Central Europe Review - Sam Vaknin: Is Transition Possible?

	Vol 1, No 21 15 November 1999

A B A L K A N E N C O U N T E R:
Is Transition Possible?
or:
Can Socialist Professors of Economics
Teach Capitalism?

Dr Sam Vaknin

Lest you hold your breath to the end of this article, the answers to the questions in the title are no and no. Capitalism cannot be "learned," "imported," "emulated" or "simulated." Capitalism (or, rather, liberalism) is not only a theoretical construct. It is not only a body of knowledge. It is a philosophy, an ideology, a way of life, a mentality and a personality.

This is why professors of economics who studied under Socialism can never teach capitalism in the truest sense of the word. No matter how intelligent and knowledgeable (and a minority of them are), they can never convey the experience, the practice, the instincts and reflexes, the emotional hues and intellectual pugilistics that real, full-scale, full-blooded capitalism entails. They are intellectually and emotionally castrated by their socialist past of close complicity with inefficiency, corruption and pathological economic thinking.

This is why workers and managers inherited from the Socialist-Communist period can never function properly in a Capitalist ambience. Both were trained in civil disobedience through looting their own state and factories. Both grew accustomed to state handouts and bribes disguised as entitlements, were suspicious and envious of their own elites (especially their politicians and crony professors), victims to suppressed rage and open, helpless, degrading dependence. Such workers and managers - no matter how well-intentioned and well-qualified or skilled - are likely to sabotage the very efforts of those whose livelihood depends on them.

Turning a blind eye

When the transition period of post-Communist economies started, academics, journalists and politicians in the West talked about the "pent-up energies" of the masses, now to be released through the twin processes of privatization and democratization. This metaphor of humans as capitalistically charged batteries waiting to unleash their stored energy upon their lands was realistic enough. People were, indeed, charged: with pathological envy, with rage, with sadism, with pusillanimity, with urges to sabotage, to steal and to pilfer. A tsunami of destruction, a tidal wave of misappropriation, an orgy of crime and corruption and nepotism and cronyism swept across the unfortunate territories of Central and Eastern Europe (CEE).

Transition was perceived by the many either as a new venue for avenging the past and for visiting the wrath of the masses upon the heads of the elite - or as another, accelerated, mode of stripping the state naked of all its assets. Finally, the latter propensity prevailed. The old elites used the cover of transition to enrich themselves and their cronies, this time "transparently" and "legally." The result was a repulsive malignant metastasis of capitalism, devoid of the liberal ideals or practices, denuded of ethics, floating in a space free of functioning, trusted institutions.

While the masses and their elite in CEE were busy scavenging, the West engaged in impotent debate between a school of "shock therapists" and a school of "institution builders." The former believed that appearances will create reality and that reality will alter consciousness (sounds like Marxism to me). Rapid privatization will generate a class of instant capitalists who, in turn, will usher in an era of real, multi-dimensional liberalism. The latter believed that the good wine of capitalism can be poured only to the functioning receptacles of liberalism. They advocated much longer transition periods in which privatization will come only after the proper institutions were erected. Both indulged in a form of central planning.

IMF-ism replaced Communism. The international financial institutions and their hordes of well-paid, well-accommodated experts - replaced the Central Committee of the party. Washington replaced Moscow. It was all very familiar and cosy.

Ever the adapters, the former communist elite converted to ardent capitalism. With the fervour with which they recited Marxist slogans in their past - they chanted capitalist sobriquets in the present. It was a catechism, uttered soullessly, in an alien language, in the marble cathedrals of capitalism in London and Washington. There was commitment or conviction behind it and it was tainted by organized crime and all-pervasive corruption. The West was the new regime to be suckered and looted and pillaged and drained.

The deal was simple: mumble the mantras of the West, establish Potemkin institutions, keep peace and order in your corner of the world, give the West strategic access to your territory. In return the West will turn a blind eye to the worst excesses and to worse than excesses. This was the deal struck in Russia with the "reformists;" in Yugoslavia with Milosevic, the "peacemaker;" in the Czech Republic with Vaclav Klaus the "economic magician" of Central Europe. It was Communism all over - a superpower buying influence and colluding with corrupt elites to rob their own nations blind.

It could have been different.

Post-war Japan and Germany are two examples of the right kind of reconstruction and reforms. Democracy took real root in these two former military regimes. Economic prosperity was long lived because democracy took hold. And the ever tenuous, ever important trust between the citizens and their rulers and among themselves was thus enhanced.

Trust makes the world go round

Trust is really the crux of the matter. Economics is called the dismal science because it pretends to be one, disguising its uncertainties and shifting fashions with mathematical formulae. Economics describes the aggregate behaviour of humans and, in this restricted sense, it is a branch of psychology. People operate within a marketplace and attach values to their goods and services and to their inputs (work, capital, natural endowments) through the price mechanism. This elaborate construct, however, depends greatly on trust. If people do not trust each other and/or the economic framework within which they interact, economic activities will gradually ground to a halt. A clear inverse relationship exists between the general trust level and the level of economic activity. There are four major types of trust :

Trust related to intent - the market players assume that other players are (generally) rational, that they have intentions, that these intentions conform with the maximization of benefits and that people are likely to act on their intentions.

Trust related to liquidity - the market players assume that other players possess or have access to, or will possess, or will have access to the liquid means needed in order to materialize their intentions, and that - barring force majeure - this liquidity is the driving force behind the formation of these intentions. People in possession of liquidity wish to maximize the returns on their money and are driven to economically transact.

Trust related to knowledge and ability - the market players assume that other players possess or have access to, or will possess, or will have access to the know-how, technology and intellectual property and wherewithal necessary to materialize their intention (and, by implication, the transactions that they enter into). Another assumption is that all the players are "enabled": physically, mentally, legally and financially available and capable to perform their parts as agreed between the players in each and every particular transaction. A hidden assumption is that the players evaluate themselves properly: that they know their strengths and weaknesses, that they have a balanced picture of themselves and realistic expectations, self esteem and self confidence to support that worldview (including a matching track record). Some allowance is made for "game theory" tactics - exaggeration, disinformation, even outright deception - but this allowance should not overshadow the merits of the transaction and its inherent sincerity.

Trust related to the economic horizon and context - the market players assume that the market will continue to exist as an inert system, unhindered by external factors (governments, geopolitics, global crises, changes in accounting policies, hyperinflation, new taxation - anything that could deflect the trajectory of the market). They, therefore, have an investment or economic "horizon" to look forward to and upon which they can base their decisions. They also have cultural, legal, technological and political contexts within which to operate. The underlying assumptions of stability are very much akin to the idealized models that scientists study in the accurate sciences (indeed, in the economy as well).

Disintegrating trust

When one or more of these basic building-blocks of trust is fractured, the whole edifice of the market crumbles. Fragmentation ensues, more social and psychological than economic in nature. This is very typical of poor countries with great social and economic polarization. It is also very typical of countries "in transition" (a polite way to describe a state of total shock and confusion). People adopt several reaction patterns to the breakdown in trust:

Avoidance and isolation - they avoid contact with other people and adopt reclusive behaviour. The number of voluntary interactions decreases sharply.

Corruption - people prefer shortcuts to economic benefits because of the collapse of the horizon of trust (ie they see no long term future and even doubt the very continued existence of the system).

Crime - criminal activity increases.

Fantastic and grandiose delusions compensate for a growing sense of uncertainty and fear and for a complex of inferiority. This nagging feeling of inferiority is the result of the internalization of the image of the people in their own eyes and in the eyes of others. This is a self-reinforcing mechanism (vicious circle). The results are under-confidence and a handicapped sense of self-esteem. The latter undulates and fluctuates from overvaluation of one's self and others to devaluation of both.

Hypermobility - people are not loyal to the economic cells within which they function. They switch jobs, for instance, or ignore contracts that they made. The concepts of exclusivity, the sanctity of promises, loyalty, future, a career path - all get eroded. As a result, there is no investment in the future (in the acquisition of skills or in long term investments, to give but two examples).

Cognitive dissonance - the collapse of the social and economic systems adversely affects the individual. One of the classic defence mechanisms is cognitive dissonance. The person involved tells himself that he really chose and wanted his way of life, his decrepit environment, his low standard of living and all that entails("We are poor because we chose not to be like the inhuman West").

Pathological envy - cognitive dissonance is often coupled with a pathological envy (as opposed to benign jealousy). This is a destructive type of envy which seeks to deprive others of their successes and possessions. It is very typical of societies with a grossly unequal distribution of wealth.

Mentality (or the historical) defences - these are defence mechanisms which make use of an imagined mentality problem ("We are like that, we have been like this for ages now, nothing to do, we are deformed."), or build upon some historical or invented pattern ("We have been enslaved and submissive for five centuries - what can you expect.").

Passive-aggressive reactions - these occur mainly when the market players have no access to more legitimate and aggressive venues for reacting to their predicament or when they are predisposed to suppressing aggression (or when they elect to not express it). The passive-aggressive reactions are "sabotage"-type reactions: slowing down of the work, "working by the book," absenteeism, stealing from the workplace, fostering and maintaining bureaucratic procedures and so on.

The inability to postpone satisfaction - the players regress to a child-like state, demanding immediate satisfaction, unable to postpone it and getting frustrated, aggressive and deceiving if they are required to do so by circumstances. They engage in short term activities, some criminal, some dubious, some legitimate: trading and speculation, gambling, short-termism.

The results are, usually, catastrophic: a reduction in economic activity, in the number of interactions and in the field of economic potentials (the product of all possible economic transactions); an erosion of the human capital, its skills and availability; a brain drain as skilled people desert the fragmented economic system en masse and move to more sustainable ones; people resort to illegal and to extra-legal activities; social and economic polarization kicks in; and interethnic tensions and tensions between the very rich and the very poor tend to erupt and to explode.

Failed poets, failed politics

And this is where most countries in transition are at right now. To a large extent, it is the fault of their elites. Providing orientation and guidance is supposed to be their function and why society invests in them. But the elite in all countries in transition - tainted by long years of complicity in the unseemly and the criminal - never exerted moral or intellectual authority over their people. At the risk of sounding narcissistic, allow me to quote myself (from "The Poets and the Eclipse"). Replace "intellectuals of the Balkans" with "intellectuals of the countries in transition:"

The intellectuals of the Balkans - a curse, not in disguise, a nefarious presence, ominous, erratic and corrupt. Sometimes, they appear at the nucleus of all conflict and mayhem; at other times (for example, when it comes to ethnic cleansing or suppression of the media), they remain conspicuously absent. Zeligs of umpteen disguises and ever-changing, shimmering loyalties.

They exert no moderating, countervailing influence. On the contrary, they radicalize, dramatize, poison and incite. Intellectuals are prominent among all the nationalist parties in the Balkans and rare among the scant center parties that have recently sprung out of the ashes of Communism.

They fail to disseminate the little, outdated knowledge that they do possess. Rather they keep it as a guild would - jealously guarded and limited only to the chosen few. In a vanity typical of the insecure, they dismiss all foreign knowledge. They rarely know a second language proficiently enough to read it. They promote their brand of degreed ignorance with a fanatical zeal, ruthlessly punishing all transgressors.

They are the main obstacles to technological development and enhancement of knowledge in this wretched region. Their instincts of self-preservation go against the best interests of their people. Unable to educate and teach, they prostitute their services, selling degrees or corrupting themselves in politics. They constitute a large part of the post-Communist nomenclature just as they constituted a large part of the Communist one.

The results are students of economics who have never heard of Milton Friedman or Kenneth Arrow and students of medicine who offer sex, money or both to their professors in order to graduate.

Thus, instead of advocating and promoting freedom and liberalization, they concentrate on maintaining the mechanisms of control and manipulating the worn levers of power. They are the dishonest brokers of corrupt politicians and their business cronies. They are heavily involved in and are oft times the initiators of suppression and repression, especially of the mind and spirit - the black crows of nationalism perched on their beleaguered ivory towers.

They could have chosen differently. In 1989, the Balkans had a chance the likes of which they never had before. In Yugoslavia, it came in the form of the government of the reformist (though half-hearted) Ante Markovic. Elsewhere, Communism was gasping for its last breath, and the slaughter of the beast was at hand. The intellectuals of Central Europe, of the Baltic States - even of Russia - chose to interpret these events to their people, to encourage freedom and growth, to posit goals and to motivate. The intellectuals of the Balkans failed miserably.

Terrified by the sights and sounds of their threatened territory, they succumbed to obscurantism and resorted to nostalgia, the abstract and the fantastic, rather than to the pragmatic. This choice became evident even in their speech. Marred by centuries of cruel outside domination, it is all but meaningless. No one can understand what a Balkanist has to say. Both syntax and grammar are tortured into incomprehensibility. Evasion dominates, a profusion of obscurantist verbal veils - twists and turns hiding a vacuous deposition.

The Balkan intellectuals chose narcissistic self-absorption and navel gazing over "other-orientation." Instead of seeking integration (as distinct from assimilation), they preach and practice isolation. They aim to differentiate themselves not in a pluralistic, benign manner, but in vicious, raging defiance of "mondialism" to define themselves against all others, rather than to compare and learn from the comparison. (A term from Serb propaganda, mondialism is the equivalent of "cosmopolitanism" in the old Soviet parlance; it is the intellectual sin of selling out to the decrepit West and its values, and it supposedly leads directly to espionage and treason.)

The intellectuals' love affair with a mostly fabricated past, their future-phobia and the ensuing culture shock all naturally follow from the premises of their disconsolate uniqueness. Balkan intellectuals are all paranoid. Scratch the surface, the thin, bow-tied veneer of "kultur," and you will find an atavistic poet, fighting against the very evil wrought by him and his actions. This is the Greek tragedy of this region. Nature here is more clever than humans. Yet, it is precisely these human conspiracies that bring about the very things humans have to conspire against - a self-perpetuating cycle.

All over the world, intellectuals represent or act as the vanguard, the fifth column of new ideas, the resistance movement against the occupation of the old and the banal. Here in the Balkans, intellectuals preach conformity and do things the old, proven way, instituting protectionism against liberal trade. All intellectuals here - fed by the long arm of the state - are collaborators.

True, all regimes had their fig-leaf intellectuals and, with a few exceptions, the regimes in the Balkans are not hideous. But the principle is the same, only the price varies. Prostituting their unique position in semi-literate, village-tribal societies, intellectuals in the Balkans have sold out en masse. They are the inertial power rather than the counterfist of reform. They are involved in politics of the wrong and doomed kind. The Balkans would have been better off had they decided to remain aloof and detached in their archipelago of universities.

There is no real fire in Balkan intellectuals, despite the fact they get excited, shout, blush and wave their hands ever so vigorously. They are empty. It is comparable to hitting full gas while in neutral. They get nowhere, because they are going nowhere. They are rational and conservative and some are emotional and "leftist." But, the situation is listless and lifeless, like the paces of a very old mechanism, set in motion 80 years ago and never unwound.

On the day of the last eclipse of the millennium, even the intellectuals stayed in their cellars and in their offices and did not dare venture out. Accustomed to the darkness, they emerged only when night fell, unable to confront their own eclipse and hiding from the evil influence of a re-emerging sun.

Dr Sam Vaknin, 15 November 1999

The author is General Manager of Capital Markets Institute Ltd, a consultancy firm with operations in Macedonia and Russia. He is an Economic Advisor to the Government of Macedonia.

DISCLAIMER: The views presented in this article represent only the personal opinions and judgements of the author.

Dr Vaknin's website is here.