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Understanding
Economic Transitions
Plan and Market Under the
New Globalization

Berhanu Abegaz
Understanding Economic Transitions
Berhanu Abegaz

Understanding Economic
Transitions
Plan and Market Under the New
Globalization
Berhanu Abegaz
Department of Economics
William & Mary
Williamsburg, VA, USA

ISBN 978-3-031-21583-4 ISBN 978-3-031-21584-1 (eBook)

https://doi.org/10.1007/978-3-031-21584-1

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature
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To my esteemed teachers and students
Preface

Around 1990, about a quarter of the world’s population lived in middle-income

socialist economies and another quarter in high-income and middle-income cap-
italist economies. The remainder lived in low-income economies with varying
admixtures of planning, markets, and informal exchange institutions. Forty years
later, the remaining outposts of socialism are Cuba and North Korea, while a few
others (mainly in the former states of the Soviet Union) wallow in the no man’s
land of neither functional capitalism nor socialism.
The USSR sustained seven decades of statist socialism between 1922 and
1992, Central Eastern Europe (CE) and Southeastern Europe (SEE) for nearly
five decades, and China for a little over three decades. By 2000, nearly all have
systemically “transitioned” from a centrally-planned economy to some form of a
decentrally organized market economy.
How and why large parts of Europe, Eurasia, and East Asia transitioned out
of the capitalist system in 1917–1952, how they managed to industrialize in
non-market settings, and how and why they came back to the capitalist fold
are questions comparative economic systems seek to address. Furthermore, this
wrenching structural change entailed a concomitant political transition from a
monoparty system to an illiberal multiparty system in formerly socialist Europe
and the former Soviet Union (FSU).
Comparative Economic Systems (CES) focuses on the workings of institu-
tional economic mechanisms across economic systems and income levels. CES, at
the macro-, meso-, and micro-levels, dwells on the two foundations of an economic
system: ownership types for productive assets (state vs. private) and the degree of
centralization of decision-making over resource allocation and income distribu-
tion (plan vs. market). The conceptual entry points are incentives (known rewards
or residual legatee rights) and the sources of discipline (bureaucratic-based or
market-based competition). More broadly, Comparative Economics (CE), which
is broader than CES, melds the study of economic systems with historical insti-
tutionalism and development economics to explore the determinants of prosperity
and inequality properties over time and across economic space within a given
economic system.
The conventional approach to the study of twentieth-century economic systems,
which obsessed with Cold-War-tinged concerns, has ebbed and flowed with the

vii
viii Preface

changing power balance between East and West. What has endured, though, is the
ever-changing mix of State and Market under various national and global contexts.
Understanding Economic Transition employs the CE prism to analyze dual
transitions in the former Socialist bloc—from a nonindustrial to an industrial econ-
omy and from a centrally-planned to a market-driven economy. These transitions
have been accompanied by corresponding changes in the political system—ini-
tially from one form of authoritarianism to another and, later, from paternalistic
accountability to democratic accountability.
More specifically, this book seeks to explain the genesis, operation, and trans-
formation of the centrally-planned socialist economy. It takes full account of the
impact of the system’s demise coinciding with a shift from a nonindustrial to an
industrial economy (and de-industrialization in some cases) and from a trade-based
globalization to a production- and trade-based globalization. Incorporating theory,
the latest research findings, cross-country empirics, and representative country case
studies (Russia, China, Poland, and Vietnam), the book also teases out the endur-
ing lessons from the fraught pathways of systemic transition from socialism to
capitalism in the age of the new globalization.
In addition to representing distinct country experiences, the four case studies
account for a sizable chunk of the world economy. IMF data for 2020 (in pur-
chasing parity US dollars) show that the four countries together accounted for 22
percent of the global GDP of $135 trillion. China, the largest economy in the
world since 2015 (www.pwc.co.uk/economics), accounted for $24 trillion, Russia
for $4.4 trillion, Poland for $1.3 trillion, and Vietnam for $0.85 trillion. Interest-
ingly, the four countries also represented 22 percent of the world’s nearly 8 billion
people—the 2022 figures being for China (1.45 billion), Russia (145 million),
Vietnam (100 million), and Poland (40 million).
This volume provides a self-contained, comprehensive, up-to-date, and authori-
tative treatment of post-1917 economic systems. The book has four novel features
that distinguish it from what is on offer in this sub-field of economics: (i) using the
prism of comparative institutionalism, it melds theory and the available evidence
to revisit the varieties of planned and market-driven systems; (ii) it takes economic
planning seriously in both theory and practice (central, cooperative, or indicative)
as a prominent marker of the ever-changing interactions between State and Mar-
ket; (iii) it focuses on the dynamics of systemic transitions in formerly socialist
countries by using a cohesive organizing framework that addresses the whence
(central planning), the how (modalities of transition), and the whither (illiberal
or liberal capitalism); and (iv) it examines the profound impact on these struc-
tural processes of the ICT-based economic globalization. The twinning of politics
and economics, the former posited as the primary driver, is one of the key ideas
invoked for understanding the rise and fall of economic systems.
Practically speaking, this book serves two purposes. Firstly, as a conspectus, it
is a reference monograph on current thinking on post-socialist transition from a
state-centered to a market-centered system. Secondly, it can be used as a panoramic
textbook for CES-focused courses that take central economic planning seriously
in a variety of contexts.
Preface ix

Instructors with an interest in the why and the how of the workings of the
centrally-planned economies and the socialist structural reforms will find a cohe-
sive theoretical and empirical survey and a critical synthesis. Toward this end,
the book provides chapter extracts, extensive glossary of key concepts, explainer
boxes and vignettes, and an appendix on data sources to help readers follow the
sometimes-dense discussions of ideas and practices.
I wish to thank generations of students in my courses on central planning and
post-socialist transition for their perceptive questions and encouragement to turn
the disparate lecture notes into a coherent book. Joshua Link has my gratitude
for formatting the text per the guidelines. I am also grateful to MIT Press for
permission to reproduce much of the material for Box 1.2, the World Bank Group
for Box 2.2, and Routledge for Figure 9.3.

Williamsburg, VA, USA Berhanu Abegaz

November 2022
Introduction

Comparative economics is central to economics

because what makes for a good economic system
is, or should be, the most important question that
economists ask.
Josef Brada (2021)

This volume critically synthesizes the vast and growing literatures on the insti-
tutional mechanisms that define modern economic systems—market, planned, or
cooperative. It draws on the various theories of political economics and scrutinizes
the evidence for competing explanations. The book comprises eleven chapters that
stitch together a compelling account of central planning in its diverse dialects,
demise, and replacement by variants of capitalism in far-flung country settings.
Key concepts, flagged in boldface the first time they are invoked, are defined
in the Glossary. An extensive bibliography and data sources are included to help
readers to dig deeper. A synopsis of the book’s four parts and their constituent
chapters is as follows.
Part I, Theories of Comparative Economic Systems, introduces the book by
distilling the core ideas that inform the study of central planning and economic
systems. The relevant literature on institutional economics and varieties of cap-
italism and socialism provides as a springboard for exploring how and why a
stable equilibrium of doubly exclusionary institutions of socialism may give way
to either partially exclusionary disequilibria or doubly inclusionary equilibria that
we associate with liberal capitalism.
Chapter 1, Economic Systems, does three things. It introduces the analytical
tools of comparative economics. An economic system is a set of cohesive insti-
tutions—formal and informal rules that guide behavior. The chapter develops the
book’s organizing concept, the “institutions hypothesis.” The core idea is that the
way societies organize themselves, by shaping positive and negative incentives, is
critical for understanding the differences in the level and sharedness of prosperity.
The chapter also leverages the interlinkages between ownership rights and con-
trol rights to property to show that, theoretically speaking, the justifications for the
superiority of a private-market system and a market-socialist system are identical.

xi
xii Introduction

This framing, developed by Lange and Stiglitz, provides a template for delineating
model and muddle that continues to bedevil the debate on the subject.
Chapter 2, Economic Planning in Various Settings, does two things. Utilizing
the perspective of comparative and integrative “varieties of economic systems,”
it affirms the value of looking for institutional similarities in form, not just dif-
ferences, for understanding the genesis and performance of economic systems.
This chapter also provides a survey of the major theories and practices of eco-
nomic planning in the context of the myriad forms of really-existing capitalism,
socialism, and market-led cooperativism (the Yugoslav and Mondragon models).
Part II, Two Canonical State Socialisms, explores the procedures and processes
followed in pre-reform USSR and China to allocate scarce resources and distribute
income. The classical Soviet planning model served as an instructive template for
latecomer socialist economies.
Chapter 3, The Soviet CPE I: The Planning Process in an Industrialized Econ-
omy, provides a detailed account of three features: the historical emergence of
command-and-control central planning, the Stalinist State’s organizational struc-
tures to govern the economy, and the rule-of-thumb procedures for drafting annual
and five-year plans. The chapter delves into the economic and political rationale
for such phenomena as organizational parallelism, nomenklatura, and hierarchi-
cal decision-making. It also connects the mechanics of Soviet planning with the
insights (and limitations) offered by the planning theories surveyed in Chapter 2.
Chapter 4, The Soviet CPE II: Plan Implementation, reviews the procedures
and the challenges of implementing the plans. It begins by characterizing the
planned economy’s endemic characteristics, including pervasive shortage, soft bud-
gets, quantitative bias, low product quality, and continual improvisation. It then
explains why enterprises and planners behaved the way they did as the incon-
sistencies and the tautness built into the paper plan become evident, including
effectuating changes in assortment, storming, cross-subsidization within ministries,
manipulation of bonus funds, and resort to the underground economy.
Chapter 5, The Chinese CPE: Planning in a Semi-industrial Economy, provides
an overview of Chinese central planning, including how it resembles or differs
from the Soviet model. The chapter begins by identifying the Chinese economy’s
peculiarities and proceeds to explore how the Chinese unitary political system’s
decentralized nature shaped the division of authority between the Center and the
Periphery.
Part III, Systemic Transition in Theory and Practice, critically explicates the
tenets of competing theories and perspectives on post-socialist transition. These
ideas inform the contrasting country experiences with structural reform that
encompass the gamut of post-socialist experiences. It also contextualizes the coun-
try experiences by taking a bird’s-eye-view of reform in Eastern Europe, FSU, and
East Asia.
Chapter 6, The Nature of Post-socialist Transitions, presents an analytical frame-
work for thinking deeply about systemic transition. It begins by presenting the
most recently available data on the pre-reform economy’s performance in terms
of growth and inequality. The chapter goes on to introduce the lexicon of reform,
Introduction xiii

the initial circumstances facing the various classes of reforming countries, and
the trajectories, dynamics (reform types, sequences, and speed), and outcomes of
impending and actual reform.
Chapter 7, The Autarkic Russian Road to Capitalism, presents the Russian reform
experience from Gorbachev to Putin. Gorbachev’s well-meaning but inept reforms
to save the system from itself, dubbed bureaucratic perfectionism, did more to
expose the system’s structural weaknesses than to repair it. The chapter also
explores Boris Yeltsin’s reforms which, despite dismantling the socialist system,
failed to create a robust market economy to replace it. Vladimir Putin continues to
tweak the oligarchic capitalism he inherited by accentuating an isolationist, self-
limiting economic nationalism that operates in a straitjacket of elite contests over
natural-resource rents.
Chapter 8, The Nationalist Chinese Road to Capitalism, explores the novel Chi-
nese pathway to a workable market economy with the help of unconventional
institutions and policies. It examines the trajectories of de-collectivization in the
countryside and de-cooperativization in the cities, both of which took turns to serve
as the early growth engines. It explains how the Chinese state leveraged these
sectors by prudently scaling up reform experiments, masterfully crafting hybrid
institutions, and taming grand theft.
Chapter 9, Two Integrationist Variants: Poland and Vietnam, looks at the reform
pathways chosen by a representative East European post-socialist economy and
a smaller East Asian post-socialist economy, both of which provide enlightening
contrasts to Russia and China, respectively. The chapter reviews the Polish reform
experience with a nod to the diversity of Balkan, CEE, SEE, and FSU reformers.
Poland opted for shock therapy under a democratic mandate and leveraged its
EU market access to integrate itself into the world economy. Vietnam is similar
politically to China and cleverly replicated the Party-led Chinese reform package
with a lag of about a decade.
Part IV, Transition under the New Globalization, offers reflections on the new
globalization in light of the radical changes in the division of labor ushered in
by the ICT revolution. The timing of post-socialist reform coincided with this
radically new phase of economic globalization whose defining feature is the ubiq-
uity of global value chains (GVCs). GVCs entail specialization in extra-territorial
production networks; the bundling of investment, marketing, and technology for
laggard economies; economies of scale that transcend national borders; a high
vulnerability to shocks; and a strong preference for nearshoring over global
shoring.
Chapter 10, Pathways of Integration in the Age of Global Value Chains,
characterizes global and regional GVCs in some detail. It recasts the impressive
economic records of three post-socialist reformers (China, Poland, and Vietnam)
since 1990, serving as industrial and service GVC hubs.
Chapter 11, Comparative Economics Redux, concludes by reflecting on the
future of the study of economic systems in a world that is being transformed by
deep but fraught global economic integration. The chapter also teases out the impli-
cations of the emergent “one capitalism, many variants” perspective for rethinking
comparative economics.
Contents

Part I Theories of Comparative Economic Systems

1 Economic Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.1 Institutions and Economic Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 Property Rights: Ownership Versus Control . . . . . . . . . . . . . . . . . . . . 10
1.3 The Neoclassical Theory of Economic Systems . . . . . . . . . . . . . . . . 15
1.4 The Emergence of the Centrally Planned Economy . . . . . . . . . . . . 20
1.5 A Synopsis of the Country Case Studies . . . . . . . . . . . . . . . . . . . . . . . 23
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2 Economic Planning in Various Settings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.1 Why Do For-Profit Firms Exist and in What Form? . . . . . . . . . . . . 31
2.2 Varieties of Capitalism: Liberal Versus Statist . . . . . . . . . . . . . . . . . 34
2.3 Intellectual History: The Socialist Controversies . . . . . . . . . . . . . . . 39
2.4 Varieties of Socialism: Stalinist Versus Market Socialist
Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2.5 Varieties of Self-Management: Yugoslav Versus
Mondragon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2.6 Theories of Economic Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Part II Two Canonical State Socialisms

3 The Soviet CPE I: The Planning Process in an Industrialized
Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.1 The Transition from Peripheral Capitalism to Autarkic
Socialism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.2 The Institutional Architecture of the Soviet Economy . . . . . . . . . . 83
3.3 Economic Ministries and State Committees . . . . . . . . . . . . . . . . . . . . 84
3.4 The Tech-Prom-Fin-Plan: Five-Year and Annual Plans . . . . . . . . . 88
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
4 The Soviet CPE II: Plan Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
4.1 The Shortage Economy Redux . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
4.2 The Khozraschet Enterprise and Plan Execution . . . . . . . . . . . . . . . 115

xv
xvi Contents

4.3 The Second Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

4.4 Economic Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
5 The Chinese CPE: Planning in a Semi-industrial Economy . . . . . . . . . 131
5.1 China’s Initial Conditions and Peculiarities . . . . . . . . . . . . . . . . . . . . 131
5.2 The Chinese Model of Socialism: Commune, GLF, and CR . . . . 134
5.3 Chinese Economic Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

Part III Systemic Transition in Theory and Practice

6 The Nature of Post-socialist Transitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
6.1 CPE Economic Performance: Growth and Inequality . . . . . . . . . . . 147
6.2 Reform Versus Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
6.3 Initial Conditions and Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . 164
6.4 The Modalities of Systemic Transformation . . . . . . . . . . . . . . . . . . . 167
6.5 Corruption in Hybrid Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
7 The Autarkic Russian Road to Capitalism . . . . . . . . . . . . . . . . . . . . . . . . . . 187
7.1 The Autarkic, Nationalist, and Integration Roads . . . . . . . . . . . . . . 187
7.2 The Gorbachev Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
7.3 The Yeltsin Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
7.4 Putin’s Political Capitalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
8 The Nationalist Chinese Road to Capitalism . . . . . . . . . . . . . . . . . . . . . . . . 211
8.1 The Nationalist Road . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
8.2 De-collectivization Begets TVEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
8.3 Urban Collectives and SEZs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
8.4 The Third Phase: Middle-Income Trap . . . . . . . . . . . . . . . . . . . . . . . . 217
8.5 The Bear and the Panda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
9 Two Integrationist Variants: Poland and Vietnam . . . . . . . . . . . . . . . . . . 233
9.1 The Baltic, CEE, and SEE Countries . . . . . . . . . . . . . . . . . . . . . . . . . . 233
9.2 The Modalities of EU Accession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
9.3 The Peculiarities of Polish Socialism . . . . . . . . . . . . . . . . . . . . . . . . . . 236
9.4 Polish Shock Therapy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
9.5 The Peculiarities of Vietnamese Socialism . . . . . . . . . . . . . . . . . . . . . 247
9.6 Vietnam’s Doi Moi Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256
Contents xvii

Part IV Transition under the New Globalization

10 Pathways of Integration in the Age of Global Value Chains . . . . . . . . . 261
10.1 Late Industrialization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261
10.2 The New Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
10.3 China, Poland, and Vietnam as GVC Hubs . . . . . . . . . . . . . . . . . . . . 270
10.4 Global Integration Under the Developmental State . . . . . . . . . . . . . 274
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278
11 Comparative Economics Redux . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
11.1 Economic Planning Under the Two Capitalisms . . . . . . . . . . . . . . . . 281
11.2 Post-socialist Comparative Economics . . . . . . . . . . . . . . . . . . . . . . . . . 282
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284

Data Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
About the Author

Berhanu Abegaz is Professor of Economics at William & Mary. He specializes in

comparative economics, institutional economics, and development economics. He
is the author of four books and two edited volumes on the subjects of economic
planning, late industrialization, regional economic integration, and state formation.

xix
Abbreviations

AIIB Asian Infrastructure Investment Bank

ASEAN Association of Southeast Asian Nations
BB Big Bang
BOAL Basic Organization of Associated Labor
BRICS Brazil, Russia, India, China, and South Africa
CA Comparative Advantage
CAB Current Account Balance
CCP Chinese Communist Party
CE Comparative Economics
CEE Central and Eastern Europe
CES Comparative Economic Systems
CGE Computable General Equilibrium
CIS Commonwealth of Independent States
CMEA Council for Mutual Economic Assistance (Comecon)
CMF Capitalist Managed Firm
COM Council of Ministers
CPB Central Planning Board
CPE Centrally Planned Economy
CPSU Communist Party of the Soviet Union
CPV Communist Party of Vietnam
CR Cultural Revolution
CRE Coefficient of Relative Effectiveness
DR Developmental Regime
DS Developmental State
DVA Domestic Value Added
EBRD European Bank for Reconstruction and Development
EE Eastern Europe
EEU Eurasian Economic Union
ES Economic System
ESOP Employee Stock Ownership Plan
EU European Union
FDI Foreign Direct Investment
FSU Former Soviet Republics
FSU Former Soviet Union
xxi
xxii Abbreviations

FTO Foreign Trade Organization

FVA Foreign Value Added
FYP Five-Year Plan
GA Growth Accounting
GDP Gross Domestic Product
GKI Goskomimushchestvo
GLF Great Leap Forward
GMP Gross Material Product
GPI GVC Participation Index
GVC Global Value Chain
HCI Human Capital Index
HDI Human Development Indicator
ICT Information and Communication Technology
IFI International Financial Institution
IMF International Monetary Fund
IO Input–Output
IPA Instrument for Pre-accession Assistance
LAH Lange–Arrow–Hurwicz
LFS Loans for Shares Program
LMF Labor Managed Firm
MB Material Balance
MCC Mondragon Cooperatives Corporation
MIT Middle Income Trap
NATO North Atlantic Treaty Organization
NDB National Development Bank
NEP New Economic Policy
NPC National People’s Congress
OECD Organization for Economic Cooperation and Development
PLA People’s Liberation Army (China)
PPP Purchasing Power Parity
PWT Penn World Tables
R&D Research and Development
SBC Soft Budget Constraint
SC Social Compact
SC State Council (China)
SEE Southeastern Europe
SEZ Special Economic Zone
SLP Stabilization, Liberalization, and Privatization
SMA Self-Management Agreement
SME Small and Medium Enterprise
SOE State-Owned Enterprise
SPC State Planning Commission
SPL Stabilization, Privatization, and Liberalization
TD Transformational Depression
TFP Total Factor Productivity
Abbreviations xxiii

TVE Township and Village Enterprise

USSR Union of Soviet Socialist Republic
VPK Voyenno-Promyshlennaya Kompaniya
WBG World Bank Group
WC Washington Consensus
WDI World Development Indicators
WMF Worker Managed Firm
WTO World Trade Organization
List of Figures

Fig. 1.1 Hockey-Stick Pattern of Per capita Income Growth,

1800–2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Fig. 1.2 Labor Productivity in 2020 relative to 1991: China,
Poland, Russia, and Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Fig. 1.3 Growth Drivers and Structural Transformation . . . . . . . . . . . . . . . . 26
Fig. 2.1 Evolution of economic systems and ideologies, 1850–2020 . . . . 34
Fig. 2.2 Evolution of the variants of socialism and post-socialism . . . . . . 34
Fig. 2.3 Employment level: CMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Fig. 2.4 Employment level: LMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Fig. 2.5 Comparative employment levels by firm type . . . . . . . . . . . . . . . . . 48
Fig. 2.6 Organizational structure of MCC cooperatives . . . . . . . . . . . . . . . . 55
Fig. 2.7 Planner’s ultimate goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Fig. 2.8 LAH Price-guided planning procedure . . . . . . . . . . . . . . . . . . . . . . . 63
Fig. 2.9 Malinvaud Price-guided Planning Procedure . . . . . . . . . . . . . . . . . . 65
Fig. 3.1 Authority Relations within the Soviet Central Economic
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Fig. 3.2 Techprofinplan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Fig. 3.3 Economic balances in Soviet planning . . . . . . . . . . . . . . . . . . . . . . . . 91
Fig. 3.4 A stylized Gosplan planning procedure for funded
commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Fig. 3.5 A stylized circular flow model of the Soviet-type CPE . . . . . . . . 105
Fig. 4.1 Bonus functions and the Ratchet Effect . . . . . . . . . . . . . . . . . . . . . . . 122
Fig. 4.2 Russia: Annual Growth Rates of Real GDP . . . . . . . . . . . . . . . . . . . 127
Fig. 4.3 Russia: real output per person and per employee . . . . . . . . . . . . . . 127
Fig. 5.1 Structure of the Chinese Government and Planning
Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Fig. 5.2 China: Annual Growth Rates of Real GDP . . . . . . . . . . . . . . . . . . . 140
Fig. 5.3 China: Real Output Per Person and Per Employee . . . . . . . . . . . . . 143
Fig. 6.1 Real GDP per capita, 1950–2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
Fig. 6.2 Real GDP of China and India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Fig. 6.3 Real GDP of Poland and Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Fig. 6.4 Real GDP of Russia and Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Fig. 6.5 Real GDP of Vietnam and Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . 154

xxv
xxvi List of Figures

Fig. 6.6 National wealth per adult (2018$) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

Fig. 6.7 Pre-tax income share of the top-10% households . . . . . . . . . . . . . . 156
Fig. 6.8 Bucket graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Fig. 6.9 Changing employment mixes in a marketizing economy . . . . . . . 167
Fig. 6.10 Transition GDP as a proportion of pre-transition GDP . . . . . . . . . 180
Fig. 7.1 Channels of contest for control of the state by the triplicity
of politicians, bureaucrats, and businesses . . . . . . . . . . . . . . . . . . . . 191
Fig. 8.1 Surplus labor absorption in China, 1978–1998 . . . . . . . . . . . . . . . . 214
Fig. 9.1 Poland: Annual growth rates of real GDP (2011 US$) . . . . . . . . . 245
Fig. 9.2 Poland: Real output per person and per employee (2011
US$) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
Fig. 9.3 Vietnam: Annual growth rates of real GDP (2011 US$) . . . . . . . 250
Fig. 9.4 Vietnam: Real output per person and per employee (2011
US$) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Fig. 10.1 Pathways of Latecomer Industrialization . . . . . . . . . . . . . . . . . . . . . . 263
List of Tables

Table 1.1 A typology of political economy: the interactions

between economic and political institutions . . . . . . . . . . . . . . . . . 7
Table 1.2 Nine pure economic systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Table 1.3 Comparative intercountry economic performance,
1990–2020: China, Poland, Russia, and Vietnam . . . . . . . . . . . . 24
Table 2.1 Two post-1990 market coordination capitalisms . . . . . . . . . . . . . 36
Table 2.2 Variants of Political Capitalism in the Age
of Post-Socialism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Table 2.3 Composition and function of Yugoslav self-managed
organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Table 2.4 Comparative Features of WMF and LMF . . . . . . . . . . . . . . . . . . . 58
Table 3.1 Interlocking: Parallelism and Nomenklatura in the Soviet
System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Table 3.2 Material balances: uses and sources . . . . . . . . . . . . . . . . . . . . . . . . . 95
Table 3.3 A schematic Input–Output table . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Table 3.4 The consolidated state budget of the USSR, 1940–1988 . . . . . . 104
Table 3.5 Basic features of Soviet Five-year Plans . . . . . . . . . . . . . . . . . . . . 108
Table 4.1 Market colors in the Soviet Economy . . . . . . . . . . . . . . . . . . . . . . . 125
Table 5.1 A chronology of socialism and capitalism with Chinese
characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Table 5.2 Basic features of Chinese Five-year Plans . . . . . . . . . . . . . . . . . . . 142
Table 6.1 Growth accounting for post-socialist and comparator
countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Table 6.2 Development accounting, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Table 6.3 Convergence and divergence in living standards
among post-socialist and comparator countries . . . . . . . . . . . . . . 152
Table 6.4 Transition indicators by sector, 1990–2012 . . . . . . . . . . . . . . . . . . 169
Table 6.5 Endpoints of transition qualities, 2019 . . . . . . . . . . . . . . . . . . . . . . 170
Table 6.6 Modalities of privatization in transition economies . . . . . . . . . . . 172
Table 6.7 Interactions between sequence and speed of reform . . . . . . . . . . 174
Table 6.8 Completion of the systemic transition: Poland
versus Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
Table 7.1 Profiles of China, Poland, Russia, and Vietnam . . . . . . . . . . . . . . 188

xxvii
xxviii List of Tables

Table 7.2 Regime type and freedom, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

Table 7.3 Structural change in Russia relative to the OECD,
1990–2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
Table 7.4 Macroeconomic indicators of shocks and transition
in Russia, 1992–2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
Table 7.5 Russia’s hybrid economy, circa 2015 . . . . . . . . . . . . . . . . . . . . . . . 207
Table 8.1 Hybrid TVC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Table 8.2 China: the first two critical phases of economic reform . . . . . . . 225
Table 8.3 Two models of transition: China versus Russia . . . . . . . . . . . . . . 226
Table 8.4 Economic profiles of China and Russia, 1990–2020 . . . . . . . . . . 228
Table 9.1 Economic indicators for Poland, 1990–2019 . . . . . . . . . . . . . . . . . 240
Table 9.2 Structural change in Poland relative to Hungary
and the EU, 1990–2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
Table 9.3 Economic profiles of Poland and Vietnam, 1990–2020 . . . . . . . 252
Table 9.4 Structural change in Vietnam relative to China,
1990–2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
Table 10.1 Key players in the six archetypes of global value chains,
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268
Table 10.2 Engagement in Global Value Chains by China and Russia . . . . 272
Table 10.3 Engagement in Global Value Chains by Poland
and Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
Table 11.1 2020 prosperity index rankings of post-socialist states . . . . . . . 284
List of Boxes

Box 1.1 The Theorems of Welfare Economics . . . . . . . . . . . . . . . . . . . . . . . . 16

Box 1.2 Six Myths About Economic Systems . . . . . . . . . . . . . . . . . . . . . . . . . 19
Box 2.1 Varieties of Modern Capitalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Box 2.2 The Communist Manifesto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Box 2.3 Yugoslavia: Social Compacts and Self-Managed
Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Box 2.4 Fagor: Multinationalization and Bankruptcy . . . . . . . . . . . . . . . . . . 56
Box 4.1 The Ratchet Effect and Soft Budgets . . . . . . . . . . . . . . . . . . . . . . . . . 120
Box 4.2 AvtoVAZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Box 5.1 The Township and Village Enterprise . . . . . . . . . . . . . . . . . . . . . . . . 135
Box 6.1 The Commandments of the Washington Consensus
and Its Critics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
Box 7.1 Mikahail Khodorovsky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
Box 7.2 Gazprom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Box 8.1 The Middle-Income Trap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
Box 8.2 Jack Ma’s Alibaba Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
Box 8.3 China’s Baowu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
Box 9.1 Vietcombank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
Box 10.1 The Container: The World the Box Made . . . . . . . . . . . . . . . . . . . . 264

xxix
 Part I
Theories of Comparative Economic Systems

Part I distills the core ideas that inform comparative economics. Based on a meta-
analysis of the literature on institutional economics and the varieties of capitalism
and socialism, and explains how a stable equilibrium of doubly exclusionary insti-
tutions may give way to an inclusionary equilibrium. This institutionalist approach
uncovers the rules of the game that shape the allocation of reproducible and non-
reproducible resources (what, how), the center of authority for the most important
economic decisions (who), and the resultant distribution of income and wealth
(for whom). Institutional economics also unveils the dynamics of inter-system
transition, including the inter-country variations that reflect differing endowments,
institutional heritages, contingencies, and strategic decisions by leading reformers.
Economic Systems
1

The bourgeoisie compels all nations, in pain of extinction, to adopt the bourgeois mode
of production; it compels them to introduce what it calls civilization into its midst, i.e., to
become bourgeois themselves. In a word, it creates a world after its own image.
Marx and Engels (1848)

Socialism is a road to hell paved with great intentions.

Socialism is the longest detour from Capitalism to Capitalism.
Two popular quips

1.1 Institutions and Economic Order

Students of economic systems grapple with four big questions: What is an eco-
nomic system, and how does it evolve over time? What are the fundamental
characteristics of the two economic systems that dominated the twentieth century?
What criteria should we use to compare and evaluate them? How do we understand
the contrasting roads taken by centrally-planned (socialist) economies to transition
to a market economy in the context of a hyper-globalized world economy? The
lens we employ here to answer these and related questions is sometimes called
historical institutionalism (Brada, 2021; Eggerston, 2013).
Institutions are codified rules or non-codified norms (conventions) that define
and structure social, political, and economic interactions among individuals and
organizations (March & Olsen, 2008; North, 1990). In other words, institutions are
endogenous rules designed to structure recurrent interactions that are enforced by
appropriate public and private sanctions (Voight, 2019). These rules of the game,
changeable slowly as their normative foundations erode, constrain or shape human
behavior (North, 1990; North et al., 2009).

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 3

B. Abegaz, Understanding Economic Transitions,
https://doi.org/10.1007/978-3-031-21584-1_1
4 1 Economic Systems

Organizations, on the other hand, are economic or political entities with a

well-defined set of shared goals and objectives. Organizations are then understood
here as bundles of cohesive internal institutions that are designed to interact opti-
mally with external institutions through appropriate strategies to advance shared
mandates, objectives, and goals.
Modern society is a set of three interlocking blocks of substructural and
superstructural institutions—a social system, a political system, and an economic
system. An economic system, accordingly, is a set of interlocked institutions that
define who owns what, who decides what, and who gets rewarded or penalized for
doing what.
Institutional economics uses the conceptual entry point of institutions to explain
how behavior is shaped by the incentives provided by the institutional rules and
how private and public organizations enforce these rules. It also frames institu-
tional change as an outcome of a loss of cohesion among the three spheres of
society, which opens up opportunities for upstarts to challenge the status quo in
an ever-present struggle for power.
Economic institutions have many dimensions, the most important of which are
secure property rights, an impartial justice system, workable financial arrange-
ments between savers and borrowers, appropriate regulations concerning labor
markets and businesses, and freedom of entry and exit. Economic institutions may
be exclusive or inclusive. Inclusive economic institutions support and encourage
productive economic transactions by protecting property rights, upholding the rule
of law, and ensuring a competitive environment (Wiles, 1977).
Societies strive to be collectively rational by institutionalizing tried and true
practices and norms. By codifying the reward-penalty system’s preferred behavior,
they routinize planning, coordination, and implementation procedures that accentu-
ate positive incentives, reduce transaction costs, and mitigate or eliminate endemic
risk. This institutional architecture of coordination is sometimes called the “so-
cial structure of accumulation.” The idea refers to the ever-changing institutional
setting that defines relations among economic actors (planners, owners, managers,
workers, and the like).
In properly regulated economic systems, economic actors gainfully interact
through legally sanctioned market or non-market institutions that may involve the
exchange of money, resources, and favors. The motivation may take the form of
meeting quota directives, profits, or community service (reciprocity or altruism),
or diversifying the consumption basket. Rule-makers and rule-enforcers shape,
through their authority over organizations, what enterprises produce, how they
produce, and how incomes are distributed among participants and non-participants
in economic activity.
Understanding economic mechanisms is, therefore, predicated on contextual
knowledge of who is powerful, how elites are organized to influence or capture
state institutions, and how the constant push and pull of politically-connected elites
and the citizenry determine the balance between growth, inequality, and stability
(Khan et al., 2016). The defining feature of socialism, for example, is the mutual
embeddedness of politics (political power) and economics (economic power). In
this sense, there is no such a thing as “the economy” under socialism since politics
is in command because the two elements are inextricably fused.
1.1 Institutions and Economic Order 5

Comparative Economic Analysis

CE traditionally deploys intra-system models that are built around rational choice
by atomistic individuals as well as by groups, classes, or organizations in an envi-
ronment of uncertainty, scarcity, and limited capability. These economic actors
are assumed to be self-interested, amoral, and calculating. However, their mental
models and motivations may encompass enlightened self-interest and altruism.
CES, on the other hand, studies the consequences of the implications of differ-
ent behaviors across countries that belong to different economic systems. In other
words, CE focuses on the varieties of capitalism or socialism while CES focuses
on the economic consequences of institutional differences in ownership forms and
control rights between capitalism and socialism.
CES melds insights from comparative economics, institutional economics, and
comparative political economy to offer transdisciplinary perspectives. Comparative
political economy, in turn, melds economics and politics.1
Two core hypotheses characterize recent institutionalist thinking. The first
claims that growth and development are decisively shaped by the quality of pre-
vailing institutions—the proscriptions and prescriptions imposed by the state or
the norms of a society. The second underscores that informal rules profoundly
shape the quality of implementing strategies conducive to growth and development
(March & Olsen, 2008; Voight, 2019).
Neoclassical institutionalists take institutions as given and focus on measur-
ing institutional quality by how well they minimize the costs of using the market
or, more broadly, transactions. These transaction costs encompass the costs of
enforcement of property rights in valuable assets (such as the right to use, modify,
derive income, or transfer). Transaction costs also include the various dimen-
sions of cost pertaining to decision-making under uncertainty—accessing accurate
information, and devising clear and enforceable contracts.
In this conceptualization, the relative size of the informal sector is one good
indicator of the quality of institutions external to organizations. Economic coor-
dination, via hierarchies or optimally sized firm organizations, can then be
understood as dependent on the balance between internal costs and external trans-
action costs incurred by the residual claimants or coordinators with control rights
(Williamson, 1985).
Economic institutions must also be coordinated with political (as well as social)
institutions. Political institutions are society’s rules which determine who can hold
political power and what types of effective constraints are placed on powerhold-
ers. Economic institutions also determine how the economic rules are formulated
and enforced. Preferences over institutions matter greatly and are driven by the
interests of the controlling elites. There is, therefore, a two-way causality or endo-
geneity between political institutions (political power) and economic institutions
(economic power). This reasoning goes a long way toward explaining why capi-
tal and labor both migrate from regions of exclusionary institutions to regions of
inclusionary institutions.
6 1 Economic Systems

The institutionalist’s take on comparative economic development harps on insti-

tutional quality (Adelman & Morris, 1973; Olson, 1996). Olson, for example,
argues that the best explanation for inter-country inequality of per capita income
is the structure of institutionalized incentives embedded in national borders that
mark the reach of public policies and institutions. The intricate social cooper-
ation, reconciling individual rationality with social rationality, requires effective
and participatory institutions and regulations that countries strive to muster.

The Institutions Hypothesis

The institutions hypothesis is the claim that differences in the way societies
organize themselves and shape the incentives of individuals, public officials, and
businesses are ultimately responsible for the large observed differences in pros-
perity within and across countries. The claim is that “good” institutions promote
productive investment and shared growth (Acemoglu & Robinson, 2019a; 2019b).
The attribution generally goes from political institutions (inclusive or exclusive)
to consonant economic institutions (inclusionary or extractive). However, this
approach has little to say about the origins, depth, and demise of institutions.
So, how and why did some countries manage to obtain effective and inclu-
sionary institutions while others continue to be wedded to socially dysfunctional
ones? The genesis and roles of institutions can be made distinct by delineating the
foundations of the deeply entrenched norms and formal rules that govern behavior
and the enforcement mechanisms that motivate actors to follow the rules (Greif &
Kingston, 2011).
The rational-choice approach, which understands institutions as rules that
incentivize behavior within bounded rationality, focuses on the contextualized
applications of the rules. The strategic-games approach defines institutions as self-
enforcing equilibria based on others’ expected behavior to render enforcement of
the rules endogenous.
Historical institutionalism, which focuses on how and when institutions change
to alter the trajectory of politico-economic development (state formation, rev-
olutions, economic and social inequalities), provides a useful framework for
understanding the plasticity of behavior under varying constraints on power
(March & Olsen, 2008; Marx & Engels, 1848 [1969]). Embracing the importance
of the timing and sequencing of events or actions, historical institutionalism, at the
levels of macro-institutions and micro-institutions, differs from the rational-action
approach of neoclassical economics which focuses on material incentives or from
the focus on cognition norms by sociology (Fioretos et al., 2016). The shared
objective is to uncover the historical roots and the logic of institutions to identify
the forces that trigger transitions from closed-access, extractive social order to an
open-access, inclusive social order.
Acemoglu and Robinson (2012), in their much-acclaimed book—Why Nations
Fail—link the political and economic dimensions of the social “system” to arrive
at an overarching framework for thinking about institutional mapping. Extractive
1.1 Institutions and Economic Order 7

(inaptly labeled, absolutist) political institutions (power in the hands of a few, with-
out checks and balances or the rule of law), they argue, have a close affinity with
extractive economic institutions (insecure property rights for non-elites, entry bar-
riers, absence of law and order) eliciting only growth episodes. Inclusive political
institutions (pluralist) and inclusive economic institutions (a level playing field and
support by capable governments for human capital investment and innovation), on
the other hand, tend to produce political legitimacy and sustainably shared growth.
Tunneling deeper (see Table 1.1), the interactions between types of politi-
cal institutions and economic institutions reveal four sets of institutional mixes
or types of societies (Acemoglu & Robinson, 2012; Bowles et al., 2005). The
Extractive-Exclusionary nexus (D) is a vicious circle (stable equilibrium) of oli-
garchies and kleptocracies. At the other end of the spectrum is doubly inclusionary
liberal democracy (A), a stable equilibrium or a virtuous circle of prosperity and
pluralism. The two intermediate cases are politically exclusionary but economi-
cally inclusionary societies [B] (typified by the slowly democratizing European
societies) and politically inclusionary but economically extractive societies [C]
(which is really a null set although state socialism comes close). To get a better
sense of the drivers of the shift from one cell to another, let us briefly turn to
history for helpful clues.
We do know for sure that vicious circles anchored in exclusionary political
and economic institutions are self-perpetuating. The logic of exclusion makes
the usurpation of power from the disorganized popular masses quite easy. Exclu-
sionary political and economic institutions are mutually reinforcing. A movement
toward inclusiveness can also be ephemeral and reversible. Economic growth is
self-limiting since it rarely accommodates creative destruction.
Once initiated, virtuous circles can likewise produce self-generating forces
against persistence. This is so because pluralism makes the usurpation of popular

Table 1.1 A typology of political economy: the interactions between economic and political
institutions

Political Institutions

Inclusionary Exclusionary
Economic Institutions
Inclusionary
A B
Extractive
C D

Source Author, based on Acemoglu and Robinson (2012)

8 1 Economic Systems

power more difficult. Furthermore, inclusive political and economic institutions

generally go together, such as multipartyism and free media (Acemoglu &
Robinson, 2012).
One way of addressing the origin of institutions is to think about the dynamics
of state formation and state-building. Political scientists tell us that the modern
political order stands on three mutually constitutive pillars (Fukuyama, 2014).
The first pillar is a capable or effective state with an adequate fiscal base to
underwrite essential public goods, including secure borders, domestic order, and
respect for personal safety and property rights. The second pillar is the rule of law
grounded in societal norms and binding on both the powerful and the weak. The
third pillar is the accountability of the ruling elite through a steady extension of
popular sovereignty to subjects turned citizens. The first attribute speaks to the
State’s administrative and military capability, while the latter two address political
legitimacy for rulers and social legitimacy for public institutions.
State-building is ultimately about nurturing supportive institutions for economic
growth and a system of taxation to ensure an adequate fiscal base for underwriting
a secure border, maintaining domestic order, settling distributional conflicts, and
enforcing the rules governing the economic and political systems. The fairness
of rulemaking and rule-enforcing crucially depends on the strength of non-elites
to constrain a rapacious ruling elite from capturing the State for its exclusive
benefit. Liberty (freedom from restraint) emerges only when a narrow window
opportunity stays open long enough for a precarious victory of chronically enfee-
bled citizens over predatory political-cum-economic powerholders (Acemoglu &
Robinson, 2019a; 2019b; Migdal, 1988).
The second pillar of the modern political order, the rule of law, is grounded in
cherished societal norms, enforced faithfully and predictably, and binding on both
the ruler and the ruled. It refers to a formalized, impersonal, and impartial applica-
tion of the law, which is best expressed in a constitution that defines the structure of
government and ideally enshrines popular sovereignty in a bill of rights. The rule
of law, which often evolved out of a rigged rule by law, also tames ever-present
nepotism, cronyism, and clientelism.
The third pillar, accountability of the political elite to citizens and stake-
holders, is all about upholding the presumed societal mandate, if only out of
enlightened self-interest, to reconcile self-interest with the common good. The
minimalist procedural form is free and fair elections with a modicum of political
competition. When accountability takes a substantively constitutional-democratic
form, it is ideally liberal, where civil rights are constitutionally guaranteed
and citizen participation in political life is wide-ranging. Where the former is
absent, illiberal democracy prevails that is only slightly removed from benevolent
dictatorship—where rights and participation are at the whim of the ruling group.
All three elements of the modern political order came together under industrial
capitalism, which raised living standards to an unprecedented level and opened
space for representative government. In other cases, absolutism gave way to benev-
olent dictatorship, which eventually brought prosperity and a belated demand for
meaningful level of political voice by ordinary citizens.2
1.1 Institutions and Economic Order 9

It follows that building a functional political order in post-socialist coun-

tries requires transforming viable but narrowly-based states into robustly broad-
based national states. This would pave the way for reliance on the rule
of law and away from meting out state violence or sowing corrosive dis-
cord as a method of rule. Fusing state-building (centralizing hard power)
and nation-building (integrationist soft power) also requires an ability on
the part of the state elite to restrain predation-with-guile by protecting the
most productive members of society. This is vital for broadening the fiscal
base of the State without endangering the position of the selectorates who,
in the world of disempowered electorates, wield veto power against credi-
ble threats to the authority the ruling clique (Acemoglu & Robinson, 2012;
de Mesquita & Smith, 2012).
Modern states which emerged in the age of commerce (1600–1800) and the age
of industry (1800–2000) had to contend with these politico-economic imperatives.
One challenge was how to transform mutually self-destructive domestic extrac-
tive contests into a goldilocks equilibrium that balances wealth redistribution with
wealth creation. A second challenge was to incentivize the specialists of violence
to protect producers, not just patrimonial state elites. A third was for regimes to
exercise self-restraint, honor accepted norms of justice (if only to cement loyalty
and legitimacy) and show openness to new ideas.
The political transition from a dependent subject to a free citizen, and from con-
trolling bodies to representative bodies, took place only in a minority of countries.
One driver was the power of ideas—of equality, justice, and moral restraint. The
other source of restraint on powerholders was the existence of a diversified eco-
nomic base that cannot be easily captured by the ruling elite (de Mesquita et al.,
2002). In other words, taxation eventually breeds representation.
But, where do quality institutions come from in the first place? Or how do coun-
tries escape doubly exclusionary institutions and Malthusian stagnation to move
toward the doubly inclusionary end of the spectrum?
Economists like to invoke the problem of commitment, which leads to the per-
sistence of bad institutions in the absence of credible third-party enforcement.
One popular explanation is that endowments and geography favor the emergence
of institutions that best serve those who somehow hold the power of coercion. If,
for example, labor is scarce relative to land (as was the case of Eastern Europe
and Russia) or the technology of production (as was the case with gold in South
Africa or tobacco in the Americas), then forced labor becomes the preferred insti-
tution—Apartheid, slavery, serfdom, and other forms of bondage. Domar’s model
of serfdom is an impeccable illustration of this economic logic (Domar, 1970).
Where land cannot be monopolized by the few (as in the mid-western states of
the United States), wage labor and independent farming emerge as dominant insti-
tutions. A large class of propertied households demands and obtains the franchise,
thereby sustaining progressively inclusionary political institutions as well.
Robinson and Acemoglu (2006) argue in this vein that oppositional class inter-
ests prefer different political institutions. That is, inclusive political institutions
such as democracy are preferred by the majority of the violent-capable citizenry
10 1 Economic Systems

but opposed by exclusivist elites. When the costs of repression are sufficiently
high and political concessions are not credible, dictatorial elites would be forced
to credibly share political power with the citizenry, thereby ensuring social stabil-
ity. These incentive-compatible processes depend on civil society’s strength, the
structure of political institutions, the nature of political and economic crises, the
level of economic inequality, the structure of the economy, the nature of external
interference, and the form and extent of globalization.
Good institutions may also be imposed by conquerors or arise as a response to
catastrophic events such as plagues and pandemics. But they need to be sustained,
which is why the role of geography and culture is relevant but certainly not destiny.
It turns out that secure property rights for all and competitive markets may be
necessary but not sufficient for shared prosperity. Many anti-growth elites have
historically provided security of ownership (including over slaves and serfs)—for
themselves. What also seems to matter more is the incentive of those holding
political power to focus on either redistributing existing wealth (extracting) or
creating new wealth to be shared with the masses (inclusionary). In other words,
politics and economics are intertwined in all systems—to varying degrees.
The Soviet-type state was an example of an extractive (though somewhat
benevolent) economic institution coexisting with highly exclusionary political
institutions. Such societies are chronically conflict-ridden over the distribution of
economic and political power. As such, they are subject to institutional drift as
resistance inexorably erodes the power of the ruling elites. At critical junctures, a
confluence of agency and contingent factors conspire to undermine the institutional
status quo to induce systemic change—as in the cases of the Russian Revolution
and the Soviet implosion in 1991 (Capoccia, 2016).3 Let us now see how far the
somewhat nebulous institutions thesis can take us.

1.2 Property Rights: Ownership Versus Control

As noted above, an economic system is a set of cohesive institutions that define

property rights, modes of decision-making, and motivation rules to govern the
level and distribution of production, income, investment, and consumption across
the population and over time. These complexly interlocking institutions bal-
ance the conflicting imperatives of competition, cooperation, and accountability.
Competition and cooperation ensure discipline via horizontal interdependence
or emulation. Accountability to relevant (read: coercion-capable) stakeholders is
enhanced through monitoring, command (vertical interdependence), and well-
designed incentives (positive or coercive).
Efficiency, as we will underscore below, requires well-defined and enforceable
property rights and decision-making rights. Therefore, well-designed economic
systems are statically efficient, dynamically efficient, and fair in providing equal
opportunity and reasonable outcomes. The most critical dimensions of efficiency
1.2 Property Rights: Ownership Versus Control 11

enhance long-term productivity by improving firm-level innovations and a macroe-

conomic environment that promotes optimal investment. In the process, the
economic system also gains popular legitimacy.
We now turn to a critical exposition of the economic criteria we will use to
compare the institutional forms and performances of economic systems. One set
dwells on ownership rights, while the other focuses on decision-making rights. A
case is made for combining the two criteria to obtain a holistic picture.

The Static Approach to Comparing Economic Systems

Property rights perspectives dwell on static considerations, such as the model of

constrained optimization that animates neoclassical economics (Winiecki, 2021).
This approach is advantageous where clear and enforceable property rights are
necessary and efficient (the Coase Theorem). On the other hand, those who accen-
tuate historical and institutional dynamics note that the security of property rights
that arises from a tenable political settlement is vital for economic prosperity but
accountability and efficiency do not easily map onto specific ownership forms.
Decision-making rights (or control rights) are decisive for productivity gains that
are much bigger and long-lasting than the static efficiency gains from eliminating
deadweight losses or Harberger triangles (the Lange-Taylor Theorem).
The legalistic perspective is built around the notion of property “ownership” or
relations of production in Marxian economics (Marx, 1867 [2010]). Let us parse
this multidimensional conceptualization.
Ownership refers to a socially sanctioned or legal title of a residual legatee over
an economic asset. The owner is a legally or socially recognized entity: an organ
of the state, a private individual, an extended family, or a community collective.
Property rights may be over one’s person, materials, or financial assets.
Property rights take myriad forms, including the right of use, income, transfer,
exchange, or sale involving an economic asset. A socioeconomic class in this sense
denotes a long-standing and distinct group of people occupying an identifiably
rigid economic position regarding the ownership and control of scarce economic
assets such as land, capital, or labor.

The Dynamic Approach to Comparing Economic Systems

This criterion refers to the de jure as well as de facto decision-making rights

over valuable economic assets, which may not necessarily be legally owned by
the person or group enjoying the right of control. The basic idea is plain enough:
what finally differentiates economic systems is the mode of resource allocation
and implementational coordination which is shaped by the distribution of power.
In oligarchic capitalist economies and statist socialist economies, the ruling class
fuses political and economic power even if ownership is predominantly private in
the former and state in the latter.
12 1 Economic Systems

These relations in production involve four important dimensions of planning

and implementation made by those who enjoy veto power in society. They com-
prise the degree of centralization of decisions, direction of information flows,
motivational forms, and coordination strategies.
Planning is ultimately about economic coordination among sundry suppliers
and between buyers and suppliers. Economic planning is also intertwined with
the notion of governance—the exercise of power under existing constraints and
incentives.4
The four distinct dimensions of the decision-making structure of an economic
system are as follows (Kornai, 1992; Neuberger, 1979):

(i) The degree of centralization of decision-making authority covers a broad

spectrum. At one end is hyper-centralization, as in the centrally-planned
economies (typified by the USSR and East Germany). At the other end is
decentralized planning, done at the level of the legally independent firm
(Apple or Ford) or the autonomous department (the Pentagon or the Califor-
nia state university system). Associative or collective decision-making falls
in between (as in the case of the Mondragon cooperative in Spain, Israeli
kibbutz, or the Yugoslav worker-managed firm).
(ii) The structure and direction of information flow are the second set of the dimen-
sions of economic planning. Economic information comes in two forms:
quantities and prices. At the competitive equilibrium, both types of informa-
tion lead to identical decisions, though prices are more efficient informational
signals. In socialist planning, for example, quantitative targets dominate pro-
duction plans, and administratively-determined prices (supplanted by quotas)
govern the distribution of basic necessities.
Economic information must be collected, processed, and communicated
to enable the communication of intelligible directives. As one might imagine,
each stage is fraught. Collecting detailed and up-to-date data is expensive and
time-consuming, and data processing requires a lot of computational capacity
and analytical rigor.
In centrally-planned economies or large business (or government) orga-
nizations, decisions are highly centralized and information flows vertically
within the bureaucracy. Transmittal of information creates many opportunities
for agents to distort economic messages by taking advantage of asymmetry
in informational access or interpretational ability.
External markets rely on a decentralized informational structure whereby
market-generated horizontal information flows among firms, or between firms
and consumers, mostly in the form of prices. Internal markets also exist
within large organizations where big decisions are made quantitatively while
inter-departmental transfer prices and talent competition may be intensely
competitive.
(iii) The third dimension, the coordinating structure of an economy pertains to
efficacy in implementing firm-level, sector-wide, or economy-wide decisions.
There are three distinct modes of cooperation. Socialist firms, as well as
1.2 Property Rights: Ownership Versus Control 13

large for-profit or non-profit organizations, rely on numbingly detailed central

plans to ensure coordination. Industrial planning, as Japan and South Korea,
fostered social learning through collaboration enforced by subsidies and
culturally-nuanced moral suasion. Tradition, such as kin-based work-sharing
and reciprocal income transfers, is another form of coordination. Competi-
tive markets coordinate decisions among buyers and sellers through price and
quality signals.
(iv) The fourth dimension, the motivational structure, addresses the enforcement
costs to implement the plans. The universally predominant mechanism for
reconciling the principal-agent problem is material incentives such as com-
pensation, job security, or profits. In highly regimented economic systems,
such as slavery and serfdom, unavoidable but inefficient coercion played a
vital role. We should not also ignore the important, albeit auxiliary, role of
ego-satisfying or moral incentives such as duty, praise, medals, and other
status-enhancing recognition awards.

The static and dynamic criteria matter greatly, as we will see in the transition
debates—ownership (privatization) and decision-making (market-led versus plan-
led allocation mechanisms). Janos Kornai (1980; 1992) has offered two instructive
theoretical insights that are worth summarizing.
The first idea is the socialist shortage economy, conceptualized by a stylized
distinction between the endemically demand-constrained economy (capitalism)
and the endemically supply-constrained economy (socialism). That is, classical
capitalist firms are taken to be demand- and hard-budget-constrained in respond-
ing to market opportunities. Analogously, classical socialist firms are understood
as supply (resource)-constrained with soft budgets thereby responding to directives
from planners.
The second intriguing idea offered by Kornai (1990; 2016) is the related thesis
of “natural affinity” between the form of ownership and the type of control. The
argument here is that private ownership is most compatible with, and gravitates
toward, market-driven allocation of resources, as in capitalism. Social ownership
is most compatible with collective management, whether such entities operate in
market economies (such as law firms or the kibbutz) or in socialist economies
(such as the Soviet kolkhoz or the Chinese commune). Lastly, state ownership is
most compatible with state-led allocation via a central economic plan.
To drive the point home, let us invoke a simple typology of three ownership
forms (state, cooperative, or private) and three control types (central plan, associa-
tive, or market). The interactions yield nine stylized economic systems, of which
three are dominant (see Table 1.2).
The Kornai affinity thesis suggests that, given the postulation of strong linkages
between ownership and coordination types, hybrid economic systems gravitate
toward either a pure private-ownership market economy or a pure state own-
ership planned economy. Market Socialism and Nazism/Fascism (which hijack
private business for mass mobilization in the service of aggressive nationalism) are
14 1 Economic Systems

Table 1.2 Nine pure economic systems

Ownership State Cooperative Private
control
Centralized: Plan CLASSICAL Collective Farms and Diversified Business Groups
SOCIALISM Urban Coops under (chaebols, kereitsu); Fascism
Socialism
Associative: (Labor COOPERATIVISM Worker Management under
Collective Management Capitalism
Decision under Market
Socialism)
Decentralized: State-Owned Cooperatives: CLASSICAL CAPITALISM
Market-based Enterprises: Employee-ownerships
Capitalism or Capitalism)
Market
Socialism
Notes Chaebols and Kereitsu are diversified business groups (designed mainly to pool investments
and rents to overcome pervasive market failures in the early stages of industrialization) in South
Korea and Japan, respectively (Abegaz, 2005)
Sources Author, based on various sources

conceptualized as transient systems. By extension, systemic reform can be under-

stood as either an acceleration of these organic institutional tendencies toward
purer forms (classical socialism, robust cooperativism, and classical capitalism) or
the supplanting of one pure system (planned socialism) by another (decentralized
capitalism).
What we actually observe across the world at a given point in time is transi-
tory hybridity. That is, observed economic systems are mostly uneasy mixtures of
market and state institutions, and informal and formal institutions (Nelson, 2012).
These insights inform our understanding of how crises or ill-informed reforms
generate conflicts between ownership rights and control rights to open the way for
radical change or prolonged stasis.
Consider, as an illustrative historical example, the changing class structure of
the economy of the United States from the vantage point of historical institu-
tionalism. A class structure refers to systemic relationships between those who
produce economic surplus and those who appropriate the surplus. As noted by
Bowles et al. (2005), on the eve of the British industrial revolution, the newly
independent colony of the United States was a country of independent commod-
ity producers (family farmers, traders, and service providers) and slaves—together
accounting for over 90% of the labor force. Two centuries later, the working class
(which owns its labor) and the new middle class (professional white-collar, aka
the labor aristocracy, and small capitalists)) together accounted for over 80% of
the workforce.
The United States transformed itself into an industrial (post-civil war to 1970)
and then a post-industrial society in just a century and a half (Gordon, 2016).
1.3 The Neoclassical Theory of Economic Systems 15

What took the United States a century (1870–1970) was, however, spectacularly
telescoped by China in just forty years (1980–2020).

1.3 The Neoclassical Theory of Economic Systems

A rigorous theory of economic systems must indeed answer several fundamen-

tal questions in economics: what should be produced (allocation), how it should
be produced (technology), for whom it should be produced (ownership rights),
and who makes what decisions (control rights). We summarize here the basic
arguments of Adam Smith’s invisible-hand paradigm of the competitive private-
ownership market economy and its relevance to an imitative market-socialist
economy. We do so by teasing out some specific implications of neoclassical
institutionalism.
Neoclassical economic theory often takes for granted the soft institutional
underbelly that interweaves the economic system with the rest of society. It instead
focuses on how the incentives embedded in existing institutions shape economic
behavior (Grief & Kingston, 2011; Rodrik, 2015). The various takes along this
line of thinking are almost unanimous in underscoring the importance of three
attributes for economic efficiency and the conservative equity notion that is Pareto
optimality. They are: Clearly-defined property rights (Coase), strong incentives
(Lange), and competitive discipline imposed by decentralized market mechanisms
(Pareto).
Welfare Economics of the Social Choice variety provides one theoretical basis
for judging the efficacy of competitive market mechanisms in allocating scarce
resources along the utility possibilities frontier. Public Choice economics, however,
focuses on hedonic self-interest as the ultimate driver of behavior. This framing is
used to explain the balance between political rent-seeking (via protection, market
power, or selective enforcement of regulations) and entrepreneurial profit-seeking.
The tension between the two motives creates a wedge between what is good for
the individual and what is good for society (Buchanan & Tullock, 1962).
Three theorems of economic systems can be discerned from the neoclassical lit-
erature:

1. The Two Fundamental Theorems of Welfare Economics state that, provided mar-
kets are complete and firms do not enjoy market power, competitive markets
have the attractive properties of being allocatively and distributively efficient.
The reasoning is distilled in Box 1.1.
The First Fundamental Theorem of Welfare Economics, in other words,
claims that, under certain conditions (existence of a complete set of futures and
risk markets to guide firms in investment decisions, information being always
perfect for preempting moral hazard and adverse selection), every competitive
market equilibrium is a Pareto-efficient resource allocation. No one can be made
better off without making anyone else worse off.
The Second Fundamental Theorem of Welfare Economics asserts that,
under certain conditions (preference and production convexities), every Pareto-
efficient allocation of resources can be obtained and sustained as a competitive
16 1 Economic Systems

equilibrium of decentralized markets. A policy-led redistribution of initial

resource endowments through a lump-sum transfer is all that would be needed
to decouple efficiency and distribution.
However, informational imperfections and incompleteness of markets render
the market mechanism inefficient. The assumptions that markets exist for all
possible goods and for all time horizons, and markets are perfectly competitive
are rather heroic. Other assumptions, such as transaction costs being negligibly
trivial and the presumed absence of externalities, rob these claims of realism
(Stiglitz, 1994).

Box 1.1 The Theorems of Welfare Economics

The First Theorem of Welfare Economics states that any competitive Wal-
rasian equilibrium is almost always Pareto efficient in the allocation of
resources. The Theorem, in other words, says that a competitive equilib-
rium is efficient. This will be so if markets work perfectly, that is, the
marginal product of labor and capital is equalized across the economy.
Otherwise, resources could be shifted to higher productivity activities to
increase output per unit of input. One implication of this view is that mar-
ket failures (in the presence of an externality, public goods, or excessive
inequality) necessitate only benign government intervention, if at all.
Note here that Pareto-efficient situations are those in which no one
can be made better off without making someone else worse off. Pareto
efficiency does not necessarily result in a socially desirable distribution of
resources since it makes no statement about equality or the overall well-
being of society that can be generated by many possible Pareto-efficient
equilibria. It is an overly conservative treatment of the efficiency-equity
tradeoff.
However, the Stiglitz-Greenwald Theorem counters that market
economies in the real world are rarely efficient. Several reasons are
adduced: risk and futures markets are incomplete, and information is often
imperfect (adverse selection, moral hazard) and distributed asymmetri-
cally among parties to economic transactions. In real-world economies,
these substantial deviations from the ideal conditions (market failures)
necessitate judicious government interventions to arrive at second-best
outcomes. These inefficiencies in resource allocation, which arise from
the substantial and differential deviations from the theoretical norm, con-
stitute the better part of the explanation for why some countries are richer
than others.
The Second Theorem of Welfare Economics asserts the converse. Every
Pareto-efficient allocation can be attained by a competitive equilibrium.
One implication is that production efficiency and income distribution are,
in principle, separable. In other words, policymakers can choose a partic-
ular Pareto-efficient outcome which is consistent with the most preferred
1.3 The Neoclassical Theory of Economic Systems 17

distributional equity. This can be done by enacting non-distortionary

lump-sum redistributions where governments fully respect citizens’ pref-
erences. Redistributions are, however, often costly in a world of imperfect
information, and decentralized decisions are not always possible due to
pervasive complementarities and the lumpiness of investments.
Sources Compiled from various sources, especially Stiglitz (1994) and
The New Palgrave Dictionary of Economics (2008)

2. The Lange-Lerner-Taylor Theorem asserts that certain institutional arrangements

of market socialism can produce Walrasian-like efficient resource allocations
and even superior income distributions. In other words, with government owner-
ship and allocation of capital, market-imitating socialism can generate efficient
central plans. Furthermore, market socialism, led by a benevolent social planner
or government, can attain greater economic equality than capitalism by redis-
tributing a portion of the social surplus (profits) without harming efficiency
(Lange, 1937; Taylor, 1929).
The Theorem, also known as the Lange-Lerner Mechanism, makes several
fanciful assumptions: state ownership of the means of production, consumer
sovereignty, free labor markets, prices adjusted for social objectives, manage-
rial autonomy, profit maximization rules for input use and output level, and
state-managed allocation between long-term investment and citizenship divi-
dend distribution (Heal, 1973). The key idea is that a robustly positive incentive
is necessary and sufficient for efficient allocation and optimal distribution of
resources that an ideal market would have generated through the Walrasian
tatonnement process.
Given the right incentives, rational workers and managers would be indiffer-
ent about the identity of the residual claimant, be it government, community, or
private owners. This Theorem’s implication is ironic: the efficiency properties of
a competitive market economy and a socialist market economy are theoretically
rationalizable by the same trial-and-error process of price discovery.
It is practice that differentiates them. Stiglitz (1994, chapter 5), for example,
argues strongly that market socialism underestimates the importance of proper
design of incentives in a world of imperfect information and public ownership
and the challenges of price-guided allocations (especially of capital), misjudges
the importance of decentralization and competitions, and ignores the role of
innovation. As Stiglitz (1994: 104) puts it:

The standard neoclassical (Arrow-Debreu) model does not provide an adequate descrip-
tion of how the market economy operates, and therefore a socialist economy built on a
model that simply imitates the model of the market economy, altering only who ‘owns’
the firms, could not have been expected to fare well.

Based on this assessment, Stiglitz is understandably skeptical about the notion

that one could keep all the advantages of the market while dispensing with its
18 1 Economic Systems

inherent disadvantages (such as the inseparability of incentives and inequality

and the need for heavy government involvement, especially in the allocation of
capital, that a decentralized market cannot provide).
3. The Coase Theorem asserts that, if transaction costs are zero and no wealth
effects exist, private and social costs will be equalized in a competitive econ-
omy. The initial allocation or assignment of property rights, however unequal,
does not matter for the efficient allocation of resources. The reasoning is that
property owners will cooperate to produce efficient, if not equitable, economic
institutions and mechanisms of enforcement.

A clear assignment of property rights and sufficiently low transaction costs pro-
vide private owners adequate incentive to work out Pareto-efficient bargains to
internalize externalities—all without government intervention (Coase, 1937; 1960).
The implication is that getting entitlements right is better than getting prices
right through government intervention since government failure can be worse than
market failure.
Coase’s critics note, however, that socialism failed because it tried to abolish
private property and it undermined positive incentives and competitive discipline in
the spheres of economics and politics alike (McCloskey, 1998). Getting institutions
(or incentives) right encompasses well-designed and flexible institutions because
markets (or plans) are not self-creating, self-regulating, self-stabilizing, or self-
legitimizing.
Stiglitz (1994) goes further to point out that government institutions do not mat-
ter much if and only if there exists a complete set of present and future markets,
and perfect competition—freedom of entry and exit, perfect information cost-
lessly available to all parties, and zero transaction costs. In the real world, five
types of market-supporting institutions matter greatly: enforceable property rights,
appropriate regulatory regimes, macro-stabilization, social insurance, and conflict
management—which are mostly public goods.
How is it that, at least in principle, the metaphorical visible hand can do what-
ever the invisible hand can, and perhaps more? Joseph Stiglitz (1994) explains
this seeming paradox by underscoring that neoclassical theory and market-socialist
theory have the same conceptual foundations. The metaphors of the mythical auc-
tioneer and the benevolent social planner theoretically, if not practically, make the
same claims. Both perspectives pay inadequate attention to the incentive incompat-
ibility that arises from the separation of “ownership” and “control” in a world of
highly imperfect information about the effort levels of agents. Finally, institutions
of accountability, underplayed by both, matter greatly for judging efficiency and
equity in economic systems along the market-state continuum.5
In this sense, markets are distinctive and powerful contractual relation-
ships (some at arm’s length and others socially embedded) among key actors
(entrepreneurs, buyers, owners, regulators, and providers of vital public services).
They are nonetheless ill-adapted for accommodating the effects of externali-
ties, public goods, and pre-market inequalities. It also bears noting that firms
populate modern economic systems—profit-seeking, sales-seeking, rent-seeking,
1.3 The Neoclassical Theory of Economic Systems 19

quota-seeking, and employment-seeking. Their objectives often overlap in terms

of time horizon and motivation.
The above observations encourage us to dispense with certain myths about
horizontal markets relative to vertical planning (see Box 1.2). By doing so,
we may be able to treat economic planning as an integral feature of organiza-
tions in the full continuum from permissively decentralized decision-making to
command-and-control centralization.

Box 1.2 Six Myths About Economic Systems

(1) The Price Myth states that economic relations in capitalist economies
are governed primarily by prices. Non-price modes of allocations are
also important, within firms and between households. Price-based allo-
cations are likewise important in planned economies, as we will see in
subsequent chapters.
(2) The State Enterprise Myth notes that state-owned enterprises should not
be judged based on profitability alone since they are also mandated to
mind social objectives such as universal access to basic public services.
Agency problems abound in the normal activities of capitalist firms as
well as socialist firms.
(3) The Centralization Myth is challenged by the fact that all systems have
varying degrees of centralization (within organizations) and decentral-
ization (across organizations), which means that the distinction should
not be overdrawn. The US Pentagon is said to be the largest centrally-
planned entity in the world. The largest transnational corporations run
global value chains and supply chains that are more intricately planned
than many socialist economies.
(4) The Planning Myth claims that only socialist economies engage in seri-
ous planning. In reality, large capitalist firms and their governments rely
on economic planning though this planning varies in degree, horizon,
and form. Conversely, very few regimented economies have managed
to stamp out market relations, which exist through varying degrees of
illegality.
(5) The Property Right Myth is challenged by the idea that well-defined prop-
erty rights are necessary but not sufficient for ensuring efficiency and
equity. Ronald Coase is not quite right in claiming that all that one has
to do is ensure the correct assignment of property rights. Coordination
failures abound in market economies while severe agency problems are
ubiquitous in socialist economies.
(6) The No-Third-Way Myth ignores the vital role of the non-profit private
sector in enhancing well-being. Standing between profit-seekers are and
power-seekers, intermediate organizations (civic organizations and non-
profits such as “private” universities and foundations and cooperatives)
which contribute enormously to national economic welfare.
20 1 Economic Systems

Source Culled from Stiglitz (1994)

A good analytical approach for studying economic systems must then clearly
identify the selection environment that privileges specific institutions (such as the
modes of corporate and state governance, and the scope for individual choice)
over others. It must also explain how incumbent institutions facilitate or impede
institutional and organizational adaptation through competitive or rigged markets
or plans: governments, firms, non-profits, and political organizations collectively
shape economic policy. The interplay of power, interests, and the ability to enforce
one’s interests is what ultimately governs the operation of specific economies.6 The
emergence and evolution of the centrally-planned economy (CPE) of the USSR is
a case in point.

1.4 The Emergence of the Centrally Planned Economy

The emergence of the modern socialist economy, about a decade after the 1917
Russian Revolution, is one of the most remarkable developments of the twenti-
eth century. Momentous debates on the feasibility and desirability of the modern
CPE took place in the interwar decades on both sides of the ideological divide.
Responding to the unprecedented macroeconomic crisis in the capitalist economy,
governments in the Atlantic West also engaged in extensive Keynesian planning
and wartime administrative rationing through the Second World War. On the other
side of the divide, the first five-year plan of the USSR coincided with the infamous
collectivization drive of 1928–1932.
The modern CPE, trailblazing a path of non-capitalist development, went
through three phases of evolution. Here is a brief chronology for historical context:

(A) 1925–1945
During this phase, the preoccupation was with how a socialist economy could
practically operate and grow in the absence of markets and private property.
As we will see in Chapter 3, the pinnacle was the famous Soviet Industri-
alization Debates, which presaged post-war development economics (Dobb,
2014; Murphy et al., 1989). The three camps within the Communist Party of
the Soviet Union (CPSU). They were: Preobrazhenski (who favored indus-
try over agriculture), Shanin (who favored agriculture over industry), and
Bukharin (who favored a balanced approach). Stalin eventually sided with
Preobrazhenski and declared war on the peasantry resulting in the infamous
collectivization drive.
In the West, this large-scale collectivist economic experiment elicited the
so-called Socialist Controversies in academic circles. Barone and Lange
upheld the case for the viability of a centrally-planned economy, and von
Mises and Hayek thought that state socialism will self-destruct sooner than
later.
1.4 The Emergence of the Centrally Planned Economy 21

Numerous arguments were advanced in favor of central planning. Socioe-

conomic modernization can be accelerated using dirigiste methods because a
meritocratic system of elite formation can enhance equality while effecting
a successful industrialization drive. Inflation and unemployment can be cast
into the dustbin of history. And the like.
On the other hand, the critique of central planning revolved around several
legitimate concerns. These included catastrophic administrative inefficien-
cies arising from an immense and rigidly organized bureaucratic structure,
infatuation with gigantism, the absence of consumer sovereignty, excessive
aversion to risk, and pervasive shortages of outputs when crucial inputs
become unavailable because of the predisposition to hoard under a regime
of pressure (taut) planning. Hayek (2007) noted further that focusing on the
contrast between state and market is less illuminating than focusing on the
distinction between the individual and the collective, i.e., freedom.
(B) 1945–1975
After the war economy gave way to a recognizably socialist political economy,
the eminently debatable question concerned the appropriate institutions, orga-
nizations, and planning processes for an efficient socialist economy. Debates
on these issues led to the emergence of CES as a sub-field of (political)
economics.
Mature socialism ultimately assumed the following four generic attributes.
Its political foundation was the monoparty system and ultra-nationalism for
a fierce defense of national sovereignty in the besieged global periphery. Its
economic foundation was public ownership of property and centrally-directed
organizational coordination to manage an autarkic economic system. Social-
ism’s social foundation was mass education and ideological indoctrination to
minimize costly social violence by socializing citizens into accepting collec-
tivist norms and habitually acquiescing to higher authority. Lastly, its control
over citizens was cemented through an extensive network of surveillance and
draconian punishment for noncompliance.
Comparative economic systems threw much-needed light on these features
based on deep-veined theoretical constructs, buttressed by empirical substan-
tiation of the workings of “really-existing” socialism and capitalism (Nove,
1993). Four empirical generalizations illustrate the power of its insights: (1)
governments have played an important role in almost all of the major eco-
nomic success stories; (2) there are inefficient state enterprises as well as
efficient ones—both governments and markets, as bundles of imperfect insti-
tutions, are prone to failure; (3) almost all governments play a pivotal role in
governing markets due mainly to informational failures; and (4) governments
have assumed a direct role in the provision of a social safety net with varying
degrees of generosity and competence.
More specifically, comparative economics has identified four attributes of
an ideal CPE (Bornstein, 1985). The first is the ubiquity of omniscient plan-
ners who can produce consistent and optimal plans. The second is the visible
hand of an omnipotent ruling party to impose its preferences on government
22 1 Economic Systems

planners, the vast economic bureaucracy, and the state-owned enterprises. The
third is the insignificance of money since quantitative planning’s practicality
renders money mostly passive. The fourth feature is the de facto flexibility
of prices whereby administrative guidance is in practice supplemented by
adjustments (using turnover and sales taxes, for example) to correct frequent
imbalances between demand and supply.
In sum, the CPE has certain generic features that hold across countries
which will help us identify commonalities as well as country specificities.
Ownership of most of the means of production was by the state that a hege-
monic Communist Party inevitably controls. The Party was assisted by mass
organizations (neighborhood organizations, labor unions, professional orga-
nizations, and youth organizations) and an extensive network of domestic
security services.
Central economic planning guides the most important decisions. This
largely normative practice entails hierarchical control, via an array of eco-
nomic ministries and agencies, a premium on quantitative targets, adminis-
trative prices to ration key inputs, centralized allocation of large investment
funds, a monobank system (financial police), taut planning, and growth driven
primarily by factor accumulation.
At its zenith around 1975, the socialist bloc (USSR, China, E/SE Europe)
accounted for a quarter of the world’s population—equal to the capitalist bloc
in OECD countries. This left half of the world’s population to reside in the
third bloc—variously dubbed the Third World, Global South, or the underde-
veloped economies. This last group, led by India, flirted with “development
planning.” The USSR, GDR, and Czechoslovakia typified the classical CPE
model of industrialized economies.7
(C) 1975–1990
New perspectives on CE (aka the new institutional economics) emerged as the
early “growth miracles” of the socialist economies gave way to deceleration
and eventually to prolonged stagnation. During this last phase of socialism,
the main challenge was to explain theoretically and substantiate empirically
the persistent simultaneity of shortage and slack in the iconic CPE.

Two general equilibrium-based perspectives were offered during this period: the
Neoclassical Disequilibrium School and the Kornai Disequilibrium School (Andr-
eff, 2021). The former applies fix-price, excess demand disequilibrium Keynesian
models of the capitalist economy (profit maximization, hard budgets, and imper-
fect relative prices) to the CPE. Shortages and repressed inflation are rationalized
as products of informational imperfections (Andreff, 2021; van Brabant, 1990).
Kornai’s shortage-economy disequilibrium perspective (Kornai, 1979; 1980;
1992), on the other hand, offers the novel argument that the socialist firm, unlike
the endemically demand-constrained capitalist firm, operates in an environment of
endemic and persistent shortage. Shortage is maintained by a variety of mecha-
nisms grounded in rational behavior on the part of enterprises, central planners,
households, and other agents alike—given the information and processing power
1.5 A Synopsis of the Country Case Studies 23

at their disposal. Such an economy is deeply inefficient due to generalized hoard-

ing of materials and labor, self-produced or procured from other firms informally
or the underground economy. Both firms and households predictably react only to
signals of above-normal shortage, such as those signaled by unusually long queues
(van Brabant, 1990). We will build on these ideas in Chapter 4 when we examine
plan implementation.

1.5 A Synopsis of the Country Case Studies

The four case studies that substantiate or contradict the various theoretical
claims represent rich variants of socialism and capitalism. Just as interestingly,
they provide contrasting economic performances which we will examine in detail
in subsequent chapters. It will suffice here to provide tantalizing snapshots to set
the stage.
Figure 1.1 provides a two-century perspective on the growth of real per capita
income for China, Poland, Russia, and Vietnam. For relevance, we include other
comparator non-socialist countries—Great Britain, Italy, Japan, and India.

40000

35000

30000

25000 ITA

20000

RUS
15000 GBR

10000
CHN

5000
IND

0
1800
1806
1812
1818
1824
1830
1836
1842
1848
1854
1860
1866
1872
1878
1884
1890
1896
1902
1908
1914
1920
1926
1932
1938
1944
1950
1956
1962
1968
1974
1980
1986
1992
1998
2004
2010
2016

CHN GBR JPN RUS IND ITA

Fig. 1.1 Hockey-Stick Pattern of Per capita Income Growth, 1800–2015 (Note Real per capita
income is in US$ 2011 prices. CHN = China, GBR = Great Britain, JPN = Japan, RUS = Russia,
IND = India, and ITA = Italy. See also, Bolt et al. [2018]. Sources Maddison Project Database,
version 2018)
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whilst he appeared to occupy his mind solely with the internal state
of his dominions. His very first act was a proof that he was quite
ready to go in opposition to all the ordinary rules of political
prudence, and when under the influence of his humour to follow his
views, reckless of consequences. He caused splendid funeral
honours and services to be performed for his murdered father, and
forced the audacious and godless, though clever criminals, who had
helped to place his mother on the throne, to be publicly exposed to
the gaze of the people. Notwithstanding this, he suffered them to
remain in possession of their honours and estates, whilst he
designated them as murderers, and reminded the people that his
mother had taken part in the murder of his father. The body of Peter
III, which had been deposited in the convent of Alexander Nevski,
was by his orders placed beside that of his wife; and it was notified
by an inscription in the Russian language that, though separated in
life, in death they were united.
Alexis Orlov and Prince Baratinski, two of the
[1796 a.d.] murderous band, were compelled to come to St.
Petersburg to accompany the funeral
procession on foot, but they were not so treated as to prevent them
afterwards from doing further mischief. Alexis obtained permission to
travel in foreign countries. Baratinski was ordered never again to
show himself at court; which, under existing circumstances, could
not to him be otherwise than an agreeable command. Single proofs
of tender feeling, of a noble heart, and touching goodness, nay even
the emperor’s magnanimous conduct towards Kosciuszko and his
brethren in arms, combined with his sympathy with the fate of
Poland, could not reconcile a court, such as that of Russia under
Catherine II had become, and a city like that of St. Petersburg, to the
change of the court into a guard-room, and to the daily varying
humours of a man of eccentric and half-deranged mind. Even the
improvements in the financial affairs of the country were regarded as
ruinous innovations by those who in times past had profited by the
confusion. The whole of Russia, and even the imperial family, were
alarmed and terrified; a complete flood of decrees, often
contradictory, and mutually abrogatory, followed one another in quick
succession; and the mad schemes of the emperor, who was,
nevertheless, by no means wicked or insensible to what was good
and true, reminded all observers of the most unhappy times of
declining Rome.b

Imperial Eccentricities

The guards, that dangerous body of men who had overturned the
throne of the father, and who had long considered the accession of
the son as the term of their military existence, were rendered
incapable of injuring him by a bold and vigourous step, and treated
without the least deference from the first day. Paul incorporated in
the different regiments of guards his battalions that arrived from
Gatshina, the officers of which he distributed among the various
companies, promoting them at the same time two or three steps; so
that simple lieutenants or captains in the army found themselves at
once captains in the guards, a place so important and hitherto so
honoured, and which gave the rank of colonel, or even of brigadier.
Some of the old captains of the first families in the kingdom found
themselves under the command of officers of no birth, who but a few
years before had left their companies, as sergeants or corporals, to
enter into the battalions of the grand duke. This bold and hasty
change, which at any other time would have been fatal to its author,
had only the effect of inducing a few hundreds of officers, subalterns
and others, to retire.
Paul, alarmed and enraged at this general desertion, went to the
barracks, flattered the soldiers, appeased the officers, and
endeavoured to retain them by excluding from all employ, civil and
military, those who should retire in future. He afterwards issued an
order that every officer or subaltern who had resigned, or should give
in his resignation, should quit the capital within four-and-twenty
hours, and return to his own home. It did not enter into the head of
the person who drew up the ukase that it contained an absurdity; for
several of the officers were natives of St. Petersburg, and had
families residing in the city. Accordingly, some of them retired to their
homes without quitting the capital, not obeying the first part of the
order, lest they should be found guilty of disobedience to the second.
Arkarov, who was to see it put in force, having informed the emperor
of this contradiction, directed that the injunction to quit St. Petersburg
should alone be obeyed. A number of young men were consequently
taken out of their houses as criminals, put out of the city, with orders
not to re-enter it, and left in the road without shelter, and without any
furred garments, in very severe weather. Those who belonged to
very remote provinces, for the most part wanting money to carry
them thither, wandered about the neighbourhood of St. Petersburg,
where several perished from cold and want.
The finances of the empire, exhausted by the prodigalities and still
more by the waste of Catherine’s reign, required a prompt remedy;
and to this Paul seemed at first to turn his thoughts. Partly from
hope, partly from fear, the paper money of the crown rose a little in
value. It was to be supposed that the grand duke of all the Russias,
who for thirty years had been obliged to live on an income of a
hundred thousand rubles (£10,000) per annum, would at least have
learned economy per force; but he was soon seen to rush into the
most unmeasured sumptuosity, heap wealth upon some, and lavish
favours upon others, with as much profusion as his mother, and with
still less discernment. The spoils of Poland continued to add to the
riches of men already too wealthy. All he could do towards restoring
a sort of equilibrium between his receipts and disbursements was to
lay an exorbitant tax on all the classes of his slaves. The poll-tax of
the wretched serfs was doubled, and a new tax was imposed upon
the nobles, which, however, the serfs would ultimately have to pay.
After the first impressions which his accession caused in the heart of
Paul, punishments and disgraces succeeded with the same rapidity
and profusion with which he had lavished his favours. Several
experienced the two extremes in a few days. It is true that most of
these punishments at first appeared just; but then it must be allowed
that Paul could scarcely strike any but the guilty, so corrupt had been
all who were about the throne.
A whim which caused no little surprise was the imperial prohibition
of wearing round hats, or rather the sudden order to take them away
or tear them to pieces on the heads of those who appeared in them.
This occasioned some disgraceful scenes in the streets, and
particularly near the palace. The
Cossacks and soldiers of the
police fell on the passengers to
uncover their heads, and beat
those who, not knowing the
reason, attempted to defend
themselves. An English
merchant, going through the
street in a sledge, was thus
stopped, and his hat snatched
off. Supposing it to be a robbery,
he leaped out of his sledge,
knocked down the soldier, and
called the guard. Instead of the
guard, arrived an officer, who
overpowered and bound him;
but as they were carrying him
Paul I
before the police, he was
fortunate enough to meet the (1754-1801)
coach of the English minister,
who was going to court, and
claimed his protection. Sir Charles Whitworth made his complaint to
the emperor; who, conjecturing that a round hat might be the
national dress of the English as it was of the Swedes, said that his
order had been misconceived, and he would explain himself more
fully to Arkarov. The next day it was published in the streets and
houses that strangers who were not in the emperor’s service, or
naturalised, were not comprised in the prohibition. Round hats were
now no longer pulled off; but those who were met with this unlucky
headdress were conducted to the police to ascertain their country. If
they were found to be Russians, they were sent for soldiers; and
woe to a Frenchman who had been met with in this dress, for he
would have been condemned as a Jacobin.
A regulation equally incomprehensible was the sudden prohibition
of harnessing horses after the Russian mode. A fortnight was
allowed for procuring harness in the German fashion; after the
expiration of which, the police were ordered to cut the traces of every
carriage the horses of which were harnessed in the ancient manner.
As soon as this regulation was made public, several persons dared
not venture abroad, still less appear in their carriages near the
palace, for fear of being insulted. The harness-markers availed
themselves of the occasion to charge exorbitant prices. To dress the
ishvoshtshki, or Russian coachmen, in the German fashion, was
attended with another inconvenience. Most of them would neither
part with their long beards, their kaftans, nor their round hats; still
less would they tie a false tail to their short hair, which produced the
most ridiculous scenes and figures in the world. At length the
emperor had the vexation to be obliged to change his rigorous order
into a simple invitation to his subjects gradually to adopt the German
fashion of dress, if they wished to merit his favour. Another reform
with respect to carriages: the great number of splendid equipages
that swarmed in the streets of St. Petersburg disappeared in an
instant. The officers, even the generals, came to the parade on foot,
or in little sledges, which also was not without its dangers.
It was anciently a point of etiquette for every person who met a
Russian autocrat, his wife, or son, to stop his horse or coach, alight,
and prostrate himself in the snow or in the mud. This barbarous
homage, difficult to be paid in a large city where carriages pass in
great numbers, and always on the gallop, had been completely
abolished under the reign of the polished Catherine. One of the first
cares of Paul was to re-establish it in all its rigour. A general officer,
who passed on without his coachmen’s observing the emperor riding
by on horseback, was stopped, and immediately put under arrest.
The same unpleasant circumstance occurred to several others, so
that nothing was so much dreaded, either on foot or in a carriage, as
the meeting of the emperor.
The ceremony established within the palace became equally strict,
and equally dreaded. Woe betide him who, when permitted to kiss
the hand of Paul, did not make the floor resound by striking it with his
knee as loud as a soldier with the butt-end of his firelock. It was
requisite, too, that the salute of the lips on his hand should be heard,
to certify the reality of the kiss, as well as of the genuflection. Prince
George Galitzin, the chamberlain, was put under arrest on the spot
by his majesty himself, for having made the bow and kissed the hand
too negligently.
If this new reign was fatal to the army and to the poor gentry, it
was still more so to the unhappy peasantry. A report being spread
that Paul was about to restrict the power of masters over their
slaves, and give the peasants of the lords the same advantages as
those of the crown, the people of the capital were much pleased with
the hopes of this change. At this juncture an officer set off for his
regiment, which lay at Orenberg. On the road he was asked about
the new emperor, and what new regulations he was making. He
related what he had seen, and what he had heard; among the rest,
mentioning the ukase which was soon to appear in favour of the
peasants. At this news, those of Tver and Novgorod indulged in
some tumultuous actions, which were considered as symptoms of
rebellion. Their masters were violently enraged with them; and the
cause that had led them into error was discovered. Marshal Repnin
was immediately despatched at the head of some troops against the
insurgents; and the officer who had unwittingly given rise to this false
hope, by retailing the news of the city on his road, was soon brought
back in confinement. The senate of St. Petersburg judged him
deserving of death, and condemned him to be broken, to undergo
the punishment of the knout, and if he survived this, to labour in the
mines. The emperor confirmed the sentence. This was the first
criminal trial that was laid before the public; and assuredly it justified
but too well those remains of shame which had before kept secret
similar outrages.
The most prominent of Paul’s eccentricities was that mania which,
from his childhood, he displayed for the military dress and exercise.
This passion in a prince no more indicates the general or the hero
than a girl’s fondness for dressing and undressing her doll
foretokens that she will be a good mother. Frederick the Great, the
most accomplished soldier of his time, is well known to have had
from his boyhood the most insuperable repugnance to all those
minutiæ of a corporal to which his father would have subjected him;
this was even the first source of that disagreement which ever
subsisted between the father and the son. Frederick, however,
became a hero; his father was never anything more than a corporal.
Peter III pushed his soldato-mania to a ridiculous point, fancying he
made Frederick his model. He loved soldiers and arms, as a man
loves horses and dogs. He knew nothing but how to exercise a
regiment, and never went abroad but in a captain’s uniform.
Paul, in his mode of life when grand duke, and his conduct after
his accession, so strongly resembled his father that, changing
names and dates, the history of the one might be taken for that of
the other. Both were educated in a perfect ignorance of business,
and resided at a distance from court, where they were treated as
prisoners of state rather than heirs to the crown; and whenever they
presented themselves appeared as aliens and strangers, having no
concern with the royal family. The aunt of the father (Elizabeth) acted
precisely as did the mother of the son. The endeavours of each were
directed to prolong the infancy of their heirs, and to perpetuate the
feebleness of their minds. The young princes were both
distinguished by personal vivacity and mental insensibility, by an
activity which, untrained and neglected, degenerated into turbulence;
the father was sunk in debauchery, the son lost in the most
insignificant trifles. An unconquerable aversion to study and
reflection gave to both that infatuated taste for military parade, which
would probably have displayed itself less forcibly in Paul had he
been a witness of the ridicule they attached to Peter. The education
of Paul, however, was much more attended to than that of his father.
He was surrounded in infancy by persons of merit, and his youth
promised a capacity of no ordinary kind. It must also be allowed that
he was exempt from many of the vices which disgraced Peter;
temperance and regularity of manners were prominent features of
his character—features the more commendable, as before his
mother and himself they were rarely to be found in a Russian
autocrat. To the same cause, education, and his knowledge of the
language and character of the nation, it was owing that he differed
from his father in other valuable qualities.
The similarity which, in some instances, marked their conduct
towards their wives, is still more striking; and in their amours, a
singular coincidence of taste is observable. Catherine and Marie
were the most beautiful women of the court, yet both failed to gain
the affections of their husbands. Catherine had an ambitious soul, a
cultivated mind, and the most amiable and polished manners. In a
man, however, whose attachments were confined to soldiers, to the
pleasures of the bottle, and the fumes of tobacco, she excited no
other sentiment than disgust and aversion. He was smitten with an
object less respectable, and less difficult to please. The countess
Vorontzov, fat, ugly in her person and vulgar in her manners, was
more suitable to his depraved military taste, and she became his
mistress. In like manner, the regular beauty of Marie, the unalterable
sweetness of her disposition, her unwearied complaisance, her
docility as a wife, and her tenderness as a mother were not sufficient
to prevent Paul from attaching himself to Mademoiselle Nelidov,
whose disposition and qualities better accorded with his own, and
afterwards to a young lady of the name of Lopukhin, who, it is
believed, rejected his suit. To the honour of Paul it is related that he
submitted to that mortifying repulse with the most chivalric patience
and generosity. Nelidov was ugly and diminutive, but seemed
desirous, by her wit and address, to compensate for the
disadvantages of her person; for a woman to be in love with Paul it
was necessary she should resemble him.
On their accession to the throne, neither the father nor the son
were favourites with the court or the nation, yet both acquired
immediate popularity and favour. The first steps of Paul appeared to
be directed, but improved, by those of Peter. The liberation of
Kosciuszko and other prisoners brought to public recollection the
recall of Biron, Munich, and Lestocq, with this difference—that Peter
III did not disgrace these acts of clemency and justice by ridiculous
violences, or by odious and groundless persecutions. Both issued
ukases extremely favourable to the nobility, but from motives
essentially different, and little to the honour of the son. The father
granted to the Russian gentry those natural rights which every man
ought to enjoy; while the son attempted the folly of creating a
heraldic nobility in Russia, where that Gothic institution had never
been known. In the conduct which he observed towards the clergy,
Paul, however, showed himself a superior politician. Instead of
insulting the priests, and obliging them to shave their beards, he
bestowed the orders of the empire on the bishops, to put them on a
footing with the nobility, and flattered the populace and the
priesthood by founding churches, in obedience to pretended
inspiration.
In his military operations, however, his policy appears to have
abandoned him, because here he gave the reins to his ruling
passion. The quick and total change of discipline he introduced in his
armies created him nearly as many enemies as there were officers
and soldiers. In the distrust and suspicions which incessantly
haunted him, his inferiority to his father is also evident. One of the
first acts of Peter III was to abolish the political inquisition
established by Elizabeth; whereas Paul prosecuted no scheme with
greater alacrity than that of establishing a system of spies, and
devising means for the encouragement of informers. The blind
confidence of the father was his ruin, but it flowed from a humanity of
disposition always worthy of respect. The distrust of the son did not
save him; it was the offspring of a timorous mind, which by its
suspicions was more apt to provoke than to elude treason.k

Paul’s Foreign Policy

In regard to foreign matters Paul’s initial policy was one of peace.

He put a stop to the levying of recruits after the manner adopted by
his mother—that is, in the proportion of three men to every five
hundred souls—recalled his army from Persia, and left Georgia to
take care of itself. He showed compassion for the Poles, recalled the
prisoners from Siberia, transferred King Stanislaus from Grodno to
St. Petersburg, visited Kosciuszko at Schlüsselburg and released
him in company with the other prisoners. He bade Kolitchev, envoy
extraordinary at Berlin, inform the king that he, Paul, wished neither
conquest nor aggrandisement. He dictated to Ostermann a circular
directed to the foreign powers, in which he declared that of all the
countries of the world Russia alone had been constantly engaged in
war since 1756; that forty years of warfare had reduced the
population; that the emperor’s humanity would not allow him to
withhold from his beloved subjects the peace for which they longed;
that though on account of these considerations Russia could take no
active part in the struggle against France, the emperor would
“nevertheless remain closely united with his allies, and would use
every means to oppose the rise of the mad French Republic which
threatened all Europe with upheaval by the destruction of its laws,
privileges, property, religion, and customs.” He refused all armed
assistance to Austria, which was alarmed at Napoleon’s victories in
Italy, and recalled the fleet that Catherine had adjoined to the English
fleet for the purpose of blockading the coasts of France and Holland.
He even received overtures made by Caillard, the French envoy to
Prussia, and caused him to be informed that the emperor “did not
consider himself at war with the French, that he had never done
anything to harm them, but was rather disposed to keep peace with
them, and would induce his allies to hasten the conclusion of war, to
which end he offered the mediation of Russia.”
It was not long, however, before relations again became strained
between France and Russia. By the Treaty of Campo Formio the
Ionian Isles had been given to the French, who thus acquired a
threatening position in the East and increased power over the Divan.
The Directory authorised Dombrowski to organise Polish legions in
Italy. Panin, at Berlin, intercepted a letter from the Directory to the
French envoy, which spoke of a restoration of Poland under a prince
of Brandenburg. Paul, on his side, took into his pay the troops of the
prince of Condé, and established ten thousand émigrés in Volhinia
and Podolia. He offered an asylum to Louis XVIII after his flight from
Brunswick, and installed him in the ducal palace at Mitau with a
pension of 200,000 rubles. The news that a French expedition was
being secretly organised at Toulon made him fear for the security of
the coasts of the Black Sea, which were immediately put in a state of
defence. The abduction of Zagurski, the Russian consul at Corfu, the
capture of Malta by Napoleon, the arrival at St. Petersburg of the
banished knights who offered Paul the protectorate of their order and
the title of grand master, the invasion of Helvetian territory by the
Directory, the expulsion of the pope and the proclamation of the
Roman Republic—all were events that precipitated the rupture.
 Paul concluded an alliance with Turkey which had been disturbed
by an Egyptian invasion, also with England, Austria, and the
kingdom of Naples. Thus, by the double aggression of Bonaparte
against Malta and Egypt, Russia and Turkey were led, contrary to all
traditions, to make common cause. Paul pledged himself to unite his
fleet with the Turkish and English squadron, and to furnish one body
of troops for a descent on Holland, another for the conquest of the
Ionian Isles, and a grand auxiliary army for the campaigns in Italy
and Switzerland.
In the autumn of 1798 a Turkish-Russian fleet captured the French
garrisons in the Ionian Isles. The king of Naples invaded the territory
of the Roman Republic, but Championnet brought the Neapolitan
troops back on to their own ground, and after making a triumphal
entry into Naples proclaimed the Parthenopean Republic.

THE CAMPAIGNS OF KORSAKOV AND SUVAROV (1798-1799)

The Russian army in Switzerland was placed

[1798-1799 a.d.] under the command of Rimski-Korsakov, that of
Holland under the orders of Hermann; while
Austria, at the suggestion of England, requested that the victor of
Fokshani and of the Rimnik should receive the command of the
Austro-Russian army. Flattered by this mark of deference, Paul I
recalled Suvarov from exile in his village. “Suvarov has no need of
laurels,” wrote the czar, “but the country has need of Suvarov.”c
A few days after the battle of Magnano, Suvarov arrived on the
Mincio with the first division of his forces, twenty thousand strong,
and took the command of all the allied troops in Italy. The jealousy of
the Austrian generals was naturally excited and they called a council
of war, in order to examine his plans. The members of the council,
beginning at the youngest, proposed their several schemes. Suvarov
quietly heard them all, and when they had done, took a slate, drew
two lines, and said, “Here, gentleman, are the French, and here the
Russians; the latter will march against the former and beat them.” So
saying, he rubbed out the French line, and added, “This is all my
plan; the council is concluded.”
 Suvarov kept his word, and in less than three months swept the
French entirely out of Lombardy and Piedmont. Thrusting himself
between the three French armies of Switzerland, northern Italy, and
the Parthenopean Republic, it was his purpose, in concert with the
archduke Charles of Austria, to penetrate into France on its most
defenceless side, by the Vosges and the Jura, the same quarter on
which the great invasion of 1814 was afterwards effected. The
campaign opened on the 25th of April, on the steep banks of the
Adda, behind which Moreau had posted his diminished force of
twenty-eight thousand men in three divisions. The passage was
forced with immense loss to the French, who were compelled to
abandon Milan, which Suvarov entered in triumph on the 29th.
After a week’s delay, during which all the principal places of
Lombardy surrendered to the allies, Suvarov followed Moreau’s
retreat, and endeavoured to dislodge him from his advantageous
position on the Po. Not succeeding in this attempt as rapidly as
suited his impetuous habits, the Russian general suddenly changed
his purpose, and advanced against Turin, whilst Moreau at the same
moment had resolved to retire to Turin and the crests of the
Apennines, in order to preserve his communications with France. On
the 27th of May, Vukassovitch, who commanded the advance guard
of the Russians, surprised Turin, and forced the French to take
refuge in the citadel, leaving in the hands of the victors nearly three
hundred pieces of artillery, sixty thousand muskets, and an
enormous quantity of ammunition and military stores. Moreau’s army,
thus deprived of all its resources, was saved from destruction only by
the extraordinary ability of its commander, who led it safely towards
Genoa by a mountain path, which was rendered practicable for
artillery, in four days. With the exception of a few fortresses, nothing
now remained to the French of all Napoleon’s conquests in northern
Italy; they had been lost in less time than it had taken to make them.
Exulting in the brilliant success of his arms,
[1799 a.d.] Paul bestowed another surname, Italienski, or
the Italian, on his victorious general, and
ordered by an express ukase that Suvarov should be universally
regarded as the greatest commander that had ever appeared.
Meanwhile the results of his skill and vigour were neutralised by the
selfish policy of the Austrian court, which had become by the Treaty
of Campo Formio, and the acquisition of Venice, in some degree an
actual accomplice with the aggressors against whom it was in arms.
Suvarov was compelled to submit to the dictation of the emperor
Francis I, and deeply disgusted he declared that he was no longer of
any use in Italy, and that he desired nothing so ardently as to be
recalled.
The disasters of the French in upper Italy were fatal to their
ascendancy in the south, and Macdonald received orders to
abandon the Parthenopean Republic, and unite his forces with those
of Moreau. His retreat was exposed to great dangers by the
universal insurrection of the peasants; but he accomplished it with
great rapidity and skill. The two French commanders then concerted
measures to dislodge the allies from their conquests—a project
which seemed not unlikely to be fulfilled, so obstinately had the Aulic
council adhered to the old system of dispersing the troops all over
the territory which they occupied. Though the allies had above a
hundred thousand men in the field, they could hardly assemble thirty
thousand at any one point; and Macdonald might easily have
destroyed them in detail could he have fallen upon them at once; but
the time he spent in reorganising his army in Tuscany, and in
concerting measures with Moreau, was well employed by Suvarov in
promptly concentrating his forces. Macdonald advanced against him
with an army of thirty-seven thousand men, taking Modena on his
way, and driving Hohenzollern out of it after a bloody engagement.
The two armies met on the Trebbia, where a first and indecisive
action took place on the 17th of June; it was renewed on each of the
two following days, and victory finally remained with the Russians. In
this terrible battle of three days, the most obstinately contested and
bloody that had occurred since the beginning of the war, the loss on
both sides was excessive; that of the French was above twelve
thousand in killed and wounded, and that of the allies not much less.
But nearly equal losses told with very unequal severity on the
respective combatants; those of the allies would speedily be
retrieved by large reinforcements, but the republicans had expended
their last resources, were cut off from Moreau, and had no second
army to fall back upon. Macdonald with infinite difficulty regained the
positions he had occupied before the advance to the Trebbia, after
losing an immense number of prisoners.
The fall of the citadel of Turin on the 20th of June was of great
importance to the allies; for besides disengaging their besieging
force it put into their hands one of the strongest fortresses in
Piedmont, and an immense quantity of artillery and ammunition. This
event, and Suvarov’s victory on the Trebbia, checked the successful
operations of Moreau, and compelled him to fall back to his former
defensive position on the Apennines. Again, contrary to Suvarov’s
wishes, the allied forces were divided for the purpose of reducing
Mantua and Alexandria, and occupying Tuscany. After the fall of
those two fortresses, Suvarov laid siege to Tortona, when Joubert,
who had meanwhile superseded Moreau, marched against him at
the head of the combined forces of the French. On the 15th of
August, another desperate battle was fought at Novi, in which
Joubert was killed, but from which neither side derived any particular
advantage. The French returned to their former positions, and the
Italian campaign was ended.
Suvarov now received orders to join his forces with those under
Korsakov, who was on the Upper Rhine with thirty thousand men.
The archduke Charles might, even without this fresh reinforcement,
have already annihilated Massena had he not remained for three
months, from June to August, in complete inactivity; at the very
moment of Suvarov’s expected arrival, he allowed the important
passes of the St. Gotthard to be again carried by a coup-de-main by
the French, under General Lecourbe, who drove the Austrians from
the Simplon, the Furka, the Grimsel, and the Devil’s Bridge. The
archduke, after an unsuccessful attempt to push across the Aar at
Dettingen, suddenly quitted the scene of war and advanced down
the Rhine for the purpose of supporting the English expedition under
the duke of York against Holland. This unexpected turn in affairs
proceeded from Vienna. The Viennese cabinet was jealous of
Russia. Suvarov played the master in Italy, favoured Sardinia at the
expense of the house of Habsburg, and deprived the Austrians of the
laurels and the advantages they had won. The archduke,
accordingly, received orders to remain inactive, to abandon the
Russians, and finally to withdraw to the north; by this movement
Suvarov’s triumphant progress was checked, he was compelled to
cross the Alps to the aid of Korsakov, and to involve himself in a
mountain warfare ill-suited to the habits of his soldiery.
Korsakov, whom Bavaria had been bribed with Russian gold to
furnish with a corps one thousand strong, was supported solely by
Kray and Hotze with twenty thousand men. Massena, taking
advantage of the departure of the archduke and the non-arrival of
Suvarov, crossed the Limmat at Dietikon and shut Korsakov, who
had imprudently stationed himself with his whole army in Zurich, so
closely in that, after an engagement that lasted two days, from the
15th to the 17th of September, the Russian general was compelled
to abandon his artillery and to force his way through the enemy. Ten
thousand men were all that escaped. Hotze, who had advanced from
the Grisons to Schwyz to Suvarov’s rencontre, was, at the same
time, defeated and killed at Schanis. Suvarov, although aware that
the road across the St. Gotthard was blocked by the Lake of
Lucerne, on which there were no boats, had the temerity to attempt
the passage. In Airolo, he was obstinately opposed by the French
under Lecourbe, and, although Shveikovski contrived to turn this
strong position by scaling the pathless rocks, numbers of the men
were, owing to Suvarov’s impatience, sacrificed before it.
On the 24th of September, 1799, he at length climbed the St.
Gotthard, and a bloody engagement, in which the French were
worsted, took place on the Oberalpsee. Lecourbe blew up the Devil’s
Bridge, but, leaving the Urnerloch open, the Russians pushed
through that rocky gorge, and, dashing through the foaming Reuss,
scaled the opposite rocks and drove the French from their position
behind the Devil’s Bridge. Altorf on the lake was reached in safety by
the Russian general, who was compelled, owing to the want of
boats, to seek his way through the valleys of Schächen and Muotta,
across the almost impassable rocks, to Schwyz. The heavy rains
rendered the undertaking still more arduous; the Russians, owing to
the badness of the road, were speedily barefoot; the provisions were
also exhausted. In this wretched state they reached Muotta on the
29th of September and learned the discouraging news of Korsakov’s
defeat. Massena had already set off in the hope of cutting off
Suvarov, but had missed his way. He reached Altorr, where he joined
Lecourbe on the 29th, when Suvarov was already at Muotta, whence
Massena found on his arrival that he had again retired across the
Bragelburg, through the Klönthal. He was opposed on the lake of
Klönthal by Molitor, who was, however, forced to retire by
Auffenberg, who had joined Suvarov at Altorf and formed his
advanced guard, Rosen, at the same time, beating off Massena with
the rearguard, taking five cannon and one thousand of his men
prisoners. On the 1st of October, Suvarov entered Glarus, where he
rested until the 4th, when he crossed the Panixer Mountains through
snow two feet deep to the valley of the Rhine, which he reached on
the 10th, after losing the whole of his beasts of burden and two
hundred of his men down the precipices; and here ended his
extraordinary march, which had cost him the whole of his artillery,
almost all his horses, and a third of his men.
The archduke had, meanwhile, tarried on the Rhine, where he had
taken Philippsburg and Mannheim, but had been unable to prevent
the defeat of the English expedition under the duke of York by
General Brune at Bergen, on the 19th of September. The archduke
now, for the first time, made a retrograde movement, and
approached Korsakov and Suvarov. The different leaders, however,
did nothing but find fault with each other, and the czar, perceiving his
project frustrated, suddenly recalled his troops, and the campaign
came to a close.
Paul’s anger fell without measure or reason on his armies and
their chiefs. All the officers who were missing, that is to say who
were prisoners in France, were broken as deserters, and Suvarov,
instead of being well received with well merited honours, was
deprived of his command and not suffered to see the emperor’s face.
This unjust severity broke the veteran’s heart. He died soon after his
return to St. Petersburg; and no Russian courtier, nor any member of
the diplomatic body except the English ambassador, followed his
remains to the grave.
 PAUL RECONCILED WITH FRANCE (1800 A.D.)

Frustrated in the objects for which he had

[1800 a.d.] engaged in war, Paul was now in a mood easily
to be moved to turn his arms against the allies
who had deceived his hopes. He had fought for the re-establishment
of monarchy in France, and of the old status quo in Europe; and the
only result had been the aggrandisement of Austria, his own
immediate neighbour, of whom he had much more reason to be
jealous than of the remote power of France. The rapid steps, too,
which Bonaparte was taking for the restoration of monarchical forms
in that country were especially calculated to conciliate Paul’s good-
will towards the first consul. The latter and his able ministers
promptly availed themselves of this favourable disposition through
the connections they had made in St. Petersburg. Fouché had such
confidential correspondence even with ladies in the Russian capital,
that he afterwards received the earliest and most correct intelligence
of the emperor’s murder. Two persons at the court of St. Petersburg
were next gained over to France, or rather to Bonaparte’s rising
empire; these were the minister Rostoptchin, and the emperor’s
favourite, the Turk Kutaisov, who had risen with unusual rapidity from
the situation of the emperor’s barber to the rank of one of the first
Russian nobles. He was also nearly connected by relationship with
Rostoptchin.
Rostoptchin first found means to send away General Dumourier
from St. Petersburg, whither he had come for the purpose of carrying
on his intrigues in favour of the Bourbons. He next sought to bring
Louis Cobenzl also into discredit with the emperor, and he
succeeded in this, shortly before the opening of the campaign in Italy
in 1800, when the cabinet of Vienna was called upon to give a plain
and direct answer to the questions peremptorily put by the emperor
of Russia. Paul required that the cabinet should answer, without if or
but, without circumlocution or reserve, whether or not Austria would,
according to the terms of the treaty, restore the pope and the king to
their dominions and sovereignty. Cobenzl was obliged to reply that if
Austria were to give back Piedmont to the king of Sardinia it must
still retain Tortona and Alessandria; and that it never would restore
the three legations and Ancona. The measure of the emperor’s
indignation was now full; he forbade Count Cobenzl the court, and at
a later period not only ordered him to leave the country, but would
not even allow an embassy or chargé-d’affaires to remain.
The emperor proceeded more deliberately with regard to the
English. At first he acted as if he had no desire to break with them;
and he even allowed the Russians, whom they had hired for the
expedition against Holland, to remain in Guernsey under Viomesnil’s
command, in order to assist their employers in an expedition against
Brittany. The English government, however, at length provoked him
to extremities. They refused to redeem the Russians who had been
made prisoners in their service, by giving in exchange for them an
equal number of French, of whom their prisons were full; they
refused to listen to any arrangements respecting the grand
mastership of the knights of Malta, or even as to the protectorate of
the order, and gave the clearest intimations that they meant to keep
the island for themselves. Bonaparte seized upon this favourable
moment for flattering the emperor, by acting as if he had really more
respect for Paul than the two powers for whom he had made such
magnanimous sacrifices. Whilst the English refused to redeem the
Russians made prisoners in their service by exchange, Bonaparte
set them free without either exchange or ransom.
The emperor of Germany had broken his word, and neither
restored the pope nor the king of Sardinia, whilst Bonaparte
voluntarily offered to restore the one and give compensation to the
other. He assailed the emperor in a masterly manner on his weak
side, causing the six or seven thousand Russians, whom the English
refused to exchange, to be provided with new clothing and arms, and
he wrote a letter to Panin, the Russian minister, in which he said that
he was unwilling to suffer such brave soldiers as these Russians
were to remain longer away from their native land on account of the
English. In the same letter he paid another compliment to the
emperor, and threw an apple of mortal strife between him and
England. Knowing as he did that his garrison in Malta could not hold
out much longer, he offered to place the island in the hands of the
emperor Paul, as a third party. This was precisely what the emperor
desired; and Sprengporten, who was sent to France to bring away
the Russians, and to thank the first consul, was to occupy Malta with
them. The Russians were either to be conveyed thither by Nelson,
who up to this time had kept the island closely blockaded, and was
daily expecting its surrender, or at least he was to be ordered to let
them pass; but both he and the English haughtily rejected the
Russian mediation.
Paul now came to a complete breach with England. First of all he
recalled his Russian troops from Guernsey, but on this occasion he
was again baffled. It was of great importance to the English cabinet
that Bonaparte should not immediately hear of the decided breach
which had taken place between them and the emperor, and they
therefore prevailed upon Viomesnil, an émigré, who had the
command of the Russians in Guernsey, to remain some weeks
longer, in opposition to the emperor’s will. Paul was vehemently
indignant at this conduct; Viomesnil, however, entered the English
service, and was provided for by the English government in Portugal.
Lord Whitworth was next obliged to leave Russia, as Count
Cobenzl had previously been. Paul recalled his ambassadors from
the courts of Vienna and London, and forthwith sent Count Kalitchev
to Paris to enter into friendly negotiations with Bonaparte. In the
meantime, the English had recourse to some new subterfuges, and
promised, that in case Malta capitulated, they would consent to allow
the island to be administered, till the conclusion of a peace, by
commissioners appointed by Russia, England, and Naples. Paul had
already named Bailli de la Ferrette for this purpose; but the English
refused to acknowledge his nominee, and even to receive the
Neapolitans in Malta. Before this took place, however, the emperor
had come to issue with England on a totally different question.
The idea of a union among the neutral powers, in opposition to the
right alleged by England, when at war with any power whatsoever, to
subject the ships of all neutral powers to search, had been
relinquished by the empress Catherine in 1781, to please the English
ambassador at her court; Paul now resumed the idea. Bonaparte
intimated his concurrence, and Paul followed up the matter with
great energy and zeal, as in this way he had an opportunity of
exhibiting himself in the character of an imperial protector of the
weak, a defender of justice and right, and as the head of a general
alliance of the European powers. Prussia also now appeared to do
homage to him, for the weak king was made to believe, that by a
close alliance between Russia and France, he might be helped to an
extension of territory and an increase of subjects, without danger or
cost to himself, or without war, which he abhorred beyond everything
else. The first foundation, therefore, for an alliance between Russia
and France, was laid in Berlin, where Beurnonville, the French
ambassador, was commissioned to enter into negotiations with the
Russian minister Von Krüderer. Beurnonville promised, in
Bonaparte’s name, that the Russian mediation in favour of Naples
and Sardinia would be accepted, and that, in the question of
compensations for the German princes particular regard would be
had to the cases of Baden and Würtemberg.

THE ARMED NEUTRALITY (1800 A.D.)

As to the armed neutrality by sea against England, Prussia could

easily consent to join this alliance, because she had in fact no navy;
but it was much more difficult for Sweden and Denmark, whose
merchant ships were always accompanied by frigates. In case,
therefore, the neutral powers came to an understanding that no
merchant vessels which were accompanied by a ship of war should
be compelled to submit to a search, this might at any time involve
them in hostilities with England. In addition to Denmark, Sweden,
and Prussia, which, under Paul’s protectorate, were to conclude an
alliance for the protection of trading vessels belonging to neutral
powers against the arrogant claims of England, Bonaparte
endeavoured to prevail upon the North Americans to join the
alliance. They were the only parties who, by a specific treaty in 1794,
had acknowledged as a positive right what the others only submitted
to as an unfounded pretension on the part of England. On that
occasion the Americans had broken with the French Republic on the
subject of his treaty, and Barras and Talleyrand had been shameless
enough to propose that the Americans should pay a gratuity, in order