23 Things They Don't Tell You About Capitalism

The above idea, known as ‘trickle-down economics’, stumbles on its first hurdle. Despite the usual dichotomy of ‘growth-enhancing pro-rich policy’ and ‘growth-reducing pro-poor policy’, pro-rich policies have failed to accelerate growth in the last three decades. So the first step in this argument – that is, the view that giving a bigger slice of pie to the rich will make the pie bigger – does not hold. The second part of the argument – the view that greater wealth created at the top will eventually trickle down to the poor – does not work either. Trickle down does happen, but usually its impact is meagre if we leave it to the market.

The ghost of Stalin – or is it Preobrazhensky?

With the devastation of the First World War, the Soviet economy was in dire straits in 1919. Realizing that the new regime had no chance of surviving without reviving food production, Lenin launched the New Economic Policy (NEP), allowing market transactions in agriculture and letting the peasants keep the profits from those transactions.

The Bolshevik party was split. On the left of the party, arguing that the NEP was no more than a regression to capitalism, was Leon Trotsky. He was supported by the brilliant self-taught economist Yevgeni Preobrazhensky. Preobrazhensky argued that if the Soviet economy was to develop it needed to increase investment in industries. However, Preobrazhensky argued, it was very difficult to increase such investment because virtually all the surplus the economy generated (that is, over and above what was absolutely necessary for the physical survival of its population) was controlled by the farmers, as the economy was mostly agricultural. Therefore, he reasoned, private property and the market should be abolished in the countryside, so that all investible surplus could be squeezed out of it by the government suppressing agricultural prices. Such surplus was then to be shifted to the industrial sector, where the planning authority could make sure that all of it was invested. In the short run, this would suppress living standards, especially for the peasantry, but in the long run it would make everyone better off, because it would maximize investment and therefore the growth potential of the economy.

Those on the right of the party, such as Josef Stalin and Nikolai Bukharin, Preobrazhensky’s erstwhile friend and intellectual rival, called for realism. They argued that, even if it was not very ‘communist’ to allow private property in land and livestock in the countryside, they could not afford to alienate the peasantry, given its predominance. According to Bukharin, there was no other choice than ‘riding into socialism on a peasant nag’. Throughout most of the 1920s, the right had the upper hand. Preobrazhensky was increasingly marginalized and forced into exile in 1927.

However, in 1928, it all changed. Upon becoming the sole dictator, Stalin filched his rivals’ ideas and implemented the strategy advocated by Preobrazhensky. He confiscated land from the kulaks, the rich farmers, and brought the entire countryside under state control through collectivization of agriculture. The lands confiscated from the kulaks were turned into state farms (sovkhoz), while small farmers were forced to join cooperatives or collective farms (kolkhoz), with a nominal share ownership.

Stalin did not follow Preobrazhensky’s recommendation exactly. Actually, he went rather soft on the countryside and did not squeeze the peasants to the maximum. Instead, he imposed lower-than-subsistence wages on industrial workers, which in turn forced urban women to join the industrial workforce in order to enable their families to survive.

Stalin’s strategy had huge costs. Millions of people resisting, or being accused of resisisting, agricultural collectivization ended up in labour camps. There was a collapse in agricultural output, following the dramatic fall in the number of traction animals, partly due to the slaughtering by their owners in anticipation of confiscation and partly due to the shortage of grains to feed them thanks to forced grain shipments to the cities. This agricultural breakdown resulted in the severe famine of 1932–3 in which millions of people perished.

The irony is that, without Stalin adopting Preobrazhensky’s strategy, the Soviet Union would not have been able to build the industrial base at such a speed that it was able to repel the Nazi invasion on the Eastern Front in the Second World War. Without the Nazi defeat on the Eastern Front, Western Europe would not have been able to beat the Nazis. Thus, ironically, Western Europeans owe their freedom today to an ultra-left-wing Soviet economist called Preobrazhensky.

Why am I nattering on about some forgotten Russian Marxist economist from nearly a century ago? It is because there is a striking parallel between Stalin’s (or rather Preobrazhensky’s) strategy and today’s pro-rich policies advocated by free-market economists.

Capitalists vs. workers