WHAT MAKES A MARKET ECONOMY SOCIALIST?

WHAT MAKES A MARKET ECONOMY SOCIALIST?Author(s): T. NAGYSource: Acta Oeconomica, Vol. 40, No. 3/4 (1989), pp. 259-264Published by: Akadémiai KiadóStable URL: http://www.jstor.org/stable/40729353 .

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T. NAGY: WHAT MAKES A MARKET ECONOMY SOCIALIST? 259

References

1. Marx, K.: Capitai Progress Publishers, Moscow 1966. Vol.III, p. 820. 2. Lenin, V.l.: Selected works. Progress Publishers, Moscow 1970. Vol.2, pp. 688-705. 3. Engels, F.: Ariti- Dûhring. Foreign Languages Publishing House, Moscow 1947. p. 412. 4. Lenin, V.l.: Selected works. Progress Publishers, Moscow 1970, Vol.2, pp. 646-649. 5. Lenin, V.l.: Selected works. Progress Publishers, Moscow 1970, Vol.2, p.689. 6. Arguments and Facts, No. 52, 1988, p.2.

A FIVE-POINT DEFINITION

P. MARER

I define a socialist market economy by the following combination of features: (1) a substantially market-driven economy; (2) where the means of production remain predominantly non-private; (3) the government assumes responsibility for economic policy that substantially directs and circumscribes economic activities; (4) the distribution of income and wealth are relatively egalitarian; and (5) the political party or coalition that governs is not involved in day-to-day economic affairs but is firmly committed to the above four economic principles.

I don't know whether such an economy is workable or not, but the experience so far of such reforming countries as Hungary and Poland suggest that the answer may well be negative, certainly until the ownership issue is resolved in a way that is consistent with market efficiency. I am rather doubtful that this can be done in a reasonably satisfactory way, but I am not absolutely certain.

April 1989

WHAT MAKES A MARKET ECONOMY SOCIALIST?

T. NAGY

The term "socialist market economy" has been used in Hungary and elsewhere to denote a system which is to be substituted for the "existing socialist systems" undergoing a crisis. It is not bad, as a short and succinct way of denoting the trends evident in the necessary economic changes; nevertheless, I think it is inexact and may give rise to misunderstanding. First, it is quite obvious today that it is not only the economic system that must be substantially changed, but the political system

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260 T. NAG Y: WHAT MAKES A MARKET ECONOMY SOCIALIST?

as well. Second, the term in question is based on the traditionally rigid distinction between capitalism and socialism. Therefore, it suggests that the market economy to be brought about has to be - since it is to be a socialist one - radically different from, say, the market economy of Sweden, which is a capitalist one. I do not agree with this. It would be more correct, and more modest, to talk about establishing a market economy of a "socialist character" (displaying features of socialism). I am of the opinion that a democratic society pursuing advanced commodity production and with a monetary economy ought to be created; its socialist nature would be asserted by certain ideas and principles of the socialist movement. Below, I shall substantiate my argument and briefly outline the contents of such a socio-economic system, as well as the conditions of its establishment and functioning.

The idea of a socio-economic system which would be radically different from capitalism based on private ownership of the means of production, which would form, as it were, the opposite of the latter, and which would be created by historical necessity, comes from Marx. According to Marx, the capitalist system increasingly exploits and pauperizes the working class, worsening the anarchy of commodity production and slowing down the further development of the forces of production. This system would be replaced by socialism in the most advanced countries, and this would be achieved through social revolution, as a historical necessity. In it, the abolition of private property would entail the abolition of commodity production and money, and these would be substituted by the planned cooperation of freely associated producers; in due course, the state would become unnecessary, and would thus die away. Lenin talked about parasitic, decaying and dying capitalism, which he saw as the eve of revolution. However, the classical capitalism, which Marx had examined, has grown in the advanced countries into a socio-economic system which further provides, and even more than earlier, for the fast development of the forces of production and for a highly efficient functioning of the economy. High economic performance has not only enriched a small group of society but has improved the standards of living of the masses as well. Modern democracy - this great achievement of humanity - has enabled the masses of working people (to different extents in the different advanced countries) to assert their interests, to exert serious influence on the state, on the increasingly centralized regulation of economic processes and especially on the distribution and spending of the national income. The changes have also affected the sphere of production, delimiting the power of private capital. The socio-economic system that has emerged in a number of advanced countries since the Second World War differs from capitalism as described by Marx in such essential features that it can be hardly qualified as clearly capitalist; yet it is not socialist, either. We are aware today that Marx (and after him, Lenin) were wrong in judging the development perspectives of capitalism and exaggerating the necessarily determined nature of social changes. The image of socialism as derived from the Marxian image of communism has turned out to be a Utopian image in scientific disguise. One cannot seek consolation (as many do) in that, maybe in an-

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T. NAGY: WHAT MAKES A MARKET ECONOMY SOCIALIST? 261

other one hundred years, it will come true, and that the countries of the "existing socialism" are only at the beginning of the building of socialism.

By "existing socialism" (at this point without questioning the validity of this term) I mean the socio-economic system of the countries, in which political power took steps to institute a system radically different from the commodity production and democracy of capitalism. In some areas existing socialism has made consider- able progress. However, the result has been a socio-economic system today qualified as Stalinist, which has by now softened into a neo-Stalinist one in most of the cases.

This system is undergoing a crisis today. It has turned out to be not superior, but inferior to the socio-economic system of the advanced Western countries. We are aware today that the serious troubles are rooted in and demonstrated by, the essential characteristics of the system: namely, by the dictatorial nature of political power, by the fact that the basic proprietory rights over the means of production in the broad sense are exercised by authorities, that economic processes are primarily regulated not by the market but by state and party bureaucracy, that the system bars the national economy from the world economy. It is an economy and a society ruled by an autocratic party-state. In order to answer the question: which way should we go, the roots of the troubles must be recognized, the Marxian Utopia discarded, and the socio-economic system of the advanced Western countries realistically evaluated, without ideological prejudices.

In order to have an efficiently functioning economy, fast development of the forces of production, and an adequate satisfaction of demands, we must create an economic system open towards the world market. It must have an advanced commodity production and monetary policy, with organically linked commodity, money, and labour markets. Such an economic system will be a market economy in that economic processes will be coordinated, and production factors allocated, primarily (though not exclusively) by a market mechanism (the "invisible hand"). Also, it will be a mixed economy in that the "visible hand" will have an important part in its regulation: i.e. the government's (and partly the different social organizations') activity. On the one hand, the government will lay down the rules constituting the general conditions of the economic activities; on the other hand it will have a part in regulating economic processes: it will provide for public services and infrastructure in those fields in which the satisfaction of demand cannot or is not suited to being left to market forces. In addition, it will exert influence on the market mechanism itself with a view to improving some of its weak points, or undesirable effects. It will bë a mixed economy also in respect of the forms of ownership. In other words, in addition to the various forms of public ownership of the forces of production (capital) in the broad sense, the individual or joint private property of the citizens, mixed ownership, and foreign ownership will be organic parts of the economy to a much greater extent than today. It can be assumed (in consideration of the initial state) that public property will predominate.

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262 T. NAGY: WHAT MAKES A MARKET ECONOMY SOCIALIST?

A socialist character may be - and I hope will be - lent to this market economy (I have already expressed my views on the subject elsewhere) by the assertion in it of certain ideas and values historically developed in the socialist movements. Such are the restrictions placed upon power based on private ownership and upon private appropriation of income yielded by capital; in general, this involves keeping the inequalities of income and property within limits, while maintaining motivation for higher performance; it involves improvement of opportunities and life-chances for everybody; it means providing for the vital needs; it means social solidarity and the humanization of labour; and it means allowing employees to have a part in controlling the economy (i.e. management). I would point out that those socialist characteristics are present in the advanced Western countries, albeit to different extents and depending on social and economic development. I think that their assertion does not primarily depend on the proposition between publicly and privately owned capital (in this respect, the significance of the otherwise highly important forms of ownership must not be exaggerated), but on the power relations prevail- ing within the political and economic democracy. It also depends on these power relations how the government (and the social organizations) regulate economic processes. All the same, the assertion of these ideas and values will be promoted by the existence of the corresponding forms of collective ownership.

The creation and the functioning of the market economy that is to be developed have numerous preconditions, of which I shall mention only the most important ones.

The development of adequate forms of ownership is a key issue. In the present state-owned sector, such new forms of collective ownership must be established and spread, which clearly contribute to the assertion of interest in the long- term profitability and increase of capital, as well as to its free flow and reallocation. For the purpose, it is indispensable to make use of the modern corporative forms - first of all, of joint stock companies. The shares must be handled (possessed) by institutions of public character which are independent of the state apparatus (as well as of the organs representing various interests), and whose interest lies in the high returns of and increase in the value of the share capital. Such institutions may be, for example, a few specialized banks, holding companies specialized in property management, investment companies, pension funds, insurance companies, or trust funds. It is not inconsistent with corporate ownership (in fact, it is desirable) that some of the company shares (with limited companies, part of the stake) be held by private individuals, in the country or abroad. Small and not highly capital-intensive companies with a fairly stable staff may function efficiently in the self-managed form of public ownership. This latter form, however, is not to be made prevalent, because of the risk of short-term interests - such as increasing personal incomes -

growing too strong, and of rendering the flow of capital more difficult. Finally, the cooperative form based on the members' association and their joint property, may represent an important version of collective ownership in the future, provided

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that the incentive for increasing cooperative property is improved by it. Greater possibilities must be assured for the establishment and development of individual and associated private enterprises. In this domain, there is good reason to let or sell some of today's state property to private persons (more than is the case now). All this amounts to saying that pluralism is needed in the forms of ownership: and they must be granted equal chances in competing with one another.

Efforts made at reaching the highest possible profitability of capital may, eventually, be a reliable guide of decentralized economic decisions only if a proper price system is instituted. In this relative prices would in the long term express the necessary costs of production and in the short term change according to supply and demand. With a few exceptions, this requires free price formation (not restricted by the government), i.e. further essential diminution of the still extensive central price control.

The market economy that is to be established can functioning successfully and efficiently only if it is open towards the world economy. For the purpose, the barriers artificially raised against imports must be lifted, allowing domestic production to compete with import goods; favourable conditions must be created for cooperation with foreign companies, and for the influx of foreign capital for direct investment. Without these conditions, it will not be possible to abolish the monopolistic positions on the domestic market, or to have a smoothly functioning price system. Also, it will not be possible to make use of the advantages of the international division of labour, and make up for the technical and organizational backwardness of the Hungarian enterprises.

Economy-wide planning must fundamentally change. Today, our starting- point should no longer involve planning as the primary coordinator and determinant of the economic processes, and the market should not function in subordination to and within the framework of planning only. In fact, it should be the other way round: the fundamental element is the functioning of the market mechanism, upon which planning must be based and made to help where the market mechanism cannot, or cannot sufficiently, solve problems. Therefore, on the one hand, planning must be an instrument in the hands of the government, enabling it to coordinate macroeconomic processes in the short run; on the other hand, planning should contribute to the development of a long-term development strategy concerned mainly with structural questions.

Finally, an absolutely fundamental condition of the creation and operation of an efficient market economy is that the party-state rule over the economy is elim- inated: in plain words, the far-reaching formal and informal intervention by state and party organs into economic processes should stop. The role of the budget in income redistribution should be diminished, primarily through a radical reduction of the various subsidies granted to poorly functioning enterprises, and of the centrally decided and financed large-scale investments. The so far mainly fiscal regulation

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264 A. NOVE: MARKET SOCIALISM

of aggregate demand, which paralyzes the activity of efficient enterprises, must be replaced by regulation primarily based on monetary instruments.

Even this brief and roughly-outlined survey makes it clear that it is not possible to create and operate a market economy of socialist character without a thorough transformation of the political system. What is involved is not only a better representation of modern democracy and the assertion of human rights representing in themselves such values which people are less prepared to relinquish at a certain stage of economic and cultural development; and it is not only that the crimes of the dictatorial political system raise indignation. It is the economic re- structuring itself that necessitates the elimination of the party and state apparatus' rule over the economy. The way to arrive at this end is to make the political power pluralistic (to create a multi-party system) and thus subject to social control. Such a change, however, would hurt the interests of significant groups and conflict with their ideological prejudices. Their resistance must be overcome. It is not enough if a given number of top executives recognize the inevitability of far-reaching reforms and present reform programme. Grassroot pressure must grow towards developing a democracy.

MARKET SOCIALISM

A. NOVE

I would define it as a state of affairs in which most of the means of production are in some way "socially" owned (state, municipal, various kinds of cooperatives), and in which the predominant mode in the production and distribution of goods and services is market-related. That is to say, goods and services are provided, and investments made, on the basis of an evaluation of demand and profitability, and not on the basis of instructions issued by state planners.

Any realistically envisageable democratic market socialist economy would contain some private enterprises (this is inevitable unless constantly suppressed by the police!), and also some hierarchically organized centralized sectors, such as a railway network, an electricity grid, telephone and postal system and the like ("natural monopolies"). For reasons I discuss at length in my book on "feasible socialism", connected both with technology (economies of scale, etc.) and producers' preferences, one should envisage a wide range of different forms of organizing production.

If the dominant mode is based on the private ownership of the means of production, then, whatever may or may not be the virtues of such a system, socialism it is not.

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WHAT MAKES A MARKET ECONOMY SOCIALIST?