Money is indispensable substance of economy because only through its use the banking system manages to bring supply and demand of products to equilibrium. In order to do so the banking system has to take into account all social forces and play a money game to find an acceptable solution.
But why not take everything into account without playing a money game? The answer of cybernetics is straightforward: because in the absence of money it is physically impossible to process an adequate quantity of social information.
However historical process shows that human society keeps seeking such physical possibility to improve the control of economy. We'll undertake to trace it on through Russian history.
The first spark of non-monetary thought was issued by F.Quesney, the physician to Loi XV. His idea of economic table dawned upon scientific conscience centuries before computer made it a virtual reality.
Up to the end of the XIX-th century no signs of non-monetarism could be discerned when at last in the wake of engineering progress two ideas became evident. The first one was saliently described by G.V.Plekhanov in his review of Russian social thought. The idea maintained that though society is ruled by ideas the latter are derived from the state of production forces, i.e. from the nature of things. The way of derivation of ruling ideas is purely imaginative but since imagination is based on the nature of things the ultimate cause of all economic phenomena is non-monetary.
The second idea had more drastic consequences. It led to appearance of energy systems analysis with its awkward pretence to substitute prices - content of energy sequestered in a product was viewed upon as a rival to price.
It is worthy noting that the founder of energy analysis S. Podolinsky ( "Slovo", April and May 1880, p.p.135-211) focused his attention not on energy content of a product but on the fraction of energy budget (transformable energy) of society coupled with a product. It was a cardinally superior idea because energy budget accumulates forms of energy in different proportions that implicates a vector.
In the end of the XIX-th century political movements overwhelmed Europe. Their ultimate vague aim was struggling against social injustice. The hidden cause of increased injustice was the advent of machines making labour less valuable and bringing energy to the foreground among production factors. Proprietors of labour grew poorer and proprietors of materialized energy (machines) grew richer. It seemed utterly unjust that proprietors of labour could no longer be producers and proprietors of energy would like to buy labour at the lowest possible price according to the algorithms of market economy. Social feeling called for a constructive idea about what's to be done and the solution came simple: it was the property to blame. The proprietors of labour should be given access to energy. Down with monetary conventions! Long live non-monetary justice!
In the turmoil of historical havoc the world brain found two local solutions to the problem.
The first one for countries with dominating energy production factors. The solution was also simple: raise the price of labour and social justice will be restored. The price enforcement institutions needed to implement the idea proved a minor problem.
The second solution was more sophisticated. It applied to countries with dominating labour production factors and aimed at attaining maximal possible level of social justice. Its main repository became Russia. We'll analyse the idea in more detail.
The starting point of this variant of solution was the following. Proprietors of energy have immanent social force. They wouldn't allow proprietors of labour to avail a just portion of energy unless they are made succumb by an opposite force. This opposite force should be produced by the proprietors of labour.
Numerous emerging questions brought to life fascinating theories that captured social conscience and turned Russia to a new way of development.
The following idea came to rule over Russia. Feeling of justice is the faculty of man but a man has no force. It is manned machines that are capable of victory. So Russia gave birth to a ruling machine with deep feedback control involving proprietors of labour. It was a powerful machine endowed with a feeling of justice. Alas for there being no knowledge of cybernetics. The quantity of information passing through the feedback channels could not be processed by proprietors of labour. They were illiterate and, what is more important, discommunicated. At that time technical means of adequate information exchange were absolutely unavailable. So the ruling machine immediately turned out to be a regular despotism.
A peculiar distinction of Russian despotism from known despotic regimes was the penetration of the idea of feedback control to the masses of proprietors of labour that produced a mesmerizing effect on local control loops and greatly enhanced the efficiency of centralism. Belief in non-monetary reason was so strong that V.Lenin in one of his speeches promised to make public loos from gold. In 1921 for purposes of centralized control the GOSPLAN was established but it could not stabilize the economy because decision-making was done elsewhere. Non-monetary reason was evidently pursuing some other aim. The aim was destructive to the economy. The need for monetary control was persistent and in the same year NEP (new economic policy) was initiated. Russian economist E.Preobrazhensky wrote (Novaya economica, Moscow, 1925) that we established an economy with two regulators: a planning one and a market one. He didn't mention how possible conflicts between the regulators were to be solved and it shows that the idea of deep non-monetary control was hidden in his conscience. Very soon the idea revealed its existence. NEP revived monetary causes of social injustice and the centralized control crushed the New economic policy. Non-monetary centralism got impetus for many decades producing social injustice of quite different quality.
It is a sure fact that at the start of the XX century civilization accumulated great amount of engineering knowledge that gave potential for a long extensive development if a country possessed material resources. Russia was such a country. In its extensive development it was but natural to process excessive labour resources into energy and at the same time to shield the economy from destabilizing knowledge generated by the excessive labour resources. Hence the GULAG.
Collapse of NEP did not help understand non-monetary ideas. Ideas live a life of their own governed by laws of mimicry, antithesis and sarcasm. The Russian polity of those times was obsessed with Marxism based on monetary economic language. In 1928 V.I.Vernadsky the then president of the Academy of Sciences declared energy analysis of production forces as the main aim of economic science. But his initiative was hushed up. It was not far from revealing the productive energy of GULAG.
Imminent war cherished the idea of surviving through force and put non-monetary control underground to suppress dangerous broader knowledge. Everybody was speaking about planned economy making no difference between the declared targets and pursued aims. The non-monetary nature of Russian economy manifested itself in military industry expanding with no reference to money and mass commodities produced with premanufactured price labels. Years of war and ensuing recovery put off economic thinking until in the middle 50-s it became evident that something was wrong with the economy. Countries with monetary control of economy drew tremendous amount of information from market processes. Russia with presumed advantages of non-monetary control had no understanding at all of non-monetary mechanisms. The lack of economic knowledge grew ominous.
On the verge of 60-s an attempt was made to acquire knowledge by liberalization of thinking. The result was poor because the shadow of GULAG prevented restoring feedback links to the government. A real disaster to Russia were the huge resources of oil and gas in West Siberia that postponed the search of knowledge until middle 80-s when it was too late.
The first publication describing non-monetary essence of economy (both with monetary and non-monetary control) appeared in 1981 and was practically ignored by scientific community. It shows how unaware Russia was (and is) of its fundamental problems. A closer look at the publication would be appropriate.
The author of the book Yu.V.Yaremenko would have liked to name it "Multilevel economy" but at the pressure of the publisher (publishing house "Mysl" in Moscow) had to succumb to "Structurnye izmeneniya v sotsialisticheskoy ekonomike (Structural changes in socialist economy) ". Incidentally publication of the book was possible only due to Yaremenko's being a high ranking civil officer.
The book was written in soviet lexics that averted serious readers and perhaps was the reason why its mathematical novelty was left unnoticed. The following model was described.
Economy was producing and consuming resources. A resource was understood as a collection of properties. So a resource was essentially a vector and no monetary value could give its adequate description. Resources were distinguished by qualities to which higher or lower levels were ascribed . The value of a level was determined by social priorities and availability of a resource. No monetary measures of levels could be admitted though it was recognized that a higher level should have a higher price.
Economy was viewed upon as a system of simultaneous and inter-coupled production of resources of different qualities. No isolated production of a resource was possible.
Resources existed in some spaces (called layers) furnished with technologies, people and natural environment. All layers were coupled with resource flows that determined the structure of an economy. Levels of quality were ascribed to layers in accordance with the levels of resources.
Structural evolution of an economy occurred through appearance of two types of resource flows.
Compensative flow effecting an extensive type of evolution
A compensative flow streams from a lower quality layer to a higher quality one enabling the latter to expand. It damages the lower layer but saves the resources of the higher one. Efficiency of the economy falls down but the output of the higher layer rises up.
Example. Machinery sector expands increasing output of combines for agriculture. For deficit of resources the combines are produced less reliable. Agricultural workers have to do often repairing and so actually work for the machinery sector. This way some agricultural labour resources virtually flow to machinery. This flow is compensative. It could have been physical instead of virtual if agricultural workers had moved to cities and had been hired by a machinery plant.
Substitutive flow effecting an intensive type of evolution
A substitutive flow streams from a higher layer to a lower layer saving the latter from exhaustion. It usually rises the efficiency of an economy.
Example. Aircraft production industry ships old turbine engines to gas industry where they are used for gas pumping stations. Gas industry gets cheaper means of expansion and aircraft industry gains profit from a by-product being otherwise useless.
Conclusion: Interplay of compensative and substitutive flows constitutes the mechanism of evolution of an economy and establishes the order of exploitation of labour.
The book described the model and supplied statistical material presumably supporting it. The statistical material referred to a 18-sector input-output model in monetary scale. 25 year span regressions of input-output coefficients were presented but no system analysis had been done. Such an analysis was performed years later. We are not going to describe here the statistical investigation but make only general remarks.
The 18-sector statistical model shows vivid structural changes of the economy but their meaningful interpretation is very dubious. A lot of observations can be done but no interplay of compensative and substitutive flows can be discerned. And no wonder - monetary model could not have sensed non-monetary phenomena. Yaremenko took his theory not from statistics but from his deep knowledge of GOSPLAN workings. (One can link to the statistic analysis from the home page).
GOSPLAN availed of most complete non-monetary economic information and its main purpose was to keep the economy balanced by proper distribution of products. But this was rarely possible because governing forces demanded too much resource in favour of military industry. Non-monetary ambitions of GOSPLAN were realized in a great input-output matrix (over 250 products) which was used for valuation of cumulative consumption of products. More deep understanding of non-monetary essence of economy was a matter of know-how of GOSPLAN's officers and Yaremenko was the first one who made it a science. And now we'll see how it relates to a purely scientific logic.
Standard basic description of an economy is the input-output matrix. Each element ai,j of the matrix is the relation ai,j = xi,j/yj , where xi,j - quantity of product i consumed for the production of product j,
yj - output of product j.
Two wrong features of the matrix have to be mentioned.
These wrong features must be taken in mind in order to adopt the right interpretation of an input-output matrix. We shall assume that an input-output matrix is a formal description of our knowledge about balancing an economy. The knowledge is not complete and the description is not adequate. There exists an input-output matrix which adequately describes (together with outputs) the balancing conditions of the economy but this matrix can not be known. We shall call it the kernel matrix. The kernel matrix describes an economy as an inter-coupled system of joint producers.
Any statistically obtained input-output matrix describes independent production because it can equivalently be transformed into a diagonal matrix. Hence what we can measure doesn't describe what really exists and we have to use measured values to build up imaginary objects. The kernel matrix is such an object and Yaremenko described it in the conventional language (as was possible). Now we repeat it in mathematical terms.
Let us have an input-output matrix of an economy. Suppose its being valid at some moment of time but at another moment there will be another matrix because economy is in constant change. Temporary disbalances are possible but in the long run all matrices must have a balanced average. The exact value of this average (mathematical expectation) is the kernel matrix. Canonical form of the kernel matrix is a Jordan block so the matrix has one eigenvalue of very high order. Such matrix can not correspond to any physical system. Each moment it splits into many physically realizable matrices which correspond to inter-acting parts of the economy. After some time these parts will recombine into another parts pulling resources from some parts or pushing resources to other parts. These pushed or pulled resources are what Yaremenko recognized as compensative or substitutive flows.
Yaremenko's work was published on the eve of perestroika but nobody took notice of his warnings (in articles) that liberalization of prices would ruin physical balance between compensative and substitutive flows without establishing an equivalent mechanism of control. Why did it happen? The answer takes us to the analysis of social conscience. We are quite aware that social conscience is an intangible thing so our arguments will sooner be guesses than statements.
First we'll take notice of what was the opinion of the Legislator (an abstract person who gives the laws). Before the fall of the soviet system in August 1991 there were two laws on income tax - one of the Soviet Union and one of Russia. Prior to the appearance of the laws numerous decisions concerning particular tax cases were issued by the Council of Ministers and the Central Committee of the Communist party. They were the raw material for the laws. And in those decisions two words of very close meanings were often used: dohod (income, return) and pribyl (profit). The Legislator felt great difficulty in understanding the difference between the words and He used to put them together as if it were one term:
dohod (pribyl) or pribyl (dohod).
But when the laws appeared the difference could be discerned (inherently) only in the Union's law and stayed obscure in the Russia's law. In the Union's law the difference was evident:
pribyl - for processes directly involving live labour,
dohod - for processes with hidden labour, i.e. mostly depending on energy.
So with the collapse of the Soviet Union the knowledge about the role of energy in industrial economy was gone from social conscience and this explains the liberalization of prices.
Another explanation can be given on more idealistic basis. During the soviet period true knowledge about economic laws in industrial and postindustrial economies were being concealed by politicians for false fear of damaging Marxism. The only alternative to the existing regime known to social conscience was the obsolete ideology of market economy which meant free trade and free prices. So just sheer desire to oppose the dying regime left no choice for economic behaviour. Such was the cost of previous suppressing the accumulation of free knowledge.
Another question arises - why scientists did not warn the government about destructive consequences of the market policy in existing situation? The scientists did. Even the Academy of Sciences did. But here is the central non-monetary law: evolution of an economy goes on in the direction which minimizes the entropy of distribution of energy over social ideas. So the social conscience is stronger than science.
And now about what's happening in Russia in 1999. First what is left of the former Russia? Very much is left. Industry slumped down but most material links between former republics exist. Certainly it is not always evident. The former republics are now independent States but what does it matter if their products suit only Russia and if their energy could be obtained only from Russia? Besides Russia has significant technological knowledge and Russia's former partners can not do without it. In Russia the control of economy seems classical monetary but centralism is still strong. Instead of direct orders it uses strong hints: "If you don't pay your money where you're told you'll be visited by the tax inspector".
Slump of industry scooped mainly military industry and its infrastructure letting loose enormous amount of resources. These resources were very quickly used to expand the sector of market economy producing money and the carriers of public control (luxuries). Excessive labour resources were a problem. They were left to manage for themselves and many of them survived due to expanding sphere of services but loosed quality. All this was reflected in social conscience as a very unjust situation.
The Russian industry differs from Western industry in its structure - it is more energy consuming. Correspondingly it is less information loaded. Its integrating in the outer system on market principles would be producing superfluous labour resources. Hence the idea of market economy will be negatively reflected in social conscience.
Information input to industry (new technologies) would lay stress on young generation acquiring new skills for future use. In social conscience it will be reflected as no solution to present day problems.
Very powerful ideas come from agricultural sector. The Russian agriculture is very risky - every third year yields a poor crop. Producers need mutual support that can be given only by a centralized state. So ideas of free farming will be strongly opposed in social conscience.
Summing up all these ideas one can say that Russia is going to restore much of the old principles of economy but there are contrary ideas as well.
Principles of market economy though non-instrumental in industrial economy stipulate enrichment of persons, human rights, acquisition of knowledge. Social conscience unconditionally approves of these ideas. But social conscience makes little difference between principles of market economy and financial (monetary) control of industrial economy. The latter may conceal its true purposes. But as long as financial control is associated with market economy it will dominate in social conscience as very desirable.
Actually the idea of market economy (meaning financial control) veils a host of financially implemented ideas including totalitarianism. Due to its universality it became the most powerful idea in social conscience because practically it suits everybody.
Social ideas are implemented with roles performed by people. Roles are very important in stabilizing certain ideas. While the performers of the roles stay the same it is very difficult to change an idea pursued by society. It helps any idea ripen and work. But at the same time it may give other ideas too long time to rot. So non-monetary forces are very slow to reveal themselves. And the greater is the country the longer are the lags. Four principal ideas lay open for Russia after perestroyka.
But in political sphere the ideas were interpreted quite differently. Most popular became the slogans borrowed from market terminology because they are appeasing to public conscience. Most strong ideas are those which serve the interests of industrial economy integrating within possible limits into the world economy.
Ideas of postindustrial economy have little support because of low quality of mass labour resources.
Whether it's bad or good but the idea of searching an optimal economy is still very strong in Russia. It is possible that after the social conscience gets aware of the crimes committed by politicians the idea will become a leading one. The main obstacle to its reviving is the shadow of GULAG that weakens every year with the new generation taking over social positions.
This summer the main tower of the Kremlin was covered with scaffolding to be renovated. The scaffolding crept up close to the star at the top as if it was to be changed for the two headed eagle. In the end of August the scaffolding receded down letting the star alone.