been unable to counteract the tendency
for the population to diminish. Due to the vastness of Russia‘s territory, the country‘s
population density is characteristically low, and with the outflow of people from regions such
as the North and the Far East, this population loss is fraught with the danger that these
territories will be lost. That is not to speak of the weakening of the country‘s overall potential.
It should also be remembered that a significant sector of the population, numbering in the
millions, is merely counted as being Russian; these are people who live and work abroad,
expanding the potential of some other country rather than their own.

Table 12. Population of the Russian Federation and its decline in the years 1989-2009

Years Population in Increase (+) or Decrease Years Population in Increase (+) or Decrease
millions (-) in thousands millions (-) in thousands
1989 147,0 - 2000 145,6 -1100
1990 148,0 +1000 2001 146,3 -300
1991 148,3 +300 2002 145,2 -1100
1992 148,7 +400 2003 145,0 -200
1993 148,7 - 2004 144,2 -800
1994 148,4 -300 2005 143,5 -700
1995 148,3 -100 2006 142,8 -700
1996 148,3 - 2007 142,2 -600
1997 147,5 -800 2008 142,0 -200
1998 147,1 -400 2009 141,9 -100
1999 146,7 -400
Sources: Rossiyskiy statisticheskiy ezhegodnik: Statisticheskiy sbornik. Moscow, Goskomstat Rossii,
2001, p. 82; Rossiyskiy statisticheskiy ezhegodnik 1999, p. 51; Rossiyskiy statisticheskiy
ezhegodnik 2003, p. 75; Rossiyskiy statisticheskiy ezhegodnik 2009, p. 77.

G. The Increase in Crime

A further lamentable result of the market experiment is the growth of crime, which has
penetrated all areas of life and in many ways, imparted a criminal character to society. Some
idea of this is provided by the following table:
In 2008, 262 cases of banditry were reported, along with 25 hired killings and 698
kidnappings. In the area of the economy, 307,600 crimes were reported, including 55,900 on
a large or very large scale.
Here as in other cases we are forced to contend with inadequate information, since for
various reasons many breaches of the law are not officially reported. Nevertheless, it can be
seen that the overall number of crimes of various types has almost doubled during the years of
the experiment. Robberies have almost quintupled, while crimes related to illegal drug
dealing have increased by a factor of 48. Terrorism, banditry and hired killings, meanwhile,
used to be unknown in our country.
 Experimental Capitalism in the Former USSR 27

Table 13. Number of reported crimes, by categories (in thousands)

Year 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2007
x
1990
Total reported crimes
1839.5 2755.7 2952.4 2968.3 2526.3 2756.4 2893.8 3554.7 3855.4 3582.5 1.95
Including:

Robbery 83.3 140.6 132.4 148.8 167.3 198.0 251.4 344.4 357.3 295.1 4.74
Robbery with violence 16.5 37.7 39.4 44.8 47.1 48.7 55.4 63.7 59.8 45.3 2.74
Theft 913.1 1367.9 1310.1 1273.2 926.8 1150.8 1276.9 1573.0 1677.0 1567.0 1.71
Terrorism (single
instances) … 1 135 327 360 561 265 203 112 48 48.0
Crimes connected with
the illegal trade in
narcotics 16.3 79.9 243.6 241.6 189.6 181.7 150.1 175.2 212.0 231.2 14.20
Source: Rossiyskiy statisticheskiy ezhegodnik 2009, p. 297.

The orgy of crime, of which the table gives an inadequate picture, is a direct consequence
of the unique manner in which the Russian mentality perceives what Western parlance terms
―market freedom‖. In a country where neither developed traditions of private
entrepreneurship nor the legislative basis for it had ever existed, the transition in a single
bound to market mechanisms and the rapid privatisation of state property were perceived by
the population as the abolition of legal and ethical restraints on human conduct. This is how
freedom was understood, and it could not have been different. At the time when market
mechanisms were introduced, three generations of people had grown up in the Soviet Union
who knew nothing of private property, and had been raised in the belief that collective
property as the basis for social well-being was sacred and inviolable. Then, suddenly, the
people who only the day before had been instilling this truth in others began seizing property
wherever they could get their hands on it. Critics of state paternalism, meanwhile, impressed
the message on us that from now on, everyone was obliged to look out for themselves. In this
situation, enterprise directors and functionaries in the organs of official power – that is,
people who had access to state assets – implemented privatisation to their own advantage.
Outside this relatively narrow circle of people, however, there remained the great majority,
who owing to their age or position in society could not privatise anything. They were still
required to look out for their own interests. But how?
The unprecedentedly rapid concentrating of property in the hands of a few, as examined
earlier, greatly narrowed the field of entrepreneurial activity for most Russians. This forced
them to seek other sources of income, and other ways of providing for themselves. Even
before this, legality had not been overly respected; now, significant numbers of young people
were drawn into various forms of organised crime. Entrepreneurial activity in Russia remains
impossible without what criminal jargon terms a ―roof‖ – that is, protection provided by
organised crime. Relying on laws and state instrumentalities is impossible.
In many cases, the organs of law enforcement are themselves in league with organised
crime, and in return for bribes, help them carry out their activity. Functionaries who are in
collusion with the criminal world are said to be ―reversed‖, meaning that their mode of
28 Soltan Dzarasov

activity is the reverse of their official status. Some larger property owners who are able to pay
big bribes can work things so that the state organs and officials act as their ―roof‖. But for
smaller businesses the protectors, with whom the entrepreneurs are obliged to share their
profits, are usually independent criminal groups and lower-level state bodies. It is not an
exaggeration to say that Russian business cannot get by without criminals. In this milieu
contract killings of competitors, and of anyone who might prevent the seizure of new
property, are commonplace. Of the people who rushed heedlessly to privatise state property in
the early 1990s, more than a few died on the orders of their class brothers in the internecine
warfare, and did not get to enjoy the fruits of their unscrupulous activity. But those who
survived finished up as oligarchs, and now adorn the list of the few hundred richest people in
Russia. They are not embarrassed by their criminal backgrounds, which do not hinder them in
the least.

H. The Generalised Nature of Corruption

The accepted formulae that society does not owe anything to anyone, and that everyone
must now look out for themselves (that is, the principles of the market and capitalism) also lie
behind another outcome of the market experiment – generalised corruption. It should be said
that bribery is rooted to a significant degree in our traditions, which consider informal ties
more important that formal ones. In Soviet times, however, bribery existed on the periphery
of our lives, and the top echelons were unaffected by it. Noting the contradictory role played
by the organs of coercion (the KGB and the Interior Ministry), Andrey Sakharov (1988, p.21 )
argued that while violating the law and human rights these bodies simultaneously waged a
fight against corruption, and so contributed to the health of society. Sakharov was not a mere
observer of the activity of these bodies, but their victim, and had no reason to whitewash
them. The truth, however, was more precious to him than satisfying feelings of personal
hostility.
By contrast, corruption in our present-day society has infected the top echelons more than
anyone else, and the crucial breeding-ground for this plague remains at this level. No longer
is corruption a reflection of our traditions and mentality; now, it reflects the way in which the
market reforms were carried out. To expedite the seizure of public property the initiators of
the reforms deliberately, and from the very first, unleashed the mechanism of corruption. In
the foreword to a book by one of his collaborators, Yegor Gaydar openly stated:

―If the road to the market had not, so to speak, been smeared with honey, drenched with
dollars for the nomenklatura, then the nomenklatura would scarcely have proceeded along it
willingly, and it is unlikely that the country could have traversed this road peacefully and
without bloodshed.‖ (Gaidar, 1994, p. 7)

The truth is that no-one raised a hand at first to seize public property, which until then
had been viewed as the inviolable basis for the general welfare. The interest of the
nomenklatura in owning wealth had therefore to be stimulated, which was duly accomplished.
The road to privatisation was thus soaked in advance with the dollars of bribes to ensure
that the nomenklatura, which had been standing guard over public property, would agree to its
being divided up – on the condition that the members of the nomenklatura would receive their
 Experimental Capitalism in the Former USSR 29

own, outsized portions. This was done before the eyes of the entire population. In the process,
both the people who were already in positions of power and those who had recently attained
office presented others with an example of permissiveness in acquiring goods by any and all
means. No sooner had the topmost layers of society freed themselves from observing the
norms of law and morality – with the seizing of the property of others becoming standard
practice – than many more people decided that they, too, were free of these constraints.
Corruption and secret deals to divide up public assets engulfed our vast country. Everyone
feverishly appropriated whatever they could.
Despite the clandestine nature of most of the corrupt deals, a good many came to light
and became notorious among the general public (Glinkina, 2006) In the summer of 1997 a
scandal erupted over a proposed deal involving the sale of state shares in the telephone
company Svyazinvest. It emerged that the then minister in charge of state property, Alfred
Koch, had had dealings with one of the would-be purchasers, Oneksim-Bank, and had
received from it the sum of $100,000 via the Swiss company Servina. The scandal had
scarcely been hushed up when in November it burst forth in a new form. A certain foreign
publishing house had paid a number of high-placed Russian bureaucrats, including First
Deputy Prime Minister Anatoly Chubais and the same Alfred Koch, an uncommonly large
honorarium of $450,000, ostensibly for a book on privatisation which they undertook to
write. In terms of intellect none of the proposed authors was capable of writing more than
trivialities on the topic, and nor did they. But the posts they occupied gave them access to
valuable information about Russian firms, including Svyazinvest, and their property; it was
for furnishing this information that the bureaucrats had been paid the designated sum. Despite
being widely reported in the mass media, these scandals were successfully smoothed over.
None of the guilty suffered any punishment, since they were the president‘s men, and were
allowed to do whatever they liked.
The upshot was that a situation became established, and silently accepted, in which
corruption had officially to be condemned, while in practice being recognised as a normal
mode of interaction in the relations between business and the state authorities under market
conditions. Appeals for legalising the bribery of officials, as a normal way for both sides to
conduct their dealings, even acquired a certain currency in the literature. It is not surprising
that with the market perceived in this fashion, Russia has become one of the most corrupt
countries on earth. According to the index of corruption published in November 2009 by the
global organisation Transparency International, the Russian Federation held the 146th-worst
place among 180 countries. The experts of Transparency International calculated that ―the
annual market in corrupt transactions in the country has reached the sum of $300 billion.‖ In
the previous year alone the average size of an everyday bribe had risen from 8000 rubles to
27,000 (Rosbizneskonsalting, 2009).
It is true that from time to time official spokespeople, including leading state figures,
burst into loud condemnations of corruption, but corruption nevertheless flourishes under
their protection. While small fish are caught occasionally in the net of the justice system, it is
understandable that this can change nothing, and is merely used to provide the appearance of
a struggle against corruption. When corrupt dealings surface that involve people close to the
centres of power, the law enforcement agencies are quick to hush them up.
The business magazine Forbes, for example, gives the following account of how a
celebrated corruption case involving former high-placed Kremlin official Pavel Borodin, and
investigated by former General Prosecutor of the Russian Federation Yury Skuratov,
30 Soltan Dzarasov

eventually finished up. ―In the late 1990s,‖ the magazine writes, ―Skuratov began an
investigation into abuses permitted during the reconstruction of the Great Kremlin Palace and
the Accounting Chamber, for which the budget had allotted $492 million. The general
contractor was the Swiss company Mercata, whose vice-president was Andrey Siletsky, a
son-in-law of then presidential chief of staff Pavel Borodin. From each tranche of the
payments, Mercata sent commissions to a company registered on the Isle of Man. From there
part of the money, after passing through several accounts, finished up in companies owned by
Pavel Borodin and his daughter Yekaterina Siletskaya – the ‗beneficiaries‘ of the scheme, and
the people of whom Skuratov now speaks. Borodin was arrested in the US in 2001; in all, the
request for his extradition from the US to Switzerland states, he and his daughter received $30
million. In Geneva, Borodin was charged with having tried to launder money through Swiss
companies. Using information supplied by Skuratov, the Swiss were able to trace the
subsequent route taken by the money and to show that the final recipients were Borodin and
members of his family.
In court, however, the case collapsed. A key element was lacking – official confirmation
from the Russian side that the money received by Borodin was of criminal origin. He escaped
eventually with a fine of 300,000 Swiss francs‖ (Forbes, no. 5 (74), May 2010, p. 106).
More than likely, the reason the case received publicity was because the US and
Switzerland became involved, in accordance with their national legislation; otherwise, we
might never have heard a thing. The case collapsed because Borodin was a close friend and
trusted associate of then President Vladimir Putin, and in present-day Russia such things are
more important than morality or the law. No Soviet leader, including Stalin, would have
intervened on behalf of such a person. This was not because Soviet leaders obeyed the laws –
they broke them as they wished – but because there was a certain morality in society which
leaders had to take into account. Now, the passion for enrichment to which the market has
given rise in Russia has so altered morality and the law that leading state figures openly shield
their protégés from any kind of charge.
To pick someone else‘s pocket, whether of a private individual or the state, is no longer
thought reprehensible. The practice of ―raiding‖, in which gallant lads turn up in your office
and try to throw you out and seize your property on the basis of a judicial decision purchased
by their boss, has become commonplace. To buy such a decision is not hard; the difficulty lies
in finding, within the structures of officialdom, an all-powerful protector ready to support the
arbitrary seizure.
A bill has now been introduced into the State Duma to legalise payments of a million
rubles (about $30,000) to ―buy out‖ young men from army service, with the burden being
transferred to the children of less well-off parents. On the internet, current prices are
published for the bribes that need to be paid to officials for the taking of some decision or
other, and also advertisements for lobbying organisations which for a set fee are prepared to
ensure that a necessary resolution is passed by the Duma or adopted by the government.
Positions as deputies in the Duma are bought and sold as run-of-the-mill commodities; these
posts are attractive because they provide their owner with immunity from being called to
account for illicit actions. Become a deputy, and then you can do as you wish. Anyone with
large amounts of money can buy a deputy‘s mandate, now reputed to cost from three to five
million dollars, and in this way can guarantee a safe path into his or her pockets for the multi-
million-dollar proceeds of illegal operations. In such a parliament, it is better to belong to the
 Experimental Capitalism in the Former USSR 31

ruling party, and to put your stamp on decisions that suit the authorities; otherwise, you will
find yourself out the door, and will lose your parliamentary immunity.
The most outrageously criminal acts of corruption take place, of course, behind closed
doors, and never become widely known. But enough evidence of them is available for
conclusions to be drawn about the criminalised nature of society. Here is what an
authoritative study of the question has to say:

―Participating in the distribution and redistribution of the national budget, of the state
budget in modern Russia, provides significantly greater economic gains to the people who
perform managerial functions than any managerial activity properly considered. With the
average level of profitability in the real sector of the economy at 5 per cent, the norm for
profits on particular rent-orientated operations has reached several hundred per cent. In such
circumstances, the logic of market behaviour impels participants in economic activity to take
their capital out of the real economy and increasingly, to direct their money and energy toward
influencing the distributive processes. They have an incentive to put their resources into
establishing special relationships with state officials who are responsible for taking decisions
that are crucial for business. According to various estimates, commercial organisations devote
from 30 to 50 per cent of their income to maintaining special relationships with corrupt state
officials, who often exercise their functions as representatives of organised criminal groups‖
(Glinkina, 2006).

In my view, the evidence noted above provides sufficient basis for concluding that the
neoclassical economic model we have embraced does not accord with the interests and goals
of our society. Using this model, we have not succeeded in creating a civilised market
economy. Still more distressing is the fact that we have made little progress along the road of
democracy. We not yet found a model of society that matches our specific character and
interests.

4. REDUCING DEMOCRACY TO FORMALISM

As explained earlier, none of the dissidents of the Soviet era demanded the restoration of
capitalism, or the rejection of collective property and its privatisation. Nonetheless, the
reforms took precisely this course. All the energies of the reformers were switched over to
seizing public property, while democracy, as already noted, was reduced to a formality of
little significance. Various parties now participate in elections, but the outcome of these
elections is predetermined. This speaks volumes about what such democracy is worth.
Particularly important for the reducing of democracy to mere formalism in the post-
Soviet states has been the polarisation of society, in social and property terms, that has been
brought about by the market reforms. These transformations raised some people to the
summit of economic and political might, while lowering others to the point where they
retained only one right: to go to the polls from time to time and to vote ―as required‖. The
reforms created favourable conditions for this. So long as the struggle for power and wealth
continued, democratic rhetoric was in fashion. But once the goal of seizing property had been
achieved, democratic institutions became not just unnecessary, but also dangerous. Using
democratic forms of rule – supposing these to be real, and not just adornments – the lower
and middle strata of the population are able potentially to achieve their goals, including at the
32 Soltan Dzarasov

expense of the topmost layers. The latter have no interest in allowing this to happen, and
hence democratic institutions and rules in our countries are robbed of real content.
Among the main obstacles to the development of democracy in the post-Soviet states is
the deteriorating welfare of the population as a result of the reforms. The experience of the
countries where democracy exists in developed form shows this clearly. The lesson here is
that democracy cannot be transferred through the imitation of someone else‘s experience,
much less installed on demand from outside. It can grow only out of a society‘s own
requirements, as was the case in the countries which first set out on the road of democratic
development – Britain, France and the US. An important feature of these countries was the
fact that democracy developed and became established there along with growth in the
material well-being of the population. L. Thurow observes at one point, ―The idea that
maximizing personal consumption is central to individual welfare is less than two hundred
years old. Without this belief the incentive structure of capitalism has no meaning and
economic growth has no purpose‖ (Thurow, 1996, p.11). The two hundred years of rising
popular well-being noted by Thurow are also the time when democracy became securely
implanted in the countries which acted as the pioneers of world democratic progress.
On the basis of the experience of the advanced countries, we can regard as historically
confirmed the thesis that democratisation of society (the state) and growth in the material
well-being of the population are two aspects of a single process, with each providing the
preconditions for the other. It is impossible to imagine a situation in which a state is
democratic, while the population has remained impoverished throughout an extended
historical period. Beggars cannot become free, and free people cannot remain in destitution.
Only growth in material well-being is perceived by the population as confirming the
advantages of the democratic way of life. If this well-being is absent, and if people remain in
continual need, there is a major risk that they will reject such ―democracy‖ and turn to some
other set of values. The impoverishment of the German population after the First World War
and in the years of the Great Depression was in no small measure responsible for the collapse
of Weimar democracy and for the coming to power of the Nazis in Germany in the early
1930s.
Great thinkers in Russia as well have always been deeply concerned with the question of
the relationship between bread and freedom. But before taking this up, we shall pose the
question: who is capable of acting as the bearer of democratic progress and of the growth of
popular well-being? Our answer to this question is different from the one usually encountered
in the West. Thus, Thurow in this connection asks as follows, ―If government is not to be a
socialistic owner of the means of production or a provider of social welfare benefits, what is
to be?‖, and replies: ―Capitalism‘s theoretical answer is that there is almost no need for
government or any other form of communal activities. Capitalistic markets can efficiently
provide all of the goods and services that humans want or need except those few items known
as pure public goods‖ (Thurow, 1996, p. 271).
This view of the role of the state in the economy was urged on us in the context of the
implementing of market reforms. The state, we were told, should stand aside from the
economy and from the resolving of social problems, and with the guards (the trade unions)
soundly asleep, should allow the wolves (business) to act in the sheep-fold as they chose,
subject only to their own self-regulation. Neoclassical orthodoxy, in the person of its foremost
representatives, shares and supports such a view.
 Experimental Capitalism in the Former USSR 33

For neoclassical thinkers, a negative attitude to the intervention of the state in the
economy flows directly from their view of the state solely as an evil, threatening the freedom
of the individual. ―Freedom,‖ writes Milton Friedman, ―is a rare and delicate plant. Our minds
tell us, and history confirms, that the great threat to freedom is the concentration of power.
Government is necessary to preserve our freedom, it is an instrument through which we can
exercise our freedom; yet by concentrating power in political hands, it is also a threat to
freedom. Even though the men who wield this power initially be of good will and even
though they be not corrupted by the power they exercise, the power will both attract and form
men of a different stamp‖ (Friedman, 1982, p. 2).
These words should cause bewilderment in at least two respects. The threat to freedom is
associated exclusively with the arbitrary power (susceptibility to corruption) of state
functionaries, while the vices of business are excluded from consideration as something
eternally absent. Our experience, however, tells us differently: business is more liable than the
state to violate the rights and freedoms of the individual. Freedom is interpreted by Friedman
simplistically, as something which proceeds from our power of reasoning (―our minds tell
us‖). In reality, freedom is exceedingly complex; if it were possible to choose freedom at the
prompting of our reason, then we would never have witnessed the ferment of passions,
accompanied by bloody wars, revolutions and other upheavals, which over the centuries have
surrounded this choice. However we understand freedom, it was not simply attained through
the urgings of reason. It had to be conquered by the forces of progress through difficult
struggles, including struggles for consistent increases in popular welfare.
In this connection, it is interesting that the Russian writer Fedor Dostoevsky in his novel
The Brothers Karamazov explores the ambiguities of this question in the monologue of the
Grand Inquisitor with Christ. Widely known in world literature, this legend of the Grand
Inquisitor has been the subject of many different interpretations, but here we shall examine it
from the angle of the question we are particularly interested in, that of bread and freedom.
The writer describes events supposed to have taken place in the Spanish city of Seville in the
sixteenth century, when the fires of the Inquisition were everywhere consuming heretics.
Suddenly, Christ appears before a crowd of people gathered in front of the city cathedral.
Christ aims to save the people through his divine power, but directly behind him there appears
an emaciated ninety-year-old man in the form of the Grand Inquisitor, embodying earthly
authority. The heavens are subject to the power of Christ, but earthly affairs are beneath the
sway of the Grand Inquisitor, who orders the guards to take Christ and lock him in the dark
dungeon of the Holy Court. At night the Grand Inquisitor goes down there and with all the
strength of the evil that is within him, pours forth his reproaches on Christ. The essence of his
rebukes is that Christ promised people that, through faith in his teaching, they would receive
freedom; but that this freedom was not granted, since Christ had placed it on a higher level
than humankind‘s daily bread. Man does not live by bread alone, Christ told people, and
called upon them to put ―fire from the heavens‖ above all else. ―You did not teach,‖ the
Inquisitor rebukes Christ, ―that such a thing is within the powers of only a few, while people
in their great multitudes are weak, and faced with hunger, will forget your precept and will
tell us, ‗It is better that you enslave us, but feed us.‘‖ The position of the Grand Inquisitor is
that the high moral demands of Christianity, as set forward in the teachings of Christ, are not
within the powers of humankind, and that when according to the logic of things people are
faced with the choice of bread or freedom, they will prefer to have bread and to sacrifice
freedom. Bearing the burden of freedom is beyond the powers of someone who is
34 Soltan Dzarasov

preoccupied with getting a piece of bread. Freedom is not a divine gift handed down from
heaven, but a heavy burden of everyday life; bearing it is within the strength only of people
who are free from cares about a piece of bread.
Whatever our views on the mystery of the artistic image, the dilemma of bread or
freedom is perfectly real and earthly. Impoverished people cannot bear the burden of
freedom, and surrender it in exchange for bread. In the name of freedom we carried out the
greatest revolution in the history of the world; then, we sacrificed the freedom we had
conquered in the hope of receiving bread from those in power. We finished up under the sway
of Stalinist despotism.
For people who are consumed with worries about a piece of bread, freedom is an
impermissible luxury. Meanwhile, the Western critique of our present situation usually points
to our lack of democratic freedoms, while not troubling with the question of why this should
be so. This critique fails to touch on the issue of how democratic freedoms are linked to the
level of popular well-being. It is only when a certain level of prosperity has been reached that
the values of freedom and democracy come to the fore. This is how it happened in our case.
After many years, having attained a certain level of well-being and cultural development, we
recognised the need for broader freedoms, and began to yearn for democracy. This shift found
its expression in Gorbachev‘s perestroika, which proceeded under the slogan: ―More
socialism – more democracy.‖
The increase in the well-being of the population, however, was not achieved thanks to
private business as the ideas of Friedman and Thurow suppose, but thanks to the role which
the state played in the economy and in social life during that period. When private business
entered our lives the level of well-being of most of the Russian population declined markedly,
and simultaneously, we took our distance from democracy. People who barely make ends
meet tend not to have the time or the opportunity to take part in public affairs, and most
importantly, they are dependent on whatever pittances they receive from their masters. Our
experimental capitalism has once again placed ordinary citizens in the humiliating position of
having to beg for crumbs from the table of their bosses. Once again the problem of bread –
that is, of satisfying people‘s primary needs – has grown acute, and the need for freedom has
been shifted to the background.
Ordinary working people have gained nothing, and lost a great deal, from the fact that so
many of them no longer work in state enterprises but in private firms. The state functionaries
of Soviet times were under the control of society and implemented laws which guaranteed
workers certain rights. Workers could be sacked only in exceptional cases. Most
fundamentally, and as explained earlier, plans for the development and reconstruction of
enterprises took into account the need to ensure employment and wages for everyone. The
trade unions did not organise strikes, but they did keep a vigilant eye on employment and on
the observing of the social rights of workers. Nothing of this remains. Now the employer is
king, and does what he or she wants without restriction. Using the freedom of
entrepreneurship as cover, employers readily evade all controls, and in practice, can violate
the rights of workers at will. The activity of trade unions has been reduced to collecting dues,
while serving the interests of the bosses. The workplace trade union committees are made up
of enterprise owners rather than of rank and file union members, and do more to defend the
former than the latter. Earlier, we never had independent trade unions that would stand up for
rank and file workers regardless of the authorities, and this is even more true of the situation
today.
 Experimental Capitalism in the Former USSR 35

The only period when real democracy (with, of course, many limitations) has existed in
Russia was during Gorbachev‘s perestroika, when glasnost and freedom of speech opened the
way for meaningful elections, with a choice of candidates, to the legislative organs of the
state. Glasnost has now been revoked, and the elections have lost all elements of choice.
Using the official media, the authorities tell the population only what they consider necessary,
with everything else kept under wraps. In formal terms the elections feature alternative
candidates, but as has been explained, the results of the voting are always more or less known
in advance. Victory invariably goes to the ―party of power‖. Authoritarian regimes have no
reason to object to ―democracy‖ of this type, and often will do their best to practice it, seeing
in it a means of legitimising their rule. In this respect, the present regime in Russia differs
little from that in Soviet times. Just as there was no possibility of replacing the Communist
Party in the Soviet era, so today there is no possibility of replacing the United Russia party,
set up by state bureaucrats and wielding power, or its leaders Vladimir Putin and Dmitry
Medvedev. By analogy with the Communist Party of the Soviet Union, United Russia proudly
describes itself as the ―party of power‖, without noticing (or more precisely, not wanting to
notice) that this is incompatible with the democracy to which, at least verbally, it swears
allegiance. Accordingly all ―elections‖, to both federal and local organs, cannot have any
outcome except victory for the ―party of power‖; the function of the polling is to ensure that
this party remains ―legitimately‖ in office.
In its supposed multiparty character, the present political order in the post-Soviet states
was cast in the same mould as the system that existed in the European socialist countries,
where the rule of the communist parties was embellished by the parallel existence of other
parties whose significance, however, was negligible. In these countries too, elections took
place, but they were incapable of changing anything. The other parties did not present any
real opposition to the communists. There is not, of course, any point in the existence of an
opposition which has no chance of coming to power and of showing in practice what it is
worth. Formal criticism of the existing authorities means little if it is not backed up by a
readiness to accept responsibility and to enact something different from what is there already.
The political forces that are now in power in Russia, like those of the past, aim to make
themselves impossible to remove from office. But if the elections are organised so as to
ensure that the opposition has no chance of ever coming to power, what is the point of having
an opposition? Only to create the appearance of something that does not exist. In the post-
Soviet states we now find the situation in which elections are held, but in such a way as to
ensure that power stays with the same political forces, and in some cases with the same clans
of people devoted to the ruler, just as with the clan that surrounded Stalin. In many cases the
movement has not been forward in the direction of democracy, but backward toward the
uncontrolled power of feudal-familial clans and the transfer by inheritance of supreme
authority, something that was excluded under the Soviet system. The advantages of the post-
Soviet order are not as incontestable as representatives of the new authorities make out.
Sociological research in 1998 found that 70 per cent of respondents preferred the Soviet
regime to the current one (Rose, 1998, pp. 40-41).
The Soviet regime, of course, was not democratic. Nevertheless, there were certain
foundations on which it rested, and which were observed. In particular, the principle of
collegiate leadership of the country was observed more or less consistently during the post-
Stalin period. The taking of the most important decisions followed discussions in various
forums – the Politburo, which with its 15-20 members made up the supreme leadership of the
36 Soltan Dzarasov

Communist Party; plenums of the party‘s Central Committee, b isting -700500 people;
and finally, party congresses with two to three thousand delegates. Implementing the
decisions that were adopted was obligatory for local organs, which were controlled by the
central authority as a matter of general necessity. This system should not, of course, be
idealised; it contained a good deal that was purely formal, or downright vicious. But unless
state organs impose a certain order they cannot function effectively, let alone make
democracy possible.
Not surprisingly, little of this order now remains. Sadly, it was not replaced by
democracy but by a continued authoritarianism, different from the Soviet variety but not
better. In 1979 the Politburo took the decision to send Soviet forces into Afghanistan
following a series of discussions, in the course of which many people objected to the
proposal; only after these discussions was the decision taken, with proponents of the
intervention still having difficulty swinging things in their favour. By contrast, the decision to
begin military action in Chechnya in 1994 took the form of a personal command from Boris
Yeltsin, without any previous discussion. The shock decision to make the shift from a
planned to a market economy was taken behind the back of the people, by a narrow group of
people who made up Yeltsin‘s immediate circle. It was also in this narrow circle that the most
important decisions were made on the transfer, to individuals from within this group, of tasty
morsels of public property. Such methods of operating can hardly be called democratic.

5. THE NEED TO RECONSIDER NEOCLASSICAL ORTHODOXY

The roots of the model of society that has been imposed in all the post-Soviet states are to
be found in the neoclassical theoretical concepts that hold sway in the world at large. These
concepts are claimed to be universal, as embodying the values of Western civilisation;
consequently, it is maintained, neoliberal ideas, constructs and recommendations are
applicable everywhere. But while paying tribute to the contribution made by Western social
thought to the treasure-house of world culture, we need also to recognise the values of other
civilisations, in which the particular character of each is reflected. The fact that civilisations
are different does not exclude the possibility of their interacting, including through borrowing
values from one another. Experience shows, however, that what is excluded is the possibility
of directly substituting the values of one civilisation for those of another.
Meanwhile, it is precisely such an attempt that was involved in the implementing of
market reforms in the states of the former Soviet Union. When Soviet socialism was in
profound crisis, and was faced with the need to modernise its economic and political system,
the new ruling class decided to carry this through according to the model of Western
civilisation, without regard for the specific nature of Soviet reality. In sum, and as was shown
earlier, we did not receive either a civilised market or an authentic democracy.
After the twenty-year experiment with the neoclassical model that has been imposed on
us, it is now clear that the values of one civilisation cannot be directly transplanted into the
soil of another. Even if we were to agree that the postulates of neoclassical orthodoxy match
the realities of the countries at the centre of world capitalism – which is untrue, as is shown
by the present crisis and by the fundamental criticism of these postulates by various
theoretical schools (Veblen, 1946, J. Robinson, 1972, 1974, Eichner, 1983, Minsky, 1986,
 Experimental Capitalism in the Former USSR 37

Lavoie, 1992) – it would still be hard to agree that they also correspond to the conditions
inhabited by four-fifths of the population of other countries. If the orthodox positions were
correct, then the peripheral countries would long since have raised themselves to the level of
the developed ones, and there would be no sense in categorising countries in this way. The
claim that the axioms of orthodoxy are universally true is disproved by the fact that countries
in which market relations have applied for equal lengths of time do not show equal results, as
was noted earlier in relation to North and South America.
The scope of the differences between countries in the capitalist world makes rubbish of
the explanation which followers of neoclassical orthodoxy, trying to justify their
recommendation that we pursue the Anglo-Saxon model of the market, provided for our
situation in the early 1990s. If all economic woes are to be explained by a lack of market
relations, how are we to understand the collapse of the Russian economy under the conditions
of the market and capitalism? What is responsible for the present economic and financial
crisis, if not market relations? And why has the crisis had least effect on China? Evidently,
because the Chinese economic model was devised in accordance with the specific traits of
Chinese civilisation, in which the market is controlled by the state, and the speculative
component of the market does not enjoy such freedom as in the West.
The peoples living outside the boundaries of Western Europe and North America are so
diverse, and their economies are developing under such strong impacts of local cultures,
established traditions, and distinct mentalities, that it is absurd to expect that their economic
life can be understood using rules that fail to take local peculiarities into account. These rules
(economic laws) cannot have identical effects everywhere, on the basis that we are all people
and need to find food, clothing and shelter, to satisfy our wants and to pursue our own
interests. This is all true, but it does not mean that the means we have for achieving our
interests, that is, the concepts of good and evil that are associated with the appropriation of
goods, are everywhere identical. Concealed behind the argument that the axioms of orthodoxy
are universal is the ambition of the civilisation of the West to do away with other
civilisations. American neoconservatives speak of this quite openly (Kristol 1995, Kagan
2003). But even when its adherents are not so explicit, the orthodox position assumes the
need for everyone to adopt the values of Western, and above all, American civilisation.
Our rejection of such an approach, along with our recognition of the right of every people
simply to be itself, and hence to choose its own model of development, is a response to two
fundamental flaws of classical capitalism. In the first place, this response accepts the position
of Keynes that excessive material inequality and unemployment is dangerous for society,
including capitalist society. Secondly, it accords with Marx‘s position that the equilibrium of
a capitalist economy will inevitably break down, and that the burden of the crises will be
shifted onto the shoulders of the poorer layers of the population. We shall begin by examining
the first of these propositions, before moving on to the second.
Keynes maintained that in pursuing laissez faire, capitalism balances on a knife-edge, and
finds itself in a state of constant instability. In his General Theory he explains his position
unambiguously:

―For my own part I believe that there is social and psychological justification for
significant inequalities of income and wealth, but not such large disparities as exist to-day.
There are valuable human activities which require the motive of money-making and the
environment of private wealth-ownership for their full fruition. Moreover, dangerous human
38 Soltan Dzarasov

proclivities can be canalised into comparatively harmless channels by the existence of

opportunities for money-making and private wealth‖ (Keynes, 1936, p.374).

As can be seen, Keynes considers certain differences in people‘s material positions to be

natural and indispensable for progress, ―but not such large disparities as exist today.‖ He saw
a threat to capitalism in the intensification of material inequality, urging that it be reduced so
as to relieve social tensions. Discussing the theory of laissez faire, he argues that the

―…ideal distribution of the production resources can be brought about through

individuals acting independently by the method of trial and error in such a way that those
individuals who move in the right direction will destroy those who move in the wrong
direction. It is a method of bringing the most successful profit-makers to the top by a ruthless
struggle for survival, which selects the most efficient by the bankruptcy of the less efficient.
The object of life being to crop the leaves off the branches up to the greatest possible height,
the likeliest way of achieving this end is to leave the giraffes with the longest necks to starve
out those whose necks are shorter‖ (Keynes, 1926, pp. 28-29).

Such is capitalism by definition. Longer-necked giraffes are to eat the most succulent
leaves, while those with shorter necks are to be trampled upon. The works of Popper (1966,
2002), Mises (1963, 1981, 1985a, 1985), Hayek (1978, 1994, 1980, 1983), Friedman (1982)
and of numerous other modern liberal theoreticians in essence defend Keynes‘s picturesque
conception of capitalism, but now as the most free and just of societies. These works affirm
that unless all giraffes have equal access to the leaves required for their nourishment however
long their necks, it will be impossible to secure the basic values of Western civilisation – that
is, market freedom and the profitability of private enterprise, which are identified with
efficiency and justice.
The Great Depression of 1929-1933 showed the bankruptcy of these ideas. In his work
The General Theory of Employment,Interest and Money, Keynes for the first time in non-
Marxist literature revealed the inner mechanisms of laissez faire that had led to such
developments. The review of the main positions of neoclassical orthodoxy that was begun in
this work heralded the Keynesian revolution in economic theory, whose full triumph would
be seen in the first two decades after the Second World War. The widespread application
during that time of Keynes‘s proposals for regulation permitted the ―golden age‖ of economic
growth in the capitalist countries.
Keynes‘s ideas strongly influenced the economic development of Western nations in the
second half of the twentieth century. The anti-crisis measures he suggested stimulated
economic growth. From the viewpoint of neoclassical theory, however, his ideas posed a
certain threat. Evеn though Keynes was hostile to Marxism, some of his ideas, in particular
his recognition of the inherent instability of capitalism and of its inability to rely on self-
regulation to provide sustained growth, played into the hands of Marxist critics of capitalism.
Keynesianism immediately began to grow stronger and to be widely accepted, so that instead
of reasoning with it, neoclassicists (Samuelson, 1947, 1955) decided to ―perfect‖ it by
ins rtnng it into the folds of neoclassical theory. Samuelson wrote: ―In recent years 90 per
cent of American conomist have stopped being ‗Keynesian economists‘ er ‗anti-Keynesian
economists‘. Instead they have orked towar a synthesis of whatever is valuable in older
economics and in modern theories of income determination. The result might be called neo-
 Experimental Capitalism in the Former USSR 39

classical economics and is accepted in its broad outlines by all but about 5 per cent of
extremely left wing and right wing writers‖ (Samuelson, 1955, p. 212).
Such a ―percentage‖ approach to defining who is right or wrong is hardly justified.
Instead of full employment being ensured through the regulation of aggregate demand, the
centre of gravity of Keynesian theory was shifted to the methods of monetary and fiscal
policy. The result was a strange metamorphosis, in which the rejection of the theory of
economic equilibrium began to be understood as its confirmation.
With Keynesianism now reduced to a mere addition to existing doctrine, talk of a
revolution in economic theory became null and void. Nevertheless, certain followers of
Keynes such as Joan Robinson (1971) and Nicholas Kaldor, (1980), disagreed with this
adaptation of Keynesian theory to neoclassical concepts. Robinson described the outcome of
this transfiguration as a ―bastard Keynesianism‖ and defended her own understanding, now
referred to as post-Keynesianism, which she thought was a more precise definition of its
scientific content.
A more profound study of the Keynesian heritage, meanwhile, demonstrates its lack of
homogeneity. In one area of his views Keynes remained faithful to classical concepts (he
described them as preclassical), while in another he fell under the influence of neoclassical
thinking. He left no doubt as to his fidelity to the former tradition, writing that he had an
affinity for ―the pre-capitalist doctrine that everything is produced by labour, aided by what
used to be called art and is now called technique, by natural resources which are free or cost a
rent according to their scarcity or abundance, and by the results of past labour, embodied in
assets, which also command a price according to their scarcity or abundance. It is preferable
to regard labour, including, of course, the personal services of the entrepreneur and his
assistants, as the sole factor of production, operating in a given environment of technique,
natural resources, capital equipment and effective demand‖ (Keynes, 1936, pp. 213-214).
Here it is important to note Keynes‘s assertion that everything is produced by labour; he
views labour as ―the sole factor of production‖, while technology and natural resources are
regarded as essential preconditions of production. This accords with the well-known assertion
of William Petty and Adam Smith that ―labour is the father of wealth, and the land its
mother.‖
Meanwhile, on a series of other question Keynes holds to views that differ from those of
the classical school, and which are better described as neoclassical. Here, Lavoie quotes the
following remark of Kaldor: ―We could even conclude that the real author of the so-called
‗neo-classical syntheses‘ was not Paul Samuelson, it was Keynes himself‖ (Lavoie, 1992, p.
3). In macroeconomics, Keynes resolutely parted from the neoclassical postulates, giving
them a different rendering, and emerged as an innovator in economic theory. But where
Keynes addresses microeconomic questions, and in particular value and price theory, he loses
the critical sting in his attitude to the classical concepts, and as has been shown, prefers to
adhere to the marginalist approach. Liberating himself from neoclassical postulates in one
area, Keynes remains subject to their power, failing to notice the conflict between his own
innovative views and conservatism.
The contradictory nature of Keynesian theory – its revolutionary character in one part and
its conservatism in another – caused it to be reconsidered by the right wing of his followers,
as represented by Hicks, Harrod, Samuelson, Modigliani and others. These latter had at least
partial grounds for incorporating Keynes into neoclassical theory, a procedure which received
the name of neoclassical synthesis.
40 Soltan Dzarasov

For the purpose of giving the earlier orthodoxy greater respectability and a scholarly
veneer, the ―neoclassical synthesis‖ on the one hand included in its make-up theories of
Keynes that matched its components, and on the other carried out a total mathematisation of
its postulates, so lending this theory the semblance of an exact science. This required the use
of numerous artificial limitations and concessions; in the process, economic analysis came to
be replaced by mathematical virtuality.
This excessive mathematisation meant a transition to an unrealistic depiction of the
economy. For neoclassical theory, however, there was a certain point to this. When cloaked in
mathematics, the theory of market self-regulation took on the appearance of a mathematically
proven theorem. In Keynesian literature it is shown that a self-regulating market in the Walras
sense, ensuring equilibrium of the market in all its areas, does not exist in reality (Eatwell and
Milgate, 1983, Eatwell, 1998). Nevertheless, this idea has such ideological value for
mainstream economics that the latter cannot reject it. By hook or by crook, and despite being
disproved by Keynesianism, the notion that a capitalist economy tends toward equilibrium
and effective self-regulation thus took on the status of an axiom in neoclassical theory.
Samuelson explains this idea as follows:

―Everybody receives money for what he sells and uses this money to buy what he wishes.
If more is wanted of any one good, say shoes, a flood of new orders will be given for it. This
will cause its price to rise and more to be produced. Similarly, if more is available of a good
like tea than people want, its price will be marked down as a result of competition. At the
lower price people will drink more tea, and the producer will no longer produce so much.
Thus equilibrium of supply and demand will be restored.
―What is true of the market for consumer goods is also true of the market for factors of
production such as labor, land, and capital inputs‖ (cited from Cooper, 2008, p. 4-5).

If Samuelson were correct, then today there would be no crisis. But in the works of the
above-mentioned Minsky, Eatwell and Milgate, and of numerous other post-Keynesians, it is
shown that capital markets behave differently. A distinctive confirmation of their theory of
financial speculation is provided by the well-known practitioner in this field George Soros,
who describes his experience in numerous books (see, for example, Soros, 2003). In these
works it is shown that thanks to the dominance of financial speculators, the capital markets
function differently from the ―normal‖ commodity markets of Paul Samuelson. While the
consumers of material goods buy less of them when the price goes up, speculators do the
opposite. Their strategy is based on buying assets whose prices are rising, in order to resell
them at a profit later on. A flagrant example of the destabilising role of speculative capital is
provided by the modern oil market. In the lead-up to the crisis rising oil prices brought
reduced demand from consumers, but their exit from the market was more than made up by
an increase in speculative purchases. Thanks to the latter the price of oil reached fantastic
heights.
As a result of the expansion of speculative capital so-called ―financial bubbles‖ appear on
the capital markets – that is, the prices of financial assets cease to bear any relation to the
value of real assets. A clear example of such a process is the spread of derivative financial
documents. In the US the market for derivatives took on enormous dimensions in association
with the growth in the market for property-backed credits. The obligation of debtors to pay
off loans was used as security for the issuing of new debt certificates. These in turn could be
 Experimental Capitalism in the Former USSR 41

used as security for new credits. Everything seemed to be in order, so long as property prices
rose steadily. But when the inflated prices on this market started falling late in 2007, and huge
numbers of debtors turned out to be insolvent, the security underpinning the credits that had
been issued rapidly became devalued, causing the devaluation of the whole chain of
derivative financial documents. The fall in the value of the assets of banks and other financial
institutions sent the entire financial system into crisis, and provoked a decline in the
American and world economy.
All this had happened in the time of Keynes as well, though in lesser degree than now.
Both Keynes and still more, his followers thus began insisting that such a market was
dangerous for capitalism. Keynes himself wrote:

―Specu ators may do no harm as bubbles on a steady stream of enterprise. But t]e
position is serious when enterprise becomes the bubble on a whirlpool speculation. When the
capital development of a country becomes a by-product of the activities of a casino, the job is
likely to be ill-done‖ (Keynes, 1936, p.159).

These words might have been written about the present crisis. Keynes was intent on
counterposing the economy of real results to the casino economy. To this end, he urged state
regulation of investments, aggregate demand and employment. The core of the Keynesian
conception is the theory of effective demand. Aggregate demand and aggregate supply were
viewed by Keynes as an inseparable unity, and this accounts for his priority focus on the
question of employment and wages. It is precisely because the marginal propensity to
consume is higher for wages than for other incomes that full employment stimulates demand
and hence supply to the maximum extent. This idea and this logic were revised in the
neoclassical synthesis. The Keynesian theory of demand began to be interpreted without
reference to employment and wages, and was inscribed into neoclassical theory despite being
deeply discordant with it. A manipulation of demand sharply different srom Keynes‘s idea
was termed Keynesian.
Such an alteration of Keynes‘s heritage drew serious objections from many economists,
especially those who over many years had worked in close cooperation with him and who
believed themselves to be loyal custodians of that heritage. Among these people were Joan
Robinson and Nicholas Kaldor. Robinson dubbed this alteration ‗bastard Keynesianism‘
(Robinson, 1971, p. 90). Of still greater significance was the fact that the camp of the
opponents of neoclassical theory had in their possession the legacy of Michal Kalecki. The
latter was a figure at least the equal of Keynes, and in the view of Robinson and many others,
even superior to him (Robinson, 1977, 1979; Osiatinski, 1988). The next major confirmation
of the positions of this camp came with the publication of the work by Piero Sraffa
Production of Commodities by Means of Commodities (Sraffa, 1960), which provided new
inspiration to the classical tradition of political economy, and strongly reinforced the
positions of the British Cambridge versus the American Cambridge in their discussions of the
theory of capital during the 1970s.
It is in this period that the well-known historian of economic thought J.E. King locates
the rise of post-Keynesianism as an independent trend in economics and an alternative to the
neoclassical synthesis. ―The 1970s,‖ he writes, ―were crucial for the post-Keynesians. These
were the years in which they came to define themselves as a distinct school of thought with
42 Soltan Dzarasov

its own research programme or paradigm, and to marshal their forces for a head-on clash with
orthodox theory‖ (King, 2002, p. 8).
During the 1970s the ranks of the post-Keynesians were swelled by a number of talented
new economists who reacted more acutely than supporters of the neoclassical synthesis to
negative developments in capitalism. To the comforting theories of the mainstream about a
trend toward equilibrium and prosperity, the post-Keynesians counterposed their alarming
arguments to the effect that capitalism was increasingly sinking in the quagmire of a new
Great Depression. One of the prophets of impending evil was Hyman Minsky, who in a 1986
book provided an alternative analysis of capitalist financial markets, and predicted the
inevitable onset of the crisis we are now witnessing.
During the very years when orthodoxy turned Keynesianism on its head, extolling
Reaganomics and Thatcherism as adequate for achieving stabilisation in the epoch of global
capitalism, Minsky pointed to the destabilising consequences of this approach. ―The view that
instability is the result of the internal processes of a capitalist economy,‖ he wrote, ―stands in
sharp contrast to neoclassical theory, whether Keynesian or monetarist, which holds that
instability is due to events that are outside the working of the economy. The neoclassical
synthesis and the Keynes theories are different because the focus of the neoclassical synthesis
is on how a decentralized market economy achieves coherence and coordination in production
and distribution, whereas the focus of the Keynes theory is upon the capital development of
an economy. The neoclassical synthesis emphasizes equilibrium and equilibrating tendencies,
whereas Keynes‘s theory revolves around bankers and businessmen making deals on Wall
Street. The neoclassical synthesis ignores the capitalist nature of the economy, a fact that the
Keynes theory is always aware of‖ (Minsky, 1986, p. 114).
Minsky here identifies the main flaw of the neoclassical synthesis, which is that it
―ignores the capitalist nature of the economy,‖ hile authentic Keynesianism proceeds from
precisely this nature. Minsky lays bare the preconceived approach of orthodoxy, which has
mainstream economics concentrating all its focus on an equilibrium which is called upon to
confirm the orthodox belief in the stability of capitalism. At the same time, orthodoxy fails to
devote sufficient attention to the speculation in the area of finance and banking that is the
precise cause of the instability of the capitalist economy.
Elsewhere, Minsky stresses still more firmly that from the theory of Keynes, the
neoclassical standard included in its arsenal only those earlier-mentioned elements which
could be interpreted as confirming its preconceived position that capitalism was so perfect
that it could not have innate flaws. In this connection Minsky writes:

―Whereas Keynes in The General Theory proposed that economists look at the economy
in quite a different way from the way they had, only those parts of The General Theory that
could be readily integrated into the old way of looking at things survive in today‘s standard
theory. What was lost was a view of an economy always in transit because it accumulates in
response to disequilibrating forces that are internal to the economy. As a result of the way
accumulation takes place in a capitalist economy, Keynes‘s 1935 theory showed that success
in operating the economy can only be transitory; instability is an inherent and inescapable
flaw of capitalism.
―The view that survived is that a number of special things went wrong, which led the
economy into the Great Depression. In this view, apt policy can assure that cannot happen
again. The standard theory of the 1950s and 1960s seemed to assert that if policy were apt,
then full employment at stable prices could be attained and sustained. The existence of
 Experimental Capitalism in the Former USSR 43

internally disruptive forces was ignored; the neoclassical synthesis became the economics of
capitalism without capitalists, capital assets, and financial markets. As a result, very little of
Keynes has survived today in standard economics‖ (Minsky, 1986, pp. 133-134).

Here, resting on Keynes‘s analysis, we find the central idea of Minsky‘s book: the innate
instability of capitalism, which in time will lead the system to a new Great Deporession. This
forecast has now been brilliantly confirmed, but previously there were few who accepted it.
Economic science was orchestrated by proponents of neoclassical orthodoxy under the
direction of Nobel prizewinners, authors of popular economics textbooks, and other
authorities recognised by the mainstream. These people argued that the main problems which
capitalism had encountered in earlier times had already been overcome, and that before it lay
a direct, sunny road to an even better future. Hence in 2003 Robert Lucas, winner of the 1995
Nobel Prize for economics, gave the presidential address at the annual meeting of the
American Economic Association. ―After explaining that macroeconomics began as a response
to the Great Depression, he declared that it was time for the field to move on: the ‗central
problem of depression-prevention‘, he declared, ad ‗]eh solved, for gll practical purposes‘‖
(Krugman 2009, p. 8).
Robed in complex theoretical constructs, and underpinned by an abundance of
mathematical formulae, these ideas of a cloudless future for capitalism interpreted the
economic situation, it then seemed, in thoroughly convincing fashion. These analyses were
balm for the souls of the people who had come to believe that capitalism had attained
perfection. Nobel Prizes were thus showered generously on the heads of those whose ideas
and elaborations best matched the ideology of capitalist irreproachability (King, 2002, p.
243). We now see the greatest number of Nobel laureates among economists in the US, where
the crisis broke out, and none at all among those in China, whose economy has proven most
resilient in resisting the shocks.
The Nobel committee has shown the same approach in relation to members of the post-
Keynesian and all other schools that have subjected capitalism to critical analysis, and which
on this basis warned of the approach of the present crisis. Such unorthodox economists as
John Kenneth Galbraith, Michal Kalecki, Piero Sraffa, Joan Robinson, Nicholas Kaldor and
Geoffrey Harcourt concede nothing to the Nobel laureates, and outstrip many of them, in their
contributions and in the recognition they enjoy among their colleagues. But their critical
analyses, and forecasts of inevitable calamities, have rendered them unworthy according to
the people on the ideological Olympus of capitalism that is the Nobel committee on
economics.
In this respect, capitalism has come to bear an uncanny resemblance to communism. We
too had experts who, while standing firmly on the soil of communism, analysed its flaws
critically in order to eliminate them. These people irritated the authorities, and did not enjoy
their favour. The awards, favours and elevated titles were reserved for those who
wholeheartedly praised Soviet socialism. The upshot is that we are now harvesting the fruits
of the dismal lag of the Soviet Union in the area of economic science.
There is, however, something beyond the preconceptions and prejudices innate to people
in all social systems, and that is the reality of historical and economic development. This
provides a filter for our ideas, and over time makes it easier to separate truth from error. The
present financial and economic crisis is an example of such reality. While the mainstream was
still euphoric about the future of capitalism, the post-Keynesians saw the approaching
44 Soltan Dzarasov

outlines of a new Great Depression. In light of this, the above-mentioned King wrote as
follows:

―The fate of Post Keynesianism will depend very heavily on the future development of
the world capitalist economy. If the business cycle has indeed been abolished (this time), so
that stable, non-inflationary growth continues indefinitely under something approximating to
the present neoclassical (or pseudo-monetarist) policy consensus, then there is unlikely to be a
significant market for Post Keynesian ideas. Things would be very different in the event of a
new Great Depression, to think one last time in terms of extreme possibilities. If ‗it‘ happened
again, to quote Hyman Minsky (1982), the appeal of both a radical interventionist programme
and the analysis from which it was derived would be very greatly enhanced‖ ( King, 2002, p.
257).

As everyone can now see, ―it‖ has indeed happened again. Nevertheless, it is uncertain
whether the fate of post-Keynesianism in the West will be different – whether it will become
a recognised alternative to neoclassical orthodoxy, or whether it will remain the preserve of
individual prophets on the sidelines of economic thought. Where the post-Soviet states are
concerned, in my view there is no set of theoretical ideas in contemporary world economic
thought that is better suited to them than post-Keynesianism, once it is enriched with the
corresponding positions of Marxism and with the positive experience of the planned
economy.

6. THE POST-KEYNESIAN ALTERNATIVE

FOR THE FORMER SOVIET STATES

Neoclassical orthodoxy – that is, today‘s mainstream economic thinking – proceeds from
the position that capitalism is so good and perfect that an alternative to it does not and cannot
exist. Post-Keynesianism takes a different standpoint. Unlike Marxism it is not so
revolutionary a theory as to call for a complete rejection of capitalism. At the same time, it
does not consider capitalism so perfect that there is nothing in it that needs to be changed. To
the contrary, Post- Keynesianism maintains that capitalism has definite flaws, and requires
changes of such scope as to allow alternative ways of running the economy to be fully
effective.
To the prejudices of the mainstream, post-Keynesianism counterposes an approach based
on an objective analysis of the real situation. Its economic and philosophical approach – the
methodology of critical realism – has been developed accordingly (Bhaskar 1978, 1989,
Lowson 1997, Dow, 1999, Brown, Fleetwood and Roberts, 2002, Dzarasov, 2009), though
space does not allow this to be examined here. It will be noted merely that with the help of
this methodology post-Keynesianism is able to answer a broad range of questions, providing
an alternative both to market fundamentalism, and to bureaucratic centralism within a planned
economy. This is the source of its attraction for us.
Now that we have experienced the charms of the neoclassical economic model, we are
faced with the need to find a new one. What has been set forward here is testimony for the
view that effective growth and social accord within society are not to be achieved through
 Experimental Capitalism in the Former USSR 45

spontaneous but through regulated development. Achieving such harmony is the essence of
post-Keynesian economic theory.
If we regard neoclassical theory as being incapable of solving our development problems,
the question arises of what alternative economic theory might provide the necessary answers.
The Stalinist-Brezhnevite version of Marxist economic theory that we followed until recently
no longer suits the purpose. In the first place, this is because it was distorted beyond
recognition to become the ideology of the Soviet bureaucracy, to a great degree losing its
critical spirit and scientific content. Secondly, this is because our present-day society is
dramatically different not only from what witonce c lled ―socialism‖, but also from Western
capitalist society. An analysis that is based on the capitalism-socialism dichotomy in the spirit
of the official Soviet dogmatic approach is thus unproductive.
In other words, both neoclassical theory and official Soviet Marxism (not to be confused
with western Marxism) are useless for analysing the current situation in the post-Soviet states.
Naturally, and as was stated earlier, no economic theory can be completely neutral in terms of
ideology. The problem is how the ideological and scientific components are correlated, and
which is subordinate to which. Does ideology determine the analysis and conclusions? Or, are
the analysis and conclusions the result of an independent analysis subject to the logic of the
issue under study? Only in the latter case is economic theory scientific. In our view this is
perfectly relevant to Post-Keynesian economics, which has withstood attempts to absorb it
into neoclassical theory, instead upholding its independent approach and methods of study.
Of all Western trends of economic thought, it is Post-Keynesianism that best accords with
our conditions, for the reason that to a greater degree than the others it has maintained its
connection with the classical tradition, from which the Soviet (Russian) economic thinking
that reflected our specific reality also proceeded. Moreover, the intellectual trend that has
arisen in recent decades on this basis, and that is termed post-Keynesianism, represents the
furthest and most profound development of the link between Keynesianism and the classical
tradition, something that for us has great value. Because of its character as an alternative to
neoclassical orthodoxy, along with the traditional institutionalism of Veblen it provides the
most adequate reflection of modern capitalist reality.
Keynes himself laid the basis for this in his General Theory, where he revived and
applied the tradition of classical political economy in order to examine economic phenomena
as interactions between socially heterogeneous agents of the market, acting in the conditions
of an uncertain future. The most striking manifestation of this approach was the fact that
Keynes gave a prominent place to the question of employment, as a central social problem of
the capitalist society of his time.
Emerging as a reaction to the neoclassical review of Keynesian theory, post-
Keynesianism thus failed to keep itself within the framework of the Keynesian heritage. To
his followers, remaining loyal to his tradition meant keeping the flames alight rather than
preserving the sacred ashes.
Against the will of Keynes himself, the route out of classical orthodoxy thus brought him
logically to a rapprochement with the detested Marxism, a development that found its
expression when Michal Kalecki was recognised as the most consistent theorist of Keynesian
ideas (Robinson, 1977, Bhaduri, 1986). Moreover, many followers of Keynes came to
observe that Kalecki made the same discoveries earlier than Keynes and independently of
him, and that he applied this approach more consistently. According to Joan Robinson and a
number of other outstanding post-Keynesians, the contribution to economic theory made by
46 Soltan Dzarasov

this Polish economist was no less than that of Keynes himself. Kalecki is sometimes regarded
as a Keynesian, but Keynes by the same token can be called a Kaleckian.
Citing Amit Bhaduri, Anthony Laramie and Douglas Mair state: ―Taking his clues from
Marx, Kalecki not only independently discovered most of the central propositions of the
Keynesian theory, but he also set it out with striking clarity to point to a set of problems
which conventional Keynesianism had preferred to avoid. Conventional Keynesians remained
content with the idea that capitalism could be managed by the State. And, they propagated a
view of State-managed capitalism based on co-operation rather than conflict among the
contending economic classes. In Kalecki‘s writings there was no such wishful thinking. He
recognized that a view of co-operative capitalism was bound to run into serious problems in
the longer run, as economic conflict among the classes begins to surface. He forewarned us
about it in his theory of political business cycles‖ (Bhaduri, 1986, p. ix). Commenting on this,
Laramie and Mair (2006, p. 637) note that the lost radicalism of Keynesian economics can be
revived with the help of the common macroeconomic tradition of Marx, Kalecki, and Keynes.
Continuing the work performed by Marx, Tugan-Baranovski and Luxemburg, Kalecki
developed an original theory of economic dynamics in which, three years before the
publication of the General Theory, he laid down some basic ideas now attributed to Keynes.
But because the work was published in Polish, it never attracted the attention of connoisseurs
of scholarly innovation. With time, however, Kalecki‘s outstanding contribution to economic
theory came to be widely recognised, so that along with Keynes he is now regarded as one of
the founders of the trend under study here. But Kalecki‘s approach, unlike the heritage of
Keynes, is devoid of the contradiction noted above. Robinson explains her reorientation
toward his views on the basis that ―Kalecki was free from the remnants of old-fashioned
theory [that is, of neoclassical notions –S.Dz.] which Keynes had failed to throw off.‖ As a
result, Kalecki was ―able to weave the analysis of imperfect competition and of effective
demand together and it was this that opened up the way for what goes under the name of post-
Keynesian theory. In both micro and macroeconomic problems the solutions given by Kalecki
are a more logical alternative to neo-classical approaches, being linked to classical tradition‖
(Robinson, 1977, pp.14-15).
Why did Keynes and Kalecki, working independently and proceeding from different
worldviews – neoclassical in the case of the former, and Marxist in that of the latter – come
up with very similar ideas? This is not a rare event in academic practice, when researchers
unaware of one another‘s work arrive at similar conclusions. It can be explained on the basis
that both authors have freed themselves from the dogmas of their respective theories. In this
case, the ideological positions of Keynes and Kalecki were quite distinct. Keynes was
concerned with saving capitalism, claiming that it needed to be transformed in order to
acquire greater equilibrium, while Kalecki proposed transforming capitalism along the lines
of socialism. With all their differences of outlook, both sought to substantiate their positions
through objective scientific analysis of real economic processes, which unfailingly led them
to similar conclusions.
Both Keynes and Kalecki in effect followed the traditions of classical political economy,
contrasting their approach to the neoclassical tradition. In Kalecki‘s case this relationship was
buttressed by his Marxist roots, while in that of Keynes it can be traced along the lines of
development of his logic. Ample evidence of this is provided by the incompatibility of
Keynes‘s macroeconomic theory with the marginalist approach.
 Experimental Capitalism in the Former USSR 47

Even though Keynes and Kalecki are both regarded as founders of the trend under
discussion, this trend has by now been considerably enriched and developed by a multitude of
their followers, whose creative work has also developed along the lines of the classic
tradition. Among these followers one should mention Piero Sraffa and Joan Robinson.
Because of the link that connects classical theory with Keynes, Kalecki and their followers,
some economists (Eichner, 1983, p. 3; Lavoie, 1992, p. 2) suggest that the trend in question
be termed post-classicism rather than post-Keynesianism.
This name would seem to better reflect the content of post-Keynesianism and other
related trends of economic thought. Meanwhile post-Keynesianism as such, through
following the route of classical theory, has had highly fruitful results. Numerous economists
in many countries who have specialised in this field have shown themselves able to make
outstanding contributions to modern economic theory, and have done so. They include
N. Kaldor, G. Harcourt, J. Kregel, M. Sawyer, P. Reynolds, J. Eatwell and D. Mair (Great
Britain); F. Lee, S. Weintraub, A. Eichner, P. Davidson, H. Minski and J. Nell (United
States); P. Garegniani and L. Pasinetti (Italy); A. Bhaduri and M. Desai (India); H. Kurtz
(Austria); K. Laski, B. Brus, T. Kowalik and J. Osiatinski, (Poland); M. Lavoie (Canada); and
M. Morishima (Japan). Alfred Eichner also mentions Roy Harrod, John von Neumann and
Wassily Leontiev.
The list does not include Russian economists, and this should be understood as the result
of our many years of isolation from the rest of the world. But for this sad situation we should
hardly be turning a blind eye to the development of such a promising trend. What we have to
do now is to try to bridge the gap. This is still more necessary for the reason that only the
post-Keynesian current of economic thought can achieve what the neoclassicals have failed to
achieve, namely, to find a way out of the impasse into which so-called market reforms have
driven us.
In the theoretical arsenal of post-Keynesianism, the heritage of Michal Kalecki has a
special significance. On the one hand this is because he is free of the inconsistency which
marks the work of Keynes, and on the other, because his writings contain original solutions to
the problems not only of Western capitalism, but also of the Third World and of the planned
economies of socialist countries.
The originality and breadth of vision of the solutions provided by Kalecki makes him not
only the equal of Keynes, but in some ways even his superior. One sign of the positive
influence exerted by Kalecki on Keynesianism is the fact that because of his impact,
Keynesianism has been transformed from a theory reflecting the limited Western experience
into a more universal doctrine which also reflects the experience of planning in socialist
countries and the peculiarities of the economic development of Third World countries
(Sawyer, 1985, Osiatinski, 1988, Laski, 1998). Also notable in this influence is the
strengthening of ties with the classical tradition. Kalecki‘s interpretation of employment,
prices, profits, investments and of the degree of monopoly represent an alternative to
orthodoxy and have clear classical roots. Another significant step in this direction was made
by Sraffa, who with the help of an original approach solved problems in the interpretation of
price and value with which the classics had grappled unsuccessfully (Sraffa, 1960).
The scope of the various economic systems and the link to the classical tradition serve to
ally Kaleckianism with the economic model which is described here as more appropriate for
the post-Soviet states. Kalecki‘s approach is characterised in the first place by a recognition
of the limited role played by the market and of the necessity for economic planning; secondly,
48 Soltan Dzarasov

by its argument in favour of prioritising popular consumption in the planning of economic

growth; thirdly, by the methods it proposes for optimising the volumes of output and
investments; fourthly, by the connection it draws between both of these and the task of
ensuring employment, reducing joblessness to a minimum or doing away with it altogether;
and fifthly, by the basis it provides for optimal rates of economic growth, while taking into
account various bottlenecks in the economy.
The works of Marx, Keynes, Kalecki and Sraffa acted as the building material with which
Robinson (1949, 1964, 1979), Kaldor (1980), Lange (1943, 1959, 1963) and Harcourt (1972,
1998, 2006) set about laying the foundations for a theoretical edifice that would represent an
alternative to the orthodox one. Meanwhile, the orthodoxy was becoming increasingly
unsatisfactory. Increasing numbers of economists therefore sensed the need to develop
various aspects of an alternative concept. Eichner (1985, 1991), Kregel (1973, Minski (1986),
Sawyer (1985, 1989), Lavoie (1992) and a series of others erected the framework for the
t eoretical constwuct that now remains ed ee completed. ―Post -Keynesian theory,‖ Joan
Robinson wrote, ―h s plenty o problems to work on. Wchave nowa general framework of
long and short-period analysis which enables us to bring the insight of Marx, Keynes and
Kalecki into a coherent form and to apply them to the contemporary scene, but there is still a
long way to go‖ (Robinson, 1979, p. 216).
What is most valuable here is the fact that Robinson points to the sources from which an
alternative concept needs to be constructed. The task itself, however, is understood in highly
simplis ic fashion if ia general framework of long and short -period analysis‖ is conside ed
sufficient preparation for it. To us, this task appears even more complex than the one which
Samuelson and Hicks carried out for their purposes. The latter interpreted Keynes in the spirit
of neoclassical theory and obtained a ―neoclassical synthesis‖. The non-orthodox economists,
as we understand it, performed an analogous operation with Marx, Keynes, Kalecki and
Sraffa, and obtained a ―postclassical synthesis‖ which they termed post-Keynesianism.
M. Lavoie writes in this connection: ―In my view, the post-classical programme groups
together a vast number of non-orthodox economic theories. Marxists, radicals,
institutionalists, structuralists, evolutionarists, socioeconomists, French circuit and regulation
schools, neo-Ricardians and post-Keynesians (with or without hyphen) all belong to the post-
classical research programme. Although they may have substantially different opinions on
various topics, such as the theory of value or the relevance of long-period analysis, I believe
they hold the same metaphysical beliefs prior to the elements constituting the hard core of
their respective theories‖ (Lavoie, 1992, pp. 5-6).
Hamyda and Harcourt (Hamyda and Harcourt, 1988) also interpret post-Keynesianism in
the spirit of the post-classical tradition, including here not only the theories of Sraffa, but also
those of Marx.
The combining beneath a single heading of such currents of thought, distinct from one
another despite their closeness, has both advantages and drawbacks. On the one hand it makes
it possible to grasp the diversity of social and economic life, and to make post-classical theory
more adequate to the real world. On the other, it makes it extremely difficult to create a
logically consistent and coherent system of theoretical concepts concerning this world, not to
speak of the difficulties that flow from the reluctance of ambitious theoreticians to submit to
any sort of methodological discipline. Nevertheless, I would like to note some fundamental
principles of the analysis of economic phenomena that seem to me to be common to
everyone.
 Experimental Capitalism in the Former USSR 49

The first fundamental difference has to do with the understanding of the subject matter of
economic theory. The starting point is the category represented by the scarcity of natural
resources, from which stems the significance of economic activities as means for the efficient
use of these limited resources. It is precisely this necessity that is proclaimed as the subject
matter of this discipline, which is reduced to a technical description of possible versions of
resource distribution and of methods for its optimisation. At the same time, the a priori
assumption is that a private owner will always act in the most efficient manner possible.
Post-Keynesians, in turn, acknowledge the subject matter of political economy as it was
set down in the classic works of authors such as Smith, Ricardo and Marx. As their objective
they see the study of what are primarily human economic relations. Moreover, post-
Keynesians acknowledge the class nature of the social structure of society, and the necessity
of explaining relationships between social groups (layers). To the neoclassical claim that
economic analysis is a ―technological‖ function, they counterpose the social character of the
production and distribution of the collective product.
―One of the most important aspects of classical economics for Post-Keynesian thought is
the organising concept of the surplus – its creation, extraction, distribution and use. It is the
core of their system and of its counterpart. The concept dovetails logically with a view of
economic processes as evolving, progressing economic systems, a dynamic view of the nature
of our discipline as opposed to the more static allocative one which characterised neoclassical
economics until the emergence of the neoclassical theory of growth in the 1950s. Linked with
the concept is the notion of society as made up of broad classes, sometimes people,
sometimes income classes, sometimes overlapping. The different classes perform different
functions. They are treated for the purpose of analysis as homogenous, so that there is no need
to start from the isolated individual economic agent of modern economic analysis‖ (Harcourt,
2006, p. 45).
Unlike neoclassical economists, who portray consumers as socially homogeneous
―Robinson Crusoes‖, post-Keynesians divide them according to the level of their incomes and
their individual norms of consumption. The post-Keynesian analysis of investment is thus
carried out on the assumption that workers do not save and capitalists do not consume, which
makes possible a more precise view of their dependence on their role in the system of social
reproduction.
The second difference has to do with the understanding of equilibrium. As stated earlier,
neoclassical theory rests on the assumption that a capitalist economy if left to its own devices
is constantly in a state of balance, due to the inherent capacity of economic processes for self-
regulation. Post-Keynesians proceed from the opposite: if left to its own devices, a capitalist
economy tends to drift into imbalance, aggravating its contradictions and enhancing its
instability.
The different approaches are preconditioned by differing assessments of the ability of the
individual to foresee and grasp the future. The neoclassicals put forward a hypothesis of the
―rational economic individual‖, whose main peculiarity is his or her ability to calculate the
trajectory of probabilities of the development of events. These rational expectations form the
basis for the maximisation by market operators of their profits. Since no external forces
prevent individuals from making rational decisions, all their expectations come true and the
economy regains its balance, or a state in which there is no impetus for change in the
economic system.
50 Soltan Dzarasov

Post-Keynesian theory rejects this conception of economic phenomena, proceeding from

Keynes‘s premise that human capabilities are limited and that the future is fundamentally
unclear. In the introduction to A Guide to Post-Keynesian Economics, Joan Robinson stresses
that when Keynes worked on his General Theory, his chief deviation from the neoclassical
school was his treatment of the problem of effective demand. ―After the book was published,‖
Robinson write, ―he drew the line differently. He saw that the main distinction was that he
recognised, and they ignored, the obvious fact that expectations of the future are necessarily
uncertain. It is from this point that post-Keynesian theory takes off. The recognition of
uncertainty undermines the traditional concept of equilibrium‖ (Robinson, 1979, p. 145).
Economic decisions, post-Keynesians argue, have to be made each time between the
irretrievable past and an indefinite future; therefore, their implications cannot be known
exactly. This approach preconditions the post-Keynesian treatment of various economic
categories, from money and investment to inflation and depression. Neoclassicals act
differently. Proceeding from their hypothesis of the omniscient individual, they extrapolate
the past into the future. In this future, however, there are always new factors at work, whose
aggregate impact cannot be taken into account in advance. As a result, life overwhelms them
with surprises such as the Great Depression, stagflation or the collapse of market reforms in
the post-Soviet states.
The third fundamental difference has to do with the focus of economic analysis. The
focal point of neoclassical theory is the sphere of circulation. The chief process in which it is
interested is commodity exchange in the market. Supply (production) is understood as a
phenomenon subject to the process of exchange. It is precisely for this reason, as was stressed
above, that the central point of neoclassical reasoning is the problem of resource scarcity.
Post-Keynesians take us back to the classical tradition, according to which the real sector of
the economy is the main element determining economic life. This has enormous scientific
importance. Shifting the role of production to the fore allows us to show the problem of
scarcity in a different light, contrasting to it the question of reproduction. ―In post-Keynesian
models,‖ writ Marc Lavoie, ―where outplt is not disaggregated, the emphasis on production
appears through the assumption that in general neither capital goods nor labour are fully
employed. In this sense, resources are not scarce. The major problem is not how to allocate
them but how to increase production or the rate of growth. The principle of scarcity is put
aside, as it is generally possible to increase the rate of utilisation of capacity, and as there are
reserves of labour. The principle of scarcity is replaced by the principle of effective demand‖
(Lavoie, 1992, p.14).
Here the alternative nature of the two concepts becomes clearly evident. If economic
theory is defined as a discipline studying the rational (optimal) use of limited resources
(scarcity), it is logical that the key area of economics should be the one where commodities,
services and financial assets are circulated according to the mechanism of supply and
demand. The key role in this mechanism is performed by prices, which control the behaviour
of buyers and sellers. According to this logic, society has only limited possibilities for
influencing economic growth through resorting to such categories of the sector as the money
supply, interest rates and exchange rates. Following the recommendations of international
organisations, the present-day Russian leadership attempts to regulate the growth of the
economy in precisely this way, with the results that one would expect. We sit on our hands
and go nowhere. We continue to lag behind others, and the national economy is collapsing.
 Experimental Capitalism in the Former USSR 51

The post-Keynesian conception follows a different logic. From the definition of

economic theory which the post-Keynesians provide (or rather, from the definition which
they borrow from the classical tradition and rephrase), it follows that the main sphere of the
economy is production. If this is true, resources should be viewed as being produced by
humans rather than provided by nature, and it is through the agency of human beings that
scarcity turns into abundance. But what should be done in order to maintain steady growth
rates? It requires that effective demand be maintained at a level corresponding to the full use
of available resources, with subsequent annual growth in the quantity of resources taken into
account. Proceeding from the assumption that this cannot happen of itself, post-Keynesians
set out on the basis of their conceptions to suggest policies that have an active impact on
economic growth through securing full employment, the growth of investments and the
acceleration of technological progress.
The fourth difference lies in the negation of the neoclassical principle of social
Darwinism (the struggle for survival) as the basis of social life, and in the vindication of the
post-Keynesian principle of securing at least social justice, if not social equality.
With the help of Keynesian propositions, we sought earlier to show the incompatibility of
laissez faire with social justice, which has always been regarded as the antithesis of the
material (and hence in practice legal) inequality of human beings. According to the logic of
neoclassical orthodoxy, justice is implicit in the mechanism of market competition, whose
outcomes supposedly represent the epitome of justice. According to this theory, the fact that
some possess capital and live in luxury, while others cannot find work and live in penury, is
normal and just. This, we are told, is simply how the world is. In relation to this identification
of human society with the animal world, we earlier noted Keynes‘s ironic story of the giraffe,
which he used to mock the neoclassical theory of distribution, according to which some must
receive more and others less. This theory, without the slightest irony, considers it an injustice
whenever anyone encroaches on this law of nature.
Keynes nevertheless committed such a trespass when he denounced such injustices of
capitalist society as unemployment and the unequal distribution of goods. ―The outstanding
faults of the economic society in which we live,‖ Keynes wrote in chapter twenty-four of the
General Theory, ―are its failure to provide for full employment and its arbitrary and
inequitable distribution of wealth and incomes‖ (Keynes, 1936, p. 372). This way of posing
the question is fundamentally different from the neoclassical approach.
Keynesianism, of course, does not place in question the right to obtain profit as an
essential precondition of capitalist entrepreneurship. But it places the right to obtain profit in
the context of a more important task – ensuring employment and the just distribution of the
national income. Keynes was preoccupied with the question of how to strengthen the social
foundations of society, mitigating class tensions and forging compromises between various
social strata.
Why was Keynes more concerned than others with this aspect of society? It is hardly
possible to answer this precisely. It can, however, be suggested with a high degree of
confidence that his thoughts were steered in this direction not only by the spectacle of mass
unemployment in Britain in the 1920s and 1930s, but also by his unfavourable impression of
the Russian revolution, which, as he was well aware, was provoked by the miserable
condition of the lower orders of Russian society. During those years Moscow was a Mecca
not only for the left, but also for a significant section of the liberal intelligentsia. Sidney and
Beatrice Webb, George Bernard Shaw, H.G. Wells and many others made visits here, and had
52 Soltan Dzarasov

numerous meetings and conversations with various representatives of Soviet society,

including Stalin. Through studying Soviet society, they sought an answer to the question of
whether Soviet socialism, with its economic planning and social and cultural progress,
represented a new civilisation toward which the world was advancing. In the course of three
visits to the USSR, Keynes also studied the fruits of the Russian revolution, and on the whole
came to answer this question in the negative (Skidelsky, 1992, p. 488).
Does this mean, however, that Keynes also took a negative view of such aspects of Soviet
life as the planned economy, the absence of unemployment, or the existence of social welfare
provisions for citizens? It seems not. In any case, his remarks on the Soviet five-year plan can
scarcely be regarded as a ―flirtation with communism‖. Keynes was quite disinclined to
flirtation, but he had a serious professional interest in what was being done in the USSR. This
is shown by the following fact. ―In 1934, Keynes sent a guarded message to the Russian
journal Za Industrializatsiyu to mark the ‗success‘ of the first five-year plan. ‗It is, however,
certainly true,‘ Keynes wrote, ‗that the growth of industrial production is much facilitated in a
state which starts from a very low level and is prepared to make great sacrifices to increase
industrial production without making a close calculation as to whether it is strictly speaking
profitable and advantageous for the existing generations of workers‖ (Skidelsky, 1992, p.
489). The heightened interest which Keynes showed in the problems thrown up by the
Russian revolution could not fail to sharpen the attention he devoted to the social problems
whose continued existence threatened the survival of capitalism.
The welfare state that arose in the West during the second half of the twentieth century
was the result on the one hand of the impact of socialism on capitalism, and on the other,
represented a capitalist response to attempts to arouse workers against capitalism through
invoking the socialist example. Socialism, after all, had shown the world something that
previously had not existed: social welfare for all the country‘s citizens, something that
constituted a visible reproach to the ruling classes of the capitalist countries. These welfare
provisions bore unmistakable witness to the fact that socialism was not simply a repellent
totalitarianism but also an enticing example that posed a dangerous threat to capitalism. It was
only after this that the ruling classes of the West were confronted with the need to counteract
socialism through their own superior example, as well as in every other way. Keynes‘s
prescriptions were the answer to this need. Thanks to them, the developed countries made a
decisive break in both theory and practice with the neoclassical concept of social Darwinism,
and accepted the Keynesian idea of social partnership.

CONCLUSION
With the help of the above facts and ideas, I have sought to show that the attempt at a
direct transplanting of the Anglo-Saxon model of the market into the soil of our civilisation
has not justified itself. Market freedom was declared in Russia while the country lacked not
only traditions of private entrepreneurship, but also the elementary bases for legally
regulating its activity. We do not have labour and tax legislation analogous to that in civilised
countries. But even if this legislation existed, we would still be faced with developing the
traditions of obeying the law that are required for civilised market relations.
 Experimental Capitalism in the Former USSR 53

In my view, the most important conclusion that flows out of our experiment is that when
the values of one civilisation are transferred mechanically onto alien soil, these values lose
their former content and are transformed into their opposite. Unregulated by the state,
freedom turns into unlimited arbitrariness, and a focus on profits into shameless exploitation
and the oppression of one person by another. The neoclassical experiment imposed on us has
not made our society better than that of Soviet times, and in some respects has made it even
worse. More of us have become poor, unemployment has emerged, and crime rates and death
rates have increased, while legality and culture have fallen by the wayside.
The Western concept that property also entails responsibility is profoundly alien to our
consciousness. For mafiosi property owners who emerged from the criminal underworld
(there was no other milieu of private enterprise), rules and laws do not exist, and such people
conduct their business according to their own whims. Such a person is worse than the Soviet
bureaucrat who, while never a democrat, was not in league with criminals. The Soviet
functionary was under the strict control of the party and the state, and danced to the music of
a higher authority. As the experience of our market development has shown, this
subordination could be far preferable for society than the kind of ―freedom‖ under which
mafiosi do as they choose. In the first case the economy operated, even if poorly, for the sake
of everyone; in the second case, to the advantage of some and to the detriment of others.
Despite having acquired the former state enterprises for nominal sums, the new owners do
their utmost to evade any responsibility to the population. It is not just that they studiously
dodge paying taxes; in addition to this, the new property-owners are accustomed to picking
the pockets of the state at every opportunity. Aided by the corruption that has infiltrated every
pore of society, they have reduced the rule of law to a minimum. As indicated earlier, firms
have appeared which, acting legally or semi-legally, advise entrepreneurs for definite sums on
how to evade the laws, dodge taxes, obtain the court decisions they need, and so forth.
Raiding – that is, the practice of violently seizing the property of others – has become
common practice.
An economy such as this cannot function normally. Under the conditions which apply in
Russia, laws can be enforced only if there is strict, honest monitoring of entrepreneurial
activity. Even without laws being enforced, reported crime has reached colossal levels. The
prisons are bursting, and funds to maintain them are inadequate. A new form of punishment,
house arrest, has had to be dreamt up.
If the laws were fully enforced, and one hundred per cent of crimes were punished, more
than half of the country‘s population would have to be jailed. The impossibility of this shows
the need to choose a different economic model, under which market freedom is kept within
reasonable bounds, and control over economic activity is exercised in such a way as to
maximise the impulse to serve society and to minimise the opportunity to break the law. We
should not shut our eyes to the fact that in the planned economy the level of economic crime
was far lower, or ignore the reason for this. The definite nature of the plan, and the obligation
to meet it, were considered a more just way of conducting economic activity than the
uncertainty and arbitrariness of the market. It has been difficult to change this perception of
reality on the part of our population, and this is something that must be taken into account.
The Chinese experience provides yet another confirmation of this truth. The high rates of
growth in China, and the country‘s resistance to the negative effects of the world financial
and economic crisis, demonstrate with considerable certainty that national planning is
perfectly compatible with the market. Moreover, it is an effective means for reducing the
54 Soltan Dzarasov

fundamental uncertainty introduced by the market, and in the process, for allowing crises in
the economy to be anticipated and avoided. If there had been a regulated market in the major
capitalist countries, there would not have been massive speculation in securities, and the
present crisis would not have occurred. Only the avarice of a narrow layer of unrestrained
speculators, together with ideological prejudices, prevent this conclusion from being accepted
in the West.
Here in Russia we have experience of market failures, while our experience of planning
has been successful by comparison. Adopting the approach indicated above is thus absolutely
vital.
It is necessary to be still more explicit: the private ownership imposed on us through
privatisation has not been accepted by the population. Not only the robbers, but also the
property-owners who established their fortunes honestly – insofar as this is possible in Russia
in current circumstances – are an unpopular category of people in our society. They live in
houses that are like fortresses under siege, surrounded not only by high fences, but by
numerous armed guards. Not only are they themselves under constant threat of assassination,
but the members of their families, including children, live under vigilant round-the-clock
protection to stop them being kidnapped and held to ransom.
For all the faults of capitalism, Western capital has not sunk to such depths of savagery.
Nor did pre-revolutionary Russian capital, which showed a far greater kinship with European
civilisation than does its present-day heir. Whatever the case, Russian capital suffered a tragic
fate. We cannot tell what the fate of today‘s private capital will be; we can only point to the
logic of the chain of events which in Russia has brought about a more acutely negative
reaction to the advent of capitalism than anywhere else in Europe. If we recall the map of
Europe in the late nineteenth and early twentieth centuries, we find there a developed
revolutionary movement threatening to divert the development of capitalism in the direction
of socialism. At that time Russians were only learning from the European socialist movement
how to make a revolution in their country.
Before long, however, the pupils outstripped their teachers. In Russia an anticapitalist
revolution took place, bringing the Bolsheviks to power, while Europe preferred to remain
capitalist. In my view, the revolution in Russia resulted from our population reacting to
capitalism in more negative fashion than was the case in Europe. Both then and now,
capitalism suited only a small, wealthy section of the population; in the rest, it aroused
discontent and a wish to replace it with something better. Russians know that some people are
more capable than others, work more skillfully and are entitled to have more. But they do not
believe it is possible to acquire a fortune of many billions through honest work. This
conviction is expressed in the proverb, ―You don‘t get stone palaces with honest labour.‖ For
good or ill, we have to recognise that our psychology is egalitarian rather than elitist. We
understand justice as equality in terms of property and social position, and for us this is most
important of all. For this reason, the dream in Soviet times was of freedom and democracy,
and there were no demands for a return to the market and private property.
Time does not flow backward, and there can be no returning to the past. If we are to
move forward, the choice of a model of development is of crucial significance. We need a
model without the flaws of either Soviet socialism or present-day capitalism, and which
combines the virtues of both plan and market while avoiding their shortcomings. The best
guide to formulating such a model is post-Keynesian economic theory. Here, an attempt has
 Experimental Capitalism in the Former USSR 55

been made to show the need to understand and employ this thinking, basing the argument on
Russia‘s bitter twenty-year experience.

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Editor: Eugene N. Shelton © 2011 Nova Science Publishers, Inc.

Chapter 2

REFLECTIONS ON THE STRUCTURAL FUNCTION

OF INDUSTRIAL DESIGN IN CAPITALISM THROUGH
DEVELOPMENT EXPERIENCES OF NICS

Ju-Joan Wong1
Department and Gradual School of Industrial Design,
National Yunlin University of Science and Technology
Douliou, Yunlin, Taiwan, R.O.C.

ABSTRACT
Industrial design is the offspring brought about by the marriage of art and the
industry; this profession not only brings huge profits for corporations, but also is the
intermediary of modernization experiences, promoting living standards of the vast
majority of the population. However, the realization of this historical process in Taiwan
was developed by foreign capital and local state through their dynamic intertwining under
the post-war new international division of labor.
After the Second World War, various countries commonly applied Keynesianism,
using high wages and high consumption to promote post-war economic recovery, counter
inflation, and batter price hikes. As a result, wage differences among individual countries
gradually became the factor that influences the international competitiveness of products.
Labor-intensive industries that had become profitless in developed countries largely
relocated to developing countries. Under the cold war structure between eastern and
western camps, based on the strategic thinking of international geopolitics, Taiwan was
incorporated into the system of global division of labor since the 1960s, accumulating
huge amounts of foreign exchange through export-oriented economic policies, creating
the world-renowned economic miracle.
In the stage of economic growth, Taiwan was actually the offshore assembly plant
for American and Japanese multinational corporations, the so-called ―international
processing base‖. Industrial design was tamed and used by the ―developmental state‖,
entrusted with the great responsibility of promoting exports, creating foreign exchange,

1
[email protected].
60 Ju-Joan Wong

and eliminating the stigma of counterfeiting that stuck to MIT (Made in Taiwan) products
in the international market. Above all, Taiwan withdrew from the United Nations in 1971
and cut diplomatic ties with several countries, gradually disappearing from the
international political stage, and MIT products instead created Taiwan‘s political identity
in the economic realm.
In the mid-1980s, the ―Plaza Accord‖ signed by international economic powers
brought huge impacts to international trade, the exchange rate of the Taiwan Dollar
gradually appreciated following the appreciation of the Japanese Yen and the Deutsch
Mark. After the ―Washington consensus‖ was addressed in 1989, advanced capitalist
countries further raised the slogan of free trade, forcing newly industrializing countries
(NICs) to adopt measures, e.g. lowering tariff and import liberalization to balance their
trade deficits. Nation states retreated and protectionist policies were abandoned; as a
result unscrupulous global capital cooperated hand-in-hand around the globe. And while
local industries were battling with transnational corporations, industrial design moved
deeply into the war of market competition and created competitive advantages in the
close combat between local and imported products, saving production lines that were
almost brought to a halt in local businesses, resolving the crisis of industrial
development. The expressing of the structural function of industrial design not only
mediates the gap between production and market in capitalism, but also reflects the
historical process of the dynamic tugging between state and capital in developing
countries.

I. INTRODUCTION: DESIGN AND CAPITALISM

When International Design Centre Berlin was established in 1970, during its opening
ceremony, German design critic Wolfgang Fritz Haug described design as follows: ―in a
capitalist environment the function of design can be compared to that of the Red Cross in
times of wars. It tends some wounds, but not the worst, inflicted by capitalism. Its function is
cosmetic, and thus prolongs the life of capitalism by making it occasionally somewhat more
attractive and by boosting morale, just as the Red Cross prolongs the war.‖ (pp. 136-137,
Appendices of the book)
During the Renaissance, design (disegno) actually meant drawing, which was the
foundation of all visual arts that referred to the initial stages such as inventing and
conceptualizing before coloring and carving. Design was considered as a part of creative
activities and did not become a stand-alone profession. It was not until the Industrial
Revolution during the eighteenth and nineteenth centuries that professionally-trained
designers appeared in Europe and America who were employed or contracted by
manufacturers; design started to be distinguished from arts and crafts. The power that pushed
this professional division of labor came from the mode of production that transferred from
feudalism to capitalism, followed by the progress of the industry, engineering, technology,
mass production, and mass communication.
The Industrial Revolution brought in the mode of mass production that replaced
manpower with machine; products manufactured along with this new mode of production
brought forth aesthetic questions as to how to coordinate humans with products. Art started to
go out from the ivory tower, which fell into the mortal world and became a philistine who
peddles along the street, up for sale, or a gifted superstar who is powerful, influential and
popular. At all events, design has made art and life closely connected, has dissolved the
 Reflections on the Structural Function of Industrial Design in Capitalism... 61

anxiety over the alienation between art and the society, and has also expelled the traditional
role of craftsmen; this is the emergence of designers in history. ―When automobiles, railway
cars, airships, steamships or other objects of an industrial nature stimulate you in the same
way that you are stimulated when you look at the Parthenon, at the windows of Chartres, at
the Moses of Michelangelo, or at the frescoes of Giotto, you will have every right to speak to
them as works of art‖ (Woodham, 1997:67) Therefore, design becomes the real art of the
twentieth century.
However, the role of design in the development of capitalism is conceived in severe
market competitions where corporations fight for profits, born in fierce tests. Corporations
need to keep on producing better new products, eliminating opponents who are still
manufacturing old products; in the mean time, they also need to increase the types of
exports, win market shares, and obtain surplus value through similar products. The most
famous case is the launch of General Motors‘ new model of automobile Chevrolet in 1926,
which for the first time surpassed the sales of Ford‘s Model T, challenging its market
monopoly that lasted for a decade, which forced Ford to launch its Model A in the following
year and thereafter established its design department in 1928.
After the Wall Street Crash of 1929 started the prologue of the great economic crisis, the
American Technocratic Party declared that scientists and engineers had replaced discredited
commercial and financial departments and were entrusted with great expectations for the
prosperity of the nation. At that time, the fist generation of American industrial design
professionals e.g. Walter Darwin Teague, Raymond Loewy, and Henry Dreyfuss emerged
under the predicament of such capitalist reality.
Moreover, the design profession further stepped outside the operational scope of restyling
product appearances; by combining production technologies including Frederick Winslow
Taylor‘s scientific management and Henry Ford‘s production lines (later on called Fordism),
and the mastering of the preferences of markets and consumers, products became
exceptionally delicate. All sorts of measures to reduce product life cycle (PLC), such as
―planned obsolescence‖, have been creating new styles year by year in order to meet the
changeful demands of the mass market, making existing products appear to be obsolete.
When the ―invisible hand‖ behind the capitalist market failed, design professionals took
the stage to save the situation of depression; after World War II, they presented their images
as brave and fearless, poised to rebuild the post-war debris. Well-known multinational
corporations, e.g. Philips, Braun, and Olivitti all established their design departments one
after another, conquering global markets with the help of their excellent product design.
Design departments were recognized as the professional department that could make concrete
contribution; ―in-house designers‖ who belonged to the corporation replaced pre-WWII
independent designers who pledged to shape the style of the era, which accelerated the
schedule for corporations to launch new products.
Since 1945 designing has become a profession in its own right; design was seen to have
two separate but related functions: it could be used strategically by a corporation to help plan
its manufacturing and shape its marketing; and it had a more obvious role in making
individual products attractive to consumers (Dormer, 1993: 9). As such, design could be
understood as the means that created ―added value‖ of products. Just when design permeates
ter d hiy lives extensively and deeply, the ―aesthetic illusion‖ of products, however, also
masks our understanding of the real world.
62 Ju-Joan Wong

Haug for one questions the relationship between the mode of commodity production of
advanced capitalism and the structure of human needs, based on the keynote of late
Marxism‘s critique to the capitalist society, extending Theodor W. Adorno and Max
Hokheimer‘s theories of the culture industry and the Frankfurt school‘s Critical Theory. Haug
questions the necessity of design, claiming design can only raise ―exchange value‖ in the
market and has no contribution to the real ―use value‖. This kind of manipulation among life,
culture and demand renders design the messenger for the ruling class to infiltrate into
ideologies and the accomplice of the monopoly of economic interests.
Since industrial design is most commonly associated with the introduction of
mechanization and the period of the Industrial Revolution (Heskett, 1987: 114), the Modern
Design Movement in Europe is there to adjust the conflicts between arts and the Industrial
Revolution, and design specialization in the United States is there to close the gap between
market and manufacturing; as such, how was industrial design formatted within the process of
industrialization in Taiwan? What is the meaning and function of industrial design in
developing countries? This paper aims to examine the development process of industrial
design and the transformation of economic structures in newly industrializing countries
(NICs) from the transition of a capitalist mode of production, using the case of Taiwan. The
emergence of industrial design in Taiwan not only reflects the technology learning trajectory
of local industries from the improvements of manufacture procedure to product design, but
can also be the probe for exploring all areas of related theories about the development
processes of NICs.

II. UNDER THE COLD WAR BETWEEN THE EAST AND THE WEST,
THE FORMATION OF THE IDEOLOGY OF DEVELOPMENT,
AND THE INCORPORATION INTO THE SYSTEM OF THE NEW
INTERNATIONAL DIVISION OF LABOR
After the Second World War, Taiwan became the refuge for frustrated politicians
from the defeated Chinese Nationalist Party (the Kuomingtang of China, KMT). The
KMT profoundly came to understand that, the only way to reinforce the KMT‘s
foundation of power in Taiwan was to ensure the island‘s economic growth and
prosperity. Therefore it dedicated to forging the war-torn Taiwan as the showcase for the
image of the wealthy and prosperous ―Principles of the People‖, thereby to announce
such prosperity to Chinese people around the world and gain their support for the
preparation to challenge the Chinese Communist Party‘s force in mainland China in the
future.
In particular, after the eruption of the Korean War in 1950, under the Cold War situation
between the East and the West, considering geopolitical factors, the US authorities supported
Taiwan‘s industrialization; using subsidies from US-aid to rebuild Taiwan‘s economy,
thereby to reinforce the blockade of communism to prevent it from ―communizing‖ the West
Pacific defense front of the globe. This international strategy, directed by the US to combat
the ideological penetration of communism through the pursuit of economic development, ran
through many developing countries that desired economic growth.
 Reflections on the Structural Function of Industrial Design in Capitalism... 63

On the other hand, technology advancement in post-war developed countries resulted in a

substantial increase in social productivity and the rise of multinational corporations, as well as
the prevalence of Keynesianism – high wages, high consumption, counter inflation and price
hikes. Wage differences among each country gradually became the factor that influenced
international competitiveness for products. A great number of traditional labor-intensive
industries that were no longer profitable in developed countries relocated to developing
countries; multinational corporations were dedicated to developing high-technology new
industries and technology-intensive industries with higher profit margins. In the mean time
they also adjusted their international logistics of production, relocating manufacturing and
processing sectors to developing countries with lower wage levels. Therefore, between
developed and developing countries, the new international division of labor that corresponds
to capital- and technology-intensive and labor-intensive industries was gradually formed, and
Taiwan‘s labor market thus became the resources for international monopoly capital, started
from cheap textile products in the mid-1960s, gradually integrated into the army of
international division of labor.

The Role of Industrial Design in the 1960s: Facilitating Exports, Expanding

Foreign Trade

During that time, the department in charge of US-aid – the Council for United States
Aid (CUSA) –combined financial subsidies from the International Co-operation
Administration (ICA) of the US, establishing the China Productivity Center (CPC) and the
Taiwan Handicraft Promotion Center (THPC) in 1955 and 1957 respectively. Industrial
design was transplanted and channeled into Taiwan amidst the chill atmosphere of the
Cold War and was treated as an edge tool for ―the revitalization of national industries‖, to
thereby increase exports and promote economic development.
Under the screening of anti-communism, designers in post-war Taiwan were given the
ideology to comply with developmentalist and technological patriotism. Taiwanese artist
Shui-Long Yen once wrote on Formosa Industrial Art in 1952 about his investigation of
Taiwan‘s traditional craft industries at that time, including bamboo weaving, papermaking,
metalworking, dyeing, embroidery and so on, and he praised them for possessing the beauty
of unique national culture compared with mechanical production. Yen even advocated the
establishment of the ―Center for Taiwan Crafts‖ exporting ―handicrafts that Taiwan can
proudly show the world‖, in order to ―strive for the preservation of national culture and using
traditional handicrafts to fight for shares in global markets‖. Therefore, although the Taiwan
Arts and Crafts Movement was derived from the turmoil of the era resulted from mechanical
production, it however was subordinate to the logic of a capitalist market.
In the light of the prospects for exporting oriental handicrafts, the ICA signed contracts
with Russel Wright Associates, an American design company, in June 1955 and
commissioned which to explore the conditions of craft industries in several Asian countries,
including Taiwan. In December in the same year, Russel Wright visited Taiwan for the first
time, and he had a good impression. Consequently, Taiwan authorities decided to establish
the THPC. Russel Wright Associates established its consultation team in Taiwan in March
1957, and later on sent its design director and exports of marketing/weaving/bamboo-
weaving to assist the development of Taiwan‘s crafts industries.
64 Ju-Joan Wong

On the other hand, in order to assist the exportation of domestic industrial products, the
CPC established the department for trade promotion as well as changing its name to the
―China Productivity and Trade Center‖ (CPTC). And then in 1961, to operate in coordination
with US-aid, the CPTC invited A. B. Girardy to Taiwan to promote the concepts of industrial
design. The organization later on invited a Japanese designer named Shinji Koike to visit
Taiwan, then accepted his suggestion to invite Michitaka Yoshi Tsuyoshi to give lectures in
―Industrial Design Summer Training Courses‖ during 1963 to 1966. These design
experiences, coming from European and American countries and absorbed and digested
by Japanese designers, became the shortcut to the Modern Design Movement for
industrial design in Taiwan. The industrial design training courses developed the first batch
of industrial professionals and lecturers, laying the foundation for the burgeoning of industrial
design in Taiwan.
However, just when industrial design became the prisoner of economic-oriented
developmentalist policies whose aims were merely set on contributing techniques in order to
raise unit prices of products, industrial design was also entrusted with missions of the era,
based on the needs in different stages of the ―developmental state‖; its professional characters
were therefore run through by the state, losing its autonomy due to instrumentalization.
Laboring contents that were relocated from core nations, e.g. US and Japan to Taiwan
were mostly trivial and repetitive assembly works, which were categorized as labor-intensive
industries that had not yet adopted automation machinery production, e.g. textiles and
electronics; this explains why textiles and electronics were the two main industries in Taiwan
in the 1970s. The extent to which for manufacturing the most profitable combination of labor
and capital is no longer to be found in the industrially advanced countries is frequently
explained with reference to a supposed crisis of Fordist production at the ―center‖ (Allen,
Brahamand Lewis, 1992). Industrial design that mainly focuses on the differentiation of
products in consumer markets had limited professional space to develop at that time;
therefore, when it came to the 1970s, Taiwan was nicknamed the ―kingdom of
counterfeiting‖.

III. ECONOMIC EFFECTS AND POLITICAL MEANING

OF INDUSTRIAL DESIGN IN NICS

The Role of Industrial Design from the 1970s to the Early 1980s: Turning
Pirates into Captains – Eliminating the Stigma of Counterfeiting

Due to the saturation of Taiwan‘s domestic market, plus the protection of infant
industries impeded healthy competition among companies, on top of trade deficit year by year
(Taniura, 1992: 25), in addition to the suspension of US-aid in 1965 that previously became
foreign loan in the 1960s, the government thus changed its policy to export-oriented
industrialization, supporting exports through the adjustment of policies and acts to win
foreign exchange reserves; moreover, the setting up of export processing zones continuously
attracted US and Japan capital, just in time to fill up the absence of US-aid. Dominant factors
that influenced Taiwan‘s economic development therefore were transferred to export trade,
which coincidently fit the above-mentioned restructuring of post-war capitalism. In 1965,
 Reflections on the Structural Function of Industrial Design in Capitalism... 65

ahead of other developing countries, Taiwan established an export processing zone preserved
solely for foreign capital, which put Taiwan in the lead among its cohorts to transfer to
export-oriented industrialization (Sumiya, Liu, and Tu, 1995: 115-116).
Cheap labor costs plus timely policies that directed international capital into the island
together contributed to Taiwan‘s economic prosperity since the 1960s. With the continuously
expanding scale of exportation, the food industry and the textiles industry and then the
electronics and machinery industries took the leading roles one after another, which also
contributed to the development of other sectors (Duan, 1992: 275; Taniura, 1992: 30-31).
Between 1963 and 1972, average growth rates of Taiwan exceeded 10%, which made Taiwan
the Asian economic miracle and was called the ―Four Asian Tigers‖ together with Hong
Kong, South Korea, and Singapore, and also established the role model of development in the
non-communist world. Export-oriented economy made Taiwan obtain a set of nicknames
including the ―shoe-making kingdom‖, the ―umbrella kingdom‖, and the ―bicycle kingdom‖.
At the same time, following the pullout of Taiwan from the United Nations in 1971 and
the break-off of diplomatic relations with the US and other countries, the ―Republic of China‖
(ROC) gradually disappeared from the world. Just when Taiwan gradually retreated from the
international political arena, it however caught the world‘s eyes through economic activities.
Under this paradoxical political economic situation, commodities labeled ―Made in Taiwan‖
(MIT) including toys, umbrellas, shoes, hats, and bicycles replaced the ROC and became the
main sources for the world to get to know Taiwan.
During the process of economic growth, Taiwan built up manufacturing industries with
excellent skills. However, being accustomed to get orders of original equipment
manufacturing (OEM), Taiwanese companies suffered from the lack of marketing channels of
their own, despite having excellent production skills and OEM capacity, and they were also
ignorant of laws and regulations of international trade concerning copy rights, trade marks,
and intellectual properties. Secondly, small and medium sized enterprises played the pivotal
role within Taiwan‘s industrial structure, which seldom undertook research of production
technology and the improvement of manufacturing flows, and most of all they lacked the
capital and capability to launch flexible production and subcontract, or shift manufacturing
procedures. As such, due to the disorder of manufacturing and marketing departments, aside
from adhering to OEM, an alternative way was to counterfeit trademarks and branded
commodities.
Just when Taiwanese companies adopted this strategy of expedience to enter the
international market under export-oriented policies, Taiwan was recognized by the world in
names of ―fake empire‖, ―piracy kingdom‖, ―counterfeit paradise‖ and so on. Internationally
well-known magazines such as Newsweek, Fortune and Life published special reports on
piracy in Taiwan one after another.
Since the mid 1970s, the US made and amended a series of laws and regulations sought
to strike bilateral trade balances with other countries, including Taiwan, through the
announcement of intellectual property rights. ―Chinese and US protecting the intelligence
proprietary meeting‖ was held annually after 1984, and the US can take ―Article 301‖ as a
reprisal measure when necessary. The Sino-US Trade Conference had also changed the
attitude of Taiwan toward private intellectual properties, which promoted the Taiwanese
government to amend or formulate relevant laws, such as the Trademark Act and Industrial
Design Act, to implement the protection of patents.
66 Ju-Joan Wong

Actuarially, in the early 1970s, relevant administrators had been crying out to eliminate
the problem of counterfeiting. Authorities in Taiwan had been encouraging manufacturers to
create their own brands to solve this intractable problem. As early as 1970, the official of the
Ministry of Economic Affairs (MOEA) of Taiwan called on industries in Taiwan to create
and use brands of their own as possible. However, its purpose was to arouse people‘s self-
confidence and self-respect, expecting that own brands could win national dignity. All the
efforts seemed to be at the level of moral persuasion only, and were irrelevant to the
elimination of counterfeiting. If the government takes an active role to counter counterfeiting,
supporting manufacturers to innovate and urging them to develop own brands became a
necessary policy.
In 1979, the institution that assisted companies to expand foreign trade named the ―China
External Trade Development Council‖ (CETRA, later on renamed as the Taiwan External
Trade Development Council, TAITRA) established the ―department of product design‖,
undertaking all sorts of businesses to promote design, such as holding the ―joint exhibition of
design departments of all colleges‖, which displayed graduate projects from all the design
departments in Taiwan and provided the industry with opportunities to observe and recruit
design talents. This activity has now been the biggest exhibition in the world that displays art
works by talented students. Besides, the Council was also dedicated to promoting the design
of products and packaging of exported goods, awarding ―excellent design logos‖ (as shown in
Figure 1), and held the first competition and exhibition of ―Excellent Design of Exported
Goods and Packaging‖ in 1981.

Source: Chan and Zheng (1996: 120).

Figure 1. An example of excellent logo design.

In the official publication of the CETRA Product Design and Packaging, the Minister of
Economic Affairs and also the Chairman of the CETRA at that time, Mr. Kuang-shih Chang,
once said so:

That kind of low-level assembly products in the past can no longer fulfill the demands of
customers. At present, excellent goods with high value-added, on the contrary, are the main
subjects people are eager to purchase. Our country has always relied on exports to maintain
economic development, therefore in order to face this change of the concept of consumption,
the direction of our industrial development and the target our economic development aim for
must be adjusted to accommodate present demands… The most basic resolution is to start
from promoting and applying industrial design. So from now on, aspects as to raising product
qualities and manufacturing high value-added goods rely on the industry‘s support and
 Reflections on the Structural Function of Industrial Design in Capitalism... 67

encouragement for and the discovery and use of excellent industrial design manpower within
the nation. (1980).

The movement of ―Good Design‖ conducted by the CETRA is also the competitiveness
of MIT (Made in Taiwan) products enforced by industrial design on top of the realization of
export-oriented policies, in addition to being the outcome of the advocating of moral
discipline in modern design by the UK, Germany, Japan, and the US. Therefore, ―Good
Design‖ can be viewed as the measure for gaining the recognition of higher product
reputation in the global market, under commerce-first ideologies. As such, the government
attracted companies to invest in research and design through policy incentives, design policies
were therefore subordinate to the principle of export-oriented trade. On the other hand,
educational circles that are dedicated to designer training and design promotion, holding
academic passion as preachers, also found their professional position to cut into the reality
among the wave of anti-counterfeiting (as shown in Figure 2).

Source: Industrial Design Magazine (1971:2).

Figure 2. Industrial design helps the country to disconnect with the stigma of the kingdom of piracy.

To help products obtain added-value through design is indeed key for NICs to break
through the position of cheap OEM assembly within the international division of labor. And
also, design could remove the stigma of the kingdom of counterfeiting that stuck to Taiwan,
which helps improve the image of the nation to thereby relaunch in the international political
arena where it used to be isolated. Compared with the ―stick‖ that seizes and eliminates
counterfeiting, ―good design‖ apparently is the ―carrot‖ the government adopts that indirectly
contributed to the emphasis on design of companies, which pushed forward industrial
upgrading within the country.
In the 1990s, in order to announce to the international society that MIT products had
reached world class, i.e. high quality, exquisite, valuable, the competition of ―Good Design‖
expanded its scale to become the competition of ―Taiwan Excellent Award‖; the awarding
body became the country, compared as previously the government only subsidized the
68 Ju-Joan Wong

operation of the activity. Aside from using the logo of ―It‘s Very Well Made in Taiwan‖ on
their products (as shown in Figure 3), companies awarded the prize could get a higher
percentage of financing (80%) when they applied to the Bureau of Foreign Trade for the loan
for creating brands of their own; necessary costs they spent for promoting the image of their
brands in the global market could also deduct a higher portion of taxes. The government
encouraged companies to advance from own designing and manufacturing (ODM) to the
stage of own branding and manufacturing (OBM).

Figure 3. The logo of excellent MIT products.

The Role of Industrial Design in the Mid-1980s: Facing the Wave of

Economic Liberalization – Global Competition, Industrial Upgrading, and
Own Branding

Industries in Taiwan were integrated into the system of the international division of labor
through export-oriented economy, connecting with overseas markets, and gradually
disconnected with the intervention of local policies and instead synchronized with the
fluctuations brought by the transitory international situation. In the 1980s, the pressure of
―free trade‖ conceived by international economic powers hit many NICs who excelled in
economic development, and exchange rate adjustment became one of the main measures to
balance trade deficits. In the mid-1980s, the ―Plaza Accord‖ signed by international economic
powers brought huge impacts to international trade.
Following the appreciation of the Deutsch Mark and the Japanese Yen, the exchange rate
of the Taiwan Dollar against the US Dollar kept on appreciating dramatically (as shown in
Table 1). The ―factor of production‖ that was no longer cheap lacked attractiveness to foreign
joint ventures or buyers‘ placing orders. In 1984 Kuo-hwa Yu became the Premier of Taiwan,
who then raised the suggestion of ―economic liberalization‖, which set the official economic
policies for the 1980s.
Nation states retreated and protectionist policies were abandoned. As a result,
unscrupulous global capital cooperated hand-in-hand around the globe. And while local
industries were battling with transnational corporations, industrial design moved deeply into
the war of market competition and created competitive advantages in the close combat
between local and imported products, saving production lines that were almost brought to a
halt in local businesses, resolving the crisis of industrial development.
 Reflections on the Structural Function of Industrial Design in Capitalism... 69

Table 1. Exchange rates of Taiwan Dollar against US Dollar from 1980 to 1990

Exchange Rate (NTU/USD)

Year Rate (Unite: TWD)
1980 36.00
1981 36.84
1982 39.11
1983 40.06
1984 39.60
1985 39.85
1986 37.82
1987 31.77
1988 28.59
1989 26.40
1990 26.89
Source: Central Bank of Taiwan.

Severely restricting the imports of foreign goods and setting high tariff barriers have
always been the tools for governments to protect local ―infant industries‖, like electrical home
appliance industry, and to maintain their competitive advantage. However, the execution of
protective policies also involved the government‘s political consideration to the
characteristics of these industries. For instance, television as a modernized daily appliance did
not start their title-page to enter the history of Taiwan‘s electrical appliances for leisure
purposes, but rather for the purposes of social education and political propaganda.
During early post-war periods, since the resource of electricity was still considered to be
rare, people‘s livelihood ranked at the bottom under the combat system. Therefore electrical
appliances were often regarded as luxury, conspicuous goods; in addition, the government
further checked thoroughly the number of electrical appliances through the Taiwan Power
Company, calling upon the public to save electricity. In particular, those far and wide
telecommunication products are often of military purposes and tools for social control, which
have great potential to overturn the image of the world. In the light of the ―228 Incident‖,
audio broadcasting was the mass medium for the battle of the government versus the public.
The government therefore dared not underestimate the companies that manufactured relating
products and those who used this technology, in a great fear that someday it might grow out
of control.
The first television station in Taiwan – Taiwan Television Enterprise, Ltd. – was
established by the Taiwanese government in 1962 in coordination with the National Day; at
the same time the television assembly plant was also established, importing parts of 5,000
black-and-white televisions from Toshiba, Hitachi, and NEC, assembling the first batch of
televisions in Taiwan. Potential commercial interests came from the broadcasting of
television stations‘ attracting private electrical appliance companies to invest in the
manufacturing of televisions. The industry often participated in political activities in person
or through political declaration to maintain good relationships with the government, whereby
to exchange their legitimacy for product manufacturing and market promotion.
The automobile industry is another example. On the National Day in 1956, Yulon
launched its first locally manufactured jeep vehicle, realizing the aspiration of Ching-Ling
Yen, the founder of Yulon: ―using generators to save the nation‖ (Yulon, n.d., para. 1).
70 Ju-Joan Wong

Private enterprises were incorporated into the state according to the military combat system,
and large electrical appliance companies, e.g. Tatung and Yulon were members of pre-
maneuvers, epitomizing the close relationship of conspiracy between capital and the state.
Companies upheld the slogan of industrial patriotism, yet in fact their devotion to the nation
wrapped their political dedication inside, for the purpose to exchange for the government‘s
protective policies; covered by the protection of promoting national industries, they obtained
excess profits.
In addition, policies such as ―Tax Refund for Export‖ (since 1955) and ―Export
Percentage Cap‖ (from 1973) encouraged exports and prevented over-competition within
local markets. Because customs and product taxes could be refunded for imported materials
and components, companies‘ export costs were reduced. According to the (revised) ―Statute
for the Encouragement of Investment‖ in 1974, many export factories enjoyed duty free
preferences; some Taiwanese electrical manufacturers made excellent export records. Under
the government‘s protective policies and the constrain of domestic consumption, electrical
appliance companies were able to enjoy thirty some years of their ―golden age‖ in the name
of ―national industry‖ – in 1949, the first batch of Tatung‘s locally-manufactured electrical
fans were sold for the equivalent of 37.5 grams of gold each, making profits in both local and
international markets.
Under the pressure from both international powers and local consumers, the government
adapted to the wave of liberalization after 1986, listing import restrictions, and adopted the
measure to lower customs on imported electrical home appliances year by year to reduce the
impacts to local manufacturers.
Taiwan electrical home appliance manufacturers apparently suffered from the blow of
trade liberalization; the market share of imported electrical home appliances grew
substantially. After Japanese and Korean electrical home appliances massively flooded in,
local businesses suffered from great losses, whose production lines were almost reduced by
half.
The above-mentioned events made the electrical home appliance industry in Taiwan go
from prosperity to decline, getting stuck in the stagnation of production one by one. Facing
this crucial moment, companies became active in developing new products, and industrial
design was adopted by the electrical home appliance industry in the hope that it could bring a
glean of hope of survival.
Under the deregulation of imported electrical appliances, all kinds of stylish electrical
home appliances from around the world entered Taiwan, overwhelming Taiwan‘s electrical
appliance market. Among them, the item of American refrigerators reached an incredibly high
60% of total domestic share in merely two years after it was imported. In addition to tariff
reductions that enabled American refrigerators to reduce product prices, this fact also posed
contrary to the trend that Taiwan‘s consumer goods markets always followed Japanese
consumer goods.
Despite becoming independent from the rule of Japanese colonization, Japanese lifestyle
still stood as the reference and example of ―modernization‖ that post-war Taiwanese people
yearned for. In the mid-1950s, the Taiwanese government started to push the island-wide
extensive electricity popularization – rural electrification; through the realization of
household electrification, electrical home appliances became hot-selling products in domestic
markets. Since then, Taiwan also stepped on the material experience of modernization of the
post-war three ―Imperial Regalia of Japan‖ – black-and-white television, refrigerator, and
 Reflections on the Structural Function of Industrial Design in Capitalism... 71

washing machine. Through technological cooperation with Japanese companies, the electrical
home appliance industry in Taiwan became the channel that ―mediated‖ modernization.
American refrigerators that often exceeded super large volumes of 500 liters and above
were very different from Japanese ones that Taiwanese consumers were more familiar with.
Kitchens in American families were mostly spacious, and a 500 liter refrigerator would not
occupy too much space of it and was just right for storing the bulk of food bought from
shopping centers during the weekend.
In addition, despite having several brands, the styles of imported American refrigerators
all looked the same, which obviously reflected the very particular ―American life‖ living
fashion.
Although American refrigerators were against all Taiwanese consumers‘ living styles and
real needs, imported American refrigerators started a wave of hot sales, seriously threatening
―Japanese style‖ or ―sim-Japan‖ refrigerators that had long occupied Taiwan‘s markets,
bringing production lines in factories nearly to a halt. Just when manufacturers were about to
give up the refrigerator market in Taiwan, industrial design became the last bet of companies
to gamble with.
At that time consumers generally had felt the shortcomings of American refrigerators:
noisy, sweating, rust easily, and lacking planning of interior arrangements. Therefore
Japanese refrigerators that were more delicate were catching up. As such, the counterattack of
the local electrical appliance industry was not hopeless. However, how to realize the so-called
―refined large refrigerator‖ that overcomes the shortcomings of American refrigerators on top
of matching their large storage capacity through design?
One Taiwan home appliance company, Sampo Co. ―adopted‖ design concepts from a
Japanese handle-less refrigerator; the door was opened from one side, so in the top view both
sides of the refrigerator door were arc-shaped. The design department made the whole door
arc-shaped, which not only modified the visual effects once the volume of the refrigerator
was increased to 500 liters, but also highlighted the well-rounded image of large capacity.
Besides, Sampo also was the first one to adopt the material of mirror printing plate that had
just been developed in Japan. Mirror plates can be printed on multiple layers with multiple
colors; compared with traditional coating, its surface is bright and shinning, has versatile
colors and patterns, with no problems of rusting, and largely enhanced the aesthetic
requirements of sophistication. Last but not least, the ultra slim design made the plates
thinner, the whole appearance of the refrigerator looked smaller, yet it still kept the character
of large capacity. In addition to appearance, as for the interior, designers allocated easy access
storage spaces according to local users‘ special diet habits, such as dumplings for hot pot,
Chinese medicine for food treatment, and cut fruit tray, etc, which further contrasted the big
and clumsy American refrigerator. While the refrigerator market in Taiwan was retreating,
designers were dedicated to tailoring a delicate ―Taiwanese refrigerator‖ that suited the needs
of Taiwanese consumers.
Combining the large storage capacity of American refrigerators, the delicacy of Japanese
ones, and domestic needs, this Taiwanese refrigerator (as shown in Figure 4) was launched in
1989 and was popular in the market; in just three months, the sales were surging and made
this the best selling product. Within half a year, other consumer appliance companies
requested to do ODM cooperative production one after another; in the years 1990 and 1991,
average orders were more than 20,000 units per year. As such, the market share of Sampo
72 Ju-Joan Wong

arc-shaped refrigerator or that of other brand names grew substantially in the market,
seriously defeating the sales of American refrigerators.
For a long time, the electrical home appliance industry in Taiwan occupied the lion‘s
share of domestic markets under the tariff barriers set by the government; however, facing the
change of policy direction towards import liberalization, the market share was declining
substantially, companies suffered from serious impacts and were almost brought to
suspension and shutting down. In the predicament where different kinds of American
refrigerators flooded the market with a market share as high as 36%, local refrigerators
however brought about a complete turnabout, and an achievement like this cannot be denied
as a ―legend‖. Most importantly, industrial design went deep into the war of market
competition, creating competitive advantages in the battle against American refrigerators,
saving production lines that were almost brought to a halt, which is the historical meaning of
the launch of the arc-shaped refrigerator in Taiwan.

Source: Lee, 1996.

Figure 4. Sampo arc-shaped regregerator.

IV. CONCLUSION: IN THE TUG-OF-WAR BETWEEN CAPITALISM

AND DEVELOPMENTAL STATE, INDUSTRIAL DESIGN IN NICS
THAT IS OUT OF LOCAL CONTEXT

This paper situates the history of Taiwan‘s economic development within the context of
capitalist globalization, clarifying the roles of (the industrial policies of) the government,
(global logistics of) foreign capital, and (the development of corporations and small and
median enterprises of) local capital. Industrial design was involved in the mutual interaction
among the three, playing its structural function, and mediating the conflicts from within.
 Reflections on the Structural Function of Industrial Design in Capitalism... 73

Since the 1960s, within the forming process of the ―new international division of labor‖,
the progress of productivity allowed the labor process to be divided into several distinct
processing procedures that could be relocated out from core nations, and the expansion of the
labor force integrated peripheral nations, especially developing countries, into production
bases of the world. This process was derived from the system of Fordist capitalist
accumulation; the common characteristic in the experience of several countries – including
Malaysia, South Korea, Singapore, and Taiwan – is very rapid growth during the crisis of
Fordism and transition to post-Fordism, as core nations relocated assembly lines to these
newly industrializing regions, forming flexible spatial production networks (Peet, 1991: 162),
which also contributed to Taiwan‘s economic development.
To examine from within the island, in the early post-war stage, the KMT adopted planned
economy, suppressing private capital. From the 1960s on, the government brought in foreign
capital and supported a number of private capital, accelerating Taiwan‘s economic structure
to transfer from rural to industrial economy, obtaining the impetus for economic growth, and
industrial design was the means for promoting exports. In the mean time, through active
promotion and propaganda by corporate units, industrial design gradually became known to
the industry. When it came to the 1970s, the secondary industry (manufacturing) had
surpassed the primary industry (agriculture), establishing the building blocks of Taiwan‘s
industrialization. In particular, under protective policies, selected industries such as
automobile and electronic home appliances conspired with the government, obtaining their
monopoly status, thus the early form of local enterprise groups were looming. In the 1980s,
under the impact of the ―free trade‖ wave conspired by international powers, protective
policies were loosened, and nation states started to retreat. Facing fierce market competition,
in order to handle the challenge of internationalization, enterprises raised added-values of
their products by intensive capital and technology and the emphasis on research and design,
which further enabled enterprises to integrate with global supply networks.
Overall, industrial design in Taiwan was started by the ―developmental state‖ (Castells,
2000: 195), and the concept of industrial design was brought in and received by corporate
organizations surrounding the government. The academic circle that was responsible for the
reproduction of ideology, on the other hand, filtered parts of thoughts that were too radical,
and then rebranded it according to development-oriented needs. Corporate organizations and
the academic circle worked together with different angles, promoted this set of modern
alchemy to the industry, fulfilling the developmental mission entrusted by the state.
During the transplanting and constructing process of industrial design, Taiwanese
designers embraced modernism passionately; at the same time the umbilical cord bearing
historical memories of Japanese colonization and the KMT‘s defeated experiences in
mainland China was also cut off. Fighters for modern design who abandoned the history
reached ideological consensus with KMT bureaucrats who worked extremely hard after
WWII; socialist thinking that embraces the public in the Modern Design Movement, however,
was silenced under the chilling political atmosphere of the ―White Terror‖. Industrial
designers in post-war Taiwan on the one hand followed the spirit of Bauhaus, posed
themselves as the preachers of the Modern Design Movement; on the other hand, however in
practice they learned from design celebrities such as Raymond Loewy and Luigi Colani, as
well as enterprises including Panasonic from Japan, Braun from Germany, and IBM from the
US, using them to persuade the industry. Also, blossoming design activities in varied
countries were used as examples to convince the government to actively invest in guiding and
74 Ju-Joan Wong

counseling the development of design, industrial design thus became the frontier that
promoted modernization plans.
Through the process of promoting and practicing design, enterprises and the government
learned and accepted a brand new value: the process in which humans start to pursuit identity
and re-mold the environment. Through learning from and imitating product images of
Western modernization, the prelude of Taiwan‘s modernization was delivered, and industrial
design thus became the agent of cultural interchange between advanced capitalist nations and
the Third World, or even the spokesperson for Western culture. This desire to pursue
modernization swam towards modernized nations through industrial design; then products
became the showcase of national culture for beautifying national image and the symbol for
achieving modernization.
Since design is penetrated by the power of capital, it gradually disconnects with the
society, ―whatever other aims and local concrete effects it may have – ends up ushering into
being the universal, systematic planification of capitalism‖ (Hays, 1998: 3). Therefore, when
the design circle shouted out load slogans such as ―anti-counterfeiting‖, ―promoting industrial
upgrading‖, ―enhancing competitiveness of companies‖, it was based on the economic
rationale of corporate competition, which not only forfeited its leading role as the avant-
garde, but also was caught in the crisis of meaningless ideology and self doubts and could
only passively chase after the reality of the industry.
Entering the twenty-first century, after industries in Taiwan were mostly upgraded to
ODM, in the headline news of Business Next in its May 2003 issue, designers were praised as
―people who help bringing in 1000 billion orders‖, which coincides with that to Raymnn
Loewy by Times: ―designer Raymond Loewy – he streamlines the sales curve.‖
However, design was developed upon the base of OEM, therefore the practice of the
whole profession was restricted by the premise of manufacturing. Basically, industrial design
in Taiwan actually contributed to new manufacturing procedures, rather than new products.
Having said this, it would be clearer if we examine with the US as the reference point:
Keynesianism that focuses on expanding consumption was prevalent in the post-war US, and
industrial design as a sophisticated sales strategy had become common practice, i.e. ―design
for sales‖ (Sparke, 1983: 29); within the re-structuring process of the global economy of the
new international division of labor, the most important mission of Taiwan‘s industrial design
was to increase production, which was ―design for manufacture‖. Taiwanese enterprises that
mainly carried out manufacturing must at the same time fulfill the premise of feasible
production and face the pressure of prompt goods-delivery. As a consequence the time-
schedule for product development and design was squeezed to its limit. The design flow
pretty much emphasizes computer aided industrial design (CAID), which enables the result of
design to be quickly connected to the manufacturing sector.
Export-oriented production pushed forward industrialization, which could be regarded as
the epitome of Taiwan‘s whole economic development. Industrial design in Taiwan followed
the requests made by international buyers who placed orders, delivering ―Americanized‖ and
―Japanized‖ product styles; therefore, e ign became the operation of ―simulacra‖ ahead of
the practice of manufacturing that aimed to obtain orders. Companies all tried to sell their
creative ideas to buyers in trade fairs; in production the design component comprises an
increasing component of the value of goods, and the ―design ocess‖ progressively more
central to value-added (Lash and Urry, 1994: 15). Although this export-oriented industrial
framework had gone from OEM to today‘s ODM in terms of technical level, it was still
 Reflections on the Structural Function of Industrial Design in Capitalism... 75

restricted under the control of foreign enterprises/brands, and kept on being molded by new
international political economic situations.
Based on above-mentioned historical factors, the starting point of Taiwan‘s industrial
design was destined to be disconnected with the needs of local markets from the very
beginning. Professor Hsia, the director of Graduate Institute of Building and Plan of Taiwan
University, said bluntly:

―‗Made in Taiwan‘ has never been an opportunity to design in accordance with their own
images… the so-called Made in Taiwan means the products should look like being made in
Japan or the U.S., instead of Taiwan.‖ (Wang, 1997: 20-24).

Professor Wan-wen Chu, a prestigious economist in Taiwan, also points out that:

The progress of productivity of Taiwan‘s industries mainly comes from learning how to
quickly and cheaply imitate products from advanced countries, fulfilling the needs of markets
in advanced countries, rather than learning how to manufacture [and design products that suit
local needs] for Taiwanese consumers. (Chu, 1999: 6).

Based on the principle of ―comparative advantage‖, Taiwanese companies would

dedicate themselves to manufacturing selected products that process global competitiveness;
however, many products supplying foreign markets with excellent quality and reasonable
prices were not found in local markets. When production and consumption in a place were
disconnected, its products could not reflect local characteristics in full, and therefore could
not assemble the power of identity. Until the 1990s, when products labeled ―Made in Taiwan‖
were stigmatized internationally, product image and national identity were finally connected,
which ignited the movement that aimed at rectifying the ―MIT‖ label.
Under the thinking of pursuing economic development, people always hold plenty of
imagination towards industrial design, hoping it will bring in more commercial interests.
Industrial design is built on such expectations to respond to a set of tasks at different levels,
including company survival, industrial development, and national identity, and its purpose is
to discharge the crisis of capitalist development. This ―alchemy‖ that comes ―out of nothing‖,
situated around the post-war period in relation to how Taiwan was transferred from war-torn
debris into an important NIC, underlines the characteristics of industrial design during the
process of Taiwan‘s economic development; at the same time, this also clearly shows the
structural function of industrial design that works as the safety valve of capitalism.

REFERENCES
Allen, J., P. Braham, and P. Lewis (1992). Political and economic forms of modernity.
Cambridge: Polity Press.
Castells, M. (2000). The rise of the network society, (2nd edition). Oxford: Blackwell
Publishing.
Cheng, G-M and Y-J Zheng (Eds.) (1996). Industrial Design in the R.O.C.: 1959-1994.
Taipei: TAITRA.
76 Ju-Joan Wong

Chu, W-W (1999). Between the public and the private: alternative thinking of Taiwan’s
economic development. Taipei: Commonwealth.
Dormer, P. (1993). Design since 1945. London: Thames and Hudson.
Duan, C-P (Ed.) (1992) The economy of post-war Taiwan. Taipei: Renjian.
Haug,W. F. (1986). Critique of Commodity Aesthetics: Appearance, Sexuality and
Advertising in Capitalist Society (1971), trans. by Robert Bock, Cambridge: Polity Press.
Hays, K. M. (Ed.)(1998). Architecture theory since 1968. Cambridge: MIT Press.
Heskett, J. (1987). Industrial design. In H. Conway(Ed.), Design history: a students’
handbook, Great Britian: Routledge.
Industrial Design (1971). A brief history of industrial design in Taiwan, Industrial Design
Magazine, volume 16, issue 10.
Lash, S. and J. Urry (1994). Economies of signs and space. London: Sage.
Peet, R. (1991). Global capitalism : Theories of societal development. New York: Routledge.
Sparke, P. (1983). Consultant design: The history and practice of the designer in industry.
London: Pembridge.
Sumiya, M., C-C Liu, and C-Y Tu (1993) Taiwan’s economy: typical achievements and
problems of NIEs. Taipei: Renjian.
Taniura, T. (1992). The forming of international assembly bases: the industrialization of
Taiwan. Taipei: Renjian.
Yulon (n.d.) In Company History, official website of Yulon. Retrieved from: http://www.
yulon-motor.com.tw/company_e/history.asp.
Wang, H-S (1999). The way of the university lies in understanding ―design‖ – records of the
conference of managerial strategies of design departments in universities, Industrial
Design Magazine, 27(2): 64-69.
Woodham, J. M. (1997). Twentieth-century design. Oxford University.
In: Capitalism in Business, Politics and Society ISBN 978-1-61122-547-1
Editor: Eugene N. Shelton © 2011 Nova Science Publishers, Inc.

Chapter 3

WHO WAS THE WHITE COLLAR CRIMINAL?

WHITE COLLAR CRIMINALS IN SWEDEN, 1865-1912

Tage Alalehto and Daniel Larsson

Umea University, Sweden

ABSTRACT
Who was the white collar criminal? During the last few years this question has been
an increasingly popular topic in the field of white collar crime. But very few have asked
who the white collar criminal was in the past. Our aim is to investigate the demographic
character of the white collar criminal during the first industrial revolution and the
implementation of capitalism in Sweden (1865-1912). Data comes from Statistics
Sweden‘s historical statistics record regarding a section of the law that concerns offenses
in bankruptcy. The hypothesis put forward is that the impact of industrialism and
capitalism changes the socio-demographic profile regarding offenders of bankruptcy. The
results, however, indicate that the profile did not change, which implies that the impact of
capitalism and industrialism during the first period in Sweden did not have any impact on
the characteristics of the offenders. This is in line with recent research showing that there
is no correlation between the number of bankruptcy offenses and industrialization during
this period. Furthermore, the results show that there are great similarities in the socio-
demographic profile during this period with the same profile today. This result clearly
contradicts the common understanding among many researchers in the field that modern
white collar crime has its roots in capitalism and industrialization. Rather, the result
shows that the socio-demographic profile is stable and related to other factors. In the
conclusion, we discuss the results from the point of view of general understandings of
theories such as Wheeler‘s ―fear of falling‖, Gottfredson and Hirschi‘s self-control
theory, and Hirschi‘s theory of social bonds.

INTRODUCTION
The question ―Who was the white collar criminal?‖, put forward by, among others, the
British criminologist Hazel Croall (1989) is a very basic question. Over the last few years this
78 Tage Alalehto and Daniel Larsson

question has been an increasingly popular topic in the field of white collar crime (e.g.,
Braithwaite 1985; Shover 1998; Piquero and Benson 2004; Zahra, Priem and Rasheed 2005;
Shover and Hoechstetler 2006; Weisburd et al 1991; Weisburd et al 2001; Benson 2002;
Benson and Simpson 2009; Alalehto and Larsson 2008), and has also been related to
incitements stemming from capitalism as an economic and social system. It is important to
shed light on the demographics characteristics of white collar criminals compared to the
demographics of street criminals (e.g., Lewis 2002), or on demographic comparisons between
white collar criminals for different types of offenses (e.g., Wheeler et al 1988), or different
types of contexts (Alalehto and Larsson 2008). But very few have asked who the white collar
criminal was in the past—whether the offender in the past shows similarities or differences in
demography to white collar criminals of today.
Our aim is to investigate the demographic character of the white collar criminal during
the first period of capitalism—during the process of modernization and industrialization.
Previous research (e.g., Robb 1992; 2006; Coleman 1987; 1992; 1998) indicates that the
increase in white collar criminality and its modern form has its roots in the process of
transition from an agricultural society to an industrial one. It is a consequence of the
proliferation of alienated ―big business‖ norms via an overwhelming ―culture of competition‖,
characterized by reified and impersonalized debtor-creditor relationships, structured around
self-centered competition that forces individuals to strive to be ―someone‖ (i.e., to come in
possession of something valuable), where ―winners‖ were rewarded and ―losers‖ were
stigmatized.
In this article, the capitalist mode of production is characterized by industrialization,
market-oriented production, proletarianization, urbanization, the extension of lordship, and
free entrepreneurship. The connection of the transition process to the socio-demographic
profile broadly follows the materialistic link that Marx (1859/2007) outlines in his theory of
historical materialism—that the conditions of material circumstances constitute the mentality
of the historical phase of the mode of production. Thus, a change in the market structure
introduces a change in social behavior because it impacts the moral standards of the society‘s
social fabric, in business as well as in other fields of human agency.
Sweden, which is the case in the present investigation, went through a transition from an
economy dominated by agriculture to one dominated by capitalist relationships during the
period in question (1865-1912). Throughout this period, the number of people employed in
industry increased by about 207 percent, the number of firms increased by about 313 percent,
and the proportion of the population living in cities increased from about 12 percent in 1865
to about 26 percent in 19121. However, the number of people found guilty of bankruptcy
offenses such as white collar crime did not increase over the same period, as shown in Figure
1.
In an earlier paper (Alalehto and Larsson 2009), we discussed the low correlation
between industrialization and bankruptcy offenses and thereby challenged the validity of the
previous statements of well-known scholars such as Robb and Coleman. To summarize our
discussion, we argued that, at least as it pertains to Sweden, the low correlation indicates a
delay between the economic and institutional orders to develop a collective capitalistic mind
(individualism, selfishness, materialistic values, etc.). Instead, during the transition period the

1 Our own calculations based on Edvinsson (2005) and on Statistic Sweden historical records.
 Who was the White Collar Criminal? 79

Swedish population probably still held values and norms that were related to agrarian society
(ibid.). However, as we will show at the end of this article, the institutional delay between
economic order and the cultural order to develop a capitalistic mind at the end of the
nineteenth century was converging, at the time of the Second World War, with a tripling in
the number of bankruptcy-related offenses.

40

35

30

25

20

15

10

0
1865 1868 1871 1874 1877 1880 1883 1886 1889 1892 1895 1898 1901 1904 1907 1910

Figure 1. Statistics of persons found guilty of bankruptcy offenses.

However, our challenging of previous research does not challenge the topic we are
putting forward in this paper. Even if there was hardly any rise in white collar criminality at
the beginning of the capitalistic transition in Sweden, this does not mean that the
demographic characteristics of white collar criminals at that time is of no interest to the
demographic agenda today—either as a form of variation in criminality (Gottfredson and
Hirschi 1994) or as a form of variation between individuals (Sutherland 1983).

WHO WAS THE WHITE COLLAR CRIMINAL?

The previous research field generated a few, but very important, quantative studies on
this topic, such as the American studies by Wheeler et al (1988), Benson and Moore (1992),
Weisburd et al (1991; 1995), the follow-up study by Weisburd and Waring (2001), and the
longitudinal investigation by Lewis (2002). For Sweden, we have two quantitative studies
similar to those undertaken by the Americans, by Ring (2003) and Alalehto and Larsson
(2008). Beyond these quantitative studies, there are many ethnographic case studies that show
some demographic characteristics of the white collar criminal, depending on the character of
the data that has been collected during the twentieth century (e.g., Kinberg and Reimer 1942;
Spencer 1965; Croall 1989; Shover 1998; Alalehto 2000; Farrell and Healy 2000; Benson
2002; Walters and Geyer 2004; Holtfreter 2005).
In general terms, the studies referred to above show that the typical white collar criminal
is a man with a mean age of 40 years. He does not belong to an ethnic minority group, and is
likely to be married and living in a stable relationships with his family before, during and
after conviction. His prior convictions vary significantly depending on what offenses he is
charged for (e.g., antitrust violators normally do not have prior convictions, whereas every
80 Tage Alalehto and Daniel Larsson

other credit fraudster usually does). The typical white collar criminal has a regular income
(either because of ownership or employment in typical middle-class occupations), and low
unemployment rates compared to street criminals. His level of education varies from being
better educated than the general public to having a mainstream education degree (depending
on what kind of white collar crime he has committed). Like most of the public, he has in
general not had any significant adaptability problems or learning difficulties during schooling.
His degree of religiosity is significantly lower than that of the general public. Furthermore,
the white collar criminal, to a significantly higher degree than street criminals, owns his own
residence. His financial standing varies, depending on what kind of offenses he has
committed. Here again, antitrust violators typically have steady and substantial financial
assets compared to bank embezzlers, who have much lower financial assets (although bank
embezzlers have three times the amount of financial assets than street criminals).

WHO WAS THE WHITE COLLAR CRIMINAL?

This rough picture shows what we know to date about the demography of the white collar
criminal, which of course is important for further studies in this area. But does this
description also hold for white collar criminals in the past? From historical studies we
actually do not know much about the white collar criminals active during the very beginning
of the capitalistic period at the end of nineteenth century. What we do know is that the
phenomena of white collar criminality was, at least from the British perspective, an
increasingly common issue from the end of eighteenth century through the nineteenth century
and onward. The fraud activities observed in the workplace and in the business world raised
an intense debate, as well as warnings and societal reaction to the fraudulent climate in British
industries (Taylor 2005; Locker and Godfrey 2006). But even though this was the case in
Britain, few studies have shed light on this period of white collar crime. However, the few
studies that actually do exist are limited in terms of data collection because they concentrate
on single cases that were in the news at the time. Moreover, the focus was on describing the
nature of the case and the reaction in the courtroom, but not the character of the criminal in
question (except sweeping statements such as ―high status‖, ―integrity and ―high honor‖);
there were certainly no substantial comments on the demographic status of these individuals
(Robb 1992; Johnstone 1999; Taylor 2005; Colley 2005; Wilson 2006). Even if these studies
would have provided more substantial information on the white collar criminal‘s
demography, it would be difficult to generalize the results in any significant way (Alalehto
and Larsson 2009). So the question remains: are white collar criminals of the past, from the
point of view of their demographic characteristics, similar to white collar criminals today or
another type of offender altogether? In our discussion, we interpret our results in the light of
modern theories in the field of white collar crime research.

DATA AND OPERATIONALIZATION

We used Statistics Sweden‘s historical statistical records on convicted offenders. The
data has been reported systematically from 1830 to today. Our working data contain
 Who was the White Collar Criminal? 81

information from 1865 to 1912. The reason for this restriction is twofold. The first reason is
technical, as the data collected between 1830 and 1865 is roughly summarized and
unsystematically declared, which makes it hard if not impossible to compare the data from
one year to another. The data between 1865 and 1912, on the other hand, has been rather
systematically presented. In 1912 Statistics Sweden reformed the data in such a way that an
accurate comparison between the variables we use before and after 1912, especially regarding
the demographic variables, is impossible.
The second reason to start with 1865 is that the previous year, 1864, is to a large degree a
demarcation point regarding the implementation of laws that began to transform Sweden from
an agricultural, conservative European country into a liberal market economy. It was in 1864
that restrictions on business activities were first abolished, giving all Swedish citizens the
legal right to own a business. This was implemented by the Decree of Economic Freedom
[näringsfrihetsförordningen], which was accepted by the Swedish Parliament in 1864
(Magnusson 1996). The 1865-1912 period was also characterized by economic growth,
industrialization, population growth and other such characteristics that reflected the fact that
Sweden was being transformed from an agricultural society to a modern industrial nation. It
was also during this period that the Swedish economy became more dependent on the
international business cycle than on the domestic harvest (Magnusson 1996). The Swedish
labor movement and employment confederation were also established during this period; the
agreement between collectives of employees and collectives of employers came in 1906,
which became the first step towards the famous Swedish labor market model (Nyström 2000;
Swenson 2002). These were all clear indications that a new society was developing during the
period under investigation. With this historical background in mind, it is quite logical to stop
the investigation before the First World War; economic growth was at its peak and more
internationally concentrated than ever, and workers‘ real wages had increased significantly,
even by international standards (Schön 2000). From 1914 onward, the economic
fundamentals changed completely as a consequence of the war. As elsewhere in the world,
the internationalization of the Swedish economy decreased and the economy became unstable
when the international gold standard was suspended to fund the war (James 2001; Schön
2000). From the perspective of economic modernization, the period after 1914 is
characterized more by regression than by progress. As such, the relationship between white
collar crime and economic development was most likely different before and after 1914.
The data used represent the entire population of reported and convicted offenders in
Sweden. The dependent variable is Offenses in bankruptcy (Sverige Rikes Lag chapt. 23 1-6 §
1864). For practical reasons we have been forced to accept the categorization of the criminals
in the way that the court has chosen, which implies that we have adopted our point of
departure to the nature of the offenses handed down by the penal law system (we are thus
forced to exclude civil decisions and administrative actions). Given this, we cannot apply the
point of departure established by Sutherland (1983), where the act of white collar crime
should be specified with regard to the powerful high-status offenders in the society. In any
case, our choice of one specific section of the law (offenses in bankruptcy) implies that we
82 Tage Alalehto and Daniel Larsson

nearly meet the character of Sutherland‘s definition.2 According to Gratzer (2001) this
particular section of the law had an explicit sense of justice in the juridical system in Swedish
penal law as early as 1743, where the correspondence section of the law explicitly
distinguished between fraudulent acts in general and bankruptcy by omission. Moreover, the
section of the law used here is the one from 1864 that is most closely related to the modern
concept of white collar crime used today and for which data are available over the entire
period under investigation—compared to other related sections of the law governing white
collar crime, such as fraud in general, or embezzlement in general, etc.
Our dependent variable Offenses in bankruptcy is explicitly divided into three categories:
fraudulent, dishonest and careless. Of these three categories we have focused on fraudulent
and dishonest since these categories confer an obvious intent to commit a crime, as opposed
to simply being careless. These two categories contain five necessary conditions that,
together, declare that a bankrupted debtor has committed a fraudulent act if he/she has made a
false claim to take over a property using false name, or embezzled money provided by the
creditor for his/her own purposes.
There are two sets of independent variables. The first set identifies the individual
characteristics of the offenders. Age is indicated via seven different categories: 15-20, 21-30,
41-50, 51-60, 61-70 and 70+. A gender variable distinguishes whether the offender is male or
female. Occupation distinguishes between trader, industrialist, military serviceman,
tradesman, farmer, householder, cottager, beadsman, worker, and unknown. While this
variable is naturally problematic for making comparisons with modern occupational
categorizations due to the significant changes in the labor market, we argue that categories
can be found that are similar to the modern occupational categories that the literature has
identified as conferring a high risk of white collar crime. Marital status distinguishes between
married, unmarried, widowhood, and unknown. There is no way of identifying cohabitants
that were not married. We assume, however, that this kind of family constellation was so
uncommon during the period under investigation that this problem is negligible. Two
variables measure education. The first one is education, which distinguishes between the
ability to read and write, the ability to read but not write, an inability to read or write, and
unknown. The second variable measuring education is knowledge of Christianity, which
distinguishes between well-off, adequate, little, none, and unknown. Financial assets
distinguishes between well-off, moderate, weak, none, and unknown. Urbanity distinguishes
between living in a town or city and living in a rural area. The last variable measures whether
the offender had a prior conviction or not.

RESULTS
Table 1 shows the distribution of demographic data for convicted white collar criminal
offenders, with all the years being merged. What we see is a rather homogenous white collar
criminal. The distribution of gender is 671 males (91%) and 68 females (9%), which reflects a

2
That is, ― … a crime committed by a person of respectability and high social status in the course of his
ccupat n.‖ (Sutherland 1983, p. 7). However, itl has to be noted that Sutherland (1941e does mention
bankruptcy as a typical form of white collar crime.
 Who was the White Collar Criminal? 83

gender mix that is substantially more male-dominated than today‘s population of white collar
criminals. Moreover, if we compare the figures with the general public at the time, the figures
show a distribution frequency of age that was distinguished from the general public‘s mean
age. The mean age of white collar criminals was in the interval 31-40 years, but if measured
by median half are between 31-40 years of age, and half are between 41-50 years of age—this
suggests that the real specific mean age is around 40-41 years. This is dissimilar to the
general public, which had a mean age spanning from 27 years in 1865 to 30 years in 1912
(SCB 2007), which means that white collar criminals were rather old compared to the general
public.

Table 1. Demographic data on convicted white collar offenders (bankruptcy offence

(Sveriges Rikes Lag chapt.23 1– 6§1864)), 1865-1912, in percent

Sex Poor 24,1

Male 90,8 Unknown 5,3
Female 9,2 Prior conviction 4,3
total/n 100/739 total/n 100/717

Age
15-20 0,8 Occupation
21-30 16 Trader 23,9
31-40 27,9 Industrialist 3,7
41-50 26,8 Military men 1,5
51-60 18,2 Tradesman 9,7
61-70 8,9 Farmer 35,8
71-80 1,3 Householder 3
total/n 100/594 Cottager 3,7
Beadsman 4,5
Urbanization Worker 9
Stockholm 6,2 Unknown occupation 5,2
Gothenburg 7,5 total/n 100/134
Malmo 12,6
Rural county 73,7
total/n 100/435
Marital status
Religious knowledge Married 66,7
Illegal birth 3,8 Unmarried 23,7
Well-off Christianity 15,6 Widowhood 6,5
Adequate Christianity 56,1 Unknown 3
Weak Christianity 11 total/n 100/691
Non Christianity 0,7
Unknown 12,8 Education
total/n 100/711 Read and write belong the general 8,6
Read and write 71,5
Financial assets Read but not write 11,3
Well-off fortunes 5,6 Either read or write 0,9
Moderate 26,4 Unknown 7,7
Little 34,3 total/n 100/688
84 Tage Alalehto and Daniel Larsson

Regarding the distribution of civil standing white collar criminals has been married
nearly three times as often as been unmarried. In fact, being married was even more common
among the sample of white collar criminals than among the general public (49.35%)
(Historisk Statistik för Sverige 1. Befolkning 1720-1950). The distribution of education level
is quite similar with the average level of the general public—over the time period, the general
public had an average reading ability of about 90-95%, compared to an average reading
ability of about 90% among white collar criminals. Literacy among the general public grew
from an average of 50-55% in 1865 to about 95% in 1910, which can be compared to the
white collar criminal sample, which had an average literacy rate of about 80%. This can in
turn be compared to convicted street criminals, who had an average literacy level of about
40% in 1865 to about 95% in 1910 (Johansson 1977, p 64). The mean for knowledge in
Christianity (which is used as an indication of the offenders‘ moral status) was ―adequate‖,
which indicates a level that was pretty much in line with that of the general population, which
actually had nearly no knowledge or a deficient knowledge of Christianity over the period.
The process of secularization started in Sweden around 1855, and at the time almost 75% of
the general population had a ―well-off‖ or ―adequate‖ knowledge of Christianity due to their
participation in religious activities, but this level of knowledge declined drastically—to
20%—by 1890, which probably means that the population‘s knowledge of Christianity
drooped to a ―weak‖ or ―none‖ level (Bäckström et al 2004, p 26). As such, a mean level of
―adequate Christianity‖ among white collar criminals was in fact fairly high for this period,
and about equal to the level of knowledge of Christianity among street criminals from 1865 to
1878 (Kriström 1975). The mean for financial assets among white collar criminals was ―little‖
(246 cases, compared to 189 cases of ―moderate‖ and 173 cases of ―poor‖). The population of
street criminals in Sweden during the period 1865-1878 had financial assets between ―poor‖
and ―little‖ (Kriström 1975, p 138). The demographic structure for urbanity among white
collar criminals was ―rural living‖, with only 24.7% of the convicted living in towns or cities;
this was only slightly higher than the mean for the general public, of which 19.2% lived in
towns or cities (Historisk Statistik för Sverige 1. Befolkning 1720-1950). With regard to prior
convictions, the entire sample had only 31 cases (4.2%).

Table 2. The distribution of mean values in ten-year spans; in percent

1865-1874 1875-1884 1885-1894 1895-1904 1905-1912 1865-1912

Male 91,4 85,7 89,6 92,8 90,1 90.8
31-40 30,7 21 27,4 31.4 29 27.9
41-50 21.9 28.0 29.1 29.7 23 26.8
Rural county* 73,3 76,1 73.7
Adequate 67,7 42,1 51,2 56,0 67,6 56.1
Christianity
Little 36,7 41,2 32,1 36,0 32,7 34.3
Married 68,8 76,5 65,6 50,4 72,3 66.7
Read and write 62,3 65,5 67,9 75,8 92,1 71.5

* Data was only available to 1882. The deviation for the span 1875-1884 was computed for the period
1875-1882.
 Who was the White Collar Criminal? 85

The mean for punishment was ―hard labor penal‖, which nearly in all cases included the
punishment of ―loss of civil rights‖. Our statistical records do not show any figures regarding
the distribution of owning residences, but we can see from the limited numbers of
occupations that at least nearly 40% of the white collar criminals owned their residences (i.e.,
farmers and cottagers); furthermore, it is plausible that the standard of the residence was far
better than those owned by convicted criminals.
The conclusion that can be drawn from Table 1 is that the white collar criminal offender
has, to some extent, the same characteristics during the transition from an agricultural society
to today‘s industrial society. But what about changes in the character of the white collar
criminal during this period? Table 2 shows the mean values of the most common
characteristics shown in Table 1, in ten-year spans. There is much variation over time, which
is most probably caused by the small n. More importantly, however, it is hard to find any
substantial trends for any of the variables with the exception of the ability to read and write,
which increases during the period under investigation. But this result is more an indication of
the increasing ability to read and write among the entire population (Johansson 1977). Thus, it
seems that the characteristics of the white collar offender are not only the same when
comparing the entire period with that of today, but also that white collar offenders had about
the same characteristics in 1865 as they did in 1912. Thus, the transition from agricultural to
industrial society and the implementation of the liberal market economy does not seem to
have had any impact on the characteristics of the white collar criminal.

CONCLUSION
The aim of this paper was to investigate whether the white collar criminal of today has
the same demographic characteristics as those in the first fifty years of the industrialization
process, and whether the socio-demographic profile of society changed during that transition.
The context to this question was the claim that white collar criminality is, to a significant
degree, the result of big business and a culture of competition, both of which emerged along
with industrialization (e.g., Robb 1992; 2006; Coleman 1987; 1992; 1998).
From our descriptive data we can see that in many ways the white collar criminal of the
past had the same characteristics as the white collar criminal of today. He was typically a man
who was married and his education level was quite high (almost regular), as it is for white
collar criminals today. His moral character (adequate Christianity) was also pretty much
consistent with that of the general public, both then and today (in a relative sense). The fact
that he was generally living in rural areas compared to living in urban areas today was a
structural circumstance influenced by the incipient process of industrialization and the degree
of urbanization that took place as a result. There are four demographic variables that truly
distinguish the white collar criminal of the past from those of today: the rather large
distribution of men as offenders, the rather high mean age, financial assets, and prior
convictions. In many ways, the criminal‘s low financial assets is a circumstance that certainly
distinguishes him from these criminals today. We can speculate but not give any empirical
reasons as to why this is the case, and to some extent this is also true for his low rate of prior
convictions (4.3%). It is obvious that the majority of the bankruptcy offenders in the past
were not career criminals, but rather one-time criminals—which is similar to white collar
86 Tage Alalehto and Daniel Larsson

criminals today, who typically are offenders who react on temporary crises and do not
combine their criminality with other types of offenses and who show a slight frequency of
recidivism (Weisburd et al 1991; Lewis 2002). To some extent, we believe that the low prior
conviction rate is correlated to a rather well-off level of financial assets before the time of
insolvency, which decreased his financial assets and motivated him to commit the bankruptcy
offense.
If we deduct the three last years from our sample, we generate a total of 28 prior
convictions, which give us a recidivism rate of 4.9% for the period. If we compare our
recidivism frequency to Weisburd et al‘s (1995) discussion that iapsitioment today has a
fairly small impact on the convicted offender at the time when the offender received his
penalty (the recidivism rate is 29.4% in their sample), our figures show something very
different. Compare also the recidivist figures from Wheeler et al (1988) of 34.2 %; Weisburd
et al (1991) of 35.4%; Forst and Rhodes (Benson 2002) of 31.3% and Ring (2003) of about
25-30%. Recidivism frequency is obviously different between white collar criminals in the
past and those of today.
But of course we cannot exclude the possibility that the low recidivism rate was linked to
the specific type of offense. Recent results in the white collar crime field show that there are
distinctions in prior convictions based on what kind of white collar crime was committed.
Offenders of high-level crimes such as conspiracy, securities violations, and so on have a very
low prior convictions rate, compared to those who commit low-level crimes such as
embezzlement, tax fraud or credit fraud (Langton and Piquero 2007). On the one hand,
bankruptcy offenses are crimes that have the character of high-level crimes such as fraudulent
statements (the creditor cheats the debtor by show a fake account in order to hold up the
prospect of the debtor). On the other hand, they also have the character of low-level crimes
such as embezzlement (the creditor convinces the debtor to trust his money to him, but then
cheats him) (Rydin 1888). All told, we aruge that bankruptcy offenses can best be described
as mid-level offenses, which Langton and Piquero (2007:11) suggest should mean a higher
number of prior convictions among the offenders.
However, these four aberrant independent variables have to be given a theoretically
constructed interpretation in order to paint the whole picture of why white collar criminals of
the past committed bankruptcy offenses.
We believe that Stanton Wheeler‘s concept (1988; 1992) of ―fear of falling‖ is a good
point of departure for providing a valid interpretation of motivation of the white collar
criminals of the past. Wheeler argues that one of the main things that causes an individual to
commit a white collar crime is a difficult business situation in which the company he is
running suffers from low margins. This situation presents a threat for two reasons. First, if he
is forced to liquidate his company he cannot be certain of an outcome that allows him to
maintain his family‘s standard of living. Second, if he liquidates the business he will have
effectively failed as a businessman and will suffer a loss of reputation among his business
colleagues. In short, he runs the risk of becoming unemployed and earning a much lower
income for himself and his family, and of becoming stigmatized as a ―loser‖ among his
former colleagues. If the businessman senses both of these factors he will feel the ―fear of
falling‖. This increases his motivation for committing a white collar crime.
Now let us examine our demographic statistics and interpret it from the point of view of
Wheeler‘s concept. The majority were married, which probably meant that they were
responsible for the family income—an income which was ―moderate‖ at best, ―poor‖ at
 Who was the White Collar Criminal? 87

worst, but ―little‖ in the mean. What we do not know is whether the convicted white collar
criminal had had ―well-off fortune‖ or at least a ―moderate‖ level of financial assets when he
started the company. He probably suddenly confronted a difficult business situation that led to
low margins for his company; he first tried to address this using his own financial assets,
which did not improve the situation, and then borrowed the money under false claims from a
creditor. This also did not improve the situation, as he was ultimately caught and convicted
for a bankruptcy offense, as a man with ―little‖ financial assets. This interpretation makes
sense of the fraudulent act. It also makes sense from another point of view: if we look at the
figures for prior convictions, they are indeed very low compared to today. If the former
Swedish white collar criminal was motivated by a ―fear of falling‖, he was rather conformist
(married, occupational status, adequate Christianity, literate, and a high mean age of 40). He
desperately tried to fix his situation, failed, and was convicted. But he learned his lesson, and
did not get into further trouble with the law after his release from prison. With the low rate of
recidivism in mind, one could easily come to the conclusion that the white collar criminal of
the past was not a career criminal, but rather a one-time offender who tried to solve a difficult
situation that threatened his standard of living and social status (Weisburd et al 1991).
The very same scenario can be examined from many theoretical perspectives, although
we do not elieve they nt a consistent picture. For example, Gottfredson and Hirschi‘s
(1994) theory of the absence of self-control can, to some extent, explain the similarities
between white collar criminals of the past and those of today. The variables of gender, low
financial assets and living in rural areas (common at that time for the population) are equal to
those of street criminals, both at the time and today. But the theory cannot really explain the
variation in variables such as the high mean age, marital status, occupational status, level of
education, and literacy, all of which were more or less equal to those of law-abiding
individuals. The theory of the absence of self-control argues that the individual cannot control
his impulse to take advantage of an opportunity that emerges; he cannot calculate and then
take a strategic decision that will be better in the long run. This does not mean that the
offender is unintelligent, but rather that he simply suffers from the absence of self-control. A
man with this quality cannot really manage a company over the longer term. Our statistics,
however, do not suggest a man with an absence of self-control. The former white collar
criminal had levels of education and Christianity that suggested he had the endurance needed
to realize certain cultural goals through work and self-discipline. But the real problematic
statistic for Gottfredson and Hirschi‘s theory is the low rate of recidivism in the sample. A
man with this kind of propensity would simply not stop committing crimes just because he
was convicted—he would continue commit crimes and become a career criminal. In fact, the
low rate of recidivism in our dataset also undermines Sutherland‘s opinion (1983, p 227) that
white collar criminals should have a high rate of recidivism because their actions were
undertaken rationally and without losing their social status among business colleagues, even
if they were convicted. In one way or another, Swedish white collar criminals of the past must
have blamed themselves instead of other for having been convicted.
Travis Hirschi‘s (1969) theory of social bonds seems to better suit the statistics provided
in the sample. The bond of commitment, involvement (his occupation) and moral belief are
truly supported in the dataset. The statistics on attachment are lacking mostly because of the
absence of substantial information about this quality in the records. However, if we look back
to the argument on the ―fear of falling‖ this can also be interpreted as supportive of the theory
of social bonding. However, a problem that disqualifies Hirschi‘s theory is that the statistics
88 Tage Alalehto and Daniel Larsson

describe a man who should not be a criminal at all. The statistics show a man staked in
conformity that should act as an obstacle to criminal behavior and restrict his freedom to act
against the social order, for two reasons. First, because of his social investments in
commitments (marital status, education, occupational status as a farmer or trader); second,
because of his moral beliefs in Christianity, which should mean that he believed that the
existing social order was a legitimate one. We believe that this contradiction presents a
fundamental problem for Hirschi‘s theory of social bonding. The theory describes four factors
of importance behind criminal activity, but it lacks a social mechanism that explains how
these factors interact with a structure that motivates the potential offender to commit his
crime, irrespective of his stakes in the social order. We think that Stanton Wheeler‘s concept
of ―fear of falling‖ describes this motivational structure fairly well, as it makes sense that the
white collar criminal‘s motivational structure in the context of coping with a difficult business
situation points towards a criminal act—despite the fact that he is tied up in the social order.
The other topic under investigation is the correlation between white collar criminality and
the transition from agricultural society to industrial society. Sweden went through this
transition at the beginning of the 1880s, experiencing an increase in trade, profit and
bankruptcy. This can also be seen as related to a ―fear of falling‖ by the fact that some
entrepreneurs, who belonged to a decreasingly agrarian economy, did not make the move to
industrial sector. They lost their fortunes pretty quickly. But does this mean that these traders
could not adapt themselves fast enough to the ―culture of competition‖ and ―big business‖?
We do not think so; in fact, the question of the relationship between the ―culture of
competition‖ and ―big business‖ in the Swedish context does not seem to have been a factor
at all during the period under study. We suspect that the labor relationship in the burgeoning
capitalist market was still mainly characterized, in small enterprises, by close personal
relationships between the owner and workers, as well as between the owner and creditors.
Even if the production of goods was industrialized, the relationship was still agrarian in
structure; as such, the character of reification and selfishness had not yet gripped the Swedish
business world by the end of nineteenth century, at least not at the local level (which our
dataset mainly represents).
This conclusion is, in fact, not random or a coincidence. The Swedish economic historian
Karl Gratzer (2001:251-255) has conducted similar analyses as us (Alalehto and Larsson
2009) on the correlation between bankruptcy and bankruptcy offenses for the period 1916-
2000, giving us the opportunity to compare our figures to developments after 1912, as
summarized by Gratzer. The mean for bankruptcy in general was 2,618 cases in five-year
spans over the 1916-1945 period (with a peak of 5,000 cases in 1920 and a low of 600 cases
in 1944). At the same time, the bankruptcy offenses occurred in no more than 4% of all the
bankruptcies that took place (pretty much the same rate that our figures demonstrate).
However, from after the Second World War to 2000, bankruptcy offenses increased
dramatically, from 4% to a mean of 11-12%, with a peak of about 23% between 1965 and
1968. At the same time, bankruptcies in general also increased: from 600 to 700 cases in 1946
to a peak of over 20,000 cases in 1996. This dramatic change in bankruptcy had a significant
impact on the pattern of bankruptcy offenses. Gratzer analyzed the data by using OLS
regression and found a significant R square of .528, which indicates that over the 1916-1998
period, the variation in bankruptcy offense could be explained by the 53% variation in
bankruptcy in general. From this statistical viewpoint, we can at least tentatively conclude,
that the big business climate, accompanied by a general self-centered and competitive
 Who was the White Collar Criminal? 89

mentality, took its place in Sweden after the Second World War, but not at the time when the
transition from agrarian economy to industrial and capitalistic market structure actually took
place.

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Chapter 4

WORK AND WAR IN THE EVOLUTION OF CAPITALISM

Wilson de Campos Vieira1

Sao Paulo, Brazil

ABSTRACT
The ―spirit of Capitalism‖, as characterized by Max Weber, was initially associated,
in Protestantism, with the belief in life after death. Even after the weakening, as of the
second half of the 19th century, of such belief, the ―spirit of Capitalism‖ has been able to
function as a defense against the reality of death, because it fulfills a displacement from
an existential temporality to another temporality ruled by incessant work, parsimony and
accumulation of wealth. This defense is not suitable for the soldier, however, it is he who
comes closest to the reality of death. Since states need soldiers, they use other forms of
denial of death, mainly those states with war programs. In World War I there was a
revitalization of the simple belief in life after death. When that belief was shaken by a
close encounter with death, the soldier developed mainly symptoms of conversion
disorder (formerly hysteria) (Campos Vieira, 2009). In World War II the Nazis applied a
technique based on the ―obsessive-compulsive disorder‖ by displacing the fear of death,
in the soldier and in the population, to the evil of contagion. The contagion factor was
attributed mainly to the Jewish people. It would suffice to isolate or eliminate them in
a ritual purification of the race (Aryan). Nowadays, especially in the USA, one tries to
conceal the drama of death by placing it as a secondary subproduct of the excitement of
the fight of good against evil. Before they are informed, when and if they are, of the
reality of natural or accidental death, children have already learned to dilute death in the
excitement of the fight. The excitement of the fight for justice, vengeance, freeing
someone, dissipates the drama of death. The cinema has been the main diffusion source
of this formula. Videogames are the latest generation. Normally these fictions decrease
with age. Soldiers, however, can sustain them to defend themselves from the reality of
war, applying them to this reality by performing what Roger Caillois called ―corruption
of games‖, that is, making the game transpose its own space and invade reality. However,
the terrible reality of death can destroy the game and lead soldiers to develop what is

1
Rua Artur de Azevedo, 1192 ap. 72. 05404-003 Sao Paulo, Brazil. e-mail : [email protected].
94 Wilson de Campos Vieira

nowadays the most common psychopathology, as of the Vietnam War, the so called
―post-traumatic stress disorder‖.

Keywords: ―Spirit‖ of Capitalism; World War I; Nazi Germany; Vietnam War; conversion
disorder; hysteria; obsessive–compulsive personality disorder; Post-traumatic stress
disorder (PTSD); obsessive-compulsive disorder (OCD); risk behaviors

INTRODUCTION
In this article I attempt to articulate contemporary history with psychopathology. The
relevant factor is the denial of the reality of death that prolongs the enormous denial
constituted by Christianity for many centuries, and which has weakened since the second half
of the 19th century. In a previous article (Campos Vieira, 2009), I tried to show that
―conversion disorder‖ (formerly called hysteria) was caused by the proximity of the reality of
death to a person who previously strongly denied this reality. At the same time, I tried to
insert this mental disorder into the historical evolution of the Christian religion. I think that I
have presented sufficient evidence for these hypotheses. In the same article, I also formulated
the hypothesis that the ―spirit of capitalism‖ of Protestant Ethics, as characterized by Max
Weber, continues to function in the contemporary world, despite the crisis of faith, as a
defense against death. Now, in this article, I present two new hypotheses, one about Nazism
having used―obsessive-compulsive disorder ― mechanisms to reduce anxiety about death
among the soldiers and the population, and another hypothesis, according to which already
during World War II, but especially after it, death began to be concealed behind the
excitement of fighting; this formula was disseminated to children mainly by the American
film industry, and it can predispose future soldiers to what is called ―post-traumatic stress
disorder‖. These last three hypotheses attempt to articulate known facts into coherent
formulations, which already renders them plausible. Although they still lack sufficient
evidence to prove them,I think that it can be foundwith a variable degree of difficulty.

1. “SPIRIT OF CAPITALISM”
I attempted to show (Campos Vieira, 2009) that ―conversion disorder‖, the psychiatric
symptom that belonged to traditional hysterical neurosis, currently no longer used by the
American Psychiatric Association, appeared shortly after a person who strongly denied the
reality of death encountered this reality, usually through the death or serious illness of
somebody close to them, or when the life of the personhimself was endangered, as in the case
of soldiers in war and of sexual abuse. In cases in which the person was not directly involved,
often the symptom mimics part of the manifestations of the disease ofthe person close to
them, or else recalls death itself, when the limbs no longer move (paralysis), we do not speak
(aphonia), we do not see (blindness), all of them pseudo-illnesses without any
anatomophysiological underpinning. The pre-condition denial of the existence of death is
essential and, since religion is a collective denial of death, conversion disorder occurred much
more frequently when religion was dominant, and even more frequently when, beginning in
 Work and War in the Evolution of Capitalism 95

the second half of the 19th century, in the Western World, the belief in eternal life entered a
crisis, and atheism grew rapidly, exposing people to the reality of death.
In order to support my thesis, I took the cases of hysteria in all of Freud‘s works, where
neither he nor his disciples noticed that in practically all one finds the background of death or
serious illness among people close to the patients. Besides clinical cases of other
psychoanalysts, I also based my thesis on the great frequency of conversion disorder in
soldiers during World War I and on historical epidemics of so-called hysterical possession,
such as St. Vitus dance, the convulsions of the Ursuline Sisters of Loudun, both events
preceded by attacks of the Black Death or, in the USA, in Salem, when the colonists were
massacred by the Indians.
During the 20th century, as religious feelings weakened because of growing atheism and
the relativization of dogmas due to the close contact among many religions and mutual
tolerance, conversion disorder became more rare. In the words of E.Trillat: ―Hysteria died, of
course. It took its enigmas with it to the grave‖ (Trillat, 1986, p.274)
But the decline of hysteria is not due only to these factors. According to my hypothesis,
the explanation is more complex, because, in the words of the DSM-IV-TR (American
Psychiatric Association-APA, 2000) epidemiological investigations show that: ―Higher rates
of conversion symptoms are reported in developing regions, with the incidence generally
declining with increasing development‖ (p. 478). Certainly the development to which DSM-
IV-TR refers is socioeconomic, and one cannot say that underdeveloped countries are more
religious than developed ones, as the USA is highly religious. The type of religion, indeed,
shows significant differences. In the History of the West, the capitalist development has the
―spirit of capitalism‖ as its mainspring, which came from Protestantism, as brilliantly shown
by Max Weber. The ―spirit of capitalism‖ preaches unceasing work ― having the intolerance
to idleness as its background ― as well as parsimony, financial success and the accumulation
of wealth.
Benjamin Franklin‘s motto, time is money, no longer appears to refer to religion, but the
―spirit of capitalism‖ whence it cameguaranteed for those who led life according to its rules,
that they had been chosen by God for the eternal life – to others, eternal death. My hypothesis
is that the conducts inherent to the spirit of capitalism constitute a more sophisticated defense
than the simple faith in the life after death of Catholicism, insofar as it associates this belief
with a displacement of existential temporality - where relations of love and a taste for life are
destined to loss, if not through the vicissitudes of life,quite certainly through death – to
anothertemporalityframed within the goals of incessant work, parsimony and the
accumulation of wealth. As Max Weber writes, in the spirit of capitalism, ―wasting time is
the efore the first and most serious of all sins‖(Weber, 2002, p.106)
The simple Catholic belief in life after death, when shaken by proximity with death,
resulted in conversion disorders.The spirit of capitalism was able to survive the weakening of
this belief and function independently from it as a defense against the reality of death.
Traditionally, women were not involved in the world of work and money, and were much
more prone to conversion disorders. As they entered professional life the conversions
diminished.
When the conducts of the ―spirit of capitalism‖ are exaggerated and disconnected from
religion, as often happens nowadays, they are partof the―obsessive–compulsive personality
disorder‖of modern psychiatry.Just as conversive disorder occurs more in the
96 Wilson de Campos Vieira

underdeveloped countries, “obsessive–compulsive personality disorder” occurs more in

developed countries (Millon, Davis, Millon, Escovar, Meagher, 2000).
In ―obsessive–compulsive personality disorder‖, incessant work and parsimony are
commonly associated with excessive attention to details in detriment of the essential, the
vision of proximity in detriment of the perspective of life. During the second half of life, it is
common for an individual with this disorder to manifest depression, because he has not
enjoyed life the way others seem to do (Beck, Freeman, Davis, 2004). This is the price paid
for moving away from existential temporality.
The accumulation of wealth inherent to the ―spirit of capitalism‖ persisted in our times
relatively independent of religion, and Max Weber sees in it today a kind of sports
competition: ―Where capitalism is at its most unbridled, in the United States, the pursuit of
wealth, divested of its metaphysical significance, today tends to be associated with purely
elemental passions, which at times virtually turn it into a sporting contest‖(Weber, 2002, p.
121). Close to the idea of sports competition, Thorstein Veblen (Veblen, 2010) sees in the
accumulation of wealth the purpose of conspicuous superiority according to the principle of
pecuniary emulation.Conspicuous wealth is a fact, but it is not the essential aspect, since
many millionaires prefer not to show what they have. I myself think that if a millionaire,
knowing that his wealth would provide an easy life even for his great-grandchildren, decided
to stop accumulating simply to spend, or at least to begin spending more than he earns, he
would be introducing time in his life: accumulating presumes an afterwards, and, if
accumulating does not establish an end, the afterwards is always put off. (The difficulty of
getting rid of objects which are accumulated over time, is one of the characteristics of the
“obsessive–compulsive personality”.)
In the Donald Duck stories, the fortune Uncle Scrooge has accumulated and preserves
remains intact over time, since the sequence of generations from grandfather to grandchildren
does not appear to be replaced by the relationship from uncles to nephews; Uncle Scrooge‘s
strongbox outside town recalls an Egyptian pyramid that held the pharaoh for all eternity .
The triangle was replaced by the square.

2. SOLDIERS IN WORLD WAR I

But the state not only needs individuals dedicated to work and production, it also needs
soldiers. The spirit of capitalism is not adequate for soldiers who have to approach the reality
of death. The Reiterlied, cavalry song, of Schiller (n.d.) reveals death hidden in the activity of
the ordinary man and magnifies the soldier who faces it:

Who looks on death with unblenchingbrow,

The soldier alone is the free man now
…………………………………………………………
The bondman grubs in the earth so brown
Still weening to lift a treasure;
He digs and shovels fill life is past
And digs but a trench for his grave at last
 Work and War in the Evolution of Capitalism 97

But the soldiers of this period of the Wars of Liberation, at least up to World War I, did
not face death without protection, not given by the spirit of capitalism, but by the simple
Christian belief in eternal life, which was reinvigorated, as George L. Mosse showed in the
book Fallen soldiers ― Reshaping the Memory of the World Wars (Mosse,1990):―From
Germany to Poland postcards showed Christ or an angel touching a dead soldier‖ ( p.75)
―However , the most important function of this popular piety during and after the war was to
help overcome the fear of death and dying. The expectation of an eternal and meaningful life
― the continuation of a patriotic mission ― not only seemed to transcend death itself, but
also inspired life before death.‖ (p.78)
The simple belief in life after death, associated with the great proximity to death
experienced by soldiers in the 1914-1918 War brought back the symptomatology of the
hysterical type: ―It is useless to ask what would have happened if the 1914-1918 War had not
occurred (...) the hysterical phenomena that had practically disappeared returned with a
significant frequency‖ (Trillat,1986, p. 241-242). After 1914 one goes back to talking about
hysteria. Ferenczi, a disciple of Freud, in 1918, writes: ― a real museum of hysterical
symptoms‖ (Ferenczi, 1974)

3. NAZI GERMANY
World War II, especially in Germany, valued new means to deny the reality of death.
Protection through religion, revitalized by World War I, was rather discredited, even because
Germany lost the war. Hitler prized two new ways to dissipate the anxiety of death present in
those times in Europe, as a result of the unusual violence of World War I. (Because of this
anxiety, there was no strong resistance to German invasions, especially by France, because
theypreferred being dominated to the repetition of killing.). Firstly, to dissolve the anxiety of
death, Hitler used the feeling of union among individuals, appealing to nationalism and
especially to the ideology of pure race – in this case the Aryan race – that was supposed to
have a natural right to dominate other peoples based on an evolutionist conception.
Evolutionist thinking in itself already rejected religion. The ―blood union‖ in therace relieved
the anxiety of death. Let us see how.
Some authors, for instance Durkheim and Claude Barrois, showed that proximity to death
in a traumatic situation, as it can happen in war, but also in accidents in civilian life, is
experienced in a feeling of extreme loneliness. ―The brutal disarticulation of ties to the human
and non-human environments, sometimes emphasized by a fissure in the first envelope which
is the own body (body surface, sensory organs, locomotor system), a privileged mediator of
all social ties, will, in the same movement, transform an individual in the world into an
individual outside the world. Psychic trauma is a true demonstration by absurdity of the
genesis of an individual from the socius‖ (Barrois,1998, p.169-170) and ―an individual
without a group to oppose or on which to support himself, a subject without an object, nor a
second, nor third person to sustain their discourse, he is reduced to an interiority invaded by
the anxiety of void‖ (ibid, p. 170). Corollary: unity with others keeps away the anxiety of
death. Especially in Nazism, where unity is strong, through blood.
We will examine this point at length, using some knowledge of psychology. It was shown
by Spitz (1965), Bowlby (1990), Vieira , Castro (2010), that during the first six months of
98 Wilson de Campos Vieira

life, a baby does not yet distinguish between the family nucleus on the one side and strangers
on the other; this usually occurs shortly after the beginning of the second semester; it then
begins to react anxiously when faced with strangers who try to approach it, and seeks
protection from the family. According to Bowlby, this family-stranger division serves the
instinct of survival. Later, during adolescence, driven by the need for autonomy, young
people loosen the family ties and usually create groups of their peers. As the adolescents
become older, destiny is projected into a perspective ending in death (Alleon, Morvan, 1990).
Youths commonly react to this reality of life by underestimating it through risk behaviors,
driving automotive vehicles, practicing radical sports and constituting cohesive groups,
believing that in this way they are strengthening themselves against death. Faithfulness to the
group is less a function of the fear of retaliation by its members, than lack of protection.
Recently, I was able to observe aging people promoting meetings among friends from
their adolescence, not so much to feel young again, but to bring back the feeling of union with
their group. Once again united to face death.
Hysteria also showed a defense against the reality of death in the tendency to constitute
epidemics that were a caricature of unions.
As I said, Hitler used two methods to reduce the anxiety of death among the soldiers and
the population. One was the feeling of union, the other the way he used racism. This way is
characteristic of the ―obsessive-compulsive disorder‖ (OCD), according to the designation of
modern psychiatry, or obsessive neurosis. (The similarity between the designation of this
disorder and obsessive-compulsive personality disorder exists mainly to preserve a tradition,
since the clinical descriptions are very different.) One example of this disorder can be found
by the reader in the aviation magnate, Howard Hughes. At the same time he was very
obsessive about contagion, he was a fearless pilot, and did not retreat from situations of great
risk. One was a condition for the other. The anxiety of death is absorbed by the obsession of
contagion, which induces a strong uneasiness, but does not refer to death or does so only very
diffusely; and this uneasiness is in turn annulled by rituals (compulsions), thus ―liberating‖
the individual to experience situations of danger without feeling fear. In some individuals
with OCD obsessions do not occur, only compulsive rituals; they do not even feel the
uneasiness resulting from obsessions. The psychoanalyst Serge Leclaire was the first to verify
that the obsession about contagion covered up anxiety of death: ―the obsessive structure may
be conceived as a double refusal of the ultimate possibility of one‘s own death.‖ (Leclaire,
1971, p.138). More recently, C. Brunot (2005): ―Obsession reveals an aspiration that every
human being knows, of not aging, of remaining an eternal child, of embodying through words
and thinking this immutable body which would be this ideal body liberated from death‖ (4th
cover)
About the immunization and strengthening resulting from the elimination of the
contaminating agent, I cite Paul Ricoeur (Ricoeur, 1960), referring to rituals of primitive
peoples: ― If you want to avoid a difficult or fatal childbirth, protect yourself against a
calamity (storm, eclipse, earthquake), avoid the failure of an extraordinary or dangerous
action (travel, overtaking obstacles, hunting or fishing), observe the practices of eliminating
or conjuring dirt‖ (p.37), and ―the prevention of dirt takes care of all fears and all pains ―
(p.38; italics mine).
In her classic Purity and Danger the English anthropologist Mary Douglas (2008)
criticizes analyses ― including the one by Paul Ricoeur of the previous citation ― that saw in
primitive religions the presence of fear associated with dirt. Opposing them, she writes: ―But
 Work and War in the Evolution of Capitalism 99

anthropologists who have ventured further into these primitive cultures find little trace of fear.
Evans-Pritchard‘s study of witchcraft was made among the people who struck him as the
most happy and carefree of the Sudan, the Azande.(....) Audrey Richards, witnessing the girls‘
initiation rites of the Bemba, noted the casual, relaxed attitude of the performers. And so the
tales goes on.‖( p.2). Although the author did not realize it, she describes the so to say
―happy‖ OCD of the person who does not even suffer the uneasiness resulting from
obsession, and only reserves some time for his rituals, gaining tranquility in exchange.
Currently the most common mental disorder among soldiers is ―post-traumatic stress
disorder‖ (PTSD) or traumatic neurosis, as it used to be called, which we will return to further
on; right now, we are interested in knowing that in this the presence of the reality of death is
not hidden. It may be associated with other disorders, such as depression, phobias, asthenia,
but not with OCD: ―(...) Obsessive psychoneurotic complications of war neuroses are rare.
Obsessive neurosis (or obsessive-compulsive disorder) is basically different from traumatic
neurosis, and we cannot really see how the two neurosis could penetrate each other‖ (Crocq,
1999, p.129, my italics). This information also shows us how OCD, protected from contagion
by obsessions and rituals, moves away from the awareness of death.
In his expansionist policy, Hitler used the OCD mechanism which we saw to diminish the
anxiety of death generated by the prospect of war and by war itself, in soldiers as in the
population. The contagion factor was attributed to minority groups and, as is known, mainly
to the Jews. The Jews were characterized in Mein Kampf as parasites of the Aryan race,
bloodsuckers, dirt and destroyers of their purity when they induced Jewesses to reproduce
with Germans.
The Germans were prepared to go to war without fear; united by blood, with the anxiety
of death absorbed into the Jews identified with contagion, which it sufficed to isolate or
eliminate. According to my hypothesis, Hitler did not have two problems, war and the Jews:
isolation and extermination of the Jews were part of the war strategy. Racism against the Jews
was already there before Hitler used it strategically.
I think that such irrationality, that the Germans believed that they were a higher race and
that the Jews conspired against the world, cannot be explained by feelings of grandiosity, but
rather by the anxiety of death announced and brought by war.

4. SOLDIERS FROM WORLD WAR II UNTIL THE PRESENT

As in World War II the resource of the denial of death through religion had become
weaker, there was a decline in conversion disorder, as Louis Crocq (1999) wrote:―Clinically,
one of the great revelations of World War II was that hysterical conversions became more
rare‖ (p. 46).
Psychosomatic disorders were more frequent in World War II instead of hysteria.
Already more cases of post-traumatic stress disorder (PTSD) (or traumatic neurosis) began to
appear, although the data are not precise; possiblyit occurred more frequently in milder forms,
confounded with states of great fatigue, than later, during the war in Vietnam.
Post-traumatic stress disorder (PTSD) is caused when a subject experiences the reality of
death directly, or it happens to someone close to him, or he witnesses it, for instance, in
accidents. The symptoms consist of very painfully reliving the experience through intrusive
100 Wilson de Campos Vieira

memories, nightmares, flashbacks, easy evocation in daily life, through signs that recall it
even remotely, and through a withdrawal in social relationsand in intimate relations, that may
persist lifelong.
The trauma may have been so terrible that practically any person develops the symptoms.
More frequently, for the same type of trauma, some develop the disorders, others do not.
Research has shown that states of dissociation, experienced at the time of trauma, i.e.,
feelings of unreality about what is happening, and of depersonalization, where the subject
feels a stranger to himself, predispose to the development of PTSD (Marmar, 1997).
We will look at a condition that may be at the inception of these feelings of dissociation.
For this, we will begin by examining the risk behaviors which have occurred increasingly
often in the last 3 decades in radical sports and in driving vehicles, and then we will return to
the soldiers.
One of the explanations that have been given for risk behaviors is based on biology,
where an imbalance in the catecholaminergic system (Zuckerman 1984), and more
particularly in the dopaminergic system (Zuckerman, 1995), induces the subjects to sensation
seeking in order to get rid of feelings of boredom and monotony. The problem of this kind of
explanation is that it assumes that the biological factor, neurochemical in this case, is the first
link in a cause and effect sequence. It may only be the substrate of feelings and sensations
that could not exist without matter and not the cause of them, or a psychological cause may
provoke a biochemical alteration, which in turn will provoke a psychological state; in this
case the primary cause is psychological, not biochemical, as in the known example of a loss;
it can provoke a change in neurotransmitters, mainly serotonin, which in turn induces a
depressive state. Moreover, in the case of risk behaviors, the biological explanation is not
determined with regard to the fact that these behaviors occur a lot more at the end
ofadolescenceand the beginning of adult age, while in psychology we have satisfactory
explanations for this, as we will see later.
Another explanation that has been given is to consider risk behaviors as ordalic behavior
(Le Breton, 2007; Charles-Nicolas, Valler, 1982). Ordalic was a ritual practiced during the
Middle Ages, in cases when judging a person, it was not possible to decide whether he was
innocent or guilty, and the judgment was left to God, placing the ―defendant‖ in a very
dangerous situation. If he were not injured, he was innocent, otherwise, guilty. About ordalic
conduct, Le Breton (2007) writes: ―Society implicitly made a negative judgment of a young
person. He does not recognize himself or only barely in what he perceives. As to people who
are affectively important to him, they also do not assure him of the value of his existence.
Since society is disqualified, he questions another instance, metaphysical but powerful: if he
succeeds in escaping death after having been in contact with it for an instant, another answer
is given to him, this time about his personal value.(…) ―When the other modes of
symbolization have failed, escaping death, passing in the test, offer the ultimate proof that his
existence is assured‖ (p. 109-110).
This type of interpretation is not precise. Besides the indetermination of concepts, we do
not know how the young person‘s life loses meaning and how to distinguish him, at this
point, from other young people. In ordalic conduct one usually includes drug addicts, young
people who risk their own lives and those of others, in the manner in which they drive on
highways, and even delinquents. Are these cases likewise explained by a metaphysical
questioning, which appears noble? Moreover, if the ―higher instance‖ has already
 Work and War in the Evolution of Capitalism 101

acknowledged the value of the youth who risked his life, why would he have to repeat the
experience again and again?
My hypothesis is different. Risk behaviors are more common at the end of adolescence
and beginning of adulthood (Peretti-Watel, 2010). As adolescence advances, destiny is
projected into a perspective ending in death(Alleon, Morvan, 1990). Youths often hesitate
about wanting to know this reality. The symptoms of conversion disorder, currently discrete,
which, as we have seen, suppose a denial of death, are precisely much more frequent in this
phase of life (Lebovici, Vincent, 1985).
The favorite movies of young people today are the Twilight Saga. Bella, the adolescent
character, hesitates between belief in immortality, represented by the Vampire, and the
acceptance of human finitude represented by the Werewolf, a mixture of man and wolf. The
wolf that devours the grandmother in the story of Little RedRiding Hood has its source in the
Greek god Chronos who devours his children; Chronos represents time which ultimately
―devours‖ all of us.In the tale The Wolfand the seven little kids the only kid that was not
devoured by the wolf hid inside the grandfather clock, which leads one to time. Little Red
Riding Hood and her grandmother are the same person at two points in life, menarche and
menopause. Menstrual blood is a marker of time in life, denied by the vampire who sucks the
(menstrual) blood, like a baby sucks milk, inverting death and birth.
As for risk behaviors, some people propose that the youth who practices them ignores, or
at least underestimates the risk, but ―the information [from campaigns about risk]
paradoxically incites certain individuals to seek out risks (..) the higher the risks, the greater
the benefits‖ (Michel, 2001, p.12). According to the latter view it is the perception of risk that
makes this behavior exciting.
I think that the risk is and is not denied. How can this be? Because it applies child‘s play
or games to reality. Playing or games are, by nature, separated from reality, but what happens
in risk behaviors is that they invade reality, what Roger Caillois (2001) called, in his
bookMan, Play and Games,―corruption of games‖. Adventure fiction is applied to reality: sea,
jungle, snow, speed, flight, cops and robbers, while circumscribed to the space of play and
games, were simulations that did not present danger. Now, they invade real life, but it is not
like a game, in real life there is danger, but since the risk behavior came from the game, it
disqualifies danger. It exists but is not taken seriously, because games are not a serious
activity. This mockery of risk is a young person‘s defense against the reality of death which
has revealed itself to him as destiny.Excitement in risk behavior is due to this disqualification
of danger, like the bullfighter fooling the bull.
Currently, many soldiers go to war with a game to be applied to reality and so diminish
the fear of death. It is a game that comes from childhood, and already in those days it
obscured the reality of death. Nowadays, before children are informed of the existence of
death, natural or by accident, they become acquainted with death as a byproduct of the fight
of Good against Evil. The excitement of the fight for justice, vengeance, freeing someone,
dissipates the drama of death. The fight shifts death to a less important secondary plane.
Movies and TV play the main role in this. They introduced the super hero doll figures.
Videogames are the latest generation. Cartoons in which death appears were preceded by
others of the Tom and Jerry type, where it simply does not exist. No matter what happens, the
characters are not harmed. In the centuries when religion dominated, at the age when, for a
child, reality became more objective, and no longer was mixed with animism, the child could
then have a more realistic notion of the existence of death. Catechism informed it about death
102 Wilson de Campos Vieira

at the same time, however, as about the Resurrection of Christ and life after death. Today this
information is not given, it is left to the media.
This eclipse of death behind the excitement of fighting is, in my opinion, the current
formula, with greater or less success, to reduce the anxiety of death, which is of interest to
modern states because, by this way, they find it easier to get soldiers who are prepared and
willing to fight.
The first time I noticed this concealment of death by fighting was reading Freud when, in
1920, he introduced his new theory of instincts in Beyond the PleasurePrinciple. During the
1914-1918 War, with the appearance, as we saw, of many conversion disorder symptoms in
the soldiers, and already of war neurosis, psychoanalysis received the greatest criticism ever:
it was obvious that the soldiers‘ pathology had something to do with a current problem – the
war that brought themassive presence of death – and was not infantile, and even less sexual,
as psychoanalysis thought. In that article, Freud recognized the exception represented by war
neurosis (and traumatic neurosis in peacetime), but to explain it he introduced the concept of
―death instinct‖ inherent to all organic life, turned originally to the person itself (the concept
of primary masochism), who, in a second moment projects it outward in the form
ofaggression, giving rise to sadism. Death was thus transformed by Freud into death instinct,
which in turn was transformed into aggression.
Many soldiers go to war with an infantilized view of death which they have assimilated
from movies and games, in a movement of corruption of games as defined by R. Caillois.
Once they are there, an inversion occurs: it is the reality of death that imposes itself terribly,
invading the game and destroying it. The dissociative feelings of unreality and
depersonalization experienced at the time of trauma, which predispose to later constituting the
post-traumatic stress disorder, appear to come from the abrupt passage of game to reality, by
imposition of the latter.In the constituted post-traumatic stress disorder it is common for the
soldier to feel and behave like a child, seeking to reconstitute a previous world and get rid of
the new reality that brought the existence of death with it, but, despite this defense by the
subject, the new reality persists, dissociated, returning in invasive memories. From L. Crocq
(1999 ) I extracted: ―The blocking of the function of love and relationship, giving rise to
major libidinal regressions [this is a particular notion of psychoanalysis, but that does not
compromise the following meaning, which is generally valid], is universally observed in war
neuroses. The French psychiatrists in World War I, referring to the works by Dupré and
Chalin at the beginning of the century talked about ‗mental puerilism‘ or ‗mental
infantilism‘.(…) In severe cases, the patient renounces his status as an adult and behaves
explicitly like a child‖(p. 142). L. Crocq reports one of Charpentier‘s cases: ―The vocabulary
[of the patient] is childish (‗papa, mama‘) and the tone is puerile. He likes to play with
children and birds (he cried when a small bird he had been given died)‖(ibid, p.143).
A symptom of children with PTSD is that they replay the traumas experienced when
playing. In this way they try to render the ludic world compatible with the traumatic reality
that invalidated it, assimilating it. Many children with PTSD have the feeling of a
foreshortened future, that they will not reach adulthood. This is the opposite of what happens
with a young person who practices risk behaviors, and thus prolongs childhood and extends
his life time, applying the game to reality, or of the young soldier who goes to war with an
infantilized view of death.
The main contestants for the 2010 Oscar were Avatar and The Hurt Locker,which won
the Oscar. It is a replica of Avatar, since the main characters in both movies – the earthling
 Work and War in the Evolution of Capitalism 103

who becomes an alien and the bomb disposal expert in the war in Iraq – have the
characteristic of ignoring fear. Avatar is almost a regression to cartoons (the bluish figures
with tails look similar to those in cartoons, where, since any damage is reversible, death is
suppressed (the father of the alien woman in Avatar dies and remains alive). In the Hurt
Locker, the character that performs bomb disposal is an artificial creation based on
Zuckerman‘s concept of ―sensation seeking‖: it is said in the movie that he is an adrenalin
addict. The character who is his counterpoint, the soldier who fears death, is more interesting.
He receives psychotherapy. I was stupefied to see him in the therapist‘s room playing war
video games right at the very time of military action. The therapist tells him to set aside the
obsessions of fear of dying, and that ―this [the war] doesn‘t have to be a bad time in your
life, war could be fun”.The therapist‘s prescription is to continue playing the game at any
cost, to keep away the reality of death.

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Editor: Eugene N. Shelton © 2011 Nova Science Publishers, Inc.

Chapter 5

POLITICAL ACTION COMMITTEES

AND THE EXPROPRIATION OF THE COMMON

Charles H. Cho1 and Crawford Spence

John Molson School of Business,
Concordia University, Quebec, Canada

ABSTRACT
This chapter analyzes the dynamics of U.S. political action committees (PACs) in the
oil and gas industry. We find that PACs were used strategically in order to try and
influence legislators to open up the Arctic National Wildlife Refuge (ANWR) to
hydrocarbon exploration. Drawing from a revised political economy theory, we contend
that PACs are thus employed in order to facilitate an ‗expropriation of the common‘.
Further, in examining the financing of PACs we find that labor constitutes the major
donor group. We thus conclude that PACs represent means through which to capture the
regulatory process as well as to simultaneously exert subtle forms of employee control.
Moreover, the chapter makes a theoretical contribution by arguing that such forms of
employee control have become more prevalent due to the advent of immaterial labor and
the attendant crisis of accounting that immaterial labor induces.

Keywords: crisis of control; exploitation; immaterial labor; political action committees;

political economy theory; regulatory capture

1. INTRODUCTION
This chapter concerns itself with the mechanics of U.S. political action committees
(PACs). These are separate legal entities which are set up by corporations in order to channel
funds to federal legislators (Mack, 1997; Ryan et al., 1987). As such, PACs have previously

1
Corresponding author: 1455, de Maisonneuve Blvd. West Montréal, Québec H3G 1M8, Canada. Tel: 514-848-
2424 ext. 2319. Fax: 514-848-4518. E-mail: [email protected].
106 Charles H. Cho and Crawford Spence

been the subject of research which has pointed out how special interest groups manage to
shape legislation in their own form (see, e.g., Cho et al., 2008; Luke and Krauss, 2004;
Roberts and Bobek, 2004; Thornburg and Roberts, 2008). However, in this chapter, the
dynamics of PACs are explored in greater theoretical detail, notably with regard to how such
analyses can be situated within the context of political economy theory (PET), rather than
conducting a detailed empirical examination of corporate political strategies or the rationality
behind corporate resource allocation to federal legislators.
Previous literature looking at PACs in the context of PET tends to view the latter in a
broad fashion. That is to say, previous PAC studies tend to support the view that the
regulatory process is captured and controlled by powerful private interests. However, we also
seek to move beyond this previous research in two substantive ways. Firstly, we seek to
subject the notion of structural inequality to more scrutiny than has hitherto been the case. We
do so by situating our analysis of PAC contributions to legislators within a radically revised
version of PET. Drawing from the Italian Autonomia school, the chapter considers how
structural inequality operates within the context of capitalist post-modernization – a context
where production has become decentralized and where the immaterial has come to dominate
the industrial as the hegemonic labor form (Hardt and Negri, 2005). These changes in the
nature of modern day work practices have created a number of nuances within the capital-
labor relation that arguably alter our very understanding of what is exploitation. Exploitation
can now be thought of as ‗expropriation of the common‘ (Hardt and Negri, 2005) rather than
simply surplus value formed through hours worked. We suggest that PACs and the uses to
which they are put need to be understood within this context.
Furthermore, the advent of immaterial labor has itself created a crisis in accounting that
extends beyond anything that conventional PET has dared to contemplate. Immaterial labor is
so diffuse that it has become immeasurable in the modern day capitalist system, rendering
value something that is beyond measure. As such, this crisis in measurement simultaneously
exacerbates management‘s crisis of control. This is endemic to capitalist post-modernization,
but we argue that when expropriations of the common are enacted through PACs, this further
serves to isolate labor from capital and so management‘s crisis of control is once more
exacerbated. Consequently, capital has to resort to further attempts at controlling immaterial
labor, albeit without the historically effective disciplinary mechanisms of accounting. We
argue in this chapter that PACs, although ostensibly vehicles through which the expropriation
of the common can take place, also offer a means through which to control labor. Previous
studies looking at PACs have focused on their downstream contributions to politicians.
Examination of their upstream financing in this chapter reveals that they are largely financed
by labor. The chapter therefore explores this phenomenon of labor financing the terms of its
own expropriation in order to consider what implications arise for the capital-labor relation.
The chapter proceeds as follows. The next section introduces PACs and considers the
PET interpretations that have been offered by the literature in that regard. In that section we
also introduce the theoretical framework and outline the importance of terms such as the
‗social factory‘, ‗immaterial labor‘ and ‗exploitation.‘ Of central importance are the
arguments that set the scene for consideration of the role of PACs as employee control
mechanisms. The subsequent section takes a look at the Arctic National Wildlife Refuge as an
example of the common which has been subject to attempts at expropriation and present some
analyses of donations to PACs from various parties, particularly employees. Section 4
 Political Action Committees and the Expropriation of the Common 107

summarizes the results, seeks to situate them closely within the theoretical context as outlined
earlier, and concludes by discussing some potential implications.

2. BACKGROUND
2.1. Political Action Committees and Political Economy Theory

A corporate PAC is a separate legal entity established by a corporate ―parent‖ (or

sponsor) and financed by ―donors‖, without whose support the PAC would not be viable
(Eismeier and Pollock, 1988). The sole purpose of a PAC is to collect campaign funds and
disburse them to federal candidates (Mack, 1997; Ryan et al., 1987; Shipper and Jennings,
1984). PAC contributions help corporations gain access to legislators and regulators to
discuss their positions on proposed legislation in an attempt to influence policy outcomes
(Hillman and Hitt, 1999; Mack, 1997). Since their allowed existence through FECA, the
number of corporate PACs has sharply increased from 89 in 1974 to 1,327 in 1981 and shown
progressive growth to reach over 2,000 making contributions in 2006. More recently, during
the 2008 election cycle, corporate PACs donated over $286 million to congressional
candidates (Center for Responsive Politics, 2010).2 There is little doubt that PACs have been
an efficient means to influence legislators, which explains their explosive growth since their
existence. For example, Luke and Krauss (2004) found a positive relationship between the
amount of campaign contributions received by United States Congress (hereafter,
―Congress‖) members and the likelihood of them voting pro-tobacco on tobacco-related bills.
Previous studies in the literature looking at PACs have convincingly shown how PACs
are employed in order to capture the accounting regulatory process in the U.S. Such studies
invariably support the case for a political economy view of the regulatory process,
highlighting where regulations have been shaped by powerful interests in their own form. For
example, Roberts et al. (2003) reported significant results on the rationale and effectiveness
of PAC contributions from the U.S. public accounting profession during auditor liability
reform. Roberts and Bobek (2004) likewise found that large corporations exercised
considerable political power during the state‘s formulation of new tax accounting laws in
1997. As such, Roberts and Bobek (2004) ―question the applicability of a strict pluralist
model in...policy research‖ (p.565), highlighting how regulatory processes tend to be shaped
in accordance with the structural inequalities in society. Thornburg and Roberts (2008) look
at the PAC contributions of large accounting firms during the policy formulation period of the
Sarbanes-Oxley Act of 2002, finding that the profession generally directed funds towards
more conservative legislators. Thornburg and Roberts‘ (2008) study again implies that the
regulatory process is not a neutral one but is in fact biased towards powerful private interests.
Finally, Cho et al. (2008) show how a sample of firms in the chemical and petroleum
industries similarly directed their PAC funds towards legislators deemed influential in a

2
It is important to note the limitation on the dollar amount of campaign contributions according to FEC regulations.
Groups and individuals may donate up to $5,000 to a single PAC per calendar year. In turn, PACs may
contribute up to $5,000 to any candidate or his/her authorized committee per election (Center for Responsive
Politics, 2010; Mack, 1997).
108 Charles H. Cho and Crawford Spence

controversial piece of legislation that was passed in the U.S. immediately after the Bhopal
disaster of 1984. The results of Cho et al. (2008) suggest that these industries sought to use
their PACs in order to subvert legislation that sought to constrain environmental pollution.

2.2. Beyond Regulatory Capture

Previous literature on PACs has therefore looked at how regulation has been the target of
capture strategies by both corporations and industry associations. We argue that the above
political economy arguments, while importantly drawing attention towards how structural
inequalities come to manifest themselves in the regulatory process, would benefit from
amplification. More specifically, political economy needs to be rewritten in order to reflect
the modern nature of work and social organization. In the post-modernized economy, there
might be much more going on when regulation is captured through PACs than conventional
political economy interpretations would suggest. In order to illustrate what extra-regulatory
tendencies are produced by regulatory capture, we draw from the Italian Autonomia school of
thought.
Autonomists take as their unit of analysis not the factory, but the ‗social factory‘
(Cleaver, 2000). The social factory designates a more diffuse and multifarious definition of
labor, emphasizing the productive work undertaken both inside the workplace by waged labor
but also outside of the workplace in terms of domestic labor, the unemployed, the unwaged,
students, leisure time, etc. The contribution to the production of value that is made by
domestic work is perhaps the more straightforward form of ‗work outside the workplace‘ to
grasp. Such work includes the auxiliary support that is necessary to allow wage earners to
earn wages as well as the moral and intellectual shaping of future workers, i.e. the physical
production of labor. It was such domestic work that was the subject of early Autonomia
analyses in the1960s, but since then the realm of the social factory has been expanded to
include all activities which contribute to and draw from what Marx called the General
Intellect, ―that heritage of cooperative production marked in language, common feeling and
enjoyment, and in science and technique, to invent evermore sophisticated forms of
interdependence‖ (Harney, 2007, p.146). This extends our understanding of what constitutes
work exponentially to include, not just thinking about how to structure tomorrow‘s meeting
whilst taking a shower, but also the emotional and psychological investments that are made
by the masses of people who are now daily contributing to internet sites such as MySpace and
Facebook. Put differently, labor does not just produce material goods but all facets of social
life: economic, cultural and political. Hardt and Negri (2005) refer to labor in this sense as
―biopolitical production‖.
The progressive expansion of the social factory has been mirrored simultaneously by
changes in the organization of the factory. In the late twentieth century, the Fordist production
model gave way to a more decentralized means of organization whereby production planning
became more directly responsive to the needs of markets (see, e.g., Boltanski and Chiapello,
2006; Hardt, 1999; Hardt and Negri, 2005; Negri and Hardt, 1999; Virno, 2000). Moreover, it
has been recognized by many that these changes in the auto-industry are emblematic of a
general transition to capitalist post-modernization (Hardt, 1999). One of the key changes
associated with these shifts in the organization of production refers to the way in which
communication and information have come to play a central role in the labor process.
 Political Action Committees and the Expropriation of the Common 109

Industrial labor has given way to ‗immaterial labor‘, being labor which creates immaterial
products such as knowledge, information, communications, relationships or an emotional
response (Hardt and Negri, 2005). One subset of immaterial labor is affective labor, being
labor that produces affects such as feelings of well-being, comfort or excitement. Some jobs
solely aim to deliver this, although such affects are increasingly necessary elements of the
way in which all jobs are done.
Essentially, the boundaries between the factory and the social factory have largely broken
down. For example, necessary forms of cooperation and communication have to be developed
among children in preparation for the workplace. There is also an increasingly blurred
distinction between work time and leisure time. Being able to conduct particular types of
relationship at work is not merely a question of professional development but entails a
particular type of person. Immaterial labor is therefore not a product of the worker but an all
consuming project of the self. More important than productivity is how to control subjectivity
(Negri and Hardt, 1999). In spite of, in some cases, ‗reasonable‘ working hours, work
intensification suggests more exploitation than ever (Marazzi, 2007). Harney (2006) refers to
this blurring of work/life boundaries as a ―biobargain, where there is no end to what might be
asked‖ (p.942).

2.3. Understanding Exploitation

When promoting post-modern intellectual frameworks there is often a danger that the
object of critique loses focus. Yet revising political economy for the post-modernized
economy need not involve a political retreat from the antagonisms inherent to late capitalism.
Indeed, ―the task of today is to renew the political economy of exploitation – for instance, that
of anonymous ‗knowledge workers‘ by their companies‖ (Žižek, 2009, p.54). However,
within the context outlined above, exploitation takes on a new meaning that cannot be
reduced to some quantitative measure of labor time or hours worked á la traditional political
economy. Such metrics fail to capture anything but the most impoverished measure of value.
Exploitation might, instead, be understood as ‗expropriation of the common‘ (Hardt and
Negri, 2005). In other words, capital does not merely create value by controlling labor
towards that objective, but by tapping into the General Intellect and appropriating labor‘s self-
activity. This is not an entirely new phenomenon. CLR James (as cited in Harney, 2006)
noted that it was the slaves who ran the plantations and that only do the slave-owners
expropriate in the last instance. So exploitation consists of the expropriation of the
knowledge, ideas, processes that are built up over time and collectively by labor. This is
starkly exemplified through innovations in intellectual property. In patenting OncoMouse, a
genetically modified animal, DuPont lays boundaries around certain strains of genetic code.
Yet the patent around these genetic codes can hardly be attributed solely to DuPont scientists
in the last instance. What role attributed to those who developed the techniques through
which these discoveries are made? Or those who developed the equipment used in the
process? These developments are the result of common endeavors built up over time (see
Hardt and Negri, 2005). Similarly, through PACs, corporations attempt to capture legislation
so that certain elements of the common become opened up to private expropriation (for
example, when exploration rights are sold off or when natural resource areas are opened up
for private sale and/or exploitation). The converse is also true – PACs can be targeted towards
110 Charles H. Cho and Crawford Spence

keeping certain areas of the private excluded from the common. This is the case when the
U.S. public accounting profession or corporations lobby against increased disclosure
requirements (see, e.g., Thornburg and Roberts, 2008 and Cho et al., 2008).
Looking at expropriations of the common in the context of the social factory we see a
number of reverberating tendencies. Although it is capital‘s intention to expropriate the
common, this always creates a crisis for management because each expropriation of the
common leads labor to look elsewhere in order to generate self-activity. Once the common
becomes private, it becomes dead labor and closed off to living labor. Labor therefore loses
interest which, in turn, creates a crisis of control for management who, of course, needs labor
in order to carry out the terms of its own expropriation.
In other words, capital is constantly chasing labor, which is constantly running away
from capital. This can be exemplified through recent developments in online shopping. The
birth of eBay in 1995 was the result of labor that was autonomous from capital, a collection of
self-organizing individuals looking to cut out the middleman. Developments since 1995 have
seen eBay progressively increase selling fees, become listed as a Fortune 500 company and
buy up a series of similar online collaborative endeavors such as Craigslist and Skype. The
company, in seeking to cut out the middleman, has become the middleman. As a result, its
community of online traders is now beginning to develop alternative autonomous spaces
where they are unencumbered by selling fees and behavioral protocols (Jones, 2008). This
example is indicative of a general tendency in capitalist post-modernization. The private is
constantly trying to shackle and pin down the common yet as soon as it does so the common
finds a way to break off the shackles of the private. All processes of expropriation thus tend to
create a crisis of management control.

2.4. PACs as an Instrument of Employee Control

One of the key challenges for management is how to ensure that the interests of capital
and labor are more closely aligned. ―What modern management techniques are looking for is
for the ‗worker‘s soul to become part of the factory‘. The worker‘s personality and
subjectivity have to be made susceptible to organization and command‖ (Lazzarato, 1996).
Our argument is that given the crisis of management that is generated by processes of
expropriation and that is exacerbated through the attendant crisis in measurement, PACs
represent an opportunity to keep employees more tightly harnessed to the goals of
management. In other words, although the ostensible intention of PACs is to direct funds
towards activities that create the conditions for the expropriation of the common, they are also
means of infusing the expropriated common with the existing common, thereby softening the
violence of the private. Previous works on PACs have focused solely on the projects to which
they have been directed. This leads to a limited view of what functions PACs serve and what
affects they have on the capital-labor relation. By focusing also on the financing of the PACs
a more complete analysis of these factors becomes possible. One aspect of PAC research that
is often overlooked is the process for contribution solicitation from donors. Previous research
suggests that these donors come overwhelmingly from inside the organization. For instance,
shareholder representation is minimized or sometimes absent in most PACs because they
simply do not solicit shareholders for contributions (Eismeier and Pollock, 1988), mainly due
to cost effectiveness issues (Handler and Mulkern, 1982). In contrast, PACs elect and solicit
 Political Action Committees and the Expropriation of the Common 111

executive or administrative personnel with policymaking, managerial, professional or

supervisory responsibilities and their families as often as it desires (Shipper and Jennings,
1984).
PACs can enhance political involvement within the organization and PAC activity is one
way to sensitize employees to their civic responsibilities and make them aware that
government is a significant external force affecting the organization (Handler and Mulkern,
1982). For each PAC, there are variations in terms of the level of management solicited,
methods and frequency of solicitation, types of contribution and methods of contribution
collection (Dominguez, 1982; Handler and Mulkern, 1982). Methods of solicitation include
mailing and variations of personal contact such as informal discussion or home-rule method.
Contributions can be classified as earmarked, contributor-recommended, split given, in-kind
or restricted. Finally, single lump-sum payment and pledging are available methods of
payment but the most commonly used is payroll deduction because of its numerous attractive
features for PACs such as stabilization of the number of contributors and consistency of
contribution inflows (Handler and Mulkern, 1982). However, PACs are allowed to make no
more than two annual written solicitations for contributions from employees paid hourly,
other than executive or administrative personnel and families (Dominguez, 1982; Mizruchi,
1992; Shipper and Jennings, 1984). This rule, called the ―twice-yearly option‖, is a
compromising outcome of the 1976 amendments regarding the controversial issue of PAC
solicitation access of the Sun Company‘s hourly employees3 (Handler and Mulkern, 1982). In
addition, contributions from any individual donor to a PAC must remain strictly voluntary.
Because of the inherent asymmetry of the employer-employee or superior-subordinate
relationship, Congress and the U.S. Federal Election Commission (FEC) have implemented
laws to protect employees from coercion and pressure potentially exhibited by PAC
solicitation practices. Thus, in the absence of coercion (or at least in the presence of measures
that mitigate against coercion), PACs offer the opportunity to analyze one way in which
employees voluntarily make a psychological and emotional investment in the firms that they
work for. We illustrate these issues through reference to the PAC activity surrounding the
Arctic National Wildlife Refuge.

3. THE CASE
3.1. The Common: The Arctic National Wildlife Refuge

The Arctic National Wildlife Refuge in northern Alaska covers about 19.8 million acres
(80,000 km2) of the North Alaskan coast (Burger, 2001). It is managed by the U.S. Fish and
Wildlife Service and part of the National Wildlife Refuge System (NWRS), which is
considered the world's premier system of public lands and waters set aside to conserve

3
The Sun Company‘s PAC requested from the Federal Election Commission (FEC) an opinion about exactly whom
it could solicit. The response from the FEC was ―stockholders and all employees‖. Unions expressed their
discontent because they felt that management could now compete with them in raising political-action funds
from hourly employees. In the 1976 amendments, a compromise resulted in allowing corporate PACs to solicit
hourly paid workers no more than twice a year by letter addressed to their home, while a reciprocal right was
extended to union PACs to solicit stockholders and management personnel twice a year as well.
 Table 1 – Contributions received by PACs of U.S. oil and gas firms during the 2004 and 2006 election cycles

Average Average dollar

Total contributions number of amount per
Company Name received Contributions received from individuals other than political committees contributors contribution
Total Itemized Unitemized
Chevron $ 1,013,138 $ 1,011,385 $ 665,466 65.8% $ 345,919 34.2% 280 $ 594.17
Conoco $ 1,044,941 $ 967,264 $ 523,349 54.1% $ 443,915 45.9% 348 $ 375.97
Devon $ 243,772 $ 241,497 $ 138,206 57.2% $ 103,291 42.8% 84 $ 411.33
El Paso $ 655,136 $ 644,233 $ 581,434 90.3% $ 62,799 9.7% 136 $ 1,068.81
Exxon $ 1,705,051 $ 1,697,116 $ 1,148,941 67.7% $ 548,175 32.3% 575 $ 499.54
Halliburton $ 496,389 $ 488,953 $ 328,427 67.2% $ 160,526 32.8% 133 $ 617.34
Koch $ 3,659,148 $ 3,516,481 $ 3,192,845 90.8% $ 323,636 9.2% 535 $ 1,491.98
Marathon $ 988,676 $ 982,287 $ 538,597 54.8% $ 443,690 45.2% 513 $ 262.47
Occidental $ 941,504 $ 935,408 $ 758,217 81.1% $ 177,191 18.9% 333 $ 569.23
Valero $ 4,030,816 $ 3,923,653 $ 2,439,918 62.2% $1,483,736 37.8% 1131 $ 539.33
TOTAL $ 14,778,571# $ 14,408,278# $ 10,315,400* 71.6% $ 4,092,878* 28.4% 407 $ 643.02

# Difference is not significant.

* Significant difference at the p < .05 level.
 Table 2 – Contributions received by PACs of U.S. oil and gas firms during the 2004 and 2006 election cycles

Average
Total itemized number of Average
contributions ‗corporate number of
received from executive‘ ‗non-corporate
individuals/ contributors executive Average dollar
persons other during the Average dollar employees‘ amount per
than political 2004 and amount per Proportion of itemized contributors contribution from
committees Proportion of itemized 2006 contribution contributions received during the 2004 ‗non-corporate
during the 2004 contributions received election from ‗corporate from ‗non-corporate and 2006 executive
Company and 2006 election from ‗corporate cycles executives‘ (per executive employees‘ election cycles employees‘ (per
Name cycles executives‘ (total) (per year) year) (total) (per year) year)
Chevron $ 665,466 $ 197,036 29.61% 35 $ 1,407.40 $ 468,431 70.39% 245 $ 477.99
Conoco $ 523,349 $ 79,405 15.17% 21 $ 945.29 $ 443,944 84.83% 327 $ 339.41
Devon $ 138,206 $ 48,508 35.10% 9 $ 1,347.44 $ 89,698 64.90% 75 $ 298.99
El Paso $ 581,434 $ 286,950 49.35% 45 $ 1,594.17 $ 294,484 50.65% 91 $ 809.02
Exxon $ 1,148,941 $ 258,571 22.51% 64 $ 1,010.04 $ 890,370 77.49% 512 $ 434.75
Halliburton $ 328,427 $ 54,565 16.61% 11 $ 1,240.12 $ 273,861 83.39% 122 $ 561.19
Koch $ 3,192,845 $ 530,465 16.61% 147 $ 902.15 $ 2,662,380 83.39% 389 $ 1,711.04
Marathon $ 538,597 $ 145,127 26.95% 25 $ 1,451.27 $ 393,470 73.05% 488 $ 201.57
Occidental $ 758,217 $ 290,963 38.37% 72 $ 1,010.29 $ 467,254 61.63% 262 $ 445.85
Valero $ 2,439,918 $ 528,163 21.65% 81 $ 1,630.13 $ 1,911,754 78.35% 1050 $ 455.18
$ 10,315,400 $ 2,419,754 23.46% 51 $ 1,253.83 $ 7,895,646 76.54% 356 $ 573.50
114 Charles H. Cho and Crawford Spence

America's fish, wildlife and plants (U.S. Fish and Wildlife Service, 2009). The ANWR is the
largest single protected wilderness area in the U.S. A unique feature of the refuge consists of
its unbroken, complete continuum of arctic and sub-arctic landscapes and ecosystems within
which large-scale ecological processes continue (U.S. Fish and Wildlife Service, 2009).
We view the ANWR as a product of the common. Although perceived and labeled as a
wilderness area, it is not free of human control or manipulation. Since ecologists began to
recognize the ‗end of nature‘ (McKibben, 1996), the very notion of any area that is
completely free from human intervention has lost all traction. Thus, even wildernesses must
now be socially constructed, ring-fenced in order that something resembling the pristine can
proceed. This is not to deny the value of such areas. On the contrary, it is merely to recognize
that it is human intervention that has permitted such areas to persist. The abundance of flora
and fauna, fish and wildlife that characterizes the ANWR would not be here today were it not
for the coalition of environmental and conservation groups that lobbied to have it declared as
a federal protected area by Frederick Andrew Seaton under President Eisenhower‘s
administration in 1960. Since then, the ANWR has remained a common resource as much for
the area‘s indigenous inhabitants as for all of humanity.
However, this area has been subject to intense lobbying by the petroleum industry that
would like to see it opened up to oil exploration. Between 2005 and 2007, various bills have
been proposed in the house and the senate that would allow drilling to take place.
Nevertheless, pro-conservation Republicans and Democrats have managed to block these bills
before they became law. As such, the ANRW remains protected to date (League of
Conservation Voters, 2006) and the attempted expropriation of the common by the private has
yet to take place. This is in spite of the significant attempts that have been made by the
petroleum industry to influence politicians in key places.
In spite of its failure, public data indicate that the U.S. oil and gas industry attempted to
exercise considerable influence on the passage of the ANWR Bill (Center for Responsive
Politics, 2010). Further and most importantly, our own analysis shows that a large portion of
PAC funds originate from individual donors, more specifically parent company employees.

4. DISCUSSION AND CONCLUSION

Even if ultimately unsuccessful in opening up the ANWR to oil exploration, PAC
contributions from the oil and gas industry might be understood as having served to create the
conditions for the expropriation of the common, rather than having successfully purchased
such an expropriation outright. Nevertheless, the intention is the same and it is such intentions
that generally prompt labor to flee from capital in search of new areas within which to
construct common endeavors. As such, even creating the conditions for an expropriation of
the common induces crises of management control. Whilst these crises might not be directly
observable in a linear cause-effect type of relationship, we would argue that they are endemic
to capitalist post-modernization in general. Because of these dynamics, we argue that the
object of studies looking at the political economy of accounting should not be restricted to
looking at the regulation itself. Rather, the crisis in measurement and control implies that
measurement of value is an increasingly impoverished activity and that management must
resort to other initiatives in order to control labor. As such, it may be too straightforward to
 Political Action Committees and the Expropriation of the Common 115

characterize PACs as vehicles through which to capture the regulatory process, as previous
works have implicitly done (Thornburg and Roberts, 2008; Cho et al., 2008; Roberts et al.,
2003). Although perhaps initially motivated as means through which corporations can avoid
legal constraints in terms of how much money can be funneled to politicians, PACs take on
additional roles because of those constraints.
Our analysis shows that PACs are financed overwhelmingly by employees. More
specifically, the funding of the sample companies‘ PACs came from a broad group of
individuals, including executives, middle managers and even non-employees. The larger
donations tend to come from executives, but a significant sum overall comes from employees
below ‗executive‘ level. On average, 23.4% of individual contributions came from the latter,
with an average annual contribution of $1,254. Enticing senior executives to contribute to
their organization‘s PAC is presumably not a difficult thing, given how sensitive their own
personal wealth is to any legislative or regulatory changes which will affect the company.
Getting lower or middle-level employees to contribute to PACs constitutes more of a
challenge, yet also represents a significant opportunity to increase ideological alignment,
whether conscious or not, between capital and labor. Indeed, the majority of financing came
from below the ‗executive‘ level. On average, 76.5% of individual contributions came from
‗non-executives‘, with an average individual contribution of $574 per year. Further, on
average 356 employees below ―executive‖ level made PAC contributions per firm. In the case
of Valero, the average number of employees who contributed exceeded 1,000 over the two
election-year cycles. Thus, the PAC contributions must have come from widely dispersed
parts and levels of the organization. We are not suggesting that contributors are primarily blue
collar or shop floor workers. The average number of donators being 356 and the average
donation amount being $574 suggests mostly middle managers. However, this does not mean
that labor is not the donor. With the advent of immaterial labor the class composition has
witnessed a sizeable shift from blue collar to white collar work and an expansion of the
middle management level. Moreover, our categorization of ‗executive‘ is a rather generous
one and includes more than one layer of administration below board level, as the number of
‗executives‘ according to our categorization even reached 147 in the case of Koch. Therefore,
the ‗non-executive‘ contributions come from much further down the chain.
Thus, we would suggest that even the larger donations from our ‗non-executive‘ sample
also constitute labor, even if at times middle managers may find themselves in a contradictory
in-between position as regards to capital and the shop floor. Making a donation to a corporate
PAC might well resolve this contradiction to some extent for the donor, softening any
cognitive dissonance that is being experienced. The same goes for those who make smaller
contributions. Even $100 contributions cannot be dismissed as trivial for a worker, whose
attachment to organizational objectives is now made more concrete. Indeed, that the majority
of these contributions come as a form of direct payroll deduction implies a constant
investment in expanding the productive capacities of the organization. This investment, which
is at least as much psychological-emotional as it is financial, also filters out into the social
factory in a myriad of ways. For example, given that a good part of an organization‘s
intellectual capital goes home after five o‘clock (Marazzi, 2007), that intellectual capital then
has a certain interest in following the news and political events with a view to supporting
particular outcomes, outcomes which the intellectual capital‘s family members and social
milieu might also be influenced to support in some subtle, imperceptible way. The effect is
therefore not limited to the worker, but reverberates throughout the social factory in a way
116 Charles H. Cho and Crawford Spence

that is productive for capital. The same goes for those ex-employees and other interested
parties who contribute to PACs. These individuals might not have a direct influence on the
factory, but they similarly are creating fertile conditions in the social factory for subjectivity
and productivity to flourish. Ultimately, this has the consequence of making connections
between the common and the eventual expropriation of the common by the private.
Therefore, even when PACs fail to achieve their objective of directly expropriating the
common, they succeed in harnessing labor to capital, thereby softening the blow when the
expropriation eventually takes place, probably influenced by some future PAC strategy.

ACKNOWLEDGMENTS
The authors are grateful for the helpful comments and suggestions provided on earlier
versions of this chapter by participants of the University of Central Florida Research
Workshop, the 4th Alternative Perspectives in Accounting Research Conference at Université
Laval, and the Innovations en Contrôle de Gestion Workshop at HEC Montréal in
visioconférence with Université Paris Dauphine. The authors also thank Ying Huang for her
data assistance and acknowledge financial support from the Fonds Québécois de la
Recherche sur la Société et la Culture (FQRSC) Social Sciences and Humanities Research
Council (SSHRC) of Canada.

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Chapter 6

DYSMORPHIC CAPITALISM AND THE ABERRANT

DEVELOPMENT OF CREATIVE INTELLIGENCE

Don Ambrose1
Department of Graduate Education, College of Liberal Arts,
Education and Sciences, Rider University,
Lawrenceville, New Jersey, USA

ABSTRACT
The iconic economist-philosopher Adam Smith lauded capitalism as a system for
distributing opportunity and prosperity widely, and for freeing populations from the
oppression they suffered under the European aristocracy of his time. In spite of its early
promise and later achievements, capitalism has been transforming in undesirable ways in
recent decades. Prominent scholars in various disciplines have lamented the ways in
which overextensions of neoclassical economic theory and neoliberal ideology have been
transmuting capitalism into a utopian ideology in which egocentric economic freedom
trumps all other considerations. The consequence is a system in which the short-term,
trivial wants of a few consistently override the desperate needs of the many as well as the
long-term sustainability of the environment. These trends have implications for the
development of creative intelligence. If the new, mutated form of capitalism reaches its
logical endpoint, the aspiration growth and talent development of a privileged few gifted
young people will be warped, leaving them acutely narcissistic, hyper-materialistic, and
ethically vacuous. In contrast, the aspiration growth and talent development of gifted but
deprived young people will be stunted or crushed.

1
Correspondence concerning this chapter should be addressed to Don Ambrose, Graduate Education; College of
Liberal Arts, Education, and Sciences; Rider University, 2083 Lawrenceville Road, Lawrenceville, NJ, 08648-
3099, E-mail: [email protected].
120 Don Ambrose

INTRODUCTION
Discovering the nature and nuances of highly complex phenomena often requires
contributions from multiple disciplines because no single discipline can encompass the
intricacies of those phenomena comprehensively (Ambrose, 2005b, 2009a; Ambrose, Cohen,
& Tannenbaum, 2003; Nicolescu, 2002; Page, 2007; Thagard, 2008). Capitalism is an
enormously complex phenomenon, which has been oversimplified by neoclassical economic
theory and neoliberal ideology. The analysis in this chapter takes an interdisciplinary
approach weaving together insights from economics, philosophy, political science, sociology,
history, anthropology, and high-ability fields (the interdisciplinary field of creative studies,
and gifted studies). The chapter begins with the ideas of Adam Smith, the free-market icon
often used to justify the hegemony of capitalism worldwide, and then employs analyses of
globalized capitalism to assess its impact in the early 21st century. Globalized capitalism
provides a macro-context within which creatively intelligent individuals develop their
aspirations, refine their talents, and strive for self-fulfillment. The extent to which today‘s
predominant versions of capitalism shape, warp, and suppress aspirations and talent are
assessed.
Rarely has a single scholar been so revered for so long. Adam Smith was an 18th-century
philosopher-economist whose influence has persisted over the centuries. One can argue that
his impact has been magnified in recent decades to the point where some of his ideas
currently dominate the world‘s socioeconomic systems. Constructs extracted from Smith's
Wealth of Nations (Smith, 1776/1937) provide much of the justification for the freewheeling,
laissez-faire globalized capitalist system that has prevailed in most nations throughout the late
20th and early 21st centuries. With some latter-day refinements, the system operates on
assumptions that the economic freedom of self-loving individuals who innovate and diligently
work within free markets largely unfettered by government regulation will maximize
prosperity. The system works because the self-organizing nature of highly motivated,
entrepreneurial interactions creates a highly efficient division of labor by sorting people into
work roles according to talents. Essentially, this efficient self-organization operates through
the machinations of Smith's metaphorical ―invisible hand‖ of the marketplace.

DYNAMIC TENSIONS BETWEEN ECONOMIC FREEDOM

AND GOVERNMENT INTERVENTION

As with most complex phenomena, capitalism can find expression in multiple variations.
In general, it locates itself on one side of a continuum running from anarchic, individual
freedom at one end, to tight, centralized government control at the other, Of course,
capitalism is most compatible with the individual-freedom end of this continuum. That said,
its various manifestations have extended from the extreme, anarchic end of the continuum all
the way into the government-controlled region.
In the more than two centuries since Adam Smith conceived of his invisible hand, free-
market principles have waxed and waned globally. For example, government regulation and
intervention ascended in the time of Franklin Delano Roosevelt. Laissez-faire deregulation
ascended in the early part of the 20th century and again in the final decades of the 20th
 Dysmorphic Capitalism and the Aberrant Development of Creative… 121

century and into the 21st. Today‘s predominant version of globalized capitalism pushes
energetically toward the anarchic, individual-freedom region of the continuum (Chang, 2007;
Wolin, 2004). The current dominance of free-market principles is extremely powerful,
reaching far and wide beyond the Western world, where it originated, to change
socioeconomic systems fundamentally in many third-world nations.
Proponents of laissez-faire capitalism argue that promoting and protecting economic
freedom in socioeconomic systems enriches populations of both developed and
underdeveloped nations and creates better societies (see Friedman, 1962, 1975; Hayek, 1944,
1948; Lal, 2006; Lomasky, 2002; Nozick, 1974; Weede, 2006). They often tie together
capitalism and political freedom, arguing that any other socioeconomic system is prone to
slippage into totalitarianism.
Other scholars argue that too much economic freedom with too little government
regulation can be counterproductive. For example, Posner (2009), a legal scholar, argued that
the recent economic collapse came about for a number of reasons, not the least of which was
insufficient regulation of freewheeling financial markets. Croley (2007), also a legal scholar,
made similar arguments about the dangers of the deregulatory trend that has prevailed over
the last few decades. He made the case that prudent government regulation can provide
significant benefits to a nation‘s population. Black (2005) showed how insufficient regulation
makes room for control frauds to cause severe damage within an economy, up to and
including economic stagnation and collapse. Control frauds are profiteering deceptions
employed by corporate chief executive officers. Still others lament the degree to which
excessive deregulation and privatization have enabled damaging exploitation of workers
(Applebaum, 2005); increased corruption and raiding of public assets (Stiglitz, 2003); and
counter-intuitively created the extremely expensive, somewhat inefficient American health
care system, which is encumbered by massive, private insurance bureaucracies (Reinhardt,
2007).
Furthermore, there are frequent critiques of neoclassical economics, the conceptual
framework that underpins today‘s predominant versions of capitalism. Some argue that
neoclassical economic theory relies too heavily on the rational-actor model, which creates an
oversimplified abstraction of the human decision-maker as an extremely self-focused,
perfectly rational individual making decisions based on perfect information sets. The
limitations of the rational-actor model cause decision-makers to ignore important nuances of
socioeconomic and cultural contexts (Beckert, 2002).
A number of leading economists have gone on the record opposing the actions of
powerful, ideologically influenced institutions such as the World Bank and the International
Monetary Fund because those institutions have done significant damage to socioeconomic
systems throughout the world (see Chang, 2002, 2007; Stiglitz 2004, 2006). For example,
Chang analyzed the effects of these neoliberal-dominated organizations on the development
of third-world countries. He concluded that their imposition of extreme, laissez-faire market
rules on those nations actually resulted in slower growth and development than what had
occurred before the implementation of those rules. Also, the developed nations insisting on
the implementation of extreme laissez-faire capitalism in the Third World did not follow
these same laissez-faire rules themselves when they were developing nations. Harvey (2006),
an anthropologist, agreed with these economists, arguing that the deregulation generated by
the prominence of neoliberal ideology has generated environmental devastation, aggravated
122 Don Ambrose

the troubling gap between rich and poor worldwide (also see Davis, 2006, a historian), and
undermined democracy.
Walzer (2002) revealed some of the nuances behind arguments between those who
promote state intervention and those who denigrate it. In an analysis of the dynamics of civil
society he showed how interest groups always are in conflict and those with less power are in
danger of being marginalized by those who control the policy apparatus. Consequently, he
argued for strong state intervention to ensure that the interests of all are considered. Laissez-
faire capitalism runs counter to this argument because it places more power in the hands of
those who already are in positions of privilege. Chambers (2002) concurred, while adding that
civil society becomes unhealthy when it is colonized by money, power, and commandeering
of the media by powerful special interests. When laissez-faire economic policies take hold
strongly the society‘s population tends to react, taking initiatives to protect ordinary citizens
from the corrosive effects of the unfettered free market (Baum, 1996; Polyani, 1944/1957).
It is the erosion of democracy that is the most troubling effect of overzealous
deregulation of national and international economic systems. While Adam Smith (1776/1937)
originally conceived of capitalism as a system for freeing large numbers of people from the
oppression of the European aristocracy of his day, late 20th- and early 21st-century versions
of capitalism provide the already privileged and powerful with an ever-firmer hold on the
levers of power. For example, various scholars have described ways in which corporations,
their lobbyists, and governments are so intricately intertwined that the corporate elite exerts
considerable control over political decision-making and undermines democracy in the United
States and Britain (see Frank, 2008; Kuttner, 2007; Monbiot, 2000; Wedel, 2009). Johnson
and Kwak (2010) argued that the situation has become so dire that a handful of megabanks
now control the majority of America‘s gross national product and exert such powerful control
over the socioeconomic system that they shift to the American taxpayer the major losses they
incur through their deregulated risk taking.
Marglin (2008) and Orlie (2001) revealed other dimensions of the problem. According to
Marglin, excessive emphases on the primacy of the market and the rational actor within that
market have eroded the valuable sense of community that served as the social glue of cultures
and nations. The absence of community becomes most evident in stressful times when people
must pull together to solve serious problems. Along similar lines, Orlie analyzed ways in
which political participation by the citizenry has been eroded and replaced by a consumer
identity. In essence, aside from a politically active elite, the citizens of modern nations
dominated by capitalist socioeconomic systems are coming to view themselves as consumers,
not active agents in their own governance.
The eminent political theorist, Sheldon Wolin (1960/2004), effectively pulled together
most of the pieces of this emerging picture with his portrayal of growing corporate dominance
in the world‘s socioeconomic systems as inverted totalitarianism. According to Wolin,
corporate commandeering of the decision-making apparatus in the United States has been
dragging this promising democracy down toward a new form of totalitarian governance.
Unlike the totalitarian governments of the 20th century (e.g., Hitler‘s Germany; Stalin‘s Soviet
Union), the new, inverted totalitarian system is more subtle and diffused, but it is becoming
totalitarian nonetheless.
 Dysmorphic Capitalism and the Aberrant Development of Creative… 123

TWENTY-FIRST-CENTURY GLOBALIZED CAPITALISM

AS A UTOPIAN FRAMEWORK

The foregoing analyses of late 20th- and early 21st-century globalized capitalism
revealed some alignment with the perspective of the iconic philosopher-economist Adam
Smith. As mentioned earlier, Smith‘s metaphor of the invisible hand of the marketplace led
many economists and policy makers to embrace laissez-faire capitalism. But metaphors can
be overextended and inappropriately applied. For example, within and beyond the field of
cognitive science, the metaphor of the human mind as computer has led to some innovative
insights as well as some misinterpretations of cognitive processing (Fields, 2006). It seems
possible that Smith‘s invisible-hand metaphor also has been misinterpreted, and has generated
too much enthusiasm for self-loving individualism, materialism, and dismantling of
government regulations in the world‘s socioeconomic systems.
Excessive enthusiasm for a particular theoretical perspective can calcify that idea
framework, making it rigid and prone to interpretive error (see Ambrose, 2009a; Fields, 2006;
Horst, 2007). In view of the previously mentioned criticisms of neoclassical economics, this
might be occurring with that theory. In some cases, an investigative paradigm might
contribute to, or actually become, a utopian ideology that dominates socioeconomic systems
and tolerates little or no dissent. This might be occurring with the marriage of neoclassical
economic theory and neoliberal ideology, and the strong influence of that marriage on late
20th- and early 21st-century globalized capitalism (Ambrose, 2008, 2009b).
When large-scale idea frameworks calcify they can turn into utopian visions that
encourage excessive pursuit of some goals and ideals along with denigration and
marginalization of others (Kumar, 1987). When large and influential segments of the
population are captured by a utopian vision some significant benefits can emerge, alongside
disastrous consequences.
Various historians, philosophers, and theologians have posited utopian visions of the
ideal society throughout human history. A few of many utopian conceptions of society
include the stratified, elite-run ideal republic proposed by the ancient Greek philosopher Plato
(see Santas, 2006); the centralized, egalitarian island nation proposed by the 15th century
philosopher and theologian, Thomas More (1516/1997); the retrospective, idyllic state-of-
nature society envisioned by the 18th-century Romantic philosopher Rousseau (1755/1984);
and the communist society proposed by Marx, which eventually would arise from the collapse
of capitalism (Marx & Engels, 1848/1998).
Proponents and followers of utopian visions of the ideal society magnify their potential
benefits and ignore their potential drawbacks. This ignorance of the possible, devastating
consequences of firmly held belief in a utopian system likely emerges from a form of self-
deception suffered en masse by the followers of that system. Mele (2001), a philosopher,
outlined a number of variations of self-deception, two of which are most relevant here.
Positive misinterpretation is a particularly ubiquitous form of self-deception, which causes
individuals to engage in elaborate mental gymnastics for the purposes of magnifying their
own virtues. Negative misinterpretation, another widespread form of self-deception,
encourages individuals to discount evidence that reveals their own flaws in order to shield
them from their own inadequacies or moral failings.
124 Don Ambrose

It would only be human nature for the creators and proponents of a utopian
socioeconomic system to fall prey to these forms of self-deception while promoting ideas that
reinforce the self-deception en masse throughout a population. If neoliberal ideology is a form
of utopian thought applied to socioeconomic systems, the recent proliferation of think tanks
devoted to the promotion of laissez-faire capitalism might be evidence of the self-deception
undergirding this utopian framework (see Halper & Clarke, 2004). Additional evidence of
utopian self-deception could be forthcoming if the neoliberal love affair with Adam Smith is
found wanting.

A CLOSER LOOK AT ADAM SMITH

While Adam Smith is revered as a champion of entrepreneurial individualism within a
laissez-faire economic system, a number of high-profile scholars have delved deeper into his
works to reveal much more nuance in Smith‘s thinking than is commonly portrayed. Instead
of supporting only self-centered competition and individual gain, Smith actually argued for
economic freedom blended with prudent regulation and moral guidance.
For example, Fleischacker (2004), a philosopher, analyzed Smith‘s Wealth of Nations
(1776/1976) as well as some insights from Smith‘s other major work, the Theory of Moral
Sentiments (Smith, 1759/1976). Fleischacker argued that Smith‘s writings have been
misinterpreted because these works actually included emphases on ethics, generosity,
empathy, and government intervention in the economy. In one example of many from this
deeper interpretation of Smith‘s work, Fleischacker revealed how Smith abhorred inheritance
of wealth, believing that if it wasn‘t abolished, or at least substantially taxed, it violated the
principle that individuals should work for a living, which was an important basis for the free-
market system. He saw inheritances as pernicious because they, "primarily serve to keep large
estates intact over many generations, as indolent father hands his wealth down to indolent
son" (cited in Fleischacker, 2004, p. 198).
Nobel laureate economist Amartya Sen (2010) also saw a much more balanced approach
in Smith‘s thinking:

Smith did not take the pure market mechanism to be a free standing performer of
excellence. Nor did he take the profit motive to be all that is needed….human beings are not
invariably guided only by self-gain…. A great many economists were, and some still are,
evidently quite enchanted by something that has come to be called ‗rational choice theory‘ in
which rationality is identified with intelligently pursuing self-interest. Further, following that
fashion in modern economics, a whole generation of rational choice political analysts and of
experts in so-called ‗law and economics‘ have been cheerfully practising the same narrow art.
And they have been citing Adam Smith in alleged support of their cramped and simplistic
theory of human rationality. (p. 53-54).

Other prominent scholars who have agreed with these critiques of jejune, neoliberal
interpretations of Adam Smith‘s work include Rothschild (2001) and Brown and Jacobs
(2008). For example, Brown and Jacobs illustrated how Smith balanced his enthusiasm for
the free market with the idea that government regulation could prevent some of the excesses
of self-interest run wild; excesses such as wasteful luxuries and corrupt business operations
 Dysmorphic Capitalism and the Aberrant Development of Creative… 125

that would undermine competition. Profligacies such as these seem glaringly apparent in the
wake of the recent, corruption-saturated, global economic meltdown.
In essence, unless all of these scholars are wrong, there seems to be at least some self-
deception in neoliberal interpretations of Adam Smith‘s work. This suggests that neoliberal
ideologues could be at least somewhat deceptively utopian, hiding or minimizing the damage
their economic recommendations can do in socioeconomic systems. The development of
creative intelligence occurs within, and is strongly shaped by, socioeconomic systems. If a
utopian, neoliberal ideology is warping late 20th- and early 21st-century globalized
capitalism, and making that system more damaging than it needs to be, it also could be doing
damage to the manifestations of creative intelligence that should be primary driving forces for
widespread prosperity and progress in a capitalist system.

WARPING AND STUNTING THE DEVELOPMENT

OF CREATIVE INTELLIGENCE

The maximization of individual abilities in a socioeconomic system can be conceived of

as the optimal development of creative intelligence (Ambrose, 2009a). The term ―creative
intelligence‖ implies any blend of high-level intelligence, creativity, and talent. Intelligence
entails impressive information processing and decision-making capacities, which rely heavily
on linear-sequential, logical, symbolic thought. Creativity entails the ability to think in novel
ways and to generate novel products. Talent entails high proficiency with skills, which often
are specific to a particular domain. For example, neurosurgery requires highly developed,
fine-motor skills.
The development of creative intelligence depends on the discovery and growth of one‘s
aspirations and talents. Aspirations are strong, long-term desires for accomplishment
(Ambrose, 2003, 2005a; Gewirth, 1998). If an individual‘s motivation for aspiration
development is enlivened, he or she will seek out opportunities to develop the talents that are
necessary for pursuit of the goal highlighted by the aspirations. For example, if an individual
discovers the aspiration to write influential works of literature, he or she will seek out
opportunities to develop writing and copyediting skills while reading volumes of extant
literature to become steeped in the preferred literary genres. The development of these talents
will then feed back into the aspirations, strengthening them and creating even more desire for
talent development. The result is a virtuous circle leading to the development of ever-stronger
abilities and the likelihood that the individual will achieve self-fulfillment while contributing
to the vibrancy of the market in a capitalist system.
Socioeconomic contextual conditions can influence the strength of aspiration growth and
development. In today‘s capitalist economies, an individual born into privilege has access to
the necessary resources for aspiration discovery and talent development. These resources
include excellent educational opportunities and access to influential educational and career
networks. Some individuals will avail themselves of these resources and become highly
motivated and immensely talented over the course of time. Seduced by the comfort of
privilege, some others can fall into complacency and let their potential die on the vine.
Those coming from disadvantaged socioeconomic conditions experience much different
dynamics in their attempts to navigate within capitalist contexts. An impoverished individual
126 Don Ambrose

with strong latent talents might never discover them because the serious lack of resources in a
highly stratified economy can preclude the discovery of aspirations, which in turn precludes
the development of talents. A few deprived individuals of strong potential might discover
some productive aspirations and then fall into the virtuous cycle of aspiration growth and
talent development; however, this is the rare exception and not the rule (Ambrose, 2003).
Moreover, aside from the odd, very rare exception, the achievements of this individual will be
stunted in comparison with peers of equal or even lesser ability who were born into privilege.
This belies the Horatio Alger myths (see Wuthnow, 2006), which provide much of the tacit
justification for highly stratified, capitalist socioeconomic systems.
In addition to these dynamics, today‘s neoliberal, capitalist socioeconomic system favors
a particular blend of aspirations and dispositions. Based on the flawed rational-actor model,
which portrays the individual primarily as a self-interested, atomistic entity who makes
decisions based on perfect information while in search of materialistic gain, aspirations
aligned with egocentric gain, without concern for others, will be favored while those aligned
with generosity and altruism will be diminished or marginalized. Kasser, Cohn, Kanner, and
Ryan (2007) studied goal and value systems (analogous to aspirations) in corporate
environments and concluded that the emphases on self-interest, hierarchy, profit, growth, and
competition tend to conflict with dispositions such as caring about others. Babiak, Neumann,
and Hare (2010) discovered a higher prevalence of self-centered, predatory, and conscience-
free behavioral traits in corporate populations than in community samples.
According to Zak (2008), markets work best when people engage in ethical, virtuous
behavior because such behavior builds trust, which is the lubricant for efficient transactions in
a market economy. In short, the overemphases on atomistic, self-centered individualism
actually may be making the free market less effective than it would be if it followed Adam
Smith‘s too-often-ignored advice about promoting the virtues of generosity, altruism, and
concern for the common good, not just his advice about maintaining economic freedom.

CONCLUSION
In a highly complex, evolving, and threat-filled 21st century, globalized socioeconomic
environment, humanity must maximize its aspiration development, talent development, and
creative intelligence. We no longer can rely on a utopian, somewhat hollow vision of the
individual as a self-centered, hyper-materialistic, rational actor. We would be wise to heed
Adam Smith‘s advice about balancing economic freedom with altruism, ethics, and prudent
regulation. The current and looming disasters of systemic corruption in the deregulated
financial markets; the environmental devastation caused by equally deregulated, extractive
industries (e.g., the coal and petroleum sectors); and the long-term specter of climate change
(Archer, 2009) make it more urgent than ever that we rebalance the capitalist system, making
it work more efficiently and effectively for all.
 Dysmorphic Capitalism and the Aberrant Development of Creative… 127

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In: Capitalism in Business, Politics and Society ISBN 978-1-61122-547-1
Editor: Eugene N. Shelton © 2011 Nova Science Publishers, Inc.

Chapter 7

SOCIAL STATUS, THE SPIRIT OF CAPITALISM

AND THE TERM STRUCTURE OF INTEREST RATES
1
IN STOCHASTIC PRODUCTION ECONOMIES

Liutang Gong2, Yulei Luo3 and Heng-fu Zou4

2Guanghua School of Management, Peking University, Beijing, 100871, China
2Institute for Advanced Study, Wuhan University, Wuhan, 430072, China
3School of Economics and Finance, University of Hong Kong, Hong Kong
4Institute for Advanced Study, Wuhan University, Wuhan, 430072, China
4Development Research Group, The World Bank, Washington, DC 20433, USA

ABSTRACT
This paper studies capital accumulation and equilibrium interest rates in stochastic
production economies with the concern of social status. Given a specific utility function
and production function, explicit solutions for capital accumulation and equilibrium
interest rates have been derived. With the aid of steady-state distributions for capital
stock, the effects of fiscal policies, social-status concern, and stochastic shocks on capital
accumulation and equilibrium interest rates have been investigated. A significant finding
of this paper is the demonstration of multiple stationary distributions for capital stocks
and interest rates with the concern of social status.

Keywords: Stochastic growth; Social status; Fiscal policies; Interest rates

JEL Classification: E0, G1, H0, O0.

1
Project 70271063 supported by the National Natural Science Foundation of China.
2
[email protected].
3
[email protected].
4
Mailing address: Heng-fu Zou, Development Research Group, the World Bank, 1818 H St. NW, Washington, DC
20433, USA. Email: [email protected].
132 Liutang Gong, Yulei Luo and Heng-fu Zou

1. INTRODUCTION
Capital accumulation, interest rates, fiscal policies, and asset pricing under uncertainty
have been studied extensively since the 1960s, e.g., Phelps (1962), Levhari and Srinivisan
(1969), Brock and Mirman (1972), Mirrlees (1965). Merton (1975) studied the asymptotic
theory of growth under uncertainty, and Foldes (1978) explored optimal saving with risk in
continuous time. As for the term structure of interest rates, Cox, Ingersoll, and Ross (1981,
1985) considered the equilibrium theory of the term structure of interest rates, and presented
the general theory for interest rates in a production economy. Sunderason (1983) provided a
plausible equilibrium model, in which the assumption of a constant interest rate is valid.
Bhattacharya (1981), Constantinides (1980), and Stapleton and Subrahmanyam (1978) also
studied these topics and presented the conditions for a constant interest rate. Constantinides
(1980) showed that the term structure of interest rate evolves deterministically over time
under the assumptions of perfect capital markets, homogeneous expectations, and the state
independent utility. Sunderason (1984) also derived the conclusion of a constant interest rate
under Constantinides (1980)'s assumptions on capital markets, expectations, and utility. For
the effects of fiscal policies on capital accumulation, interest rates, and asset pricing in
stochastic economies, Eaton (1981), Turnovsky (1993, 1995), Grinols and Turnovsky (1993,
1994), and Obstfeld (1994) introduced taxations and government expenditure into the
stochastic continuous-time growth and asset-pricing models. Under a linear production
technology and other specified assumptions on preferences and stochastic shocks, they have
derived explicit solutions of growth rates of consumption, savings, and equilibrium returns on
assets.
In all these neoclassical models of capital accumulation, interest rates and asset pricing
models, wealth accumulation is often taken to be solely driven by one's desire to increase
consumption rewards. The representative agent chooses his consumption path to maximize
his discounted utility, which is defined only on consumption. This motive is important for
wealth accumulation. It is, however, not the only motive. Because man is a social animal, he
also accumulates wealth to gain prestige, social status, and power in the society; see Frank
(1985), Cole, Mailath and Postlewaite (1992, 1995), Fershtman and Weiss (1993), Zou (1994,
1995), Bakshi and Chen (1996), and Fershtman, Murphy and Weiss (1996). In these wealth-
is-status models, the representative agent accumulates wealth not only for consumption but
also for wealth-induced status. Mathematically, in light of the new perspective, the utility
function can be defined on both consumption, c , and wealth, w : u (ct , wt ) . Another
interpretation of these models is in line of the spirit of capitalism in the sense of Weber
5
(1958): capitalists accumulate wealth for the sake of wealth .
With the wealth-is-status and the-spirit-of-capitalism models, many authors mentioned
above have tried to explore diverse implications for growth, savings, interest rates, and asset
pricing. Cole, Mailath, and Postlewaite (1992) have demonstrated how the presence of social-
status concern leads to multiple equilibria in long-run growth. Zou (1994, 1995) has studied
the spirit of capitalism and long-run growth and showed that a strong capitalistic spirit can
lead to unbounded growth of consumption and capital even under the neoclassical assumption

5
See Cole, Mailath, and Postlewaite (1992), Zou (1994); and Bakshi and Chen (1996) for details.
 Social Status, the Spirit of Capitalism, and the Term Structure of Interest… 133

of production technology, Gong and Zou (2002) have studied fiscal policies, asset pricing,
and capital accumulation in a stochastic model with the spirit of capitalism. Bakshi and Chen
(1996) have explored empirically the relationship between the spirit of capitalism and stock
market pricing and offered an attempt towards the resolution of the equity premium puzzle in
Mehra and Prescott (1985). Smith (2001) has studied the effects of the spirit of capitalism on
asset pricing and has shown that when investors care about status they will be more
conservative in risk taking and more frugal in consumption spending. Furthermore, stock
prices tend to be more volatile with the presence of the spirit of capitalism.
This paper explores capital accumulation and equilibrium interest rates in a stochastic
model with the spirit of capitalism and with diminishing return to scale technology. Under a
CES utility function defined on both consumption and wealth accumulation and a Cobb-
Douglas production function, explicit solutions for capital accumulation and equilibrium
interest rates have been derived. These multiple optimal paths and stationary distributions of
capital stock and interest rates are quite significantly different from many existing
neoclassical models. With the aid of the steady-state distributions for capital stock, the effects
of fiscal policies on the long-run economy and the equilibrium interest rates have been
investigated. In particular, the equilibrium interest rates are constant when the technology is
linear and when the utility function is extended to include the wealth-is-status concern.
Moreover, the equilibrium interest rates are a mean reserve process with these special
assumptions.
This paper is organized as follows: in section 2, we set up a stochastic growth model in a
production economy with the social-status concern. Allowing some special utility function
and production function with selected parameters, explicit solutions for the optimal paths and
stationary distributions of consumption, capital accumulation and interest rates have been
derived in section 3. With the aid of the steady-state distribution of the endogenous variables,
the effects of fiscal policies, production shocks, and the spirit of capitalism on the long-run
economy have been examined in section 4. In section 5, we present the equilibrium interest
rates under both a nonlinear technology and a linear technology and analyze the dynamic
behavior of equilibrium interest rates and discuss the effects of fiscal policies and stochastic
shocks on the interest rates. In section 6, we present some examples to show the existence of
multiple stationary distributions of optimal capital accumulation and equilibrium interest
rates. We conclude our paper in section 7.

2. THE MODEL
Following Eaton (1981) and Smith (2001), we assume that output y is given by

dy  f (k )dt   kdz , (1)

where z is the standard Brown motion,  is the stochastic shocks of production.

Equation (1) asserts that the accumulated flow of output over the period (t , t  dt ) ,
given by the right-hand side of this equation, consists of two components. The deterministic
component is described as the first term on the right-hand side, which is the firm‘s production
134 Liutang Gong, Yulei Luo and Heng-fu Zou

technology and has been specified as a neoclassical production function, f ( k ) . The second
part is the stochastic component,  kdz , which can be viewed as the shocks to the production
and assumed to be temporally independent, normally distributed.
Suppose the government levy an income tax and a consumption tax. Then, the agent's
6
budget constraint can be written as

dk  ((1   ) f (k )  (1   c )c)dt  (1   ) kdz (2)

where  and  ' are the tax rates on the deterministic component of capital income and
stochastic capital income, respectively, and  c is the consumption tax rate.
With the social status concern, the utility function can be written as u (c, k ) . Suppose
the marginal utilities of consumption and capital stock are positive, but diminishing, i.e.

u1 (c, k )  0, u2 (c, k )  0, u11 (c, k )  0, u22 (c, k )  0 (3)

The representative agent is to choose his consumption level and capital accumulation
path to maximize his expected discounted utility, namely,


max E0  u (c, k )e  t dt
0

subject to a given initial capital stock k (0) and the budget constraint (2). Where 0    1
is the discount rate.
Associated with the above optimization problem, the value function J (k , t ) is defined as


J (k , t )  max Et  u (c, k )e  t dt
t

subject to the given initial capital stock k (t ) and the budget constraint (2). Define the current
value function X ( k ) as

X ( k )  J ( k , t )e  t (4)

6
Merton (1975) assumed that output is produced by a strictly concave production function, Y  AF ( K , L) , where
K (t ) denotes capital stock, L (t ) the labor force, and A(t ) is technology progress. Production is
Y  AF ( K , L) and the labor force follows dL  aLdt   Ldz , where z is the standard Brown
motion.Defining the capital-labor ratio k  K / L , from the Itô's Lemma, we can derive the capital
accumulation equation similar to equation (2). Or we assume the technology progress follows
dA / A  adt   dz Defining the efficiency capital k  K /( AL) , we can also derive the capital
accumulation similar to equation (2).
 Social Status, the Spirit of Capitalism, and the Term Structure of Interest… 135

The recursive equation associated with the above optimization problem is

1
max{u (c, k )   X (k )  X (k )((1   ) f (k )  (1   c )c)  X (k )(1   ) 2  2k 2}  0
c 2

Therefore, we get the first-order condition

uc (c, k )  (1   c ) X (k ) (5)

and the Bellman equation

1 (6)
u (c, k )   X (k )  X (k )((1   ) f (k )  (1   c )c)  (1   ) 2 X (k ) 2k 2  0
2

Equation (5) states that the marginal utility of consumption equals the after-tax marginal
utility of capital stock. Equation (6) determines the value function X ( k ) . In the next section,
we will specify the utility function and the production function to present an explicit solution
for the value function.

3. AN EXPLICIT SOLUTION
3.1. The Explicit Solution under the Separable Utility Function
7
In order to derive an explicit solution, we specify the utility function as

c1 k 1
u ( c, k )   , (7)
1 1

where   0 is the constant relative risk aversion, and it also represents the elasticity of
intertemporal substitution.   0 measures the investor's concern with his social status or
measures his spirit of capitalism. The larger the parameter  , the stronger the agent's spirit of
capitalism or concern for social status.
The production function is specified as

f (k )  Ak  (8)

where A  0 and 0    1 are positive constants.

For the special utility function and production function in equations (7) and (8), we
conjecture that the value function takes the following form

7
In Appendix B, we present a similar analysis when the utility function is non-separable.
136 Liutang Gong, Yulei Luo and Heng-fu Zou

b k 1 (9)

X (k )  a 
1
where a and b are constants, and they are to be determined.
Under the specified value function in equation (9), we rewrite the first-order condition (5)
as

c  (1   c ) X k  (1   c )b k 

namely,

1
c  (1   c )  bk (10)

Upon the relationship (10), the Bellman equation (6) is reduced to

1 1
(1   c )  b1 k 1 k 1 b  k 1 1 1
   (a  )  b  k  ((1   ) Ak   (1   c )  bk )
1 1 1 (11)
1
 X kk  2 (1   ) 2 k 2  0
2

If   1 , from equation (11), we have a  0 and b is determined by the following

equation

1 1 1
0   (1   c ) b   b  (   (1   ) A(1   )  (1   ) (1   ) 2  2 )
2

In general, for the case of   1 , we cannot determine the constants a and b .

Following Xie (1994), we specified the parameters as a   , then from equation (11), we
have

(1   )A
a
 b

and b is determined by

1 1 1
0  (1   c )  b   b  (   (1   ) (1   ) 2  2 ).
2

Summarizing the discussions above, we have

Proposition 1. Under the special utility function and production function in equations (7)
and (8), if   1 , then the explicit solutions for the economy system are
 Social Status, the Spirit of Capitalism, and the Term Structure of Interest… 137

c 1
 (1   c )  b (12)
k
1 1
dk  ((1   ) Ak  (1   c ) bk )dt  (1   ) kdz (13)

and the TVC

lim E ( X (k )e t )  0 (14)

t 

where b is determined by

1 1 1
0  (1   c )  b   b  (   (1   ) A(1   )  (1   ) (1   ) 2  2 ). (15)
2

If   1 and    , then the explicit solutions for the economy are

c 1
 (1   c )  b , (12‘)
k

1 1
dk  ((1   ) Ak   (1   c ) bk )dt  (1   ) kdz (13‘)

and the TVC (14) holds, whereas b is determined by

1 1 1
0  (1   c )  b   b  (   (1   ) (1   ) 2  2 ). (15‘)
2

When   1 , the capital stock follows the stochastic growth path (13), and we get the
mean growth rate for the capital stock

dk 1 1
E( )  ((1   ) A  (1   c )  b)dt
k

It is easy to show from equation (12‘) and the production function that the mean growth
rates for consumption level, output, and capital stock are equal. Let us denote the common
mean growth rate as  , which is given by

1 1
  (1   ) A  (1   c )  b .

From the expression above, it is clear that capital income taxation, consumption taxation,
stochastic shocks, and various preference and production parameters jointly determine the
growth rate of the economy. Please also note that when the parameters satisfy the condition
138 Liutang Gong, Yulei Luo and Heng-fu Zou

  , the deterministic income tax rate has no effects on the equilibrium consumption-
capital stock ratio.

3.2. Steady-State Distributions for Endogenous Variables

Similar to the certainty model, we will examine the existence and the properties of the
steady state economy. As in Merton (1975), we are seeking the conditions under which there
is a unique stationary distribution for the capital stock k , which is time and initial condition
independent.
From equation (13‘), the capital stock follows the following stochastic process,

1 1
dk  ((1   ) Ak   (1   c ) bk )dt  (1   ) kdz
(16)
b(k )dt  (a(k ))1/ 2 dz,

1 1
where we denote a(k )  (1   )
2
 2 k 2 and b(k )  (1   ) Ak   (1   c )  bk .
Let  k (k ) be the steady-state density function for the capital stock. As in Merton
(1975),  k (k ) exists and it can be shown to be

m k 2b( x)
 k (k )  exp  dx ,
a(k ) 0 a ( x)


where m is a constant chosen so that  0  k ( x)dx  1 .
Substituting the expressions for a ( k ) and b(k ) , we have

1 1
k 2((1   ) Ak  (1   )

m bk )
 k (k ) 
(1   ) 2  2 k 2
exp 0 (1   ) 2  2 k 2
c
dx
1 1
2
(1 c )  b(1  )2  2
2 A(1   )
 mk (1  )2  2
exp( k  1 )
(1   )(1   ) 
2 2

Defining variable R  k  1 , we have

dR m  1
 R ( R)   k (k ) / | | R exp( R) ,
dk 1  

1 1
(1 c )  b  (1  ) 2  2 2 A (1 )
where   2 (1 )(1  )2  2
0,   (1 )(1  )2  2
 0 , and b is determined by equation
(12‘).
 Social Status, the Spirit of Capitalism, and the Term Structure of Interest… 139

Therefore, we have

(1   )  
m ,
( )
8
where (.) is the gamma function .
Thus, the steady-state distribution for the capital stock is

0, k 0
 (k )  {(1 )  

1 1
2((1 c )  b(1  )2  2 ) (17)
 ( ) k (1  )2  2
exp( k  (1 )
), k  0

and the moment-generating function

(   /(1   ))  /(1 )

 k ( )  E{k  }   (18)
( )

The steady-state distribution for R  k  1 is

0, R0
 ( R)  {  
R 1 exp( R), R  0
(19)
 ( )

and the moment-generating function

(   ) 
 R ( )  E{R }   (20)
( )


The steady-state distribution for y ( Ak ) is

0, y0
 ( y)  {  
y  ( 1)
exp( ( Ay ) ), y0
(21)
A ( ) ( A )

and the moment-generating function

A (   /  )  /
 y ( )  E{ y }   (22)
( )


( )   x 1e x dx
8
The Gamma function ( ) is defined as 0 .
140 Liutang Gong, Yulei Luo and Heng-fu Zou

With the aid of these steady-state distributions and moment-generating functions, we can
derive quite a few long-run properties of our endogenous variables in the following section of
comparative static analysis.

4. COMPARATIVE STATIC ANALYSIS

With the given steady-state distributions of the capital stock, output, and the interest rate,
we can derive the long-run expected values of capital stock, consumption level, and output

 [  1/(1   )] 1/(1 )

E (k )   k (k )dk   , (23a)
0 ( )

1
E (c)  (1   c )  bE(k ), (23b)

A(  1/  ) 1/
E ( y)   , (23c)
( )

where b ,  ,  , and  are presented in section 3 above, and (.) is the Gamma function.

4.1. Effects of Uncertainty on Expected Capital, Output, and Consumption

As in Zou (1994), the modified golden rule for the long-run capital stock in a
deterministic model with the spirit of capitalism can be derived as

u k (c, k )
(1   ) f (k )    (1   c )
uc (c , k )

With our special utility function and production function and with the parameter
condition of    , we have

1
(1   ) A k  1  (1   c ) ( Ak  1 )  
1c

and the associated consumption level and output are

1 
c  A(k  ) , y   A(k  )
1c
 Social Status, the Spirit of Capitalism, and the Term Structure of Interest… 141

Comparing with the uncertainty case, we have

E ( k )  k  , E (c )  c  , E ( y )  y 

Thus, the long-run expected capital stock, expected consumption level, and expected
output are smaller than the deterministic steady-state ones, respectively. This is because that
the output is a strictly concave function of the capital stock, and Jensen‘s inequality implies
that an increase in capital risk must reduce the expected capital stock and expected output.
The fall in the expected output results in a fall in the expected consumption.

4.2. Effects of the Spirit of Capitalism

In our special utility function, we know that the parameter  measures the representative
agent‘s concern with his social status or his spirit of capitalism. Because we have specified
the parameters as    , we have   [0, 1] .

Figure 1. The effects of the spirit of capitalism on the long-run economy.

142 Liutang Gong, Yulei Luo and Heng-fu Zou

Figure 1 presents the effects of the spirit of capitalism on the economy under the cases of
  1 (the solid line) and   1 and    (the star line). It is easy to see that with a
stronger spirit of capitalism, the long-run expected capital stock, consumption level, and
output will be higher.

4.3. Effects of Production Shocks

Figure 2 shows that with increasing production shocks, the long-run expected capital
stock, output, and consumption will be decreasing. Therefore, uncertainty in production
reduces investment, output and consumption. This result is rather clear-cut because other
related studies have indicated an ambiguous result of production shocks on investment and
output, see Turnovsky (1993, 2000), Obstfeld (1994), and Gong and Zou (2002).

Figure 2. The effects of production shocks on the long-run economy.

 Social Status, the Spirit of Capitalism, and the Term Structure of Interest… 143

4.4. Effects of Fiscal Policies

The solid line in figure 3 shows the effects of income tax rate on the long-run economy.
From which, we find the with a rise in the deterministic income tax rate, the long-run capital
stock, output, and consumption will be decreasing (solid lines in figure 3). The effects of
stochastic income tax rate (starred lines in figure 3) on the economy are just opposite to the
effects of deterministic income tax rate: A rising stochastic income tax rate raises expected
capital stock, output and consumption.
As for the effects of consumption tax rate on the economy, from the circled line in figure
3, we find that with an increasing consumption tax rate, the long-run expected capital stock
and output will be rising, whereas the long-run expected consumption will be decreasing.
This is true because a rising consumption tax raises the cost of consumption, which leads to a
reduction in consumption and an increase in investment, capital stock and output. Please note
that this positive effect of a consumption tax rate on capital accumulation and output is a
significant feature of stochastic growth model. In the traditional, deterministic literature such
as Rebelo (1990), a consumption tax has no effect on the long-run capital accumulation.

Figure 3. The effects of the deterministic income tax rate, the stochastic income tax rate, and the
consumption tax rate on the long-run economy.
144 Liutang Gong, Yulei Luo and Heng-fu Zou

5. EQUILIBRIUM INTEREST RATES

From Cox, Ingersoll, and Ross (1985), we know that the equilibrium interest rates can be
written as

L( X k ) ,
r
Xk

where L(.) is the differential operator.

9
Thus we have
Proposition 2. With the utility function and technology in equations (7) and (8), the
equilibrium interest rate is given by

1 1 1
r     ((1   ) Ak  1  (1   c ) b)   2 (1   ) 2  (  1) (24)
2

when   1 and    , where b is determined by equation (15‘). Furthermore, the

equilibrium interest rate is given by

1 1 1
r     ((1   ) A  (1   c ) b)   2 (1   )2  (  1) (25)
2

when   1 , where b is determined by equation (15).

From proposition 2, the equilibrium interest rate is a constant when the technology is
linear. Among many existing studies, Sundareson (1983, 1984) has also presented a constant
interest rate for a constant absolute risk aversion utility function in an infinite horizon
dynamic portfolio and consumption choice problem. Our model obtains the same result while
allowing the utility function to be dependent on both consumption and wealth.
Comparative static analysis shows that, with a rise of technology shocks, the equilibrium
interest rate will be decreasing; with a rise in the deterministic income tax rate, the
equilibrium interest rate will be increasing; but the equilibrium interest rate will be decreasing

9
With the utility function and technology in equations (B1) and (8), the equilibrium interest rate is given by
1 1 1
r    (   )((1   ) Ak  1  (1   c ) b)  (1   ) 2  2 (   )(    1)
2 when   1 and      ,
 11  12 (1   )(   )(1   ) 2  2
b 1
(1   c )  
1

where b is determined by . On the other hand, the equilibrium

1
1 1
r    (   )((1   ) A  (1   c ) b)  (1   )2  2 (   )(    1)
interest rate is given by 2
 11  (1   ) A  12 (1   )(   )(1   ) 2  2
b 1
(1   c )  
1

when   1 , where b is determined by .

 Social Status, the Spirit of Capitalism, and the Term Structure of Interest… 145

with a rise of the stochastic income tax rate. Also, we find that with the increase of the
consumption tax rate, the equilibrium interest rate will be increasing; please see figure 4.
When   1 , the equilibrium interest rate is stochastic, not a constant anymore. Using
the expression for the equilibrium interest rate, the dynamics for the capital stock can be
rewritten as

dk 1 1
 (r     2 (1   )2  (  1))dt   dz (26)
k  2

Thus, the dynamics of the interest rate is

1 1 1 1
dr  [ (r     2 (1   ) 2  (  1))  (1   c )  b]
 2
(27)
1
{(r     2 (1   ) 2  (    1))dt  (1   ) dz}
2

If   0 and   0 , we have

dk 1 dr 1
 (r   )dt ,  (r   )dt
k  r 
These are dynamic accumulation paths for the capital stock and the interest rate without
production shocks and the spirit of capitalism. It is obviously that the equilibrium interest rate
will convergent to  .
Equations (26) and (27) can be used to study the behavior of the interest rate in this
economy. For example, when the initial interest rate is very high, say it is larger than
  12  2 (1  )2 (  1) , then the capital stock will be growing. And from the
expression for the interest rate, it will go down. If the initial interest rate is lower enough, say
lower than   12  2 (1  )2 (  1) , then the capital stock will be increasing, thus the
interest rate will be go up. Thus, the equilibrium interest rate will fluctuate around a value
depending on  ,  2 , and  .
Similarly, we can find the stationary distribution for the interest rate. For simplicity, we
define r   (1   ) Ak
 1
, the steady-state distribution and the moment-generating function
for variable r̂ can be found as

0, r 0
 (r )  {(  (1 ) A ) (28)
 ( ) r  1 exp(  (1 ) A r ), r  0
146 Liutang Gong, Yulei Luo and Heng-fu Zou

 (   ) 
 r ( )  E{r }  ( )  (29)
( )  (1   ) A

Thus, we get the long-run behavior of the equilibrium interest rate

(  1)  1 1 1
E (r )  ( )1     (1   c )  b   2 (1   ) 2  (  1) , (30)
( )  (1   ) A 2

where b is determined by equation (15).

From figure 4, we know that the long-run expected interest rate will be decreasing with a
rise in technology shocks and the deterministic income tax rate (the star line in figure 4c). At
the same time, the stochastic income tax rate, the consumption tax rate, and the spirit of
capitalism all have positive effects on the long-run expected interest rate.

Figure 4. (a) Effects of the spirit of capitalism on the interest rate; (b) Effects of production shocks on
the interest rate; (c) Effects of the deterministic income tax rate and the stochastic income tax rate on
the interest rate; (d) Effects of the consumption tax rate on the interest rate.

6. MULTIPLE OPTIMAL PATHS AND STATIONARY DISTRIBUTIONS

From equation (15‘), we cannot determine the unique solution for variable b . In this
section, we examine the existence of multiple solutions for the consumption-capital ratio for a
few selected parameters. Because there exists a unique path for the capital accumulation
associated with the consumption-capital ratio, there will exist a unique steady-state
 Social Status, the Spirit of Capitalism, and the Term Structure of Interest… 147

distribution associated with each path10. Below, we will present examples to show the
existence of multiple optimal paths or stationary distributions and their associated long-run
expected capital stocks, consumption levels, equilibrium interest rates, and output.
If we select the parameters as A  0.5 ,     0.6 ,   0.3 ,    0.3 ,   0.1 ,   0.1 ,
 c  0 , and let  vary from 0.5, 1, and 1.1, and we get the following results
2

For the case of a linear technology , i.e.,   1 , we have derived the mean growth rate of
the economy and the equilibrium interest rate as follows

1 1
  (1   ) A  (1   c )  b
1 1 1
r     ((1   ) A  (1   c ) b)   2 (1   )2  (  1)
2

Table 1. Multiple optimal paths when     0.6

 2  0.5  2 1  2  1.1
path 1 path 2 path 3 path 1 path 2 path 3 path 1 path 2 path 3
c/k 0.0210 0.3519 0.1601 0.4217 0.2010 0.0430 0.2093 0.4355 0.0476
E (k ) 150.1 0.8 4.4 0.4 2.0 25.8 1.7 0.4 20.1
E (r ) 0.0559 0.0559 0.0559 0.0118 0.0118 0.0118 0.003 0.003 0.003
E (c) 3.1568 0.2732 0.6984 0.1810 0.3967 1.1067 0.3619 0.1688 0.9566
E ( y) 4.5098 0.3902 0.9977 0.2585 0.5667 1.5811 0.5171 0.2411 1.3665

where b is determined by equation (15).

In this case, we select the parameters as:   1 , A  0.43 ,   0.6 ,   0.3 ,
   0.3 ,   0.21 , and c  0 . When   0 , we have a unique path or stationary
distribution for consumption-capital ratio, the growth rate, and the equilibrium interest rate.
When   0.025 , we have three stationary distributions for these variables. See Table 2 for
details.

Table 2. Multiple optimal paths when  1

 0   0.025
path 1 path 1 path 2 path3
c/k 0.2473 0.2245 0.2578 0.2301
mean growth rate 0.0537 0.0765 0.0432 0.0709
interest rate 0.007 0.0207 0.0007 0.0174

10
For the non-separable utility function in (B1) in Appendix B, we can determine the unique steady state.
148 Liutang Gong, Yulei Luo and Heng-fu Zou

Finally, we select the parameters as:   1 , A  0.46 ,   0.6 ,   0.3 ,    0.3 ,

  0.25 , and  c  0 . That is to say, we only change the values of A and the discount rate of
 slightly. Again, we have multiple expected values or multiple stationary distributions in
the economy. See details in Table 3:

Table 3. Multiple optimal paths when  1

 0   0.025
path 1 path 1 path 2 path 3
c/k 0.3000 0.2744 0.3119 0.2806
mean growth rate 0.0220 0.0476 0.0101 0.0414
interest rate 0.0280 0.0434 0.0209 0.0397

This existence of multiple stationary distributions for asset accumulation and interest
rates is significant different from the unique stationary distribution in Brock and Mirman
(1972), Merton (1973), Lucas (1978), Brock (1982), Cox, Ingersoll and Ross (1985), and
many other classical models on stochastic capital theory and the term structure of interest
rates. In fact, multiple stationary distributions in asset markets and returns may provide a
more realistic picture of the real world because it admits the rationality and plausibility of
different expectations and heterogeneity, though our model is still in line with the
representative agent framework.

CONCLUSION
This paper has studied capital accumulation and the equilibrium interest rates in
stochastic production economies with the spirit of capitalism. Under the specified utility
function, production function, and selected parameters, we have presented the explicit
solutions for consumption and capital accumulation. With the aid of steady-state distributions
for the capital stock, we presented the effects of fiscal policies, the spirit of capitalism, and
stochastic shocks on the long-run economy.
We find that the long-run capital stock, output, and consumption level in the uncertainty
case are less than those ones in the deterministic case; the long-run interest rate in the
uncertainty case is larger than the deterministic case. These conclusions are different from the
one presented by Merton (1975), similar to the one in Smith (1998).
As for the effects of the spirit of capitalism on the long-run economy, we find that with
the increase of the spirit of capitalism, the long-run interest rate, consumption level, and
output will be decreasing. The effect of the spirit of capitalism on the long-run capital stock
will be negative when the production shocks are small; its effect will be positive when the
production shocks are larger. These findings are different from the ones in Gong and Zou
(2001, 2002), and Zou (1994, 1995).
The effects of the income tax rate on the long-run economy have also been investigated
in this paper, and we have found the similar effects of a deterministic income tax and a
stochastic income tax rate presented by Gong and Zou (2002), Turnovsky (1993, 2000). With
 Social Status, the Spirit of Capitalism, and the Term Structure of Interest… 149

the rise in the deterministic income tax rate, the long-run capital stock, output, and
consumption level will be decreasing, but the interest rate will be increasing. The effects of
the stochastic income tax rate on the long-run economy are just opposite to the effects of the
deterministic income tax rate on the long-run economy. We have also shown that the
consumption tax rate will affect the long-run expected capital stock, output, and consumption,
which are different from the ones in the traditional, deterministic models.
The equilibrium interest rate has been shown under a linear technology and a nonlinear
technology, respectively. When the production technology is linear, we can still obtain a
constant interest rate for this stochastic model with the spirit of capitalism and social status.
This result is similar to the one in Sunderason (1983), who presented the conclusion of
constant interest rate under the assumption of CES utility function and a linear technology. Of
course, his utility function is independent of the state variable of capital stock. But, with a
nonlinear technology, we find that the interest rate follows the mean reserve process and
fluctuates around a value depending on the parameters of  and  .
Finally, the existence of multiple stochastic optimal paths or multiple stationary
distributions for capital accumulation is presented in this paper. This is a main feature of a
model with the spirit of capitalism or social-status concern. Associated with the multiple
stationary distributions for capital accumulation, there exist multiple expected interest rates.
This line of investigation enriches our understanding of the complexity of asset markets and
the term structure of interest rates.
This paper considers an economy with one consumption good and production technology.
A first extension of this paper is to follow Sunderason (1983) to study the equilibrium interest
rate in an economy with many consumption goods and production technologies. Secondly,
this paper has not considered monetary policy, and we should follow Grinols and Turnovsky
(1998) and extend this model to a monetary one with the spirit of capitalism. Thirdly, we can
extend this model to consider habit formation, catching up with the Joneses, and the non-
expected utility.

APPENDIX A. THE STEADY-STATE DISTRIBUTION

FOR A DIFFUSION PROCESS

We follow Merton (1975) and consider the steady-state distribution for a diffusion
process. Let X (t ) be the solution to the Itô equation

dx  b( x)dt  (a( x))1/ 2 dz ,

where a (.) and b (.) are twice-differentiable function on [0, ) and independent of t with
a( x)  0 and a(0)  b(0)  0 .
The steady-state distribution will always exist, and it can be expressed as

m x 2b( y )
 ( x)  exp  dy ,
a( x) 0 a( y )
150 Liutang Gong, Yulei Luo and Heng-fu Zou


where m is chosen such that  0 ( x)dx  1 .

APPENDIX B. THE CASE OF NON-SEPARABLE UTILITY FUNCTION

If we specified the utility function as in Bakshi and Chen (1996), Gong and Zou (2002)

c1 k  
u (c, k )  , (B1)
1

where  is the constant absolute risk aversion, and it is assumed   0 , and   0 when
  1 , and   0 otherwise; |  | measures the investor's concern with his social status or
measures his spirit of capitalism. The larger the parameter |  | , the stronger the agent‘s
concern for social status.
For the specified utility function and production function, we conjecture that the value
function takes the following form

b  k 1 
X (k )  a  ,
1  

where a and b are constant, and they are to be determined as follows.

From the first-order condition, we have

1
c  (1   c )  bk

and the Bellman equation (6) is reduced to

1 1
(1   c ) b1 k 1  b  k 1  1 1
  (a  )  b  k   ((1   ) Ak   (1   c )  bk )
1 1  
1
(1   )2 X kk  2 k 2  0.
2

If   1 , from the above equation, we have

a  0,
 11  (1   ) A  12 (1   )(   )(1   ) 2  2
b 1
(1   c )  
1

In generally, for the case of   1 , we cannot determine the constants a and b .

Following Xie (1994), we specified the parameters as      , then, we have
 Social Status, the Spirit of Capitalism, and the Term Structure of Interest… 151

(1   ) A
a ,
 b
 11  12 (1   )(   )(1   ) 2  2
b 1
.
(1   c )  
1

The remaining discussions are similar to ones in the main text.

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In: Capitalism in Business, Politics and Society ISBN 978-1-61122-547-1
Editor: Eugene N. Shelton © 2011 Nova Science Publishers, Inc.

Chapter 8

SURPLUS ALLOCATION AND DEVELOPMENT

UNDER GLOBAL CAPITALISM 1

Cem Somel
Technical University, Ankara, Turkey

1. INTRODUCTION
Mainstream thinking in economics currently tends to describe the problem of economic
development as one of differential economic growth across space; a differential which is
ascribed to seizing or missing opportunities to solicit foreign investment, to attract
subcontracting orders, to upgrade activities in value chains and to grow by exporting. This
approach to development overlooks the mounting case-by-case evidence on the lope-sided
distribution along value chains (Gereffi 1989: 525; Gereffi 1994: 102-3; Feenstra 1998: 36;
Kaplan and Kaplinsky 1999: 1794; Chossudovsky 1998: 87-90; Figueroa 1996: 37, 39; Talbot
1997: 182; Dikmen 2000: 215, 243). The evidence raises questions concerning the
international distribution of the ‗gains from trade‘ and suggests that, if international growth
differentials are driven by international distribution mechanisms rather than the other way
round, then the development issue demands greater attention to global distribution
mechanisms.
Economic development involves fixed capital accumulation. The capacity to undertake
fixed investment in underdeveloped countries that import capital goods depends on these
countries‘ terms of trade, as much as on their efforts to save and export. Institutionalist
economists, aware of the importance of the terms of trade for accumulation, have been careful
to qualify their own recommendations for strategic trade and industrial policies in that such
policies might be self-defeating at the global level, since implementation of export-based
upgrading policies among many underdeveloped countries may cause a general deterioration
of the terms of trade (UNCTAD 1996, Part Two Chapter III; UNCTAD 2002, Part Two
Chapter IV; Mayer 2003).
1
I owe thanks to Dr. Ahmet Haşim Köse and to Mr. Tuncel Öncel for comments that helped to improve the paper.
2
Page number on internet version.
154 Cem Somel

Hence a framework apposite for studying the global distribution of investible resources is
necessary to understand the sustenance of differences in per capita incomes between
countries. Such a framework should preferably take the global social product as given, and
focus on attempts of firms and governments to extract the maximum surplus out of the social
product, on the struggle between social groups and nations to appropriate the generated
surplus, and on how the surplus is used.
This essay is an endeavour to understand and assess the developmental consequences of
global economic integration by focussing on the generation, transfer and utilization of the
global surplus. It tries to address the following questions: (1) How does globalization affect
surplus generation? (2) Where does the global surplus accumulate? (3) How is the global
surplus absorbed? (4) What prospects does this pattern of absorption hold for the capital
accumulation needs of poor countries? The essay continues as follows: the second section
presents a brief description of the surplus concept, and questions whether the tendency for the
share of the surplus in GDP to rise has abated under globalizing capitalism. The third section
discusses at an abstract level how the surplus is generated and allocated in internationally
organized production. In the fourth section empirical clues on the last question are
investigated, which seem to indicate an increasing flow of surplus from periphery to core. The
fifth section takes up the problem of surplus absorption and juxtaposes the rising consumption
of the surplus in the core with the fixed capital formation in the periphery. Section six
concludes.

2. THE SURPLUS
It seems useful to begin by reviewing the theoretical framework we will employ. The
social surplus is a basic concept of classical political economy which has been revived in the
post-war period by Paul Baran and Paul Sweezy.3 They defined it as

― ... the difference between what a society produces and the costs of producing it. The
size of a surplus is an index of productivity and wealth, and of how much freedom a society
has to accomplish whatever goals it may set for itself. The composition of the surplus shows
how it uses that freedom: how much it invests in expanding its productive capacity, how much
it consumes in various forms, how much it wastes and in what ways‖. (Baran and Sweezy,
1966: 23).

The surplus can be calculated in alternative ways. One is to estimate the necessary costs
of producing the national product, and to deduct the costs from the national product. This
raises the conceptual problem of calculating the necessary costs of production. Some of the
outlays recorded as costs by firms (such as outlays for superficial product differentiation and
advertising) may be unnecessary from the social viewpoint. Hence the determination of the
necessary costs is crucial for this first method. A second method is to estimate the various

3
Baran and Sweezy made the surplus a measurable concept. Lippit (1985), Danielson (1990) , Yeldan (1995)
provide similar definitions and descriptions of the concept. A more general theoretical presentation of the
classical surplus approach can be found in Garegnani (1988).
 Surplus Allocation and Development under Global Capitalism 155

expenditures absorbing the surplus (non-essential consumption, investment etc.) and to add
them up.
The difficulties of estimating the surplus at the global level either way are obvious.4 This
paper does not attempt to estimate the global surplus produced, but uses available statistics to
make conjectures about trends in the generation and the disposal of the surplus.
The re-elaboration of the surplus concept in the post-war period is connected to the
evolution of certain features of capitalism. In Monopoly Capital (1966) Baran and Sweezy
argued that capitalism had made a transition from a competitive phase to a monopolistic
phase in the twentieth century. In their view, the concentration of capital in giant corporations
enables them to fix prices, in contrast to nineteenth century capitalists who worked under
more intense competition. These giant corporations set their sales prices by adding mark-ups
to production costs. Such price setting gives the corporations control over the partition of the
value added with their workers.
Corporations also strive to increase their profits by reducing their production costs. On
the macroeconomic plane, the general endeavour to reduce production costs (inclusive of
labor costs) tends to raise the share of the surplus in GDP. This rising surplus can be
sustained only if it is absorbed. The consumption of capitalists, the consumption of
employees in non-productive activities (e.g. superficial product differentiation, advertising,
litigation etc.), investment and some part of government expenditure (e.g. public investment,
military outlays) are the main outlets for absorbing the surplus.
As forty years have elapsed since the above framework was formulated, it is legitimate to
ask: has the increasing ratio of trade to global output in the last decades of the twentieth
century impaired the diagnosis of Baran and Sweezy with regard to the monopolization of
capital, and with respect to the inclination for the surplus in GDP to increase? Has increasing
trade and integration of markets raised competitive pressures so as to restrict the pricing
latitude of industrial conglomerates?
The immediate effect of global trade expansion obviously must be to increase overall
competition, as greater numbers of firms would come to compete in formerly segregated
markets. But a countervailing effect would emerge when large firms with greater financial
resources and organizational advantages eliminate smaller firms (as happens when large
transnationals take on firms of peripheral countries in opened markets).
Another countervailing trend to the competition-enhancing effect of trade expansion is
mergers and acquisitions, on which there is evidence in the core countries. Statistics show that
in the US the number of merger and acquisition ‗deals‘ have risen in a wave in 1965-73, in
another wave in 1981-89 and between 1992 and 2000 (USBancorp 2001-3 : 4). The advent of
the euro triggered a boom in cross-border megamergers in Europe, an increase of 87% from
1998 to 1999 (Graff 2000). Overall, ―[a] powerful trend increase in the extent of firm level
concentration of global markets share could be observed in industries as diverse as aerospace
and defence, pharmaceuticals, automobiles, trucks, power equipment, farm equipment, oil and
petrochemicals, mining, pulp and paper, brewing, banking, insurance, advertising, and mass

4
There are surplus estimations for the US (Baran and Sweezy 1966, Stanfield 1973, Dawson and Foster 1992 and
Lippit 1992) and one for Turkey (Somel 2003). Baran reports estimations of potential surplus -hypothetical
surplus that could be produced in full employment- for a number of underdeveloped countries (1967: 227).
Other work on the surplus in underdeveloped countries include Kanth (1987), Lippit (1987 and 1988),
Danielson (1990) and Yeldan (1995).
156 Cem Somel

media‖ (Nolan 2003: 302-3).5 Indications are that the competition-enhancing effect of trade is
balanced (perhaps even overwhelmed) by the monopolizing effect of the centralization of
capital, which may sustain the ability of large corporations to control the market prices of
their products.
On the other hand, if mergers and acquisitions imply an increase in the average size of
the workforce of corporations, this could stimulate a counterbalance to corporate power by
higher unionization and worker militancy. However, the increasing mobility of capital, goods
and services on the one hand, and unemployment on the other is weakening unionization in
the core countries, and making workers accept temporary employment, part-time
employment, flexibility in hiring and dismissing, flexible working days and weeks, and
flexibility in assigning tasks in the workplace (Walby 2000).6 Increasing flexibility in labor
relations shifts various risks related to the product markets and the associated costs from firms
onto workers. Enhanced flexibility cannot but boost gross profits. Hence the trend towards
increased flexibility in labor practices clearly implies increased surplus generation for given
output in individual countries.
The neoliberal global reform agenda also includes measures to increase surplus
generation through fiscal and institutional reforms, both in developed and underdeveloped
countries. Lowering taxes on corporate profits, capital gains and high incomes; increasing
taxes on consumption; raising fees on public services and privatization of these services, of
utilities and of social security – all these policies aim at disburdening the high income earners
and property owners of contributing to financing essential services for the maintenance of the
labor force (Jones 2001: 13).7 These reforms also contribute to increasing the share of surplus
in total output.
In brief, in the era of neoliberal policies evidence does not seem to suggest that the
tendency for the share of surplus in GDP to rise in individual countries may have waned. If
so, what is happening to the surplus generated in international production?

3. OUTSOURCING TO THE PERIPHERY

Baran and Sweezy argued (1966; Baran 1952, 1967) that the surplus of underdeveloped
countries had been and was being drained away to the centers of the world-system. Their
description of core firms‘ overseas activities in Monopoly Capital can be read as a description
of offshore outsourcing activities today if one replaces ‗subsidiary‘ with ‗suppliers‘ (1966:
200):

5
Frequent reports in The Economist (February 19, 2004; April 7 2005; July 14, 2005; September 1, 2005;
September 8, 2005) testify to an ongoing boom in MandA activities in the US and Europe.
6
See JIL (2004: 58) for the unionization rate decline in Japan over 1945-2003; JIL (2000) for the unionization rate
decline in Japan, US, Germany (1985-1997) and the UK (1990-1997); Friedman (2005: Table 4) for the
decline in the unionization rate in the US 1953-2000 and the decline in combined unionization rate in Canada,
France, Germany, Italy, Japan and the UK 1980-1990. The weakness of labor and trade unionism in most
peripheral countries needs no substantation.
7
Privatization of socially owned assets and services is a tendency of capitalism that stretches back to the sixteenth
century English enclosures, a tendency that was driven off course by Keynesian policies in the twentieth
century (Nasser 2003). Shaikh (2003) shows that the ‗net social wage‘ has been a small fraction of GDP in the
major industrialized countries in the 1980s and 90s. Privatization is penetrating the most vital services,
provoking sharp social responses, as in the water crisis in Bolivia in 2000 (Gosh 2003; Moberg 2004).
 Surplus Allocation and Development under Global Capitalism 157

What they [giant multinational corporations] want is monopolistic control over foreign
sources of supply and foreign markets, enabling them to buy and sell on specially privileged
terms, to shift orders from one subsidiary to another, to favour this country or that depending
on which has the most advantageous tax, labour and other policies...

The authors‘ view was that imperialism had a two-fold function with respect to the
surplus: finding cheap foreign sources of supply (which increases the surplus in the home
country), and using other countries‘ markets as outlets (which helps absorb the surplus of the
home country).
A major motive of transnational companies in their current practice of outsourcing parts
of production to underdeveloped countries is to cut production costs, hence to increase gross
profits. When the corporation of a core country decides to outsource its production to a
peripheral country, or when it shifts its sources of supply of intermediate inputs to a
peripheral country, this increases global surplus creation. Global output remains the same, the
costs of producing it decline.8 For the firm, the effect of offshore outsourcing is the same as if
it were to reduce its own (in-house) costs of production, or were to outsource to a cheap
supplier in the home economy. If the workers in the core country dismissed due to the
offshore outsourcing find newly created jobs and continue to produce surplus, then global
output increases and surplus creation increases a fortiori. If the workers dismissed due to the
outsourcing remain unemployed, then their consumption (provided by family, unemployment
benefits etc.) absorbs part of the surplus produced by other workers in employment. Should
the supplier in the peripheral country expand her production to meet the order under
subcontract, there will also be some increase in surplus creation in the peripheral country. In
this case the total increase in surplus may accrue to both countries‘ economies - in
indeterminate proportions.
Rough estimates suggest that by outsourcing globally a multinational firm may be able to
lower its costs by as much as 50-70% (The Economist, 2004: 4). The McKinsey institution
estimates that for every dollar American firms spend on services from India, the US economy
receives between $1.12 and $1.14 in benefits (Drezner 2004). Of that dollar spent in India
only part contributes to surplus generation in India; the rest is the necessary cost of
production. But the $1.12 accruing to the US is pure surplus.
It is worth noting that the effect of offshore outsourcing on productivity in the core
economies is ambiguous. The formula

shows that an increase in material input cost (due to the increase in outsourced inputs) and a
reduction of the in-house workforce (due to outsourcing) may ultimately affect the
outsourcing firm‘s productivity either way. The gains that motivate firms to outsourcing are
not gains in labor productivity (which arguably could legitimize outsourcing from a social
viewpoint), but gains in gross profits – i.e. in surplus appropriation.

8
Here the implication is that integration of national economies through trade is reducing the ‗necessary costs of
production‘ which is taking the attribute of a global concept.
158 Cem Somel

4. GLOBAL SURPLUS TRANSFERS

To substantiate their argument on the transfers of surplus from the periphery, Baran and
Sweezy (1966: 191-201; also Baran 1967: 228-230) showed that the repatriated profits from
investment exceeded investment in peripheral countries by core countries‘ firms, and that
investment returns of firms in core countries exceeded their returns in the periphery.
Today we have access to more factual information and analytical tools for gauging
international transfers of surplus. The first indicator of surplus flows is trade balances: a
country that runs a trade surplus must be transfering net resources (part of its saved surplus)
elsewhere. World Bank Indicators show that the high-income countries (and also the high-
income OECD countries) have recorded deficits in their trade in goods and services with the
low and middle income countries through 1999-2002 (summary figures in Table 1); hence the
periphery has been realizing a net transfer of resources to the core, assuming that prices
reflect values of resources.
This recent surplus of the periphery in recorded trade might not accurately reflect the
magnitude of the real transfer if the prices of peripheral exports were increasing at a higher
rate than the prices of core exports. However, evidence suggests the converse. In a recent
study investigating the terms of trade of twenty-six developing countries Ram (2004: 251)
found that ―[w]hile there are some cases of positive trends, the overall scenario is of sizable
negative trends for most developing countries over the thirty-year period 1970 to 1999.‖
Another study reports the deterioration of the terms of trade in manufactured commodities for
underdeveloped countries in their trade with the EU by an average annual 2.2 percent over
1979-1995 (UNCTAD 1996: 148). Yet another calculation shows an average annual terms of
trade deterioration for non-oil exporting developing countries of 1.3 percent for 1982-1988,
and an average annual deterioration of 1.5 per cent for 1989-1996 (UNCTAD 1999: 85).
Morisset (1998) highlights the increasing difference between commodity prices in
international trade and their prices in developed country markets, suggesting that the
increasing spread may be due inter alia to the ability of large international trading companies
to influence such spreads. He reports that ―the spread between world and domestic prices
almost doubled in all major commodity markets during 1975-94‖ (1998: 503). To sum up, in
view of the terms of trade deterioration of the periphery, trade balances -whether in surplus or in
deficit- tend to underestimate the periphery‘s actual resource exchange with the core countries. 9
Changes in the periphery‘s terms of trade with the core can be tracked to various
variables that affect the costs of production in different countries: real wage differences,
differences in profit margins, tax policies etc.10 Another important variable that bears on

9
Computations of the ecological and natural resource content of trade are not central to this paper but significant
from the viewpoint of surplus transfer. A study of the environmental and natural resource content of trade
between the developed and underdeveloped countries finds that industrialized countries are in general physical
net-importers of natural resources from other world regions. In some material categories (like fossil fuels and
basic metal products) ―a clear tendency toward an increasing physical trade surplus can be observed‖ (Giljum
and Eisenmenger 2003: 16). The authors highlight the role of declining primary commodity prices in
sustaining the imbalance in trade in physical resources. Lipke (2002) and Jorgenson and Rice (2005), using
ecological footprint per capita, likewise find a net transfer of ecological capacity through trade from the
periphery to the core.
10
Emmanuel (1972) argued that real wage differences are the main determinants of relative prices of the exports of
core and periphery; and that differences in profit rates do not play the defining role in these prices.
 Surplus Allocation and Development under Global Capitalism 159

terms of trade and on resource transfers in core–periphery trade is the undervaluation of

underdeveloped countries‘ currencies with respect to their purchasing power parity. Köhler
(1998) has suggested that, as the purchasing power parity exchange rates compiled by
international agencies are based on a comparison of prices of a certain basket of goods and
services in the US and in other countries, the purchasing power parity figures can be
interpreted as, roughly, the price of goods and services in local currency units in other
countries that are priced at one dollar in the US. Hence the difference between a currency‘s
purchasing power parity and its market exchange rate to the dollar can be used as a rough
measure of the overvaluation or undervaluation of a countries‘ exports with respect to their
values in the US.
Table 2 shows the deviation of exchange rates from purchasing parities for 20 peripheral
countries. Dividing the GDPs in current dollars by GDP in current international dollars
highlights the under- or overvaluation of currencies in market exchange rates compared to
their purchasing powers. The undervaluation in some of the countries (the South Asian
countries, China, Indonesia, Malaysia, Zimbabwe) appears to have been increasing. To note
some extreme cases: the average undervaluation of the national currency against the US
dollar compared to its purchasing power in 2000-2004 was 78 per cent in Bangladesh and
China, and 81 per cent in Vietnam and India.
Table 3 shows the same exchange rate deviation for the currencies of ten major core
countries. The dollar exchange rates of the core currencies appear to gyrate around unity; and
the figures indicating an undervaluation generally do not approach the extreme degrees seen
in underdeveloped countries. It follows that the currencies of underdeveloped countries
generally tend to remain undervalued not only with respect to the US dollar, but also with
respect to the currencies of the other major core countries. The undervaluation of peripheral
countries‘ exports with respect to their values in the core countries implies that outsourcing
production to the periphery generates an unrecorded flow of surplus to the economies of the
outsourcing firms in the core.
Köhler (1998) estimated the unrequited transfer due to distorted exchange rates from 97
underdeveloped countries to 22 OECD countries for 1995 and found a transfer amounting to 8
percent of the GDP of the OECD countries and 24 percent of the GDP of the underdeveloped
countries.11

Table 1. External Balance in Goods and Services of Country Groups

(Annual Average Balance, billions current US dollars)

1975- 1980- 1985- 1990- 1995- 2000-

2003 2004
1979 1984 1989 1994 1999 2002
High income -1 -21 -39 86 165 -71 ... ...
High income: OECD -35 -67 -68 49 112 -159 ... ...
Low income -14 -27 -24 -19 -27 -18 -25 ...
Middle income -12 1 17 -1 -13 93 140 127
Source: World Bank, World Development Indicators.

11
Lipke (2002), using and refining Köhler‘s method, finds a positive correlation between the unequal exchange in
goods and the unequal exchange in ecological content of exports and imports (ecological footprint).
160 Cem Somel

Table 2. The Ratio of GDP at Current US Dollars to GDP in Current International

Dollars (for selected underdeveloped countries)

1975-1979 1980-1984 1985-1989 1990-1994 1995-1999 2000-2004

Bangladesh 0.39 0.31 0.28 0.27 0.25 0.22
Bolivia 0.41 0.35 0.43 0.42 0.44 0.38
Brazil 0.60 0.48 0.44 0.52 0.66 0.40
Chile 0.73 0.78 0.44 0.52 0.59 0.48
China 0.64 0.39 0.28 0.22 0.24 0.22
Colombia 0.37 0.41 0.28 0.28 0.39 0.29
Egypt 0.47 0.40 0.37 0.32 0.40 0.36
India 0.37 0.35 0.30 0.21 0.20 0.19
Indonesia 0.62 0.59 0.36 0.34 0.30 0.29
Kenya 0.70 0.59 0.46 0.32 0.36 0.39
Malaysia 0.75 0.72 0.56 0.55 0.53 0.44
Mexico 0.55 0.58 0.41 0.60 0.52 0.68
Nigeria 1.33 1.25 0.48 0.34 0.35 0.41
Pakistan 0.47 0.46 0.33 0.29 0.28 0.27
South Africa 0.36 0.43 0.39 0.42 0.39 0.32
Thailand 0.50 0.46 0.39 0.44 0.40 0.30
Turkey 0.79 0.53 0.43 0.54 0.49 0.44
Venezuela 0.99 1.19 0.70 0.51 0.65 0.74
Vietnam ... ... ... 0.14 0.20 0.19
Zimbabwe 0.66 0.61 0.40 0.31 0.22 ...
Source: Calculated from World Bank http://devdata.worldbank.org/dataonline/ by dividing ―GDP
(current $)‖ data by ―GDP, PPP (current international $)‖ data and taking arithmetic averages over
periods.

Table 3. The Ratio of GDP at Current US Dollars to GDP in Current International

Dollars (for selected core countries)

1975-1979 1980-1984 1985-1989 1990-1994 1995-1999 2000-2004

Belgium 1.12 0.82 0.83 1.06 1.06 0.90
Canada 1.09 1.00 0.96 1.03 0.88 0.87
France 1.10 0.93 0.95 1.14 1.12 0.95
Germany 1.11 0.90 0.97 1.22 1.20 0.98
Italy 0.70 0.68 0.80 1.01 0.91 0.84
Japan 0.97 0.90 1.22 1.50 1.49 1.24
Netherlands 1.09 0.89 0.88 1.03 1.03 0.91
Sweden 1.47 1.16 1.17 1.43 1.28 1.09
Switzerland 1.12 1.00 1.15 1.40 1.43 1.24
United Kingdom 0.71 0.81 0.76 0.94 0.95 0.99
Source: Calculated from World Bank http://devdata.worldbank.org/dataonline/ by dividing ―GDP
(current $)‖ data by ―GDP, PPP (current international $)‖ data and taking arithmetic averages over
periods.
 Surplus Allocation and Development under Global Capitalism 161

What drives the currency undervaluation in peripheral countries? Capital account

convertibility in peripheral countries instigates a private demand for dollars and for other
reserve currencies as a store of savings and for capital flight.12 In addition, volatile
international capital flows unleashed by this convertibility compel central banks to
accumulate large reserves in order to prevent currency crises, generating a rising official
demand for reserve currencies. The accumulation of foreign exchange reserves in poor
countries is seen in Table 4. The rising trend of the ratio of reserves to imports and to GDP
reftects an increasingly costly hoard, and a source of downward pressure on the exchange
rates of peripheral national currencies against the reserve currencies.13

Table 4. Low and Middle Income Countries’ Official Reserves Relative to Imports
(world reserves and GDP)

1981-1985 1986-1990 1991-1995 1996-2000 2001-2003

Ratio to imports 0.21 0.22 0.30 0.41 0.52

Ratio to GDP 0.04 0.04 0.07 0.11 0.15

Ratio to world reserves ... 0.18 0.27 0.35 0.39

Source: World Bank, World Development Indicators.
Note: Total reserves comprise special drawing rights, reserves of IMF members held by the IMF, and
holdings of foreign exchange under the control of monetary authorities. Gold holdings are
excluded. Imports refers to imports of goods and services and does not include factor incomes.

Table 1 showed that the high income countries as a group have been running trade
deficits in goods and services, largely due to OECD countries‘ deficits in the 1980s and in
recent years. Table 5 reveals that when the undervaluation of the currencies of the low income
countries is used to find a rough estimate of the value of their exports in the markets of the
core countries, this undervaluation overshadows these countries‘ recorded deficits in trade of
goods and services. Similarly, Table 6, comparing the value in the core countries of middle
income countries‘ exports with their recorded external balance in goods and services,
suggests that the undervaluation these countries‘ exports to the core countries may far exceed
their recorded trade surpluses. However, peripheral countries do not trade only with the core
countries, but also trade with each other. The different rates of undervaluation of currencies of
peripheral countries (highlighted in Table 2) suggest that trade among these countries also
incurs unrequited surplus transfers.

12
―In the emerging markets, for each dollar of net inflow there was a net outflow of 14 cents in the 1980s, but of
almost 24 cents in the 1990s. For developing countries as a whole, this share more than doubled during the
1990s alone‖ (UNCTAD 1999: 106).
13
In an alternative explanation for the undervaluation of currencies in the periphery, Reich (2004) argues that a
country with a lower productivity in the production of tradables compared to its trading partners must have
lower wages than its trading partners to be able to price its tradable goods competitively (―the law of one
price‖), given the exchange rate of its currency. Then wages in the non-tradables sectors in this country would
also have to be lower. If productivity of labor in the non-tradables sectors of this country is comparable to that
of its trading partners, then the prices of non-tradables are underpriced comparatively to the corresponding
non-tradable goods in developed countries. Reich attributes exchange rate distorsion to this underpricing of
non-tradables in excess of productivity differentials. But this cannot explain why transnational companies
outsource production of tradable goods to suppliers in peripheral countries.
162 Cem Somel

Table 5. Low Income Countries’ Annual Exports in Current International Dollars and
Their External Balances (billion US dollars)

1980- 1985- 1990- 1995- 2000-

1984 1989 1994 1999 2003
GDP in PPP $/GDP current $ (=current e-rate/PPP) 2,36 2,93 4,03 4,31 4,69

Exports in current dollars 66 65 91 133 192

Exports in PPP $ 154 191 366 575 953

Exports in PPP $ - exports in current $ 88 126 275 442 750

External balance on goods and services (current $) -24 -21 -16 -24 -14

Source: World Bank World Development Indicators.

Notes: PPP $ rate/current $ rate is calculated by dividing GDP in current international US dollars by
GDP in current US dollars. Exports in current international dollars are calculated by multiplying
exports of goods and services by the PPP $ rate/current $ rate. Exports in current dollars are actual
earnings from exports. All figures are simple arithmetic averages for periods indicated.

Table 6. Middle Income Countries’ Annual Exports in Current International Dollars

and Their External Balances (billion US dollars)

1982- 1985- 1990- 1995- 2000-

1984 1989 1994 1999 2003

GDP in PPP $/GDP current $ (=current e-rate/PPP) 2,20 2,59 2,56 2,53 2,98

Exports in current $ 471 475 773 1292 1803

Exports in PPP $ 1004 1231 1975 3278 5132

Exports in PPP $ - exports in current $ 534 757 1202 1986 3416

External balance on goods and services (current $) 11 4 2 1 130

Source: World Bank World Development Indicators. Note: Calculations are same as in Table 5.
Averages begin in 1982 for lack of 1980 data.

Tables A1-A3 in the appendix and Table 7 below present a tentative calculation of
unrequited transfers through exchange rate distorsions between regional groups of core and
peripheral countries. The reader should be reminded of the exclusion of East European and
Central Asian transition economies from the estimations, and of our crude assumptions
underlying the calculation of the distorsion factors for whole regions -necessitated by the
incongruence of aggregate data from ECLAC and from the World Bank- so that the tables
should be taken rather as a methodological exercise than an estimation with any claim for
precision.
Still, with due caution, the figures in Table 7 merit some scrutiny. The total value of
unrequited transfers appears to increase with trade from 1985 to 2000. Latin America‘s
surplus transfers seem to concentrate in the US and Canada, while that of developing Asia
 Surplus Allocation and Development under Global Capitalism 163

appears more balanced between Western Europe, North America and ‗other industrialized
countries‘. The net unrequited transfers from the Asian periphery overshadow that from the
other two peripheral regions. The change in the relative position of Africa with respect to
‗developing‘ Asia and Latin America from 1985 to 2000 is to be noted. The table shows an
upward stream in 2000 of undervalued exports from Africa to ‗developing Asia‘, from Asia to
Latin America, and from the latter region to the core countries; and the confluence of surplus
from each of the ‗developing‘ regions directly to the core blocks.
Table 7 depicts a hierarchy of transfers – the ―structured inequality‖ of the world-system
demarcated by territorially based states (Tabb 2005: 50). Asian peripheral countries‘
undervalued exports to other peripheral countries may serve to underpin local support in
peripheral countries for free trade policies. Workers in Turkey, for example, may be unaware
of the market price in the EU of their products exported there, or may not notice how export
competition against other Asian producers pushes down their wages and deprives them of
their jobs; but they may see more easily the advantages of purchasing cheap consumer articles
imported from China or India which enable them to survive on their wages.

Table 7. Net Unrequited Transfers between Different Regions, 1985 and 2000
(billion current international dollars)

1985 Western US and Other Latin America Asian Africa

Destination/Origin Europe Canada industrialized and Caribbean developing
Western Europe - 65 10 - - -

US and Canada - - - - - -

Other Industrialized - 21 - - - -

Latin America and 37 90 12 - - 1

Caribbean
Asian developing 67 117 102 2 - 2

Africa 48 18 3 - - -

2000
Destination/Origin
Western Europe - 70 53 - - -

US and Canada - - 46 - - -

Other Industrialized - - - - - -

Latin America and 34 225 17 - - -

Caribbean
Asian Developing 976 1282 875 90 - -

Africa 132 52 14 13 8 -

Source: Table 3A. Inter-regional flows are ignored.

164 Cem Somel

5. SURPLUS ABSORPTION
From the viewpoint of economic development, the critical matter in the use of the surplus
is fixed investment in the underdeveloped countries. To investigate whether the level of fixed
capital formation in the periphery offers any prospects for per capita income convergence, it
seems logical to focus on fixed capital formation per capita, as labor productivity is largely
determined by the quantity of the means of production per worker, and its quality. Table 8
shows per capita gross fixed capital formation figures for underdeveloped regions as ratios to
the corresponding figures in the high-income OECD countries, and for the low income
countries and the middle income countries as blocks, estimated both on market exchange rate
and purchasing power parity bases. The relevant ratio for a country should lie between the
two estimates, depending on how imported investment goods and domestically produced
investment goods are combined in fixed capital formation.

Table 8. Per Capita Gross Fixed Capital of Peripheral Country Groupings Relative to
per Capita Gross Fixed Capital Formation in High-income OECD Countries

1975- 1980- 1985- 1990- 1995- 2000-

1979 1984 1989 1994 1999 2002

East Asia and Pacific (a) 0.04 0.04 0.03 0.03 0.05 0.06

East Asia and Pacific (b) 0.06 0.08 0.09 0.14 0.19 0.22
Europe and Central Asia (a) ... ... ... 0.10 0.08 0.08

Europe and Central Asia (b) ... ... ... 0.30 0.23 0.23
Latin America and Caribbean (a) 0.22 0.20 0.12 0.11 0.13 0.12
Latin America and Caribbean (b) 0.37 0.33 0.28 0.24 0.25 0.24
Middle East and North Africa (a) ... ... ... ... 0.06 0.07
Middle East and North Africa (b) ... ... ... ... 0.18 0.18
South Asia (a) 0.02 0.02 0.02 0.01 0.02 0.02
South Asia (b) 0.05 0.06 0.06 0.07 0.08 0.09
Sub-Saharan Africa (a) 0.07 0.05 0.03 0.02 0.02 0.02
Sub-Saharan Africa (b) 0.11 0.09 0.06 0.05 0.05 0.05
Low income (a) 0.03 0.02 0.02 0.01 0.01 0.01
Low income (b) 0.05 0.05 0.05 0.06 0.06 0.07

Middle income (a) 0.12 0.11 0.08 0.06 0.07 0.08

Middle income (b) 0.21 0.21 0.20 0.18 0.20 0.22
Source: World Bank World Development Indicators.
Note: (a) The ratio of per capita gross fixed capital formation of indicated countries to that of high-
income OECD countries in current US dollars.
(b) The ratio of per capita gross fixed capital formation of indicated countries to that of high-income
OECD countries in current international dollars.
 Surplus Allocation and Development under Global Capitalism 165

The table reveals that the ratios in general appear to be stagnating in purchasing power
parities, and appear to be decreasing in current US dollars. The ratios for East Asian and the
East European and Central Asian grouping show upward trends. If these upward trends were
to continue, they would imply a convergence not of per capita stocks, but of rates of increase
of per capita stocks. As long as the absolute difference between per capita fixed investment in
two regions continues, the gap in per capita stock of fixed capital deepens. Convergence of
per capita capital stocks of peripheral countries with the core countries would necessitate that
the figures in the table be over unity – moreover, substantially over unity. Given the figures,
the prospects for the low and middle income countries‘ raising their capital accumulation and
labor productivity to levels commensurate with that of the core countries seems to be nil.
The alternative mode of surplus absorption is that part of private and government
consumption that cannot be categorized as necessary for the maintenance of the workforce.
There is no doubt that such non-essential consumption is widespread in the periphery of the
world-system (formerly among the comprador and ‗traditional‘ ruling classes, now among the
emerging transnational élite groups14) and that this consumption diverts resources away from
investment. It lies beyond the scope of this paper to estimate non-essential consumption for
groups of countries. However Table 9 reveals that as the peripheral countries are being
officially exhorted to raise their saving rates, the propensity to consume in the core countries
is increasing. An increase in the share of consumption in national income in core countries
may be interpreted as impinging on the global surplus, unless there are reasons to suppose
that the necessary costs of maintaining the labor force in the core rises faster than GDP. The
declining overall saving rate and trade deficits of the core countries as a block flies in the face
of the need to make provisions for aging core populations.
The United Sates and the European Monetary Union countries as a group have been
contributing less to global saving (relative to GDP) than the middle income countries since
the 1970s, and Japan appears to have joined the former group in this respect since 2000. The
high income OECD countries‘ final consumption share in GDP has risen by four percentage
points from 1975-1979 to 2000-2003, and the final consumption share of the low income
countries has declined by four percentage points. The average saving rate in the core has
dropped to the level of the low income countries in 2000-2003. The increase in the
consumption rate from 0.78 in 1999 to 0.79, 0.80 and 0.81 in 2000, 2001 and 2002 in the high
income OECD countries has deprived the world of roughly 1.49 trillion dollars (1.55 trillion
in current international dollars) of saving in the three years, a sum equal to 1.5 percent of
world output in those years (1.1 percent by current international dollars). The increasing flow
of global surplus to the core countries makes it both possible and necessary to increase
consumption rates in the core.
The rise in the consumption rate in the major core countries appears to be maintained
inter alia by a rising household consumption rate in the US and Japan. Private consumption
expenditure is sustained by advertising, superficial product differentiation and planned
obsolescence. Asset prices inflated by speculation (such as the current housing bubble in the
US) play a part in encouraging consumption. As income levels in the core countries become
increasingly polarized, corporate sales strategies develop mass markets in segments, e.g. in

14
Sklair (1994).
166 Cem Somel

markets for ‗life-style model‘ consumer goods and markets for discount-store consumer
goods (Jones 2001: 14).
Capitalists, for their part, present advertising as necessary to serve consumers, who are
portrayed as having mysteriously become more whimsical in their demands and preferences.15
World advertising expenditure (Table 10) amounted to around one percent of world GDP in
2003 and 20 percent of the fixed capital formation expenditure of the low and middle income
countries combined. Much of expenditure on advertisement can be seen as a waste of
resources that is used to abet further waste. Another factor that instigates private consumption
in the core countries is consumer credit, which has enabled US consumers to accumlate a debt
of ten billion dollars at the end of 2004 (Wolff 2005).
The share in GDP of the other component of final consumption expenditure, government
expenditure, in the core countries appears to stable, balanced by Japan‘s rising share and a
declining trend in the US. In the context of government expenditure, US military expenditure
played an important role in absorbing surplus during the Cold War (Baran and Sweezy, 1966:
Chapter 7). In the 1990s the proportion of disclosed military expenditure in GDP and in
central government expenditures has been slightly declining according to World Development
Indicators; in 2002 its share in GDP was 3 percent in the US, and 2 percent in the European
Monetary Union. But a comparison of the level of military spending with investment figures
in the periphery yields a more telling picture.

Table 9. Final Consumption as Percentage of GDP (%)

1980- 1985- 1990- 1995- 2000-

1975-1979 1984 1989 1994 1999 2003

Low income 84 85 83 82 82 80
Middle income 74 74 73 74 74 73
High income: OECD 76 78 78 79 78 80
European Monetary Union 77 79 78 78 77 78
Japan 67 69 67 67 71 74
United States 80 81 83 84 82 85

Per capita GDP as percentage of High Income OECD

1980- 1985- 1990- 1995- 2000-
1975-1979 1984 1989 1994 1999 2004
Low income 7 6 6 6 6 7
Middle income 17 18 18 17 18 19
Source: World Bank, World Development Indicators. Per capita GDP ratios (not in percentages)
calculated by dividing ‗GDP per capita, PPP (current international $)‘ figures of low and middle
income country groupings by that of the high-income OECD countries.

15
An ICC Policy Statement argues ―In an increasingly competitive environment and the tendency toward shorter
product life spans, new products and services must be introduced without delay to the local market so that
business can meet consumer expecations and or preference …‖ (ICC 2002).
 Surplus Allocation and Development under Global Capitalism 167

Table 10. Advertising Expenditure through Major Media* (billion US dollars)

1996 1997 1998 1999 2000 2001a 2002b 2003c 2004c

North America 105.6 112.6 118.9 124.9 131.2 146.7 150.3 158.4 167.9
Europe 72.9 78.6 83.4 87.7 92.2 76.9 86.9 89.5 95.0
Asia and Pacific 61.7 67.2 67.2 70.4 74.0 61.3 66.2 69.7 75.0
Latin America 21.1 24.2 26.7 29.6 33.1 18.3 14.1 13.7 16.1

Rest of World 5.3 6.1 6.8 7.6 8.4 9.4 11.4 14.2 17.4
Total 266.5 288.8 303.1 320.1 338.9 312.6 328.9 345.5 371.4

Source: For 1996-2000 figures: http://www.asianmediaaccess.com.au/ftimes/adspend/summary.htm (14

July 2005), original source: Zenithmedia.
a ZenithOptimedia Press Release June 30, 2003.
b ZenithOptimedia Press Release July 19, 2004.
c ZenithOptimedia Press Release April 18, 2005.
*Major media comprises newspapers, magazines, televison, radio, cinema and outdoor advertising. The
internet is also indicated in the source tables for figures beginning 2001.

Table 11. Military Expenditure (billion US $, 2003 prices and exchange rates)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Western Europe 209 210 209 211 214 216 215 220 223 220
North America 347 328 326 319 320 332 335 375 424 466
World 789 772 774 765 773 806 819 864 927 975
Source SIPRI. http://www.sipri.org/contents/milap/milex/mex_wnr_table.html
Western Europe comprises Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece,
Iceland, Ireland, Italy, Luxembourg, Malta, Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland, Turkey, UK. North America comprises US and Canada.

Table 11 shows the share of the core in global military expenditure.16 In 2003 world
military expenditure figures of the Stockholm International Peace Research Institute
amounted to 53 percent of gross fixed capital formation in the low and middle income
countries combined (1758 billion current US$ - World Development Indicators); and the
military expenditure of the core corresponded to 37 percent of this investment. The
opportunity cost of military expenditure is only one side of the coin. Maintaining military
might, flexing it and intermittently using it is necessary for the core countries to maintain the
momentum toward deregulating trade and capital movements, and controlling global natural
resources.

16
It should be recalled that in many countries part of military expenditure is concealed in other government
accounts and SIPRI cannot give data on a number of countries.
168 Cem Somel

CONCLUSION
In conclusion, it emerges from the observations above that the basic tendencies in the
production and growth of the social surplus described by Baran and Sweezy have not changed
under ‗globalizing capitalism‘. New economic policies, corporate strategies and international
rules of conduct appear to promote increasing surplus transfers from the periphery to the core
of the world-system.
In order to lift itself out of destitution the periphery is exhorted to remove restrictions on
trade and capital flows, and to compete for advantageous positions in global value chains
controlled by transnationals by improving quality, reducing costs, innovating etc. The export-
led growth economic strategy compels peripheral producers to individually compete for
exportation by repressing wages, and conceding much of the surplus produced to their trade
partners in the core countries. Part of the surplus accruing to the periphery is consumed by
transnational élites imitating the consumption of the well-to-do in the core societies. On the
other hand dollarization, capital flight and official reserve accumulation exert downward
pressure (a pressure unrelated to trade balances) on the exchange rate of peripheral currencies.
The undervaluation of peripheral currencies, reflected in deteriorating terms of trade,
translates into a loss of surplus to the core countries, and reduces the capacity of poor
countries to import capital goods from the core. The resulting meager per capita fixed capital
formation in the underdeveloped countries bodes grim prospects for the welfare of future
generations of working people in the periphery.
These trends are maintained by the insertion of millions of workers in Asian hinterlands
into global production networks, and by the willingness of peripheral states governed by
transnational élites to continue free trade and capital transactions policies, and to accumulate
foreign exchange reserves. Africa‘s poor populations await their turn to be drawn into the
world labor market, to eke out a subsistence and produce a surplus, of which a large part will
likely flow to the core.
In order to prevent the drift of the victims of globalizing capitalism to irrational reaction
(religious or nationalist fanaticism, ‗clash of civilizations‘ etc.) and to focus their attention on
the real issues, social scientists and activists should open to debate the social and economic
consequences of the export-led growth idea, all the theories and policies that give precedence
to global efficiency over national saving and investment, and the social psychology of
consumerism. There is pressing need to promote socio-economic programs based on the
principle of self-sufficient and self-reliant national development, wherein the people can
decide through democratic procedures how they will dispose the social surplus they produce
(how they will distribute it, how much they will save, invest, export) under less pressure from
world markets dominated by transnational companies, and with less interefence from
international institutions and core states. Within the framework of the capitalist world-system,
there is little hope for solving the deep social contradictions the system reproduces. The
solution, reason shows, lies outside the logic of the system.
 APPENDIX
Table A1. World Exports by Origin and Destination , 1985 and 2000 (billions US dollars)

1985 Western US and Other Total Latin America Asian Africa Total Total by
Destination/Origin Europe Canada industrialized industrialized and Caribbean developing developing origin
Western Europe 663 115 35 813 18 55 27 102 915
US and Canada 84 157 53 294 24 40 7 71 362
Other industrialized 51 106 22 179 7 57 4 66 245
Total industrialized 798 378 110 1284 49 152 38 239 1522
Latin America and Caribbean 33 64 9 106 15 4 2 20 128
Asian developing 77 93 91 259 7 84 4 95 356
Africa 64 18 4 86 2 4 2 9 95
Total developing 175 175 104 453 24 95 9 126 579
Rest of world 73 4 7 84 2 18 7 24 108
Total by destination 1045 557 221 1821 75 265 51 389 2209
2000
Destination/Origin
Western Europe 1952 352 115 2427 77 222 46 345 2764
US and Canada 283 505 145 934 245 184 8 436 1371
Other industrialized 153 237 46 436 23 260 8 283 720
Total industrialized 2389 1095 306 3790 337 666 61 1064 4862
Latin America and Caribbean 61 283 15 77 23 100 459
360 0
Asian developing 360 452 291 1103 38 628 15 681 1784
Africa 84 31 8 130 8 31 8 38 168
Total developing 505 766 314 1585 123 674 23 819 2404
Rest of world 283 38 15 337 8 38 8 54 390
Total by destination 3185 1899 636 5720 467 1378 92 1937 7657
Source: Figures calculated from Table 2.2 (―Structure of World Imports, By Origin and Destination, 1985 and 2000‖ showing exports in percentages of world exports) from
ECLAC (2002: 33); and from world ―exports of goods and services‖ figures in World Development Indicators of the World Bank (http://devdata.worldbank.org/dataonline).
Note to ECLAC table: The data on world imports refer to the total imports of 82 reporting countries, corresponding to approximately 90% of world trade. 1985 refers to the annual
average for the period 1984-1986. 2000 refers to the annual average for 1999-2000. The countries not included as reporting countries are primarily those with economies in
transition. Western Europe: European Union plus Switzerland, Norway and Iceland. Other industrailized: Japan, Australia, New Zealand and Israel. ―Rest of World‖ is not
included as a destination for lack of information. Asian origin, [sic] ―Rest of World‖ refers to economies in transition, Oceania except Australia and New Zealand, free zones,
etc.
 Table A2. World Exports by Origin and Destination, 1985 and 2000 in Current International Dollars
(billion current international dollars)

1985 Western US and Other Total Latin America Asian Africa Total Total by
Destination/Origin Europe Canada industrialized industrialized and Caribbean developing developing origin
Western Europe 1052 182 56 1291 28 88 42 161 1452
US and Canada 86 161 55 302 25 41 7 73 373
Other industrialized 62 129 27 218 8 70 5 81 299
Total industrailized 1200 473 138 1811 61 199 54 315 2123
Latin America and 80 155 21 257 37 11 5 48 311
Caribbean
Asian developing 176 211 206 588 15 191 10 216 809
Africa 128 35 9 173 4 9 4 18 190
Total developing 385 402 236 1018 57 211 20 282 1310
2000
Destination/
Origin
Western Europe 446 80 26 554 17 51 10 79 3395
US and Canada 293 523 151 968 254 190 8 452 1420
Other industrialized 126 196 38 360 19 215 6 234 594
Total industrialized 2818 1152 330 4309 367 678 71 1109 5409
Latin America and 112 517 28 657 140 42 0 182 839
Caribbean
Asian developing 1387 1741 1121 4249 148 2420 59 2626 6875
Africa 227 82 21 350 21 82 21 103 453
Total developing 1725 2341 1170 5257 308 2544 80 2911 8167
Source : Calculated from Table A1 and exchange rate distorsion factors. Exchange rate distorsion factors found by dividing GDP, PPP (current international $)
figures by GDP (current US$) figures from World Development Indicators of the World Bank (http://devdata.worldbank.org/dataonline) for 1985 and
2000. As the regional data of the World Bank do not correspond to those of Table A1 drawn from ECLAC, approximations for exchange rate distorsion
explained in Table A4 were used.
Table A3. Unrequited Transfers through Exports due to Exchange Rate Distorsion, 1985 and 2000 (billion current international dollars)

1985 Western US and Other Total Latin America Asian Africa Total Total by
Destination/Origin Europe Canada industrialized industrialized and Caribbean developing developing origin
Western Europe 389 67 21 478 10 32 16 60 597
US and Canada 2 5 2 9 1 1 0 2 11
Other industrialized 11 23 5 39 1 13 1 14 53
Total industrialized 403 95 27 525 13 46 17 76 601
Latin America and 47 91 13 151 22 6 3 28 182
Caribbean
Asian developing 99 118 115 329 8 107 6 121 453
Africa 64 18 4 86 2 4 2 9 95
Total developing 210 227 132 567 33 118 11 158 731
2000
Destination/Origin
Western Europe 446 80 26 554 17 51 10 79 631
US and Canada 10 18 5 33 9 7 0 16 49
Other industrialized -27 -41 -8 -76 -4 -45 -1 -49 -125
Total industrialized 429 57 23 512 22 12 9 45 555
Latin America and 51 234 13 297 63 19 0 82 380
Caribbean
Asian developing 1027 1289 830 3146 109 1792 44 1945 5091
Africa 142 52 13 220 13 52 13 65 285
Total developing 1220 1575 856 3664 185 1863 57 2092 5756
Source: Calculated by taking differences of corresponding regional export figures in Tables A1 and A2.
172 Cem Somel

Table A4. Exchange Rate Distorsion Factors for Regions in Table A2

Exchange Weights (from Regional

Country/Region in
Region in Tables rate annual exports exchange rate
World Development Year
A1-A3 distorsion in billion distorsion
Indicators
factor current dollars) factor
European Monetary 1985 1.587 - 1.587
Western Europe
Union 2000 1.228 - 1.228
US 1.000 0.752
1985 1.029
Canada 1.116 0.248
US and Canada
US 0.986 0.769
2000 1.036
Canada 1.202 0.231
Japan 1.169 0.812
Australia 1.222 0.114
1985 1.218
New Zealand 1.720 0.029
Other Israel 1.756 0.045
Industrialized Japan 0.694 0.769
Australia 1.290 0.134
2000 0.826
New Zealand 1.480 0.028
Israel 1.123 0.069
Latin America Latin America and 1985 2.423 2.423
-
and Caribbean Caribbean 2000 1.826 1.826
East Asia and Pacific 0.466 2.742
South Asia 0.1000 3.238
1985 2.274
Middle East and
0.433 1.548
North Africa
Asian developing
East Asia and Pacific 0.675 4.199
South Asia 0.099 5.041
2000 3.853
Middle East and
0.226 2.306
North Africa
Sub-Saharan Africa 0.379 2.794
Middle East and 1985 2.004
0.621 1.549
North Africa
Africa
Sub-Saharan Africa 0.352 3.400
Middle East and 2000 2.691
0.648 2.306
North Africa
Note: The distorsion factor for Western Europe is based on the World Bank‘s GDP figures for
European Monetary Union; the distorsion factor for US and Canada is average of World Bank‘s
GDP figures for the US and Canada, weighted by exports of goods and services; the distorsion
factor for other industrialized countries is average of distorsion calculated from World Bank‘s
GDP figures for Japan, Australia, New Zealand and Israel, weighted by these countries‘ exports of
goods and services; the distorsion factor for Latin America and Caribbean is calculated from
World Bank‘s GDP figures for this region; the distorsion factor for Asian developing countries is
average of distorsion factors calculated from World Bank‘s GDP figures for East Asia and Pacific,
South Asia and the Middle East and North Africa, weighted by these regions‘ exports of goods and
services; the distorsion factor for Africa is average of distorsion figures calculated from World
Bank‘s GDP figures for Sub-Saharan Africa and the Middle East and North Africa, weighted by
exports of goods and services.
 Surplus Allocation and Development under Global Capitalism 173

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 INDEX

anxiety, 61, 94, 97, 98, 99, 102

A aphonia, 94
Arctic National Wildlife Refuge, xi, 105, 106, 111,
abolition, 27
117
abstraction, 121
Asia, 162, 164, 167, 172, 173
access, 158
Asian countries, 63, 159
accounting, xi, 105, 106, 107, 110, 114, 117
aspiration, xi, 69, 98, 119, 125, 126, 127
acquisitions, 155, 156
assassination, 54
Adam Smith, 39, 119, 120, 122, 123, 124, 125, 126,
assessment, 7, 18
128, 129
assets, 3, 5, 6, 8, 10, 16, 17, 21, 22, 23, 27, 29, 39,
adaptability, 80
40, 43, 50, 80, 82, 83, 84, 85, 87, 121, 132, 156
adaptation, 39
asthenia, 99
adjustment, 11, 64, 68
asymmetry, 111
administrators, 66
atmosphere, 63, 73
adolescents, 98
attention, xii, 153, 168
adulthood, 101, 102
Australia, 169, 172
advertisements, 30
Austria, 47, 167
advertising, 154, 155, 165, 166, 167, 174
Austrian school, 1
aerospace, 155
authoritarianism, 11, 36
Afghanistan, 36
authorities, 5, 13, 16, 19, 22, 31, 34, 35, 43, 62, 63,
Africa, 160, 163, 164, 168, 169, 170, 171, 172, 174
161
agencies, 29, 159
automation, 64
aggregate demand, 17, 39, 41
automobiles, 61, 155
aggregate supply, 41
autonomy, 64, 98
aggression, 102
aging, 165 B
agriculture, 73, 78, 89
Alaska, 111, 116 balance of payments, 15
Albania, 25 Bangladesh, 159, 160
alienation, 61 bankers, 42, 128
alternative, 154, 161, 165 banking, 155
altruism, 126, 127 bankruptcies, 88
aluminium, 9 bankruptcy, x, 38, 77, 78, 79, 81, 82, 83, 85, 86, 87,
American Psychiatric Association, 94, 95, 103 88
annuals, 8 banks, 6, 41, 161
anthropologists, 99 barriers, 15, 69, 72
anthropology, 120 barter, 10
antithesis, 51 behaviors, 94, 98, 100, 101, 102
antitrust, 79 Beijing, 131
178 Index

Belgium, 160, 167 classical capitalism, 2, 37

benefits, 4, 21, 121, 123, 157 classical economics, 39, 49
blocks, 163, 164 classicism, 47
Bolivia, 156, 160 climate, 80, 88, 126, 127
bonds, x, 77, 87 coal, 126
boredom, 100 coercion, 28, 111
Boris Yeltsin, 5, 7, 20, 36 coffee, 175
bounds, viii, 2, 53 cognitive dissonance, 115
Brazil, 93, 160, 173 cognitive process, 123
breakdown, 22 cognitive processing, 123
bribes, 27, 28, 30 cognitive science, 123
Britain, 32, 51, 80, 91, 122, 128 coherence, 42
brothers, 28 cold war, ix, 59
building blocks, 73 Cold War, 9, 62, 63, 166
Bulgaria, 25 colleges, 66
bureaucracy, 20, 45 collusion, 6, 27
business, 74, 89, 91, 105, 116, 117, 175 Colombia, 160
business cycle, 44, 46, 81 colonization, 70, 73
buyers, 50, 74 commercial bank, 6
commodities, 158
C commodity, 40, 50, 62, 158, 175
commodity markets, 40, 158
campaign funds, 107
communication, 108, 109
campaigns, 101
communism, 43, 52, 62, 63
Canada, 156, 160, 162, 163, 167, 169, 170, 171, 172
Communist Party, 3, 5, 35, 36, 62
candidates, 35, 107
community, 5, 110, 122, 126, 128
capital accumulation, vii, xi, xii, 131, 132, 133, 134,
comparative advantage, 75
143, 146, 148, 149, 151, 153, 154, 165
competition, x, 6, 40, 46, 51, 60, 64, 66, 67, 68, 70,
capital flight, 161, 168
72, 73, 74, 78, 85, 88, 96, 124, 125, 126, 155, 163
capital flows, 161, 168
competitive advantage, x, 60, 68, 69, 72
capital gains, 156
competitiveness, ix, 59, 63, 67, 74, 75
capital goods, xii, 50, 153, 168
competitors, 6, 21, 28
capital input, 40
complexity, 149
capital markets, 40, 132
complications, 99
Caribbean, 163, 164, 169, 170, 171, 172
composition, 115, 154
categorization, 81, 115
compulsive personality disorder, 94, 95, 96, 98
C-C, 76
concentration, 155
Central Asia, 162, 164, 165
conference, 76
central bank, 161
conflict, 5, 20, 39, 46, 122, 126
centralisation, 13
conformity, 88
chemical, 107, 116
Connecticut, 173
Chicago, 55, 56, 127, 128, 151
consciousness, 53
Chile, 160
consensus, viii, x, 2, 44, 60, 73
China, ix, 3, 37, 43, 53, 62, 63, 64, 65, 66, 73, 131,
conservation, 114
159, 160, 163
conspiracy, 70, 86
Chinese medicine, 71
Constitution, 3, 56
Christianity, 33, 82, 83, 84, 85, 87, 88, 94
construction, 6, 12, 19
CIA, 9
consumer goods, 40, 70, 166
citizens, 5, 34, 81, 122
consumer markets, 64
citizenship, 16
consumers, 40, 49, 61, 70, 71, 75, 122, 166
civil rights, 85
consumption, ix, xii, 32, 48, 49, 59, 63, 66, 70, 74,
civil society, 89, 122, 127, 128, 129
75, 128, 132, 133, 134, 135, 137, 140, 141, 142,
clarity, 22, 46
classes, 46, 49, 52, 165
 Index 179

143, 144, 145, 146, 147, 148, 149, 151, 152, 154, democracy, viii, ix, 2, 3, 4, 5, 7, 31, 32, 34, 35, 36,
155, 156, 157, 165, 166, 168 54, 56, 122, 128, 129
consumption rates, 165 democratisation, 3, 5, 32
contradiction, 46, 88, 115 demographic characteristics, 79, 80, 85
control, 155, 156, 157, 161 demographic data, 82
convergence, 3, 164, 165 demographic structure, 84
conversion disorder, x, 93, 94, 95, 99, 101, 102 demography, 78, 80
conviction, 54, 79, 82, 83, 86 denial, x, 93, 94, 99, 101
corporations, 155, 156 Denmark, 167
correlation, x, 77, 78, 88, 159 dependent variable, 81, 82
corruption, viii, xi, 2, 6, 28, 29, 31, 33, 53, 93, 101, depersonalization, 100, 102
102, 121, 125, 126 depression, 43, 50, 61, 96, 99, 128
corruption of games, 93, 101, 102 deprivation, 104
cost, 19, 30, 39, 103, 110, 143, 157, 167 deregulation, 70, 120, 121, 122
cost effectiveness, 110 derivatives, 40
costs, 154, 155, 156, 157, 158, 165, 168 designers, 60, 61, 63, 64, 71, 73, 74
costs of production, 154, 157, 158 destiny, 98, 101
cotton, 11 Deutsch Mark, 60, 68
counseling, 74 devaluation, 41
counterbalance, 156 developed countries, vii, viii, ix, 1, 2, 9, 24, 52, 59,
CPC, 63, 64 63, 96, 161
creative intelligence, 119, 125, 126, 127 developed nations, 121
credit, 166 developing countries, ix, x, 59, 60, 62, 63, 65, 73,
creditors, 6, 17, 88 158, 161, 172
criminal activity, 88 developing nations, 121
criminal acts, 31 developmental state, 59, 64, 73
criminal behavior, 88 deviation, 50, 84, 159
criminality, 6, 78, 79, 80, 85, 86, 88 Diagnostic and Statistical Manual of Mental
criminals, 28, 53, 78, 79, 80, 81, 83, 84, 85, 86, 87 Disorders, 103
critical analysis, 43 dichotomy, 45
criticism, 11, 20, 35, 36, 102 differentiation, 154, 155, 165
culture, vii, 1, 36, 53, 62, 63, 74, 78, 85, 88, 151 diffusion, xi, 93, 149
currency, 16, 17, 29, 159, 161 diffusion process, 149
current prices, 30 dignity, 66
cycles, 112, 113, 115 direct funds, 110
Cyprus, 167 directors, 27
Czech Republic, 25 disaster, 108
disclosure, 110, 116
D disorder, 65, 94, 95, 96, 98, 99, 102
displacement, x, 93, 95
dance, 95
dissatisfaction, viii, 2
danger, 26, 98, 101, 109, 122
dissidents, 3, 31
Darwinism, 51, 52
dissociation, 100, 103
data collection, 80
distribution, xii, 153, 154, 173
death rate, 9, 24, 25, 26, 53
distribution of income, 22
debt, 17, 166
diversification, 152
debtors, 40
diversity, 48, 128
deduction, 111, 115
division, 175
defence, 155
division of labor, ix, 59, 60, 63, 120
deficit, 158
domestic labor, 108
degradation, 11, 12
domestic markets, 70, 72
delegates, 36
dominance, 40, 121, 122
demand, 161
donations, 106, 115
180 Index

donors, 107, 110, 114 ethics, 124, 126, 127

dopaminergic, 100 ethnic minority, 79
drawing, 60, 108, 161 EU, 158, 163
dream, 54 Europe, 155, 156, 164, 167, 174
drug addict, 100 European aristocracy, 119, 122
Duma, 22, 30 European Monetary Union, 165, 166, 172
duty free, 70 European Union (EU), 158, 163,169
exchange rate, x, 50, 60, 68, 159, 161, 162, 164, 167,
E 168, 170, 172
exchange rates, 159, 161, 167
earnings, 13, 18, 19, 21, 162
execution, 69
East Asia, 164, 165, 172, 173
exercise, 31, 33, 114, 162
economic activity, 5, 14, 15, 31, 53
expenditures, vii, 1, 155, 166
economic consequences, 168
experimental capitalism, 34
economic crisis, 43, 53, 61
exploitation, 53, 105, 106, 109, 121
economic development, xii, 9, 10, 11, 38, 43, 47, 62,
export-led growth, 168
63, 64, 66, 68, 72, 73, 74, 75, 76, 81, 153, 164
exports, ix, 59, 61, 63, 64, 66, 70, 73, 158, 159, 161,
economic efficiency, 127
162, 163, 169, 172
economic fundamentals, 81
extraction, 49
economic growth, ix, xii, 8, 9, 13, 17, 32, 38, 48, 50,
extradition, 30
51, 59, 62, 65, 73, 81, 151, 152, 153
economic growth rate, 9, 13 F
economic indicator, 24
economic integration, xii, 154 Facebook, 108
economic liberalization, 68 factor incomes, 161
economic performance, 151, 152 factories, 19, 70, 71
economic systems, 47, 49, 122 faith, 5, 33, 94, 95
economic theory, xi, 38, 39, 45, 46, 47, 49, 50, 51, family income, 86
54, 119, 120, 121, 123 family members, 115
economics, xii, 153 fanaticism, 168
education, 25, 69, 80, 82, 84, 85, 87 farmers, 85
Egypt, 23, 160 farms, 18
elaboration, 155 fear, x, xi, 69, 77, 86, 87, 88, 93, 97, 98, 101, 103
election, 107, 112, 113, 115 Federal Election Commission, 111
electricity, 69, 70 fidelity, 39
emerging markets, 161 filters, 115
empathy, 124 financial crisis, 37
employees, 155 financial instability, viii, 2
employment, 18, 19, 25, 34, 41, 45, 47, 48, 51, 80, financial instability hypotheses, 2
81, 155, 156, 157 financial markets, 42, 43, 121, 126, 127
encouragement, 67 financial resources, 155
endurance, 87 financial support, 116
energy, 13, 14, 31 financial system, 41
engineering, 60 financing, 156
England, 90, 128, 129 Finland, 167
entrepreneurs, 6, 15, 20, 22, 23, 28, 53, 88 firms, xii, 154, 155, 156, 157, 158, 159
environment, 166 fiscal policy, 39
equality, 51, 54 fish, 29, 114
equilibrium, vii, xi, 37, 39, 40, 42, 46, 49, 50, 131, Fish and Wildlife Service, 111, 117
132, 133, 138, 144, 145, 146, 147, 148, 149, 152 fishing, 98
equipment, 11, 12, 14, 39, 65, 109, 155 fixation, 13
equity, 133 flashbacks, 100
erosion, 122, 127 flaws, 37, 42, 43, 44, 54, 123
estimating, 155 flexibility, 156
 Index 181

flight, 16, 17, 101, 161, 168 Great Depression, viii, 2, 32, 38, 42, 43, 44, 50, 90
flora and fauna, 114 Greece, 23, 167
fluctuations, 68 Gross Domestic Product, 10, 23
food industry, 65 gross national product, 122
Ford, 61 grouping, 22, 165
Fordism, 61, 73 groups, 162, 165
foreign banks, 16 growth, xii, 153, 168
foreign exchange, ix, 13, 59, 64, 161, 168 growth rate, 9, 51, 65, 132, 137, 147, 148
foreign firms, 15 guidance, 124
foreign investment, xii, 15, 153 guilty, 20, 29, 78, 79, 100
formula, xi, 93, 94, 102, 157
fossil, 158
H
fossil fuels, 158
Hawaii, 4
foundations, 35, 48, 51, 56, 127, 129
health care, 25, 121
France, 23, 24, 32, 97, 156, 160, 167
health care system, 121
Franklin, Benjamin, 95
hegemony, 120
fraud, 80, 82, 86, 90, 91
height, 38
free market entrepreneurship, 1
Henry Ford, 61
free trade, x, 60, 68, 73, 127, 163, 168
heterogeneity, 148
freedom, xi, 13, 15, 27, 32, 33, 34, 35, 37, 38, 52, 53,
highways, 100
54, 88, 119, 120, 121, 124, 126, 128, 129, 154
hiring, 156
fruits, 28, 43, 52
homogeneity, 39
full employment, 18, 39, 41, 42, 51, 155
Hong Kong, 23, 65, 131
funding, 115
hostility, 28
G House, 7
housing, 19, 25, 165
Gaidar, 28, 55 human agency, 78
GDP, xii, 10, 23, 24, 25, 154, 155, 156, 159, 160, human development, 25
161, 162, 165, 166, 170, 172 Human Development Index, 25
GDP per capita, 24, 25, 166 Human Development Report, 25
General Motors, 61 human nature, 124
generation, xii, 154, 155, 156, 157 human rights, 28
genetic code, 109 Hungary, 25
Georgia, viii, 2 hyperinflation, 17
Germany, 23, 32, 67, 73, 97, 122, 156, 160, 167 hypothesis, x, 49, 50, 77, 94, 95, 99, 101
gifted, xi, 60, 119, 120, 127 hysterical neurosis, 94
global capitalism, 42
global distribution, 153, 154
I
global economy, 74
ICC, 166, 174
global markets, 61, 63, 155
Iceland, 167, 169
global trade, 155
icon, 120
globalization, xii, 72, 90, 127, 129, 154, 173, 175
identity, x, 60, 74
goals, 154
ideology, xi, 5, 43, 45, 63, 73, 74, 97, 119, 120, 121,
goods and services, 15, 32, 156, 158, 159, 161, 162,
123, 124, 125
169, 172
illusion, 61
governance, 122
image, 16, 34, 62, 67, 68, 69, 71, 74, 75
government, xii, 154, 155, 165, 166, 167
images, 61, 74, 75
government expenditure, 132, 155, 166
imagination, 75
government intervention, 124
IMF, vii, 1, 5, 129, 161, 173, 174
governments, xii, 69, 122, 154
imitation, 4, 32
gradualist approach, 13
immortality, 101
gravity, 39
immunity, 30
Great Britain, 23, 24, 25, 47
182 Index

immunization, 11, 98 international processing base, 59

imperialism, 157 international standards, 81
implementation, xii, 153 international trade, x, 60, 65, 68, 158
import restrictions, 70 internationalization, 73, 81
imported products, x, 60, 68 internet, 153, 167
imports, 12, 69, 159, 161, 169 intervention, 33, 36, 68, 114, 120, 122
imprisonment, 86 intoxication, 4
in transition, 169 inversion, 102
income, 156, 158, 159, 161, 164, 165, 166, 167, 175 investment, xii, 153, 155, 158, 164, 165, 166, 167,
income determination, 38 168
income tax, 134, 137, 143, 144, 146, 148 investments, 7, 15, 47, 51, 88, 108
incompatibility, 46, 51 investors, 133
independence, 13 invisible hand, 61, 120, 123, 128
independent variable, 82, 86 Iraq, 103
India, 23, 47, 157, 159, 160, 163 Ireland, 167, 175
Indians, 95 irony, 51
individual character, 82 isolation, 47, 99
individual characteristics, 82 Israel, 169, 172
individualism, 78, 123, 124, 126 Italy, 23, 47, 156, 160, 167
indolent, 124
Indonesia, 159, 160
J
industrial design, 60, 61, 62, 64, 66, 67, 68, 70, 71,
Japan, 24, 47, 64, 67, 70, 71, 73, 75, 156, 160, 165,
72, 73, 74, 75, 76
166, 169, 172, 174
Industrial design, 59, 63, 64, 67, 72, 73, 74, 75, 76
Japanese Yen, 60, 68
industrial revolution, x, 77
Jews, 99
industrialisation, 11
jobless, 18
industrialization, x, 62, 64, 73, 74, 76, 77, 78, 81, 85
jobs, 157, 163
industrialized countries, 156, 158, 163, 172
joint ventures, 68
inequality, viii, 2, 20, 37, 38, 51, 106, 129, 141, 163
infant industries, 64, 69 K
inferiority, 11
inflation, ix, 6, 11, 21, 50, 59, 63, 151 Kenneth Galbraith, viii, 2, 43
information processing, 125 Kenya, 160
inheritance, 35, 124 Keynes, vii, 1, 17, 18, 21, 37, 38, 39, 40, 41, 42, 43,
institutional reforms, 156 45, 46, 47, 48, 50, 51, 52, 55, 56, 57
institutions, 19, 31, 41, 121, 168 Keynesian, ix, 3, 38, 39, 40, 41, 42, 43, 44, 45, 46,
insurance, 155 47, 48, 49, 50, 51, 52, 54, 55, 56, 57, 156
integration, xii, 127, 154, 155, 157 Keynesian model, 50
intellect, 29 Keynesianism, 38, 39, 40, 41, 42, 44, 45, 46, 47, 48,
intellectual capital, 115 51, 55, 59, 63, 74
intellectual property, 65, 109 Keynesians, 40, 41, 42, 43, 45, 46, 48, 49, 50, 51
intellectual property rights, 65 Kuwait, 23
intelligence, vii, xi, 65, 119, 125, 126, 127
interdependence, 108 L
interest groups, 106, 122
interest rates, vii, xi, 50, 131, 132, 133, 144, 147, labor, 155, 156, 157, 161, 164, 165, 168
148, 149, 151, 152 labor force, 73, 134, 156, 165
internal processes, 42 labor markets, 91
International Chamber of Commerce, 174 labor productivity, 157, 164, 165
international division of labor, ix, 59, 63, 67, 68, 73, labor relations, 88, 156
74 Labor-intensive industries, 59
international market, 60, 65, 70 labour, 157
International Monetary Fund, 121 landscapes, 114, 127
 Index 183

Latin America, vii, 1, 162, 163, 164, 167, 169, 170, marketplace, 120, 123
171, 172, 173 markets, 155, 157, 158, 161, 165, 168
law enforcement, 27, 29 marriage, ix, 59, 123
lead, xi, 5, 43, 65, 93, 132 Marx, vii, 1, 37, 46, 48, 49, 78, 90, 108, 123, 128
leadership, 9, 13, 35, 50 Marxism, 175
learning, 54, 62, 74, 75, 80 Marxists, 1, 48
learning difficulties, 80 mass communication, 60
legality, 27, 53 mass media, 4, 29, 156
legend, 33, 72 materialism, 78, 123
legislation, 30, 52, 106, 107, 108, 109 mathematics, 40
leisure, 69, 108, 109 Max Weber, 93, 94, 95, 96
leisure time, 108, 109 measure of value, 109
lending, 40 measures, 156
level of education, 80, 87 media, 35, 102, 122, 156, 167
liberalisation, 5, 14, 15 median, 72, 83
liberalism, 128 medical care, 24, 25
liberalization, x, 60, 70, 72, 129, 174 melting, 21
life expectancy, 9, 24 menarche, 101
life span, 166 menopause, 101
liquidate, 86 mental disorder, 94, 99
literacy, 84, 87 mergers, 155, 156
litigation, 155 metallurgy, 9
lobbying, 30, 114 metamorphosis, 39
locomotor, 97 metaphor, 123
logistics, 63, 72 methodology, 44
LTD, 57 Mexico, 23, 160
Luo, 131 Middle East, 164, 172, 173
Luxemburg, 46 militancy, 156
military, 9, 36, 69, 70, 82, 103, 155, 166, 167
M military spending, 166
mining, 155
machinery, 12, 64, 65
minority groups, 99
macroeconomics, 39, 43
missions, 64
Made in Taiwan, 60, 65, 67, 68, 75
MIT, 60, 67, 68, 76, 152
magazines, 65, 167
mobility, 156
magnitude, 158
models, 7, 21, 132, 148
majority, ix, 4, 27, 59, 85, 86, 115, 122
modernisation, 13, 14, 15, 16
Malaysia, 73, 159, 160
modernism, 73
management, 61, 106, 110, 111, 114, 115
modernity, 75
manipulation, 41, 62, 114
modernization, ix, 59, 70, 74, 78, 81, 106, 108, 110,
manpower, 60, 67
114
manufacturing, 11, 13, 61, 62, 63, 64, 65, 66, 68, 69,
mold, 74
73, 74, 75
momentum, 167
marginal utility, 135
monetary policy, 149
marginalization, 123
money income, 22
marital status, 87, 88
money supply, 50
market, 156, 159, 163, 164, 166, 168
monopoly, 15, 47, 61, 62, 63, 73
market economy, vii, 1, 4, 6, 31, 36, 42, 81, 85, 126
moral beliefs, 88
market failure, 54
moral standards, 78
market prices, 156
morale, 60
market share, 61, 70, 71, 72
morality, 29, 30, 90
market structure, 78, 89
Moscow, 8, 12, 20, 21, 24, 26, 51, 55, 56, 57
market-capitalist experiment, 3
Moses, 61
marketing, 61, 63, 65
184 Index

motivation, 86, 125 orange revolutions, 2

motor skills, 125 ores, 13
multinational corporations, ix, 59, 61, 63, 157 organ, 19
multiples, 22 organised crime, 27
music, 53 originality, 47
MySpace, 108 outsourcing, 156, 157, 159
ownership, 3, 20, 22, 37, 80
N
P
narcotics, 27
nation states, 73 Pacific, 62, 164, 167, 172
national culture, 63, 74 PACs, xi, 105, 106, 107, 108, 109, 110, 111, 112,
national identity, 75 113, 115, 116
national income, 7, 51, 165 Pakistan, 160
national product, 154 Panama, 6
nationalism, 97 parallel, 35
natural resources, 39, 49, 158, 167 parity, 9, 159, 164
natural selection, 6 Parliament, 81
Nazi Germany, 94, 97 partition, 155
negative effects, 53 patents, 65
negative outcomes, 17 paternalism, 27
neoliberal, 156 pathogens, 127
neoliberalism, 128 pathology, 102
Netherlands, 160, 167 patriotism, 63, 70
neuroses, 99, 102 payroll, 111, 115
neurosurgery, 125 per capita income, xii, 154, 164
New Zealand, 169, 172 performers, 99
newly industrializing countries, 60, 62 permit, 15
newspapers, 167 personal contact, 111
NICs, v, 59, 60, 62, 64, 67, 68 personal relations, 88
Nigeria, 160 personal relationship, 88
nightmares, 100 personality, 96, 103, 110
Nobel Prize, 43 personality disorder, 96, 103
non-inflationary growth, 44 persuasion, 66
North Africa, 164, 172 PET, 106
North America, 37, 163, 167 petroleum, 107, 114, 116, 126
Norway, 167, 169 pharmaceuticals, 155
nucleus, 98 piracy, 65, 67
pku, 131
O planned economies, 47
planned investment, 19
observations, 168
plants, 114
obsessive-compulsive disorder, xi, 93, 94, 98, 99
Plato, 123, 129
obstacles, 32, 98
plausibility, 148
OCD, 94, 98, 99
Plaza Accord, 60, 68
Oceania, 169
Poland, 25, 47, 56, 97
OECD, 158, 159, 161, 164, 165, 166
policy makers, 123
offenders, x, 77, 80, 81, 82, 83, 84, 85, 86
political action committees, 105
oil, xi, 10, 13, 40, 105, 112, 113, 114, 155, 158
political leaders, 15
omission, 82
political participation, 122
operations, 31, 125
political power, 107
opportunities, xii, 5, 38, 66, 125, 153
politics, vii, 116, 117, 128
oppression, vii, xi, 53, 119, 122
polling, 35
optimization, 134, 135
pollution, 108
 Index 185

population density, 19, 26 prosperity, vii, viii, xi, 1, 2, 4, 13, 16, 24, 34, 42, 61,
population growth, 81 62, 65, 70, 119, 120, 125, 128
portfolio, 144, 152 Protestantism, 93, 95
Portugal, 167 psychiatry, 95, 98
positive correlation, 159 psychoanalysis, 102
positive relationship, 107 psychology, 54, 97, 100, 168
post-Soviet states, vii, viii, ix, 1, 2, 3, 4, 9, 11, 18, psychopathology, xi, 94
31, 32, 35, 36, 44, 45, 47, 50 psychopathy, 127
post-traumatic stress disorder, xi, 94, 99, 102 psychotherapy, 103
post-war economic recovery, 59 PTSD, 94, 99, 100, 102, 103
potential benefits, 123 public affairs, 34
poverty, viii, 2 public goods, 32
power, 155, 156, 159 public interest, 127
predation, 6 public investment, 155
preference, 166 public opinion, 7
prejudice, 18 public service, 156
preparation, 48, 62, 109 publishing, 29
pressure, 161, 168 pulp, 155
prestige, 16, 132 punishment, 20, 29, 53, 85
prevention, 43, 98 purchasing power, 159, 164, 165
prices, 155, 158, 159, 161, 165, 167 purchasing power parity, 159, 164
primacy, 122 purification, xi, 93
prisons, 53 purity, 99
private entrepreneurship, 2, 27, 52
private firms, 34
R
private ownership, 3, 54
race, xi, 93, 97, 99
privatization, 121, 156, 174
racism, 98
probe, 62
radicalism, 46
producers, 163, 168
radicals, 48
product design, 61, 62, 66
radio, 14, 167
product life cycle, 61
rational expectations, 49
product market, 156
rationality, 106, 124, 148
production, xii, 154, 155, 156, 157, 159, 161, 164,
raw materials, 13, 14
168
reading, 84, 102, 125
production costs, 155, 157
Reaganomics, 2, 42
production function, xi, 131, 133, 134, 135, 136,
real assets, 40
137, 140, 148, 150
real wage, 17, 81, 158
production networks, 73, 168
realism, 44, 55
production technology, 65, 132, 133, 134, 149
reality, viii, x, 2, 9, 16, 22, 33, 36, 40, 43, 45, 53, 61,
productive capacity, 154
67, 74, 93, 94, 95, 96, 97, 98, 99, 101, 102, 103
productivity, 154, 157, 161
reasoning, 33, 38, 50
professional development, 109
recall, 54, 100
profit, 15, 38, 40, 51, 63, 88, 116, 124, 126, 158
recidivism, 86, 87
profit margin, 63, 158
recidivism rate, 86
profitability, 31, 38
recognition, 37, 38, 43, 45, 47, 50, 67
profiteering, 121
reconstruction, 30, 34
profits, 155, 156, 157, 158
redistribution, 24, 31
project, 109
reduction, 157
proliferation, 78, 124
refining, 159
promote, 168
reformers, 4, 31
propaganda, vii, viii, 1, 2, 16, 69, 73
reforms, viii, ix, 2, 3, 4, 5, 7, 9, 10, 11, 13, 15, 16,
prophylactic, 25
20, 22, 24, 28, 31, 32, 36, 47, 50, 156
proposition, 144
refugees, 26
186 Index

regional, 162, 163, 170, 171 self-discipline, 87

regression, 81, 88, 103 self-interest, 5, 124, 126
rejection, 31, 37, 39, 44 self-organization, 120
relative prices, 158 self-regulation, vii, 1, 32, 38, 40, 49
relevance, 48 sensation, 100, 103
religion, 94, 95, 96, 97, 99, 101 sensation seeking, 100, 103
religiosity, 80 sensations, 100
rent, 31, 39 senses, 21, 86
reproduction, 49, 50, 73 serotonin, 100
reputation, 67, 86 SES, 173
requirements, ix, 3, 71, 110 sexual abuse, 94
researchers, x, 21, 46, 77 shape, 6, 16, 61, 106, 120
reserves, 16, 50, 64, 99, 161, 168 shareholders, 110
resistance, 7, 53, 97 shelter, 37
resolution, 30, 66, 133 shock, vii, 1, 5, 13, 15, 17, 36
resource allocation, 106 shock therapy, vii, 1, 5, 13
resources, xii, 14, 31, 38, 39, 49, 50, 51, 63, 125, shoot, 6
126, 154, 155, 158, 165, 166, 167 short supply, 20
restructuring, 64 shortage, 6, 18
retail, 8, 10 signs, 76, 100
retaliation, 98 silk, 11
retribution, 22 simulations, 101
returns, 158 Singapore, 65, 73
revaluation, 21 slaves, 109
rewards, 4, 132 smoothing, 151
rhetoric, 31 SNS, 90
risk aversion, 135, 144, 150, 152 social behavior, 78
risks, 101, 156 social contradictions, 168
Roger Caillois, 93, 101 social control, 69
Romania, 25 social fabric, 78
Roosevelt, Franklin Delano, 120 social group, xii, 49, 154
rule of law, 53 social institutions, 19
rules, 15, 32, 37, 53, 121, 152, 168 social justice, 51
rural areas, 85, 87 social life, 34, 51, 108
Russia, 6, 7, 9, 10, 11, 12, 13, 14, 15, 16, 17, 19, 20, social order, 88
21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 35, social problems, 32, 52
52, 53, 54, 55 social psychology, 168
social relations, 100
S social security, 156
social status, vii, xi, 82, 87, 131, 132, 134, 135, 141,
sadism, 102
149, 150, 151
sales, 155, 165
social structure, 49
Sarbanes-Oxley Act, 107, 117
social welfare, 32, 52
saturation, 64
socialism, ix, 3, 4, 18, 19, 34, 36, 43, 45, 46, 52, 54
Saudi Arabia, 23
society, 57, 76, 100, 117, 154
savings, viii, 2, 4, 6, 17, 132, 152, 161
South Africa, 160, 174
scarcity, 39, 49, 50, 51
South Asia, 159, 164, 172
schooling, 80
South Korea, 65, 73
scientific validity, 11
Soviet scholars, 2
Second World, ix, 38, 59, 62, 79, 88
Soviet socialism, 3, 36, 43, 52, 54
securities, viii, 2, 86
Soviet Union, 3, 9, 18, 19, 21, 24, 25, 27, 35, 36, 43,
seizure, 6, 28, 30
122
self-confidence, 66
Spain, 23, 167
self-control, x, 77, 87
 Index 187

special drawing rights, 161

specialists, 11
T
specialization, 62
Taiwan, ix, x, 59, 60, 62, 63, 64, 65, 66, 67, 68, 69,
specter, 126
70, 71, 72, 73, 74, 75, 76
speculation, viii, 2, 40, 41, 42, 54, 165
takeover, 128
speech, 35
talent, xi, 119, 120, 125, 126, 127
spirit of Capitalism, 93
tanks, 7, 124
Spring, 175
target, 66, 108
stabilization, 111
tariff, x, 60, 69, 70, 72
stagflation, 50
tax rates, 134
standard of living, 24, 86, 87
tax system, 22
stars, 4
taxation, 137
state authorities, 29
taxes, 70, 156
state control, 5
technological progress, 51
state enterprises, 6, 34, 53
technologies, 61
state intervention, 122
technology, 39, 62, 63, 73, 133, 134, 144, 146, 147,
states, viii, x, 2, 36, 60, 68, 93, 99, 100, 102, 135,
149
163, 168
telephone, 29
stationary distributions, xii, 131, 133, 147, 148, 149
television stations, 69
statistics, x, 77, 86, 87, 155
tensions, 38, 51
stereotypes, ix, 3
territory, viii, 2, 19, 26
stigma, ix, 60, 67
textiles, 11, 64, 65
stigmatized, 75, 78, 86
Thailand, 160
stochastic model, 133, 149
Thatcherism, 2, 42
stochastic production economies, 131, 148, 152
The Economist, 156, 157
stock, 165
therapy, 103
stock price, 133
thinking, xii, 153
storage, 71
Third World, 47, 74, 121
strategies, 165, 168
thoughts, 4, 51, 73
stroke, 13
tobacco, 107
structuralists, 48
toys, 65
structuring, 74
trade, xii, 153, 155, 156, 157, 158, 161, 162, 165,
style, 61, 166
167, 168, 169, 173
subjectivity, 109, 110, 116
trade deficit, x, 60, 64, 68, 161, 165
Sub-Saharan Africa, 164, 172
trade liberalization, 70
subsistence, 168
trade union, 32, 34, 156
substitution, 135
trademarks, 65
Sudan, 99
trading, 158, 161
suppliers, 15, 157, 161
trading partners, 161
supply, 157
traditions, viii, 2, 27, 28, 37, 46, 52
surging, 10, 71
training, 19, 64, 67
surplus, vii, xii, 49, 61, 106, 154, 155, 156, 157, 158,
traits, 37, 126
159, 161, 162, 164, 165, 166, 168, 175
trajectory, 49, 62
survival, 38, 51, 52, 70, 75, 98
transactions, 6, 29, 126, 168
susceptibility, 33
transformation, 62, 128
sustainability, xi, 119
transformations, 31
sweat, 127
transition, 155, 162, 169
Sweden, v, x, 23, 77, 78, 79, 80, 81, 84, 88, 89, 90,
transition economies, 162
91, 160, 167
transition period, 78
Switzerland, 23, 30, 160, 167, 169
transnational corporations, x, 60, 68
synthesis, 38, 39, 40, 41, 42, 43, 48
trauma, 97, 100, 102
trend, 155, 156, 161, 166
Turkey, 155, 160, 163, 167, 173, 175
188 Index

U W

Ukraine, viii, 2 wage level, 63

umbilical cord, 73 wages, ix, 6, 19, 20, 34, 41, 59, 63, 108, 161, 163,
unemployment, 156, 157 168
unemployment rate, 80 war, 154, 155
unionism, 156 Washington, viii, ix, x, 2, 3, 5, 56, 60, 103, 117, 131
unions, 34, 98, 173 Washington Consensus, ix, 3
United Kingdom (UK), 55, 56, 67, 116, 128, 156, waste, 16, 166
160, 167 water, 156
United Nations, x, 60, 65, 173, 175 weakness, 7, 156
United States, 166, 173 wealth, x, 5, 6, 10, 16, 20, 21, 22, 23, 24, 28, 31, 37,
universities, 76 39, 51, 93, 95, 96, 115, 124, 129, 132, 133, 144,
urban areas, 85 151, 152, 154
urbanization, 78, 85 wealth effects, 152
USSR, v, vii, 1, 4, 5, 7, 8, 9, 19, 24, 25, 26, 52 welfare, 28, 32, 33, 52, 91, 152, 168
Uzbekistan, 19 welfare state, 52, 91
well-being, 27, 32, 34
V Western Europe, 37, 163, 167, 169, 170, 171, 172
white collar criminal, 77, 78, 79, 80, 82, 84, 85, 86,
valuation, 21, 151
87, 88
value-added goods, 66
White House, 5, 7
values, 158, 159
wholesale, 6
vandalism, 7
work roles, 120
variable, 158
workers, 17, 18, 19, 20, 22, 34, 49, 52, 81, 88, 108,
variables, 81, 82, 85, 87, 140, 158
109, 111, 115, 121, 155, 156, 157, 168
variations, 111, 120, 123
working hours, 109
vehicles, 98, 100, 106, 115
workplace, 34, 80, 108, 109, 156
Venezuela, 160
World Bank, vii, 1, 5, 121, 131, 158, 159, 160, 161,
victims, 7, 168
162, 164, 166, 169, 170, 172, 173, 174, 175
video games, 93, 101, 103
world economic system, 1
Vietnam, xi, 94, 99, 159, 160
World War I, x, 61, 93, 94, 95, 96, 97, 99, 102
Viking, 57
violence, 27, 97, 110 Y
vision, viii, 2, 47, 96, 123, 126, 128, 129
visions, 123, 127 Yale University, 57, 91
vocabulary, 102 Yugoslavia, 25
voting, 35, 107, 117
Z

Zimbabwe, 159, 160