Guns and Rubles: The Defense Industry in the Stalinist State

Mark Harrison, editor, Guns and Rubles: The Defense Industry in the Stalinist State. New Haven, CT: Yale University Press, 2008. xxvi + 272 pp. $50 (hardcover), ISBN: 978-0-300-12524-5.

Reviewed for EH.NET by Steven Nafziger, Department of Economics, Williams College.

Beginning in 1990, the easing of Russian archival access opened the inner workings of the Soviet command economy to study by modern economic historians. The resulting research frames the Soviet system as a nested hierarchy of self-interested principals and agents, glued together by the dictatorial regime consolidated under Stalin (see the discussion in Gregory and Harrison, 2005). Unlike much Cold War-era scholarship, these studies emphasize the prevalence of informal markets and self-interested competition over scarce resources within the command system. At the same time, recent scholarship reinforces the picture of the Soviet economy as being rife with incentive and information problems in the absence of true market competition and private property rights. In Guns and Rubles, Mark Harrison, Professor of Economics at the University of Warwick and a ?party leader? of the new cadre of economic historians of the Soviet Union, has edited a volume of archival studies that investigate how Stalin?s defense industry was structured and developed over time. The result is a richly documented and richly rewarding collection of papers on a central but secretive component of the Stalinist economy.

In nine substantive chapters, Harrison and his colleagues collectively explore why Stalin wanted a large defense sector and how the production and allocation of military goods actually took place over the first four decades of the Soviet Union. In the first chapter, Harrison interprets defense expenditures and repression as imperfectly substitutable tools of a Dictator (Stalin) interested in maintaining power. The latter tool worked quickly and was most effective against internal threats, while military build-up required a longer time period and was aimed at external enemies. Harrison convincingly argues that increasing military expenditures in the 1930s and 1940s (to the detriment of other types of spending) actually headed off internal dissent to Stalin?s authority by reducing external threats.

The second chapter, by Andrei Sokolov of the Russian Academy of Sciences, steps back to provide historical background to the Stalinist system. Sokolov posits a simplified model of defense procurement where the Army ?purchased? weapons from the Industry under the watchful gaze of the central authorities. Out of this framework, he identifies the roots of Stalin?s industrial policies in the organization and mobilization of the defense sector in the mid-late 1920s. This simple model informs the rest of the book, while usefully avoiding much of the alphabet soup that was the Soviet economic system.

The third and fourth chapters focus on the industrial organization of the defense industry under Stalin. Harrison and Andrei Markevich (a fellow of the New Economic School in Moscow) first summarize how the command hierarchy, ?internal? markets (linking Industry and Army for particular defense products), and ?real? markets (supplying labor and, occasionally, investment funds) enabled growth in defense production over the 1930s. They clearly outline (with the help of some simple but useful microeconomics) the key information and incentive problems that characterized the Army-Industry relationship, especially in regards to unverifiable quality of military goods. Stalin did not look to solve such information problems through the integration of the Army with Industry because he was wary of creating a strong alternative to his own power. In chapter four, Markevich goes on to analyze the planning process within the defense sector. Mobilization and ?normal? operational planning occurred simultaneously and alongside planning for the civilian sectors. The result was chaotic, with much of the actual organization of defense production taking place under decentralized producer (individual defense enterprises) to consumer (various military branches) contracting.

Chapter five, by the eminent scholar R.W. Davies, focuses on how planning for military mobilization affected the defense sector and Soviet economy in the 1930s. Most actors in the Stalinist economy were required to produce production and/or consumption plans in the event of a war. These constantly revised plans played a role in the allocation of investment funds and led to the creation of excess capacity in defense-related production. Davies provides a narrative that delves into the mobilization planning of two industries: small arms and artillery and tanks.

Chapters six through eight look into how specific markets functioned within the defense sector. In chapter six, Harrison and Markevich analyze the problem of ensuring quality in the two-sided market of weapons production. The authors identify a hold-up problem, whereby Industry was forced to produce a certain quantity but could shirk on quality that was costly or hard to verify. The Army responded by sending agents into production facilities, creating a collusive equilibrium that ensured quality but reduced production. In chapter seven, Mikhail Mukhin, a research fellow in the Russian Academy of Sciences, explains how poor working conditions and incentives in the aircraft industry were inadequately dealt with in an environment of large technological change, rapid growth, and high labor turnover. In chapter eight, Harrison investigates how the uncertainty of innovation was dealt with in the market for aircraft propulsion. Engine designers used their informational advantages to draw out funding from the Army and the Industry, but the threat of repression and self-motivation discouraged poor quality innovators from predominating (as would be in a classic lemons problem). Costly failures such as steam engines for aircraft did initially tap scarce funding, but the ?chaos? of the early 1930s eventually gave way to more focused research on jet propulsion and rocketry.

In the final substantive chapter, Harrison analyzes why Stalin and the Soviet state instituted such an extreme, all-encompassing doctrine of secrecy, especially when it came to the defense sector. He notes that this policy was in line with the Tsarist heritage and Bolshevik traditions, only much more extreme. Harrison argues that official secrecy not only reduced gains for individual deviations from commands but created an environment where Industry and the Army could more easily exploit their informational advantages. In the absence of political or market competition, the result was that individual actors were willing to go along with the secrecy without imposing too many costs on overall productive activity. A short afterword concludes the book by drawing attention to the relative success of Stalin?s defense industry in stopping Hitler while avoiding the collapse of the Soviet Union during World War II.

Guns and Rubles makes astonishing use of hundreds of archival documents to shed microeconomic light on the early decades of the Soviet defense industry. The chapters are well-written and cohere nicely, although the tones and analytical styles do differ considerably between authors. While this reviewer found the volume enlightening and greater than the sum of its parts, more of an effort could have been made to provide some historical or comparative context for the general reader. For instance, just how distinctive was the Soviet defense sector compared to other economies? Given that excessive military spending is often suggested as a cause of the Soviet economy?s decline after 1970, did developments under Stalin set the stage for this? And finally, how do the microeconomic models put forward in Guns and Rubles fit into the theoretical frameworks put forward by F.M. Scherer, William P. Rogerson, and others who have worked on the problems of defense procurement?

Guns and Rubles complements, but does not substitute for, other recent studies of the Soviet command economy and defense industry. Non-specialists would also benefit from considering Gregory?s study of the Stalinist economy (2005) and Harrison?s other works on military production and the defense sector (e.g. Barber and Harrison, eds., 2000). At the same time, Mark Harrison and his colleagues have provided a fascinating study that sets the bar for careful, archive-based scholarship in the economic history of defense production and the Stalinist system.

References:

Barber, John, and Mark Harrison, eds. The Soviet Defense-Industry Complex from Stalin to Khrushchev. London: Macmillan, 2000.

Gregory, Paul R. The Political Economy of Stalinism. Cambridge: Cambridge University Press, 2004

Gregory, Paul R., and Mark Harrison. ?Allocation under Dictatorship: Research in Stalin?s Archives.? Journal of Economic Literature 43, no. 3 (2005): 721-761.

Steven Nafziger is an Assistant Professor of Economics at Williams College. He is currently involved in a number of projects on the economic development of Tsarist Russia.