April 30, 2024 • 30 mins
Dr. Dan Sutter, of the Manuel Johnson Center for Political Economy, hosts EconVersations, a program that explores the role of free markets in promoting prosperity through conversations with Manuel Johnson Center faculty and guests. In this episode, Dr. Sutter interviews Dr. Konstantin Zhukov, as they discuss Poland’s road to socialism and back.
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(00:00):
The opinions expressed on
this programrepresent the viewpoints
of individual authorsor contributors,
and do not necessarily reflectthose of Troy University.
This is conversations.
A joint production of TroyTrojan Vision and the manual H.
Johnson centerfor Political Economy.
(00:20):
Now, here'syour host, Doctor Dan Sutter.
Hello, and welcometo your conversations.
I'm your host, doctordancer of the Johnson Center
for Political Economy at TroyUniversity.
Polls show that around a halfof Americans under the age of 30
have a positiveor favorable view of socialism,
despite its failures in countryafter country.
(00:43):
While the experiencesof the Soviet Union and China
underMao have been well documented,
many other countries experiencedsocialism in the 20th century,
including the nationsof Eastern Europe.
Under the dominationof the Soviet Union, Canada's
Frazier Institute is undertaken
a project to documentthe realities of socialism
when it's been triedin other countries.
(01:03):
The first study in this projectlooked at Poland's
experiencebetween 1945 and 1990.
Did Poland experience any betteroutcomes under socialism?
And his life improved since thecollapse of the Eastern Bloc?
Joining me on conversations
today is one of the authorsof this book,
Doctor Constantine Zhukov,a visiting professor
of economics at TrinityUniversity in Johnson Center.
(01:25):
Alum Constantine study
as an undergraduateand author of the university
before earning a master'sdegree in economics from Troy
and then a PhD in, economicsfrom George Mason in 2023.
His researchfocuses on Eastern Europe,
the history of communism,and illegal markets.
Welcome back to theconversations, Doctor Zubkov.
(01:49):
Thank you so much.
Thank you for having me back.
And it's a great pleasure to be,back to,
to Detroit all the, online.
And I'm very thankfulto Detroit,
to the Johnson programfor my education.
I, my masters just wantedto say that before we move on.
The it was greatto have you here as a student,
(02:09):
and it's great to see youhaving success.
other as an economist,starting your career.
So tell us a little bit first
about this, projectthat you undertook
becausehe had a couple of coauthors.
And so tell us a little bitabout, the the project
before we get into, what happened in Poland.
Yes, exactly.
So, so,I had, this opportunity,
(02:31):
I had a chance to work with, my advisor, the Jupiter Project,
and another formerJMU, scholar.
those were MIT's Mitchell,who is right now
at Fraser Instituteis the Fraser Institute.
So we collaborated.We worked together.
on this project to understand,what happened to Poland
and Estonia, beforeand after socialism and weather.
(02:55):
but they're starting
to believe inthey have improved ever since.
The countries have ever,
ever sincethe Berlin Wall have failed
and the countries have movedto the market economies.
and the purpose of this,of these books is to illustrate
the institutions that marketsthey in that matter,
and they can dramaticallyimprove,
economic growthand prosperity of the people.
(03:16):
Well, let's talka little bit broad terms.
So the people are awareof exactly when it is
we're talking about this year.
when did, Poland becomea socialist or communist country
and when did the transitionoccur?
right.
So, this is a good question.
So, so initially,
(03:37):
Soviet Union and Nazi Germany,the divided Poland in,
in September 1949,but the full, the full movement
of Poland towards socialism,towards communism, happened,
in 1944,
once the Soviet Unionwas able to regain Poland,
(03:58):
and within the four years it, the Communist Party,
the Polish Communist Party,
was able to reestablishits power in the country.
It was ableto, essentially gain,
so, they won the electionsthrough fraud.
and they and they canceledall other parties.
(04:18):
Are they prosecutedthe political opposition?
and then they moved on
to implementing their,institutions such as,
then moved on to, to, abolishprivate property, to abolish
any kind of market,institutions,
the firms cannot private firmsnot operate anymore.
so we can really start talkingabout the implementation
(04:41):
of communism in Polandfrom around, 4647.
and then, the country was able
to, to.
to. We can say
that the country was ableto become independent again
without influencefrom the Soviet Union.
(05:02):
in 1989.
so that's approximatelythat's a approximate timeline.
I certainly remember in 1980when the solidarity,
union began and Lech Walesawas leading that, and then,
amazingly, in 1991, he got elected president of Poland.
So it was a great,transformation that,
(05:23):
that that changedmany people's lives.
So when you talk about the,planning that occurred
during this time,that it was a serious socialism,
it really was
basically a true governmentcontrol of the ownership
of the means of production.Right?
Exactly. Yeah.
So itit was, just, so it was very
(05:46):
much implementationof the classics
and the socialist policiesto the extent that,
all of the private propertywas abolished.
So, you could only the citizensof Poland could only
they had rights to the,movable property.
So let's say a caror if you have one, if you,
if you, you can wait in lineand long enough
(06:07):
or you can also get a propertyto, you know,
just your basic possessions,you know,
but then when it came to the, property over, the property
rights over movable propertysuch as land or buildings for.
Since then, that was,almost impossible to attain.
(06:28):
but then there was also,
there was also deletionof the market prices.
so market pricesand private property
are the pillarof the market economy.
And those were not allowedto operate, in Poland.
instead,the prices were set by special
Organization Commission.
That was setting the pricesessentially
for the whole of the economy.
(06:49):
and any of the, marketinstitutions that we usually
think of, banks, private stock, the stock market,
you name it, those were alsonot in existence.
there was no powered pens,there was no stock market.
there was no insurance firms.
you could not go to a privatedoctor to get health care.
(07:13):
It was all providedby the state.
No. Youmentioned in the book that,
a lotof people sometimes say that
socialism is good in theory, butdoesn't work well in practice.
But actually,economic theory offers
some very good reasonswhy socialism is likely to fail.
So tell us brieflyabout the three problems
(07:33):
that economists have identifiedwith, with the idea
of centrallyplanning an economy.
So there are threemajor problems,
with the socialist economy.And there is a control problem.
There is a knowledge problemand incentive problem.
then the control problemrefers to the idea that
in the market economy,
it is individualsthat are planning
(07:55):
and acting up under,icon upon their own plans
while in the,socialist economy, it's
essential,
A central planning agent,
central planners
who are making the society and essentially for
and especially so
essentially what it meansis that for the plans to work,
(08:17):
the government needs to enforceits plans on individuals,
even on thosewho disagree with them.
So this leads to the controlproblem of how to control
the population,
how to make surethat they comply with the plans.
And that often involvessome sort of repression
from the central planners.
that's why,so communist societies
where some of the
(08:37):
kind of committed some ofthe atrocities for the last
of the 20th century. Right.
then there is also a knowledgeproblem.
The knowledge problem,refers to the idea,
that when it comes to economicdecision making,
we need to have knowledge
to make the most economicallysound decisions and information,
to make,to make sure that we are using
(08:59):
the least costly methodsto attain our goals.
And so in a market economy,we have private, property and,
emerging market pricesthat allow for the coordination
and for the emergence of priceson just enough prices
and for the economiccalculation.
That, however, is impossiblein the socialist
(09:20):
economy and in socialisteconomies, it's impossible
to attain the total, the, the scarcity of any other goods.
It's impossible
to make the propereconomic decision
and utilize the least costlymethods in your production.
and, finally,
the incentive problemrefers to the idea that, it is
(09:43):
hard to incent qualifies,the workers
to perform a good job, without the proper incentive.
Think about the market economy.
where, you as a manager,
you have the incentivefor your firm to do well to,
for for the firm to operate.
Well, because you haveso many bonuses.
you haveso many incentive structure.
(10:05):
and the same appliesto the market firms, right?
Where, the from the,
the workersalso have some sort of bonuses,
and more and more companieswe can see worldwide
in the United States,for instance,
where they are offeringdifferent kinds of different,
kind of privilegesto their workers.
so in the Soviet economy
(10:27):
and the communist economy,that's
incentive problemis very much real, because,
as a manager, you do not owna part of the firm.
You'rejust controlling its processes.
So your incentiveto make sure that the firm
operates properly is, is kind ofis weaker.
and the same appliesto workers,
especiallybecause the Soviet system,
(10:50):
the communist system,they're supposed to operate
on the principleof egalitarianism,
of having equal salaries.
and the interesting thingis that, all the some
the countries, including Poland,
they started from this premiseof having equal wages,
but they quickly realizedthat this is not attainable
and that they have to switchto the different wage system
(11:13):
where they actually had to go,go with their and
also they didn't haveegalitarianism where,
managers started,and highly qualified workers,
they had better privilegesand positions in society.
Well, Poland was where World Warone or World
War two started, with Germanyinvading Poland in September.
(11:33):
And I was Polandwas a scene of a lot of fighting
during the war.
And at the time you get to 1944,
the country had been devastated.
And then, as youexplain in the book,
the Soviet Union actually moveda lot of, physical capital
equipment, to
Russia,and out of the country. So
(11:55):
Poland started a very desperatesituation about 1945
when they also startedcentral planning.
But as you explain,
they actually helped makethe central planners, problem
a little easier at the start.
And so Poland experiencedrelatively fast
growth for a while.
Explain to us why this was so.
so, the reason why Poland
(12:15):
experienced such a dramatic, growth is that it's,
it's a fact,that Poland was destroyed.
both NaziGermany, and Soviet Union,
they have, rather infighting,destroyed the infrastructure.
They have destroyed capital,they have destroyed labor.
They have sort of culturaland livestock.
(12:36):
So from that perspective,of course,
we know from the economic sidethe catching up once you start,
we have lower level of capital,for instance,
your rate of growthis going to be much higher.
and once you start the people,
you can get capital,but once you reach a certain
threshold, you're going to hitkind of like,
it will your growth rateare going to slow down.
(13:00):
And so,so the lower level of capital
and infrastructurehave allowed for better growth
initially for the,socialist Poland.
but then once,
Polandwas more or less restored, then
the kind of the usual dynamicsof a social socialist
economy kicked in to the extentthat there was just
(13:23):
the shortagesof, of many goods.
The production was
very inefficient,was very ineffective.
and because ofthe lack of access to the,
the the investments too,because like a corporate device,
the economy just stagnatedand couldn't really develop,
I think we,we talk about in our book
(13:43):
how from 1972 about,
to the until the collapseof the, communist Poland,
the growth rate on averagefrom 1970
to 1990 was about 1.8%,something like that.
So the by any means,it was not a high growth rate,
(14:04):
for the country.
A wecan show a couple of the numbers
that you guys show in there and,and we one thing was in
and I guess this is some of due
to some of the detailsof the planning process,
but Poland produceda lot of steel,
and they used a lot of steeland producing,
the goods and servicesa lot more than other countries.
And so that actually representsa well, we might think,
(14:26):
oh, that's a productive economyin producing all this steel.
But they were actually producingway more steel
than other countriesused to produce output. Right.
And so that that'sa sign of inefficiency.
Exactly. Yes.
So, and and onethe reasons why Poland,
was trying to produceso much steel is because
of the general dynamicsof the socialist economy,
(14:50):
wherethey tried to industrialize
kind of the movethe country towards other.
So according to socialist,
theoreticians, the only wayto move country to over it's,
communist throughout historyis by industrializing.
And that's what Polandfocused in on producing
(15:12):
or developing its industrialcapacity and over emphasizing
industrial production suchas steel or coal, for instance.
but as a result of that,the negative side of it
was that consumerssector was underdeveloped.
People did not have enough of,of the goods for, for,
for their household.
And that led actuallyto many of the social unrest
(15:35):
in the country.
And in their industrial izationwas not
very environmentally friendly.
so we didn't have very green,socialism in Poland.
But then,
as you already mentioned,but you have a couple
of statistics here on this,
goods and servicesdidn't end up being available.
This wasn't exactly a worker'sParadise.
Here's the waiting time to get,housing in Poland was just
(15:59):
is just off the chartsin terms of that that delay
there of of years, 15, plus years, they had to wait
to get housing and,you know, the prices of goods.
Well, and as you mentioned,with once you have like, these
artificially set prices,they're not real market prices.
But if you're estimatethe amount of time
(16:19):
it took, poles, we would workto get different items.
It was much, much higher than,in Western countries, right?
Absolutely.
And this is this is exactlywhat we're talking about.
The economy.
The economywas totally inefficient.
as you can see in this graph,it took way more, way more time
for, in Polandto produce Coca-Cola TV
(16:42):
or any other item comparedto, to, to West Germany.
So that just illustrateshow inefficient the economy was,
because there was no incentiveto, to structure the,
efficient production,and there was no way to,
rely on the market knowledgeto, for the production.
(17:05):
So, as you mentioned to the,
it wasn't only for the,
it wasn't only the work for the
for the for the houses,for the apartment and
the for the yearsfor which the approach had to,
applyto many of the basic goods.
Right. To the cars,for instance, too.
(17:26):
So the, Polish people werereally much more disadvantaged
compared to many other states.
Well,then the Soviet Union started
to, pull back and Polandunderwent this transition
and our implementswere a market oriented policies.
But I guessfirst we have to document
that they actually madethe transition.
(17:48):
And,
the peopleat the Frazier Institute
also put out the economicFreedom of the world index.
And so you use that to measurewhether or not Poland actually
engaged in the transition.
So it was very briefly,what's involved
with, the economicfreedom of the world.
You know, so,when it comes to the economic
freedom of the world,it involves,
(18:09):
several or, rankings suchas the size of the government,
protection of the propertyrights and the legal system.
It also involves,the sound money.
So, what is the monetarypolicy of the state,
whether it's sustainable?
it also, so could you alsomove the slide back?
(18:30):
So I think it would be easierfor me to, to talk about this.
Oh. Yeah.
I guess, I was just.
I cannot hear you.
Oh, I haven't, we have.
so we have the economicfreedom of the world,
and then you can actuallymeasure it now because we have,
(18:52):
we have been able
to go back to measure
economic freedom in Poland backbefore the transition.
And then we can seewhat happened after that.
And the numbers show here in,
I guess I should mentionfor everybody in the, index
goes from 0 to 10, where zerois no economic freedom and nine
and ten is, a lot of economic freedom.
And, and Poland, experienced
(19:13):
a very significant increasein economic freedom
in those years there after thecollapse of the, socialism.
Exactly.
And, so one of the things Iwanted to mention about Poland,
the case of Poland,is really remarkable
because of where Polandstarted from.
(19:33):
so Poland started offcomparatively
to other countries under the,the sphere of the socialist,
the, the, the Soviet influenceupon actually started off
from the higher, lower, lowereconomic freedom ranking.
but it also started offfrom lower GDP per capita.
(19:56):
if we look at the,
there was a graph in our book
on the,utopia per capita in 1985
of the socialist states comparedto that of the United States.
And, so Poland had, lower
per capitacompared to other countries
such as Czech,Slovakia, Yugoslavia, Bulgaria,
(20:19):
but Poland also had the
the highest inflation, moving in transition.
I think in
80, 990.
It was 250%.
So it was on the brinkof the hyperinflation.
Right.
And Poland also startedwith the largest, that of all
(20:40):
the countries, from whatwe introduced in process.
So I think it iseven more remarkable
that they started off
from the Warsaw positioncompared to everyone else,
and how remarkabletheir success has been.
Of course,the transition has not
been perfect,but they did really well.
Well, in the another thingthat,
plagued the Eastern European
(21:01):
countries,I mean, the Soviet Union
had this whole planned system
of international tradebetween these countries,
but it was all planned.
It was all all based on orders,not any, economic principles
of like one countriesproducing something of value.
other countries
basedon their comparative advantage
or any other waysin which you would
normally expect
to see international tradein a free market develop.
(21:25):
So they had a lot of baggage.
They had a lot of, bad things
they had to try to overcomehere.
But, you know,and as you said, it's like,
some of these other countriesstarted at a higher level
of economic freedom,but Poland made,
I think, the largest increasein economic freedom.
So they certainly,
did some good thingsin terms of the transition and,
(21:47):
you know, one waywe can certainly measure
it is, is, looking at stateowned enterprises in employment
in the state owned enterprisesbecause it's 1999, 1989 or so.
We are starting this process.
As you mentioned,
the government ownedall the means of production.
That meant basically everybodywas working for the state.
And this is one measurethat you can show that,
(22:09):
Poland actually did quite,very well
in terms of privatizingthese ventures. Right?
Yeah.
So, moving into the transition,I think about 1989 or 1990,
80% of the labor was working
in a state, companies,in this case, firms.
The rest were working primarily,in agricultural sector
(22:32):
because, so, the companies didnot really try to collectivize
they tried to collectivizeoppose,
but it didn't workbecause of how strong the,
Polish resistance was.
So, the only area where privateenterprises could work in
Poland during the socialistperiod, was in agriculture,
(22:54):
but but, the state essentiallycut them off from any,
any financial aidfrom the financial markets.
So they,they were very low scale.
But so you but, the main point is that
moving in the transition,most of the workers
were in the stateowned enterprises.
And Poland has done,
tremendous job in terms of,privatizing the terms.
(23:16):
Of course,it was not a perfect process.
it took them, longercompared to other countries to,
to privatize the firms.
I think the process was still, going on
in 2006 or so.
but they still did really well,and they only retained,
(23:38):
state owned firmsin the strategic industries.
So I think it's energyfirms, telecommunication firms,
utilities firms,
of course there's still room
for improvement, but theyhave done a really good job.
And you,
as you
describe,they also did a very good job
liberalizingtheir financial markets.
A stock market got startedand allowing foreign investment
(24:00):
in and opening upto international trade as well.
Exactly. Yes.
so,
unfortunatelyduring the Soviet era,
so all of the Soviet, the communist countries,
they were kind of aboutsales of the Soviet Russia.
So their trade, their productionwas very much dependent
(24:22):
on sustaining Soviet Russia.
And so when, well,so when the Berlin Wall fell,
the major one of the majorproblems for Poland at the time
was that they had to rebuild,its international trade
from scratch.
it had to find newlogistical reality.
It had to find new inputs,new customers.
(24:44):
So that's one of the reasonswhy there was such
high unemployment.
Just becauseit's not an easy task to
really
start everything from scratch,to start your,
international tradeand investment.
In it is really important.
And you see,
when you see thattrade rebounded it,
(25:05):
it was because now they wereoperating in a global market.
They their companieshad to actually be
producing something that
others wanted to buy, as opposedto being ordered to buy
under the old Soviet plannedsystem of international trade.
So, I mean,
that itself is a great signthat their businesses,
they were, converting to having businesses
that were doing that were making good products.
(25:30):
Exactly.
That was the case.
and of course, it took themsome time to adjust to this.
even to imagine thatif you live your whole life
under socialism,where you didn't have
even the ideaof how the trade should work,
or maybe you had an ideaonly from the operation
of illegal markets,but it's still not the same.
So, so I think it'sstill quite remarkable
(25:51):
how they have been ableto adjust to this new,
like a market mentalityand the new market processes.
and now we see how tremendous
growth has been in Polandever since.
the markets have been ableto unleash their productivity.
Well, yeah.
And, and so,we like to measure,
(26:12):
economic standards of livingbased on real GDP and, and,
you know,
we can talk all aboutthe great things of the, reform
and the transition.
But, I mean,
ultimately people want to seelet let's see the money.
Let's see the, the, the performance on growth.
And it's been pretty remarkablefor, for Poland.
They've certainly madea tremendous transition,
(26:32):
like you said,from being one of the poorer
communist countries to,being quite certainly middle
income or on par with otherEuropean countries. Now.
Absolutely.
so, according to our estimates,so as we've said, Poland,
Poland was growing,at the rate on an average rate
(26:55):
of 1.8% from 1970 to 1990.
So when they QuakeCon
it has matured and recoveredfrom the World War two.
and so if the countrywere to sustain this path,
we have made the estimate thatright now Poland would have the,
GDP per capita of 14,000and something, by now.
(27:18):
Right.
But now everything is,
just the graph that you showedit just it showed,
this remarkable jump in economicgrowth in GDP per capita.
how,GDP just showed up in the sky.
No, it's 31, 32,000 per capita.
it's it's remarkable.
(27:39):
And of course, of course, weshouldn't actually mention that
transition hasn't been perfect.
it was high unemployment rate.
a lot of the peoplein the former
industrial agriculture sectors,
especially on
the east of the country,they were hurt
by the transition,unfortunately.
but by and large, the standardsof living for improved.
(27:59):
And and he also showedthat it wasn't just pulling
the countries that, reformedmore have had, better growth.
So we're nearthe end of our time.
Anything we wanted to add, towrap up here?
oh, so, I think the main ideathat we would like to, to,
to illustrate with our workis, institutions really matter.
(28:22):
The matter for economic growth.
and the reason why we, startedthis project is because, the
younger generation
of Americans, of Canadians, they have these,
they they haven't livedthrough the Cold War.
They haven't lived through thecollapse of the socialist state.
So they have not witnessed,really what socialism leads to.
(28:42):
And we tried to illustrate that,
though these ideas could
be very, the ideas of socialismcould be very compelling.
We wanted to illustratewhat what happens
when they put into practice,one to, Yeah.
So I say, well, well,thanks so much.
It is greatto catch up with you.
And thanks for coming on.
Joining us,and thank you for joining us.
(29:04):
Join us againnext time for another E!
Conversations.
Thank you so much.
Really appreciate yourthis has been in conversations,
a joint production of TroyTurgeon Vision and the Manuel H.
Johnson Center for PoliticalEconomy at Troy University.
The opinions expressed on
this programrepresent the viewpoints
of individual authorsor contributors,
and do not necessarily reflectthose of Troy University.
This is conversations.
A joint production of TroyTrojan Vision and the manual H.
Johnson centerfor Political Economy.
(00:20):
Now, here'syour host, Doctor Dan Sutter.
Hello, and welcometo your conversations.
I'm your host, doctordancer of the Johnson Center
for Political Economy at TroyUniversity.
Polls show that around a halfof Americans under the age of 30
have a positiveor favorable view of socialism,
despite its failures in countryafter country.
(00:43):
While the experiencesof the Soviet Union and China
underMao have been well documented,
many other countries experiencedsocialism in the 20th century,
including the nationsof Eastern Europe.
Under the dominationof the Soviet Union, Canada's
Frazier Institute is undertaken
a project to documentthe realities of socialism
when it's been triedin other countries.
(01:03):
The first study in this projectlooked at Poland's
experiencebetween 1945 and 1990.
Did Poland experience any betteroutcomes under socialism?
And his life improved since thecollapse of the Eastern Bloc?
Joining me on conversations
today is one of the authorsof this book,
Doctor Constantine Zhukov,a visiting professor
of economics at TrinityUniversity in Johnson Center.
(01:25):
Alum Constantine study
as an undergraduateand author of the university
before earning a master'sdegree in economics from Troy
and then a PhD in, economicsfrom George Mason in 2023.
His researchfocuses on Eastern Europe,
the history of communism,and illegal markets.
Welcome back to theconversations, Doctor Zubkov.
(01:49):
Thank you so much.
Thank you for having me back.
And it's a great pleasure to be,back to,
to Detroit all the, online.
And I'm very thankfulto Detroit,
to the Johnson programfor my education.
I, my masters just wantedto say that before we move on.
The it was greatto have you here as a student,
(02:09):
and it's great to see youhaving success.
other as an economist,starting your career.
So tell us a little bit first
about this, projectthat you undertook
becausehe had a couple of coauthors.
And so tell us a little bitabout, the the project
before we get into, what happened in Poland.
Yes, exactly.
So, so,I had, this opportunity,
(02:31):
I had a chance to work with, my advisor, the Jupiter Project,
and another formerJMU, scholar.
those were MIT's Mitchell,who is right now
at Fraser Instituteis the Fraser Institute.
So we collaborated.We worked together.
on this project to understand,what happened to Poland
and Estonia, beforeand after socialism and weather.
(02:55):
but they're starting
to believe inthey have improved ever since.
The countries have ever,
ever sincethe Berlin Wall have failed
and the countries have movedto the market economies.
and the purpose of this,of these books is to illustrate
the institutions that marketsthey in that matter,
and they can dramaticallyimprove,
economic growthand prosperity of the people.
(03:16):
Well, let's talka little bit broad terms.
So the people are awareof exactly when it is
we're talking about this year.
when did, Poland becomea socialist or communist country
and when did the transitionoccur?
right.
So, this is a good question.
So, so initially,
(03:37):
Soviet Union and Nazi Germany,the divided Poland in,
in September 1949,but the full, the full movement
of Poland towards socialism,towards communism, happened,
in 1944,
once the Soviet Unionwas able to regain Poland,
(03:58):
and within the four years it, the Communist Party,
the Polish Communist Party,
was able to reestablishits power in the country.
It was ableto, essentially gain,
so, they won the electionsthrough fraud.
and they and they canceledall other parties.
(04:18):
Are they prosecutedthe political opposition?
and then they moved on
to implementing their,institutions such as,
then moved on to, to, abolishprivate property, to abolish
any kind of market,institutions,
the firms cannot private firmsnot operate anymore.
so we can really start talkingabout the implementation
(04:41):
of communism in Polandfrom around, 4647.
and then, the country was able
to, to.
to. We can say
that the country was ableto become independent again
without influencefrom the Soviet Union.
(05:02):
in 1989.
so that's approximatelythat's a approximate timeline.
I certainly remember in 1980when the solidarity,
union began and Lech Walesawas leading that, and then,
amazingly, in 1991, he got elected president of Poland.
So it was a great,transformation that,
(05:23):
that that changedmany people's lives.
So when you talk about the,planning that occurred
during this time,that it was a serious socialism,
it really was
basically a true governmentcontrol of the ownership
of the means of production.Right?
Exactly. Yeah.
So itit was, just, so it was very
(05:46):
much implementationof the classics
and the socialist policiesto the extent that,
all of the private propertywas abolished.
So, you could only the citizensof Poland could only
they had rights to the,movable property.
So let's say a caror if you have one, if you,
if you, you can wait in lineand long enough
(06:07):
or you can also get a propertyto, you know,
just your basic possessions,you know,
but then when it came to the, property over, the property
rights over movable propertysuch as land or buildings for.
Since then, that was,almost impossible to attain.
(06:28):
but then there was also,
there was also deletionof the market prices.
so market pricesand private property
are the pillarof the market economy.
And those were not allowedto operate, in Poland.
instead,the prices were set by special
Organization Commission.
That was setting the pricesessentially
for the whole of the economy.
(06:49):
and any of the, marketinstitutions that we usually
think of, banks, private stock, the stock market,
you name it, those were alsonot in existence.
there was no powered pens,there was no stock market.
there was no insurance firms.
you could not go to a privatedoctor to get health care.
(07:13):
It was all providedby the state.
No. Youmentioned in the book that,
a lotof people sometimes say that
socialism is good in theory, butdoesn't work well in practice.
But actually,economic theory offers
some very good reasonswhy socialism is likely to fail.
So tell us brieflyabout the three problems
(07:33):
that economists have identifiedwith, with the idea
of centrallyplanning an economy.
So there are threemajor problems,
with the socialist economy.And there is a control problem.
There is a knowledge problemand incentive problem.
then the control problemrefers to the idea that
in the market economy,
it is individualsthat are planning
(07:55):
and acting up under,icon upon their own plans
while in the,socialist economy, it's
essential,
A central planning agent,
central planners
who are making the society and essentially for
and especially so
essentially what it meansis that for the plans to work,
(08:17):
the government needs to enforceits plans on individuals,
even on thosewho disagree with them.
So this leads to the controlproblem of how to control
the population,
how to make surethat they comply with the plans.
And that often involvessome sort of repression
from the central planners.
that's why,so communist societies
where some of the
(08:37):
kind of committed some ofthe atrocities for the last
of the 20th century. Right.
then there is also a knowledgeproblem.
The knowledge problem,refers to the idea,
that when it comes to economicdecision making,
we need to have knowledge
to make the most economicallysound decisions and information,
to make,to make sure that we are using
(08:59):
the least costly methodsto attain our goals.
And so in a market economy,we have private, property and,
emerging market pricesthat allow for the coordination
and for the emergence of priceson just enough prices
and for the economiccalculation.
That, however, is impossiblein the socialist
(09:20):
economy and in socialisteconomies, it's impossible
to attain the total, the, the scarcity of any other goods.
It's impossible
to make the propereconomic decision
and utilize the least costlymethods in your production.
and, finally,
the incentive problemrefers to the idea that, it is
(09:43):
hard to incent qualifies,the workers
to perform a good job, without the proper incentive.
Think about the market economy.
where, you as a manager,
you have the incentivefor your firm to do well to,
for for the firm to operate.
Well, because you haveso many bonuses.
you haveso many incentive structure.
(10:05):
and the same appliesto the market firms, right?
Where, the from the,
the workersalso have some sort of bonuses,
and more and more companieswe can see worldwide
in the United States,for instance,
where they are offeringdifferent kinds of different,
kind of privilegesto their workers.
so in the Soviet economy
(10:27):
and the communist economy,that's
incentive problemis very much real, because,
as a manager, you do not owna part of the firm.
You'rejust controlling its processes.
So your incentiveto make sure that the firm
operates properly is, is kind ofis weaker.
and the same appliesto workers,
especiallybecause the Soviet system,
(10:50):
the communist system,they're supposed to operate
on the principleof egalitarianism,
of having equal salaries.
and the interesting thingis that, all the some
the countries, including Poland,
they started from this premiseof having equal wages,
but they quickly realizedthat this is not attainable
and that they have to switchto the different wage system
(11:13):
where they actually had to go,go with their and
also they didn't haveegalitarianism where,
managers started,and highly qualified workers,
they had better privilegesand positions in society.
Well, Poland was where World Warone or World
War two started, with Germanyinvading Poland in September.
(11:33):
And I was Polandwas a scene of a lot of fighting
during the war.
And at the time you get to 1944,
the country had been devastated.
And then, as youexplain in the book,
the Soviet Union actually moveda lot of, physical capital
equipment, to
Russia,and out of the country. So
(11:55):
Poland started a very desperatesituation about 1945
when they also startedcentral planning.
But as you explain,
they actually helped makethe central planners, problem
a little easier at the start.
And so Poland experiencedrelatively fast
growth for a while.
Explain to us why this was so.
so, the reason why Poland
(12:15):
experienced such a dramatic, growth is that it's,
it's a fact,that Poland was destroyed.
both NaziGermany, and Soviet Union,
they have, rather infighting,destroyed the infrastructure.
They have destroyed capital,they have destroyed labor.
They have sort of culturaland livestock.
(12:36):
So from that perspective,of course,
we know from the economic sidethe catching up once you start,
we have lower level of capital,for instance,
your rate of growthis going to be much higher.
and once you start the people,
you can get capital,but once you reach a certain
threshold, you're going to hitkind of like,
it will your growth rateare going to slow down.
(13:00):
And so,so the lower level of capital
and infrastructurehave allowed for better growth
initially for the,socialist Poland.
but then once,
Polandwas more or less restored, then
the kind of the usual dynamicsof a social socialist
economy kicked in to the extentthat there was just
(13:23):
the shortagesof, of many goods.
The production was
very inefficient,was very ineffective.
and because ofthe lack of access to the,
the the investments too,because like a corporate device,
the economy just stagnatedand couldn't really develop,
I think we,we talk about in our book
(13:43):
how from 1972 about,
to the until the collapseof the, communist Poland,
the growth rate on averagefrom 1970
to 1990 was about 1.8%,something like that.
So the by any means,it was not a high growth rate,
(14:04):
for the country.
A wecan show a couple of the numbers
that you guys show in there and,and we one thing was in
and I guess this is some of due
to some of the detailsof the planning process,
but Poland produceda lot of steel,
and they used a lot of steeland producing,
the goods and servicesa lot more than other countries.
And so that actually representsa well, we might think,
(14:26):
oh, that's a productive economyin producing all this steel.
But they were actually producingway more steel
than other countriesused to produce output. Right.
And so that that'sa sign of inefficiency.
Exactly. Yes.
So, and and onethe reasons why Poland,
was trying to produceso much steel is because
of the general dynamicsof the socialist economy,
(14:50):
wherethey tried to industrialize
kind of the movethe country towards other.
So according to socialist,
theoreticians, the only wayto move country to over it's,
communist throughout historyis by industrializing.
And that's what Polandfocused in on producing
(15:12):
or developing its industrialcapacity and over emphasizing
industrial production suchas steel or coal, for instance.
but as a result of that,the negative side of it
was that consumerssector was underdeveloped.
People did not have enough of,of the goods for, for,
for their household.
And that led actuallyto many of the social unrest
(15:35):
in the country.
And in their industrial izationwas not
very environmentally friendly.
so we didn't have very green,socialism in Poland.
But then,
as you already mentioned,but you have a couple
of statistics here on this,
goods and servicesdidn't end up being available.
This wasn't exactly a worker'sParadise.
Here's the waiting time to get,housing in Poland was just
(15:59):
is just off the chartsin terms of that that delay
there of of years, 15, plus years, they had to wait
to get housing and,you know, the prices of goods.
Well, and as you mentioned,with once you have like, these
artificially set prices,they're not real market prices.
But if you're estimatethe amount of time
(16:19):
it took, poles, we would workto get different items.
It was much, much higher than,in Western countries, right?
Absolutely.
And this is this is exactlywhat we're talking about.
The economy.
The economywas totally inefficient.
as you can see in this graph,it took way more, way more time
for, in Polandto produce Coca-Cola TV
(16:42):
or any other item comparedto, to, to West Germany.
So that just illustrateshow inefficient the economy was,
because there was no incentiveto, to structure the,
efficient production,and there was no way to,
rely on the market knowledgeto, for the production.
(17:05):
So, as you mentioned to the,
it wasn't only for the,
it wasn't only the work for the
for the for the houses,for the apartment and
the for the yearsfor which the approach had to,
applyto many of the basic goods.
Right. To the cars,for instance, too.
(17:26):
So the, Polish people werereally much more disadvantaged
compared to many other states.
Well,then the Soviet Union started
to, pull back and Polandunderwent this transition
and our implementswere a market oriented policies.
But I guessfirst we have to document
that they actually madethe transition.
(17:48):
And,
the peopleat the Frazier Institute
also put out the economicFreedom of the world index.
And so you use that to measurewhether or not Poland actually
engaged in the transition.
So it was very briefly,what's involved
with, the economicfreedom of the world.
You know, so,when it comes to the economic
freedom of the world,it involves,
(18:09):
several or, rankings suchas the size of the government,
protection of the propertyrights and the legal system.
It also involves,the sound money.
So, what is the monetarypolicy of the state,
whether it's sustainable?
it also, so could you alsomove the slide back?
(18:30):
So I think it would be easierfor me to, to talk about this.
Oh. Yeah.
I guess, I was just.
I cannot hear you.
Oh, I haven't, we have.
so we have the economicfreedom of the world,
and then you can actuallymeasure it now because we have,
(18:52):
we have been able
to go back to measure
economic freedom in Poland backbefore the transition.
And then we can seewhat happened after that.
And the numbers show here in,
I guess I should mentionfor everybody in the, index
goes from 0 to 10, where zerois no economic freedom and nine
and ten is, a lot of economic freedom.
And, and Poland, experienced
(19:13):
a very significant increasein economic freedom
in those years there after thecollapse of the, socialism.
Exactly.
And, so one of the things Iwanted to mention about Poland,
the case of Poland,is really remarkable
because of where Polandstarted from.
(19:33):
so Poland started offcomparatively
to other countries under the,the sphere of the socialist,
the, the, the Soviet influenceupon actually started off
from the higher, lower, lowereconomic freedom ranking.
but it also started offfrom lower GDP per capita.
(19:56):
if we look at the,
there was a graph in our book
on the,utopia per capita in 1985
of the socialist states comparedto that of the United States.
And, so Poland had, lower
per capitacompared to other countries
such as Czech,Slovakia, Yugoslavia, Bulgaria,
(20:19):
but Poland also had the
the highest inflation, moving in transition.
I think in
80, 990.
It was 250%.
So it was on the brinkof the hyperinflation.
Right.
And Poland also startedwith the largest, that of all
(20:40):
the countries, from whatwe introduced in process.
So I think it iseven more remarkable
that they started off
from the Warsaw positioncompared to everyone else,
and how remarkabletheir success has been.
Of course,the transition has not
been perfect,but they did really well.
Well, in the another thingthat,
plagued the Eastern European
(21:01):
countries,I mean, the Soviet Union
had this whole planned system
of international tradebetween these countries,
but it was all planned.
It was all all based on orders,not any, economic principles
of like one countriesproducing something of value.
other countries
basedon their comparative advantage
or any other waysin which you would
normally expect
to see international tradein a free market develop.
(21:25):
So they had a lot of baggage.
They had a lot of, bad things
they had to try to overcomehere.
But, you know,and as you said, it's like,
some of these other countriesstarted at a higher level
of economic freedom,but Poland made,
I think, the largest increasein economic freedom.
So they certainly,
did some good thingsin terms of the transition and,
(21:47):
you know, one waywe can certainly measure
it is, is, looking at stateowned enterprises in employment
in the state owned enterprisesbecause it's 1999, 1989 or so.
We are starting this process.
As you mentioned,
the government ownedall the means of production.
That meant basically everybodywas working for the state.
And this is one measurethat you can show that,
(22:09):
Poland actually did quite,very well
in terms of privatizingthese ventures. Right?
Yeah.
So, moving into the transition,I think about 1989 or 1990,
80% of the labor was working
in a state, companies,in this case, firms.
The rest were working primarily,in agricultural sector
(22:32):
because, so, the companies didnot really try to collectivize
they tried to collectivizeoppose,
but it didn't workbecause of how strong the,
Polish resistance was.
So, the only area where privateenterprises could work in
Poland during the socialistperiod, was in agriculture,
(22:54):
but but, the state essentiallycut them off from any,
any financial aidfrom the financial markets.
So they,they were very low scale.
But so you but, the main point is that
moving in the transition,most of the workers
were in the stateowned enterprises.
And Poland has done,
tremendous job in terms of,privatizing the terms.
(23:16):
Of course,it was not a perfect process.
it took them, longercompared to other countries to,
to privatize the firms.
I think the process was still, going on
in 2006 or so.
but they still did really well,and they only retained,
(23:38):
state owned firmsin the strategic industries.
So I think it's energyfirms, telecommunication firms,
utilities firms,
of course there's still room
for improvement, but theyhave done a really good job.
And you,
as you
describe,they also did a very good job
liberalizingtheir financial markets.
A stock market got startedand allowing foreign investment
(24:00):
in and opening upto international trade as well.
Exactly. Yes.
so,
unfortunatelyduring the Soviet era,
so all of the Soviet, the communist countries,
they were kind of aboutsales of the Soviet Russia.
So their trade, their productionwas very much dependent
(24:22):
on sustaining Soviet Russia.
And so when, well,so when the Berlin Wall fell,
the major one of the majorproblems for Poland at the time
was that they had to rebuild,its international trade
from scratch.
it had to find newlogistical reality.
It had to find new inputs,new customers.
(24:44):
So that's one of the reasonswhy there was such
high unemployment.
Just becauseit's not an easy task to
really
start everything from scratch,to start your,
international tradeand investment.
In it is really important.
And you see,
when you see thattrade rebounded it,
(25:05):
it was because now they wereoperating in a global market.
They their companieshad to actually be
producing something that
others wanted to buy, as opposedto being ordered to buy
under the old Soviet plannedsystem of international trade.
So, I mean,
that itself is a great signthat their businesses,
they were, converting to having businesses
that were doing that were making good products.
(25:30):
Exactly.
That was the case.
and of course, it took themsome time to adjust to this.
even to imagine thatif you live your whole life
under socialism,where you didn't have
even the ideaof how the trade should work,
or maybe you had an ideaonly from the operation
of illegal markets,but it's still not the same.
So, so I think it'sstill quite remarkable
(25:51):
how they have been ableto adjust to this new,
like a market mentalityand the new market processes.
and now we see how tremendous
growth has been in Polandever since.
the markets have been ableto unleash their productivity.
Well, yeah.
And, and so,we like to measure,
(26:12):
economic standards of livingbased on real GDP and, and,
you know,
we can talk all aboutthe great things of the, reform
and the transition.
But, I mean,
ultimately people want to seelet let's see the money.
Let's see the, the, the performance on growth.
And it's been pretty remarkablefor, for Poland.
They've certainly madea tremendous transition,
(26:32):
like you said,from being one of the poorer
communist countries to,being quite certainly middle
income or on par with otherEuropean countries. Now.
Absolutely.
so, according to our estimates,so as we've said, Poland,
Poland was growing,at the rate on an average rate
(26:55):
of 1.8% from 1970 to 1990.
So when they QuakeCon
it has matured and recoveredfrom the World War two.
and so if the countrywere to sustain this path,
we have made the estimate thatright now Poland would have the,
GDP per capita of 14,000and something, by now.
(27:18):
Right.
But now everything is,
just the graph that you showedit just it showed,
this remarkable jump in economicgrowth in GDP per capita.
how,GDP just showed up in the sky.
No, it's 31, 32,000 per capita.
it's it's remarkable.
(27:39):
And of course, of course, weshouldn't actually mention that
transition hasn't been perfect.
it was high unemployment rate.
a lot of the peoplein the former
industrial agriculture sectors,
especially on
the east of the country,they were hurt
by the transition,unfortunately.
but by and large, the standardsof living for improved.
(27:59):
And and he also showedthat it wasn't just pulling
the countries that, reformedmore have had, better growth.
So we're nearthe end of our time.
Anything we wanted to add, towrap up here?
oh, so, I think the main ideathat we would like to, to,
to illustrate with our workis, institutions really matter.
(28:22):
The matter for economic growth.
and the reason why we, startedthis project is because, the
younger generation
of Americans, of Canadians, they have these,
they they haven't livedthrough the Cold War.
They haven't lived through thecollapse of the socialist state.
So they have not witnessed,really what socialism leads to.
(28:42):
And we tried to illustrate that,
though these ideas could
be very, the ideas of socialismcould be very compelling.
We wanted to illustratewhat what happens
when they put into practice,one to, Yeah.
So I say, well, well,thanks so much.
It is greatto catch up with you.
And thanks for coming on.
Joining us,and thank you for joining us.
(29:04):
Join us againnext time for another E!
Conversations.
Thank you so much.
Really appreciate yourthis has been in conversations,
a joint production of TroyTurgeon Vision and the Manuel H.
Johnson Center for PoliticalEconomy at Troy University.
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