Volume 9 Numbers 1/2

Winter/Spring 2000

 

Symposium on Postsocialist Pathways: Transforming Politics and Property in East Central Europe
By David Stark and Laszlo Bruszt
(Cambridge University Press, 1998)

Postcommunist Networking: Secret Agents, Mafiosi, and Sociologists
Laszlo Bruszt and David Stark

Since the publication of our book, Postsocialist Pathways, we have had the pleasure of seeing it reviewed in a number of journals and of hearing it discussed in various conference settings. We welcomed the criticisms raised in those exchanges because they proceeded from the assumption that, with all our limita-tions, we had seriously attempted to contribute to a better understanding of the simultaneous transformation of politics and property in East Central Europe. We enjoyed those exchanges, especially where they involved perspectives different from our own, because we learned that scholars who disagreed with our answers had, nonetheless, understood the questions we were posing and grasped the framework we were developing. While we left some of these debates still in disagreement on major issues, at least we had the pleasure of having participated in a scholarly dialogue. The reviewers in the East European Constitutional Review pose another kind of challenge, because they require us to respond to a process we might call inven-tive reviewing. That method begins with the invention of analytic and normative statements that have little to do with our book and then proceeds with the reviewers offering critiques of these invented state-ments, seasoned with unsubstantiated claims about our intentions. To work in the method of inventive reviewing, a lack of knowledge of the subject is no constraint since one can always fall back on the facile and ostensible truths readily available in mainstream views on the topic. The tone is set by Aviezer Tucker, who claims that our analysis of interenterprise cross-ownership networks is motivated solely by the desire to hide, or otherwise disguise, the predatory behavior of former apparatchiki and KGB operatives. He informs the reader that we have missed the "true character" of these networks because "here we are dealing with the communist cadres and nomenklatura, the secret police and the black marketeers." The other two reviewers continue in the same putatively scholarly vein. Venelin Ganev, equally inventive, after a review of the related literature, basi- cally repeats Tucker's major point with the aim of showing that our real intentions were to justify these truly evil forces. According to Tucker and Ganev, the story of postcommunist transformation is about the struggle of the evil forces of the past-euphemistically referred to by us as networks-against the angel of the radiant future, called hard-budget constraints. To his credit, the third reviewer, Jozef van Brabant, might have a more nuanced view about our networks because he at least acknowledges that some may be less than wholly venal. At one point in his review he complains that "nowhere is there mention of the fact that among asso-ciative networks inherited from state socialism some can play a constructive transformation role while others are anathema to democratization and marketization." But he may have read our book too hastily to notice that in several key places we carefully warned the reader about the double character of these networks. In introducing our discussion of associative networks, this is how we actually described our research question: "Strong networks are a resource but they are not unproblematically so. They have the capacity to be agencies of development-or rent-seekers depleting the public treasury and inhibiting economic growth. Under what conditions can states of relative strength recog-nize the coordinating capacity of networks of relative strength to unburden the state, thereby strengthening the capacity of the state to facilitate the effective moni-toring of these same networks? It is to this problem that we turn" (p. 129, emphasis added). Jozef van Brabant is an impatient reader. He is particularly impatient that we expended too much effort in our "treatment of the proper price of a state-owned asset." As we wrote in our chapter, "From Plan to Market or from Plan to Clan?" one of the central dilemmas facing policymakers in the privatization question was not simply about the price of an asset but about the evaluation of the assets of the state-owned enterprises. We point to the difficulties of such evalu-ation- especially in the initial months and early years of privatization. His observation that the value of an asset is simply the price that "a potential user is willing to pay for it" recalls the simplistic notions, operative in 1990, that valuation was straightforward: if you simply let the market decide, a fair price is what someone is willing to pay for it-ignoring the fact that capital markets did not exist and that privatization was portrayed by many, at the time, as one important step toward the creation of markets for productive assets. The point of our discussion of this aspect of the priva-tization debates was not to wave a magic wand, showing that we had the correct formula, but, instead, to illuminate the ways in which issues of justice and fairness were so salient in the public discourse at that time. As we predicted, policymakers who dismissed these concerns risked creating an aggrieved public that later might demand renationalization of illegitimately privatized property. The long-term result could threaten the very legitimacy of private property. Developments in Russia, subsequent to our writing, confirm the dangers that we anticipated on precisely this point. Van Brabant ignores these issues. And his dismissive gesture that, after all, "there is no 'just' price" invites the emergence of the very problems to which we alerted the reader. Whereas van Brabant is impatient about such nonsense as justice and fairness-wrongly character-izing us as advocates of a retarded market-Tucker and Ganev are outraged that we have committed the opposite blunder, wrongly characterizing us as advo-cates of the double-dealing, two-timing parasites who have stolen public assets. In their outrage that we have failed to see that all networks are evil, they impute to us the notion that all networks are beneficent. Ganev distorts our position when he complains that "both as an empirical claim and as a conceptual proposition the assertion that inherited networks neces-sarily play a positive role in postcommunism remains largely unsubstantiated" (emphasis added). On the contrary, we did not glorify these institutions. In the introduction to our book we cautioned: "Some of these recombinatory organizational innovations will fail. Others, perhaps even those that appear most monstrous from the standpoint of conventional orga-nizational theory, might thrive. Some will prove to be backward-looking strategies conserving the status quo. But we should not be too quick or too confident in our a priori ability to distinguish strategies of survival from strategies of innovation . . . survival can be the basis of innovation, and risk spreading the basis for risk taking. We shall also see that where public policy ignores these network properties and operates only in the categories of state and market, there risk spreading can turn to risk shedding" (p. 7). Nowhere do our reviewers inform the reader that our analysis of the Hungarian case offers an account of how, in the wild swings from market shock to statist interventions and back again in the early 1990s, unmonitored networks repeatedly raided the state treasury through bank bailouts and debt forgiveness. Our reviewers seem offended that we should mention the word "networks" with any adjectives other than "dangerous," or its like. They so deplore our exploration of the institutional arrangements under which networks might be brought into developmental strategies that they must portray us as naively assuming that such will always be the case. About our networks, van Brabant asks derisively ". . . Is it not too simplistic to presume that all will now act constructively to orches-trate the transformation . . . ?" (emphasis added). Willfully ignoring our repeated emphasis on the need for new institutions for monitoring, van Brabant char-acterizes our position as follows: "They assert that these networks were already present at the end of state socialism, and, given a chance (by being left alone?), they will transform themselves and many more of the remnants of state socialism. . . ." Nowhere do we make such claims. Our position is that networks were left out of the dichotomous categories of states and markets that have long dominated (and, as our reviewers' comments indicate, regrettably still dominate) the debates about comparative economic systems. We neither suggest nor even imply that they should be "left alone." In fact, we repeatedly stress that they must be brought in and made accountable. By themselves, networks are neither dangerous nor developmental. What is dangerous is to ignore them, analytically and in policy formulations. We wrote: "During both the state socialist and postsocialist periods, East European experience demonstrated that as long as official policies operate in the dichotomy of markets or hierarchy, associative networks will under-mine markets and states. Lest they remain shady, these networks must be brought out of the shadows of the domi-nant theories and policies. Where they are recognized, they can promote productive restructuring and provide a vital source of intelligence about real assets and liabilities, about mobilizable ties among organiza- tions, and about the possible synergies of their locally coordinated projects" (p. 194, emphasis added). Later in this chapter we stress that "chapters 5 and 6 [will] indicate that deliberative association functions most productively where heterogeneous types of social actors enter negotiations. Homogeneity increases opportunities for collusion and rent seeking. Heterogeneity in itself does not, of course, preclude an expanded circle of collusion, but it improves the chances that deliberations will have some degree of publicity and increases the likelihood of exposing egregious rent seeking" (p. 136). Finally, the last section of our book, "Extending Accountability to Economic Actors," again urges further research about the double characteristics of networks and about new ways of making them accountable. How can we explain the misrepresentations of both the question posed by our book and of its content? We can think of two interrelated causes. The first might be that the Cold War dualistic thinking of "states versus markets"-targeted by our book-is still so strongly with us that any attempt to depart from this ideological construct invokes instinctive and infuriated rejection by those who are prisoners of the Orwellian dualism of "markets are good, states are bad." For those with such a framework, we can understand that a book about the potential role of economic networks might look down-right silly at best, and dangerously, perhaps even corruptly, misguided at worst. Another possible cause might be a lack of knowledge of the literature regarding the varieties of economic coordinating mechanisms; of the rapidly growing literature on varieties of capitalisms; and of the debate about the impact of globalization on the divergent modes of economic coordinations. Whatever the cause, Tucker pretends to have some knowledge of these issues as he introduces our book: "In a larger context, the book promotes the view that the endorsement of capitalism does not imply the Anglo-American model of free markets. Viable alternatives, for example, the nonmarket capi-talism of Germany, Japan, and South Korea, can be emulated elsewhere. This opinion was popular a decade ago, among some sociologists, political scien-tists, and communitarian political philosophers, like Charles Taylor, who suggested a corporatist model of civil society. . . ." Tucker's assertion that the only alter- natives to a free-market economy are the nonmarket economies that were once popular (among sociologists and other vegetarians) indicates that he is unfamiliar with the literature on comparative capitalism. First, although in journalistic representations one can find references to something like the Anglo-Saxon free-market economy and the Japanese, German, and South Korean institutionalized market economies (not, as Tucker erroneously indicates, "nonmarket"), the scholarly debate on the differences among these models begins with the recognition that there is no such thing as a free-market economy, and that the difference between the Anglo-Saxon and the other models is in their mode of regulation. Stated briefly, whereas American and British capitalisms are strongly regulated by the state (Tucker might consult the insightful works of Cass Sunstein on this topic) and have weak self-regulative institutions, in the other countries named strong state regulation of economic activity is combined with the activity of robust "regu-lated self-regulations." Stated differently, whereas legal regulation in the American development preferred hierarchies over networks, in the other countries such self-regulations of economic actors were encour-aged- if not created-by the state, and their legal regulation largely differed from the Anglo-American regulative framework. In Tucker's so-called nonmarket economies, in fact, the economic troubles of the last decades have been partly linked to direct state inter-vention and partly to the inadequate regulation of the associative institutions. The adjustment that we see in the present, however, is not the deinstitutionalization of these economies-in order to make them free-market economies-but, instead, an increase of the financial accountability of these associative institutions. At the same time, it is precisely from these "nonmarket" economies that the US is importing network-type organizational practices (for example, the "just-in-time cooperative production system" from Japan, regional developmental networks from Germany, and so on) and the reinvention of legal regu-lative frameworks, such as those permitting banks to have holdings in nonfinancial institutions-features characteristic of the networked varieties of capitalism. Based on Tucker's Orwellian cognitive frame-work, under the rubric of networks he can see only the KGB, secret-police agents, communist appa-ratchiki, and black marketeers. We find it puzzling that an editor of a constitutional review, based in an American law school, could not draw on familiarity with constitutional debates on the role of economic networks in the history of American capitalism in the early twentieth century. This background knowledge might have allowed him to make an informed judg-ment about a book on the role of economic networks in postcommunist countries. Networks (known as "combinations" or "self-regulations" in the early-twentieth-century American legal literature) have been a major topic for American constitutional thinkers since the Sherman Act of 1890. It was around the time of the emergence of corporate capitalism that American firms, exposed to ruinous competition, undertook the formation of what they called "self-regulations," that is, trusts, cartels, pools, and other forms of associative institutions. These new orga-nizational forms were, in part, scarcely disguised price-fixing arrangements and, in part, attempts to attain some normative regulation of market behavior in order to arrive at what they called a "fair price." The external problem with these networks was that they frequently wielded their market power to exploit other economic actors and reduce or eliminate competition. The internal problem of these "trusts" was that actors within them could not trust each other. Unlike in Germany or Japan, where the state has used such regulated self-regulations for economic developmental purposes, economic self-regulations in America could not count on third-party enforcement of contracts. Consequently, they were prone to holdups. The Sherman Act (the first antitrust law), in trying to find a balance between ruinous free compe-tition and fair competition, was not intended to eliminate these self-regulations. Instead, it actually attempted to federalize the common-law practice that differentiated between reasonable and unreasonable forms of combinations in restraint of trade. In other words, it was based on the assumption that there are good networks and bad networks. This is how the Supreme Court understood the Sherman Act until 1904. Between 1904 and 1911, however, all the Court's rulings were based on the assumption that the Sherman Act was targeted against any and all kinds of associative forms, and it vehemently undertook to destroy them. Like Tucker and Ganev, the majority of the justices were for competition, free and unre-stricted. The minority view of the time was represented by Justices White and Holmes. According to them, not all forms of self-regulations were venal, corrupt, and inimical to the public good; and, in their view, the Sherman Act should not be interpreted as hostile to "every peaceable organization or combina-tion." Combinations, according to White and Holmes, were the only civilized alternative to industrial warfare and "Hobbesian chaos." The refusal to make a distinc-tion between good and bad self-regulations, resulting in a state-enforced "free competition," Justice Holmes argued, "would make eternal the bellum omnium contra omnes . . . the universal disintegration of society into single men, each at war with all the rest." Both of the dissenting justices represented a view that would become the majority view after 1911: recognizing the economic developmental potential of networks of firms and for the application of the "rule of reason." Only combinations undertaking unreasonable restraint of trade should be made illegal. All in all, whereas Tucker represents a late-nineteenth-century populist view on networks, our work is closer to the consensus of the post-New Deal era. Ganev also seems unfamiliar with the debates that have shaped, for decades, constitutional doctrines about the legality and the permissible scope of action of the different associative institutions of economic actors in the United States. While economic networks for Tucker are identical with a communist conspiracy, Ganev instead invents a supposedly "dominant schol-arly view" of "ugly," "Al Capone" networks. As pointed out above, Ganev and Tucker's perspectives have a close family resemblance to the outlook of late-nineteenth- century populists who, in the name of "enforced free competition," were against all forms of combinations and fought for the reestablishment of an American economy of farmers with equal economic power to everyone. We can only conclude that they would dislike the actual outcome of the constitutional debates on these issues and the resulting emergence of a corporate capitalism in which the state polices and regulates the (mis)use of economic power by self-regu-lations but does not prevent their coming about. Ganev, led by the desire to demonstrate that a scholarly work cannot say a good word about networks, undertakes an encompassing review of the literature. We admire his courage. He first invents an "Eastern European literature" to demonstrate that everyone who has ever written about the topic wrote only about rent seeking. He cites Erzsebet Szalai, Elemer Hankiss, and Jadwiga Staniszkis, students of the problem of the postcommunist elite (and not primarily concerned with problems of economic networks or economic restructuring), who, at the outset of the economic transformation, predicted correctly the great capacity of managers to convert their political capital into economic capital. The authors cited described cases of asset stripping by these actors, and our references to the potential dangers of uncontrolled networks are similar to their claims. What sets our book apart from their work is not "an assumption of managerial benevolence," as Ganev claims, but that we focus on economic institutions and ask the question under what conditions they can be made accountable and become units of economic restructuring. In the process of presenting our own research findings, we cite other scholars (Coffee, Grabher, Friedman and Rapaczynski, Ickes and Rytterman, McDermott, Orenstein, Seibel, and numerous others) who, unlike the students of the post-socialist elite, undertook to study the role played by different forms of governance and associative institu-tions in these countries. From different perspectives, all of them present a view of the role of the various associative forms that stresses, as does our approach, both the possibilities and the potential dangers of these forms of economic governance. Ganev cannot make a distinction between studies of the elite and studies on forms of economic gover-nance, but we cannot fault him for lack of imagination. In his review, he has invented a fictive "general litera-ture" about networks that "links networking to such ugly phenomena as the perpetuation of inequalities, concentration of profits, abuses of power, and chronic inefficiency." He invents this to demonstrate that the "truth is, however, that the hostility toward networks is grounded in detailed empirical research and careful observations. Stark and Bruszt offer no compelling reason for rethinking this dominant attitude." Readers would be wise not to rely on Ganev as their only source of information on network analysis. Not content to invent a book we did not write, he also feels compelled to reinvent the work of Granovetter, Evans, DiMaggio, Powell, Podolny, Uzzi, and others who have written insightful studies about network forms of organization, emphasizing their role in economic development; their capacity to solve problems of collective action and to produce goods that neither markets nor hierarchies are able to produce; and their role in reducing transaction costs in ways that markets and hierarchies can do but in a less satisfactory way. None of these authors has mysti-fied or glorified networks; but none would accept that the results of their empirical research has led to a supposedly "dominant" view that networks are ugly, hostile, and inefficient. Our book was written in the midst of an epochal transformation and in the face of theoretical blindspots that threatened any real understanding of the processes that were unfolding. In attempting to move the debate from the competing blueprints, recipes, formulas, and therapies of designer capitalism, we gave attention to the diverse starting points of the East Central European transformations. We showed that none of these experiments started from scratch, as it were. There was no tabula rasa. Instead, differences in how the pieces fell apart shaped differences in how new institutions were constructed from the ruins. In attempting to move the debate from its simplistic terms of "getting prices right," we shifted attention to the institutional preconditions for sustained economic reform and reorganization. In attempting to move the debate from an exclusive focus on the individual entrepreneur or the isolated firm, we suggested a rela-tional approach that emphasized mechanisms of coordination across the network properties of interde-pendent assets. In attempting to move the debate from how best to buffer centralized policy design from democratic politics, we emphasized that policymakers should be accountable and constrained, and we pointed to the need for dispersed deliberative forums. In attempting to move beyond the network metaphor, we conducted empirical research on forms of interor-ganizational ownership in Hungary, Germany, and the Czech Republic. And we demonstrated that, within an emerging East European capitalism bearing a particular family resemblance, the particular structures of these business groupings take distinctive configura-tions shaped by the distinctive political economies of the respective cases. As we have seen subsequently, our analysis provides theoretical and methodological tools for understanding recent developments in Russia, where financial-industrial groups-a distinctively Russian pattern of business networks-are emerging as one of the most important, unmonitored, organiza-tional innovations in that wild ride to an unregulated capitalism. We would have hoped that the inventive-ness of our reviewers might have pointed to these and other forms of inventiveness that we accurately predicted in our analysis. We are not enemies of inventiveness. Our book can be read as an appraisal of innovation, the inventive-ness of postsocialist economic actors in finding ways of accommodation and development while surrounded by weak markets and weak states. But although inven- tiveness by economic actors might be both a blessing and a source of decay, inventiveness in reviewing a book can only rebound against the reviewer negatively, not simply because other people might actually decide to read the reviewed book but also, and primarily, because inventive reviewing is an indulgence that undermines the conditions of scholarly debate.

Laszlo Bruszt is an associate professor in the department of political science and the former academic prorector and acting rector of the Central European University, Budapest. He has published exten-sively on the political sociology of state socialism and the political and constitutional problems of creating market economies. David Stark is the Arnold A. Saltzman Professor of Sociology and International Affairs and chair of the department of sociology at Columbia University. His recent publications include "Ambiguous Assets for Uncertain Environments: Heterarchy in Postsocialist Firms" in The 21st Century Firm: Changing Economic Organization in International Perspective, edited by Paul Dimaggio (Princeton University Press, forthcoming) and Restructuring Networks in Postsocialism: Legacies, Linkages, and Localities (Oxford University Press, 1997), coedited with Gernot Grabher.

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