The Queen of England famously challenged the economists to explain why they didn’t see the approach of the Global Financial Crisis. It is not clear that anyone provided an answer although the Austrians would claim that they did better than most but their voice was too small to be heard. There is another episode which would have raised the Queen’s eyebrows. This was the dismal performance of most economists who wrote about the progress of the Soviet economy during the Cold War. This is described by Levy and Peart in a new book Escape from Democracy: The Role of Experts and the Public in Economic Policy.
Most commentators thought that the Soviet economy was doing very well, with some exceptions such as Warren Nutter. The outstanding optimist was Paul Samuelson who predicted in successive editions of his best-selling textbook that the Soviets would match the US GNP per capita by the turn of the century and most likely earlier. Levy and Peart’s Table 6.2 shows the sequence of Samuelson’s prediction from 1961 to 1980 with the best case for the Soviet overtaking time, the worst case, and the ratio of the initial US:USSR GDP per capita in the year of each new edition.
The “best case” Soviet overtaking times ranged from 23 years in 1961 to 22 years in 1980. The “worst case” numbers ranged from 36 years to 32 over the same period. It is surprising to see that in 1980 the USSR was only four years out from the optimistic forecast of the overtaking time, but the predicted overtaking time was still 22 years ahead. It is difficult to see how Samuelson’s optimism survived his own figures because in addition to the numbers cited above the ratio of US:Soviet GDP per capita only changed from 100:50 in 1961 to 100:55 in 1980.
Commentators might have been more careful in the light of observations by astute travellers. Bryan Magee visited extensively in Marxist countries during his time with the leading British weekly TV news program and he wrote that he had difficulty persuading even his conservative friends of the extent of squalor (and repression) that he observed behind the Iron Curtain.
It was much the same with US estimates of the number of intercontinental ballistic missiles in the Soviet arsenal. Alan Carlin reported on work in the RAND corporation in 1959 when the US Air Force claimed that the Soviets could have hundreds of ICBMs, the CIA estimated about a dozen and later it transpired that the actual number was four (Carlin in Environmentalism Gone Mad).
Levy and Peart attribute Samuelson’s misplaced optimism regarding the Soviet economic performance to his adoption of the production possibility frontier (PPF) approach which is a curve of economic output on the assumption that all inputs are used efficiently. This approach is blind to historical and institutional factors. It is described as a “thin” approach as opposed to a “thick” approach which takes account of social and institutional factors such as the rule of law (or its absence), property rights and the moral framework which helps or hinders cooperative trading and business practices.
After the Fall of the Wall Karl Popper wrote a foreword to a Russian edition of The Open Society and Its Enemies. Popper was no economist but he was onto something when he suggested that economic reforms in the direction of a free market would not work without the Rule of Law. Given the absence of the rule of law (and a moral framework) for several generations in Russia he suggested a transplant of the French or German legal codes, supported by training in France or Germany for legal officers.