Funding Loyalty: The Economics of the Communist Party

Published by EH.Net (April 2013)

Eugenia Belova and Valery Lazarev, Funding Loyalty: The Economics of the Communist Party. New Haven, CT: Yale University Press, 2013. xi + 209 pp. $35 (paper), ISBN: 978-0-300-16436-7.

Reviewed for EH.Net by Richard E. Ericson, Department of Economics, East Carolina University.

The Communist Party of the Soviet Union (CPSU) has been much studied in the historical, political science, and even economics literatures as a driving force in the Soviet system, the ruling oligarchy?s critical instrument of control. Most work has focused on the Party?s structures, rules, and roles in the Soviet system, and remained rather formal and speculative in discussing its inner workings, with most focus on its highest levels. Belova and Lazarev use heretofore unexploited archival resources ? detailed financial records of regional and local Party organizations from 1938 to 1965, their discussion in the Central Committee department, and some records from the 1980s ? to cast new light on these workings, in particular on the incentives of these organizations molded by their budgets and revealed in budget implementation. Their analysis is explicitly economic, focusing on costs and benefits, on the ?supply? and ?demand? sides of the relationships between the Party leadership, Party professionals, Party activists, and others. In ten chapters, including an introduction and conclusion, it systematically builds the case that the CPSU evolved into a largely self-interested business enterprise, still serving the state through maintaining kadre, loyal to its leadership, which spanned all the disparate regions of the Soviet Union. In doing so, this research makes a valuable contribution to our understanding of the Soviet system and how it actually functioned.

Applying the prosecutor?s motto, ?follow the money,? the authors reveal the CPSU as a more autonomous (than typically understood) agent of the top leadership, a ?self-interested actor? only partially supported by state resources. Indeed, Party organizations became increasingly finance-driven and entrepreneurial, following the loss of most state subsidies after 1948, operating as a ?businesses,? posing agency problems to the top leadership, while dealing with their own, internal, agency problems. This perspective casts new light on the ability of Party-based organizations, and individual regional and local Party functionaries, to survive, transform, and thrive in the chaos following the collapse of the Soviet system, a system in which they were central, and essential, parts.

The argument is developed in an introduction and eight chapters, and cleanly summarized in the conclusion. The introduction places this research in the political economy of dictatorship, focusing on the generation of loyalty, rather than on repression, for the maintenance of power. It applies fundamental economic logic to the study of this consummately political organ, highlighting differing incentives of agents in the ?inner? and ?outer? Party and how they worked to maintain loyalty and service to the system. The first two chapters provide the factual basis for the analysis, discussing first Party structures and then budgets and trends in revenues and expenditures from 1939 to 1965, based on the Party archives for that period. The critical role in managing Party structures played by the Central Committee department ?Administration of Affairs? (UD) is emphasized. The devolution of Party funding from the state to membership dues and ?business activities? (largely the publishing industry) is described, as is the evolution of expenditures from ?mobilization? and propaganda to administration and operational maintenance. Chapter 3 discusses the critical break in Party policy driving those trends, the dramatic reduction in state support to less than 25 percent of expenditures announced in the ?special budget? of 1948, and the subsequent rise in Party ?business? activity.

The next four chapters explore in detail the mechanisms that the CPSU used to maintain the active loyalty and commitment of its members to the Soviet state and system. Chapter 4 shows how incentives were tied to position in the hierarchy, making promotion the critical motive, and requiring an ever growing and elaborating economic hierarchy, with its associated Party structures, to allow promotion without threatening to displace the top leadership. This career motivation of the professional ?inner party? provided a base on which motivation of the ?outer party? ? activists and members ? was built; they donated time, effort, and money to Party activities for the probability of a future position of privilege in the nomenklatura. The authors develop a simple econometric model demonstrating the working of this implicit ?promotion contract? and its decay toward the end of the Soviet Union. This incentive structure naturally generated a principal-agent problem; inner party agents faced a trade-off between potential promotion for loyal service and immediate personal benefit from exploiting current position. How this problem was, evidently successfully, managed is analyzed in the next two chapters, where the roles of Party Audit (use of material resources) and ?Kontrol? (purity, ?discipline? in Party task performance) [Chapter 6] and the use of selective justice and ?Party leniency? to enforce discipline without undercutting loyalty [Chapter 7] are discussed, again on the basis of primary archival materials. Chapter 8 then lays out the nominal financial costs of the Party and explores the determinants of its expenditures in an econometric model, casting light on the Party?s changing institutional role from economic manager to an ?elite filter,? deciding who joins. The conclusion summarizes the argument, indicating how the evolved ?business nature? of the Party both helped to undermine the system and to position the Party and its members to survive the chaos of transition. Indeed, the entrepreneurial experience of regional and local Party members gave them an advantage in personally exploiting that chaos and transitioning themselves to leading economic positions in the new Russia!

This monograph makes a valuable contribution to the literature on the role of the Party in the Soviet political-economic system. The evidence and the arguments are both convincing and enlightening, particularly with regard to the period for which detailed archival evidence is available. But much more is suggested. The nature of the ?inner Party? incentive system helps explain the apparently economically irrational replicative elaboration and growth of Soviet production operations as a critical part of the Party incentive mechanism. And the decay of that system, as factors supporting the ?promotion contract? eroded through the 1970s and 1980s, casts new light on the readiness of the Party to give up at the end, and the ease with which its members insinuated themselves into new economic structures. Overall, this monograph helps fill an important gap in our understanding of the Soviet political economy, showing in previously unavailable detail how the lynchpin of that system, the mass party, functioned and evolved with the maturation of the system, from ?shock troops? of the absolute leader to a ?political club? sustaining the elite of the authoritarian system.

Richard E. Ericson is Professor and Chair in the Department of Economics, East Carolina University, and former Director, The Harriman Institute, Columbia University. His recent work has been on Soviet legacies in the Russian economy, published as Chapter 3 in Alexeev and Weber, eds., The Oxford Handbook of the Russian Economy (2013), and game-theoretic models of refugee negotiations, forthcoming in Zeager, Ericson, and Williams, Refugee Negotiations from a Game Theoretic Perspective (2013).

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