A roundtable on Inequalities, economic models and Russia’s October 1917 revolution in historical perspective, was held on 23-24 October, at the Dialogue of Civilizations Research Institute, in Berlin.
The event started with a short presentation by Vladimir Popov, Research Director at DOC RI, and Principal Researcher at the Central Economic Mathematics Institute of the Russian Academy of Sciences.
Popov began his presentation by explaining that globally, inequalities were relatively low until the 16th century and increased only afterwards until the 19th century. There was then a decrease between 1914 and1980, and yet another rise, which we continue to witness today.
He continued by mentioning that inequalities are unfortunately seen as irrelevant in contemporary economic theory. Economics, which includes equilibrium and Pareto efficiency, rarely deals with questions like the historical evolution of social systems, how these systems are born, reach maturity, and cease to exist.
Popov posed the question as to whether there is an optimal level of income inequality. Economists often shy away from giving concrete numbers for optimal levels of inequality.
At low levels of income (i.e. in a developing economy), when inequalities increase, the saving rate goes up, which makes investment in the economy possible. The trade-off is that this leads to impoverishment of the masses, which then increases mortality rates among poorer parts of the population.
Popov pointed to the United Kingdom as an example. Productivity increased between the years 1500 and the mid-1800s, while at the same time the standard of living remained stagnant. Investment and savings rates grew from six percent of GDP in 1760 to 12 percent in 1831.
Vladislav Zubok, of the London School of Economics, spoke about Russia’s October Revolution and the collectivisation and industrialisation that followed during the late 1920s and 1930s. He posed the question of whether alternatives to these events would have been possible, and what might have been a different scenario than World War Two.
In Zubok’s view, the idea of freedom played an important role during the Russian Revolution. The desire for less inequality was an important driver for change in Russia, as a constituent factor, and sustained the Stalinist systems and later the initial reforms of the Gorbachev era, despite its trade-offs.
In Zubok’s eyes, one important fact that helped the Bolsheviks to stay in power was that they destroyed the monetary system. From his perspective, it became evident in 1926 and 1927 that the industrialisation of the country and the transition to a war economy could not be achieved by the New Economic Policy (NEP).
He continued by asserting that the Soviet Union was in fact the true winner of World War Two because of the successful industrialisation process started by Stalin, when state-controlled profits and investment went into heavy industries to support the war efforts, to a large degree, due to heavy taxes leveraged on peasants. Savings were expropriated and a dual system of money and non-cash circulation was created, where mostly urban workers received cash. In Zubok’s view, this was an ingenious measure to control inflation, and to control the economic system with a high degree of efficiency.
Rusland Grinberg, Research Director of the Russian Academy of Science’s Institute of Economics, began his presentation by expressing concerns about Russia becoming more anti-democratic. His main argument was that neither Stalinism nor a radical free market approach are desirable. During the dissolution of the Soviet Union, a majority of policy-makers fell prey to the erroneous belief that ‘sausages would grow out of freedom’. Instead it turned out that the free market approach led to new heights of inequality.
According to Grinberg, capitalism developed an almost socialist approach to welfare between the 1950s and 1970s. Middle classes appeared to be shrinking in Western societies as well as in Russia. The middle classes in the US and Western Europe made up 50 percent of the population, and in the USSR, a middle class developed too. Grinberg stated that the recent shift to high levels of inequality can partly be traced back to Reagan and Thatcher. These two politicians came to power, he said, precisely because Western society was far too equal.
Domenico Mario Nuti, Professor Emeritus of Economics at the University of Rome, began his presentation by identifying four models of Soviet-style planned economies around the world – Belarus, Cuba, and North Korea – to the Yugoslavian and Chinese models of 1978 to the late 1990s, and the Chinese economic system from 2001 until today. Nuti went on to explain that inequality has always been a feature of society, as has been the conflict between efficiency and equality.
In Nuti’s eyes, the major sin of socialist planning was committed by Rosa Luxemburg and Bukharin, whose ideological approach marked the end of political economy as a science within socialism. Sound economic policy planning was neglected, and decisionism and voluntarism was adopted. On the other hand, a major mistake that social democrats committed was that they largely embraced the primacy and desirability of markets, at the same time as they rejected government ownership and stepped back from exerting control over industrial policy and favoured shock therapy over gradual transition.
Generally, Nuti said, the capitalist system promoted urbanisation, industrialisation, technical progress, economic growth, and prosperity on an unprecedented scale. Paradoxically, the highest praise for capitalism can be found in Marx and Engels’ Manifesto of the Communist Party (1848). But Nuti added that at the same time, Marx viewed capitalism as a form of systematic labour exploitation.
Nuti stressed that concerns about inequality have been tempered by several considerations. Firstly, that persistent inequality has always been an inexorable feature of our past, only contrasted by outbursts of large scale violence: mass-mobilisation warfare, transformative revolutions, state collapse, and catastrophic plagues. Secondly, that a conflict is alleged between efficiency and equality, which is deemed to reduce incentives to elicit effort and imagination for the benefit of society. Thirdly, that inequality depends on the phases of capitalist growth, rising with industrialisation then peaking and falling with further growth (Kuznets’ curve) and finally the fact that there is widespread indifference about inequality compared with a much greater concern about poverty.
Georgy Derluguian, Professor of Social Research and Public Policy at New York University’s Abu Dhabi campus, began his talk by commenting that virtually every revolution in recent history has ended up with a ‘revolutionary emperor’ or dictatorial regime in charge, so as to preserve the achievements of these revolutions.
Derluguian looked at the emergence of social inequality from an anthropological point of view. He stated that humans are one of the few species for which personal weaknesses did not become an immediate cause of death and where a long childhood gave the brain time to develop the ability of adaptation to new circumstances and to continuously learn. The survival of the weak was supported by family and community structures. How then did social inequality emerge? Derluguian traced it back to the emergence of agriculture, which provided people with a food surplus and to the invention of the sword. The latter, he argued, could only be used for a single purpose: to kill fellow humans.
Andres Solimano, of Chile’s International Center for Globalization and Development, examined the mobility of the very wealthy and the movement of international capital. There are pull and push factors for wealthy individuals that differ from the pull and push factors for global capital to move their wealth to other jurisdictions.
According to data provided by Solimano, the top three receiving countries for the world’s wealthiest individuals (with assets of $30 million) in 2016 were Australia, the US, and Canada. The top sending countries were France, China, Italy, India, Greece, Russia, Spain, and Brazil. In 2016 approximately 82, 000 HNWI (High Net Worth Individuals) changed their country of residence. Solimano listed a number of pulling factors for HNWI, which include personal safety and economic security, availability of high/quality and health services, favourable tax treatment, protection of wealth and enforcement of property, visa-free mobility to third countries, cosmopolitan settings, good transport, and money-for-residence schemes.
Solimano also provided a number of push factors important for the movement of the HNWI, which include economic insecurity (also weak property rights), high tax rates, frequent macro-financial crises, political crises and anti-capitalist revolutions, capital controls and currency inconvertibility, and violence and terrorism.
The Chilean researcher concluded by stating that high inequality countries nurture HNWI for a while. But, due to certain factors (such as political instability) they might feel the wish to leave. Solimano added that sending countries, which lose HNWI, could experience lower economic inequality as a result, while receiving countries might experience rising inequality due to the associated movement of capital.
UCLA Sociology Professor, Kevan Harris, presented an in-depth analysis of the different models of Arab socialism and compared their differences to European socialism.
Harris mentioned that Middle Eastern and North African (MENA) states had a different approach to state building compared with the socialist etatism. One of the main features of nation building is the commanding heights nationalisation of finance and production that took place in many of the MENA countries. Moreover, various land reform schemes in the wake of peasant revolts changed the economy and led to a de-peasantisation.
Additionally, the MENA countries provided mass technical education for the production of new cadres, which assisted the emergence of a tiers mondiale Marxism and political Islam as a dual opposition to socialist etatism. Harris added, that these approaches became popular and some monarchies in the region emulated certain features of these new political movements.
In contrast to Latin America, foreign direct investment (FDI) to MENA was very limited, so growth had to be spurred domestically. In this way, Harris continued, MENA countries were able to sustain high growth rates until 1970. Compared to middle income countries, the MENA states have been able to catch up in terms of child mortality and life expectancy, and are also closing the gap in terms of education (including female education).
Harris also pointed to challenges that MENA countries are facing today. One of the most pressing issues is that of the overeducated, so-called lumpen intelligentsia, who, due to their bleak prospects (the MENA region is unlikely to become a market for low-added value products for global FDI) might start to fill the ranks of revolutionaries, militants, or migrants. Another challenge that Harris identified is that there is no MENA Marshall Plan in sight, and that there is a lack of regional interdependence.
Sociologist Beverly J. Silver, Director of the Arrighi Center for Global Studies, at Johns Hopkins University, argued that historically capitalism has been characterised by a contradiction between profitability and legitimacy, resulting from conflict between labour and capital.
According to Silver, there is a long-term cycle of national income redistribution associated with the changing balance of forces between labour and capital. She noted that in recent years, one percent of the very rich were able to increase their income disproportionally to the remaining 99 percent.
Silver expressed concern that growing and extreme social inequalities would lead to growing social unrest and wars, which could in turn entail a shift in the geographical centre of capitalist accumulation. In order to provide an example, Silver presented data on social unrest that showed unrest in Spain was highest until the country’s civil war (1936-39). After the conflict, social unrest decreased and remained at relative low levels until the 1990s, but began to rise again in the last five years.
Michael Ellman, Professor Emeritus of economics at the University of Amsterdam, discussed the development of inequality in non-market economies. While low levels of economic inequality have characterised socialist societies, other forms of inequality were based on the bureaucratic and political status ascribed to by the dominant classes.
Ellman provided several examples of inequality in the Soviet Union. For Ellman, the Kazakh famine of 1931-1934, when a poorly carried out live-stock collectivisation led to a large-scale famine and consequently resulted in the death of 1.5 million formerly nomadic Kazakhs, is an example of large-scale inequality. Another group of people that faced severe forms of inequality were the so-called lishentsy (1918-1936). They were deprived of their voting rights, had their ration books confiscated, and lost their rights to receive a higher education. Ellman also mentioned the 2.5 million people that served sentences in gulags and the 2.8 million who were ‘special settlers’ – those who lived under harsh conditions and were confined to their place of residence.
The Dutch economist also presented insights from the Chinese socialist system, when during the Cultural Revolution there were five ‘red castes’ that consisted of workers, poor and middle-class peasants, soldiers, cadres, and relatives of revolutionary martyrs. The five ‘black castes’ included landlords, rich peasants counter-revolutionaries, and rightists who were subject to severe forms of discrimination (beatings, re-education etc.).
Ellman concluded that a socialist system does not eliminate inequality, but instead shifts the causes of inequality away from ownership of wealth, to someone’s status in political and bureaucratic hierarchies.
University of Perugia Economist, Milica Uvalic, gave a presentation on market socialism in Yugoslavia and the different transition models of its successor states.
According to Uvalic, the four features that were specific to the Yugoslav model included a socialist economic system (non-private property, non-market mechanism of resources allocation, etc.), market mechanisms (abolition of state monopoly of trade and greater freedom of enterprises), labour self-management, and specific international relations (Yugoslavia was founding member of the IMF, World Bank, and not aligned to either the West or the Eastern Bloc). Moreover, Uvalic continued that the Yugoslav model stood out for its labour-managed firms.
After the breakup of Yugoslavia, all successor states adopted orthodox transition models (stabilisation, privatisation, or liberalisation), with Slovenia being the most equal and most economically successful country. Uvalic provided several possible factors for Slovenia’s relatively successful transition, including political stability, the gradual transition to a market economy, and the decision not to sell off its banking system.
During the discussion session, Vladimir Popov started off by arguing that it is generally seen as an important democratic principle that people have voting rights (one person, one vote). Therefore, he voiced his view that it is only natural that employees should have a say in the managing of their company or working place.
He established a link between social tensions (inequalities) within countries and a backlash against globalisation. Popov presented research results that suggested a correlation between rising inequality and decreasing institutional capacity, an increase in crime and mortality, obesity, psychological health, etc.
Popov provided Brexit as an example for a backlash against globalisation. He provided evidence that the UK was benefiting from the EU (and developing faster than European countries on average), but that the gains accrued only to privileged classes. Britain’s wealthy thought that it would be smart to blame everything on globalisation (while the real reason was that the lion share of the gains were distributed to the wealthy), but contrary to expectations, Brexit was the result. In Popov’s view this will prove to be detrimental for the UK as a whole, since globalisation is generally good for growth if gains are distributed fairly.
According to Popov there are two possible scenarios for the future. The first is that economic inequalities continue to grow, which will lead to nationalism and could in turn entail a backlash against globalisation (as seen during Brexit). This backlash could then result in the collapse of world trade and capital flow, as we witnessed during the 1930s. The second possibility is that a number of countries are finally recognising that it is crucial to reduce economic inequality. This will render these societies more competitive: stronger institutional capacity, lower murder rates, better investment in addressing climate change, etc. Subsequently, other countries might be tempted to follow this new, more successful model.