Weapons, Culture, and Self-Interest

Kimberly Marten Zisk

Columbia University Press, New York

1997

1. Soviet Defense Managers and Economic Upheaval

 

Imagine for a moment that the world as you know it has been turned suddenly upside down, like a game board being upended. One day the rules you had been playing by all your life were crystal clear, and you knew exactly who was on your team. The next day the rules were anybody's guess, the players changed by the minute, and you began to suspect that some of your long-time team members were cheating you. What would you do?

This was the situation Soviet defense enterprise managers faced during the transition to the new Russia. In Soviet times, these managers lived comfortable lives inside a closed network where everybody knew everybody else. To move up in the world, they pleased their patrons at the top, who took care of them in return. Managers were likewise expected to take care of the employees they supervised. Everyone's basic needs were met through a system of mutual help that prevented anyone from having to make many independent decisions. Then suddenly the framework crumbled. People stopped sheltering those who had been their responsibility, and resources dried up. A persistent rumor began to circulate that a more exciting game was now afoot, but the rules were complicated and alien, and information was scarce. Some old friends became untrustworthy. Meanwhile, those lower down in the network continued to cry out for help, constantly reminding managers of their traditional obligations.

While the players in this game happened to be Soviet defense enterprise managers, a parallel set of circumstances could easily befall other people, including ourselves. The rules of the old and new games might be different--perhaps the old game favored self-help, while the new game would force people into dependence on others--but the shock would be the same. History has repeatedly overturned existing economic systems. Whether it was seventeenth-century Native Americans first encountering European claims to private property, Polish landowners confronting the imposition of Soviet-style collectivism following World War II, or freed slaves in the Reconstruction-era South first facing economic independence, well-established social groups have often been challenged to react and adapt as best they can to upheaval in their economic environments. Even today's United States has encountered dramatic change, though it may happen more slowly: people are confronting a new economic reality. U.S. companies are challenged to compete in the differing business cultures of the new global marketplace; successful corporate executives are looking at the threat of unemployment because of downsizing; and the country may face the end of the welfare system as we know it.

This book aims to contribute to our understanding of how social groups react to systemic economic shock. It does this by examining one very important group: Soviet (now Russian) defense enterprise managers. In 1992 Russian defense enterprise managers faced two simultaneous economic upheavals: (1) the sudden restructuring of the state budget away from huge, subsidized, and guaranteed military purchases, ¹ and (2) the increasingly likely prospect of enterprise privatization, with an end to state planning and ministerial control over directors' economic decisions. In their struggle to make it in the new Russia under the presidency of Boris Yeltsin, these managers confronted unimagined economic freedom and unimagined economic constraints, both of which were potentially terrifying. The military-industrial complex was plunged into crisis, and managers had to figure out for themselves how best to survive.

This crisis serves as a kind of natural experiment, allowing us to gain new insights about how people, especially powerful people, react to revolutionary circumstances. When those who are members of the political and economic elite of a well-established social system are confronted with radical change, how do they navigate? How quickly and how well do they adapt to (or even shape) the requirements of the new system?

These questions are particularly interesting to political scientists when they are framed in terms of a debate that splits the discipline from top to bottom today, namely, how best to describe people's underlying economic and political preferences and interests. Should we assume that virtually all people everywhere in the world act primarily to further their own economic self-interest, as many economists would have us believe? Or should we assume instead that people's motives and behavior are shaped by different cultural mindsets and diverse social habits, requiring deep study by anthropologists? Both of these approaches are reflected in the broad academic literature on political economy, which comes from two competing traditions (discussed more below): positive political economy, on the one hand, and economic sociology, on the other. These traditions reflect a profound divide among social scientists more generally about what drives economic and political behavior. ²

To answer the question of how members of political and economic elites deal with radical change, why should we study Russian defense managers in particular? The truth is that we could look at many different instances across countries and across history where groups of people have reacted to revolutionary economic circumstances and find similarly interesting answers to the questions raised by this debate. But I have chosen to study this particular case in depth because it has vital implications for tomorrow's real-world problems of international security. If we understand why Russian defense enterprise managers have done what they have in the new economy, we can make better predictions about what will happen next.

This book focuses on three key institutions that structured the Russian defense manager's working life in the 1992-95 transition era and endure today. These are: (1) the large defense enterprises dating from the Soviet era (including industrial factories, design bureaus, and scientific institutes), where most managers continue to make their professional homes; (2) the web of official political authorities at both the local and the national ministry levels, with whom all defense managers must negotiate on a regular basis; and (3) the market-oriented spin-off firms that emerged from most Soviet defense enterprises, where many managers make most of their personal income. Once we understand the combination of material incentives and cultural ties that defines the typical manager's relationship to these institutions, we can gain new insights into how the managers and institutions interact with each other to influence important aspects of Russia's future. The political economy of the Russian defense sector is having an impact on everything from the cohesion of the vast Russian state to the likelihood that advanced Russian weapons or mass destruction technology will proliferate throughout the third world. How this particular social group reacts to crisis matters to all of us, not merely to theoreticians.

This book is in fact intended to be a bridge between political economy and international security studies, two areas of research that scholars have kept artificially separated for too long. ³ While many detailed and excellent studies of Russian defense industrial reform exist, ⁴ none is designed to speak to people from both traditions. In the following pages, I will discuss the relevant theoretical social science issues in more depth, and in the final section of this chapter, I will briefly foreshadow the factual findings and predictions of chapters 2 through 4, suggesting why and how these results may be useful to those interested more in policy than in theory.

Culture and Self-Interest

The question of how Soviet defense industrial managers reacted to systemic shock is tailor-made for a test of whether rational self-interest or cultural socialization better explains political and economic behavior. This is because the system these managers came from was filled with rules for social interaction that are markedly different from those that define successful behavior in a free-market economy. The system placed overwhelming importance on the need to meet or exceed the production targets set by the state plan every year. To accomplish this, managers needed to concentrate on two basic skills. First, they had to be able to bargain with state authorities to ensure that the plan they were given was one they were actually able to meet. The plan was not merely sent down from above as an unchanging directive. Instead, it was the result of negotiation and bargaining. Managers who were willing to work with state authorities got better deals than did those who went their own way. Second, managers needed to be able to cooperate with the groups of employees and colleagues who surrounded them, because success in fulfilling the plan depended on group performance, not individual initiative or productivity. Fundamentally, the Soviet system rewarded group effort and group cohesion, not individual achievement. Groups who exceeded plan targets were rewarded with bonuses and special access to scarce consumer goods. Managers needed to create group solidarity and a sense of group morale in order to get these benefits.

Now that system has evaporated. As the conspicuous consumption of the Moscow nouveaux riches and the prevalence of what one Russian observer has called "the siren call of predatory capitalism" show, ⁵ the new Russian business world of the early 1990s rewarded those who sacrificed group well-being and pursued individual wealth opportunistically and even violently. Following the social behavior patterns encouraged by Soviet society could have left one at a real material disadvantage in post-Soviet Russia.

Economic revolutions, such as the one Russia has undergone in recent years, give us a unique opportunity to assess how durable economic culture really is and how much socialization influences the choices people make. ⁶ In stable societies, it is hard to determine which goals motivate people. When the economic system does not undergo drastic change, it is often impossible to disentangle people's material self-interest from their emotional identification with societal norms of propriety and morality. This is because most societies reward their adult members materially for doing those things that they learned to do through socialization and education. For example, U.S. society has traditionally encouraged individual competitiveness in school, sports, and work. In turn, the U.S. political economy rewards individual achievement through such things as high salary differentials, career stratification, and (one could even argue) the use of a presidential, not parliamentary, political system, where the achievements and character of an individual candidate often outweigh the importance of party platforms. Japanese society presents a clear contrast to this. The Japanese school system encourages children to be oriented toward the group, and powerful political-economic networks in Japan ostracize those who as adults fail to practice group loyalty. ⁷ In both cases, an individual's material self-interest is best met by following behavior patterns inculcated by society since childhood.

Economic revolutions provide us with a before-and-after contrast that most stable societies cannot offer. In revolutionary circumstances, following old social norms is no longer the best way to get ahead, because the underlying economic incentive structures have changed. What effect, then, do economic revolutions have on the social behavior patterns established over lifetimes in previously stable societies? The existing literature's answers to this question fall into two categories.

The first category is made up of those who call themselves positive political economists. These scholars have tended to explain away culture and its attendant values and habits, viewing them either as window dressing or as tools to be used by those following the universal human pattern of self-interested materialism. ⁸ This school, which operates under the label of rational self-interest , argues that the most useful assumption to make about the behavior of people everywhere in the world, and especially about those among the economic and political elite, is that they act primarily to protect and expand their own individual wealth, property rights, and power over the distribution of resources. ⁹ By uncovering actors' underlying economic motives, this perspective claims to be able to explain most political behavior. Neither cultural attributes nor past socialization patterns should cause individuals to falter in their pursuit of material well-being. ¹⁰ Because Russian defense managers were powerful and well-connected actors in the Soviet system, they should have used the advantages they had (especially in terms of information) to seize opportunities during the transition era to enrich themselves as individuals. They should have made every attempt to adapt quickly to the demands of the largely unregulated market. Along the way, they should have discarded any old social obligations or ethical norms that no longer served their individual interests in the new system. ¹¹

In contrast, those labeling themselves practitioners of socioeconomics or historical institutionalism have argued that both the interests people pursue and the means they use to achieve them are influenced and changed by the social environments in which they live. Political and economic behavior is not limited to the search for wealth and power but includes such things as the upholding of social codes and societal values for their own sake and responsiveness to the demands of informal social networks. ¹² Members of this socialization  school argue that people's behavior is influenced and constrained not merely by objective economic, political, and legal structures but by informal behavioral norms and social customs that vary across cultures and societies. People are motivated to follow patterns of action that they learn are proper and socially acceptable through both the upbringing and education they receive as children and the experiences and rewards they gain as members of social networks throughout life. Hence the goals that individuals pursue are constructed by the social environment surrounding them, ¹³ and it would be a mistake to think that some kind of universal and objective notion of material self-interest can accurately capture their motivations. ¹⁴

From this perspective, social norms are "sticky," because they tend to condition people's identities and values and are thus likely to continue to influence people's behavior even as rapid environmental change occurs. ¹⁵ Over time, the culture changes, but in the short term, people should turn to their past experiences and socialization for advice about how to proceed. ¹⁶ Because Russian defense managers were socialized into Soviet-era behavior patterns that stressed group welfare and the maintenance of collective well-being over the achievement of individual goals and individual wealth, these patterns should have been maintained even as managers made efforts to adapt and survive in a changed environment. Other Russian economic groups who were not well socialized into Soviet-era norms, such as the old black marketeers who sought profits even under communism or the young who came to maturity in the late 1980s when copying Western-style commercialism was the social fashion, would be the ones to thrive in a system that encourages individuals to be materialistic and self-regarding. ¹⁷

The major point of contention between the two perspectives described above is the degree to which past socialization colors present behavior. From the rational self-interest perspective, the institutions surrounding people's lives merely constrain  the means individuals can use to achieve their given ends in the here and now, without changing their goals and preferences. Soviet defense managers were forced to follow the rules of the old game in order to get ahead when that was the dominant game in society. Now they should adapt in order to follow the rules of the new game of the market, following the siren call of capitalism and ignoring old obligations when they no longer further self-advancement. Under both systems, managers wanted to get ahead; it was merely the means for doing this that changed. From the socialization perspective, in contrast, institutions actually help to condition individuals' identities, thereby changing the goals and preferences they hold. ¹⁸ Soviet defense managers would be expected to have different goals and preferences from those of their counterparts in the West and as a result should not have made the same kinds of individual profit-maximizing choices that the average U.S. corporate executive might make in similar circumstances. Instead, Russian managers should have maintained the social norms and networks with which they were familiar and comfortable, even if that meant sacrificing opportunities for self-enrichment.

It is these two perspectives, then, that this study is designed to compare and test. While proponents of the two perspectives often argue against each other, they tend to portray their opposites in what we might call "straw man" terms, focusing their critiques on older or narrower scholarship that is easy to dismiss rather than on more subtle, nuanced, and hence convincing arguments. ¹⁹ This book tries to avoid that tendency and does not begin by taking a single perspective as its base. Instead it is designed to allow each perspective its own best say over the available evidence. By giving each perspective its due, a theoretical contribution can be made that adherents of both schools should take seriously.

My findings are based on evidence collected from sources reflecting a wide variety of geographic locales and military technologies throughout Russia. This variety means that these sources are likely to provide a good basis for understanding what has happened inside the "typical" Russian defense enterprise in the transition period. Indeed, the similarity of problems faced by defense enterprises across Russia has been striking, as I shall show in the chapters that follow. The sources I used include several Russian newspapers at the national level that frequently cover defense sector issues ²⁰ and (what turned out to be more significant) a number of Russian newspapers published at the local level, in cities with a heavy concentration of defense enterprises. ²¹ Included in this second group are papers from St. Petersburg (known especially for military shipbuilding), Zelenograd (which was created as a closed military electronics city and only recently opened to outsiders), and Arzamas-16 (the still-closed flagship city of nuclear warhead research and construction) and, to a lesser extent, those from the region of Nizhnii Novgorod (which houses a wide variety of defense enterprises) and the city of Zhukovskii (famous for its aviation institute and test facilities). Local newspapers tend to go into much more depth about the political and economic situations faced by particular defense factories and institutes than does the central Russian press. Beyond press analysis, this book reflects the results of interviews I conducted at the Nizhnii Novgorod Arms Fair in September 1994, as well as during visits to four defense enterprises in the Moscow region at that time ²² and at meetings with defense industrial representatives in Moscow and St. Petersburg during several visits between 1991 and 1994. Where examples from studies conducted by other researchers fill crucial gaps in the available information or provide additional support or challenge to these findings, I cite them, too.

In the next two sections, I will draw out the arguments made by the two schools described above, so that the value of each can be compared against the other. In the final section, I will return to the question of how our theories allow us to understand better the real-world consequences of Russian defense enterprise reform.

Rational Self-Interest: Structure and Goals

The rational self-interest school of positive political economy assumes that the goal of maximizing individual wealth and power is inherent in human nature. Ulterior motives are sought for any behavior that appears on the surface not to be self-serving. While different societies provide individuals with different paths for achieving wealth and control over resources, cultural attributes do not give people fundamentally different motives. A nineteenth-century clan leader from Kenya may have gained wealth and social power differently from the way a late-twentieth-century U.S. corporate executive does, but in both societies the end goals of the two people remain basically the same (even though they are couched in terms of different religious beliefs and social mores). ²³ Individuals want wealth and power, and those whose resource bases are the strongest will get the most of both. Actors in post-Soviet Russia, as everywhere else, are limited in their attempts to gain wealth only by the initial assets (such as wealth and information) that they bring to the game and by the formal constraints on behavior (such as enforced laws or their absence) that are found in the new system. ²⁴

This leads directly and easily to the first argument of the rational self-interest paradigm: Most individuals most of the time (and especially those who are among a society's elite, such as Russian defense enterprise managers) will act primarily to maximize their individual wealth and/or personal control over resource allocations. Self-serving explanations should be discoverable for the vast majority of economic and political actions taken by the vast majority of people . This means that rational self-interest arguments can be disconfirmed if instances are found where the desire to protect and expand wealth and property rights cannot provide a satisfactory explanation for the choices people make. If most people in a given social group give up wealth and material resources to pursue other goals, positive political economy cannot explain their political and economic actions.

In revolutionary circumstances, we should expect that those who held the most resources at the start of the game (in the case at hand, at the end of the Soviet era) will take advantage of new opportunities for wealth and power as they arise. The winners in any situation act to create the political, economic, and legal institutions that they believe will benefit them most in the future. ²⁵ What has been called "nomenklatura  capitalism," where the old Soviet Communist Party elite captured the property rights that permitted the acquisition of new wealth in the new system, comes as no surprise to the members of this school. Because reform originated at the top under both Mikhail Gorbachev and Boris Yeltsin, it was the people who were connected to the top who had the most political savvy and the best information networks to take advantage of fast-changing events. ²⁶ Because defense managers in the USSR were well represented in high-ranking positions (controlling nine state ministries and occupying prestigious positions in local and regional Communist Party organizations), they should have been well placed to take advantage of the reform processes. This is especially the case because managers already had partial ownership rights over state-owned capital resources in Soviet times; they had the power to make day-to-day decisions about how the property of the state enterprises should be used. ²⁷ During the transition period they should have used their existing access to capital to provide themselves with new paths to individual wealth and resource control.

This single argument alone is not specific enough to provide tests of some key questions. Two more issues in particular have to be addressed. First, when rational self-interested individuals face a trade-off between short-term and long-term material gains, how do they choose one over the other? What are the underlying conditions that (in economic terms) determine how heavily potential future gains are discounted, or, in other words, whether people would rather have access to cash now or a larger saved investment in years to come? The answer to this question will tell us what combination of the two self-interested material goals (immediate wealth and long-term resource control) the average person is supposed to pursue in particular circumstances. (It is essentially the same question that economists ask when they wonder why younger Americans spend more and save less of their income than older Americans do, or why the United States has a lower overall personal savings rate than Japan does.)

The question as positive political economists would frame it, is how does the incentive structure of the situation affect the degree to which the future is discounted? When people look at the economic and political environment surrounding them, how do they decide whether to put their efforts into getting short-term gains or instead into building long-term resources? The literature tells us that under conditions of great institutional uncertainty (a description that certainly fits the legal, political, and economic climate of Russia through 1995), rational self-interested actors should be oriented toward short-term gains, because there is little likelihood that delaying profits by making long-term investments will pay off. ²⁸ Defense enterprise managers in post-Soviet Russia should have maximized their immediate income, even at the cost of possible long-term economic benefits, because the future consequences of current behavior were unpredictable (and thus lacked what economists call "present value"). Contracts were not easily enforceable, nationalization of profitable industry was a distinct possibility, the taxation structure changed from week to week (often retroactively), and even the borders of the Russian state were contested. ²⁹ Opportunistic Russian actors in the 1992-95 period should have focused on getting while the getting was good, either spending their profits on immediate gratification or investing them in stable foreign countries.

Indeed, this appears to be largely what happened. The Russian Central Bank reported in mid-1995 that there had been $30 billion of untaxed capital flight abroad since 1990; although this exodus peaked in 1992-93, by August 1995, capital was still estimated to be leaving at a rate of $400 million per month. ³⁰ Russians without the means to send earnings abroad "invested" them in under-the-mattress dollar-currency stashes; the Ministry of Economics estimated in August 1995 that this untapped source of potential capital investment measured $20 billion. ³¹ Direct foreign investment in Russia remained relatively low during this period, and in the first quarter of 1995 actually fell 25 percent from the level achieved in the last quarter of 1994. ³² Some large U.S. companies were willing to take the risk and have in fact invested significantly in the conversion of the Russian defense industry. ³³ Yet a 1995 conference of U.S. corporate leaders in Moscow revealed "uneasiness" about Russian investments, citing "the lack of a connection between the taxation and economic policies of the government; the problems of certification, standardization, and licensing . . . ; the absence of [mechanisms for] defense of intellectual property; and all-encompassing corruption." Said one anonymous conference participant, "Given all that has been said here, only a lunatic would invest more than two dollars in Russia." ³⁴ This assessment was largely confirmed by an early 1996 report from the American Chamber of Commerce in Russia. ³⁵ According to the rational self-interest perspective, while particularly risk-acceptant individuals may be willing to invest in Russia's long-term business future, the average investor should not be willing to bear that risk and should instead be playing a game where what political economists call the "shadow of the future" is faint to nonexistent. And most major foreign investors in Russia are in fact big, diversified corporations; while the dollar amounts they have devoted to Russian businesses may seem large, they are probably a small fraction of the corporations' overall investment and planning portfolios.

This conclusion, that rational people should apply short-term thinking in their approaches to business at times of societal upheaval, is important theoretically because it tells us something unexpected. It says that in these circumstances, one's reputation in the wider community doesn't count for much. Building a reputation for honesty and quality workmanship can be seen as a kind of investment in the future, made at the expense of the higher immediate profits available to those who cheat people or cut corners. If people are interested only in gaining material wealth for themselves and not in doing what they believe is moral or "right," then when the future is heavily discounted, they will take advantage of each other to get ahead.

Intuitively, this might seem to go against the common wisdom of capitalist business practice. After all, anyone who wants to get ahead in U.S. business today knows that word-of-mouth advertising is often the best kind and that building customer loyalty is important. I argue, however, that this practice is rational only in a stable society. In an unstable society where the future is unpredictable and the rules are undefined, rational self-interested individuals will take whatever they can while they can and will even cheat if necessary. Consider, for example, what capitalism in the United States looked like during the era of cut-throat robber barons, or among patent medicine salesmen before consumer protection laws were implemented, or during Prohibition when competition commonly resulted in gangland warfare, or today, for that matter, when drug wars are fought on urban streets.

This insight provides us with a means for distinguishing between two explanations for why individuals choose behavior that is socially correct but costly. On the one hand, such behavior may reflect people's desire to follow appropriate social norms for their intrinsic emotional value (i.e., it may fit the theories put forward by the socialization approach). On the other hand, it may be seen as a long-term investment in the person's own reputation and thus in his or her own material future (i.e., it may fit the theories put forward by the rational self-interest approach). An example of where this matters is the well-known phenomenon of Japanese reciprocal gift giving between coworkers and supervisors. If such gift giving is expected by others in the business world, there are two possibilities for the persistence of this practice: Perhaps participants see it as the appropriate "way things are done," where the networks and actions involved bring intrinsic emotional rewards, such as enjoyment of tradition and the warmth of community, regardless of economic costs. Or perhaps each self-interested participant is caught involuntarily in this tradition's catch-22 net. Each individual might believe that breaking the tradition would leave him or her with more disposable income and might prefer that result but at the same time recognizes that anyone violating the rule would be ostracized from the Japanese business world and thus doomed to economic ruin.

In a stable society where rational self-interested people are concerned about the future economic payoffs of their current social behavior, there is no real means for distinguishing between behavior based on expected material gains and behavior based on the embeddedness of a tradition that everyone agrees is appropriate. But in an unstable society, such delayed reputational payoffs should have a minimal impact on self-interested calculations and maybe no impact at all. Social conventions should only be followed by rational self-interested people if the resulting social networks provide them with immediate, short-term access to resources. Long-term concern about future reputation appears unrealistic. Given the cataclysmic swings of Russian economic history (recall that the successful businessman of the Soviet 1920s, in the era of the New Economic Policy, was likely to be shot in the Stalinist 1930s if he had failed to emigrate) and the evident regime instability of the immediate era (including the attempted coup of 1991, the bloody parliamentary crisis of 1993, the Chechen civil war that began in 1994, and constant rumors that the government is shaky), the self-interested Russian had plenty of reason not to expend resources on an investment in future reputation.

As a result of short-term thinking, predatory behavior should have been dominant in society during the early reform period, including within the society of Russian defense enterprise managers. No one should have been able to place much trust in anyone else, even in old partners. At every opportunity, the temptation to cheat should have outweighed the perceived benefits of cooperation for the common good, given that the shadow of the future (in other words, concern about maintaining relationships tomorrow) was short. ³⁶ Each actor in any business relationship had to make a move in a competitive game where play was unlikely to be repeated over the long haul. Since economic instability might convince anyone at any time to cut his or her losses and run (going abroad or into the arms of the mafia, for example), no one should be trustworthy. It is in everyone's interest to take advantage of everyone else, unless such behavior threatens one's own immediate gain. (And in fact news reports from Russia by 1995 make clear that everything from pyramid schemes and hit killings to government graft and the betrayal of political allies was so common as to be ho-hum.)

There are only two exceptions to the rule that in times of economic turmoil everyone should cheat everyone else. The first exception is that people have to cooperate with those who can give them either immediate favors or immediate punishment. If a person's own future directly depends on someone else's actions, it makes sense to treat that second individual well. For example, managers might have to make a good impression on authorities who impose taxes or provide credits, on monopoly suppliers or monopsonistic buyers of their factories' outputs, or on those who control access to advertising.

Using this logic, economists have argued that when individuals trading in the market have reason to suspect that their partners may take advantage of their weaknesses and vulnerability, it is in their interests to institute a set of internal controls over this interaction by forming a single firm. ³⁷ By merging the economic interests of partners, the temptation of each to take advantage of the other is overcome. Hence rational self-interested actors in the uncertain situation of reformist Russia should be able to trust one particular kind of partner: those whose economic lot is tied inexorably to their own.

The second exception is that reputation did continue to matter in one area: the world market outside of Russia. Those operating businesses in Russia who have an important interest in maintaining their reputations in other, non-Russian contexts--for example, large Western conglomerates--need to be concerned about how their reputations follow them outside Russian borders. Short-term, rapacious gains in Russia would not serve the long-term interests of these corporations in other markets. Similarly, a Russian manager engaged in a business relationship with representatives of stable foreign countries may have an interest in building a good reputation abroad. Foreign business representatives might offer the manager the hope of future employment in a better environment should Russia fall to pieces. The manager's future prospects may depend on that contact. Pleasing a business partner from abroad might thus reasonably be viewed by a self-interested individual much as investing cash in a Swiss bank account would be: as a sensible and stable long-term investment.

It is only toward those Russian partners who can promise no acceptable counterincentive that predatory behavior should be common. This logic, then, provides the rational self-interest school with its second major argument: Reputation, the upholding of social norms, and the preservation of preexisting social networks should be decidedly secondary considerations for Russian defense industrial managers during this period, if they are considerations at all. Immediate personal wealth should not be sacrificed in order to uphold old customs or friendships. Reputation and friendship matter only matter when they involve those who have immediate power over the manager's future .

This argument provides an important means for distinguishing between the theories of the rational self-interest and socialization schools, because the socialization school argues that existing social networks cement trust between actors. ³⁸ If reputation mattered, then self-interested managers could use their past experiences with other people to gauge their trustworthiness. Rational self-interest scholars do argue that in the absence of developed legal institutions, personal trust can substitute for contracts as a means of establishing long-term business relationships without fear of predation, because experience provides information about the other players' likely strategy. ³⁹ But the underlying assumption of this argument is that people's strategies will remain constant, and this in turn requires a stable business climate that will endure for the foreseeable future. Trust depends on the likelihood of repeat dealings. If actors are oriented toward the short term, then trust should not be a primary basis for building long-term relationships, since everyone has the incentive to cheat in a context where the long term may never come to pass.

The second question yet to be answered from this perspective is, what does rational self-interest mean for group-oriented behavior? Do groups of like-minded individuals tend to cooperate for mutual gain, or instead do they compete against each other? Certainly an argument could be made that the survival and health of a particular group can benefit individual members in the long run. Yet most positive political economists in fact argue that the individual pursuit of self-interest often undercuts group interests. ⁴⁰ Self-interested individuals will recognize that they are acting within the confines of a strategic game involving competition against other self-interested people. This fact should make interest groups in Russia, as anywhere else, difficult to maintain because of what positive political economists call the "collective action problem." ⁴¹

Individuals face a collective action problem when they have to decide whether or not to make a sacrifice that contributes to the welfare of a large group. Each individual's contribution alone is by nature insignificant; it takes lots of individuals acting together to make a difference. But it is easier for each individual to sit back and let someone else make the sacrifice. Everyone in the group benefits from the efforts made by those who are generous, and those who don't make the effort can get the same advantages for free. The end result is that few people bother to make the necessary sacrifices, and the group ends up failing to get the result that would lead to a joint benefit. For example, it is not logical for a businessperson to spend his or her own time and money in political lobbying activity that benefits other businesses in a large industry, because the individual firm does not get any relative profit from this activity. And in any case free riders who contribute nothing to the group can still take advantage of the benefits supplied by those who commit resources to lobbying, thereby gaining a competitive economic advantage over the active participant by spending less but getting the same result.

According to this logic, most individuals join large-scale interest groups, or at least are active in supporting them, only when doing so is rewarded (or when not doing so is punished) by selective incentives. Selective incentives are benefits that accrue only to those who expend resources to join or costs that accrue only to those who do not. Such incentives must be provided by those whose interests in the success of the joint endeavor are much higher than that of the typical participant. There are many examples of this logic operating in everyday experience. For example, environmental lobbying groups in the United States issue glossy nature magazines to those who pay their membership fees and thereby provide them with a selective incentive for joining the group, a benefit received only by those who are members. Similarly, political parties provide special opportunities to meet their candidates at fee-per-plate dinners, and big campaign contributors are rewarded with political appointments. The same logic, used this time from the perspective of punishment rather than benefit, explains why striking coal-mine workers in West Virginia have sometimes posted the names and addresses of strikebreakers on telephone poles with the notation "Death to Scabs." ⁴² Those who continue to be loyal to the striking coal workers' group won't suffer, but those who don't stick by the group had better watch out. Only those who pay the costs involved in staying on strike (namely, lost wages) will get the selective incentive--protection--that is offered to those who remain true to the cause.

In each of these cases, group-aiding action is encouraged by the provision of selective costs or benefits. And while, of course, some individuals always exhibit altruism, the rational self-interest school sees these individuals as rare exceptions. Getting back to our case, defense enterprise managers as a large ⁴³ interest group (standard estimates indicate that there were somewhere between 500 and 2,500 defense enterprises in Russia in 1992) should not be a powerful lobby because few should bother to participate in lobbying activity, unless organizers of the lobby (possibly, government authorities themselves) ⁴⁴ could provide selective incentives to those who joined. What should matter most to the rational self-interested manager is profit opportunities and control over resources at his or her own enterprise, not the well-being of the sector as a whole.

This leads to the third major argument of the rational self-interest school: Given that Russian defense enterprises are very numerous and are competing against each other for access to scarce resources (such as state subsidies and contracts), the collective action problem should make a unified lobby hard to maintain. Cohesive lobbies should only be active when outside organizers can provide valuable selective incentives to encourage participation .

Socialization: Structure and Goals

Analysts from the socialization school tend to see post-Soviet actors as products of their own past environment. What these actors want, and what these actors do, is a reflection of the set of values inculcated in Soviet times. These values leave many actors unsuited for individual success under new conditions. Instead, old social networks and informal cultural institutions are maintained for their own sake, as group success is still sought. ⁴⁵ Those individuals who were most strongly acculturated into the old system are the ones who have had the hardest time adapting to change.

This school turns to the set of long-standing societal expectations or norms that surrounds each individual to explain the sources of economic and political action. These expectations are internalized by individuals who have been socialized into the society in question. Of course, following such norms can certainly have material benefits. For example, a good job and the prospects for promotion depend on following behavior patterns that do not disgust or offend one's peers and supervisors. However, the socialization perspective sees the primary motive for such behavior as being not an underlying desire to gain material wealth but instead as the desire to do what is appropriate and expected. ⁴⁶ Notions of appropriateness vary by society and continue to operate on the individual consciousness because of education and background history, regardless of where the individual finds him- or herself at the moment.

Most socialization scholars see change in these norms and habits occurring slowly and incrementally. ⁴⁷ A shock to the system can, of course, result in a disruption to this path of incremental evolution. ⁴⁸ Nevertheless, those who were socialized best into the old system should be the ones who have the hardest time adapting to that shock. One socialization scholar who has applied this perspective to the postsocialist economies argues that new, small entrepreneurial organizations unrelated to the old Soviet enterprises have the best chance for survival under capitalism, while the old Soviet-era dinosaurs will flail about, searching for a means to stay alive by referring back to the behavioral norms that they already know and understand. ⁴⁹

The socialization school bases its expectations on the continuation of well-established, Soviet-era behavior patterns, which should still have been operating throughout the transition era among those who had thrived under the old system, such as Russian defense managers. Anyone who had been among the managerial corps in Soviet times would have internalized the social norms that were taught in the previous era. And in fact, at least through 1995, most Russian defense directors, even those who were newly elected or appointed to the director's chair, had worked in their enterprises for several decades and had previously held some sort of upper-management positions there.

In order to determine what the old patterns of social expectations are, we need to turn to specific historical analysis. The socialization school's hypotheses, while based on a set of general principles, cannot be applied across nations and cultures as easily as those of the rational self-interest school. Yet once the cultural and institutional history surrounding a particular set of actors is known, the socialization school can make clear predictions about how that history will affect current action: old networks, old values, and old norms of proper social behavior will be maintained regardless of system change, at least in the short run. (And certainly the four-year period from early 1992, when the double shock of defense budget slashing and expected privatization occurred, and late 1995 would reasonably constitute a short run.)

To formulate the socialization perspective's arguments, I will foreshadow the institutional history of Soviet defense enterprises, which I will detail in the following chapters. A number of in-depth studies of the institutions surrounding Soviet enterprises in general and Soviet defense enterprises in particular have been completed over the years, giving us a solid basis from which to work. ⁵⁰ From the work of other analysts, we also know that the key pattern of social relations followed both inside factories and between various enterprises and governmental authorities is well described by the notion of paternalism. ⁵¹ In a paternalistic system, interactions are hierarchical and take place inside a basically noncash economy. Business relationships are based on the exchange and barter of emotional attention, favors, and concrete material benefits rather than on monetary payments. Within the enterprise, bartered items might include scarce consumer goods and services as well as job promotion; among enterprises and in interactions with government officials, bartered items might also include production equipment, raw materials and components, and policy favors. Each individual has a clear rank within the system, and personal mutual obligations connect each level of the hierarchy to the levels above and below it. The pattern of the hierarchy and its accompanying obligations guide decisions about which types of behavior are appropriate and expected at which times.

Four basic social networks undergirded the Soviet defense enterprise. Each of these was based on a similar combination of mutual dependency and paternalism. As noted above, everyone's primary goal was to pull together to meet or exceed the targets of the state plan. The first network, and the most clearly paternalistic, linked the director to his or her "collective" (the Soviet word used to describe all those employed by the enterprise). This was the bedrock of the Soviet economic endeavor, and it was to this network that the director owed primary attention. The director of a large enterprise was like the mayor of a small, close-knit, traditional village and was similarly obligated to oversee and contribute to his or her society's material well-being. In return, enterprise employees were expected to pull together to meet the plan, so that everyone got the resulting rewards.

The second network connected the enterprise subdivision manager with the employees in his or her subdivision. This was the network that seemed to have the strongest emotional pull for most workers. (Many of these subdivisions would later become the basis for privatized spin-offs from Soviet defense enterprises.) The subdivision manager was obligated to create a sense of cohesion and camaraderie within the subdivision collective. If such an atmosphere were created, the subdivision would work well together and would likely succeed in reaping the bonuses offered to those who overfulfilled state planning norms. Subdivisions competed against each other for those bonuses.

At the level connecting enterprises to outside bodies, there were two additional networks of obligation. While these may have had only an indirect influence on most employees, managers probably spent most of their time nurturing them. The first connected actors across a particular subsectoral ministry. (As already noted, defense enterprises were divided into nine sectoral ministries at the close of Soviet history. An example here would be the Ministry of Aviation Industry.) It comprised links between enterprise managers and ministry administrators, as well as those among managers of related enterprises. As I shall show in chapter 3, enterprise directors would have had reason not to be overly trusting of the intentions of their former ministerial supervisors once planning was abolished. Yet managers whose enterprises interacted because of ministerial connections would have had reason to turn to each other for mutual support as they entered the market. They would have formed linked supply and production chains and in Soviet times would have helped each other to meet or to bargain over the state plan.

The final network connected enterprises to municipal and regional bodies. It included ties between managers and the local authorities (an example here might be the Communist Party administration of Leningrad), as well as those among managers of nearby defense enterprises. ⁵² Enterprises and authorities within these local networks helped each other by lending out their resources when the need arose, once again so that everyone could meet or exceed the plan sufficiently. Large enterprises often helped to construct the surrounding cities where they were located.

Each of the four networks described above reflected a shared interest in joint economic success: fulfillment of the plan set by the state. If managers failed to mobilize whatever resources were necessary to meet the plan, then collectives, subdivisions, ministries, and regions all suffered. If the collective, the subdivision, the ministry, or the region blamed the manager for their suffering, then the manager would be less able to meet the plan in the future (and hence less able to gain bonuses), because the willingness of every level to share resources was necessary for the plan to be met. Furthermore, the manager's ability to get special access to consumer goods for both personal use and the collective as a whole depended on the cooperation of others in the circle. Each actor was connected to the others by ties of mutual dependence; the well-being of each depended on the others.

This interdependence led to the development of strong bonds of trust. For example, illegal market transactions were routinely carried out between sets of managers from different enterprises over long time periods. These transactions made it easier to meet and surpass plan goals and so allowed managers to achieve both private wealth and access to the bonuses that were handed out to factories that overfulfilled the state plan. ⁵³ The success of such schemes depended on collusion in lawbreaking: if anyone turned the group in to the authorities, then everyone lost. The operation was thus based on what was called the "circular guarantee" (krugovaia poruka ), which demanded that everyone participating knew and trusted the other participants. ⁵⁴

In the stable system that constituted the Soviet economy from about 1945 through about 1991, social interaction followed behavior patterns that may have been maintained both because they were considered appropriate and had intrinsic emotional value and because they served wealth-maximizing individual interests. The Soviet example of mutual dependence parallels the Japanese example of reciprocal gift exchange, cited above.

It was impossible in Soviet times to determine whether people acted as they did because doing so brought them individual material benefit or because it brought them the emotional and psychic rewards of fellowship and shared purpose. But the advent of the unregulated market, where predatory behavior is dominant and future rewards are uncertain, provides a means for testing whether or not the socialization school is right. Socialization scholars would argue that the habits based on old social networks should largely have continued through 1995 regardless of external economic and political circumstances. This perspective would hypothesize that, because people turn to the patterns they know for an understanding of how to react to new circumstances, defense managers in the new Russia should have acted to maintain trust and goodwill among these old in-groups and to continue paternalistic behavior patterns and existing social roles. Because it was the proper thing to do and because of the intrinsic value associated with them, old patterns of behavior should have been followed even if managers lost greater immediate individual profit as a result. Soviet defense managers' actions in the new Russia should have differed from those of, say, U.S. corporate executives in similar circumstances.

Arguments originating from the socialization school thus can be matched to those of the rational self-interest school concept for concept:

Managers act to maintain the health and well-being of their enterprise collectives, of the subdivisions they oversee, and of their ministerial and local networks, because all these are seen as important continuing obligations, part and parcel of the paternalistic social role managers were allotted. Managers will sacrifice personal wealth when necessary in order to help retain jobs, benefits, business orders, and other resources for those inside the krugovaia poruka. The closer the social circle is to the manager, the more it should matter.

Managers care a great deal about maintaining their reputations for trustworthiness inside these networks, as well as the reputation of their work in society. They will turn to trusted colleagues for mutual support when they face uncertain market conditions. It is important that they be seen as playing by the rules, so that their old social groups do not ostracize them.

Managers turn to their long-time colleagues to find mutually beneficial solutions to problems created by market pressures. No collective action problem prevents the formation of strong, voluntary lobbying groups and cooperative commercial structures, because trust-based networks are maintained for their own sake.

Table 1.1 summarizes the arguments to be tested in the chapters that follow:

Table 1.1   Comparison of Arguments to be Tested

Rational Self-Interest	Socialization
Defense enterprise managers are self-interested individuals who act to mazimize their own wealth and control over resources.	Defense enterprise managers value network maintenance and the fulfillment of established social obligations over individual enrichment.
Defense enterprise managers are unconcerned about societal reputation and thus focus on gaining short-term income in any way possible.	Defense enterprise managers are concerned about their reputations for caring for their employees, as well as about the glory of their work to society.
Collective action among directors is possible only with selective incentives; lobbies and cooperative business activity will be hard to maintain.	Cooperative trust-based relationships are upheld by directors for their intrinsic value; voluntary lobbies and joint business activity are common.

In some instances, the available evidence may not favor the arguments of one perspective over the other. It may turn out, for example, that managers could best meet their material self-interests by maintaining group loyalty, as in modern Japan, where economic incentive structures accurately reflect long-term socialization patterns. In this instance, then, the natural experiment of Russian reforms will not have had the shattering impact on people's economic lives that was originally predicted. Such a result would nevertheless be interesting in and of itself, even though neither of the two perspectives would be disconfirmed by the test, because the evidence would at least demonstrate that history is path-dependent. ⁵⁵ In other words, it would reveal that revolutions need not disrupt established social institutions as much as one might expect. This would support the literature claiming that national culture leads to variation in objective market structure, ⁵⁶ even though it would not indicate whether rational self-interest or socialization is the primary source of people's motives. Whether cultures ever matter at all is in fact a contentious issue in the political economy literature, because some scholars believe that all societies facing similar distributions of land, labor, and the natural resources necessary for the creation of capital should look alike. ⁵⁷ If unique Soviet patterns of economic interaction continue to allow individuals to maximize wealth in the new Russia, then even though those patterns may be based on underlying self-interest, understanding the impact of cultural institutions will be necessary for a complete explanation of outcomes.

The Real-World Value of Theory

Sometimes Western observers are tempted to conclude that with the collapse of the Soviet Union and the end of the cold war, Russian defense industry no longer matters. After all, the argument goes, Russia cannot possibly afford to rebuild a threatening military machine, and by all accounts Russian technology was the loser in the U.S.-Soviet arms race. Such a view is dangerously short-sighted, however. While it is true that a Russian juggernaut no longer threatens the outside world, this book argues that the possibility of Russian anarchy does, and that the struggle of defense managers to find a role for themselves in the new society may be one important determinant of the direction that the Russian polity takes in the future.

What does all the political economy discussed above have to do with international security? Why does it matter what motivates managers? Why not merely collect descriptive material about what is happening in the defense complex, without turning to theory? As I shall show in the chapters that follow, the theory matters because the arguments arising from the two theoretical perspectives I have described cause us to look at the situation faced by managers in new ways. By determining what self-interested people are likely to do in a given set of circumstances and by establishing how people socialized into a particular mindset look at the world, we can discern important behavioral trends whose existence and significance might otherwise be missed.

As I shall show, each of the three institutions described and analyzed in this book has vital implications for the choices managers make. As detailed in chapter 2, rational self-interest leads both managers and many workers to want to keep their enterprises open at all costs. Yet managers have made culturally induced choices about enterprise restructuring that have actually made it harder for those enterprises to stay in business. This means that state support continues to be necessary for enterprise survival, even as budgetary resources evaporate. This in turn can lead to violent protests at enterprises as workers express their frustration and attempt to attract state attention. It can also cause managers to search aggressively for outside buyers of enterprise products, leaving them with less reason to exclude criminals or rogue foreign states from their pool of customers. Yet the very fact that managers and workers are attached to their own individual enterprises also provides a lever for political influence by stable Western countries: enterprises vulnerable to a cutoff of Western trade and investment have an interest in maintaining Russia's cooperation with the Western world economy.

Chapter 3 argues that most managers identify more with local and regional interests and authorities than with those at the national level. Cooperating with provincial-level administrations maximizes managers' own self-interests while simultaneously reflecting long-standing cultural patterns of economic interaction. This gives the identification a double whammy, making it likely to endure for a long time in the future. Given the growth of regional autonomy in Russia, this has important ramifications for the Russian state's ability to control the space it occupies. In particular, it increasingly places in doubt the ability of the Russian state to direct its own foreign, economic, and security policies, as local authorities help their defense plants gain new customers.

In chapter 4, I describe how self-interested conflicts between market-oriented spin-off firms and workers at the enterprises they have left behind have challenged the traditional rules of social cohesion, integrity, and responsibility to authorities that were inculcated into defense complex employees. This situation presents ripe opportunities for organized criminals and terrorists to obtain unauthorized access to Russian weapons and technology. It may also cause the workers left behind to view Western investment in these high-tech spin-offs as exploitative, thereby fueling nationalist or communist political sentiment.

Understanding the combination of rational and cultural motives surrounding managerial behavior thus has important implications for the future of both the Russian state and international security. These findings should give Western policy makers cause for caution and concern. In fact at present a happy ending to the story of Russian defense enterprise reform does not seem possible. Decades of international experience indicate that the idealistic vision of Russian defense industry converting en masse to civilian production is extremely unlikely to be realized. The skills, equipment, and organizational structure necessary for successful market competition are simply too different from the skills, equipment, and structure that characterized Soviet defense enterprises. ⁵⁸ While it is likely that certain individuals or groups from within Soviet defense enterprises can (at least in theory) become successful long-term market competitors, they will only have the opportunity to do so if they are supported by state institutions and structures--favorable tax codes, enforceable intellectual property rights, fair rental markets, and a supportive environment for foreign investment--that Russia had not yet established when this book went to press. Establishing such institutions requires both economic resources and a great deal of policy maneuvering space, neither of which Russia appears likely to gain any time soon. In fact recent world experience (for example, with such Newly Industrializing Countries as Taiwan, Singapore, South Korea, and Brazil) indicates that such free-market entrepreneur-supporting institutions are most effectively created from scratch by relatively authoritarian states that can put down the political protest bound to arise in response to changes in resource distribution and as a result of economic nationalism.

Foreign arms sales may seem to provide an alternative arena for successful market adaptation by Russian defense enterprises. Yet the global arms market has been shrinking for the past several years, and countries that have established successful client relationships with stable weapons-producing states are unlikely to switch partners wholly or permanently. ⁵⁹ In the past, the USSR heavily subsidized its arms clients with low-interest loans and deals for barter rather than hard currency. While Russian arms exports apparently have increased substantially in recent years, ⁶⁰ a large fraction of those exports has been to states such as India and China who hope soon to replace many of their Russian arms imports with domestic production of Russian-licensed weapons technology. ⁶¹ Short-term arms export success thus may not translate into long-term orders for Russian enterprises.

The greatest number of potential long-term clients for Russian weapons exports may in fact be pariah or semipariah states that cannot buy their weapons elsewhere. But while by 1994 there were rumblings throughout various Russian governmental structures about the desirability of encouraging arms sales to countries such as Iraq and Libya, ⁶² the dangling carrot of Western financial aid has thus far prevented the official Russian acceptance of such alternatives.

Of course, the Russian state could always choose to let unproductive defense enterprises die. However, this option carries enormous political costs. Many large Russian metropolises are dominated by defense industrial sites, and dozens of isolated smaller cities are essentially defense company towns. In many of these areas, alternative jobs (outside of such basic home-based services as baby-sitting, clothes tailoring, or car repair) simply do not exist. Because most of the growth in the Russian economy has been based on foreign consumer good imports and domestic natural resource exports, the opportunities for attractive new employment tend also to be geographically limited, clustered around international borders and large mineral deposits. While the city of Moscow, a doorway to international trade and tourism, may be protected from the threat of instability that accompanies defense enterprise bankruptcy and mass layoffs, Siberia, the Volga regions, and the Urals are not. As I show in chapter 3, even Westward-leaning St. Petersburg appears to have felt the political lash of defense industrial decline.

Subsidies to unproductive enterprises cannot continue forever; they are likely to contribute to hyperinflation and economic instability, in turn hindering political stabilization. The fact that none of the alternatives is ideal and all of them carry the risk of either international or domestic upheaval and possible violence makes the future of Russian defense enterprises a pressing concern for all of us. The choices made by Russian defense managers and the political interaction of defense managers, workers, and local and national political authorities has enormous significance for the future tranquillity of a key region of the globe. A Russia pockmarked with regional political protest and economic instability, which would create a political and legal vacuum over a potentially huge swath of territory, arguably constitutes as much a threat to world peace as a Russia that consciously supplies advanced weaponry to pariah states on its periphery. Furthermore, Russian defense industrial enterprises contain the materials necessary for either legal or illegal conventional and nuclear weapons proliferation throughout the third world.

This situation results from strong institutional factors that no one in the outside world can control. Russia will have to reach its own solutions to these problems. But as I show in chapter 5, the actions of Western governments can help to make the underlying situation either better or worse. For this reason, an understanding of how both economic incentives and cultural norms affect the actions taken by defense managers will lead the West to make better policy choices.

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Endnotes

Note 1: Around 75 percent of Soviet defense enterprises were located on Russian territory. See Julian Cooper, The Soviet Defence Industry: Conversion and Economic Reform  (New York: Council on Foreign Relations Press, 1991), p. 21. Back.

Note 2: For discussions of how this divide permeates social science literature, see James N. Rosenau, "Before Cooperation: Hegemons, Regimes, and Habit-Driven Actors in World Politics," International Organization  40, no. 4 (fall 1986): 849-94; and Stephen Krasner, "Sovereignty: An Institutional Perspective," Comparative Political Studies  21 (April 1988): 66-94. Back.

Note 3: See Edward Kolodziej, "Renaissance in Security Studies? Caveat Lector!" International Studies Quarterly  36 (Dec. 1992): 421-38, esp. pp. 427-8, 433; Theodore H. Moran, "An Economics Agenda for Neorealists," International Security  18 (fall 1993): 211-15; James A. Caporaso, "False Divisions: Security Studies and Global Political Economy," Mershon International Studies Review  39 (April 1995): 117-22; and Robert Latham, "Thinking about Security after the Cold War," International Studies  Notes 20 (fall 1995): 9-16. Back.

Note 4: See Kevin O'Prey, A Farewell to Arms? Russia's Struggles with Defense Conversion  (New York: Twentieth Century Fund Press, 1995); Michael McFaul and Tova Perlmutter, eds., Privatization, Conversion and Enterprise Reform in Russia  (Stanford, Calif.: Stanford University Center for International Security  and Arms Control, 1994); Petra Opitz and Wolfgang Pfaffenberger, eds., Adjustment Processes in Russian Defence Enterprises within the Framework of Conversion and Transition  (Hamburg: Lit, 1994); and Lars B. Wallin, ed., The Post-Soviet Military Industrial Complex: Proceedings of a Symposium  (Stockholm: Swedish National Defense Research Establishment, 1994). Back.

Note 5: Leonid Zagalsky, "Gold into Straw," Bulletin of the Atomic Scientists  51, no. 5 (Sept./Oct. 1995):10. Back.

Note 6: It is important to note that both the rational self-interest perspective and the socialization perspective see people making reasoned choices about how to act. The debate between the two is over how the menu of choice is defined. The first views individualistic, materialistic behavior as natural and universal and thus as the dominant choice of people everywhere. The second believes that certain societies cause individuals to link their sense of well-being to their membership in (or even sublimation to) a group and a set of group values, leaving individualistic materialism lower on the scale of actors' priorities. Both perspectives could therefore fit comfortably into the procedural rational choice approach, which simply states that individuals choose to act in ways that they believe will allow them to satisfy their goals. For a clear exposition of what procedural rational choice entails, see William H. Riker, "Political Science and Rational Choice," in Perspectives on Positive Political Economy , ed. James E. Alt and Kenneth A. Shepsle (New York: Cambridge University Press, 1990), pp. 173-74. My book is not designed to test or challenge the broader rational choice perspective, because rational choice per se does not make assumptions about what people's preferences are. Instead, it examines two common but competing models of what people's preference structures look like. The argument here is over what individuals' goals are and how they go about trying to achieve them. Back.

Note 7: See Ronald Dore, "Goodwill and the Spirit of Market Capitalism," British Journal of Sociology  34 (1983), as reprinted in The Sociology of Economic Life , ed. Mark Granovetter and Richard Swedberg (Boulder, Colo.: Westview, 1992). Back.

Note 8: See, for example, Robert H. Bates, "Macropolitical Economy in the Field of Development," and David M. Kreps, "Corporate Culture and Economic Theory," both in Perspectives on Positive Political Economy . Back.

Note 9: Examples of scholarship from this perspective, which focus on a variety of geographical regions, include Robert H. Bates, Essays on the Political Economy of Rural Africa  (Berkeley: University of California Press, 1983); Douglass C. North and Barry R. Weingast, "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," Journal of Economic History  49 (Dec. 1989): 803-32; and Mancur Olson, "Dictatorship, Democracy, and Development," American Political Science  Review 87 (Sept. 1993): 567-76. Back.

Note 10: See Bates, "Macropolitical Economy in the Field of Development." Back.

Note 11: For support of the notion that this is exactly what Russian defense managers did, see Michael McFaul, "State Power, Institutional Change, and the Politics of Privatization in Russia," World Politics  47 (Jan. 1995): 210-43. Back.

Note 12: See Socio-Economics: Toward a New Synthesis , ed. Amitai Etzioni and Paul R. Lawrence (Armonk, N.Y.: Sharpe, 1991); and Sociology of Economic Life. Back.

Note 13: See Peter L. Berger and Thomas Luckmann, The Social Construction of Reality: A Treatise in the Sociology of Knowledge  (New York: Irvington, 1966). Back.

Note 14: Representative examples of scholarship under this paradigm include Dore, "Goodwill and the Spirit of Market Capitalism"; Richard Swedberg and Mark Granovetter, introduction to Sociology of Economic Life ; and Kathleen Thelen and Sven Steinmo, "Historical Institutionalism in Comparative Politics," in Structuring Politics: Historical Institutionalism in Comparative Analysis  (New York: Cambridge University Press, 1992). Although I cited Douglass North above as an author whose work reflects the assumptions of the rational self-interest paradigm, that work is ambiguous and difficult to categorize, because North has emphasized the influence of different mixes of objective structures and subjective understandings on economic behavior at various points in his career. The portion of his work that most clearly falls into the socialization perspective is "Informal Constraints," chapter 5 of his Institutions, Institutional Change and Economic Performance  (New York: Cambridge University Press, 1990), pp. 36-45. Back.

Note 15: For an example of such reasoning applied to state behavior, see Krasner, "Sovereignty." Back.

Note 16: Thrainn Eggertsson, Economic Behavior and Institutions  (New York: Cambridge University Press, 1990), p. 56. Back.

Note 17: For examples of the argument that managers socialized into the old norms cannot perform well under market conditions, see Kenneth L. Adelman and Norman R. Augustine, "Defense Conversion: Bulldozing the Management," Foreign Affairs  71 (spring 1992): 26-47; and Peter Murrell, "Evolution in Economics and in the Economic Reform of the Centrally Planned Economies," in The Emergence of Market Economies in Eastern Europe , ed. Christopher Clague and Gordon C. Rausser (Cambridge, Mass.: Basil Blackwell, 1992). Back.

Note 18: The contrast between institutional constraint over behavior and institutional conditioning of preferences is made by Krasner, "Sovereignty." Back.

Note 19: For example, Bates appears to condemn all "cultural theorists" who do not use game theoretic or collective choice models for their failure to recognize the power of individual choice but criticizes by name only those from the 1950s and 1960s who got their data wrong in rural Africa; see his "Macropolitical Economy in the Field of Development." Similarly, Swedberg and Granovetter make a relatively radical argument that economic institutions influence behavior based on their social construction of reality, but they choose to differentiate themselves from "the new institutional economics" only on the question of whether political power constrains economic efficiency, an issue where Bates and Weingast would share their stance, even though those two authors would fundamentally disagree with Granovetter and Swedberg on the role played by socialization in economic behavior. See Swedberg and Granovetter, introduction to Sociology of Economic Life , pp. 13-16. Back.

Note 20: Newspapers that report frequently on defense industry matters include Segodnia , Kommersant-Daily  , and Inzhenernaia Gazeta . Back.

Note 21: These newspaper searches were carried out at the U.S. Library of Congress, at the Centre for Russian and East European Studies at the University of Birmingham, and at the Newspaper Reading Room of the Russian State Library in Khimki. My search of some local newspapers (unavailable in the United States) was halted in mid-October 1994, when issues I requested at the Khimki reading room were suddenly and without explanation unavailable for perusal. Back.

Note 22: I visited these enterprises as a member of a group sponsored by the Stanford University Center for International Security  and Arms Control (CISAC). Some findings are from interviews conducted jointly by the CISAC group as a whole and are noted as such in the notes. Back.

Note 23: Robert H. Bates, Beyond the Miracle of the Market: The Political Economy of Agrarian Development in Kenya  (New York: Cambridge University Press, 1989). Back.

Note 24: See, for example, Robert D. Cooter, "Organizational Property and Privatization in Russia," in Law and Democracy in the New Russia , ed. Bruce L. R. Smith and Gennady M. Danilenko (Washington, D.C.: Brookings, 1993); McFaul, "State Power"; and Anders Aslund, "Russia's Sleaze Sector," New York Times , July 11, 1995. Back.

Note 25: See Terry M. Moe, "Political Institutions: The Neglected Side of the Story," Journal of Law, Economics and Organization , special issue, 6 (1990): 213-53. Back.

Note 26: For a non-Soviet example of this theoretical argument, see Bates, "Macropolitical Economy." For an empirical example of how such connections were used by members of the Soviet Communist Youth League, see Svetlana G. Klimova and Leonid V. Dunaevskii, "Novye Predprinimateli i Staraia Kult'tura" (New entrepreneurs and the old culture), Sotsiologicheskie Issledovanie , no. 5 (1993): 64-69. Back.

Note 27: Janos Kornai, The Socialist System: The Political Economy of Socialism  (Princeton: Princeton University Press, 1992), pp. 64-66; Gertrude E. Schroeder, "Property Rights Issues in Economic Reforms in Socialist Countries," Studies in Comparative Communism  21 (summer 1988): 175-88; Frederic C. Pryor, Property and Industrial Organization in Communist and Capitalist Nations  (Bloomington: Indiana University Press, 1973); and Jan Winiecki, "Large Industrial Enterprises in Soviet-type Economies: The Ruling Stratum's Major Rent-Seeking Arena," Communist Economies  1 (1989): 363-83. Back.

Note 28: See William H. Riker and David L. Weimer, "Economic and Political Liberalization of Socialism," in Liberalism and the Economic Order , ed. Ellen Frankel Paul, Fred D. Miller Jr., and Jeffrey Paul (New York: Cambridge University Press, 1993), pp. 86-87; and Cooter, "Organizational Property," pp. 67-68. Back.

Note 29: While some have argued that organized criminal protection rackets can serve as an alternate means for contract enforcement (and hence business stability) in Russia today, it is hard to imagine that organized crime as an institution, with its attendant gang rivalry and murderous techniques, would provide a basis for confidence in long-term domestic investment. See Jim Leitzel, Clifford Gaddy, and Michael Alexeev, "Mafiosi and Matrioshki," Brookings Review  13 (winter 1995): 26-29. Back.

Note 30: "Russia to Crack Down on Importers' Capital Flight," Reuters, July 28, 1995. Back.

Note 31: Lynnley Browning, "Russia Has New-Look Economy but Lacks Investment," Reuters, Aug. 10, 1995. Back.

Note 32: Penny Morvant, "Inflation 6.7% in June," OMRI Daily Digest , no. 128 (July 3, 1995). Back.

Note 33: For example, Rockwell International's chairman and CEO, Donald R. Beale, said in 1994: "We are taking proactive steps in forming alliances with many industrial enterprises in Russia in most of our major business areas. . . . We believe Russia will become a major player in the world market and we are building a solid foundation for the future" ("Rockwell Executives Visit Russia in Separate Delegations," PR Newswire Association, Mar. 31, 1994). Back.

Note 34: Ol'ga Romanova, "Sumasshedshie vkladyvaiut v Rossiu ne bolee 2 dollarov" (Lunatics invest no more than two dollars in Russia), Segodnia , July 15, 1995. The title is an editorial pun on the statement made by the anonymous Western conference participant. Back.

Note 35: The report cited, among other risk factors, "uncertainty in politics, lack of [a] legal base and stable tax system, inefficient and overzealous bureaucracy" ("Russian Lawmakers Hope for Interventionist Involvement," Kommersant , no. 3, Feb. 6, 1996, as reported in Foreign Broadcast Information Service Daily Report--Central Eurasia (FBIS-SOV) , Mar. 11, 1996, p. 53. Back.

Note 36: This proposition arises from the folk theorem of game theory, which states that in noncooperative games, it is only the expectation of long-term, repeated interactions that leads actors to cooperate in the short run so that they can develop reputations for cooperativeness that can maximize their long-term gains. See David M. Kreps, Game Theory and Economic Modeling  (New York: Oxford University Press, 1990), esp. pp. 65-82; and Robert Axelrod, The Evolution of Cooperation  (New York: Basic, 1984). Back.

Note 37: The first article to make this point was Benjamin Klein, Robert A. Crawford, and Armen A. Alchian, "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics  21 (1978): 297-336. For literature reviews on related issues, see Paul L. Joskow, "Asset Specificity and the Structure of Vertical Relationships," and Harold Demsetz, "The Theory of the Firm Revisited," both in The Nature of the Firm: Origins, Evolution, and Development , ed. Oliver E. Williamson and Sidney G. Winter (New York: Oxford University Press, 1991). Back.

Note 38: Mark Granovetter, "Economic Action and Social Structure: The Problem of Embeddedness," American Journal of Sociology  91 (Nov. 1985): 481-510, as reprinted in Sociology of Economic Life . Back.

Note 39: North, Institutions , pp. 34-35; and Robert H. Bates, "Contra Contractarianism: Some Reflections on the New Institutionalism," Politics and Society  16, nos. 2-3 (1988): 387-401. See also Robert O. Keohane and Lisa L. Martin, "The Promise of Institutionalist Theory," International Security  20 (summer 1995): 43-44. Back.

Note 40: See Bates, "Macropolitical Economy," for an argument about how opportunistic behavior lessens social efficiency. Back.

Note 41: Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups  (Cambridge: Harvard University Press, 1965), esp. pp. 10-12. Back.

Note 42: The author observed such notices along the Ohio River in summer 1992. This fits Olson's discussion of labor groups in ibid., pp. 66-97. Back.

Note 43: Ibid., pp. 53-65, notes that small groups can accomplish a great deal cooperatively, since the input of each member leads demonstrably to benefits for that member. Back.

Note 44: Bates, "Macropolitical Economy," p. 44. Back.

Note 45: Examples include Adelman and Augustine, "Defense Conversion"; James M. Buchanan, "Asymmetrical Reciprocity in Market Exchange: Implications for Economies in Transition," in Liberalism and the Economic Order ; and James R. Millar, "From Utopian Socialism to Utopian Capitalism," Problems of Post-Communism  42, no. 3 (May/June 1995): 7-14. Back.

Note 46: The notion that behavior is oriented toward doing what is appropriate has also been applied to the behavior of organizations; see John W. Meyer and Brian Rowan, "Institutionalized Organizations: Formal Structure as Myth and Ceremony," American Journal of Sociology  83 (1977): 340-60, as reprinted in Organizational Environments: Ritual and Rationality , ed. John W. Meyer and Richard Scott (Newbury Park, Calif.: Sage, 1992); and James G. March, "Footnotes to Organizational Change," Administrative Science Quarterly  26 (1981): 563-77. Back.

Note 47: Harry Eckstein, "A Culturalist Theory of Political Change," American Political Science Review  82, no. 3 (Sept. 1988): 789-804. Back.

Note 48: Some socialization scholars have adopted the term of paleontologists Stephen Jay Gould and Niles Eldredge, "punctuated equilibrium," to describe the results of a sudden revolutionary jolt. See Thelen and Steinmo, "Historical Institutionalism," p. 15, who refer to Stephen Krasner, who developed this model for change in state systems in "Approaches to the State: Alternative Conceptions and Historical Dynamics," Comparative Politics  16 (Jan. 1984): 223-46. However, Gould and Eldredge do not argue that such punctuation means that all organisms suddenly alter to adapt themselves to new circumstances. Instead, certain organisms that already existed on the margins find themselves well suited for the new niches opened by the shock, and they now thrive and multiply. Those who were well adapted to a system that no longer exists are more likely to suffer and die off. A clear explanation is found in Stephen Jay Gould, The Panda's Thumb: More Reflections in Natural History  (New York: Norton, 1980), pp. 179-85. Back.

Note 49: Murrell, "Evolution in Economics." Back.

Note 50: Key sources include Joseph S. Berliner, Factory and Manager in the USSR  (Cambridge: Harvard University Press, 1957); Blair A. Ruble, Leningrad: Shaping a Soviet City  (Berkeley: University of California Press, 1990); Peter Almquist, Red Forge: Soviet Military Industry since 1965  (New York: Columbia University Press, 1990); and Cooper, Soviet Defense Industry . Also see Julian Cooper's "The Civilian Production of the Soviet Defence Industry," in Technical Progress and Soviet Economic Development , ed. Ronald Amann and Julian Cooper (New York: Basil Blackwell, 1986). For an in-depth comparison of U.S. and Soviet business practices, see Paul R. Lawrence and Charalambo A. Vlachoutsicos, eds., Behind the Factory Walls: Decision Making in Soviet and U.S. Enterprises  (Boston: Harvard Business School Press, 1990). Back.

Note 51: Vladimir Gimpel'son, "Politika rossiiskogo menedzhmenta v sfere zaniatosti" (The politics of Russian management in the employment sphere), Mirovaia Ekonomika i Mezhdunarodnye Otnoshenie, no. 6 (1994): 5-20; and Clifford Gaddy, "Notes for a Theory of the Paternalistic Russian Enterprise," unpublished paper prepared for the annual convention of the American Association for the Advancement of Slavic Studies, Philadelphia, Pa., Nov. 1994. Also see Linda J. Cook and Vladimir E. Gimpelson, "Exit and Voice in Russian Managers' Privatization Strategies," Communist Economies and Economic Transformation 7 (Dec. 1995): 475. Back.

Note 52: among area specialists and therefore demonstrates the inherent subjectivity of the socialization perspective. For example, Tarja Cronberg, in "Enterprise Strategies to Cope with Reduced Defense Spending--the Experience of the Perm Region," in Adjustment Processes in Russian Defence Enterprises , p. 77, finds that there was little regional interaction among defense enterprises in the region of Perm' in Soviet times and calls the recent trend toward conducting regional business there an example of independent restructuring of contacts. However, the evidence that I will present in chapter 3 indicates that if the basis for these ties was not present in Perm' in Soviet times, then Perm' was an exception. Local or regional interaction appears to have been present throughout Soviet defense enterprises in general. Direct contracting between enterprises may have been a minor or nonexistent part of that relationship. (See Julian Cooper, "Regional'naia fokusirovka konversii oboronnoi promyshlennosti" [A regional focus on defense industry conversion], Voprosy Ekonomiki i Konversii , special issue, "Materials from an International Symposium on Investing in Conversion, May 25-26, 1993, Birmingham, U.K.": 61.) Yet local political networks and informal economic ties across enterprises were certainly crucial to enterprise success. Back.

Note 53: Gregory Grossman, "The 'Second Economy' of the USSR," Problems of Communism  26 (Sept.-Oct. 1977): 25-40, as reprinted in The Soviet Economy: Continuity and Change , ed. Morris Bornstein (Boulder, Colo.: Westview, 1981). Also see Mancur Olson, "The Hidden Path to a Successful Economy," in Emergence of Market Economies in Eastern Europe . Back.

Note 54: See John M. Litwack, "Legality and Market Reform in Soviet-Type Economies," Journal of Economic Perspectives  5 (fall 1991): 77-89; Berliner, Factory and Manager in the USSR , p. 192; and Steven J. Staats, "Corruption in the Soviet System," Problems of Communism  (Jan.-Feb. 1972): 40-47. Back.

Note 55: Path dependency is accepted by most of the socialization school and many members of the opportunism school. See Thelen and Steinmo, "Historical Institutionalism"; Swedberg and Granovetter, "Introduction to Sociology of Economic Life ; Bates, "Macropolitical Economy," p. 54; and North, Institutions . Back.

Note 56: In addition to the work of Ronald Dore on Japanese capitalism, such conclusions would lend support to the controversial work of Francis Fukuyama, Trust: The Social Virtues and the Creation of Prosperity  (New York: Free Press, 1995). Interestingly, Fukuyama (p. 28) calls Russia "a truly individualistic societ[y] with little capacity for association," where "both families and voluntary associations are weak." While Russians today may not join many voluntary associations, it is my personal observation that Russian parents are much more involved in their children's daily education than are parents in the United States and that adults in Russia are much more likely to include their parents and other members of their extended families in social activities on a regular basis than U.S. adults are. Back.

Note 57: For one attempt to make just this argument, see Gary S. Becker and Richard A. Posner, "Cross-Cultural Differences in Family and Sexual Life," Rationality and Society  5, no. 4 (Oct. 1993): 421-31. The authors present data indicating that marriage, bloodwealth, polygyny, and tolerance of homosexuality across so-called primitive societies are correlated with the production modes available to those societies. Back.

Note 58: See the historical summary and literature review provided by Murray Weidenbaum, "The Future of the U.S. Defense Industry," unpublished paper prepared for the 1991 annual meeting of the Western Economic Association, Seattle, Wash., July 1, 1991; and Bernard Udis, "Adjustments to Reduced Domestic Defense Spending in Western Europe," in Downsizing Defense , ed. Ethan B. Kapstein (Washington, D.C.: Congressional Quarterly, 1993). Back.

Note 59: Kevin O'Prey, The Arms Export Challenge: Cooperative Approaches to Export Management and Defense Conversion , Brookings Institution Occasional Papers, Washington, D.C., 1995, pp. 5-15. Also see Laure Després, "Conversion of the Defence Industry in Russia and Arms Exports to the South," Communist Economies and Economic Transformation  6, no. 3 (1994): 367-83; and Ethan B. Kapstein, The Political Economy of National Security  (Columbia: University of South Carolina Press, 1992), p. 155. Back.

Note 60: "Russian Arms Exports up 80 Pct," Associated Press, Mar. 5, 1996. Back.

Note 61: See Patrick E. Tyler, "Russia and China Sign a Military Agreement," New York Times , Nov. 10, 1993; Stanislav Fillin (deputy director of Rosvooruzhenie, the state arms export agency), "A New Stage in Partnership," Military Parade , Nov./Dec. 1994, p. 15; Aleksandr Koretskii, "Vooruzhat' soseda--pribyl'no. No do razumnogo predela" (To arm one's neighbor is profitable. Up to a certain point), Kommersant-Daily  , May 4, 1995; and Nigel Stephenson, "Russia Plans $3.5 Bln Arms Deals with India in 96," Reuters, Feb. 20, 1996. Back.

Note 62: For example, see the comments on Iraq and Libya made by General Sergei Oslikovskii, first deputy director of Rosvooruzhenie, as reported in Pavel Fel'gengauer, "Yel'tsin obeshchaet ne prodavat' oruzhie Iranu" (Yeltsin promises not to sell weapons to Iran), Segodnia , Sept. 29, 1994. Back.