| San José State University
Department of Economics
As Reformer and Counter-Reformer
By the mid-1990's Yuri Luzhkov was the mayor of Moscow and the head of an
efficient, all powerful political machine. Now Yuri Luzhkov is believed
to be considering an alliance with the Communists, but he rose to prominence as
a supporter and initiator of reforms of the stagnant communist system. While he was
by no means an advocate of free markets he did play a vital role in the demise of
the so-called centrally administered economic system.
Yuri Mikhailovich Luzhkov was born in 1936 and knew the suffering of the war years and their aftermath. He grew up in Moscow near a railway station. When he came of age he chose to study engineering at a technical institute. He had intended to work in the petroleum industry of the Soviet Union but the authorities assigned him to a job in the petrochemical and plastics field. Specifically, he was made the director of a design agency in the Ministry of Chemical Industry and later rose to become the manager of a plant for designing and manufacturing equipment for chemical engineering processes.
As a manager of a socialist enterprise Yuri Luzhkov became aware of the institutional flaws of Soviet socialism. Decision-makers at the plant level had little or no incentives to make their plants efficient and productive. Plant managers were required to meet production quotas in order to receive a bonus that amounted to a major portion of their income. But the production quotas could be met without maintaining an adequate standard of quality.
In the shortage-ridden socialist economies there was no problem of getting some organization to take even low quality output. For one thing the central administration assigned the distribution of production. The turning down low quality supplies by a plant manager would result in the plant having no supplies at all rather than getting better quality supplies. Completely useless production simply had to be hidden in storage forever. Enterprises tried to cope with the uncertainties of supplies by trying to produce what they needed within the organization; i.e., by vertical integration.
But an enterprise that failed to produce enough to cover its costs was not punished. The central authorities continued to assign it its supplies and budgets were soft; i.e., they were no budgets at all.
If a socialist enterprise by some miracle were productive and efficient and produced output of greater value than the costs of its inputs it received no rewards. The profit from its operation simply went to the central authority. So good management was not rewarded and bad management was not punished. This was the system that Stalin created in the 1930's. If an enterprise needed capital to replace old equipment or invest in new capabilities it had to depend upon convincing the central authorities to assign it the funds.
Yuri Luzhkov perceived that a system in which enterprises were self-financing would have the proper incentives for efficient operation. Self-financing meant that an enterprise had to cover its costs from the revenue received from its output and that if it earned a profit it got to keep at least a portion of that profit to invest in new capacity.
Yuri Luzhkov proposed to the higher authorities in his ministry that his chemical equipment design organization operate on a self-financing basis by selling the knowledge and expertise it had acquired. The proposal was turned down by the top bureaucrats on the basis that it violated Marxist dogma.
At that time Yuri Luzhkov was middle aged. He had joined the Communist Party only in his early 30's, an indication that he was more of a careerist than an ideological zealot. His career within the Communist Party hierarchy was not promising. His status as a plant manager was high enough however to warrant his selection in his early 40's as a member of the Moscow City Council, the Mossovet.
At that time, throughout the Soviet Union and the communist states of Eastern Europe there were two parallel hierarchies. One hierarchy was the formal institutions of government such as the official government of Russia and the Moscow City Council. These institutions had no real power. The parallel hierarchy which transcended the official nation states and wielded the real power was that of the Communist Party.
The Moscow City Council was a cumbersome one thousand member organization which functioned only to give formal sanction to the decisions made by the local officials of the Communist Party. But as changes came to the Soviet Union the facade organization such as the Moscow City Council acquired some real power.
As General Secretary of the Communist Party and head of the Soviet Union Mikhail Gorbachev tried to reform the system. In 1986 he he initated a campaign against unearned incomes. Its target was the bribes and corruption of officials but it also hit the people who had incomes from noncorrupt but unsanctioned activities such as craft production. People were being persecuted for completely innocuous activities such as tutoring. It is not impossible that Marxist ideologues actually intended to suppress such activities. Production for the purpose of making a profit was after all a serious criminal offense in the Soviet state.
In any case, when some people in authority with some sense realized that persecuting people for craft production and tutoring and the like was foolish they promulgated a law permitting individual labor activities, The precise wording is notable. Individual meant that one person could not hire others to produce goods or services. This meant the activities would be limited to individuals or individuals and their family members. Labor meant that services, including selling goods, which in Marxist terms were nonproductive activities could be excluded.
But individual labor activities was not interpreted in a strict Marxian sense. This law was interpreted as permitting street vendors. This was a major breakthrough for the private economy. Probably it had not been the intent of the law to permit street vending but once the street vendors thought they had a right to sell on the street it became too difficult to suppress and the authorities let it continue.
Later the authorities decided to remove the restriction that private economic activity had to involve only a single individual. The Communist authorities would not permit one person to hire others as employees but they decided that it would be ideologically proper if a group of individuals cooperated as equals in an economic venture. The authorities then issued the Law on Cooperatives. The cooperatives had to register with local authorities and be licensed. In Moscow the responsibility of approving and licensing the cooperatives fell to a committee of the Moscow City Council. Yuri Luzhkov was the deputy chairman of that committee. In keeping with the past practice of retaining the real decision-making power in the hands of the Communist Party, the Party assigned one of its own to be executive director of the committee. This Party operative, Alexander Panin, however favored the concept of cooperatives. Alexander Panin, Yuri Luzhkov and Yelena Baturina, Luzhkov's assistant and later his wife, reviewed the entrepreneurs' proposals for cooperatives and generally were quite well disposed toward approval.
The cooperatives were allowed to set their own prices. Everywhere
in which governments have responsibility for setting prices they
create a price delusion. The price charged by governments is usually
below the cost of production and the difference is covered out of
taxes by Western governments or in the case of socialists governments
out of the surpus which they confiscate from the economy.
The subsidized government price creates the delusion that the
public provision of goods and services is somehow more efficient than
market provision of the same goods and services. The public then
interprets market prices, which are necessarily above the subsidized
prices of governments, as being price gouging and the garnering
of excessive profits by the private marketers. It is ironic
that the public compares unfavorably market prices, at which they
can buy, against the government subsidized price at which they typically
cannot buy because there is none available. In effect, the government
subsidized pricing creates a feeling of public entitlement to
prices below costs.
The Vegetable Warehouses of Moscow
The next step in Yuri Mikhailovich Luzhkov's career involved his undertaking the management of a singularly misguided socialist institution in Moscow, the fruit and vegetable supply system for the city.
It helps in understanding such problems if one dismisses all the rhetoric and proclamations about socialism being a socially progressive system and recognizes the reality that socialism is a form of tribalistic feudalism. The system that was created during the Stalin era would not be out of place in the Sumeria of three thousand years ago.
Fruits and vegetables for Moscow were supplied from state and collective farms which were required to supply quotas of produce at token prices. The fact that these farms had to supply commodities at a price below what they could get on the black or gray markets means that that they had no incentives to be concerned about quality. They would not have an incentive to make sure that the fruits and vegetables were packed properly for transport.
The fruits and vegetables, such as they were, were received for sorting, storage and distribution at twenty three giant warehouses in Moscow. While some of the labor was permanent and paid, the system relied upon twenty thousand involuntary workers. Each organization in the city had to supply its quota of workers. This system of conscripted labor was called corvee labor in the Middle Ages but probably goes back to Sumerian times when the community worked for the temple gods under the direction of the priesthood. Such a system might have worked for an extended family in which everyone knew everyone else and was concerned about each other's well being but it is guaranteed that it will not work properly with 20,000 disgruntled and untrained workers. In such a situation many or most would avoid exerting themselves and would be unconcerned about whether they did assigned jobs properly or not. The result is excessive spoilage and improper sanitation. Such involuntary workers would have few qualms about taking for their own use anything they could.
When the failure of sanitation led to chronic mold and rodent infestations the work sessions in the warehouses were not only objectionable for the involuntary workers because they were unpaid but also because they were under disgusting conditions.
The job of managing such a terrible physical and organizational mess was understandably trying. In 1987 the manager of the fruit and vegetable warehouses of Moscow had a nervous breakdown Boris Yeltsin, who at that time was the head of the Communist Party for the Moscow Region, asked --even begged-- Yuri Luzhkov to take over their management. With some trepidation Yuri Mikhailovich Luzhkov accepted what would most likely be a difficult and thankless job.
The residents of Moscow were quite aware of the failings of the the produce distribution system both as consumers and as involuntary workers. With characteristic Russian fortitude they made sharp-edged jokes about the situation. There was an old slogan of the Soviet Union being the Land of Evergreen Forests. A comedian in Moscow said Moscow was the City of Evergreen Tomatoes. Yuri Luzhkov took the jibe personally.
Within months of taking charge of warehouses he did away with the system of involuntary, unpaid labor. The untrained, disgruntled conscripted workers were replaced with more full-time and part-time paid employees. Yuri Luzhkov then created an incentive for the warehouse workers to reduce the spoilage and waste. The workers were entitled to half of the produce they saved from spoilage. This was computed on the basis of the difference between the actual spoilage rate and the rate that normally would be expected. This system would likely reduce the losses from out-and-out theft.
The elimination of corvee labor in the produce system was a real accomplishment and was reported as such by the Party administration. When a top-level Communist Party bureaucrat included the elimination of corvee labor in produce system at a public meeting it was the one item of a long list of supposed accomplishments of the Party that brought applause. It was an indication of how divorced the top level Communist Party bureaucrats from the day-to-day life in Moscow that he thought he was being made fun of.
While Luzhkov's management and reforms of the fruit and vegetable distribution system were a success, other more important political events were occuring. Boris Yeltsin, with public fanfare, quit the Communist Party. Real, contested elections for city government offices were held and the advocates of democracy won a majority in the Moscow City Council.
The leaders of the winning faction of the City Council recognized that they did not have enough experience with the nitty-gritty details of running Moscow. They saw a need for someone to serve as a bridge between the old regime and their new one. Yuri Mikhailovich Luzhkov was perfect to serve as that bridge but it was not obvious to all parties at the time. For one thing, Luzhkov had not broken with the Communist Party as had Yeltsin and others. But Luzhkov had worked with Boris Yeltsin and Yeltsin's recommendation of him was a key factor in the Democrats accepting him. Also Yuri Mikhailovich Luzhkov adroitly parried the question of whether he was a Communist with the reply that he was a guardian manager for his constituency.
HOME PAGE OF Thayer Watkins