What Can We Learn From the Five-Decade Socialist Experiment in Estonia?

The short answer: It didn’t work then, and the U.S. shouldn’t try it now

Matthew D. Mitchell and Peter Boettke. 

"Hulking, out-of-touch monopolies that dominate the economy, robbing both the worker and the soil. A new class of pampered corporate executive, blithely making uninformed decisions that affect millions. Aged and detached political leaders incapable of recognizing the inconvenient truths before their eyes. Masses gripped by materialistic obsession. Rampant corruption, ennui and addiction. And all the while, in the Nordic countries there is a better model, if only it could be tried.   

Is this a young American’s jaundiced view of late capitalism? Perhaps: Four in 10 Americans age 18-34 are so disenchanted with the U.S. economic system that they believe socialism would be better. But it’s also an accurate description of late socialist Estonia. We explore this experience, as well as Estonia’s inspiring turnaround, in our latest book, “The Road to Freedom,” co-authored with Konstantin Zhukov. What could America’s young socialists learn from this small country half a world away?

First and foremost, they can learn that real socialism does not work. We say “real,” because many in the West mistakenly identify the Nordic model with socialism. But the Nordic countries, after all, are more capitalist than socialist—just ask a Dane. 

Under real socialism, the state owns and operates the means of production. When Stalin dragooned Estonia into the Soviet Union in 1939, he promised that real socialism would deliver material abundance, economic equality and social harmony. The reality proved far different.

Stagnation

We can evaluate Estonia’s economic record under socialism by looking across the narrow Gulf of Finland during the same period. How did socialist Estonia stack up against capitalist Finland?

The two countries have much in common. They were both subjects of first Swedish and then Russian rule. They both fought for and won their independence following the October Revolution of 1917, whereupon they both became parliamentary democracies with the rule of law and relatively market-oriented economies. Besides this, they have similar climates, disease environments, geographies and natural resources. Finns and Estonians even share a cultural habit of referring to themselves as resilient or gritty (sisu in Finnish, jonn in Estonian).

But while Estonia’s leaders felt they had no choice but to accede to the Red Army’s demands in 1939—it outnumbered their own force 10 to one—the Finns took a different tack. They donned skis and fought off the Soviets in the “Winter War” of 1939-40. Though they lost territory and had to make concessions, the Finns retained their independence, allowing their citizens to preserve economic freedom.

Before socialism, in the 1920s and ’30s, the average Estonian had earned about 84% more than his Finnish cousins to the north. But by the end of the 1980s, he was earning less than a quarter of what the capitalist Finns earned. Even this dismal picture overstates Estonian prosperity, however. That’s because the official exchange rate—by which one Finnish markka was worth 6.86 rubles—overvalued the ruble. Due to the poor state of the Soviet economy, those who were able would avoid paying the official, overvalued exchange rate. If they could, they would use the black-market rate. And on the black market, one Finnish markka bought only 0.4 rubles. Using this alternative exchange rate gives a better picture of the relative purchasing power of the Estonians and the Finns. Using the black-market exchange rate, Estonians earned a mere 1.3% of what their Finnish neighbors earned.

Another way to compare living standards is to see how long Estonians had to work for basic goods compared with their Finnish neighbors. Before socialism, the average Estonian had to work about as long as the average Finn for basic necessities. But after the imposition of socialism, Estonians had to work twice as many hours as Finns to buy a bar of soap. They worked three times as long for a set of men’s clothes and five times as long for women’s clothes. There were chronic shortages of basic necessities: coffee, sugar, detergent, rubber, kitchen appliances and—above all—meat.

Estonians’ living spaces were 70% the size of Finnish living spaces, and their homes were less likely to be appointed with bathrooms, hot water or central heating. Estonian babies died at three times the rate of Finnish babies. And Estonia’s elderly individuals could expect to die nearly a decade earlier than their Finnish counterparts.

Inequality

Churchill once claimed that the “inherent virtue of socialism is the equal sharing of miseries.” But the truth is that miseries weren’t shared; the Soviet elite were immune to the privations of socialism.

The nomenklatura—elite bureaucrats and Party leaders—were entitled to shop in their own shops stocked with Western goods unavailable to the masses. They vacationed in their own resorts, relaxed in their own spas and hunted in their own hunting grounds. They had their own pension plans and their own healthcare. Some were exempted from taxation. And if they played by the rules, they could have passports and leave whenever they chose.

The shortage economy strengthened the position of the elite. Store managers, factory executives and planning authorities used their positions to pilfer goods and sell them on the black market, where prices were typically much higher than the official rate. Indeed, as George Mason University economist David Levy once explained, this phenomenon is one reason why there was a shortage economy.

But there were other dimensions to inequality. While Russia was just one of 15 (at one point 16) Soviet Socialist Republics, it was always first among equals. Russians got the best jobs and the best goods, and as a rule, the central plan tended to favor the center.

At the bottom rung of the socialist hierarchy were two entirely made-up classes: the “kulaks” and the “enemies of the people.”

Kulaks were not a coherent ethnic or social group. Most descended from serfs. And most had gotten their wealth because they worked hard and made wise choices. But to the Soviets, a kulak was anyone prosperous enough to own a farm, especially if he or she had the temerity to want to keep owning it. In December of 1929, Stalin had announced that kulaks would be “liquidated as a class.” His poet laureate, Ilya Ehrenburg, described the kulaks’ “crimes” in a Soviet-approved novel from 1934: “Not one of them was guilty of anything; but they belonged to a class that was guilty of everything.” To encourage this liquidation, posters were distributed with the title “We will destroy the kulaks as a class!” As the historian Timothy Snyder once put it, one featured “a kulak under the wheels of a tractor, a second kulak as an ape hoarding grain, and a third sucking milk directly from a cow’s teat.”

The kulak class was invented because its lands were needed for the realization of the collectivist dream. To justify the government’s seizure of these lands, the kulaks were demonized. And when collectivization failed to produce the prosperity that had been promised, the kulaks became a useful excuse. Whenever socialized agriculture seemed to be failing, state propaganda would blame kulaks for sabotaging it.

The category “enemy of the people” was even more pliable. It could apply to kulaks, capitalists, ethnic minorities, nationalists, internationalists, left deviationists, right deviationists, religious leaders, cultural icons or intellectuals. Above all, though, it applied to anyone who challenged the power structure of the Soviet state or Stalin himself. Of the roughly one million enemies of the people who were executed in Stalin’s great purges, many were true socialist believers.

Social Discord

Marx and Engels once stated that “the theory of the Communists may be summed up in the single sentence: abolition of private property.” To bring this theory to life, Soviet socialists confiscated large factories, small businesses, houses, wardrobes, cookware, cars and bicycles. And because, as Stalin himself once admitted, “A person is a person, he wants to own something for himself,” these things had to be taken at the point of a gun.

The property was supposed to go to “the people.” But somehow most of it ended up in the hands of Red Army soldiers, some of whom collected wrist watches by the half-dozen. The famous photo of Soviet soldiers hoisting the Soviet flag above the Reichstag had to be airbrushed to remove a second watch from a soldier’s wrist.

With the army came the secret police, the NKVD. When transliterated to Estonian, the acronym spelled the Estonian word for “coffin.” NKVD officers interviewed all Estonians over the age of 12, looking for anyone who couldn’t be trusted. This included successful businesspeople, intellectuals, Estonian patriots and those with “cosmopolitan” interests such as Esperanto or stamp collection.

In 1941 about 10,000 people, mostly city dwellers, were rounded up and sent to the “happier East,” as the Soviet press put it. It was the first of three mass deportations. Entire families were arrested, women and children separated from their husbands and fathers and sent to different parts of the vast country.

Tiia-Ester Loitme was 14 when she was deported to Siberia with her mother and three sisters, while her father was sent to die in a Leningrad prison:

I did not cry, because it was so unreal. You see, when you get up in the morning to go to school, you have a piano exam that day, and end up in a cage like an animal, you have to say that it’s bizarre. There was one person who screamed horribly throughout the whole journey. It was this woman who had been picked up, and she didn’t know what had become of her four small children. Her constant wailing the whole way there was absolutely chilling.

Half of the women and 94% of the men were dead within two years. They weren’t murdered. Instead, they were worked to death in slave labor camps. Between 1945 and 1948, slave laborers constituted up to 18% of the Soviet workforce.

In 1944 another 30,000 were rounded up. And in 1949, after Estonia’s farmers had refused to join collective farms, up to 60,000 farmers and their families were arrested, put in American-made Studebaker trucks and scattered across Siberia. Faced with such a terrifying prospect, nearly every other farmer gave in and joined a collective. Agricultural production collapsed, but the Soviets had achieved the dream of collectivization.   

The communist revolution had been fought in the name of the worker. But in Stalin’s factories, workers couldn’t be trusted. They were constantly surveilled and punished for minor infractions. Those who were 20 minutes late for work lost a quarter of their pay for six months. Those who refused a transfer were given up to four months in prison. “He who does not work, neither shall he eat,” as the Soviet constitution put it.

When one Estonian factory worker went missing, his friend and co-worker made the mistake of complaining about it at work: “So this is what they call Communist freedom. This is no longer a factory, it is worse than prison!” As if to prove his point, the friend was arrested the next day. 

In time, Stalin’s terror gave way to quiet suppression. The successor to the NKVD, the KGB, no longer rounded up tens of thousands. But it paid dissidents a visit, let them know that they were being watched and admonished them to get with the program. 

In 1980, Mart Niklus snapped 15 photos of the Estonian city of Tartu and smuggled them to Finnish students. The pictures showed Tartu’s crumbling infrastructure, dilapidated buildings, goats grazing in the city park and a radio tower used for jamming signals from the West. For his photographic crimes, Niklus was sentenced to 10 years of hard labor and another five in exile.

Because the state still owned the means of production, it continued to control the population. It owned the radio stations, the cinema, the publishing houses, the schools, the newspapers, even the Soviet version of the Boy Scouts (the Pioneers). It didn’t own artists, but since it controlled their access to the artistic means of production—paint, paintbrushes and museums—it could control what they painted. 

With its obvious hypocrisies and rank contradictions, socialism somehow made people smaller. It was supposed to create a new “Soviet man”: selfless, strong and supremely dedicated to the cause. Instead, it made men and women guarded and distrustful, isolated from their communities and living lies. If anything, they were more selfish, not less so. Petty theft was rampant, in part because the socialist ethos emphasized that everything belonged to everyone. In the face of pervasive shortages, Estonians commodified their friendships and familial relationships, using them as instruments to obtain what the command economy could not supply.

A common coping mechanism in the totalitarian state was to hide one’s true self. Some kept their true selves hidden nearly all their lives. An Estonian named Boris Ioganson was born to a family that had been designated “enemies of the people.” His father and grandfather had both been arrested during the Great Terror of 1937. Boris lived with his wife, Antonina, for 40 years without ever revealing this dark secret. It wasn’t until the 1990s that he finally worked up the courage to tell her the truth. When he did, Antonina revealed that her father had also been arrested because he had been designated a kulak, and that Antonina and her family had been sent to slave labor camps in the Gulag. Boris and Antonina had lived together for decades without truly knowing each other.  

Revolution

By the late 1980s, the Iron Curtain was beginning to crumble. Gorbachev was loosening his grip on the puppet states; with the repudiation of the Brezhnev Doctrine, the Red Army would no longer threaten these states if they rejected socialism. But while East Germans danced on the crumbling Berlin Wall and Poles opened up their economy, nearly 300 million Soviet citizens awaited their turn.

Gorbachev had no desire to preside over the breakup of the USSR or to permit its citizens economic freedom (as late as January 1991, the Soviet leader’s army crushed a demonstration in the Soviet state of Lithuania, killing 14 at the TV tower in Vilnius).  

But in the spring of 1987, the Estonians saw an opportunity. For decades, socialist central plans had exploited Estonia’s environment. Fifty million tons of shale—rich in radioactive thorium, uranium and radium—lay in heaps throughout the countryside, often catching fire, choking the air and poisoning the groundwater. When the central plan called for further extraction of Estonian’s relatively worthless phosphate, Estonians protested. And much to their surprise, they won: Soviet leaders backed down.

Next, Estonians began to test Gorbachev’s promise of “openness” by freely talking about Estonia’s illegal annexation and the secret protocols of the Nazi-Soviet Pact of 1939. Then, in 1988, 100,000 Estonians thronged to the Song Festival grounds in a spontaneous show of defiance and national pride that came to be known as the Singing Revolution.

The Estonians eventually gained their freedom in the chaos of the failed 1991 coup against Gorbachev. Then, under the leadership of a 32-year-old prime minister, they set about creating one of the freest nations on earth. They adopted a currency board and pegged the currency to the German Deutschemark. They reduced government spending. They consistently balanced the budget. They introduced the world’s first flat personal income tax and set it at half the average rate of others. They unilaterally eliminated all barriers to trade. They reduced regulations and made it easier to start a business. They privatized previously state-owned businesses and, when possible, returned property to its previous owners. By 2004, Estonia was the 12th-freest economy in the world, according to the Fraser Institute’s Economic Freedom of the World report.   

This freedom paid off. From 1993 to 2021, no other country in the world except Ireland managed to grow so fast and achieve such a high level of income. Estonians now earn twice as much as the average citizen of the former Soviet Union. At just 2.7%, the Estonian poverty rate is one-tenth that of the other former Soviet states. As a share of its population, Estonia has more startups and more unicorns (startups valued at $1 billion) than any other country in Europe. The perception of corruption is lower in Estonia than it is in the U.S. Once three times the Finnish rate, Estonia’s infant mortality rate is now lower than Finland’s. And the Estonia-Finland gap in life expectancy is rapidly closing.

Dream On

We will be the first to admit that the U.S. politico-economic system is deeply flawed, even pathological in some ways. It is good, necessary even, to dream of change. But daydreamers should appreciate that actual socialism—of the variety where the state owns and operates the means of production—was a nightmare. In fact, life in late socialist Estonia was not so different from the worst caricatures of modern capitalism.  

But the Estonians offer American dreamers a realistic model. To borrow a phrase from Hayek, it is a “liberal program which appeals to the imagination.” Contrary to Marx’s expectations, when it finally arrived, the revolution was against socialism, not capitalism. And contrary to everyone’s expectations, it was a mostly peaceful revolution. Astonishingly, the totalitarian regime that ruled over a fearful nation for half a century was felled not by bullets but by song.

In its place, the Estonians created one of the freest nations on earth. In contrast with others that had been trapped behind the Iron Curtain, the Estonian break from socialism was swift and bold. It avoided the long, fitful and often corrupt transition that bogged down so many other nations. This allowed reformers to maintain both the momentum and the moral legitimacy of their efforts.

Compared with late socialist Estonia, early capitalist Estonia is a towering triumph."