On the surface, it might have seemed that the second economy served a benign, even stabilizing, function. The second economy met some consumer appetites not satisfied by the first economy and thus drained off a certain amount of discontent over the quantity and quality of socialist goods. It also offered a remunerative outlet for individual initiative that otherwise might have been turned directly against the system.
Perhaps such beliefs accounted for the failure of Soviet authorities to pay much attention to the second economy and to crack down on its crimes. As noted earlier, Soviet economic texts ignored the second economy. Valery Rutgaizer, who headed Gosplan’s Scientific and Research Economic Institute (where Koriagina did her studies) said the first publications on the second economy in the Soviet Union did not appear until the beginning of the 1980s.196 More importantly, Soviet authorities made no concerted effort to suppress it. Grossman said:
By 1960 the Soviet shadow economy was already institutionally mature and of notable scope and size. In the early 1960s it was the target of a fierce campaign by Khrushchev to the point of reintroduction of the death penalty. In the event, this campaign, like all others against ‘economic crime’ before and since, did little to set back the steady, rapid rise of illicit activity. Instead the shadow economy spread out, grew, and prospered—under Brezhnev (1964-82), thanks to benign neglect if not tacit encouragement.197
An indication of this benign neglect appeared in the almost complete absence of prosecution of clearly illegal economic activity. In the early 1980s, crimes of speculation (buying to resell at a higher price) accounted for only 2 percent of all reported crimes. According to one estimate, the actual amount of speculation was a hundred times greater.198 In retrospect, few other mistakes of the Soviet leadership did so much harm as the indifference toward illegal economic activity.
Whatever small and temporary benefits Soviet society may have reaped from the second economy, the costs far outstripped them. Most important, the second economy damaged the first economy. If the second economy satisfied some consumer appetites and deflected some discontent, it simultaneously stimulated these appetites and increased discontent. Koriagina said, “The second economy alleviates shortages in consumer markets and at the same time, provokes their growth.” Shortages then encouraged even more criminal economic activity, and this led to the “socio-economic and political destabilization of the society.”199 Moreover, the larger the illegal economy became, the more it interfered with the performance of the legitimate economy. Since the second economy involved stealing time and material from the socialist sector, it impaired socialism’s efficiency. Alexeev said, “Diverting inputs and outputs to the black market must have lowered the official performance of at least some enterprises.”200 Furthermore, the second economy undermined economic planning. If an enterprise compensated for a misallocation of resources by resorting to informal purchases or trades, the planners had no reason to correct future allocations. By weakening or destroying the feedback mechanism, the second economy forced planners to “direct the Soviet economy with a highly distorted map of the economic situation.”201 Finally, private moneymaking increased income inequality and its attendant jealousies and resentments. In all of these ways, the second economy either caused or exacerbated the Soviet Union’s economic problems.
How did the second economy influence the Communist Party? In one word, the answer was corruption. Corruption of some cadres more than anything else explained why the Party that had rebuffed Bukharin and Khrushchev (though not without some damage) did not overcome Gorbachev. The peasantry that provided a class basis for Bukharin’s ideas did not require the corruption of the Party for its existence, but the entrepreneurs of the second economy did. Simply put, to exist and thrive, illegal producing and selling required the bribery of some Party and state officials, and the more organized and widespread this producing and selling became, the more corruption they required. Simis said, “No underground enterprise could be created without the venality of [some in] the state administration; it would not last a month.”202
In 1979, Grossman reported that corruption, namely the bribery of Soviet officials, was “extremely widespread” and reached “up and down nearly all levels of the formal hierarchy.” At the lowest level, in an actual case recounted by a former Soviet prosecutor, it might involve the director of a vegetable storage warehouse being forced “on pain of dismissal to pay regular graft to several of the Party and government chiefs of the given district.”203 At the highest levels, it led to scandals such as the so-called cotton fraud of the 1970s and early 1980s, in which top Party and government officials in Uzbekistan and elsewhere “boldly and deftly padded” the size of the cotton crop to harvest billions of rubles. In the process “thousands were bought off,” including Brezhnev’s son-in-law.204 The rackets varied by area: in Azerbaijan caviar, in Georgia wines and precious stones, in the Baltics fish, and in Kirghyzia meat, and invariably they required the corruption of the Party.205
Venality reached the highest levels of the Party. Frol Kozlov, Khrushchev’s right hand man, Deputy Premier and Secretary of the Central Committee, retired in disgrace after the authorities opened the safe of a deceased Leningrad official and discovered packages belonging to Kozlov that contained precious jewels and bundles of money. These were payoffs in part for Kozlov using his influence to stop the criminal prosecution of illegal businessmen.206 Eventually, corruption reached the very top. After Chernenko’s death in 1985, officials of the Central Committee found “desk drawers stuffed with banknotes. Banknotes also filled half of the General Secretary’s personal secret office safe.”207
Alexander Gurov, a top police official in the USSR, related the development of Party corruption from the time of Khrushchev to Gorbachev directly to the development of illegal economy and organized crime:
It [organized crime] was bound to happen as soon as our system opened up and that was in the so-called thaw of the 1960s when Nikita Khrushchev was in power….It was impossible to imagine powerful organized crime groups under Stalin…. What we got after that in our society was the moral code of the plunderer. And of course it was run totally in the interest of the [Party] bureaucracy. For example, we had a so-called trade mafia in Moscow with representatives in top Party bodies as early as 1974. If I or anyone else had tried to warn people about the danger of the shadow economy then, liberals would have laughed and the government would have called us crazy. But that was how it started. And the government allowed it to happen, for reasons that ought to make us think. It began under Khrushchev and developed under Brezhnev. But the Gorbachev era was the period in which organized crime really became powerful in our country.208
The political problems of the Communist Party were intimately related to the corruption. Even if the cause and effect were not all in one direction, low Party standards, ideological weakness, formalism, cynicism and other political weaknesses were intertwined with corruption. Corruption gave some Communist Party and state officials a material stake in private enterprise. These officials may not have been directly involved in private trade or production, but they were in fact engaging in their own form of illicit money grubbing.
If the second economy greatly contributed to the problems of Soviet socialism, it had an equally corrosive effect on the attempt to solve those problems. As bad as the problems were, they did not bring down socialism; Gorbachev did that, and his thinking increasingly reflected the interests of the second economy entrepreneurs. The course that Gorbachev followed after 1986 stemmed directly from the second economy in two respects. First, for all the reasons given above, the second economy had created and fed a great cynicism about the efficiency of socialism, the effectiveness of planning, and the integrity of the Communist Party. Increasingly, Gorbachev exploited and even fanned this cynicism, until it spun out of control. Secondly, by creating a nascent petty bourgeoisie, the second economy had created a stratum within socialism whose personal interests lay outside of socialism. It served as a ready-built constituency for Gorbachev’s pro-market and pro-private property policies.