Monday, December 23, 2013

Soviet general equilibrium theory

When we think about a social planner that maximizes welfare by assigning optimal allocations without an explicit price system, we are really describing a Soviet economy. History has shown that this utopia does not quite work out for a variety of reasons. Yet, Soviet economies were following this doctrine and their governments must have acted on some principles that must have come from somewhere: what should one allocate where, how should allocations change according to changes in exogenous factors, etc. Russia actually has a rich history of economic theoreticians who have worked out models to guide the policy makers, who liked to think themselves as technocrats. These theoreticians were mostly mathematicians working on various optimization techniques.

Ivan Boldyrev and Olessia Kirtchik describe the life of Victor Polterovich, who expanded Walrasian theory to non-market economies in the 1970s and was the only active Soviet economist with visibility in the West during that period: he has an Econometrica in 1983 and another one in 1993, and a few articles in the Journal of Mathematical Economics in between (see his page on IDEAS) and is a fellow of the Econometric Society. While Polterovich started as many others his academic career of Marxist planning theories, his move to general equilibrium theory may seem puzzling. Indeed, the welfare theorems have often been touted as a victory for the market economy, and Polterovich would certainly have been ill-advised to promote a market economy.

The paper is largely based on interviews of Polterovich that reveal interesting anecdotes, such as the unique history of his first Econometrica and how some of his most important results never got translated. The other Soviet economists did not go through the trouble of integrating with the international research community, and I am sure their are still interesting results that are ignored by the wider general equilibrium theory community. Polterovich came to general equilibrium theory by realizing that one needs at least as many instruments as objectives to manage optimally an economy. That did not seem feasible to him, hence his interest in decentralization. In his early models, agents interact, possibly forming coalitions. Keep in mind that to Soviets, agents were not individuals but political entities or firms. Later, price constructs are introduced, and they are helpful in understanding coordination among agents.

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