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NOTE Soviet Militarism and Economic Control

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Our next speaker is Dr. Yuri Maltsev. Yuri teaches economics at Carthage College in Kenosha, Wisconsin.

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He's a senior fellow of the Mises Institute, an editor of our volume, Requiem for Marks.

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More important for our discussion tonight, he was also a senior economic advisor to Mikhail Gorbachev.

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Needless to say, Gorbachev didn't take his advice, and Yuri got into big trouble for giving it,

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and so had to defect. We're very glad that he came to America, that he became associated

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with the Mises Institute, and that we have him here tonight to talk to us about Soviet

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militarism and economic control. Dr. Maltseff.

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This year is full with the free market jubilees. This year is the 50th anniversary of the publication,

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not only of Hayek's roads to serve them, but also of the book which to my mind affected

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intellectual thought, both in the United States and everywhere else in the West, and the book

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I am referring to is The Omnipotent Government, which was published by Ludwig von Mises in

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1944.

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Even today a center of acute controversy of the omnipotent government is von Mises's

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was well reasoned, graceful and forceful warning to the free nations that the extended collectivism

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implied in social planning and economic nationalism is incompatible with peace and prosperity.

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Von Mises was the first eminent economist of the West who exposed how economic controls

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can destroy individual freedoms and lead to the total war.

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Another eminent critic of totalitarianism, British writer George Orwell wrote in 1944,

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the year The Omnipotent Government was published, that it cannot be said too often, at any rate,

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it is not being said nearly often enough that collectivism is not inherently democratic,

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but on the contrary gives to a tyrannical minority such powers as the Spanish Inquisition

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never dreamt of.

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Political and economic performance of Russia and other former Soviet republics today is

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taking on a central role in the world's political, economic and military relations.

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The numerous attempts to reform and perfect the Marxist-Leninist economic system undertaken

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by Mr. Gorbachev's government in the course of Perestroika have been a spectacular failure.

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The final stage of this century's most dramatic event, the rise and fall of socialism.

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Attempts to combine communist ideology with some selected market gears have led the country

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to the present economic chaos.

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The August Revolution of 1991, which followed the failure of the coup, attempted by the

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desperate and incompetent Kremlin bureaucrats, manifests the complete collapse of Marxist-Leninist

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Ideology and all its philosophical underpinnings, including the search for the third way in

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between the centrally planned and free enterprise systems.

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Ludwig von Mises said there is no such a way.

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The denationalization of state assets and the increasing freedom of private enterprise

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will no doubt help to alleviate much of the adverse effects of the transition, will make

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Make Russia a safer place to live.

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Make Russia and other formerly socialist countries less threat to world peace.

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Private enterprises, especially in the neglected areas of service and consumer goods production,

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can absorb much of the unemployment that will inevitably result from the restructuring of

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the heavy military industries.

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The private sector must serve as a social basis of a political regime.

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The reforms must be radical enough to generate incomes and incentives sufficient to support

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it, sufficient to make the reverse from the military command economy to the free market.

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The most crucial factor here is time.

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The quicker the reform, the more decentralized the social policy, the less painful it will

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Ludwig von Mises analysis of war and peace is quite relevant to the problems experienced

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today by the post-communist countries.

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Ludwig von Mises revives the traditions of classical liberalism set by John Locke, Thomas

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Jefferson, Thomas Paine, George Mason and Lord Acton.

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Today traditions of the classical liberalism are cherished in many countries liberated from

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communism more than here as a cradle of Jeffersonian democracy.

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The Declaration of Independence observes Czech President Vaclav Havel states that the Creator

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gave man the liberty.

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It seems man can realize that liberty only if he does not forget the one who endowed

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him with it.

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It isn't very often nowadays that Americans hear public references to this kind from the

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mouths of statesmen, whether visiting a homegrown.

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As a writer and thinker, Mr. Harwell, as well as other intellectuals from the former communist

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states, say, Alexander Solzhenitsyn, Leonard Marion, Mark Lahr, president and prime minister

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of Estonia, Wachov Klaus, Czech prime minister, Philip Dimitrov, former prime minister of

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of Bulgaria and many many others has had certain advantages not given to our own American intellectuals.

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These people lived under genuinely oppressive militaristic regimes, been imprisoned and

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actually endured state punishment for expression of their views and art.

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Our own artists and intellectuals must content themselves with manufactured fantasies of state

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oppression and assaults on freedom.

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It must, therefore, seem at least a bit peculiar to Mr. Howell and others like him to witness

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what is going on in the United States today, where, if liberal establishment opinion is

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to be believed, the greatest threats to freedom and democracy today are not militarism but

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school prayers, radio and TV ministries.

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For making anything like Mr. Howell's reference to a creator in an American classroom, a teacher

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A comprehensive program of transition from the war economy to the free economy should

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include the privatization of industrial and agricultural property, provisions of the free

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trade in shares at newly created stock exchanges, the denationalization of military industries,

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the creation of labor markets through the elimination of existing restrictions on the

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the freedom of labor to contract, the immediate demian civilization of housing, drastic cuts

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in military spending, monetary reform, aid at achieving the convertibility of the currency

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in international money markets and the liberalization of foreign trade.

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We don't have much choice, said recently Russian economist Ivan Korolev.

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We must develop our economy by the most radical classical liberal approach.

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The issue of freedom, the issue of fight with militarism is of the utmost importance for Russia and other formerly Soviet republics undergoing this transition today.

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These nations went through the tragic experience of deprivation of economic freedom for the sake of the fulfillment of the communist utopia.

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The central planners had totally controlled production and re-entered it, thus achieving the communist goal of world domination.

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Even traces of competition were eliminated since the beginning of the 1930s with the

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formation of the system of the highly militarized industrial ministries solely responsible for

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the production of certain groups of commodities.

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As a result, the market price system necessary for efficient economy ceased to exist.

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In the Soviet Union and other socialist countries, defense expenditures became the most important

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component of government expenditure, the most important part of the economy.

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The level of defense expenditures was decided by the government in the way to secure socialism

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the World Domination.

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According to different estimates ranging from say low CIA estimate of 21% of Russian GDP

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being produced in the military industrial sector to Russian, present Russian estimates

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to over 50% of Russian GDP circulating within the military sector.

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spending was the most, I would say, single negative consequence of socialism.

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The level and structure of this military investment, orientation of research and development and

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productivity growth was very negatively affected.

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The country which would send people to space, which would create the weapons of mass destructions

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in the Civilized World would have problems in feeding their own citizens, in reducing

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infant mortality, in reducing the hazards of day-to-day life in bleak, grey and green

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Soviet unions.

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Unlike Keynesian point of view, it's obvious today that the military spending, although

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may be increases aggregate demand and leads to job creation in the long run produces a

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devastating effect on any country's economy.

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It has been increasingly argued today that defense expenditure has no particular economic

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benefits that could not be achieved by other forms of private spending.

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Even in those communist countries, where the creation of military industry has been associated

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by our local socialists here and Keynesians all around the world with faster economic growth.

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Furthermore, I think it is recognized today, even in Russia, that military expenditure,

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military build-up was a factor reducing flexibility in enterprise behavior, even in the United

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States and given the frequent use of cost-plus contracts leading to resource hoarding, over

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scaling and the generation of inflation.

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Its expansion can thus easily have effects which run counter to the generally desired

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objectives of enterprise, free enterprise and labor market efficiency.

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The defense expenditure, as Ludwig von Mises showed it, has a very negative impact on investment.

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It's also supported by a considerable amount of evidence.

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The war materials can rarely be used for productive investment.

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It is clear and it was discussed at various levels for a very long time.

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Even classical economists such as Adam Smith and David Ricardo saw certain basic levels

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of Military Expenditure as a requirement for national sovereignty, however, they were against

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an excessive level of military expenditures. They held that state expenditures on war and

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war preparation were financed out of profits and came at the expense of investment into

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new productive capacity and additional productive employment, being withdrawn from the productive

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Capital of the Nation In the Soviet Union, most Soviet enterprises

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of heavy industries were built during Stalin's industrialization program in the 1930s and

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were designed to win the coming final war with the capitalist nations, to secure world

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The concept of peaceful coexistence coined by Lenin was designated mostly for Westerners.

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This coexistence could not be permanent from the point of view of Lenin and his successors.

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As Stalin reminded his colleagues at the 15th Party Congress in 1927, even if we succeed

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and quoting here, even if we succeed in delaying the war with the capitalist countries, it

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is nonetheless inevitable.

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The suppression of economic freedom, militarization of economy, led to widespread apathy and inability

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of the public to make independent decisions under socialism.

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It also resulted in complete lack of individual responsibility.

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Concerns Concerning Economy were of pure military and political character.

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A similar orientation of these decisions and corresponding propaganda on the final victory

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of communism, the communist civilization of tomorrow, world victory of socialism, complete

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satisfaction of societal needs, scientific and technological evolution and other abstract

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goals undermined entrepreneurship and initiative made people helpless in dealing with the Leviathan

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and the ability of the people to make these decisions, virtual complete lack of any kind

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of entrepreneurship except the black market one, that what has resulted.

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Economic incentives were replaced under socialism by the simple system of commands based on

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the mechanism of the central planning and state ownership.

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The whole country was run the same way as an army.

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The economic activity was subordinated to the fulfillment of communist goals of world

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domination at any price.

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The shortages of the consumer goods were caused by the system itself, a system that was oriented

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towards the world domination.

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Eran Katselienbogen of the Wharton School of Economics wrote that the need to produce

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The collapse of socialism came as a surprise only to the fellow travelers of Communism

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in the West, as well as some blackboards of ethologists who have critically read too much

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of the Kremlin propaganda, which actually was disregarded as nonsense by the majority

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of Soviets themselves.

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The characteristic feature of this age of destructive wars and social disintegration,

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stated Ludwig von Mises, is the revolt against economics.

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This revolt failed and it became obvious even for the advocates of socialism in the West

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that economic collapse of the Soviet Union is not a result of a military defeat but the

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rejection of economic reasoning on behalf of its own government.

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Today former communists are urgently seeking a replacement for the archaic ideology of

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of Marxism and Leninism that can survive the current turmoil only here in the greenhouses

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of the Western Academia.

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They found the new ideology for militarism, which is called in Russian государственничество,

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or being translated as the cult of the state.

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This ideology is based on Max Weber's theorizing.

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Due to Max Weber, the whole intellectual tradition, I'm quoting, leaned towards rational planning,

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social engineering and teleological mastering of social phenomena by the enlightened bureaucracy.

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Weber claimed that bureaucratic organization is the most rational known means of carrying

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out imperative control over human beings.

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Also Weber recognized the importance of personal or, as he put it, charismatic leadership.

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He concluded that bureaucratic management was indispensable for the mass administration

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required in a modern society.

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Weber set forth the conception of the attributes of a perfect bureaucratic model, which to

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The organization of positions follows the principle of hierarchy, each lower office being subject

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to the control of a higher one.

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There is a systematic division of labor.

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Each office has a clearly defined sphere of responsibilities.

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The occupants of the offices are selected on the basis of technical qualifications.

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The office should be the sole or primary occupation of the occupant and constitute a career with

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promotion based on seniority, achievement or both.

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It is obvious that this system is as utopian as Marxism itself.

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Rewards in the public sector are tied to higher spending and budget increases and not to the

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and the economic efficiency understood in terms of forgotten opportunities.

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Lenin, who was a disciple of both Marx and Weber, attempted to introduce the Weberian

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system into the reality of Russia devastated by the World War I.

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Today there are plenty of people who would agree with Weber, who would agree with Soviet

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militarists, Russian militarists, and unfortunately some of them we can find in the Russian government.

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Mr. Yeltsin definitely started from the very wrong end. The progressive tax sanction with

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the upper tax bracket of 80% was introduced, while the new sales tax rate was set at 28%.

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Taxes on export and investment were also introduced. This so-called free market approach led to

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This is a situation when every new announcement of impeding reform causes perverse public

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responses and every new law passed, ostensibly to increase freedom only increases opportunities

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for fines and bribes of the bureaucrats.

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Russia's prisons, probably the worst in the world, are still filled with over 100,000

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entrepreneurs, most of them convicted for commercial and business practices absolutely

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As a popular Russian journalist, Victor Kopin assesses the present stage of the so-called

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capitalist revolution in Russia the same way, I quote, The White Guard's attack on socialism

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failed.

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We have gotten the quasi-democratic society with quasi-market, quasi-legality and quasi-moral.

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The predominant conclusion out of it is that freedom leads to the devastation of spirituality

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Crime, Polparization of Masses and Emergence of the Class of Fat Cats.

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This is very sad to know that a lot of Russians today blame the problems which they see today

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not on communism, not on their criminal leaders, but on the free market.

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I believe that the great success the former Soviet and present Russian bureaucracy had

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achieved in discrediting the ideas of freedom in Russia.

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This discreditation of ideas of freedom was highly supported by the ideologues of economic

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nationalism which, as von Mises stated, is the main threat to peace.

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Sinophobia, the hatred to foreigners, is cultivated by both Yeltsin government and opposition

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leaders, like, say, communist Zyuganov and anti-communist Zhirinovsky.

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I am sure that many in the West do not want to see strong competitive Russia, including

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the chief of Russian counter-intelligence Sergei Stepashin, again Mr. Stepashin and

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and other former KGB officers in charge of modern, new Russian intelligence service are

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creating this western threat to Russia, irrespective to the fact that today there is an ongoing

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cooperation between the Department of Defense of the United States and Russian military.

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It's kind of strange to see how taxpayers' money coming from the United States are wasted

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on joint maneuvers between Soviet or Russian and American armies.

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These maneuvers actually boosted rabid nationalism in Russia.

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Zhirinovsky, for example, Vladimir Zhirinovsky, who is a liberal democratic party, which is

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nor liberal nor democratic, is actively canvassing within the military ranks for new aggressive

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wars, thrust to the south, revival of the Soviet Empire, coming war with the West, etc.

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Alexander Solzhenitsyn, who recently returned back to Russia, dismissed Vladimir Zhirinovsky as a caricature of a Russian patriot. It is as if somebody wanted to create a purported Russian patriot so that he would be faithful to the whole world.

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How wonderful that Mr. Solzhenitsyn is able to see through the fog that has blinded American

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sovietologists and economists as well as political leaders for years.

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He understands that today the answer to Russian problems is the enforcement of property rights,

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The grassroots movement of the population against bureaucracy and harsh limitation of government spending, including military spending.

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Yeltsin government, however, has chosen, or maybe was forced to choose by the hardliners

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of parliament, the least daring, least radical of the reform options available.

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Bureaucratic networks are so deeply rooted that the regime ancien is still largely in

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place, protecting a staffers' core that has been bolstered in large part by geopolitical

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This establishment was consistently lying for American people and American government

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for the last 40-50 years.

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During the Cold War, the statistics on the size of the Soviet economy was all faked.

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It's interesting enough that when I lived in Washington, several times I met Admiral

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Carl Turner, who was Carter's chief of the CIA, and Mr. Turner told me that about 30-40%

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of his time he was dealing with Soviet economic and military statistics.

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Interestingly enough, this statistics was all wrong.

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Even in 1990, the CIA in their World Factbook published a figure 55% that they think was

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the size of the Soviet economy in relation to the US economy.

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And anybody who would go to Soviet Union would not find not only 55 but even 10 or even 7%.

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According to Steve Hunker from Johns Hopkins University, all Russian GDP is below $100 billion.

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So what kind of regime it was which was running a poor developing third world country which

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was producing at the expense of the health, the expense of nutrition, the expense of housing

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of the People was producing highly sophisticated weapons of war and mass destruction.

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The economic consequence of this status quo is to further the fundamental problem of a

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fully militarized and bureaucratized society.

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As my former colleague at the Russian Academy of Science, Evgeny Yasin, admits, I quote,

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The influence of politics on economy have reached now its great possible dimension.

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In addition to deplorable economic and ecological conditions, political instability, abuse of

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intellectuals, human rights violation, militarization of economy, all this is forcing people to

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look for better opportunities beyond Mother Russia.

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The Russians are living due to poverty, the disastrous state of public, socialized health

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and absence of housing.

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The urge to emigrate is made stronger still by the absence of foreseeable prospects for

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serious improvement.

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The already low quality of life is aggravated by the economic collapse due to the ill-devised,

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half-hearted and inconsistent so-called economic reforms of Gorbachev's and then Yeltsin's

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Today, the collapse of the Soviet empire, widespread national unrest, is forcing the

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exodus of hundreds of thousands of ethnic Russians from the newly independent states

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back to Russia as well as to Western countries.

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Over 45 million of ex-Soviet are living outside their national republics, including 25 million

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In the newly independent states, Russian colonists have suddenly become an ethnic minority, a

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are all previously reserved for the indigenous people. Increasingly, they feel themselves

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unwelcome and hated. If ethnic unrest and civil strife continue, these people are vulnerable

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to persecution on the basis of their nationality. This shift in their status led to mass migration

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of those Russians who are unable or unwilling to adjust to their new role.

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In a series of negotiations between the governments of the Baltic states and Mr. Yeltsin's government,

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The agreements were made to make repatriation of Russians as painless as possible, with the Baltic Republics providing these people with partial compensation for property, wherever it means losses, and relocation costs.

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The mass exodus of Russians from Tuva, nationalist demonstrations in Tataria, Sakhar, Chechnya, Komi and other parts of Russia itself raises the question of when and where the disintegration process will stop.

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In some of these republics within Russia, national minorities have lived alongside a large number of Russians for hundreds of years.

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So most of the latter lack any understanding of the local language or culture.

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There is already a mounting problem of over a million internal refugees in Russia who have suffered in the republics of Central Asia, Moldova, Armenia and Azerbaijan,

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as well as ethnic Russians and Jews who have been displaced as a result of the military conflicts and national strife.

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The anticipated exodus of Russian population raises many economic and social problems.

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For example, the economies of Russia and other republics will have to deal with the massive reallocation of labour,

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It is likely that as a result of repatriation, many Russians will experience a further drastic

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decline in the quality of life and their living standards and become an easy catch for militarists,

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Nationalists and all kinds of enemies of freedom in today's Russia.

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It is beyond the abilities of economic analysis to calculate the opportunity cost of the socialist

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experimentation in Russia.

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By the human toll is estimated by an eminent Russian historian, Roy Medvedev, at 41 million

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people.

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41 million people perished in a dreadful gulag during Stalin's collectivization, purges,

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campaigns against unearned income and other devilish experiments.

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But the only lesson of history is that it does not teach us anything, says the popular

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Russian aphorism.

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Despite the recent collapse of socialism, communism and Soviet Union and Eastern Europe, socialism

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is still alive and growing here in the West.

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It still possesses a mortal danger to freedom, liberty and the world peace.