MAY 10, 2018 | HISTORY
OF ECONOMIC THOUGHT
200 years after Marx’s birth,
a look at how two economists sought to reconcile his idea of common ownership
with market mechanisms
A century ago this February
the British Labour Party proclaimed its conversion to socialism. By committing
itself in Clause IV of its 1918 constitution to the “common ownership of the
means of production, distribution and exchange,” Labour, in the eyes of most
observers, had announced its birth as a truly socialist party. But what exactly
did the party hope to do with the means of production once it had
socialized them? On this point answers were scarcer. The author of Clause IV,
the Fabian leader Sidney Webb, spoke of a comprehensively planned economy in
which the role of markets would be strictly minimized. Other party
intellectuals, such as John Hobson and Barbara Wootten, advocated a more
“liberal” socialism, with a mixture of plan and market.
But a strange lacuna loomed
over the whole discussion, for as a historian of the party’s economic debates
points out, “despite the near universal dedication to the rhetoric of
‘conscious and deliberate direction’ [of the economy, through planning] few had
any specific ideas as to what exactly this implied for actual economic policy.”
The prevailing view seems to have been that the precise content of a “planned
economy,” though admittedly hazy at the moment, would come into focus gradually
and through trial and error, in the course of constructing one. That is why
even Western socialists distrustful of Bolshevik methods, like the Fabians,
looked hopefully to the newly birthed Soviet experiment — expecting, if nothing
else, a wealth of practical lessons.
Seventy years later, on the
eve of the Soviet collapse, two Polish economists who had spent a lifetime
studying that experiment compiled the lessons they drew from it and published
them in a book titled From
Marx to the Market. Włodzimierz Brus and Kazimierz Łaski had been leading
figures in the fleeting golden age of postwar Polish economics, which thrived
under the reform-minded Communist government from 1956 to 1968. After that
year, when the regime swung to a posture of repressive conservatism and open
antisemitism, the two academics, both Jewish, left the country and settled in
the West. In the intervening period, they had stood at the center of reform
debates, serving as senior policy advisers, publishing widely translated works
on the economics of planning, and working closely with the Marxist-Keynesian
economist Michał Kalecki, whose 1955 return to Poland they sponsored.
Few were better placed to
offer a mature judgment on the seven decades of the Communist economic
experiment. But they offered something else as well: a promising vision of a
feasible socialism.
Under the classical command
system inherited from the Stalin era, a single overriding objective was imposed
on individual enterprises in the Eastern Bloc: “plan fulfillment.” What
resulted from that objective was a series of symptomatic behaviors by firm managers
that, while individually rational, yielded dysfunctional economic performance
in the aggregate. For example, there was the so-called “minimax” strategy.
Since shortfalls of input deliveries were by far the most common reason for
firms’ failure to meet their output targets, enterprise managers during
the ex ante bargaining that led to the formulation of the plan sought
assiduously to minimize the output targets they were expected to deliver while
maximizing the input allocations they claimed to need. More broadly, firms
hoarded inputs to guard against the danger that they would run out and find
themselves unable to hit their output targets. But while individually rational
for managers, “minimax” behavior was collectively irrational for the system as
a whole: since one firm’s output shipments were another firm’s input
deliveries, pervasive input hoarding led to chronic output shortfalls that
cascaded through the economy, manifesting in shortages and bottlenecks.
Then there was “priority
adjustment,” which involved managers choosing, among the plan’s conflicting
objectives (quantity, quality, variety, etc.), whichever ones could be most
readily fulfilled. In practice, the favored priority was usually the output
target — a pattern satirized in the old Soviet joke about the factory that was
assigned to produce 10 tons of sewing needles and ended up delivering one
gigantic needle. Product quality and variety in the planned economies were
generally kept to minimum acceptable levels.
Finally, managers in the planned
economies exhibited a marked aversion to change. Anything that heightened the
uncertainty of input supply was unwelcome, and this is always the case with any
sort of new product or process innovation. As the American economist Joseph
Berliner found in his landmark study of Soviet innovation, new products and
processes tend to require new and unfamiliar inputs, as well as larger volumes
of them to accommodate the necessary tinkering and experimentation. Input
suppliers often must be asked to make custom modifications to their products, a
nuisance that can impede the suppliers’ ability to meet their own output
targets. And new products often turn out to be uneconomical in their intended
uses yet highly effective in other, unexpected uses; yet to allow this sort of
serendipity to play out freely would completely unravel the coherence of the
plan. All of this made systematic innovation impossible.
After Stalin’s death and the
loosening of ideological controls, economics experienced a rebirth in the
socialist countries — especially in Poland. The result was emergence of a
cohort of reform-minded economists who bemoaned the command system’s
overcentralization and urged a wider scope for the use of prices, profits, and
other “market-like” metrics while preserving the principle of “socialist
ownership” — that is, collective ownership of the means of production. Brus’s
1961 book, later published in English as The Market In A Socialist Economy,
served as a sort of economic manifesto for the movement.
In the 1960s and 1970s,
halting experiments in this direction were half-heartedly undertaken in a
number of socialist economies, including the Soviet Union itself. But Hungary
pushed this line of reform further than all the others. Under the New Economic
Mechanism (NEM) inaugurated in 1968, Hungarian firms were still owned by the
state but were no longer subject to formal output quotas or input allocations.
In fact, there was no longer any national “plan” specifying physical production
targets at all. Each firm was still attached to a state ministry, which had
sole power to dissolve, merge, or reorganize it, and the ministry still
determined the firm’s permitted “sphere of activity” (i.e. industrial sector or
sub-sector). Ministries also wielded hiring, firing, and pay-setting power over
firms’ top managers. But enterprises now had to acquire their inputs and sell
their outputs on the open market, with the state, in principle, guiding the
economy and capital accumulation solely through macroeconomic means — that is,
through control of taxes, interest rates, subsidies, and the like. The command
economy of the Stalin era was a thing of the past.
The results were a
disappointment. But, not a complete disappointment: any foreign visitor to
Hungary in the 1970s could see a marked improvement in the quality, and variety
of consumer goods now that firms had to pay attention to cost and demand. Yet
innovative activity was still nonexistent and shortages persisted. Hungarian
economists were nearly unanimous in finding no qualitative change in
the overall operation of the economy. What had happened instead was a shift
from “direct” to “indirect” bureaucratic control, a situation in which “the
firm’s manager watches the customer and the supplier with one eye and his
superiors in the bureaucracy with the other eye,” as the eminent Hungarian
economist Janos Kornai put it. Under the new dispensation, a sort of “financial
tutelage” replaced physical planning, in the terms of economist David Granick.
Enforced through special taxes and subsidies imposed on individual firms on a
discretionary basis, along with informal quotas, licenses, price controls, and
so on, this financial tutelage largely negated whatever autonomy firms were
supposed to wield under the New Economic Mechanism.
By the time Brus and Łaski
wrote their 1989 book, a consensus had formed among Hungarian economists that
the root cause of this puzzling persistence of bureaucratic control was the
absence of a capital market. The NEM had envisioned the use of market
mechanisms to govern decisions about the use of existingproduction
capacity in product markets. But decisions about quantitative or
qualitative changes in production capacity, requiring the
mobilization of factors of production, were still supposed to be a
matter for national planning authorities to decide.
Yet it soon became clear that
these two features of the system were in contradiction with each other: in the
absence of a capital market, even decisions about the use of existing capacity
in product markets could not sustainably be left to autonomous firms. As Brus
and Łaski observed:
If a currently unsuccessful
enterprise is prevented from attempting to raise capital in the market in order
to restructure its operations, including branching out into other more
promising fields, or cannot be taken over by a more dynamic firm which sees
latent opportunities, strict application of the market rules of the game would
actually lead to gross inefficiencies: not only would those enterprises unable
to recover go out of business, but also those with good prospects although in
temporary difficulties.
In effect, the state was forced to
intervene. Non-intervention “would push an unduly large number of enterprises
into bankruptcy,” the Hungarian economist Marion Tardos wrote at the time; and
without a capital market, there would be no one to buy their assets once they
had been liquidated.
Here is where Brus and Łaski
made their most original contribution. At a time when the winds of history in
Eastern Europe were blowing at gale force toward a full embrace of free-market
capitalism, the two economists proposed an effort to place market socialism on
firmer foundations, through the establishment of a socialist capital market
mechanism. But how could Sidney Webb’s hallowed “common ownership” be
reconciled with fragmentation of that ownership — a logical
precondition for the buying and selling of financial and control rights over
productive enterprises?
As Brus and Łaski put it, what
was needed was “a firm separation between a number of roles hitherto performed
by the socialist state in such close interconnection that they have come to be
regarded as indivisible.” The role of the “owner state” must be clearly
separated from the state’s role in levying taxes; in “setting business, health,
safety and other standards”; in serving “as the center of macroeconomic
policy”; and in dealing with all those societal problems “which cannot be
defined in profit-and-loss terms (public goods, externalities).” All these
roles were vital, Brus and Łaski believed; unlike many of their Eastern
European colleagues in the 1980s they were no laissez-faire enthusiasts, and
Łaski soon became a vehement critic of the IMF’s structural adjustment policies
in Poland. But the legal basis of the state’s economic planning must be
grounded in the state’s role as the democratic guarantor of the public will —
not in its proprietorial interest in the productive infrastructure.
Although Brus and Łaski
advanced these ideas as a path for reforming existing socialist economies, it
is possible to imagine a transformation to such a system from the starting
point of a modern capitalist economy. Suppose that a democratically constituted
Common Fund were to carry out the compulsory purchase of all financial assets
owned by households: stocks and bonds, but also mutual funds and other wealth
instruments. Payment for the assets would be deposited in households’ bank
accounts — with ownership of those banks now in the hands of the Common Fund
itself. At the end of this process, all private financial wealth balances would
represent the liabilities not of mutual fund companies or other private
securities issuers, but of the Common Fund. Meanwhile, the firms that make up
society’s means of production would now constitute the Fund’s assets, and could
be allocated among newly constituted socialized investment funds. These funds
would manage their portfolios on the Fund’s account, rather than the account of
private owners. And newly formed private businesses could, in time, be sold
into this socialized capital market (nudged along by incentives favoring such
sales) to ensure that it remained the predominant owner in the economy.
Such a system would make it
possible, as Sidney Webb wrote in Clause IV of the Labour Party constitution,
“to secure for the workers by hand or by brain the full fruits of their
industry and the most equitable distribution thereof” as well as “the best
obtainable system of popular administration and control of each industry or
service.” Workers, in other words, would be able to obtain a far greater degree
of managerial control over the firms they work for.
And more than that would be
possible. For example, a number of advantages would arise in the area of
macroeconomic management. Private financial wealth would no longer
fluctuate chaotically with financial markets; instead it would be a matter
determined by macroeconomic policy, just as one component of it—the size of the
monetary base—already is today. Under such a system of socialized finance, bank
runs and their counterparts in the shadow banking system would no longer pose a
threat, since subjective expectations of future returns would no longer
automatically determine the exchangeable value of individually owned financial
assets—that, again, would be a matter for public policy to decide. Meanwhile,
any public guarantees extended to financial institutions in times of crisis
would no longer pose moral hazard concerns, since those financial institutions
would already be public institutions, their managers could be removed at will,
and no private actors would have profited “on the way up.”
Above all, the commanding
heights of the economy would no longer constitute an archipelago of private
empires ruled by Bezoses, Zuckerbergs, Kochs, or Trumps. They would instead be,
to coin a phrase, “ours, not to slave in, but to master and to own.”
