Market Socialism in the East

...But this reaction can hardly be interpreted as a new sense of confidence in the ability of public officials to manage the economic affairs of a nation in a democratic framework...

...I would therefore suggest that, if democratic market socialism is to have a future anywhere, it is most likely to be in those parts of the world where democratic and market institutions and cultures have already been well established...

...But it is one thing for myriad transactions to take place between buyers and sellers...

...I would argue that the prospects for a viable and democratic form of market socialism in the East would have been substantially greater had the effort to establish it occurred as part of a process of gradual transition from CP-directed socialism to a freer economic and politi al system, rather than in the wake of the total collapse of the communist system...

...Many of the economists and other professionals who at one time had invested their hopes and energies in the promotion of market socialism (with or without worker selfmanagement) now abandoned all interest in a third way...

...Also lacking—and just as important— are a social culture in which individuals believe they can make a difference and have some incentive to participate in political activity and a political culture in which politicians are ready to negotiate and compromise in order to satisfy partially many interests rather than impose totally a single interest...

...For one thing, state authority at the national level has been greatly weakened since the collapse of the CP regimes...

...These dissidents sought to combine political democracy with an economic system that would combine the efficiency of market mechanisms with the humanitarian social goals that CP-directed socialism had honored more fully in rhetoric than in reality...

...where the political leadership remains somewhat skeptical of capitalism and might become interested in a genuine alternative...

...Had Soviet troops not put an end to the experiment, it is possible that a democratic and economically successful form of market socialism could have developed in this little country with relatively strong democratic, market, and socialist traditions, pois d between East and West...

...But these three lacked the critical ingredient of strong democratic traditions and pressures...

...This kind of popular sentiment points more surely toward an authoritarian form of capitalism than toward a democratic form of socialism...

...To the dismay of anyone who wants rational, ordered, and equitable change—including all advocates of market socialism—the countries of the East seem most likely to be in for a Hayekian process of spontaneous and chaotic change motivated largely by individual selfinterest, constrained less by conscious social engineering than by the pressures of an increasingly powerful global capitalist economy...

...In the Soviet Union, Gorbachev gathered around him economic advisers—such as Leonid Abalkin — who talked openly about converting the Soviet economy to a form of market socialism...

...The legacy of corruption and opportunism among government bureaucrats, and the culture of soft-budget constraints, has made it almost second nature for public officials to serve particular private rather than general public interests...

...and there has been diffusion of effective economic power to former state enterprises (and/or monopolistic associations thereof) and to local government agencies...

...These employee-owned enterprises could conceivably provide the foundation for a worker self-managed variant of market socialism...

...Not only were CP leaders increasingly interested in moving their brand of socialism in a more capitalist direction, but many leading dissidents in the East favored a third way for their economies—if and when they would be liberated from the yoke of CP dictatorship...

...Once the preconditions for political democracy have been established with the collapse of CP-dominated regimes, the impetus for market socialism tends to be lost for two reasons...

...In a context of continuing WINTER • 1995 • 83 Market Socialism in the Last economic dislocation, declining real incomes for the majority of the population, and increasingly conspicuous inequalities, many people turned to reformist elements of the old CP apparatus and other opposition groups in search of some protection from the ravages of the collapse of the old system and the transition to the new...

...In some countries of the East, dissidents found very appealing the notions of worker ownership and workplace democracy—elements of a variant of market socialism that places strong emphasis on self-management...

...Indeed, because contemporary models of market socialism involve more ambitious goals with respect to democratic decisionmaking, they face even more daunting obstacles in the chaos of postcommunist societies...

...In most of the postcommunist countries there has been substantial diffusion of political power to regions and localities...

...To be efficient a market system must also find ways to limit the incidence and avoid the negative consequences of "market failures" arising from public goods, externalities, and other well-known sources of divergence between private and social benefits and costs...

...Second, as compared with democratic forms of capitalism, democratic market socialism calls upon the state to play a particularly sensitive role in order to serve goals such as distributive justice...

...Clearly the establishment and operation of a market socialist economy involves a continuing role for the state and its officials— albeit one that is much more subtle, indirect, and benign than running an administered socialist economy...

...In the absence of the appropriate institutions and culture, market participants will have to devote substantial resources to such nonproductive activities as security and contract enforcement...

...and the idea of market socialism resonated well with such an agenda...

...In several of the East European nations—notably Poland and Hungary—new decentralizing measures were introduced...

...The failure of the Soviet-type system was not necessarily a failure of socialism...

...This is precisely the case now in the East...

...But the fact that the USSR had such a long history of authoritarian and bureaucratic rule no doubt made efforts at reform in a democratic market socialist direction all the more problematic...

...Economic development and transformation in the East must therefore rely, by default, largely on initiatives from below...

...Depending on the context, market failures may best be alleviated by the extension or redefinition of private property rights, by state regulation or intervention, or by voluntary mechanisms of cooperation...

...as Roemer, Shweickart, and others have forcefully argued, socialism can work if it is embedded in (robust) democracy and markets rather than in authoritarianism and commands...

...Yet the state has been so discredited in the East by the years of CP bureaucratic domination that it can no longer plausibly present itself as an instrument of effective and beneficent social engineering...

...But a society emerging from authoritarianism and commands is ill-equipped to make democracy and markets work effectively, and it is also ill-equipped to sustain the sensitive state role in setting limits to the operation of free markets that represents the essence of the socialist project in a market environment...

...The Inhospitable Environment Let us suppose now that the political obstacles to the establishment of democratic market socialism can somehow be overcome...

...Popular cynicism about the role of government in the economy, in the wake of the manifestly self-serving, corrupt, and obtuse behavior of its representatives under CP regimes, is perfectly understandable...

...This is a time-consuming process—and it will take even longer in the nations of the former Soviet Union that were dominated by the CP for seventy years than it will in Eastern Europe, where CP dominance began only after the Second World War...

...extreme individualism, widespread distrust, and opportunism are rampant...

...Although firmly opposed by the first generation of postcommufist leaders, privatization schemes in which employees acquire a majority of the publicly held shares of corporatized former state enterprises have emerged as a popular means for removing these enterprises from government control...

...The obstacles to effective democracy and markets in the East are just as sobering for the prospects of a democratic form of capitalism as they are for democratic market socialism...

...and market failures are largely ignored...

...To be sure, in some countries of the East—for example Romania and Ukraine—the thrust toward capitalism was much weaker, as conservative nationalist leaders limited the pace of privatization and the scope of the market...

...88 • DISSENT...

...Because the CP monopolized the political arena so completely, suppressing most manifestations of civil society, the institutions and culture undergirding democracy must be built up virtually from scratch in the East...

...Is it plausible to suppose that such a system would survive and prosper in the environment of the postcommunist societies of the East...

...But many of the general ideas underlying market socialism have been circulating for quite some time, and indeed advocates could be found in virtually every postcommunist country...

...One obvious candidate for an explanation is the absence of a clear and well-worked-out blueprint for such a system...

...The programs of these parties have much more in common with social democracy than with market socialism...

...It has more to do with the ongoing struggle over the private appropriation of formerly state property rights than with democratic self-management or market socialism.* * When I presented to a conference in Moscow a paper advocating the transformation of state-owned enterprises into democratic self-managed firms, the labor-oriented participants showed little interest in the provisions for In sum, the evidence is strong that the idea of market socialism—as a viable alternative option for the economies of Eastern Europe and the former Soviet Union—is dead...

...It turned out that for all but a committed minority, the embrace of market socialism had merely represented a marriage of convenience—based on the limits of the possible...

...The state must also be held accountable for its activities to the general citizenry...

...Obstacles What accounts for the failure of democratic market socialism in the East...

...and in a number of countries (including the Soviet Union as well as Poland) CP regimes, under pressure from workers and reformers, began to confer greater power on enterprise-level workers' councils...

...In a few exceptional cases—perhaps the Czech Republic, Slovenia, and Estonia—these hopes may not prove to have been so unfounded...

...and in the Soviet Union Mikhail Gorbachev launched his programs of glasnost and perestroika, thereby initiating a process of growing marketization and decentralization of political and economic power that would accelerate with each passing year...

...Because of the decline in the authority and legitimacy of the state, political leaders and national economic decision-makers will have relatively little influence over the course of events...

...rent-seeking activities will tend to displace productive activities...

...Yet the environment and the culture in which the state now operates in the East are unfavorable in both these respects...

...they suggest that the early hopes and expectations of many Western reformers for a rapid transition to a Western-style economic system were naive at best.* But there is good reason to suspect that conditions in the East are even less hospitable to democratic market socialism than to some forms of capitalism...

...their main concern was to assure that enterprise assets would remain under the control of insiders—including management as well as the leadership of workers' organizations—rather than be open to acquisition by outsiders...

...As far back as the "New Economic Policy" initiated by Lenin in the early 1920s to set the war-torn Soviet economy back on its feet, the idea of combining markets with socialist forms of property ownership has had considerable appeal for Communist party (CP) leaders...

...In practice, however, employee ownership of former state enterprises has almost always meant undisputed managerial control...

...It has in fact served much more as a vehicle for insider "nomenklatura privatization" than for the establishment of industrial democracy...

...It is not easy to explain in simple and compelling terms how a market socialist economy would work to benefit the majority, particularly in the case of the relatively sophisticated versions of market socialism that offer the best prospects for combining economic efficiency with social justice...

...To be sure, the market mentality—Adam Smith's "propensity to truck and barter" —never disappeared under CP rule, and all kinds of markets have mushroomed in the East since the command system collapsed...

...But here another obstacle arises: the complexity of the concepts and mechanisms of democratic market socialism...

...Klaus had supplanted Havel as the dominant political personality in Czechoslovakia, becoming the darling of the World Bank and the International Monetary Fund among political leaders in the East...

...The forms of democracy can be and in most cases have been introduced in the East: more-or-less free elections, a relatively free press, political parties, and so on...

...Yugoslavia, Hungary, and China did of course develop forms of market socialism under more favorable conditions than now exist in the East...

...National governments are having difficulty raising revenues, and they lack resources to undertake programs and even to enforce laws...

...A partial exception to this general rule is the growing support (in countries such as Poland and Russia, and now apparently also in Ukraine) for forms of employee ownership as a mechanism of privatization...

...Under these circumstances, the leaders provide opportunities for intellectuals and professionals to devise the kind of decentralizing reforms—in the context of society-wide economic regulation— that characterize market socialism...

...As the momentum for economic reform accelerated in the late 1980s and early 1990s, worker ownership and control of enterprises increasingly appeared as a politi82 • DISSENT Market liedallem in the Cast cally and economically promising alternative to conventional forms of capitalist ownership and control...

...This was the case in the few sustained historical examples of market socialism—for example, Yugoslavia from the 1950s, Hungary from the late 1960s, and China under Deng Xiao-Ping...

...In general, support for market socialism in the East came from professionals active in the reformist wing of the CP or from intellectuals prominent in the underground resistance to the CP...

...The growing crisis was aggravated by the worldwide economic doldrums of the 1980s, but there could be little doubt that internal economic weaknesses were becoming increasingly serious...

...First of all, consider the advocates of market socialism themselves...

...For the most part, the winners in 1993 and 1994 were politicians and parties also committed to a transition to capitalism—but a more gradual one, in which attention is paid to maintaining employment, and public spending is devoted to social programs to cushion the adverse effects of economic change on ordinary people...

...Perhaps Czechoslovakia in the "Prague Spring" of the 1960s offered the best historical opportunity for such a scenario...

...A new generation of political leaders and (Western-trained) economists embraced market capitalism, and the most rapid possible transition thereto, with strong support from the West and from indigenous entrepreneurs and speculators...

...It will be just as difficult and timeconsuming a process to develop an effective market system...

...Because of their small numbers (and lack of disproportionate resources), they are not in a position to prevail in open political competition without a large and/or powerful set of political allies...

...Nor is it easy to show how self-management will yield palpable gains for workers...

...By 1992, just a few years after the opportunities for market socialism had seemed so bright, realistic political prospects for a third way seemed to have vanished throughout the East...

...Two years of "shock therapy" in Poland, begun by Balcerowicz in early 1990, had thrust the economy irreversibly onto the road to capitalism...

...But each of these solutions depends on an appropriate institutional or cultural framework: institutions backing up property rights and/or state programs, or "cultures of cooperation" of the kind that can be built up only through frequent interactions among relatively equal members of a community...

...In elections in 1993 and 1994 in Lithuania, Poland, Russia, and Hungary, large numbers of voters turned against the most avid free-marketeers and the most enthusiastic pro-capitalists...

...The Soviet Union had collapsed, and the Yeltsin-Gaidar team in Russia was firmly committed to a rapid transition to capitalism...

...That it will be very difficult to establish effective democracies in postcommunist societies is a perfectly commonplace observation...

...To be sure, many citizens of Eastern nations, suddenly exposed to the inequalities and insecurities of an unregulated market system, have started to long for a return to greater order amid the unfamiliar and unsettling chaos...

...These reforms rarely went so far as to create a system that could be called "market socialism" —though the experiences of Yugoslavia since the early 1950s, Hungary since the late 1960s, and China more recently do warrant that label...

...To accomplish its tasks under democratic market socialism, the state must be strong enough to set and enforce rules regarding property rights and the operation of markets— in ways that are of course less overbearing and intrusive than under CP-dominated socialism, but which are more extensive than under most forms of capitalism...

...To be sure, recent political and economic trends in the developed capitalist countries of the world do not suggest any movement in this direction— quite the contrary...

...In Czechoslovakia, Vaclav Havel and some of the intellectuals in his circle of Charter 77 dissidents sought to develop an alternative to what they viewed as the excessive individualism and rampant commercialism of Western capitalist economies...

...One may be able to identify a few countries of the East (Romania, Uzbekistan...

...There is evidence of growing sympathy for a "strong ruler" to set things right again...

...The unfortunate fact is that the political prospects for market socialism tend to be brightest when authoritarian regimes in control of socialist economies begin to loosen up— when their leaders become receptive to experiments designed to improve the nation's economic performance without compromising their own political authority...

...This last point can hardly be over-emphasized...

...To function effectively a market system must be embedded in a general culture of honesty and trust...

...It is far simpler to make a case for social democratic modifications of capitalism as a way of meeting the economic interests of the poor or to interest workers in forms of employee ownership that are much closer to syndicalist capitalism than to market socialism...

...Since 1992, the political tides have again turned, though hardly as dramatically as they did in 1989...

...countries...

...Yet the beneficiaries of this backlash against the "big bang" strategy of transition have not been advocates of market socialism...

...But these are countries in which the influence of old-style CP leaders remains very strong and in which democratic traditions are particularly underdeveloped...

...In the early 1990s, there was a flurry of interest in market socialism in the rapidly changing nations of the East...

...Once the ideological barriers to full-fledged capitalism came tumbling down, most intellectuals and professionals abandoned the project of reforming socialism and joined the movement to build a new capitalism...

...But it poses a huge obstacle to advocates of democratic market socialism in their efforts to rally support for their cause...

...But both these bases of support were soon to be overwhelmed by the forces unleashed by the crumbling of CP authority...

...New legal and regulatory institutions are woefully underdeveloped...

...indeed, history provides many examples of capitalist economies that have prospered in the absence of democracy...

...Rather, they were rooted in the effort of much of the CP nomenklatura to maintain their privileged status in the old style rather than try to convert it into a favorable position in the new market economy...

...By the late 1980s, CP-directed socialism in the Soviet Union and Eastern Europe was crumbling...

...What is widely recognized to be lacking are the underlying institutions that sustain a vital democracy: strong organizations representing and serving various interest groups, reliable sources of information for citizens, opportunities for meaningful debate and discussion of issues...

...In such a context, the reform effort would not have had to contend with the private cynicism and opportunism and the governmental corruption and impotence that have plagued contemporary efforts to promote effective democracy, efficient markets, and social justice...

...Mechanisms and attitudes that would support effective monitoring of the actions of public officials are largely lacking...

...First, many of those who supported it on pragmatic grounds jump ship and join the movement for full-fledged capitalism...

...Second, all of the countries of the East face grave problems of accountability of the public sector...

...and private 86 • DISSENT Market Socialism in the East benefits and costs will depart significantly from social benefits and costs...

...Concluding Observations My conclusions about the prospects for democratic market socialism in the East are very pessimistic indeed—especially for those (myself included) who believe in the kind of social rationality, responsibility, and justice reflected in contemporary models of market socialism...

...Political circumstances have a way of changing over time, however, and they surely change more readily than institutions and culture...

...I am grateful to many of the participants at that conference for constructive comments that have helped me in revising the paper for publication...

...Needless to say, this kind of scenario is enormously demanding and (even without the benefit of hindsight) could never have been considered a very strong historical possibility...

...Indeed, in most of the many historical instances in which a centralized CP-dominated system encountered serious economic problems, reforms were undertaken to reduce the degree of centralization and increase the scope of markets...

...In many countries of the East, the new breed of politicians and economists were welcomed—or at least tolerated—by a substantial fraction of the population eager for economic improvement and ready to believe in the miraculous powers of free enterprise and the market...

...The realities of the Eastern environment appear to be as inhospitable to the preferred models of WINTER • 1995 • 87 Market Socialism in the East the left as they are to the preferred models of the right...

...Forward-looking political leaders with substantial authority to bring about fundamental change, ready to listen to and act upon the advice of innovative social and economic reformers, and under strong pressure from an aroused and mobilized citizenry, could conceivably have initiated the kind of fundamental reforms that would introduce democratic and market and (truly) socialist institutions in a gradual, systematic, and ultimately effective way...

...it must also be embedded in institutions that limit problems of malfeasance and, more generally, the transactions costs of market operations...

...What is needed is a comprehensive institutional structure of laws, regulations, and sanctions that support an ethic of personal responsibility...

...Here the critical missing ingredient is the socialist commitment to greater egalitarianism (and more profound democracy...

...After the collapse of the old-style hard-line CP regime of Erich Honecker in East Germany, a new generation of reformist leaders came to power (briefly) advocating a market socialist "third way" for East Germany...

...Yet in none of these cases were authoritarian regimes prepared to allow the degree of political liberalization needed to undergird a democratic form of market socialism...

...it is quite another for such transactions to work "as if by an invisible hand" to coordinate the independent actions of atomistic individuals and achieve a significant degree of overall economic efficiency...

...I believe that the answer is probably negative—because the institutional and cultural WINTER • 1995 • 85 Market Socialism in the East context bequeathed by CP-directed socialist societies is in too many ways incompatible with the requirements for the successful operation of a democratic market socialist economy...

...One might argue that market socialism has in one-person–one-vote workplace democracy...

...thus market socialism, should it ever be introduced, is highly unlikely to take a democratic form that would reflect the aspirations of its most committed devotees...

...The Soviet Union under Gorbachev in the late 1980s might be considered another such historical opportunity...

...CP leaders were well aware of the need for major reform if there was to be a future for any kind of socialism in their An earlier version of this paper was presented to the conference on "A Future for Socialism" at the University of Wisconsin—Madison, May 1994, under the title "The Death of Market Socialism in the East...

...It seems to me, therefore, that the long-run prospects for democratic market socialism are best where history has prepared at least some of the institutional and cultural grounds for its successful operation...

...This in turn helps to channel people's self-seeking instincts into activities that create new wealth rather than simply redistributing old wealth...

...In Poland, the Solidarity Movement in the early 1980s embraced workers' control as an important element of its economic program...

...What needs to be explained is the evident difficulty of developing a strong political constituency in the more open political arenas of the postcommunist societies...

...Workers, moreover, might well be attracted to variants of market socialism involving substantial elements of self-management...

...But these exceptions can be attributed in considerable part to the small populations and favorable geographical locations (vis-à-vis the West) of the countries involved...

...In those Eastern nations yet to embark on a systematic transformation of their economies, the old socialist system was crumbling and a form of primitive capitalism was emerging in a chaotic manner— in the absence of any well-conceived or strongly supported alternative...

...This is because, first of all, democratic politics is considerably more important for the success of a democratic market socialist system than it is for the success of a capitalist system...

...They consist for the most part of well-educated professionals, government officials, skilled workers, and labor leaders—but in every country of the East they constitute only a small minority of their peer group...

...This pessimistic appraisal raises the question: under what conditions could democratic market socialism ever have been or still be expected to succeed—in the East or elsewhere...

...But these go-slow approaches had little or nothing to do with market socialism...

...Second, and even more important, the legacy of a discredited state apparatus looms as an enormous obstacle to popular support for a socioeconomic system involving a critical role for the state...

...In these latter cases, of course, the CP maintained authoritarian political control and a substantial degree of bureaucratic economic control as well—so these examples were still a far cry from the kind of market socialism proposed by advocates of a democratic "third way...

...Thus figures such as Balcerowicz (in Poland), Klaus (in Czechoslovakia), and Gaidar (in Russia) came to the fore, embracing Thatcherite and Reaganite conceptions of capitalism...

...As a result, the costs of doing honest business are very high, and the economic efficiency gains from a decentralized market system are very hard to realize...

...84 • DISSENT Market Srialism in the East fact a very large latent constituency in the poorer classes of society, for they stand to benefit from its redistributive implications...