Mises Daily Articles
Fast Forward to the NEP
The sane maxim that the government doesn't control reality, or even the economy, is actually a slight overstatement. The government can prevent market forces from operating by channeling resources into artificial channels.
Broad intervention — for example, flooding the market with public funds while adding new and onerous restrictions on firms — is, like pressing down on a car's accelerator and brake pedals simultaneously, and is guaranteed to make the economy stall. So the answer to everyone's question, how long is this downturn going to last? remains within the control of the government, although not in the sense intended by Keynesian theorists.
President Obama is constitutionally empowered to say "no" at any point along this precipitous decline.
Recently, a series of econometric criteria have been suggested as standards for the success of the bailouts and spending programs.1 But it would be more realistic, in light of the history of interventionism, to set criteria marking failure: gauges of the level of pain inflicted on the body politic that would act as a tripwire for the reevaluation — and reversal — of economic policy. Indeed, by any reasonably compassionate standard, that threshold has long since been reached. Yet Mr. Obama is throwing away his chance to reverse the Bush era's policy of "war consumerism" and is continuing down the same well-trodden road, when instead he should be executing a 180 degree turn and implementing a "new economic policy."
If the phrase "new economic policy" has a familiar ring to it, that is because it was coined nearly ninety years ago in the aftermath of World War I and the Bolshevik revolution. This New Economic Policy (hereafter, NEP) was Lenin's response to the disasters ensuing from war communism. After the period of outright requisitioning and collectivization carried out by the Bolsheviks during and after the First World War, private property in land and small enterprises was recognized after March 21, 1921. This saved the Soviet Union by allowing the GNP to stabilize so that the Soviets could staunch the flight of manpower and resources out of Russia and fend off internal and external enemies.
Just how liberal the Soviet Union got during that decade is a subject of ongoing debate.2 While I propose no novel insights on the period as a historical subject, I do find the contrast between the policy options that were open to the Bolsheviks and those that are presently being exercised by the American government illustrative of the failure of government to foresee, let alone make a prudent response to, the ineluctable outcome of events
In certain regards, the United States is as socialized today as Russia was at the end of WWI, albeit this has occurred through analogous, rather than identical, historical causes. War always wreaks havoc with the distribution of economic resources, making an end run around the supply and demand functions of civil society. But whereas Russia entered the 1920s under the banner of "war communism," what might be termed America's "war consumerism" has grown insidiously and without fanfare for the last two decades under both Democratic and Republican administrations.
An opportunity was lost to return to the status quo ante bellum at the end of the Cold War, when President Clinton failed to curb military Keynesianism, and the Republican Congress failed to curb civil Keynesianism. This process accelerated under the Bush administration, and Obama shows no inclination to brake its inertial velocity.
However, Lenin, in his audacity, resembled Obama the candidate more than what we have seen so far of Obama the president. Surrounded by collectivist dreamers, some of them almost as dangerous as he was, Lenin embarked on what was, for the times, a rather ambitious program to restore free markets. In this he was motivated not by any insight into the connection between private property and human dignity, but by political expediency, yet this motive was sufficient to spare the lives and fortunes of millions — at least until the NEP was revoked by Stalin in 1928.
Considering the fact that the Bolshevik party platform was to the left of the Mensheviks, and the Mensheviks were roughly equivalent to the far left wing of the US Democratic party, Lenin's NEP was a bold stroke indeed. This is not to say that Lenin had any intention of restoring capitalism. As Nikolay Nenovsky, working within the framework of Austrian monetary theory has noted, the reforms were so partial that they ultimately thwarted the evolution of true market institutions.3 Nonetheless, the system of commodity payments was abolished and prices were established for agricultural commodities, while private property, that is, property outside of medium and large firms, was tolerated.
Most surprising of all, in the hindsight of post–New Deal economic history, hard currency was introduced and continued to circulate up until the eve of the Second World War. In fact, as Nenovsky explains, currencies were allowed to compete for a short period during the early NEP. This period saw the introduction of the chervonetz, a gold coin originally left to rise to its own value against other media, and later established (to its detriment) as an official state currency.
In other words, the NEP was, at its monetary core, the kind of policy experiment that only the most radical advocates of the free market would urge on the American government today. It would seem that the cynical Marxists surrounding Lenin could boldly rush in where the angels (fallen or otherwise) of the Obama administration fear to tread. One can only wonder at the source of this policy rigidity among purported advocates of a mixed economy. At least the Russian Bolsheviks were willing to tack in the direction of market principles, albeit in the faith that, once the economy had recovered, this would provide a reserve of capital subject to state control or expropriation.
In contrast, present American policy constitutes a unidirectional slide towards state stewardship of the economy. Is there some rational explanation for the relative flexibility of Lenin in contrast with the knee-jerk Keynesianism of today's social-democratic Democrats? The answer to the query, will you fast-forward to an NEP, Mr. President? is thus far a firm "no" — but the ensuing matter of why not is one that merits speculation. Anyone who believes in the efficacy of government actions and also favores liberalization would probably default to that portmanteau phrase "a failure of political will," but a brief analysis into secular and psychological obstacles to the NEP might prove rewarding. In both spheres, the manifest differences between the USSR in 1921 and the US of A in 2009 are unquestionable, but whether these differences add up to an explanation of the "non-NEP-ability of America" is not so apparent.
Ominous Parallels and Less Obvious Perpendiculars
The secular differences between the American situation of today and the Soviets' nearly ninety years ago can be summarized in three points:
Russia had reached the end of its economic lifeline and America has yet to do so.
The suffering caused by war communism was transparent, while the suffering caused by war consumerism has been, until very recently, opaque.
Soviet policies — both war communism and the NEP — were conducted under a program of naked class struggle, while America's policy has been framed within the context of national, and even international, social contractarianism.
In the first instance, the deterioration of the American economy in this winter of 2009 has not yet run its full course. There are still reputable people who think that the nation can afford more guns and more butter through an expansion of public debt and the money supply. Moreover, these people are demanding an infinite series of second chances to prove their theories right. However, since nature abhors linear infinities, sooner or later this war consumerism (i.e., military and civil Keynesianism) is bound to be superseded by either liberalization or a command economy.
Now the problem with a command economy is not that people aren't willing to work for the common good. As Ludwig von Mises pointed out in his book Socialism, people don't work for the common good in capitalism either. Rather, the difficulty is that there is no mechanism to determine what is or is not a productive use of labor or capital. The early Soviet economy was saved in part by Lenin's pragmatic attitude towards collectivization, but more importantly by the fact that, during the NEP, Russia had a window on the rest of the world in the form of commodity prices conducted in real currency. These prices, in turn, allowed domestic planners to mimic the price system of the global economy.
Today, America is an integral part of a world economy that is embedded in an increasingly rigorous network of economic treaties and central banking, a world in which there is no longer an "outside." To the extent that this global economy is subjected, by insidious degrees, to arbitrary decision making, then it also becomes increasingly susceptible to the kind of collapse that the Soviet Union narrowly avoided in the 1920s.
In all probability, one harbinger of this is the current volatility of markets, which are not so much starved for capital (as the Keynesians claim) as they are starved for objective information to help them make decisions about profits and losses.
So, apart from global economic collapse, what possibilities are there? The first would be the emergence of an "outside" from some region or regions imperfectly integrated into the global economy. This disengagement and emergence of an external economy might save even the rump of the global market, but at the price of making the latter into a kind of ghetto politburo dancing to the tune of an increasingly robust capitalism elsewhere in the world. However, if New York ceases to be the economic capital of the United States, forgoing any hope of remaining that of the world, nobody should expect "the world to dress in sackcloth, now that you have forsaken cake and ale." No, there will be other financial centers willing to take up the slack, in terms of distributing capital and talent.
The other possibility would be for the United States to tear a hole in its own governmental hegemony over commerce, allowing entrepreneurs to resume control over the allocation of capital, thus creating a domestic window against which everybody, including the newly chastised public sector, could judge the rationality of their decision making. That is not to say that a hypothetical Obama NEP would, or should, look anything like that of Lenin.
Although the introduction of hard currency, even under the auspices of nationally chartered banks, would certainly help restore rational calculation to the fuzzy and volatile quasi markets of today, there are many other aspects of the Soviet experience in the 1920s which would best be avoided. Possibly the most egregious of these was the emergence of a special class of state-created traders dubbed "the NEPmen." These people emerged at the intersection of the tightly controlled Soviet urban markets and the newly privatized hinterland of Russia and its outliers. Their monopolistic stranglehold over the exchange of agricultural and industrial commodities, albeit an exchange conducted in cash, became so noxious that eventually the Old Bolshevik factions were able to press forward with their case for total collectivization.
Unfortunately the present program of bailouts, subsidies, and bonuses has already become instrumental in creating America's own class of NEPmen, that is to say, people operating at the interface of the public and private sectors and skimming off of both. Just as in Russia, in the long run the American public won't stand for a parastatal class of private managers subsidized and privileged by the US Treasury. Without any market to check avarice, in its stead, regulatory measures will be tightened by insidious degrees, until either the managerial and official classes have merged, or there is a general revulsion at the trend.
A far better basis for any hypothetical NEP would be to legalize the failure of large firms and the success of small ones. This would entail cutting down on government expenditure in general, eliminating not only bailouts but large-scale contracts (both military and civil) to the privileged partners of government. It would involve reversing the growth of taxation and regulation, burdens that fall disproportionately on small businesses. And in an echo of Soviet peasants' liberation during the NEP, it would involve the selling (as opposed to the current acquisition) of public lands and curtailing eminent domain.
Even these measures might not be enough. Still, it is remarkable that the tepid capitalism of the NEP managed to save the Soviet Union, such that, by the later 1920s, its GNP had recovered to the level of Russia in 1913.
The Irrelevance of Good, or Even Bad, Intentions
Beneath the overarching secular trends of history, there is an irreducible human factor, and I realize it is rather unfair to compare our new president to someone as historically questionable Vladimir Lenin. It is said that President Obama prefers the moral council of Reinhold Niebuhr to that of Karl Marx, and his inaugural address certainly gave homage to root American and Western values. Nonetheless, President Obama is probably less inclined towards an NEP today than Lenin was in 1921.
He is also in a more disadvantageous position for turning to liberalization. First of all, it is far easier for a scoundrel to change his tune for the sake of self-preservation than for a stubborn idealist to renounce a fond theory. The mind of Barrack Obama seems to operate more along the lines of a Woodrow Wilson than any Bolshevik, but this is scant comfort. For while the coercive impact of war communism revealed a transparent tyranny, it could not appeal to the kind of passive acquiescence that occurs when a revolution is carried out "within the form" of a preexisting social contract, as was done under Wilson, and later FDR.
Now, recapturing the level of prosperity of Russia in 1913 is probably not a very inspiring thought for either Barrack Obama or any other American, but the point is not one of inspiration but of comparison. We have already had our fill of inspired rhetoric, and the time has come for prudent policy. Prudence is a virtue that transcends ideology and theology. It even transcends the gap between men and women who, as perhaps Lenin did, operate out of ill will, and those who, as I presume our president does, operate out of good. As he himself has acknowledged, it is a matter of averting catastrophe.
Finally, although I have been crediting Lenin with the merit of expediency and cunning foresight, perhaps even this isn't exactly true. Historically, it would seem that Lenin waited until the last possible minute to save the Soviet economy, when sailors were already in revolt in Kronstadt. No matter how cunningly Machiavellian the man at the helm, the state can only react to crises, not prevent them.
Unfortunately, this administration's Keynesian advisors are likely to be just as loath to give up the illusions of omniscience and control. They would do better to remember the old proverb that when everybody is hiking in the wrong direction, it is the first person to turn back who is making the most progress. The sooner interventionism is abandoned, the more likely it is that economic disruptions can be contained. But, more likely, the state's leaders will wait until it is a choice between a new economic policy or national ruin. Thus, it's up to free-market economists to set rigorous standards for the failure of intervention, so the market can be restored at the first possible opportunity. And that's the kind of change we can believe in.
- 1. Phil Izzo, "Obama Press Conference: How Will We Gauge Success?" Wall Street Journal, February 9, 2009. The metrics specified are (1) job creation, (2) credit market "effectiveness," (3) housing market "stabilization." The explicit premise is that if these indicators improve, it will be a result of the "stimulus package"; the implicit corollary is that if they continue to deteriorate, additional stimulus in the form of government spending will be required.
- 2. There is even an American academic journal dedicated to the cultural and political history of the period: NEP Era Journal, based at the University of Minnesota-Duluth.
- 3. Nikolay Nenovsky. "Lenin and the Currency Competition: Reflections on the NEP Experience (1922–1924)." International Centre for Economic Research Working Paper (22/2006).