In the coming weeks, IMR will begin publishing chapters from Alexander Auzan's recent book on institutional economics in Russian and in English. By way of introduction, we are presenting an interview with Dr. Auzan where he reflects on the possibility of major changes in  approaches to government worldwide and on the impact such shifts may have on Russia.



Olga Khvostunova: Russian Esquire recently published a collection of your articles. The introduction to these jokingly suggested that they were “Institutional Economics for Dummies.”  Who do you actually consider to be your audience?

Aleksander Auzan: We said "for dummies" because understanding my writing doesn't require a graduate degree. The book is for anyone with a high school or perhaps a college education  who happens to also be interested in economic problems.

OK: What appeals to you about this average reader? What are you trying to accomplish with this book?

AA: I expect that this book can change an average reader's worldview. The basis of new institutional economical theory, the Coase Theorem, can have an impact on everyday life. The theorem posits that besides other things, people are alienated  by the transactional expenses of communication. In other words, it’s hard for people to come to agreements due to irrationality and the human tendency to not play by the rules. Transactional expenses are always positive, which means that the ideal society is unattainable. On the one hand, it’s bad news, but on the other hand, it means that there are many ways of attaining a less-than-perfect state.

OK: What kind of conclusions do you expect the reader to arrive at when they finish your book?

AA: In each chapter, on every topic, I tried to make points that could impact the reader's perception of the world in general. It was important to me that the conclusions I drew could be useful in any behavioral situation -- in politics, economics, and even in regular human interaction.

OK: So your ambition is to change the way people see the world. Do you think this is an attainable goal? Especially considering the fact that Russians tend to be rather conservative?

АА: I don't entirely agree with you about the Russian mentality. Some conservatism is indeed inherent to  Russian culture, especially when it comes to embracing new ideas. Russians prefer to avoid uncertainty and risks, which is actually the source of many political problems. However, in other regards, Russians can be open-minded. They exhibit a powerful tendency toward self-realization, especially the educated classes. Which is to say that in Russia, it is customary to seek out knowledge and look for unusual, creative solutions. The Russian intellect's distaste for standards is both its strength and weakness. My book isn't a new testament or ideology, but the fruit of long-term reflection, based on scientific inquiry and research. It leaves some questions unanswered--there is a lot more to think about. To me, this approach makes the book more appealing.

OK: In a recent op-ed in Vedomosti, you spoke of the awakening of the Russian creative class. Not the middle class, not an intellectual elite, but a creative class. Who belongs to this class?

АА: We've been closely observing the emergence of the Russian middle class over the course of the past five to seven years. They are quite heterogenous, as the many studies of my colleagues--sociologists and economists--have demonstrated. In fact, in any country, the middle class is full of contradictions. On the one hand, it disavows revolution and aspires to stability; on the other hand, it longs for change, tackling new issues, and it rejects stagnation. It is these contradictions that make the middle class valuable for political stability and economic development. Within the middle class, these qualities are manifested among various groups. For example with entrepreneurs, or liberal professionals who work in creative fields, you have the bearers of diversity and creativity. These are the people who look for unique solutions. And then there are other groups, such as government officials, teachers, and doctors, who all advocate for stability. If all these groups are in balance within middle class, the country can evolve. But if the balance is upset, for example, if the creative class becomes too numerous and active while stabilization groups grow scarce and weak, it could be dangerous for the country. This kind of rift may tear it apart. Or, if you have the opposite situation and the middle class is predominantly conservative, the country might stagnate.

I think that Russian politicians will have to work very hard to be accepted by the creative class.

OK: Why did people suddenly start talking about the creative class now? It’s hard to believe that no one had realized that it existed before.

AA: From an economic angle, we have always known that the creative class existed. However, until the winter of 2011-2012, we did not see it as a political player. It all came out during the anti-Putin demonstrations, when they all took to the streets--despite the general reluctance of this class to do so. People felt compelled to express their views on the country's future out of their dread of the long-term stagnation in Russia. They are not able to leave the country, even when they are dissatisfied, because of the recession and unfavorable economic conditions worldwide. In my opinion, it’s a good thing they took to the streets.

OK: You say that creative class isn't partial to protesting. Now that they have declared themselves, what will they do next? Will the battle continue?

АА: The creative class will definitely keep fighting using unconventional tactics. For example, they will make satirical videos and generate jokes that  spread all over the Internet. If the creative class is unhappy about something, it goes to war online, a corrosive method that gradually erodes the regime. I think that Russian politicians will have to work very hard to be accepted by the creative class. They would have to effect some substantial changes to win them over.

OK: During the demonstrations, one of the things the creative class called for was honesty in politics.  It seems that people are fed up with the constant stream of lies coming from the political elite and politicians' promises that are never kept.

АА: I think that the demand was not only for political honesty, but for honesty in general. Everyone is tired of the lies, not just the creative class and not only in Russia.

OK: Are you referring to protest movements in other countries?

АА: Yes. 2011 started with the Arab Spring. Then we had dissident demonstrations in Southern Europe, followed by the fight to establish the Robin Hood tax in London, the Occupy Wall Street movement in the U.S., and the rise of pirate parties in Sweden and Germany. The year ended with mass protests on Bolotnaya Square in Moscow and in other Russian cities. This isn't a mere coincidence.

OK: Do you believe that in countries where the protest movements took place, the people were all demanding honesty?

АА: It seems to me that the 2008-09 economic crisis fundamentally changed the long-term economic climate. We are going to have to live in difficult economical conditions for a while. Various political systems in a number of countries all turned out to be useless under the new circumstances. Across the board,  government mechanisms started failing. These failures drove the demand for major changes. In many ways, 2011 resembled 1968, when a wave of protests swept the world.

Here is the real problem for Russian leaders: How do you combine Russia 1, Russia 2, and Russia 3 into a single country?

OK: Had anyone foreseen the 1968 protests?

АА: In fact, yes. Social contract theorists, especially John Rawls, a philosopher from Harvard who wrote A Theory of Justice, as well as American economists James Buchanan and Gordon Tullock, authors of The Calculus of Consent and The Limits of Liberty: Between Anarchy and Leviathan.

OK: What was the global impact of the 1968 protests?

АА: Since 1968, many new political platforms have emerged and many value systems have changed. World leaders whose positions had been considered solid were forced to resign in the wake of the protests. Charles de Gaulle, the French president, who had led  his country out of Nazism and thwarted a domestic fascist plot, was forced to leave office in 1969, following the student strikes, in disgrace. In the USSR, August 1968 saw the first demonstrations in support of Czechoslovakia [which the Soviet Union had invaded that year--Ed.] American universities erupted in demonstrations against the Vietnam War. As a result, new ideas emerged about what is proper in politics and what is not. New values, Big Ecology, and all sorts of other things followed the protests.

OK: When you draw these historical parallels, are you also suggesting that such major shifts may take place now?

АА: They might. Shifts like these can take place every 20 years, and they are usually caused by globally-significant events. Let's take another example: 1989. It was the year of the collapse of the socialist system in Eastern and Central Europe and North Asia. This change was brought about by the dissolution of the bipolar world. I attribute the most recent changes in society to the 2008-09 economic crisis. Incidentally, the American political scientist Francis Fukuyama recently published an article where he suggested that the time may have arrived for a new wave. The premonition of a major shift is already in the air.

OK: In your lectures and articles you often speak of the Russian path, which you say the country has been unable to get off of. Do you think that the shifts we have been discussing could help Russia get out of this rut?

АА: Global shifts in value systems can stimulate domestic changes. Russia is not the only country suffering from path dependence, a problem that was first described by Douglas North, a prominent American economist and Nobel prize winner. When it occurs, a country may try to leave its long-term trajectory and move to a higher level of development. Metaphorically speaking, the country wants to overcome gravitational forces and shift from the first cosmic velocity to the second one, which will allow it to reach the next level. Global statistical data shows that the majority of countries in world are on the lower trajectory. Only about 25 of them have managed to move to the higher one. Shifts like this are rare, and not every country actually cares about them.

OK: Who else seeks to advance besides Russia?

АА: Spain is a good example. It has been trying to solve the path dependence problem for three centuries. Although it has all the prerequisites to do so and had once been the center of a world empire, Spain has not been able to get its wish and join the elite club of world leaders. Every time Spain tries to take the leap, it slides back on its path, as if it has hit a ceiling.

Everyone is tired of the lies, not just the creative class, and not only in Russia. In many ways, 2011 resembled the tumultuous 1968.

OK: How can a country overcome its gravity?

АА: There is one interesting theory suggested by a very important book called Violence and Social Orders. This book is based on research conducted by Douglas North and two other prominent American academics – historian John Wallis and political scientist Barry Weingast. It was published a few years ago. This group  studied three cases (France, England, and the U.S.), in which the countries have managed to take leaps and push themselves to higher levels of development. The group came to the conclusion that successful development was only possible after three key problems had been resolved in each respective country and three threshold conditions had been reached. The first condition was that the elite stopped making exceptions for themselves and started coming to agreements on rules that would apply to everyone. The second one was that commercial, political, and civil organizations began to outlive their creators. The resignation of the leader did not lead to the death of an organization anymore. The final condition was that the elite began to control the state’s instruments of violence collectively, rather than distributing their influence by the sector: someone gets the army, others get the police, and the rest oversee special services. The important thing is that instruments of violence stopped being used in political fights. The U.S. managed to break through to the higher level only at the turn of the 20th century, winning the competition with Argentina. For a long time these two countries were neck and neck, but eventually Argentina failed to achieve the three threshold conditions and thus overcome gravity. It has been suffering from that failure ever since. This is the theory we are testing on various Russian and international studies.

OK: What is happening in Russia right now, if you were to analyze it through the prism of this theory?  How far away are we from reaching those three threshold conditions?

АА: I think that a certain demand for reaching these conditions has emerged. What were the protesters upset about? They protested not only against the lies, but also against abuses such as the flashing lights on some officials’ vehicles [which allow them certain privileges in traffic--Ed.]. Polls show that 80% of respondents in Russia want to abolish the use of flashing lights, even though they are not generally found outside of Moscow. These flashing lights were a symbol of the exceptions Russian elites create for their own advantage instead of making rules that apply to  everyone. It's a typical example of violating the first condition. As for the second condition, hardly any organization has managed to survive its leader in post-Soviet Russia.

Nevertheless, we can see that people are starting to call for management rotation, for new leaders that are capable of political decision-making. Such demands are coming from Russian internet communities and the demonstrators. The rotation of leaders needs to happen not only in political parties, civil organizations, and commercial companies, but also at large. As for, the third condition, the abuse of so-called «administrative resources» during the elections or in commercial competition has also come under fire. The protest against such activities signifies that the foundation for changing how defense systems are controlled has been laid.

OK: Do you think that the Russian political elite will actually make the effort of effecting these changes?

АА: As I've said, changing the top leadership in the country is not a threshold condition for changing the country's path. Sooner or later top officials are bound to leave office. That's not enough. It’s important that rotation takes place everywhere: in the opposition, in civil organizations, in business.



OK: In the mean time, rotation of leaders in Russia remains a sheer formality.

АА: I don’t think the problem is that Putin is going to become the next president, or that Medvedev will be the Prime Minister. The essential thing is how both of them will deal with the rift that's appeared in Russian society. During the electoral season of 2011-12, we saw the birth of a Russia-1 and Russia-2. The terms Russia-1 and Russia-2 were introduced by Natalia Zubarevich, a leading Russian regional geographer. Russia-1 is comprised of large cities, which have a population of more than one million, where people live in accordance with European values, aspire to modernization, including political modernization, and demand a better quality of life. Russia-2 is the industrial country of the cities with a population of 200-400,000, where basic necessities and stability are the key demands. This is the country that voted for Putin, seeing him as the guardian of their stability who would protect them from the “horrors” of the 1990s. But there’s also a Russia-3, the country of nearly-abandoned villages and small cities. Here is the real problem for Russian authorities: how do you combine all three parts in one territory? I can only dream that Russia-1 and Russia-2 would start talking to each other and come to an agreement on what to do next and how to save Russia-3. This would demand the formation of a  horizontal social contract and the democratization of the political regime. Political leaders would be forced to find peaceful solutions to Russia's problems that would benefit everyone.

OK: Why do you conflate ending path dependence with the idea of the social contract?

АА: If you look at world history, you will see that countries that embraced the idea of the social contract  had breakthroughs. For instance, the Netherlands of the late 16th and early 17th centuries. Dutch scientist Hugo Grotius wrote about the social contract only a decade before the Dutch Revolt and a hundred years later, the Netherlands had become the the country that led the world.  In the 18th century, John Locke and Thomas Hobbes continued the exploration of the social contract in England--after which that country too made a leap, and for several centuries became the most dynamic and progressive in the world. Jean-Jacques Rousseau, the messenger of the French Revolution, provided a similar foundation for France. Around the same time, American philosopher George Mason wrote about the social contract in the U.S. The essence of this contract is in meeting the three threshold conditions I mentioned above. The idea is replacing individual agreements on exceptions with social agreements on common rules.

OK: Returning to the current situation in Russia. You are saying that the demand for specific changes in government, the demand for modernization, has indeed appeared among the creative class and in society at large. But the the vertical power structure in Russia cannot allow changes like this to come from the below, let alone to permit the drawing of a social contract. The current regime is completely incapable of modernizing the country, although they have been speaking of nothing but for the past four years.

АА: Well, I don’t think that it is possible to modernize a country in four years. Modernization can take as long as 50 years.  It’s a good thing that we are not on square one. In Russia, the first attempts at modernization came before the times of Peter the Great. Czar Aleksei Mikhailovich and Princess Sophia were the first ones to try it.

OK: It is amazing to me, how long the country has been trying to reform itself. Why do you think it always fails?

АА: It's because of the path problem. If a country does not have any other powerful institutions, modernization is created by individual authorities or the state. What is the state? It’s an organization with the competitive advantage of being able to use force. What does the state use when it attempts institute modernization? Its capacity for violence. The government begins mobilizing resources, moving them around various sectors. As a result, the resources lose their value. This kind of modernization usually ends in the disruption of the human potential or country's resources, and cannot be reversed. This is the way modernization has taken place throughout Russian history. The only exceptions, in my opinion, were the Great Reforms of Aleksander II, which included reforms of the military, landowning, and serfdom. And, perhaps, the reforms instituted by Mikhail Gorbachev.

OK: Clearly, Medvedev is no Aleksander II.

АА: It is too early to assess the results of Medvedev’s modernization. There have been some changes and there might be more. But here is what I think is the problem. I happen to preside over a committee of independent specialists that consults the Presidential Commission for Modernization. In our discussions, we have come to a unanimous conclusion. We believe that before there can be modernization in the economy, it’s crucial to modernize the social and cultural spheres. Modernization begins in the mind, in the prevalent value system. A poem by Vladimir Kornilov, who passed away in 2002, is often quoted online. It goes like this:


They thought the system had to change
So that was what they changed
And now they're three times poorer
And they're three times as angry.

And it ends with,

Just one thing for another
And property for rights
When what they should have done
First, is to change themselves.

To me, this seems very accurate.