Has Jeffrey Sachs changed his tune...

James Devine jdevine at popmail.lmu.edu
Tue Sep 15 13:11:12 PDT 1998

(Doug, I know I'm far above-quota with this one. Mea culpa. I'm sorry. I'm very sorry. No-one could be sorrier than I am. I have sinnned...)

Brad writes: >"Shock therapy" is a judgment that you need to get from bureaucratic-industrial feudalism to the capitalist mode of production *as*fast*as*possible* because to be stuck in the middle (as Russia is today) is the worst of both worlds.<

>... [this] judgment ... still look[s] to me to be correct: looking at
Poland, Russia, Ukraine, and Romania makes me think that shock therapy was the best of a very bad set of options. <

One comment: why does the transition have to be from the old USSR system to capitalism? Obviously -- because the US and its allies were the winners of the war. Just as after WW 1, the winners impose punishment and humiliation on the losers while remaking the losers in their own image (as much as possible). Might makes right. (BTW, I wouldn't call the old USSR's economic system "feudal" at all, since the word is totally inappropriate to a country with a centralized state which owned the means of production. To talk of Chinese peasants as "serfs" also seems to indicate a lack of knowledge of economic history.)

But what _should_ have been done, if we reject the idea that might makes right?

Looking at the USSR in 1989, I said (though I never published my thoughts, though old Gorby had some similar ideas):

their capital goods seem pretty worthless in most sectors, while their labor is highly skilled. What should have been done was to turn the factories over to the workers (who produced them in the first place), who can then figure out how to eke out as much value as possible from the aging and obsolescent plant and equipment. As with worker co-ops around the world, labor would be productive because of the motivation to work as a group, for the common good. The workers would have to figure out the best way to get this kind of economy as a whole to work, in a hostile world economy. But in this situation, they'd have more clout in fighting with the old apparatchiks, the mafiosi, and the IMF (that unholy trinity) to avoid getting the short end of the stick.

This "solution" isn't socialism (though like the old USSR, it has some socialist aspects). It's what economists call a "second best" solution.[*] Among other things, there'd be problems because some co-ops would have monopoly positions, but that shrinks in comparison to the type of monopoly power wielded in today's Russian economy by the new oligarchs.

In retrospect, this is all a pipe-dream (though maybe something like it would be feasible in the future). The unholy trinity has won. And look what they created. A basket case.

BTW, the Sachs-solution, i.e., the application of shock therapy a la Bolivia, didn't work that well in Bolivia. Tom Kruse, are you there to fill us in on the details?

BTW2, I know for a fact that Krugman thought that sweat shops were better than the situation of many people in the third world; there's a chapter in his ACCIDENTAL THEORIST book about the superiority of low-wage capitalism over gleaning from garbage heaps. Even though he's wrong (since contrary to Mrs. T., there are other alternatives), the point should be taken seriously and discussed rather than being simply dismissed.

[*] BTW3, whatever happened to the theory of the second best? The neo-liberal consensus, Jeffrey Sachs et al., seemed to have totally forgotten it. If you try to impose the Arrow-Debreu general equilibrium utopia on the world, imposing "flexibility" and markets on everyone, but there are parts of the world that don't adapt to fit the formula, the A-D model won't work anything like as promised. At least that's my interpretation of the Lipsey and Lancaster theorem, which used to be part of the orthodoxy (at least when I went to grad school). It has something to do with the way Chicago-school ideology dominated the minds of the Harvahdians (and maybe the UC-Berkeleyans). Which has to do with the political dominance of financial capital these days. Economists follow power, like almost everyone else.

Jim Devine jdevine at popmail.lmu.edu & http://clawww.lmu.edu/Departments/ECON/jdevine.html

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