The Oligarchs (17 page)

“We knew that we were not free there,” Glazkov recalled. “We knew that we had been watched, and that we couldn't allow revolutionary things there at all. The word ‘market' was a dangerous word at the time.”

As
perestroika
dawned with the arrival of Gorbachev in 1985, the topics at the Leningrad seminars grew more ambitious. The participants began to broach an altogether bold idea: introducing some
aspects of the market to Soviet socialism. For a long time, they intensely debated whether the economy could be saved by such reform concepts as self-financing or by decentralization, which meant allowing factory directors to make more of their own decisions. Later, as the years went on, they concluded that the existing machine was probably doomed and would have to be massively restructured. Still later, they spent many days contemplating the prospect of a “transition” to some new kind of a system. Even the notion of a “transition” was a thrilling idea.

They were nurtured by the books at the Publichka, but they had other sources of inspiration as well. They had ample access to more radical texts in
samizdat,
the dog-eared, self-typed, or mimeographed manuscripts that were officially prohibited but widely distributed from hand to hand. “They would give you a photocopy and you could read it at night,” Oding recalled, “and in the morning you had to give it back. And there was no guarantee that the person who gave it to you wouldn't tell on you.”

Then came a sudden bolt of inspiration. They were profoundly inspired by a two-volume, 630-page book published in 1980 by a Hungarian economics professor, János Kornai.
The Economics of Shortage
, more than any other text, offered an insight into the failings of Soviet socialism. Hungary had been at the forefront of more market-oriented economic reform in the Eastern Bloc since 1968, and Kornai's groundbreaking work was almost entirely based on his observations about Hungary. But for the young scholars around Chubais, the work opened a window as no other Soviet or Western study had done on why the economy of shortage existed and how it functioned. Kornai examined the behavior of buyers, sellers, and producers in an absence of free prices, as well as the relationship between firms and the state under socialism and central planning.

Kornai asked his readers to imagine the economic relationship between a parent and child. He described this as five stages of “paternalism.” In the first stage, which he called “grants in kind—passive acceptance,” the infant cannot express his needs in words and receives all his nourishment and material needs from his parents. In the second, which he called “grants in kind—wishes actively expressed,” the child lives with the family and gets everything for free, but there can be a certain amount of pleading and bargaining. The third phase he called “financial allowance,” in which the child has grown up and
moved away from home, say to college, but still depends on a defined stipend. The fourth phase, “self-supporting—assisted,” Kornai defined as the child grown up and working for a living but being able to turn to the parents, if need be. And the last was called “self-supporting—left to himself,” in which the child is grown and must rely entirely on himself.

Kornai pointed out that the ideal market economy was the last phase: the state did not bother to help or hinder firms and left them alone. But he concluded that the real root of the shortage economy was too much of the first kind of “paternalism,” in which the state generously doled out subsidies to factories and enterprises, as a mother to a newborn. Kornai found that this led to unhealthy dependence, which he termed the “soft budget constraint,” meaning that the firms never had to stop feeding; the more subsidies they wanted, the more they got. The point was that a factory which always got more regardless of how poorly it performed would never become accountable for its work—it would just go on producing shoddy goods because there was never any penalty for doing otherwise. Kornai concluded that the “softening” of discipline had led to the miseries of the shortage economy: the insatiable, unfulfilled demands of consumers, the hoarding, and the endless lines.
¹⁰

The book first arrived in Leningrad as smuggled photocopies and instantly “became a Bible,” Vasiliev recalled. “We had some ideas initially, but the book was kind of a catharsis. It pushed our thinking forward. You met a person and you said, ‘Have you read Kornai? Yes?' And then it was a starting point for discussion.”

Chubais recalled that Kornai showed him why the shortage economy persisted in socialism. Kornai demonstrated how the producers—the factories—always had first claim on subsidies and resources because they were fed them constantly by the paternalistic state. “He showed that the very distribution of resources happens in such a way that the producer always has a priority over the consumer, meaning that the consumer is always dissatisfied, there is always a shortage.”

But Kornai alone did not lead the Chubais team out of socialism; he just helped them see it much more clearly. The other great inspiration of those years came from the Austrian economist Friedrich von Hayek, one of the most trenchant early critics of socialism, who was especially acute in his searing denunciation of central planning. Although Hayek's best-known work was
The Road to Serfdom
, a 1944 treatise
about the dangers to individual liberty of socialism and central planning, Chubais took to heart a lesser-known economics text.
¹¹
It was an article that Hayek had published in 1945, “The Use of Knowledge in Society.”
¹²
The article articulated clearly what the Leningrad scholars had been groping toward since the debate at the collective farm: that free prices were the single most powerful “indicator” to measure all the millions of decisions in a large, complex economy.

Hayek used the example of a commodity, tin. In a free market, he said, if there was a shortage of tin, all the producers and users would adjust by producing more tin or using less or finding substitutes. Hayek pointed out that it was virtually impossible for a central planner to make these decisions for so many people, but that free prices could quickly and efficiently communicate the new situation to producers and consumers. As prices rose, some producers would make more tin or consumers might look for a different metal, and the effect would quickly cascade through the market economy, even if most participants did not precisely know why the adjustment was being made. Hayek said the freely set price for tin is like a high-speed network of information that works splendidly to allocate resources—just what an army of Soviet researchers had been hunting for all those years.

Hayek declared that the price system was a “marvel” which could free people from the “conscious control” of the central planners. At the time Chubais read this essay in Leningrad, the Soviet Union was the world's largest example of “conscious control,” with rigid, fixed state prices set throughout the economy. Hayek, who won the 1974 Nobel Prize in economics for his work, had taken a battering ram to the underpinnings of Soviet socialism. Amazingly, his wisdom was smuggled past the KGB on those dog-eared photocopies, and it landed in the hands of an eager young generation of knowledge-hungry Leningrad academics.

Many years later, Chubais recalled the thrill of reading Hayek and instantly gave his own example of how Hayek's theory worked in practice in the United States. “One person is selling hamburgers somewhere in New York,” he told me, “while another person is grazing cows somewhere in Arkansas to produce meat that will be used to make those hamburgers. But in order for that person in Arkansas to graze cows, there needs to be a price for meat, which tells him that he should graze cows.”

“And the value of price,” he said, “is absolutely universal, and absolutely fundamental.”

 

The theories Chubais and his team were debating at their institute on Marat Street were also beginning to dawn on others in the Soviet Union. Even before the Gorbachev era, unorthodox thinking was fermenting in remote pockets. One was in Novosibirsk, Siberia, where an outspoken reformist economist, Abel Aganbegyan, had come up with a surprisingly candid and devastating critique of the ailing Soviet economy. Aganbegyan, director of the Institute of Economics and Management of the Siberian Academy of Sciences, was joined by a colleague, Tatyana Zaslavskaya, a sociologist. Zaslavskaya had prepared a landmark internal study challenging the entire structure of the Soviet economy, which was debated at a 1983 conference in Novosibirsk and later contributed to many of the ideas in Gorbachev's
perestroika.

Chubais soon felt that he had to break out of the provincial world of the Leningrad institute and make contact with others, especially in Moscow. Although there were a few freethinkers in Leningrad, he knew that there must be dozens in the capital. Glazkov had taken a trip to Moscow and, through friends, brought to Chubais word of a bright, young economist there. He was Yegor Gaidar, who worked at the All-Union Institute for Systems Research, under the tutelage of a famous mathematical economist, Stanislav Shatalin. Like Chubais, Gaidar had also struggled with the grand quest for “indicators” and perfection in the Soviet industrial monster.
¹³

But the difference was that Gaidar was in Moscow, at the center of the action, whereas Chubais was in a remote provincial institute. Gaidar was a child of the Soviet elite, grandson of a famous Red Army officer and author of beloved children's stories, and son of a Pravda journalist. When Andropov began to look for progressive ideas about economic reform, one of the young researchers who worked on the early drafts was Gaidar. The atmosphere in Shatalin's group was also more open than Chubais could ever afford to be in Leningrad, where the KGB was always watching. “Here you didn't have to cross your fingers behind your back when you talked,” Gaidar recalled of Moscow's atmosphere.

Despite many appeals from Glazkov, Gaidar could not find the time to come to the Chubais seminars in Leningrad. “He was too busy
to come to some tiny place, the Engineering Economic Institute,” Glazkov recalled. “He was among the elite. He didn't care.”

So Chubais went to Moscow and sought out Gaidar. Pyotr Aven, son of a leading mathematician, was working on econometrics in Gaidar's group and introduced the two men. He recalled that at their first meeting, Gaidar and Chubais understood that they shared the same ideas and fears.
¹⁴
Gaidar was by all accounts the smartest economist of his generation. “We were better prepared than Chubais. We were far ahead, and better educated,” Aven recalled. But Gaidar was a product of the Soviet era and could be excruciatingly cautious about pushing the system too hard. Chubais shared that caution, yet he had that steely, whitewater-rafting determination and an absolutely unshakable self-confidence in whatever he was doing.

In the following years they were all reminded, once again, that the system was not yet ready for radical change. In early 1985, just as Gorbachev came to power, Gaidar's laboratory was given an assignment from the Politburo to study “improving economic mechanisms at the enterprise level,” more of the same old nonsense from the past. But since the work was intended for the Politburo, Chubais and his team leaped at a chance to collaborate with Gaidar on the assignment. Working for the Politburo would give Chubais a bit of protection from the KGB, and for the first time he was working on something for the upper echelon of power, something more than abstract, what-if speculation.

“We started trying to think about real things, instead of all that bullshit we were engaged in during our formal jobs,” Glazkov said. The Gaidar-Chubais group produced a 120-page report, adapting some of the Hungarian and Yugoslav reforms to the Soviet system. They called for abandoning planning dictates and permitting some free market mechanisms. When Gaidar's boss came back one day, he brought bad news: the plan had been rejected. “Which meant we were to give up our fruitless daydreaming” and come up with something “on a more mundane level,” Gaidar recalled. But when Gaidar went home that day and turned on the television, he heard Gorbachev deliver a speech using some of the same terms they had put in the rejected report. It was a strange time; they had to constantly guess and read between the lines for opaque signals of change.
¹⁵

Chubais had a personal brush with the KGB. In 1986 he attempted to attend a ten-month academic program abroad. Chubais recalled that it was in either Finland or Sweden. It would have been his first
extensive exposure to the West, but he was denied permission to exit the Soviet Union by the KGB. Chubais said it was suggested that he not go to a capitalist country but rather study in a socialist country.
¹⁶
His brother, Igor, said the denial came because Chubais is Jewish on his mother's side. Chubais was deeply disappointed. It was a personal reminder that the authorities could crush you, if they wanted to.

The year 1986 was a critical turning point for Chubais and Gaidar. Chubais helped make arrangements for Glazkov to work in Moscow for a year. Glazkov was stationed at the Central Mathematical Institute, where he found, to his amazement, that researchers were openly toying with mathematical models of a market economy. At the end of August 1986, all the freethinkers in Moscow and Leningrad—about thirty economists—finally got together for days of debate at a rundown resort hotel, Snake Hill, in the forests outside of Leningrad. “It was the best time in our lives,” Glazkov recalled. The forest was so isolated they felt free to talk without the KGB listening, and they trusted one another.

Glazkov recalled that Gaidar was the shining light of the group. He was the best informed and had the clearest vision of what was happening. “And it was clear that this system was not going to survive. So, the question became, what's going to happen when the system collapses ? What are the scenarios?” Glazkov said that some of the participants wanted to debate the shape of a theoretical alternative economy for the Soviet Union, but Glazkov was more pragmatic; he wanted to focus the debate on the
actual
transition to a new economy. “I was only ready to raise the point,” he recalled, “but wasn't ready to be specific. We were not ready. I was not ready. Nobody was ready!”