A Forgotten History: East European Market Socialism

‘The alternative is still either Socialism or a market economy’ – these deceptive words come from Count Ludwig von Mises and they have haunted much economic thought concerning socialism and indeed communism ever since. They were initially uttered in 1932 in a moment of exasperation. Von Mises sought to respond to first successful communist revolution, in Russia, and what was then emerging as the Soviet Union, which was in the early stages of launching its ‘socialist offensive’ – the massive process of industrialisation and agricultural collectivisation. It would result in the Soviet Union’s leap into the modern era. However, in the rather different world after 1989, von Mises’s slogan of exasperation has become an apparent truism.

Why have the words of this slogan continued to haunt? In the now-faded triumphalism after the counter-revolutions in Eastern Europe, many – Marxists included – have clung onto the either-or dichotomy. You cannot have, they believe, a socialist system and a market economy. Such a combination is a hybrid, an oxymoron.

Why deceptive? Von Mises (and Count Friedrich von Hayek after him) restricted socialism to a fully planned economy, without any form of a market. And a ‘market economy’ was by definition a capitalist market economy. Deceptive, yes; persuasive, even more so. Today, it takes a significant mental effort for many to disconnect ‘market’ from ‘capitalism’, but the effort must be made.

The Initial Proposal

Over the last couple of months, I have been engaged in researching the various market socialist experiments in Eastern Europe, from the 195os to the 1980s. All of them – including the Soviet Union – attempted to develop versions of market socialism. Some were more tentative, such as the Soviet Union, Romania and Bulgaria, while some went much further, such as Poland, Hungary and Yugoslavia. The programs in these countries, which saw their role in the CMEA, or Comecon, as complementary rather than competitive, had distinct local variations, but they also evinced significant similarities that are still known as ‘market socialism’.

The initial model was proposed by Oskar Lange in the late 1930s (although there were stray precursors). He argued that under a market socialist system there would be neither a market in production nor in finance for enterprises, but individuals could select their own jobs and what they consumed. In this context, the Central Planning Board would set an initial price for products, to which enterprises would respond by two means: taking appropriate measures to minimise the average costs of production; levelling prices in relation to these costs of production and consumer preferences. Thus, while the state owned the means of production, workers would exercise freedom of choice in terms of where to work and what to consume, which would in turn influence the pricing mechanisms of the planning board. For Lange, this approach would achieve – through a perpetual cycle of trial and error – a viable form of socialist planning. This would overcome the inherent tendency of capitalist market systems to monopolies and state intervention, and enable the optimum outcome for the social good, as well as provide a way to make significant economic improvement. Lange’s proposal is usually seen in light of the ‘socialist calculation’ debate (including the two Austrian counts mentioned earlier), but this is to miss the profound impact of Lange’s model in Eastern Europe. There, it opened up crucial theoretical space for considering the role of markets within a socialist system, although each of the market socialist programs modified Lange’s proposal in various ways – particularly in terms of independent enterprises, the nature of prices and the law of value under socialism.

Lange was only the beginning, for in my research I have uncovered a significant trove of material that is mostly forgotten these days. For some, it is as though this important phase of economic theory and planning simply did not exist. But exist it did, particularly in in places like the GDR (East Germany), where a massive concentration of economic research opened up new paths in developing a Marxist political economy for the construction of socialism and a socialist economy. I do not need to go into all the material and references here (they are contained in a lengthy article which will be published in due time), but my focus is to draw out the most significant insights. I do so with an eye on the Chinese socialist market economy.

Economic Mechanism

There were three crucial insights that arose from Eastern European market socialism: the market as an economic mechanism; the relation between planning and market; and ownership, or what is really the connection between the relations and means of production.

The first breakthrough is often forgotten: a market economy is by no means equivalent to a capitalist market economy. Marx himself already points in this direction and historical analysis confirms Marx’s approach: market economies have existed in many different historical periods, and they have clearly not been capitalist market economies. Indeed, a market economy under a capitalist market system is but one historical form of a market economy.

How did the Eastern European economists see the market? It should be seen as an instrument rather than inherently capitalist. The favoured term was ‘economic mechanism’, which entailed that it was like a neutral piece of machinery. As for the workings of this economic mechanism, the most influential proposal came from the Hungarian economist, János Kornai. He argued that an economic mechanism such as the market could exist in different forms of organisation, including socialist ones, and the way one deploys such a mechanism is through direct and indirect levers. The direct levers were the direction of production, the allocation of production materials, the regulation of foreign trade, and the appointment of managers. All of these were centralised through the state, although the problem thus far had been overcentralisation and thus the dominance of direct levers. Kornai also proposed four indirect levers: investment, the monetary system, the price system, and the wage fund. These were indirect because the government would provide the necessary environment for appropriate forms of activity, but not control them directly.

However, there was a catch with the economic mechanism argument. By and large, Eastern European economists did not move beyond the idea of a neutral instrument that could be used in different contexts. Of all the economists, only Branko Horvat (from Yugoslavia) went a step further: ‘It is not the market that determines a social system; it is, on the contrary, the socio-economic system that determines the type of the market’. In other words, a market economy is not merely a neutral instrument that could be used in different contexts; its nature, its constellation of components, was also shaped by the socio-economic system in which it operated. But Horvat made this important point in 1989, already under the acknowledged influence of earlier developments in Chinese economic theory.

Between Planning and Market

A second important breakthrough was made in terms of the planning-market opposition. We have already seen that Count Ludwig von Mises had – deceptively – suggested that planning and the market were diametrically opposed to one another. Eastern European economist struggled with this question as well, often being tempted to see them in tension. This opposition was posed in various ways, such as centralisation and decentralisation, state control and worker (economic) democracy, or vertical and horizontal relations. Given these oppositions, many saw them as working against each other, so that the enhancement of one side undermined the other – most often in terms of the state refusing to allow or even actively blocking the decentralising impetus of market relations.

Most attempted to find the correct balance between the ‘invisible’ and ‘visible’ hands, which was described by Włodzimierz Brus as ‘central planning with a regulated market’. Thus, significant marketisation would be possible, all the way from individuals to enterprises, from supply-and-demand price mechanisms to an economic bottom line for an enterprise’s viability, from division of labour to wage differentials, without it being a version of laissez-faire or even the capitalist model of social democracy. At the same time, the state would continue to own the core means of production, engage not in micro-management but in overall planning and direction of the economy via indirect levers, engage in price control in crucial areas and to prevent speculation during shortages, focus on efficient allocation, calculation and valuation, and have primary control over many areas that simply cannot be ‘marketised’, such as the mitigation of inequalities, overcoming poverty, social care, fostering talents through education, and environmental concerns, which were already becoming apparent in the 1970s

While this ‘balance’ approach dominated, there was at least one effort to go a step further. It comes from Branko Horvat: ‘without market there is no self-management and therefore no socialism’. With all members of society as ‘share-holders’, his point is more dialectical rather than simply seeking a balance of opposing forces. Or, as he puts it even more sharply: ‘a market is a planning device; without planning a market cannot operate efficiently’. In other words, planning and a market are not diametrically opposed to one another, but work in a dialectical way to enhance the other. Again, Horvat was by this time influenced by Chinese economic thought, where we find that Chinese economic planning has taken on a whole new reality in light of the development of the socialist market economy. Let me be clear: China has certainly not abandoned economic planning, for it now works at a qualitatively higher and more sophisticated level. And it does so through the socialist market economy, which is in turn a planning device.

From Ownership to Liberating the Forces of Production

It should not surprise us that Eastern European economists focused extensively on ownership of the means of production. The Communist Manifesto makes it clear that one of the first acts after a proletarian revolution is to abolish bourgeois private property and give workers control over the means of production. But the Eastern Europeans also began to examine what happens after bourgeois ownership has been overcome, and so they began to distinguish between individual private property (deriving from the Roman legal tradition) and public-social ownership. Non-bourgeois private property was quite possible in a socialist system, so much so that it caused little debate. Most of the debate was focused on the transition from public (or state) ownership to social ownership.

However, this debate had one significant shortcoming: the tendency to focus too much on the relations of production, specifically by defining socialist economics in terms of the ownership of the means of production, an emphasis that led at times from economic democracy to misdirected emphases on political ‘democratisation’ with a distinctly bourgeois aftertaste. This emphasis relegates to second place or indeed neglects what is arguably the primary issue of liberating the forces of production under socialism (as Deng Xiaoping saw). So let us see how the question of ownership looks in light of a focus on productive forces.

After a successful revolution, the historical evidence is clear that all communist parties moved to liberate productive forces through full-scale nationalisation of enterprises, abolition of bourgeois private property, industrialisation in light of ‘backward’ economic conditions, collectivisation of agriculture, and moves to a fully planned economy. As the dictatorship of the proletariat and peasantry, the new state has had to act decisively to destroy the previous system and instigate the economic structures needed for the initial phase after a communist revolution. As Engels put it in 1890: ‘Gewalt (i.e. state power [Staatsmacht]) is also an economic force [ökonomische Potenz]!’ I know of no case where this approach did not propel productive forces forward, now that they were freed from the bonds of a capitalist-landlord system. Even more, it enabled Eastern European countries that were – due to a much longer history – on the periphery of Western European development to break out of this peripheral status. This process is particularly clear with the Soviet Union, Czechoslovakia and East Germany, which became highly industrialised and dynamic economies, but the others also made considerable breakthroughs and significant growth (in the 1950s averaging 11 percent per annum). These are quite stunning results of the first phase, especially in what were comparatively ‘backward’ countries.

However, this approach – full state ownership and planned economies – has turned out to be an initial phase of socialist economic construction.  With the development of productive forces, older tensions that formerly could be managed now become threatening, while new tensions arise between the forces and relations of productive, which hinder further development.[1] Fully planned socialist economies have found that they reach a limit-point for further liberation, with eventually stagnating economic performance, supply-side structural blockages, a dwindling of creative solutions to such problems, and increasing contradictions in the relations of production that threatened to become antagonistic.[2] In short, the forces of production need a new burst of life, another form of liberation.

Historically, the way these problems have been tackled – with less and more success – is the development of a market economy in a socialist framework. The implications for the relations of production were in terms of the rise and spread of private property, of increasing competition between enterprises (even state-owned enterprises), and even of new levels of creativity and competition. Not unexpectedly, this new phase gave rise to a whole new series of contradictions that were handled in less or more competent ways.

Concluding Assessment

How do we assess the whole experiment, with the advantage of hindsight? While the initial phases of planned economies did indeed liberate the forces of production, the problem was that the market socialist reforms did not seem to provide the hoped-for breakthroughs. Economic development, growth and wages evidenced initial improvements equal to and beyond those of Western Europe, but then began to fall behind by the late 1970s and 1980s. Herein lies the initial problem: the desire to show that socialism was better than capitalism, so much so that the former would ‘catch up’ to and ‘overtake’ the latter. Many factors were sidelined in such assessments, such as natural resources, global economic crises (especially in the early 1970s), hostile external forces, social structures, cultures, and especially the longer history of Eastern Europe over some five centuries. This economic, social and political history, characterised by a smaller population in relation to territory, the phenomenon of re-feudalisation on the way to capitalism, and persistence of pre-bourgeois modes of governance, led to a situation in the twentieth century in which Eastern Europe found itself on the periphery of and lagging behind Western European capitalism. In terms of economic analysis, the focus on growth, prices, wages, innovation and efficiency in one or more small country bracketed out both the global situation and crucial socio-economic indicators such as worker-focused medical care, education, retirement pensions, full employment of both women and men, and a sense of the common good.

All the same, the various efforts at market socialism in Eastern Europe remained tentative, achieving no more than a half-way house between centralised planning and market economies. They were of course feeling their way along a path no one had before travelled. And the fact that they were forced into ‘shock therapy’ in the 1990s, precisely when many expected that they would finally be able to achieve a fully function market socialism, has cast a pall over the whole effort.

What have been the responses? One line was to retreat to the position that market socialism was a hybrid that would never work. This approach usually bifurcates along the old planned-market opposition. For pro-capitalists, only a capitalist market economy is viable. Thus, it matters not whether one has a fully planned economy or market socialism: they are both unviable. On the other side were Marxists who argued that socialism should never entertain any type of market economy, for only a planned economy is appropriate to socialism. Any effort at market socialism thus becomes an oxymoron, if not a ‘betrayal’ of Marxism – a narrative that is redolent with Western religious assumptions. The solution in this case is to enhance the efficiency and sophistication of such central planning. However, the problem with either approach is that it assumes the misleading slogan promoted by von Mises – ‘the alternative is still either Socialism or a market economy’.

The alternative is to grasp the dialectic: full marketisation – including the ‘hard budget constraint’ of bankruptcy – is a socialist project, and thus planning happens and is indeed enhanced through a market economy. It is not a case of either planning or markets, but a dialectical enhancement of both, with the attendant qualitative leap in the need for sophistication.[3] In this light should we understand Xi Jinping’s observation that China ‘resolved a major problem that other socialist countries had long failed to resolve’. Or, as Oskar Lange said at one point, ‘authentic free competition could only exist in socialism, because under capitalism monopolies put down all kinds of true competition’.

Thus far, I have mentioned China on rare occasions. This is a deliberate move, since the socialist market economy in China requires a distinct study on its own, since it is not really the same as East European market socialism and cannot be drawn into that historical path. Of course, as the Reform and Opening Up began, scholars and economists from China studied the Eastern European situations very carefully, with interchanges between China and Eastern Europe and even implementation of some early Chinese measures. While the Chinese learnt from Eastern European successes and failures, and while Eastern European scholars began to learn from China’s approach, the latter developed a distinct approach, designated by the term, ‘socialist market economy with Chinese characteristics’.

[1] Here Marx’s well-known insight from ‘A Contribution to the Critique of Political Economy’ (1859) also applies, although perhaps not quite in the way he expected during the construction of socialism: ‘At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production … From forms of development of the productive forces these relations turn into their fetters’. Stalin would, of course, develop this point much further in his long study of economic problems under socialism.

[2] Specific problems included the unevenness of development – in terms of talents and distribution of productive capacity – over a very short period of time; overspending of national incomes for the sake of increasing production to meet consumption demands, a situation that led to constant tensions between expanding or modernising production; the contradictions of engaging in foreign trade, where essentially complementary production processes had to deal with capitalist competition.

[3] Such detail and complexity is theoretically possible but in practice it proved immensely difficult, not least because the computational methods and extraordinary flexibility developed later – as with China – were not yet available.