A Distrustful Economy:
An Inquiry into Foundations of the Russian Market
Anton Oleinik
Strengthening network capitalism implies that a common economic space does not exist
even within national borders. Does this mean that one cannot speak about the national
market, or economic transactions made on a national scale, in post-Soviet Russia? The
first section of this paper is devoted to a discussion of the minimal prerequisites for arriv-
ing at an arrangement between the participants of a transaction. Then, the analysis will
focus on the parameters of the arrangement that conditions the reproduction of eco-
nomic institutions in Russia. We will pay particular attention to two basic parameters of
the institutional environment: the level of trust and the character of authority
relationships.
Minimal Prerequisites of the Arrangement in Economic Activity
Since Adam Smith, economists have been committed to a search for a monistic
explanation of the reasons for economic activity. Smith’s interpretations of economic
motives given in his two most influential books seem contradictory and mutually exclu
-
sive. In his early work, Theory of Moral Sentiments, Smith discussed moral prerequisites
for market play and particularly emphasized the necessity of sympathy between the par
-
ticipants in economic exchanges. By contrast, in his classic work, Inquiry into the Nature
and Causes of the Wealth of Nations, Smith concentrated his attention exclusively on ego
-
ism and a natural inclination for trade. In its modern form, what is known as “Smith’s
problem” consists in opposing ethics and neoclassical economics. “Economics has two
ratherdifferentorigins:‘ethics’and‘engineering.’...Thenatureofmoderneconomics
1
JOURNAL OF ECONOMIC ISSUES
Vol. XXXIX No. 1 March 2005
The author is Assistant Professor in the Department of Sociology at Memorial University of Newfoundland, St. John’s, Can
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ada. He would like to thank two anonymous referees of the journal for their helpful comments on an early version of this
paper. Sheryl Curtis has significantly improved the style.
Jei
© 2005, Journal of Economic Issues
has been substantially impoverished by the distance that has grown between economics
and ethics” (Sen 1987, 3, 7).
One could hardly deny that many economic transactions are reduced to a simple
search for individual profit. However, the thesis about the universal character of the ego
-
istic motivation is refuted by the existence of pre-capitalistic relationships and a plurality
of the models of capitalism itself. The relative importance of the various motives varies
in space and time; moreover, they can coexist within a given market society. “Individu
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als are, simultaneously, under the influence of two major sets of factors—their pleasure
and their moral duty (although both reflect socialization),” emphasized Amitai Etzioni.
“There are important differences in the extent each of these sets of factors is operative
under different historical and societal conditions, and within different personalities
under the same conditions” (1988, 63). For example, moral considerations prevail over
utilitarian considerations during the first stages of market evolution. “Economy was
embedded [till the end of seventeenth century] in a more broad system of social rela
-
tions” (Polanyi 1995, 75). In modern societies, there still exist some spheres of everyday
activities, like volunteering, in which transactions between individuals can be governed
by morality or feelings of affinity and sympathy (Schmid 2002).
Arguments in favor of a new rapprochement between ethics and economics sound
persuasive. Its advocates argue that transaction costs arise as a result of the interference
of different motives. According to this point of view, a society populated exclusively by
profit seekers would be free of transaction costs. For example, the term “opportunism”
reflects a moral evaluation of profit seeking to the detriment of the partner’s interests.
When both partners are equally free of moral bonds, the unilateral search for individual
profit seems rather natural (Thévenot 1997, 70–73; see also Etzioni 1988, 68).
Morality does not create a credible danger for the market. By contrast, market
expansion renders any ethical considerations relative, making them absolutely irrele-
vant. Michael Walzer referred to “market imperialism” as the “the ability of wealthy
men and women to trade in indulgences, purchase state offices, corrupt the courts, exer
-
cise political power” (1983, 120). Market imperialism took on especially manifest forms
in the post-Soviet countries in the 1990s. Sociological interventions (i.e., focus groups
organized in a special way) conducted by French scholars with respect to several groups
of Russian businessmen showed that ethical considerations dominated the discourse in
1991–1992. Only one year later, in 1993–1994, statements made by the same parties
were characterized by extreme cynicism (Berelowitch and Wieviorka 1996, 160, 176).
Despite the relative strength of utilitarian motives—they can annihilate moral con
-
siderations—such a result calls the stability of the market itself into question. Profit seek
-
ing in its “pure” form destabilizes the market. Economic theory accepts that a perfect
egoist is unable to produce public goods due to the free-rider problem. Consequently,
the interaction of egoists leads to a suboptimal result. In other words, “free exchange
can not sustain itself, it must rely on institutions, rules, customs and traditions” (Walzer
1992, 114; see also Fukuyama 1996, 11).
2 Anton Oleinik
The list of the determinants of economic action was reduced to the two motives for
the sake of simplicity. It should include affect and coercion as well. Property, one of the
basic economic notions, implies the exercise of control over material resources as well as
over human actions. John R. Commons described “an evolution of the notion of prop
-
erty from the ownership of visible things to the ownership of invisible encumbrances on
behavior and opportunities” (1939, 237). If we set aside coercion, the list looks very sim
-
ilar to Max Weber’s typology of action. He discussed four types of action: instrumen
-
tally-rational, value-rational, traditional, and affective (1968, 24–25). The influence of
these four factors on economic action might be visualized with the help of figure 1.
Then we reformulate the question about relative importance of each motive in the fol
-
lowing way: what is the distance from point X (a particular everyday action) to the four
nodes of the quadrangle?
1
Now we turn to the issue of the minimal arrangement between the participants of a
transaction. Institutional arrangement between economic units “governs the ways in
which these units can cooperate or compete” (Davis and North 1971, 7).
2
From a func
-
tionalist perspective, institutional arrangement enables economic subjects to adjust
their expectations, to make them mutually compatible.
We will focus our attention on particular features of the institutional arrangement
on which the post-Soviet market is based. These features concern both formal (e.g., law)
and informal (e.g., moral) frameworks of transactions. Prerequisites to the arrangement
do exist if the afore-mentioned four factors determine the behavior of most economic
subjects in the same way. For example, the economic subjects’ geometrical location lies
in the surroundings of the same point, say, point X. Even if this point coincides with the
“utility” mode, there are no problems in interpreting actions and, consequently, in com
-
ing to an arrangement about what these actions should look like. The neoclassical
model of the market then becomes the special case of a more general model of economic
action. In contrast with the previous instance, divergent motives (for example, some eco
-
An Inquiry into Foundations of the Russian Market 3
Figure 1. Influence of Weber’s Four Factors on Economic Action
nomic subjects pay attention to moral considerations—they lie close to the “moral”
node, whereas the others are profit seekers and are found closer to the “utility” node)
make arriving at an arrangement more difficult, virtually impossible.
Institutional Environment of the Post-Soviet Market
Although each person fixes a proportion between the different motives in an indi
-
vidual way, as a result of the sometimes difficult search for an “internal equilibrium,”
3
the parameters of the balance depend on the institutional environment in which the
individual acts. Institutional environment influences basic characteristics of the
arrangement between the participants in economic exchanges. “Institutions operate at a
higher level of generalization than do markets and organizations: they delineate the
rules of the game within which such ‘governance structures’ actually operate. As an illus
-
tration, the legal system, which most economists would agree to call an institution, is a
framework that defines the social acceptability of possible actions, e.g. the ways in which
property rights can be implemented and enforced” (Ménard 1995, 163). The preference
for the market or, rather, for a type of market (e.g., a network market) derives from the
institutional environment reflecting a particular combination of behavioral motives.
The basic characteristics of institutional environment (its place on a map such as in fig-
ure 1) are an independent variable, whereas the parameters of governance structures,
including the market, are a dependent variable. In other words, institutional environ-
ment is a set of the values, both formal and informal norms, that influence the combina-
tion of different behavioral motives and condition the arrangement as the cement of a
transaction.
The influence of institutional environment on institutional arrangements such as
the firm, the network, and the market can be conceptualized in the following way. Insti
-
tutional environment attaches a relative “weight” to each behavioral motive (let p
i
be the
relative weight of the factor i, for example, the utility, then 0 < p
i
<1and
p
i
i =
å
=
1
4
1
). The
behavioral motives weighted in this way determine the institutional arrangements that
are the most appropriate to a given institutional environment. According to our hypoth
-
esis, the network market provides a perfect fit for the post-Soviet institutional environ
-
ment (Oleinik 2004). When discussing the concept of market capitalism, one needs to
differentiate two basic governance structures: first, the network market as a complex of
transactions between local networks and, second, the local network itself as a system of
localized and personified relationships within a particular network. In this article, we
will concentrate our attention on the network market, that is, on the minimal prerequi
-
sites for an arrangement in interactions outside of the network.
If an economic system is stable over the long term, this proves the existence of an
arrangement between economic subjects. It is worth emphasizing that the arrangement
made in the economic sphere plays a stabilizing role even if its parameters do not coin
-
4 Anton Oleinik
cide with those prescribed in the neoclassical model (i.e., profit seeking as the only sig
-
nificant motive). The command economy has been characterized by an arrangement,
too; it resulted from a combination of coercion (fiat) and the moral considerations
linked with the communist doctrine. János Kornaï pointed out a paradox: the economy
of shortage, which has been by definition very far from the Walrasian equilibrium, was
nevertheless a stable system. The existence of a particular set of norms allowed the com
-
mand economy to function and to limit the destabilizing consequences of shortage.
Kornaï argued that a normal intensity of the plan “comes from the informal arrange
-
ments and the customary norms, it has a historically given value” (1990, 79; the consti
-
tution of the command economy is also discussed in Oleinik 2002a, 96–98). In his
latest works, Kornaï has changed his emphasis and has stressed the leading role of coer
-
cion and fiat as a centerpiece of the bureaucratic coordination. According to him,
bureaucratic coordination (the geometric place of all economic agents that lies in the
surroundings of the “coercion” node) nevertheless implies a particular type of arrange
-
ment (1992, 98). The situation in post–Soviet Russia after the full liberalization of the
economy in 1991–1992 represents another interesting case. Despite deep and extreme
lacks of balance, which became apparent as a result of liberalization, an inner stability
characterized the institutional environment. The stabilizing effects were due to a deep
pessimism and the refusal to take any initiative observed in the behavior of a major part
of economic agents (Shlapentokh 1995). In other words, affects and a “negative” moral
system (the refusal of all values and norms on which the socialist economy has been
based) conditioned a very special kind of arrangement.
The cases considered above convince us that the mystery of arrangement consists in
the accordance of the economic agents’ expectations with the real paths in socioeco-
nomic evolution, in the harmonization of their beliefs. If pessimistic prophesies come
true, this becomes a guarantee of stability, however suboptimal and unbearable it may
be.
Modeling of human behavior provides for accurate insights about the actions of
other people. Everyone works out his own “typologies” of the people around him in
order to understand them and, hence, to arrive at an arrangement. “The more a behav
-
ioral model is standardized and institutionalized, the more there are chances that the
expectations and the reality would get harmonized” (Schutz 1987, 33). So a homoge
-
neous motivation of economic subjects facilitates the understanding of their behavior
on the basis of modeling and makes the arrangement possible.
As far as the network market is concerned, two elements of the post-Soviet institu
-
tional environment provide for arriving at the arrangement and ensure the relative sta
-
bility of the socioeconomic system as a whole. First, an extremely low level of general
and institutional trust ought to be taken into account while analyzing the plans of eco
-
nomic agents. Impersonal distrust means that personally unknown people should not
be trusted, whereas the lack of trust in formal institutions structures the interactions
with the government and its representatives. Second, coercion continues to play an
important role in economic activity although it now takes on less explicit forms than
An Inquiry into Foundations of the Russian Market 5
