"Market Socialism" & "Free Economy"

...The way to prevent fortunes from being made in such ways is by encouraging free entry into the apple merchandising business...

...Also that what he calls "freedom requirements" for private enterprise should certainly exist: there should be no discrimination in respect of supplies, taxes, access to foreign markets and foreign exchange, no need to apply for permits and licenses (though the need to register, if only to ensure that taxes are paid, is not an unreasonable requirement...

...Its basic argument is that there is no "third way," no viable alternative to Western capitalism in one of its several forms, once one rejects Soviet-type "socialism...

...On the contrary...

...This is not quite the same as pocketing an enormous commission for placing privatization issues on the stock market, or buying land needed for housing in order to resell it at a large profit, or the "work" of corporate raiders, whose takeover is followed not by installing a more efficient management but by a break-up and sell-off...

...But I can see why...

...I agree at once that the Hungarian halfway house—with state enterprises still subject to various instructions, benefiting from subsidies, "soft budget constraint," and lack of effective competition—was very unsatisfactory...

...For one thing he would be conscious of the fact that Thatcherite laissez-faire has not had a positive effect on the real wealth-creating sectors of the British economy...

...Inflation, says Kornai, "is not a natural disaster, it is created by governments or the political powers behind them...

...The world is full of complaints that public-sector expenditures of all kinds have been repeatedly cut, so it seems obvious that governments can resist pressures, and can close down the unsuccessful, if determined to do so...

...But should it not also act as a cure to inefficiency of publicly owned or cooperative enterprises...

...He may rely on private-sector provision...

...Indeed, he may then even join them himself...

...In Britain, despite the government's commitment to combating inflation and a budget surplus, inflation has been fueled by unrestrained credits and loans granted by deregulated private financial institutions...

...Is this then a necessary characteristic of any variety of economy containing a large public or socially owned sector...

...But who can say that it is impossible...

...Must Kornai also not study the many cases where the state— or municipally owned enterprise is subjected to a hard budget constraint...

...Kornai himself would no doubt agree that competition, customer choice, makes a vital difference to productive efficiency, to producer motivation to satisfy demand...

...But we are not speaking of a Soviettype economy...

...A leading exponent of these ideas is Janos Kornai...

...Clearly, all this must change...

...high interest rates maintain a high value for the pound while discouraging productive investment...

...To take a Soviet example, suppose there were apples in Krasnodar and no apples in Kharkov...

...An oddly Friedmanite formulation...

...As far as I am concerned, not devoutly to be wished...

...It is not as if Eastern Europe under communist rule provided adequately for such things...

...True, Kornai shows himself well aware of the fact that private-sector operators can "greedily want to make money . . . cheat customers . . . defraud the state . . . forgo productive investment," and so on...

...q 446 • DISSENT...

...Yes, it is necessary to incorporate a small country like Hungary into world markets, especially into Western Europe...

...We have low savings, of which a large part goes into the purchase of foreign assets...

...We thank Alec Nove for permitting us to publish it in Dissent...

...But he must know that in Budapest, as in London, New York, Paris, and so on, the market rent exceeds the total earnings of a high proportion of teachers, postal workers, cleaners, hospital staff members...

...It cannot work...

...Most of his fellow citizens, as well as the lawenforcement agencies, would regard such activities as illegitimate speculation, the apple merchant as "greedy" and a scoundrel...

...competition should quickly eliminate the excess profit...

...Kornai does seek minimum social provision, but his attitude toward taxation and his emphasis on private gain and individual welfare seem to leave few resources for social purposes...

...No doubt echoing the views of many in his country, he declares that "following a number of decades in which a maximal state prevailed, it is now time to take great steps in the direction of a minimal state...

...Alec Nove's The Economics of Feasible Socialism (George Allen & Unwin, 1983) has rapidly become a classic text concerning modern socialist thought...

...And in some areas of life the sense of public service matters, too...

...Yes, it should...

...Norton & Co., New York, 1990...

...He would agree that industrial zoning, preservation of architectural ensembles, policies designed to restrict megalopolises (Mexico City now has over twenty million inhabitants...

...Which leaves us both far from "socialism" in any variant of that ill-defined word...

...If I understand him aright, he wishes to give emphasis to private wealth creation, so that, in due course, social democrats could demand and obtain more for social purposes...

...But take just one example: housing...

...A new edition of the book will include as an appendix the following urgently relevant text...

...Of course his ideas are deeply influenced both by East European experience and by the urgent need to compensate (even overcompensate) for the distortions imposed by state and party under communist rule...

...Perhaps we would both settle for a kind of welfarecapitalismwith-a-human-face, not easy to distinguish from a "socialism" with a big role for private capital and individual entrepreneurs...

...But does he not know that in French a company or corporation is known as a Societe anonyme...

...Of course one needs to provide a means to acquire capital, to market shares, and this in turn requires the emergence of a stratum of market intermediaries, dealers...

...He expresses his views systematically and cogently in The Road to a Free Economy (W.W...

...I raised earlier the question whether, to qualify as "socialist," a society needs to impose some upper limit on the size of private activities...

...for the Communist regime's ideology of egalitarianism and negative attitudes toward "unearned" income, that is, income from property ownership, stock exchange or commodity deals, and the like, as well as income from other kinds of entrepreneurship...

...To the example of Moscow theaters, which undoubtedly compete for spectators, I could add Soviet literary journals such as Novyi mir, Znamya, Nash Sovremennik, and many others...

...I imagine that if he were a British citizen in the year 1990 his emphases would be different, as mine are...

...For all these reasons I connect my vision of a flourishing private sector with the concept that "small is beautiful," with owners that do relate directly with what they own...

...Electricite de France, the Dutch railways, Norwegian coastal shipping, American airports, Swiss postal buses, Swedish telephones, even Budapest's own municipal transport system could be contrasted with examples of wasteful or unsuccessful "public" activities, which exist also...

...EDS...

...He stresses that he is concerned with immediate remedies for countries such as Hungary, and not with describing the sort of society he prefers...

...The many American company executives who award themselves annual incomes of $1 million and more surely do so because of their position at the top of the company's nomenklatura rather than through successful entrepreneurship or exceptional marginal productivity...

...Kornai rightly states that "the critical deficiency of socialist state property consists in the impersonalization of ownership...

...An attack on "market socialism" is now coming from a number of East European economists, converts to free-market ideology, who usually express regret at their own "naive" illusions of earlier times about the "reformability" of Soviet-type "socialism...

...However, for him they share the characteristic that the bulk of the means of A Discussion of Alternatives production is in private hands, and the market plays a dominant (though of course not an exclusive) role...

...On this I agree entirely with Kornai...

...Much may depend in the end on the stability of the international system that the East Europeans are now so keen to join...

...It is the diversion of so much energy and talent to what Keynes called "the casino" that causes concern to those who wish capitalism to prosper...

...To clean it up in association with private business, private capital, including foreign capital, is most certainly needed to finance necessary investments...

...The USSR, Poland, and Hungary need large-scale infrastructural investment of a kind typically financed by the state in all countries...

...Can one discern a correlation between forms of ownership and the quality of the cooking or service...

...Let us accept that it is indeed a built-in characteristic of Soviet-type planning...

...Private production can be increased, FALL • 1990 • 443 Market Socialism modernized and raised to the level of successful modern large firms only if a considerable accumulation of private wealth takes place...

...Sometimes the "owner" is an Arab sheik's bank, totally remote from the actual concerns of the firm, ready to be "satisficed" if things do not go badly...

...Or the "owner" is an indifferent absentee, his fortune administered for him as he basks in the sun in Bermuda...

...What if it founders under a mountain of debt and cumulative trade-and-payments disequilibria...

...Hungary, too, has inherited a number of structural distortions...

...and the government believes in laissez-faire and even cuts scientific research budgets...

...But must public-sector enterprises 444 • DISSENT Market Socialism necessarily operate amid shortage...

...He is understandably concerned with legitimizing private acquisitiveness in a social setting in which it was denigrated when it was not actively repressed...

...In Britain, at least, the stock exchange is not a significant source of venture capital, or of resources for real investment...

...As for infrastructure, even in affluent America the individualist tax-cutting ideology has led to a dangerous backlog of repairs to roads and bridges...

...The experience of Hungary shows particularly clearly the failure of attempts to combine public ownership and marketization...

...But an inhabitant of Thatcherite Britain could be excused for wishing to stress the undesirability of extremes of inequality, much of it based on inheritance, or on what have to be characterized as unproductive activities...

...He is so concerned with providing incentives for private enterprise that he even opposes progressive taxation...

...It is on record that this characteristic of the limited liability company caused concern to Adam Smith...

...True, he points out that the Western model comes in many varieties: Sweden, the United States, and Japan differ in many ways...

...Under conditions of glasnost, they seek with the utmost vigor to attract subscribers, while pursuing a variety of editorial policies...

...He (or she) works, indeed works very hard and responsibly...

...I would simply refer to the ideas of Richardson,* and also to the quite considerable literature on the behavior of Wall Street and the City, the struggle of theorists to comprehend the gyrations of stock prices (and exchange rates too...

...So anything like "market socialism" is, in his view, a chimera...

...This is indeed much, much better than to send the successful merchant to jail, or to subject him to a 90 percent tax rate...

...Kornai is, after all, not Hayek or Friedman...

...Therefore I, too, would welcome the emergence of real owners who take personal care of their business...

...Would he also argue that Soviet and Hungarian experience proves that publicly owned enterprises are of their very nature incapable of competition...

...I do not conclude from this that absentee owners should be expropriated, or limited liability companies abolished in the real Western world in which we live...

...Customer choice, "the dissolution of the shortage economy," competition, should act as a cure...

...Nor does he oppose the "safety-net" concept of a welfare state, and he favors action to protect the environment...

...In which case it seems wrong to stress private affluence to such a degree...

...Yes, Kornai himself wrote in Economics of Shortage, in which he demonstrated that the generation of shortage was, so to speak, systematic...

...Such economies also, with barely any exception, were polluters of the atmosphere and underfunded medicine...

...Do such things lead us along "the road to serfdom...

...But Western Europe too will be contemplating its own investment strategy, involving energy, fish stocks, steelworks...

...There is quite a sizable theoretical literature on the relationship of principal and agent, the formal owner(s) and working management...

...All this hardly suggests changes in the structure of the British economy, which are urgently needed to cope with record trade deficits and industrial decline...

...An enterprising would-be trader could make a lot of money by buying them cheap in Krasnodar and selling them at a much higher price in Kharkov...

...Perhaps later generations will be able to envisage a more moderate mid-way...

...Is it not the fact of competition, the absence of queues, of chronic shortage, that really matters...

...I imagine Kornai's reply: yes, and these distortions were due to state control, state intervention, state investments, so why should the remedy involve more of the same...

...charter, much disliked by Thatcher and apparently also by Kornai, since he emphasizes that wage bargains must be a matter left solely to free negotiation between employer and employee (other than in the state sector, where he advocates tight wage control...

...It also proposes a social * G.B...

...FALL • 1990 • 445 Market Socialism Lastly, a word on structurally significant investment and the related question of the functioning of a capital market...

...More important still is Kornai's emphasis on correcting (overcorrecting...

...To which one can only reply: the state also neglected the environment and achieved record levels of pollution, but it still remains the task of the state to clean up the mess...

...Here our paths do diverge...

...But in envisaging a transition from Soviet-type "socialism" to something more acceptable, we should not consciously aim to reproduce some of the less desirable features of Western society, and by "less desirable" I mean also those that contribute negatively to economic efficiency and welfare...

...And what of the role of the state as provider or financer of health, education, public parks, roads and other infrastructure, old-age pensions, a better environment, low-rent housing...

...Of course a nationalized monopoly facing a queue of customers in a sellers' market will often fail to perform adequately...

...We now have institutional investors who acquire large packages of shares with other people's money and sell them again maybe a few weeks later...

...A condensed version of his final chapter appears in the pamphlet, "The Question of Socialism" —see ad on p. 477...

...Richardson showed that perfect competition provides no basis for investment decisions, since the profitable opportunity is seen by all one's competitors...

...are necessary areas of public policy, and that public parks provide more human freedom than would their sell-off to private individuals...

...Nor is this a passing, transitional phenomenon...

...Is there not a case for much more research into which publicly owned enterprises perform well and which badly, and where, and why...

...One thinks of the quality contrast between American commercial television channels and the BBC, the tradition (where it has survived commercial pressures) of punctual postal deliveries, and the like...

...The original Hungarian title was "A Passionate Pamphlet in the Cause of Economic Transition...

...He is all for decontrol, for market forces to operate...

...To me an entrepreneur is one who devises some new product or method, produces goods and services, thereby enriching not only her or himself but society...

...This is not a question that concerns Kornai, and this is, of course, an important difference...

...Kornai may point to the danger of censorship, to the possibility of sacking independent-minded editors, and I naturally agree that there should not be an imposed state monopoly in publishing...

...However, the world knows of many cases of censorship being imposed on privately owned papers, and such owners as Rupert Murdoch are not averse to sacking editors and imposing their political line...

...He does recognize a role for the state beyond that of a "night watchman...

...In Budapest there are (and have long been) restaurants that are the property of the state, or are leased, or cooperative, or private...