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Six Things Every Economics Student Should Know About the Cold War

One of the benefits of growing old is that suddenly, there are areas of history you never had to study because you were there. If you’re a teacher, this has a downside: suddenly there are things which did not have to be taught because everybody knew about them but which now need to be taught -the basic structure of the cold war falls into this category. A surprising number of economics undergraduates seem to make their way through the school system while learning little to nothing about this period, so here is a short background note, to fix that gap.

The history of the cold war era is a long and complex topic in itself, and not one for a short blog post. (At the time of writing, there is a CNN series on youtube here: https://youtu.be/xmQ80DQpnO8?list=PLY7AwRiAaRrYMn5q53hi4_WUwdHhg-jck if you want to know more.) This note, simply aims to outline the most essential background facts, and to highlight some knock-on effect this relatively recent period in history has for those who study economics or begin to do research into economics now. So, here are six things you should know about the cold war:

1. What was it? -the general background

The term ‘cold war’ commonly refers to the period after World War II to approximately 1990. During this time, two military blocks, the Warsaw Pact, comprising the Soviet Union (Russia) and its allies on the one hand and NATO, comprising the United States and its allies on the other. Both blocks were ready to attack with nuclear weapons and ultimately refrained from doing so for the duration of the conflict (which is why you are still here to read about it).

To understand the origins of this conflict, it is necessary to go yet further back, to at least the end of World War I. It was then, that the first communist state -the Union of Soviet Socialist Republics (USSR)- was established in the Russian revolution of 1917. This revolution was established by Marx’ brand of communist ideology which also inspired communist parties in other European countries, led to unsuccessful attempts at establishing soviet republics in Germany and inspired a revolutionary union movement (Industrial Workers of the World) in the United States. Several industrial countries in their turn, supported the counter-revolutionary forces in Russia. From the onset then, Soviet Russia was in conflict with what is commonly known as ‘the West’. What needs explaining is why the USSR and the USA worked together before the cold war.

This answer is simple: Hitler! The western allies needed to work together to defeat Germany so they did. Having won the war, they fell out faster than a freshly married couple returning from their honeymoon.

The beginning of the cold war is often formally dated from 1947, the year of the Truman doctrine in which the US president Truman moved to contain growing soviet influence, after the USSR ‘encouraged’ communist revolutions in a number of eastern and central European countries. Its end is often dated in 1989/1990, since the Berlin wall (and the rest of the iron curtain) opened that year, although it would take until 1991 for the Soviet Union itself to disintegrate. In the 43 years in between, relatively little actually happened, at least in the centres of power. Both military blocks spent heavily on nuclear weaponry and maintained nuclear missiles ready for deployment. At the same time, both sides were aware, that any actual deployment would result in mutually assured destruction.

2. It involved systemic competition

Far from being an interlude of merely military rivalry, the cold war was based on ideological rivalries which in their turn implied competition between two economic systems. The soviet system, being based in Marxism rejected free markets and private ownership of capital. In practice, this meant, that production took place according to a government plan (five year plans were common) and prices were set as part of the administrative process. The value of the exchange rate, likewise, was administratively determined and currency trading was controlled by government.

In western countries, the economy ran largely as it does now, with prices determined in the market and currencies being traded freely in most cases. Exceptions did exist and government intervention in markets tended to be more extensive prior to the 1980s. In spite of this, economies in non-communist countries continued to be fundamentally market based.

This situation matters, not only because trade volumes were low, but because much of the world economy was effectively divided into two competing systems, each of which attempted to be comprehensively functional on its own and worked by different rules. Towards the end of the cold war, the socialist (i.e. soviet) alternative failed for reasons best discussed separately, and the former eastern block economies transitioned to market based systems.

3. The soviet block and the Soviet Union

It is important to distinguish the Soviet Union from the soviet block. The term Soviet Union describes the post-revolutionary nation state following on from the Russian Empire. The term ‘soviet’ (council) refers to workers’ councils which in theory formed the basis of the socialist republic’s political structure. The Soviet Union then was a federation of states, which each were organised as soviet republics, to form a nation state in what was the Russian Empire, later augmented by the Baltic states annexed during World War II.

While the Soviet Union was a nation state, the term soviet block refers more loosely to a group of mainly east and central European countries closely associated with the USSR. Some of these were members of an economic agreement: the Council for Mutual Economic Assistance (COMECON) as well as the Warsaw Pact as a military alliance. Other countries, like China or Albania, were also often considered part of the communist or eastern block without being members of either COMECON or the Warsaw Pact.

4. The rest of the world

The Western counterpart to the eastern block was not limited to the NATO military alliance, but is commonly linked with the Organisation for Economic Cooperation and Development (OECD, now a developed country club, but originating from an organisation dedicated to postwar reconstruction), the European Free Trade Association (EFTA) and the European Economic Communities (EEC) with member countries of the latter two organisations eventually moving into the European Union by the early 1990s.

The remaining, non-aligned, countries formed the third world. Note, that this term was not originally intended to be synonymous with poor or underdeveloped countries: the first world was the western block, which was challenged by the socialist block (2nd world) and those countries which had chosen to remain neutral or had not yet taken sides formed the third world. Many of these countries were underdeveloped, but Austria, Finland and Sweden were also originally considered part of the third world. Of these, some, like Austria, were members of EFTA. Yugoslavia, on the other hand was an openly socialist third world country refusing to join the soviet block.

5. The end

The Soviet economy and the economies of the soviet block more generally struggled under their own systemic inefficiency and under the increasing cost of competitive nuclear armament. The Soviet Union finally lost power with the opening of the Berlin Wall in 1989 and the old Soviet regime collapsed in 1991, following a failed coup against Soviet Premier Mikhail Gorbachev, who had tried to reform the Soviet system.

With the end of the Soviet Union, the constituent republics seceded to form independent nation states; among them: Kazakhstan, Uzbekistan, Tajikistan etc. in Asia and the Baltic states (Estonia, Latvia, Lithuania) as well as Ukraine, Moldova and Belarus in Europe. Other eastern block countries also fractured: Czechoslovakia peacefully split into the Czech and Slovak republics while Yugoslavia disintegrated after a civil war throughout the 1990s. Germany, on the other hand, ended its cold war partition, when the socialist part (the German Democratic Republic) joined the west German state (the Federal Republic of Germany).

6. What it means for data and empirical work

The cold war defined half a century of recent history and was directly linked to the choice of economic system. This clearly had a defining impact on the world economy, with a large, territorially defined economic block effectively opting out of the international market economy to create a large and largely closed alternative economy. The end of this situation in turn created a structural shock to the world economy. Studies of economic time series will usually have to take this factor into account, in particular if they are directed at international economics or at particular countries that were directly affected by the cold war transition.

In a very mundane way, there are consequences for the economic data series available, in international data sets in particular:

– the number of independent nation states changed substantially during the early 1990s. In particular, former Soviet and Yugoslav republics now started reporting national data series that did not exist beforehand.

– in comparative international data sets like the World Bank’s World Development Indicators or the IMF’s International Financial Statistics, many national series will only commence some time after 1990 for some countries, when longer series are available for other countries.

– for countries which transitioned from a planned to a market economy, long data series may be available, but the quality of the data, and the way they were recorded may often change at some point in the past.

This then is what economists should be aware of when it comes to the cold war as background fact: the parallel existence of distinct economic systems, a likely structural break for the world economy in the early 1990s and a pronounced change in the number of independent nation states around the same time.

The history of the cold war is of course much richer and much more nuanced than it would appear to be from this short note. It deserves much more extensive study in its own right. To those who need a quick summary in a rush, I hope to have given a short but useful background information on why this period in history matters for economics specifically.

Appendix:

Former Soviet Union (FSU) countries: Russia, {Baltic states: Estonia, Latvia, Lithuania}, {Eastern Europe: Belarus, Moldova, Ukraine}, {Caucasus: Armenia, Azerbaijan, Georgia}, {Central Asia: Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan}.

Former Yugoslavia: Bosnia & Herzegovina, Croatia, Macedonia, Montenegro, Slovenia Serbia.

Note: in the above listings I did not include or pay attention to disputed territories (Kosovo, Nagorno Karabakh etc.) I also did not care about official country names but used short names (‘country X’ not ‘federal people’s republic of X’).

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