A Road Eastern Europe Could Take
BROCKWAY, GEORGE P.
The Dismal Science A ROAD EASTERN EUROPE COULD TAKE BY GEORGE P BROCKWAY The countries of Eastern Europe have a unique opportunity to combine the virtues of capitalism and socialism. If...
...Contrast the situation in Eastern Europe with that of our unions trying to buy out United Air Lines...
...In all these countries, the general will is so corrupt that the growth of unemployment actually is greeted with cheers and a rising stock market...
...Its vice is totalitarianism—and too often has prevailed...
...As for the Poles, many or most of the tractor workers would be out of a job— that's the principal reason for the new plant...
...The collapse of the Communist order has occurred at a time when the most visible examples of capitalism are limping badly...
...Poland hopes to do better and has dispatched a commission to see how we run our admirable exchanges...
...The setting up turns on a confusion of thought and may be only stupid, not deliberate...
...A few city folk seem to have some money and are delighted to buy fresh produce off the tailgates of a few farmers' trucks...
...The road less traveled by might still be taken...
...The TV news programs report that a Harvard professor is pleased with this example of free enterprise...
...It will probably come about because the whole world seems to have confused finance with industry, or, as aforesaid, money with capital...
...Of course, you will have borrowed it...
...The newly liberated countries are being set up to recapitulate the disasters of Africa and Latin America...
...Take that tractor factory...
...The debt service would of course go abroad, and so would the profits, if any...
...The new financing will probably be structured more like a leveraged buyout, in that bonds will mostly be sold to "institutions"—pension plans, mutual funds, and so on...
...You cannot make things with money, nor can you buy things with capital, except on an insignificant scale...
...Nodoubtyoucan easily think up dozens of objections to the employee-ownership scheme...
...otherwise the privatization of Eastern Europe would be a cinch...
...The classic bankers' solution would be to abandon the whole thing and start over, with a leaner work force and a meaner mountain of debt...
...A more likely fate is that of Africa and Latin America (and of the creditor countries as well)—being doomed to decades of what is politely called austerity because of the Great Recycling...
...It could combine the best features of capitalism and socialism (see "The Labor Theory of Right," NL February 11-25,1985, and "Faint Praise for Profit Sharing," NL March 25, 1985...
...With money you can buy things, including capital...
...So there's this tractor industry with the ability to make a product it can't sell...
...Such promises are rarely fulfilled...
...In all these countries, high or rising interest rates are regarded with complacency...
...and if you'll stay after class I'll tryto answer them...
...Yet there is no doubt that some societies are vastly better places to live in than others, and that vast changes for the better are achievable in every society...
...He points out that those who work for poorly run businesses would not get a fair shake, to which I reply that the bankers' alternative would give them no shake at all...
...Unfortunately the bank will have only about $12 billion to lend, and perhaps 30 or 40 times that will be needed...
...The fledgling democracies (or some of them) seem determined to copy as well as follow the limpers...
...Something like the imprinting of goslings seems to be happening in the nations of Eastern Europe...
...Then you could float a stock issue, which might respond to the cries in the stock market hall and make you very rich indeed...
...Unemployment (previously unknown) is embraced as a necessity for free enterprise...
...With capital you can make things...
...The factories used to be subsidized, and so were the farmers who bought them and the city folk who bought farm produce...
...The confusion is of capital and money...
...They are both necessary, but they are not the same...
...Third, they have to hire an executive for $9 million, not because he knows anything about running an airline, but because he has the confidence of the junk bond bankers...
...As in Africa and Latin America, there would be no winners from this creative destruction, with the possible exception of some foreign bankers...
...Now none of them will be subsidized (this is the free market hope...
...The new Reconstruction and Development Bank's money can be used to finance modernization of the infrastructure...
...Needless to say, these junk bonds will be given a more high-sounding name...
...The new Bank for European Reconstruction and Development is being established for that very purpose—to underwrite privatization...
...Perhaps it cannot be done, at least not on a large scale, or not for very long...
...Only a small minority has so far enjoyed the capitalist virtues to the fullest, while a different and much larger minority suffers poverty and unemployment and hopelessness...
...No nation has yet succeeded in combining the virtues and avoiding the vices...
...If Eastern Europe copies the mistakes of its Western models, the best it can hope for is that the suffering imposed on the present generation will be followed by a better lif e for the next generation...
...A subsidized tractor factory that loses money is not likely to become profitable when the subsidy is withdrawn and is replaced by interest charges of 14 per cent or more...
...The same is true of the farms that used to buy the tractors and the grocery stores that used to buy the farm produce and every other productive organization in the country...
...Nevertheless, those traits of the world's most successful capitalist countries are regarded with envy by many of the new governments in Eastern Europe...
...And all this could—can—be done at no cost...
...There are complications, however...
...Its vice is class conflict...
...The disasters, though, will be real enough...
...The newly liberated countries will find themselves burdened by unmanageable debt, while our institutions are burdened by uncollectible loans...
...In all these countries, the gap between the rich and the poor has always been great and has recently been widening...
...Forward-looking Hungary has been trying for several years to get a stock market going and is ashamed that an average day's trading is still only 40,000 shares...
...Capitalism's virtues are the freedom and responsibility that come with being your own master...
...Its industries would not stagnate for lack of incentive...
...In all these countries, a hypervolatile stock market is considered an indicator of prosperity...
...Inthemeantime, let me suggest that most of your objections will be similar to one raised recently by Barry Bosworth of the Brookings Institution...
...Such misdirections are bad enough, yet it seems likely that worse is in store...
...What they actually need to do—and have the opportunity of doing—is transfer the ownership of capital, which is what they used to call "the means of production, " to the workers, thus making them entrepreneurs...
...Consider the Polish tractor industry...
...Socialism's virtues are the ideal of classlessness and the practical abolition of unemployment...
...The Poles make a pretty good tractor, but today they're overflowing the factory yards...
...Higher prices are somehow thought necessary to combat inflation (no doubt on the same theory that recommends higher interest rates to us), and lower wages are decreed (although in the future they will presumably be set by the free market...
...The money would come partly from the new bank and partly from Ford or Honda or Mercedes...
...Who will buy the operation...
...the capital exists...
...The new plant would be able to compete internationally...
...But we have not asked where you got the money to buy the business...
...No money has to change hands...
...As Jake said to Lady Brett, isn't it pretty to think so...
...You might take a flyer on it if you could pick it up for, say, aquarterof whatitcostto build...
...But it is pretty small potatoes and evidently does not build much of a demand for tractors...
...These distinctions, although elementary, apparently are easy to forget...
...How can arbitragers and brokers and takeover experts get along on such slim pickings...
...As matters stand, enthusiasts for privatization want to consult investment bankers (if they're not bankers themselves), print up a lot of stock certificates, hire a hall or a curbside for a stock market, plug in their computers, and let her rip...
...High sounding or not, junk is junk, as we're beginning to understand...
...In short, the privatization of Eastern Europe bids fair to wind up in something like a combination of the recycling of opec's profits and the junk-bonding of American business...
...Those remaining would find that their pay had to be held down so the plant could handle its debt service and still compete internationally...
...To privatize their industries, all the Poles have to do is transfer the ownership from the people collectively to the people who work in each separate business...
...First, the unions have to offer an outrageous price for the company's stock to save it from investment bankers who want to break up the company...
...Everyone assumes that what Poland and the rest need to do to become viable capitalist nations is sell their industry to entrepreneurs...
...Others may object that the Polish tractor business, say, is hampered by obsolete machinery and a swollen payroll...
...It is currently owned by the State—that is, by the people who work there and all the other people of Poland...
...Its capitalists and laborers would not be at each other's throats, because they'd be the same people...
...It is sad when the road not taken is a better road...
...What is to be done...
...None ofthat is necessary...
...Second, they have to issue junk bonds at usurious interest to pay for the stock...
...It might eventually pay out, especially if somehow the Polish economy recovered from its self-imposed austerity...
...Poland—and the rest of Eastern Europe—could become a land of producers' cooperatives...
...The United States, Great Britain and Germany have shockingly high unemployment rates, and Japan's is growing...
...The citizens of Eastern Europe, who so bravely and joyfully threw off the chains of communism, will be cruelly deceived...
...If they do not seize the opportunity—andPoland, for one, seems to be kicking it away—they will be in danger of combining the vices of both systems...
...So commercial banks and investment banks around the world will be encouraged to participate, as they were encouraged to participate in the Great Recycling of opec's winnings...
...This, you will recall, was the promise of communism, too...
...That is, it would cut into the sale of American or Japanese or German tractors, and naturally into American or Japanese or German employment...
Vol. 73 • November 1990 • No. 15
