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Teaching Capitalism in the Last Days of the USSR, Part One

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Prelude

One night in October of 1990, I was awakened by a phone call from a man with a strong Russian accent who said: "Mr. Mariotti, this Mr. Shatalin. Chairman Yeltsin and I read an article about you in the Christian Science Monitor and we would like you to come to Moscow to take charge of a one-week seminar we are putting on for the top young children in the USSR."

Now I was excited, and I immediately accepted. Mr. Shatalin was pleased and said I would be hearing from Nasir Ashemimry. I knew Nasir -- he was a friend and mentor. The Russians had contacted Nasir first, and he was to be the coordinator of this project. Stanislav Shatalin, a former general, was the primary architect of the 500 Days Program.

The next morning Nasir called me: "Steve, this is big. We're going to Moscow next week. You and NFTE will be in charge of the youth BizCamp, and I'll be running the adult training." We were both so wound up that he could barely talk and I could barely listen. "The plan is that we're going to be signing an agreement with Komsomol, the Communist Youth Organization, and we're going to be putting in place their switch from Communism to Capitalism that Yeltsin is backing. It's called the Transition to the Market - the 500 Days Program." (Gorbachev, who was jockeying for power with Yeltsin at this time, was originally in favor of the program, but soon withdrew his support.) Nasir was almost yelling in his excitement: "We'll be working with the children of the political elite - and the top young chess players, the top young math students. It'll be our chance to teach market economy to the next generation of Soviet leaders." "It will be another October Revolution!" I added excitedly.

The following morning the Soviet Consulate called to say my tickets would be ready the following day and that we would be leaving on Saturday. Russell Kelly, one of NFTE's best teachers at the time, agreed to come with me.

We met Nasir at JFK for the flight to Moscow. Other Americans had been recruited for this project, including Anne Matthews, a well-known educator, and Wilson Harrell, the chairman of Inc. Magazine. On the plane, the true significance of this historic opportunity was sinking in. As a business educator, it was the chance of a lifetime. I was on the cutting edge of fundamentally changing the repressive economic beliefs of the Soviet Union.

Day One

We landed in Moscow on Sunday morning. Three KGB agents greeted us; later they became our official translators during the visit. We were then driven to the KGB training center, about 20 miles outside of Moscow. I realized that our driver was intoxicated. Almost everyone I met there drank to excess, often until they got sick. I tried to ignore the smell of alcohol that wafted from the front seat to the back.

We passed a monument -- in the form of a giant barricade -- commemorating the exact spot the Russians had stopped the German advance at the end of 1941.

We sped along the country roads in our powerful black sedan. Occasionally, an outdated car from the '50s limped along in front of us. With a loud honk and a hearty laugh our driver -- Yuri -- would zoom past it. He proudly announced we were going to the KGB Language Institute, "It is where our top people learn basic languages. It is state of the art."

The training facility looked like a spa. Inside it was drab and military. The rooms were dirty, cramped -- peeling wall paper and no shades on the windows. The whole place had the air of a rundown summer camp. There was no toilet paper or hot water. The food was tasteless -- just potatoes, water, and bread, but we all pretended to like it.

Leaving dinner early, I went to look at the classrooms. I wanted to be ready for the first day of school! They were no more "state of the art" than the sleeping quarters. If this was where the top KGB agents were trained, I wondered how powerful this Evil Empire really was.

Returning to the cafeteria, I discovered the KGB alternated between trying to terrify us and being overly solicitous. "In 1989 alone, we had been some 2,600 people had been executed for black marketeering," it was announced.

We realized that what we were teaching was illegal, and punishable by death. I remembered that Fred Koch, an entrepreneur from Texas, had gone to the Soviet Union in the 1920s to help build oil refineries. Lenin was implementing the New Economic Policy (NEP) then, to deregulate the economy. But things were soon to change.

When Koch visited Russia a few years later, he discovered that all his Russian friends and colleagues had been executed by Stalin's regime. He returned home despising Communism and became a thoroughly dedicated anticommunist.

As we sat in a small auditorium for the briefing, the Administrator handed out a list of rules for us to follow: no student can leave class early; no student can criticize the USSR or its leadership; any complaint from a student had to be reported immediately to Leonid, the head of the training facility, and so forth.

The presentation gave me a dark feeling. I returned to the cold room to organize my materials, eager for the morning class.

Days Two and Three

The next morning we were briefed yet again on our assignment. A hundred and twenty-eight children were shipped in from the Socialist Republics that made up the Soviet Union. The group included the son of the head of the KGB and the son of the former head of the Ukrainian Communist party, as well as, we were told, Boris Yeltsin's niece.

Russell and I divided the group into two classes of 64 students and for the next five days, with two KGB translators each, and with portraits of Marx and Lenin staring down on us from the walls, we taught the sons and daughters of the Communist leadership the essentials of starting a business.

On the first day of classes, the students were apprehensive of the Americans, who they had been taught to hate and fear. However, that evening we all had dinner together and everyone began to warm up to each other.

"The economics of one unit of sale," a basic building block of business, was my first lesson. We played "the trading game" to demonstrate the power of voluntary trade and the insights of subjective value. This exercise illustrated that each individual had a personal perception of the worth of any given item. This ran counter to the Labor Theory of Value, which established an objective value for any given item through centralized planning. The Soviet Union was proof that the Labor Theory of Value didn't work. I had the class fill out mock stock certificates as a way to teach "ownership." My students grasped this concept immediately. I could hear them talking among themselves about it. They went through 100 years of economic thought in twenty minutes.

For the concept of pricing, we held a mock auction for several watches. This illustrated how prices are a signal to both entrepreneurs and consumers about the supply of products and the demand for them. Not one student had ever heard of supply and demand, or seen the graphs of Carl Menger's great economic discoveries. Determining prices and value became a class essay. Almost every student wrote that prices were dictated by the government's standard labor value. Several times a day, I set out a five-minute drill on how to establish markups, to reinforce the necessity of making a profit. For the rest of the course, I had the students practice sales calls on each other in pairs. One would have a set amount of time to sell his or her product to a partner -- at a profit -- and then switch roles.

The idea of private philanthropy was another foreign concept to the class, but they were instructed to include a segment of "giving back to society" in their business plans. Natasha, a 15-year-old, put a provision in her business plan to donate ten percent of her profits to a local hospital to help breast cancer patients. It turned out that her mother had died from breast cancer due to a shortage of medical care.

By the end of the third day, each of the 128 students had formulated a business plan for a competition, but it was a disaster. Every single student had calculated an economics of one unit of sale based solely on the costs of materials and labor -- with no markup! One student created a donut business, with both herself and her mother as employees. Her labor was the equivalent of a dollar and her materials would cost about 25 cents, so she set the retail price of a donut at $1.25!

Sergei, the son of the former head of the Ukrainian Communist Party, spoke to me quietly in the hall during a break, out of earshot of the KGB men in the classroom: "Mr. Mariotti, we cannot do a markup, it is against the labor theory of value. Our families would be destroyed if we did that. That is what they did to my grandfather in the 20's." In Marxist theory, any profit was considered exploitative, even on the scale of one unit! "But why is everyone using the collective as a legal organization and not the sole proprietorship or corporation model?" I asked. "All ownership is evil," Sergei replied. I was stunned - not by the answer, but by comprehending the deep psychological harm that Communism had done to generations of children.

Angry at this, when I went back into the classroom, I took the pictures of Marx and Lenin off the wall and held them up to the students: "They were both wrong, wrong, wrong! You cannot help people if you do not make a profit. The way to end poverty is to create private ownership and political freedom." Dropping the pictures onto my desk, I stared at the KGB translator, who for a minute was silent, but in the end he had to tell the class in Russian what I had said. When he finished, the children just sat there in silence.

Read part two here.