Economic History, Economic Theory, and Soviet Institutions: A Response to George Grantham

George Grantham has given us a fascinating glimpse of how he sees economics contributing to an understanding of history, largely focusing on its weaknesses. The springboard for his discussion is his reading of Yegor Gaidar’s Russia: A Long View, which provides the interpretation of Russia’s history that stood behind Gaidar’s partially implemented policies as acting premier of the Russian Federation in 1992.¹ In the same spirit, let me present some thoughts inspired by my reading of Grantham’s thoughtful remarks.

Economic History and Economic Theory

Should we expect more from economic history than general, cautious “morality tales”? It seems to me that Grantham expects too much and is too disappointed when a lesson is unclear or evidently forgotten. But history’s signal seems neither as clouded nor as clear as presented. The economics of any situation is often eclipsed by the politics, particularly when its lessons are deemed by the elite to be socially/politically unacceptable. Culture, evolved through historical experience, clearly affects economic opportunities, choices, and outcomes, and often the application of economic analysis. Thus one of Grantham’s fundamental points, that we cannot draw any but the most general useful lessons from economic history, is undoubtedly correct. Indeed, economic theory and economic analysis give us no strong reason to believe that we should be able to do so, despite the simple stories we sometimes tell our students.

What economic theory teaches us is always highly conditional, applying a major economic premise to a cloud of often poorly articulated—if indeed known—minor premises, including the particular historically embedded details of time, place, and circumstance being analyzed. Economic theory does not provide lessons but rather a framework for thinking through economic issues clearly and consistently. It allows us to organize our knowledge and information and to systematically analyze the impact of those forces, incentives, and constraints that we believe significant. Applied in concrete historical circumstances, its “if–then” propositions are meaningless when the antecedent is false and always hard to apply with any confidence, “difficult to make operational in practical contexts,” as Grantham (861) notes.

Thus the failure of economic history to give a definitive answer on the impact of tariffs on economic development, as Grantham notes (863–64), is hardly surprising. Because of the infinitude of factors not considered in those logical antecedents, they are always subject to wide interpretation, often driven by ideological preference or political or social prejudice. This can be seen in Grantham’s discussion of institutions favoring economic growth. Indeed, just what was the relation between “powerful private interests” (861) and powerful governmental institutions, pushing a progressive social agenda in the genesis of the crisis in home ownership, in the “expropriation” of homeowners in 2008–9?² Only superficial analysis can give “loud and clear” signals (864). Thus the truly policy-relevant question in the Great Depression (and recent Great Recession) is not the existence and impact of the “persisting shortfalls in aggregate demand” (864) but rather the sources of those shortfalls and of their extraordinary duration—the structural, institutional, and policy foundations of the failure of economic activity and aggregate demand to recover as they had in the past.

History, including the formation of deep social structures over time, imposes important constraints on economic development. Gaidar and Grantham correctly emphasize the overwhelming role of the state and its needs in Russia, which were drivers in the emergence of serfdom and its “collective responsibility” regime. As Grantham explains, “Gaidar believed that collective liability for taxes, instituted through the agency of a landlord or the commune (obshchina), impeded peasant enterprise, thereby depressing productivity growth. This view overlooks the administrative cost of directly taxing individual households.” (870). But the discussion fails to appreciate the damage that such constraints, however useful in facilitating state taxation, inflict on economic dynamism. The retarding factor, as Gaidar recognizes, is not the tax on relative wealth but the stifling effect on initiative, on experimentation and the pursuit of opportunity, that collective responsibility imposes.³ Not only peasant but all other enterprise is impeded by collective...