Thursday, January 17, 2019

Russia’s circular economic history?

Today I participated in a nice web-based program started by the Central Bank of Russia (it will be posted soon). An economist is being interviewed by another, and then the one who has been interviewed becomes in his/her turn the interviewer of yet a third one. My friend Shlomo Weber, the head of the New School of Economics interviewed me, and then I interviewed Professor Natalya Zubarevich, from the Lomonosov Moscow State University and a noted scholar of Russian regional economics.

Just a couple of days ago Natalia gave a very well-received talk at the Gaidar Forum in Moscow on (what one might call) “unhealthy convergence” of Russian regions. In fact, Natalia shows that most recently regional per capita GDPs have started a mild convergence, but that this is due first to low growth rate of most of them and the economy as a whole, and to the redistribution mechanism (mostly of the oil rent) between the regions. A healthy convergence, Natalia says, would be the one where economic activity, and especially small and medium size private businesses, were much more equally distributed across some ninety subjects of the Russian Federation. She also had very interesting insights into the excessive “verticalization” of economic power and decision-making in Russia, and the economic growth of Moscow (much faster than of any other part of Russia) driven by centralization of that power, and concentration of large state-owned or state-influenced enterprises as well as bureaucracy in Moscow.

What most attracted my attention during Natalia’s presentation at the Gaidar Forum was her description of the current period of low growth rates in Russia as zastoi, or stagnation. Now, zastoi has a very special political meaning in Russian because it was a disparaging term used in the Gorbachev era, and by Gorbachev himself, to define the Brezhnevite period of declining growth rates, lack of development perspectives, unchanging bureaucracy, and general demoralization and malaise.

But I asked Natalia the following question. Looking over the past 150 years of Russian history (and I think it is hard to go further back), were not really the best periods for ordinary people exactly the periods of zastoi: incomes rose by little for sure, but the state repression was weak, there were no wars, and probably if you look at violent deaths per capita per year, the lowest number of people died precisely during the periods of zastoi. So perhaps that zastoi is not so bad.

Natalia said, “I know it: I lived through the Brezhnev period. Many people were demoralized; but I used it to study. I never read so many books and learned so much as then—you could do whatever you wanted because your actual job really did not matter much.” (Even art, as I saw in the Tretyakovska Gallery, even if some of these paintings were never exhibited in the official museums, seems to have done well during the Brezhnevite zastoi. And as the recent film, which I have not seen, but read the reviews, Leto, appears to indirectly argue as well.)

The best growth periods, as Natalia said, and as is generally accepted by economic historians were the 1950s up to about 1963-65, and then the period of the two first Putin’s terms. In both cases, the growth spurs came as a ratchet effect to the previous set of disasters: in the Khrushchev period, to the apocalypse of the Second World War, in the Putin period, as a reaction to the Great Depression under Yeltsin during the early transition.

So this then made us think a bit back into the past (say, going back to 1905) and put forward the following hypothesis: that Russian longer-term economic growth is cyclical. The cycle has three components. First a period of utter turbulence, disorder, war, and huge loss of income (and in many cases of life as well; period A), followed by a decade or so of efflorescence, recovery and growth (period B), and finally by the period of “calcification” of whatever (or whoever) that worked in that second period—thus producing the zastoi or stagnation (period C).
I do not know if this is something specific to the Russian economic history. It made me think of Naipaul’s observation on successful and unsuccessful countries. The history of the former consists of a number of challenges and setbacks indeed, but certain things are solved forever, and then new challenges appear. Take the United States: the Indian challenge and then the independence from Britain were not easy to overcome/acquire, but eventually, they were and they never came back; then the Civil War and the Emancipation; then the Great Society etc. But unsuccessful countries, according to Naipaul (and he had, I think, Argentina in mind) always stay within the circular history. The same or similar events keep on repeating themselves forever without any upward trend—and no single challenge is forever overcome. In each following cycle everything simply repeats itself.

The challenge for Russia today is to break this cycle.


Wednesday, January 9, 2019

What is the just pay? Capitalists, John Roemer and the Cultural Revolution

In the 1990s and in his 1999 book “Equality of opportunity”, John Roemer set the stage for what has since been a flourishing area of inequality studies—inequality of opportunity. Roemer’s key insight was to divide the factors that influence one’s income into three parts: circumstances or factors that are exogenous to the individual, that is over which he has no control (gender, race, parental income and education etc.), those that are the product of his effort, and finally those that are the result of what Roemer called “episodic luck” (I got a good  job because I just happened to be available at the time when the job was advertised).

Roemer’s approach has led him also to propose a very radical way to reward (pay) people. Consider two groups of individuals, defined by an exogeneous marker like gender. One group (men) tends to be physically stronger and produces on average 10 widgets per day. Another group, women, is physically weaker and produces only 5. Should everybody be paid according to the number of widgets he/she produces (which a simple-minded “meritocratic” approach would suggest)? No, Roemer says, the reward should be proportional to our contribution compared to the average of our group. So, if I produce 12 widgets, why is 20% above men’s average, I should be paid the same as the woman who produces 6 widgets, which is also 20% above the average of her group. The reason is that we are both paid according to our (differential) effort—and the attempt is made to control (abstract from) our innate characteristics which may privilege or  punish some of us.

Consider the radicalness of this proposal as applied in another context. Students’ grades should also follow the same rule. If say rich parents’ kids do better than poor parents’ kids on average, then a rich kid who has scored 12 points on a test should get the same grade as the poorer kid who has scored only 6 points. And so on.

But recently as I was rereading Phelps  Brown’s book “The Inequality of Pay”, published in 1977, I ran across a different scheme of rewards applied in Beijing in the 1960s, around the time of the Cultural Revolution. All men were paid according to the average number of widgets produced by men, and all women were paid according to the average  number of widgets produced by women. Here is the quote from Phelps Brown:

This story brings out what to Western observers may seem a contradiction in Chinese pay structure: if it is right and proper to pay a man more than a woman because the man being stronger produces more, why should not a man who exerts himself and produces more than another man likewise be paid more? To the Chinese the answer is simply that the latter differential appeals to self-interest whereas the former cannot. Strangely but intelligibly, the Chinese treat payment in proportion to the amount of work done as a self-evident principle of natural justice while differences  in that amount are not within the worker’s own control, but as mischievous when they are. (p. 53; emphasis mine)

The reader, probably having thought how radical and left-wing is Roemer’s proposal, is now suddenly thrown into this most radical left-wing experiment ever where—the very opposite principles rule! It seems that there is no continuity: a more left-wing approach is not just slightly more to the left than the less leftist approach—it is the very opposite of it!

To see that, recall that in Roemer’s case we do not want to pay somebody for his or her circumstances, but only for his or her effort. In the Chinese case, it is the reverse: we pay somebody only for his or her circumstances, but not for his or her effort. Why is that? The philosophy is entirely different. Circumstances are viewed  as “natural” and one should be paid according to them. But payment according to effort is viewed as corrosive of moral norms since it means that people respond to economic incentives. People should work either because they want to contribute to the community (without expecting anything in return) or because they like to work. “Incentivizing” --appealing to self-interest--in such a setting is considered as bad, as in a different setting paying somebody for an exogenous advantage that he or she does not deserve.

The ultimate outcome of the Chinese system is an equal pay for everybody, both men and women, and regardless of individual productivity. It would be at the polar extreme of the “meritocratic” pay where everybody is paid simply according to the number of widgets he or she produces.

What is the best way? Meritocratic pay responds to out feeling of justice that everybody should be paid according to their contribution. Presumably it would lead to the highest output. Roemer redefines justice so as to extract only differential effort according to which people should be paid. They will be paid the same amount  for different number of widgets produced. Empirically, it will be always very difficult to determine what are the factors that should fall under the heading of circumstances and hence should not affect the reward. The Chinese system has a moralistic element in it: it is bad to be incentivized by pay. The downside is that it is likely to lead to very low effort of most participants.

When we design systems of rewards, we are obviously always led by some principles of justice or ethics. The problem is that these principles do not all come up with the same solution. In many cases, as we have seen here, depending on what our guiding principle is, the reward structure will be very different. On top of that we need, in principle, to take into account the effects on the overall output—unless of course our philosophical principle Is such that the quantity of that output is immaterial.


John Roemer who kindly commented on the text asked me to make clear that he never advocated  direct application of the principles explained here (nor thought that this would be possible to do in a market economy), but argued that policies like affirmative action should be designed with the objective of reducing or eliminating the impact of circumstances on one's income.