Public Choice 113: 265–286, 2002.© 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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Dictator, loyal, and opportunistic agents: The Soviet archives oncreating the Soviet economic system ∗

EUGIENIA BELOVA1 & PAUL GREGORY2

1Department of Economics, University of Houston, Houston, TX 77204-5882, U.S.A.;e-mail: ebelova@bayou.uh.edu; 2Department of Economics, University of Houston,Houston, TX 77204-5882, U.S.A.; e-mail: pgregory@uh.edu

Accepted 20 March 2001

Abstract. Studies of the mature Soviet economy focus on the structural weaknesses of rentseeking and corruption. Such an economy is presumed to perform better in its adolescent phaseunder a strong stationary-bandit dictator, dedicated to growth and able to control rent-seekers.We use the recently opened Soviet state and party archives to show the process that began inthe 1930s of transforming the inner circle of the Soviet stationary bandit into a rent-seekingbureaucracy lacking long-term goals.

1. Performance of the adolescent soviet system

Studies of Soviet economic growth, pioneered by Bergson (1961), show thatgrowth was most rapid in the 1930s, remained high in the early postwarperiod, but then declined steadily throughout the prolonged “period of stag-nation” under Brezhnev. A variety of explanations have been offered for theapparent greater success of the early period. The classic critique of socialismby Mises (1922) and Hayek (1936) could perhaps be interpreted as predictingthat information, computational, and motivational problems would intensifyas the economy matures, although Mises and Hayek did not explicitly say so.Indeed, specialists on the Soviet economy have offered a number of Mises-Hayek-like explanations of the postwar decline: the difficulty of managingan increasingly complex economy (Schroeder, 1985), capital/labor substitu-tion problems (Weitzman, 1970), incentive problems of guaranteed job tenure(Granick, 1987), and inadequate rewards for innovation (Berliner, 1976).

Olson (1993, 1995) offers an alternate “political-economy” explanation.In the early years, the “stationary bandit” dictator (Stalin) was able to impose

∗ This project was funded by financial support from the National Science Foundation,Social Science Division and from the Hoover Institution. The authors wish to thank MarkHarrison, Roger Sherman, Thomas Mayor, and Steven Fortescue for their comments on anearlier draft. We are indebted to Valery Lazarev, Aleksei Tikhonov, and Andrey Markevichfor materials they provided. We are especially grateful to an anonymous referee for extremelyinsightful comments that resulted in, we believe, substantial improvements in this paper.

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growth-maximizing policies to increase his political, military might, and in-ternational influence. The dictator’s “encompassing” view required him toprovide public goods and induce high savings rates, and resulting growth wasrapid. As time passed, however, growth rates declined as special interests,bureaucratic competition and collusion supplanted the growth-oriented dic-tator, creating a massive rent-seeking society. Olson’s theme of the weaknessof mature socialist institutions is elaborated by Boettke (1997), Wintrobe(1998) and, to a degree, Rutland (1985). They characterize the mature So-viet system as a directional-less society, in which bureaucratic rent-seekingcompetition replaces economic competition, According to these authors, theSoviet economy should be modeled as a bureaucratic economy, which theparty controls (Anderson and Boettke, 1993) and organizes for its own gain(Wintrobe, 1998). Shleifer and Vishny (1992, 1994), to the contrary, picture asort of collusion among bureaucrats that allows them to maximize their rentsat the expense of the party. There is general agreement among these authorsthat scarcity is contrived to promote rent-seeking activities. Although suchmodels can prove useful for understanding the “final” or “degenerate” phaseof the Soviet system, they do not explain the system In its early years or itsconsiderable appeal in many parts of the world (Wintrobe, 1998: 217).

These writings provide a framework for studying the “adolescent” Sovietadministrative-,command economy using the recently-opened Soviet stateand party archives. The theories of Mises and Hayek, Olson, Boettke andWintrobe make certain predictions about the dictator’s behavior, the actionsof rent-seeking coalitions, and the difficulties of dealing with information andopportunistic behavior. The stationary bandit and rent-seeking models seek topenetrate the stereotype (for earlier attempts see Hewett, 1988 and Leitzel,1996) of a monolithic party and state organization devoted to a common“party line.” The formerly-secret archives provide us with the very documentsthat top Soviet leaders used for decision making and create an unprecedentedopportunity to study the real-world behavior of dictators and rent seekers.1

The “adolescent” 1930s was a period in which Olson’s “stationary bandit”conditions were most likely to apply and the Hayek/Mises critique perhapsleast applicable. Khlevnyuk (1996), in his analysis of the highest party re-cords, concludes that, although Stalin was not to become absolute dictatoruntil the Great Purges (1937-38), Stalin was first among equals in the ten-person Politburo that constituted the Soviet dictatorship at that time – a sortof “Team Stalin.” Despite rumors of ideological splits within the Politburo,Khlevnyuk shows Team Stalin’s strong consensus on an economic policy ofrapid growth of heavy industry and defense, collectivization of agriculture,and the elimination of private property. This Team Stalin embarked upon an

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ambitious industrialization drive, based on a massive construction programof heavy industrial plants and infrastructure.

Team Stalin was comprised of a close-knit group of former conspirat-ors, whose ties extended back to the revolutionary struggle. They joined theBolshevik Party early and knew each other well. It was this Team Stalinthat provided the direct leadership of the adolescent economy’s rather sim-plified hierarchical structure. Stalin’s close Politburo associates ran the ranthe government (Molotov), the major economic ministries (Ordzhonikidze,Kaganovich, Mikoyan and others), the State Planning Commission, andthe Politburo’s powerful control commission The stationary-bandit theorysuggests that such an economic management team, dedicated to the “encom-passing” purpose of rapid industrialization, would create conditions favorablefor growth and inimical to narrow rent seeking.

We examine a three-tiered economic system, comprised of a) Team Stalin,also referred to as D for “dictator”, b) the “bureaucratic” agents that translatedD’s directives into concrete tasks, primarily the State Planning Commissionor Gosplan, hence denoted as GP, and c) the economic agents respons-ible for fulfilling production tasks. The latter called, in the Soviet parlance,“managers of production” (khoziaistvenniki), hereafter referred to as KH,are represented primarily by the major industrial ministries.2 The industrialministries (KH) have been discussed in the theoretical and applied literatures(Gregory, 1990; Coyningham, 1982; Dykker, 1985; Gorlin, 1985; Granick,1980; and Keren, 1982). Rutland (1985), Boettke (1957) and Treisman (1999)show that industrial interests, joined by regional authorities, formed therent-seeking coalitions that plagued the mature economy.

2. Was “Team Stalin” a stationary bandit?

Olson based his stationary bandit model on Stalin. Although scholars recog-nize that the stationary bandit model’s applicability to certain autocracies, itis not obvious whether it can explain the most important dictatorships, likeStalinist Russia (Wintrobe, 1998: 132). Anderson and Boettke (1997) arguethat Stalinist Russia was simply an unorthodox variant of mercantilism. Theseauthors suggest that, although ideological factors may have motivated theearly Bolsheviks, already by the time of the Stalin dictatorship, the economicsystem had begun to function like a mercantilist state with strong rent-seekingtendencies. Olson infers stationary-bandit behavior from Stalin’s taxation andsavings policies. Recall that the stationary bandit is a rational autocrat witha sufficiently secure hold on power to take a long-term view of maximizingfuture income and hence long-run tax receipts. The stationary bandit choosesa revenue-maximizing tax rate, provides public goods, and achieves a high

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rate of saving and investment. To impose his encompassing policies, the sta-tionary bandit would have to control rent-seeking interests. Did Stalin, ormore appropriately Team Stalin, behave as a stationary bandit according tothe Soviet archives?

The archives provide a number of written exchanges among Team Stalinmembers that speak to the issue of their objective function. A number ofdecisions were made by correspondence during absences of Stalin and otherkey officials from Moscow; most were made in face-to-face meetings withoutstenographic reports. Khlevnyuk’s (1996) and Rees’s (2001) analyses of thiscorrespondence suggest remarkably little difference between private and pub-lic stances. Stalin truly believed that he was surrounded by anti-socialistwreckers and by domestic and foreign enemies and that immediate industrial-ization and a strong defense were required for survival. Written exchanges oneconomic matters focused on a few key industrial and agricultural products,called control figures, and on the investment budget. Team Stalin appearedto aim to bring the amount of investment finance in conformity with theavailability of real investment resources (Gregory, 2001). Various investmentfigures would often be discussed with Stalin usually having the final word,sometimes raising, sometimes lowering the final figure.3 Team Stalin ap-peared, after an early period of exaggeration, to understand that there werelimits on the investment budget; too many investment rubles would resultin the bidding up the prices of investment goods (Gregory, 2001). TeamStalin’s control figures for key industrial products, like pig iron or transportvolume, were (again after a period of exaggerated expectations) based uponengineering-like estimates of maximum capacity. For example, Team Stalinbased its freight transport figures on estimates of maximum daily loadingrates of rail cars (Rees, 1997: 220). Once key figures were set, considerablelobbying was required to get Team Stalin to budge (Rees, 2001). The heartof Team Stalin’s growth policy was its program of large construction projectson the state’s “title list” which accounted for much discussion among TeamStalin members. From the documentation that exists, Stalin appeared to weighprojects based on his perception of economic efficiency, such as his earlyopposition to the Dneprstroi Industrial Complex.4

Stalin’s correspondence with trusted allies was not political posturing. Inhis letters, he entrusts them with highly confidential instructions. In suchcorrespondence, Stalin insisted on an encompassing view of economic de-cisions and railed against narrow rent-seeking activities, particularly by TeamStalin’s own members. Stalin explicitly warned not to tolerate the “selfish”efforts of the minister of heavy industry (and fellow Team Stalin member,Ordzhonikidze) to turn the Politburo “from the leading organ into a body sub-ordinate to the needs of a particular commissariat.” Similarly, Stalin argued

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against another “selfish” request by the deputy minister of heavy industryfor scarce currency: “Bolsheviks cannot take this path if they wish to avoidturning our Bolshevik party into a conglomerate of branch groups. . . Whatis better: to press on the government’s currency accounts, allowing the eco-nomic bureaucracy a quiet life, or to press on the economic bureaucracy andprotect the interests of the state?”5

The “collective” Team Stalin was prepared to fight against narrow in-terests, even if its own team members represented them. Consider a Stalinassociate’s complaint against Molotov: “When we worked together in the[Politburo], we worked in a friendly manner, but when he became primeminister and I minister of transport we argued . . . I demanded more rails,investment, GP did not give and Molotov supported them” (Chuev, 1992:61).

Despite its stated intent to take an encompassing view, Team Stalin didsuccumb at times to political motives. Lazarev and Gregory (1999) concludefrom a case study that D allocated its reserve of vehicles to build politicalsupport rather than to achieve economic goals. A case study of the Uralsregion shows that Team Stalin supported large regional investment proposals“not based on especially sound economic logic” but to capture the politicalsupport of regional leaders. (Harris, 1999: 4).

3. Bureaucrats as loyal agents

Both Olson and Mises/Hayek paid little attention to the manner in which Dwould organize its bureaucratic staff to manage the managers of production.Mises and Hayek referred to a central planning board (which was assumedto be identical to D) that would deal directly with enterprises. Boettke andWintrobe, to the contrary, characterize the Soviet economy as a bureaucraticeconomy. In Wintrobe’s model, the formal bureaucratic “vertical” structurecreates “vertical trust”, which strengthens the bureaucracy’s control over pro-ducers. Producers, on the other hand, create informal “horizontal” structures,which weaken the bureaucracy’s control (Wintrobe, 1998).

Due to fear of outsiders, Team Stalin’s real ability to manage the economyfaced strict physical limits. The party’s central staff consisted of less than400 employees in the early 1930s. D’s own immediate staff was limited toa small core of highly-loyal and vetted persons. Team Stalin could makeonly a limited number of decisions. Given its own limited staffing and centraldecision making capacity,6 D had no choice but to use a hierarchical struc-ture comprised of bureaucratic agencies, such as GP and the finance ministry(hereafter referred to as MF), in dealing with KH. D’s bureaucrats were alsolimited in what they could do. GP, the largest central agency, then including

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the Central Statistical Administration, had only 900 employees.7 The largeindustrial ministries, on the other hand, employed 10,000 or more specialists.8

The number of top Party officials who could be allocated to positionsindependent of branch or regional interests was limited. Even “independent”commissions such as the Fuel Commission or Price Commission, includedindustry specialists, who fought for narrow branch interests (Barnett, 1997).D’s solution to the loyalty problem was to create a “functional bureaucracy”of GPs and MFs to serve as “loyal agents.” Loyal agents were kept true toD’s interests by not being held responsible for concrete economic results(Gregory, 1990). The loyal agent understood the importance of avoiding re-sponsibility and remaining as remote as possible from concrete economicresults. The archives reveal virtually no documented cases of D’s dissatisfac-tion with GP in the 1930s, with the spectacular exception of 1930, when itsleadership was purged for advocacy of moderate growth rates (Khlevnyuk,1996). This purge made GP wary of any hint of conflict as is seen in theGP Chairman’s vigorous and immediate defense against press criticism in1931 of opportunism and skepticism about plan fulfillment. GP cleared anysubstantive changes in economic policy with D and obediently implementedarbitrary changes from above. The rare instances of GP disobedience in the1930s involved its efforts to introduce more realism into the plan or to showunderstanding for failure to meet production targets.9

Although GP was divided into branch departments, we could find no overtevidence of GP branch departments lobbying for their branches. PerhapsStalin’s openly-expressed dislike of branch specialists served as a restraint:Consider Stalin’s complaint to Molotov about GP specialists’ undue influ-ence: “It is sometimes even worse than that: not GP but GP ‘sections’ andtheir specialists are in charge . . . ” (SLM, No. 44). The feared tendency ofGP branch departments to lobby for their branches materialized in the earlypostwar period, prompting another purge of GP and the execution of GP’sdirector.

D considered GP an honest broker of its interests: GP was treated as aninternal staff department, preparing plans and state decrees. But GP lackedlegislative authority to issue its own operational state decrees; with a fewrare exceptions, they had to be approved by D. D also relied on GP for itsexpertise in evaluating the thousands of requests and petitions that it received.When KHs tried to circumvent GP and go directly to D, their requests usu-ally ended up back m GP. GP sought to make its decisions “on the side” ofD and routinely complained that ministry documents did not spell out howthey complied with government programs. In this early period, ministriescould request inputs without providing justification for their requests (Laz-

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arev and Gregory, 1999), leaving GP with the daunting (and unwelcome) taskof checking consistency with state directives.

In keeping with the character of loyal agents, GP undertook its own meas-ures to avoid responsibility for concrete results. Throughout the 1930s, GPsought to limit itself to generalized planning and avoid the setting of concretetasks, such as delivery plans, for which it could be held responsible.10 GPconsistently tried to avoid D’s requests for expertise on specific materialrequests with protests that “we are simply not equipped to deal with suchmatters.” (RGAE 4372.30.25: 186). GP sought, on numerous occasions, tobe relieved of what it called “syndicate work,” ostensibly because it lackedpersonnel. Nevertheless, GP found itself drawn inadvertently into operationalplanning. An example shows the fine line between planning and operations(“syndicate work”) that GP had to navigate: In April of 1933, GP was freed atis own request from operational planning of printing, which was transferredto the Ministry of Cellulose Products.11 GP’s freedom from planning paperproducts was short-lived. Complaints against the new arrangement mountedbecause paper planning meant the planning of printing, which was a matter ofnational significance. GP reluctantly agreed to resume the planning of paperand printing, under the condition that the publishers prepare their own plans,still leaving GP with the substantial tasks of planning capital investment anddistribution of paper (RGAE 4372.31.39: 5).

D’s uneasy relationship with bureaucratic agents created systematic prob-lems: GP planned at a level of aggregation above actual transactions to avoidresponsibility and ceded resource-allocation authority to the managers of pro-duction. In a telling quote, GP declared: “GP is not a supply organization andcannot take responsibility either for the centralized specification of orders byproduct type or customer or the regional distribution of products” (RGAE4372.32.28: 144–147). Second, bureaucratic agencies necessarily employedpotentially-disloyal “technicians” who could be “captured” by branch in-terests, prompting calls by Stalin to “hound such specialists out of Moscow”(SLM, No. 44). Given this distrust, D was reluctant to cede authority to bur-eaucratic agents on “important” matters. Stalin warned against “Our fundsbeing allocated by Gosplan specialists” turning the Politburo “into a court ofappeals or a council of elders.” (SLM, No. 44). However, D was confusedover what constituted an “important” matter. Much of Politburo time wasdevoted to trivial matters, such as approving travel requests, deciding whichparticular enterprise should get more steel, or resolving disputes betweenregional authorities over one imported car.

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4. The economics of illusion

Mises and Hayek emphasized the information problems of a planned eco-nomy. Gregory (1990) has shown that most information was generatedby KHs, who had a vested interest in concealing or distorting informa-tion. Boettke (1993) speaks of the “economics of illusion,” a phenomenonnoted earlier by Berliner (1957); that is the ability of enterprises to reportinformation to “pull the wool over the eyes” of superiors. Berliner even iden-tified a rich slang vocabulary to describe the various forms of informationmanipulation.

Stalin is on record as early as 1929 as fearing that managers of productionwould evade, ignore, or fill instructions only on paper, writing to Molotov:“The Politburo has adopted my proposal concerning gram procurement. Thisis good, but in my opinion, it is inadequate. Now the problem is fulfillingthe Politburo’s decision” (SLM, No 42). Stalin’s subsequent correspondenceis replete with complaints of “paper fulfillment” and calls for a “commis-sion on fulfillment.” Team Stalin installed elaborate monitoring systems: ThePolitburo ordered each local, regional, and republican party office “to assignone of its secretaries the responsibility of monitoring the fulfillment of direct-ives of the Central Committee and providing timely responses to questions”(SP30, No. 83). Similarly, ministries were ordered to designate a high officialto be responsible for monitoring fulfillment of party directives according todetailed reporting procedures under conditions of strict secrecy (SP30, No.84, 85). Such formal monitoring structures were unimportant compared tothe party’s own control apparatus. All important positions in the economywere occupied by party members, appointed by the party.

The ultimate enforcer of party discipline was the Politburo itself, whichhad the power to punish (including the death penalty) any and all partymembers. Team Stalin used its control commissions to investigate economicwrongdoing. GP, contrary to its powerful image in the Western literature,lacked punitive power. It could only use administrative sanctions, such asthreats to draw up its own investment plans using “materials on hand”if ministries did not provide timely information, or to deprive projectsof financing.12 GP routinely called upon control commissions to enforcedirectives.13 In 1934, GP even asked the state procurator to make proposals“to establish criminal responsibility for exaggerated orders, incorrect inform-ation about supplies, and receipt of funded materials and equipment without[financial] funds” (RGAE 4372.32.27: 215). D would often form temporaryjoint commissions, including GP, the control commission, and the offendingministry, to resolve specific problems. “The files of the party control commis-sions are filled with egregious examples of “economics of illusion” of false

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or misleading information (Belova, 2001), confirming Stalin’s fears of “paperfulfillment.”

5. Dealing with opportunism

After a brief but disastrous experimentation with direct involvement in fact-ory management in 1930, Team Stalin adhered to hierarchical division ofresponsibility.14 The industrial minister, like the enterprise manager, waspersonally responsible for production. Upon appointment to line responsib-ilities, Team Stalin members dropped encompassing views and became aviddefenders of branch interests.15 The industrial ministry’s task was “to fulfillthe plan”, which constituted the law of the land (Belova, 2001). The multi-dimensional plan represented a contract between D and KH, constructed onthe basis of imperfect information. It was this contract/plan that Stalin fearedwould be fulfilled only on paper. KHs, as the primary source of data, hadan incentive to distort information and retain their information advantage.Managers of production could increase the probability of plan fulfillmentby negotiating for lower production targets or more resources, particularlyinvestment. The combination of low targets and large investments allowedthem to reduce effort per unit of reward. Berliner (1957) and Granick (1954)showed that it was this sort of “quiet life” that enterprise managers oftensought. KH’s struggle for resources, or ‘their battle for the plan’, can be inter-preted alternatively as rent seeking: Industrial ministers fought for investmentprojects and protection of capital assets from takeovers for political gain (Laz-arev and Gregory, 1999). In their struggle for rents and/or the quiet life, KHsought favorable contracts, or, if they failed, engaged in ex post renegotiation.The stationary bandit’s task, however, was to give the KH a “tough life”(“pressing on the state bureaucracy” in Stalin’s words) and to prevent rentseeking. This struggle constituted the basic principal/agent conflict betweenD and KH (Gregory, 1990).

The archives provide abundant evidence that KHs were reluctant to revealinformation: In May of 1933, two months after D’s approval of the prepara-tion directives of the second five year plan, the Ministry of Heavy Industry(hereafter referred to by its acronym NKTP) proposed that it along withother ministries and republics submit their control figures three months afterthe deadline without the required enterprise control figures.16 GP opposed,stating: “Such a plan [that excludes enterprise plans] will contain mistakesand distortions and will require changes and corrections” (GARF 5446.14.3:32). As would prove to be typical, NKTP lost this battle but won the war. Bythe time D ruled against NKTP in June, NKTP had already won its desireddelays. In another typical instance, on 13 January 1934, GP complained that

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NKTP had yet to submit its equipment balances – perhaps the most import-ant balance of this period – despite GP’s January 16 deadline to completethe balance (RGAE 4372.32.34,64a). GP’s struggle to extract information isalso illustrated by its inability to fulfill a decree to raise wages by 20% inthe Buryat-Mongolian Republic because of excessive wage fund requests byregional operators and the failure of the regions to deliver the information,despite its urgency (RGAE 4372.32.28: 266). Industrial ministries felt en-tirely justified in delaying information: Plans were constantly being revised,wasting the time of ministerial specialists. Superior instructions were viewedas ill-conceived and irritating. Ordzhonikidze wrote: “I am obligated to tellyou that all is not well. They give us every day decree upon decree, eachsuccessive one is stronger and without foundation” (quoted in Khlevnyuk,1991: 32).

When Mises and Hayek first raised the aggregation problem, they did notanticipate that producers would actually want grossly aggregated plans. KHsfought for highly generalized (highly aggregated) plans as ferociously as formore resources. in April of 1933, GP complained that the documents sub-mitted by the ministries lacked details, economic justification and sufferedfrom such an incompleteness that it was impossible to use them. (RGAE4372,31.36). Ministries gave as little detail as possible particularly on con-struction projects. In 1932 and 1933, GP complained that the heavy industryplan, proposed by the ministry lacks a regional distribution and thereforedoes not provide an opportunity to judge, “how the most important indus-trial locations are being satisfied in their need for new construction” (RGAE4372.31.25. 89,385). Although the issue in these examples is the lack of in-formation, GP must have been torn between its desire for specific informationand its real ability to disaggregate. Even in the case of a relatively homogen-eous commodity – cars and trucks – which was allocated at the highest levels,GP could not plan at the level of supply plans. GP made numerous attemptsto transfer operational planning to ministry supply organizations. Just as Dhad to walk a fine line between its “leading role” and direct interventions, sohad GP difficulty in defining the appropriate level of aggregation.

Ministries received law/plans that they were obligated to fulfill; minis-tries then gave their enterprises plans that they were obligated to fulfill. Thisprocedure assumes that there is one “plan.” Such was not always the case:According to information at GP’s disposal, in February of 1934, the ministryof heavy industry gave its enterprises plans to produce in excess of the stateplan, while simultaneously submitting to GP a second plan, corresponding tothe lower targets approved by D. The Deputy Director of GP warned againstdual planning: “The system of two plans breaks plan discipline and introduceselements of disorganization into the economy” (RGAE 4372.32.34: 9–10),

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The archives disclose an even more extreme ministerial practice, which weterm “non-planning.” In January 1934, GP reported that the ministry of lightindustry did not even prepare a plan below the level of its main departments.Only quarterly plans were prepared for the enterprises and trusts; there wereno annual plans. Cotton textile trusts prepared their 1933 annual plans in1934, only for reporting purposes. To quote the GP report: “Until that time, noone was even interested in the 1933 plan . . . Enterprises declared to represent-atives of GP that they had not seen annual plans for a period of years” (RGAE4372.32.53a: 136–140). The factories without plans were among the mostsignificant in their industries located in the vicinity of Moscow. Non-planningallowed for ministries to reserve for themselves maximum flexibility: namely,to squeeze more output to provide a reserve for unexpected changes and todeal with enterprises out of sight of central authorities.

Already in the early 1930s, the ministries lobbied for increased resource-allocation freedom in return for stricter economic accounting. In 1932, GP,no longer wishing to approve minor plan changes, gave ministries the au-thority to redistribute financing among construction projects within a 10%limit.17 NKTP responded to its new-found freedom by redistributing capitalinvestment in 465 of its 650 construction projects (RGAE 4372.33.85: 244),applying the 10% rule on multiple occasions to the same projects. NKTP’scoal department’s investment plan was changed two times, resulting in a33 million ruble reduction in investment in this key sector.18 The capitalredistribution in 1935 alone amounted to enough to build about eight largeproduction facilities.19 The abuse of the 10% rule was so substantial that GPconcluded that NKTP’s 1935 investment plan was fulfilled only in a “ritual”fashion.

Despite such examples of massive opportunism, Team Stalin’s support ofits loyal agents in disputes with industrial ministries was by no means auto-matic as the following examples illustrate: GP’s prolonged battle with theministries against “unplanned” staffing and wage increases became publicwhen NKTP attacked unnecessary labor accounting work in its newspaper“For Industrialization” (Za industriatizatsiu, No. 22, 1933) and unilaterallyimposed a new abbreviated accounting form for employment and wages.To counter, GP cited D’s own decree of 9 May 1931, which forbids agen-cies to “introduce changes to the forms of reporting without the approvalof GP [and of other affected committees]”. With such an abbreviated form,GP could also not insure compliance with D’s own decree of 6 April 1932entitled “The Planning and Accounting of Wages.” Despite GP’s citation oftwo direct violations of state decrees, D permitted the abbreviated form tobe used, when NKTP cited D’s own campaign to reduce “non-productive”personnel. Simpler forms meant more workers in the factories and fewer

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accountants. Lacking support from D, GP was left with empty threats of“selective surveys” (RGAE 4372.31.34: 3,54 and RGAE 4372.32.53a: 136).

D’s typical reaction to conflicts between loyal agents and KHs was to form“compromise” commissions of high-level officials of the conflicting parties:On 17 January 1935, NKTP proposed to reduce its required reporting on mil-itary industry purportedly to protect military secrets. GP and MF vehementlyopposed, stating that they could no longer plan defense industry under thesecircumstances. D, rather than refusing NKTP’s request, formed a compromisecommission. This commission proposed to reduce the number of reports onmilitary industry but less than requested by NKTP and to limit distribution toa “completely secret order,” which would exclude loyal agents from receiv-ing this information at all (GARF 5446.16.239: 2–14) In another high-stakes1933 dispute, MF charged that NKTP was avoiding profit taxes by violatingstandard accounting rules (GARF 5446.16.269: 2–24). D assigned GP to finda compromise, but GP’s proposal was rejected by NKTP, and, in September,D formed a second commission which was even more favorable to NKTP. MFtried further mollification in a 10 September 1934 letter in which it withdrewmore of its objections. Even these concessions did not satisfy NKTP, and anew commission was formed on 11 November. NKTP gained a final victorywith a 4 February 1935 memo from the secretary of affairs of the Council ofMinisters stating that “the question about the disagreement between NKTPand MF has been removed from discussion.20 In another case, D simply cavedin to ministerial pressure. In 1935, NKTP failed to report its 1934 profits,while claiming an additional 330 million rubles for investment finance, assert-ing that MF had incorrectly calculated its 1934 profits (GARF 5446.16,210).MF moved to strike the 330 million on the grounds that it could not evaluateNKTP’s claim without the 1934 figures. D again sided with NKTP, despitethe obvious rule violation, because supplemental financing was required tostay on target with key construction projects.

D’s puzzling siding with KHs against its loyal agents is explained by thefact that KHs could play effective games against loyal agents: They could citeconflicting rules; they could use their personal influence; and they could em-ploy delaying tactics. Their main weapon was to argue that the loyal agent’sinstruction constituted a threat to production or to the completion of an im-portant construction project. Clearly, D did not always side with KHs; in fact,it was the impression of KHs that D sided more often with loyal agents. Theseexamples simply show rather that D was prepared to throw his loyal agentsoverboard when deemed necessary.

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6. Ad hoc interventions versus ex-post renegotiation

The Soviet stereotype is of a “scientific” plan, prepared by GP in the formof mathematical balances executed flawlessly by managers of production.This idealized view of planning has been challenged by Zaleski (1980),who showed that ad hoc “resource management” actually allocates resourcesbecause plans are constantly revised. D’s frequent and unpredictable interven-tions via ad hoc decrees often overturned entire plans, frustrating professionalplanners.21 Some typical examples: In February of 1933, D ordered the real-location of the total annual production of cars to collective farm harvests andredistributed 30% of trucks allocated to republican governments to construc-tion materials (Lazarev and Gregory, 1999). In February of 1935, D doubledcommunications investment in Kazakstan, while reducing communications’overall investment allotment. GP had to revise the entire list of constructionprojects of the Ministry of Communications (RGAE 4372.33.84: 312-313,327–331).

Were these and other countless interventions the “exogenous” actions of afocused stationary bandit, who was mobilizing resources to maximize growthin the face of shocks and/or planning errors? Or were these the “reactions”of the Team Stalin “court of appeals” (Stalin’s words) to the renegotiationsof prominent industrialists seeking to extract maximum rents? Several casestudies speak to whether economic or political reasoning predominated in D’sdecisions. Lazarev and Gregory (1999) provide a case study of conflicts overvehicles, with D apparently deciding on the basis of the political weight of thepetitioners. Protocols of meetings on grain collections show Stalin decidingweighty issues strictly as a growth maximizing stationary-bandit.22 Harrison(2001) shows that D gave defense-industry interests “little or no freedom ofaction.”

Wintrobe’s (1998) model reconciles these conflicting results under theassumption that political power is a function of economic performance, andvice versa (on this see also Wintrobe and Breton, 1986). The case studiescited above support this proposition: D used its power to provide defenseagainst dissipation of rents, paper fulfillment, and development of horizontalnetworks for the purpose of maintaining economic performance, which, in itsturn, works to increase D’s power. If D were to forsake actions that strengthenthe political dictatorship, economic growth would suffer under the model.

7. Liquid versus non-liquid rewards

According to the stereotype of the Soviet system, real resources – bricks,trucks, plants, and steel – were important, not money. Monetary rewards

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would buy little, loyalty was rewarded in terms of perks, not money. Andersonand Boettke (1997) take a contrary view, arguing that with high managerialturnover, no property rights, and perks that were tied to official positions, KHswould actively seek to accumulate liquidity/money. A strikingly clear featureof the archives is the amount of opportunism and outright lawbreaking in the1930s aimed at illegal accumulation of cash assets (Gregory and Tikhonov,2000). Belova (2001) has studied party control commission files of morethan 3,000 economic crimes ranging from falsification to embezzlement andbribery, practiced both by KH and by party officials. Examples include topofficials of regional party organizations who extorted money from regionalenterprises for personal enrichment, ending up with the relatively “large”amounts of cash (KPK files 6.1.56: 64–65). Local party officials ordered localbanks to transfer funds to their accounts to pay monthly premiums to partyofficials roughly equal to their monthly salaries. Also they took premiums inthe form of valuable consumer goods instead of money and even sold partymemberships for cash. In one of the most spectacular cases, the managers ofUkraine’s social insurance fund embezzled five million rubles between 1932and 1935 by means of shady accounting practices. They also sold vacationsin the vacation facilities owned by the fund (KPK files 6.1.38: 20-30; 6.1.68:80). After the Great Terror of 1937–38, the proportion of party expulsionsfor embezzlement rose from 16% in 1941 to 34% in 1950 and a remarkablequarter million party members were expelled between 1939 and 1952 forembezzlement (KPK files 6.6.1; 6.6.3).

8. Conclusions: Lessons from the archives

Scholars have offered competing explanations for the stylized fact of highereconomic growth during the Soviet economy’s early phase. Olson’s stationarybandit model argues that the “adolescent” Soviet economy, unlike its ma-ture variant, was directed by an ideology-driven growth-maximizing dictatorwho forced high rates of capital accumulation. The stationary bandit wasnot diverted from his encompassing goals by narrow rent seeking; high-levelcorruption was minimal; the leadership was united in its growth consensus;and the lack of a serious political challenge created a political equilibrium. Analternate explanation can be inferred from the Hayek/Mises critique of social-ism. In its adolescent stage, the Soviet economy was compact, subdivided intosmall number of large ministries each headed by a member of the ruling elite.Such a “simple” economy may have been easier to manage than the mature,complex Soviet economy despite obvious information, computational, andmotivational problems.

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We use the actual (formerly-secret) documents that circulated among thetop Soviet leaders in the 1930s to determine their commitment to growthand their dealings with rent seeking. Working with primary sources raisesa number of methodological problems, such as the lack of information onreal motivations behind official decisions and the difficulty of distinguish-ing typical from unrepresentative cases, but our data create a rare pictureof “how things really worked” at the highest levels of the Soviet dictator-ship. It describes the beginnings of the process of transforming the stationarybandit’s inner circle into a rent-seeking bureaucracy, strongly resisted byStalin himself, and provides a ‘missing link’ between political and economicexplanations of dictatorial decision making.

The first lesson from the archives is that the intent of ‘Team Stalin’ wasindeed that of a stationary bandit. Their intent was to select growth maximiz-ing policies, and to select control figures and investment budgets to squeezemaximum performance from the economy.

The second lesson is that a stationary bandit cannot make individualdecisions in the context of unlimited power no matter how “simple” the or-ganizational structure. A socialist planned economy must be a bureaucraticeconomy. The dictator must form a “team” and, whatever its origins, thisteam will be comprised of autonomous members. Some team members cantake an “encompassing” view; others must run particular industries and beheld accountable for concrete results. This division between encompassingand narrow views is the genesis of an eventual mature economy dominatedby special interests. Only a strong/feared dictator can slow this process, andthe archives show that Stalin understood the dangers of rent seeking and didhis best to stop it.

Third, the dictator clearly understood the threat of opportunistic behaviorby industrial ministries and sought to devise appropriate monitoring and pun-ishment systems. The “plan/law” was a contract between the dictator and theindustrial ministry; and any failure of the industrial ministry to fulfill thiscontract threatened the dictator’s goals. Industrial ministry opportunism (pa-per fulfillment) can be interpreted, alternatively, as coping with a non-optimalcontract or as rent seeking for narrow gains.

Fourth, industrial ministry renegotiation of plan/contracts occupied muchof the dictator’s time, The plan was only a first step in contracting, but the sys-tem lacked a formal recontracting procedure. Instead the dictator was floodedwith requests for lower production targets and more resources from petition-ers, who had a prominent information advantage over the center. The dictatorresponded with numerous ad hoc interventions, that disrupted existing plans.Some interventions were exogenous, but most were responses to petitions.Some case studies show the dictator weighing petitions on economic merit;

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others show attention to political weight. This duality disappears, however, ifwe assume that economic performance and the dictator’s power are simultan-eously determined (Wintrobe, 1998). If all decisions were based on economicmerit and ignored political implications, the stationary bandit’s hold on powercould have weakened.

Fifth, the Soviet dictatorship could have reinforced its “stationary bandit”impulses by imposing growth-maximizing constitutional “rules” enforced bya “scientific planner” such as Gosplan. Such rules would be designed to insurethe efficiency of economic decisions and combat horizontal trust networks.But for this purpose Gosplan had to be a powerful and autonomous organiz-ation. Trotsky understood this point as early as in 1921, when he proposedto give Gosplan (which he intended to make his own power base) legislativepower. The archives, however, picture a rather weak and hapless Gosplan –an organization that had to beg the dictator to enforce its plans. Never inSoviet history was Gosplan’s head a dominant politician (with the exceptionof Voznesensky after World War II, who was executed for his independence).The stationary bandit’s complex relationship with loyal agents explain thefailure to use rules, other than the Mises/Hayek point that such rules wouldhave been impossible to devise: To ensure loyalty, loyal agents could not beheld accountable for concrete results. Not trusting this guarantee (becauseof earlier purges), loyal agents actively avoided responsibility by planningat highly-aggregated and non-operational levels. This practice constituted aserious loss of information that diminished the dictator’s ability to preventthe dissipation of the rents and ceded real control over resource allocation tothe managers of production.

Sixth, the archives clearly support Zaleski’s (1980) view of the Soviet eco-nomy as a “resource-managed” rather than a planned economy. The economyoperated basically without operational plans: ministries issued two sets ofplans; some large enterprises either had not seen an annual plan for years orprepared annual plaits in retrospect. The dictator’s primary planner appearedcontent at least with the basics of this arrangement, declaring that it was notits job to plan specific transactions. The ability of the “super ministries” ofthe 1930s to “play the system” with such success may explain why they werebroken up beginning in the mid 1930s.

A clear distinction has been drawn between the two stages of Sovietdictatorship: In its adolescent phase, it was supposedly more ideological,cohesive, and devoted to the goal of economic growth. In its mature phase,it was non-ideological, lacking a clear objective function, and dominated bynon-cohesive industrial and regional interest groups. These differences havebeen cited to explain the better performance of the adolescent system. Afterexamining the very documents that the Soviet dictatorship generated in the

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1930s, we find much merit to this distinction. The archives allow us to identifythe genesis of rent seeking as Stalin’s team split into groups representing nar-row and encompassing interests, despite Stalin’s own warnings against rentdissipation. More importantly, we identify a ‘missing link’ between the twostages of Soviet dictatorship. In the face of developing opportunism, the dic-tator needed more power to generate economic growth; dictatorial decisionscame to be increasingly dictated by political rather than economic decisions.Hence, the stationary bandit gradually was transformed into a dictator whoseprime concern was to maintain its political power. The rate of economicgrowth diminished as rent seeking came to dominate and diminishing returnsto power set in as the dictator could provide fewer incentives for growth. Thedictator’s unwillingness to commit to a rule-based system managed by a loyalagent removed a potential obstacle to rent seeking.

Notes

1. This study uses the Russian State Archive of the Economy (RGAE) and the State Archiveof the Russian Federation (GARF). We also use the archives of the Hoover Institutionto study the work of investigative commissions, such as the Party Control Commission.Excellent guides to the Soviet economic archives are available (Kratki putevoditel, 1993;State Archival Service, 1994).

2. The industrial ministries were broken down into main administrations, which managedenterprises. The administrations and the enterprises were also “managers of production”,but we focus in this paper on the industrial ministries. Our most reliable knowledge ofthis system is of its micro-economic level of enterprises (Berliner, 1957; Granick, 1954).

3. In a discussion of investment, July 1915, GP first proposed 19 billion rubles for con-struction along with a distribution of this investment. Stalin responded that this figurewon’t work and proposed 22 million and stated his own priorities. “Some things can’t becut: Defense. repairs of roads and moving stock, plus payments for new trains and steamengines (list continues) . . . ” (SLM, No. 80).

4. In an early letter to Molotov (1925). Stalin complained that a large infrastructure project(Dneprstroi) was too expensive and risky, compared to projects that cost one third asmuch. Stalin proved stubborn in derailing inefficient projects, such as Dneprstroi. Molotovwrote that Stalin was still pestering him to sink the Dneprstroi project (SLM, No. 1).

5. In both cases, the ministry of heavy industry attempted to reduce the plan targets throughimports. The first case (Rees and Watson, 1997: 16) involved Ordzhonikidze’s attemptto push an increase in steel imports through the Politburo. The second case involved thedeputy minister of heavy industry’s attempt to force the currency commission to allotadditional currency for imports of wagon axles.

6. In the 1930s, between 2.3 and 3.5 thousand decisions were registered annually in Politburodecrees. In the very early 1930s, the Poliburo, dealt with as many as 50 issues per meeting.By the mid 1930s, the Politburo dealt with between 100 and 1000 points per meeting(SP30: 15, 196–250). These statistics do not include the thousands of decisions of ad hoccommissions that were made in place of formal Politburo decisions throughout the 1930s.

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7. Only 30 persons staffed GP’s key department of energy and electrification. A departmenthead (chemicals section) complained: “We cannot present and decide even one issuebecause of the complete lack of workers.” (RGAE.4372,39.34. 85, 91–93).

8. Compared to D’s own staffing at the central level of loss than 3000 in the early 1930s,the Ministry of Transportation employed 5,000 engineers and 16,000 technicians in 1933(Rees, 1997: 208). The Ministry of Heavy Industry’s staffing rose from 4346 in 1934 to7375 in 1937 (Markevich, 2000).

9. The archives reveal a little-known case of a GP official being rebuked in a Politburo decreefor approving reduced production targets: The Politburo issued “stem reprimands” to thedirector of the trust and the plant manager – the usual penalty for failing to meet plantargets. (SP30, No. 86).

10. An industry official protested in 1925 that GP’s control figures were too aggregated anddid not specify concrete tasks. GP responded: “Of course, for many organizations it wouldbe a considerable relief to receive without any of its own effort a fully prepared plan withdetailed tasks. But consider what kind of a super-bureaucratic result would be achievedif GP, sitting in Moscow, took upon itself the role of all-union nanny” (Strumilin, 1928:312).

11. A prescient internal GP memo warned that the “planning of paper means the planning ofprinting for which the Ministry of Cellulose Products is not suited,” and reminded GP ofthe national importance of printing. The memo correctly predicted that complaints againstthe Ministry would be turned back to GP for resolution (RGAE 4372.31.36: 33–34,57).

12. GP threatened NKTP in 19.33 that, if sufficiently detailed information was not re-ceived within three days, it would ask the government to approve an investment plan forNKTP formulated entirely by GP from materials on hand. (RGAE 4372,31.33.2, RGAE4372.31.34: 62). Also GP threatened the grain milling industry with total exclusion fromtitle lists if it did not provide detailed investment information (RGAE 4372.32.54: 114).

13. In 1933, GP requested that the control commissions (NKRKI) investigate the crude mis-takes and excessive non-economic use of resources of pipe factories in Leningrad “inthe shortest possible time to find the guilty and turn them over to the courts.” Also GPrequested that NKRKI investigate why the Ministry of Wood Products did not build anelectrical station in Arkhangelsk contrary to a D’s order (RGAE 4372.31.35: 172, 204).In further letters from 1934, GP asks control commission to investigate and punish thosewho failed to fulfill D’s tasks (RGAE 4372.32.28: 193; RGAE 4372.33.84: 478–480).

14. Consider the haughty rebuff of Ordzhonikidze, the best-known “manager of production”,to the chairman of GP: “Today they gave me your order, addressed directly to the chem-ical department . . . I regard such a directive through the director . . . [not through me] asincorrect. Therefore I request that all directives be sent in the usual order. They think thatthey can give the factories orders through us, but why the devil [do we] exist and whyshould I sit here . . . ” (Khlevniuk, 1993: 32).

15. Ordzhonikidze was converted from an avid advocate of unrealistic growth rates as headof the control commission to more realistic rates as the head of NKTP. Kaganovich(Stalin’s first deputy) underwent a similar conversion when he was appointed Ministerof Transportation (Khlevnyuk, 1996).

16. NKTP argued that: “the approved dates. if we hold to the order of processing of controlfigures, will lead to rushed results and will lower the quality of planning at the mostimportant stages of work.” NKTP further complained about “repeated planning work forthe ministry, its trusts and enterprises.” (GARF 5446.14.3: 34–37).

17. Sobranie Zakonov SSSR. No. 33 (196), 27 April 1932.

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18. In August 1935, GP wrote: “The capital investment plan for GlavUgol (the coal trust ofNKTP) was revised twice in this year . . . While executing the plan, NKTP cut GlavUgol’saccount, justifying its actions by its right to redistribute 10% of its subordinates’ invest-ment. These cuts have led to the reduction of planned investments by 8.5 million rubles.Moreover, NKTP used its 1935 credit to pay for the capital investment debts of 1934,The total amount of these debts equaled 24.5 million rubles. Thus, the actual amount ofinvestment in the coal industry was reduced by 33,0 million rubles” (RGAE 4372.33.85:244).

19. A Central Statistical Bureau’s survey of capital investment shows that NKTP’s totalinvestment in 1935 was 9042 million rubles; thus the “reported” internal reallocationsconstituted about 5% of the total. (RGAE 1562.10.468: 1–5) 322 million rubles wouldcover the cost of constructing eight average metal working plants like the Gorky Plantwith the planned capacity of 5,000 milling cutter machines per year (RGAE 1562.10.531:41).

20. NKTP achieved a similar victory in 1934 by drawing out a dispute on the reported bal-ances of enterprises for 1934 until October of 1935, when the issue was dropped (GARF5446.16.108).

21. Consider the following letter from a GP specialist concerning substantial last-minutechanges in investment targets: “Such changes are so serious that they reflect on allbranches and one cannot directly correct the tables, but it is necessary to start from scratchto project each sector . . . This means a new balance of construction materials, metals,different needs for energy” (Khlevniyuk, 1996: 137).

22. In an October 1931 meeting of Team Stalin members (Stalin, Molotov, and Mikoyan),party leaders from grain-producing regions petitioned for lower collection targets. Lower-Volga representatives made a compelling case that collection control figures exceededtheir capacity and their figures were lowered. When the secretary of the Kazakstan regionobjected to his quotas, Mikoyan responded: “I have read you an official document, adecision of the Politburo, 55 million without rice. This is precise, and I don’t know whyyou are confusing things“” (quoted in Davies, 2001).

Archival sources

(References to archival material are given in the following notation: ArchiveFond. Register. File: Page).GARF (the State Archive of the Russian Federation):

− Fond 5446, Soynarkom;− Fond 5674, STO;

RGAE (the Russian State Archive of the Economy)

− Fond 1562, TsSU (Central Statistical Bureau);− Fond 4372, Gosplan.

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Hoover Archive (the Hoover Institution for War, Peace and Revolution)

− Fond 6. KPK files. Documents of the Communist party and the SovietState. Party Control Commission.

Originals are held in the former archive of the Central Committee of theCommunist party of the Soviet Union (now RGANI). Moscow.

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