Funding Loyalty: From Communist Party Inc to Russia Inc

Wednesday, February 13, 2013
Funding Loyalty: The Economics of the Communist Party, by Eugenia Belova and Val
Funding Loyalty: The Economics of the Communist Party, by Eugenia Belova and Val

When the Soviet Union collapsed at the end of 1991, its vast ranks of  bureaucrats and party officials successfully transitioned into post-Soviet business and politics. Twenty years later, those same party and state officials, who populated the ranks of the elite nomenklatura or had begun their ascent up the communist ladder, are among the most successful.

Funding Loyalty, a new book by former W. Glenn Campbell and Rita Ricardo-Campbell National Fellows, Eugenia Belova and Valery Lazarev, shows the  transition of the Soviet Communist party into a money making operation and  how the tensions within the Soviet system had been building for a long time. Not ideology per se but institutions and incentives coordinated the actions and beliefs of millions of bureaucrats and activists – until they suddenly no longer did.  The system ended when the party elite decided they would do better within a capitalist system. During its last four decades, the communist party incongruously became a business operation that served as a hothouse for Russia’s new entrepreneurs.

The two scholars, working in the Hoover Institution Archives, found buried deep and overlooked within the official records of the Central Committee of the Soviet Communist Party details on how the Party was financed. These records naturally piqued the authors’ attention. Party’s balance sheets yielded no traces of legendary party gold, but they did produce a rather astonishing finding: Starting in April of 1949, all party organizations were ordered to run themselves as a “for profit” business. They would no longer receive automatic subsidies from the state budget. Each party organization, henceforth, had to be run as a real business. Each party organization must collect its dues on time, spend its money carefully, sell off excess inventories and properties, and branch out into new and profitable businesses, taking advantage of its political monopoly and power.

In particular, party organizations were instructed to direct their business acumen to  party publishing. The party had a monopoly over the major presses and publishing houses, with the party newspaper, Pravda, serving as the flagship of its publishing operations.  The party Central Committee ordered the party organizations at regional and municipal levels to expand into virtually all areas of publishing. In so doing, party officials should throw around the weight of their power and influence. After all, everyone occupying influential positions was a member of the party and could be “influenced.”  Regional and local party leaders were told, in language that would be familiar to any mafia boss: If any communist anywhere “does not like your bossing, let us talk to him at the regional party meeting, and probably he will find the party’s decision acceptable.”

These leading figures of government, industry, and culture would surely follow the party’s orders to direct their business to party publishing operations. Surely, they would like to place advertising in party papers, and they would not baulk at a high price. If they needed manuals printed, of course, they would turn to party publishers. The party would not need strong arm tactics. A word to the wise would suffice.

Thus began a major downsizing in major newspapers and publishing houses as party publishing houses sought to reduce costs and raise revenues. To his satisfaction, the head of party propaganda reported that the ten percent layoffs of 1948 resulted in a 13.5 percent increase in the party’s profit from publishing. Regional party newspapers solicited expensive advertising. Party presses even began to publish spy thrillers and other pulp fiction. Anything to make a ruble. By 1956, the party received one third of its revenues from its publishing business. The authors conclude: “Surprising as it may seem in an economy that defied the market rationale, the party achieved remarkable success….The party became a major player in the Soviet printing industry and, using such methods as layoffs, aggressive cost reductions, and product diversification, turned it into a reliable source of revenue.”

Managing the party publishing business remained one of the party’s top priorities. As late as  1990, Mikhail Gorbachev signed a resolution recommending that local newspapers devote no less than half their space to advertising and that the profits go to the party’s discretionary funds. Entrepreneurial success came at a cost of reduced propaganda. Those responsible for bringing ideology to the masses were preoccupied with more urgent business matters.

The history of Soviet economic reform is one of dead ends and inaction.  Enterprises were not allowed to cut staff or negotiate prices. Profits continued to be accounting entries. Profitable enterprises saw their profits automatically redistributed to unprofitable ones. Only the Communist Party was allowed to run itself as a profit maximizing business. It did not deny itself the flexibility to expand markets, downsize, or to use its political power to increase its profits. The Communist Party became an invaluable training ground for business. Those still young enough to adapt combined training in capitalism and in crony capitalism – the ideal formula for success in the new world of a non-communist Russia.

Why did the Communist Party decide to operate as a business? My guess is that they understood the power of the purse string. As long as the party was dependent on the state budget or on contributions from enterprises, the party would become dependent on others. You can only control your own fate if you control your own finances.

This book looks at mundane and economically rational motivations of  people in the Soviet system using “big data” of sorts: the huge extant mass of numerical data as well as memos and other archival material, which were produced within the system, meant for internal use only, and thus never distorted deliberately. The title underscores the novelty of this approach by putting together words from the realms of political psychology and business. Scholars of the communist regimes of the past as well as those of modern non-democracies, such as China or the Mid East, should take a look to check for similarities. Do totalitarian regimes everywhere have their cash cow which guarantees them financial independence and flexibility that they deny all others?

Eugenia Belova and Valery Lazarev, Funding Loyalty: The Economics of the Communist Party (New Haven: Yale  University Press, 2013): Yale-Hoover Series on Stalin, Stalinism, and Cold War.

This review was prepared by Paul Gregory, Hoover Fellow and Professor of Economics, University of Houston.