The Forgotten Vision of Market Socialism

200 years after Marx’s birth, a look at how two economists sought to reconcile his idea of common ownership with market mechanisms

A century ago this February the British Labour Party proclaimed its conversion to socialism. By committing itself in Clause IV of its 1918 constitution to the “common ownership of the means of production, distribution and exchange,” Labour, in the eyes of most observers, had announced its birth as a truly socialist party. But what exactly did the party hope to do with the means of production once it had socialized them? On this point answers were scarcer. The author of Clause IV, the Fabian leader Sidney Webb, spoke of a comprehensively planned economy in which the role of markets would be strictly minimized. Other party intellectuals, such as John Hobson and Barbara Wootten, advocated a more “liberal” socialism, with a mixture of plan and market.

But a strange lacuna loomed over the whole discussion, for as a historian of the party’s economic debates points out, “despite the near universal dedication to the rhetoric of ‘conscious and deliberate direction’ [of the economy, through planning] few had any specific ideas as to what exactly this implied for actual economic policy.” The prevailing view seems to have been that the precise content of a “planned economy,” though admittedly hazy at the moment, would come into focus gradually and through trial and error, in the course of constructing one. That is why even Western socialists distrustful of Bolshevik methods, like the Fabians, looked hopefully to the newly birthed Soviet experiment — expecting, if nothing else, a wealth of practical lessons.

Seventy years later, on the eve of the Soviet collapse, two Polish economists who had spent a lifetime studying that experiment compiled the lessons they drew from it and published them in a book titled From Marx to the Market. Włodzimierz Brus and Kazimierz Łaski had been leading figures in the fleeting golden age of postwar Polish economics, which thrived under the reform-minded Communist government from 1956 to 1968. After that year, when the regime swung to a posture of repressive conservatism and open antisemitism, the two academics, both Jewish, left the country and settled in the West. In the intervening period, they had stood at the center of reform debates, serving as senior policy advisers, publishing widely translated works on the economics of planning, and working closely with the Marxist-Keynesian economist Michał Kalecki, whose 1955 return to Poland they sponsored.

Few were better placed to offer a mature judgment on the seven decades of the Communist economic experiment. But they offered something else as well: a promising vision of a feasible socialism.

Under the classical command system inherited from the Stalin era, a single overriding objective was imposed on individual enterprises in the Eastern Bloc: “plan fulfillment.” What resulted from that objective was a series of symptomatic behaviors by firm managers that, while individually rational, yielded dysfunctional economic performance in the aggregate. For example, there was the so-called “minimax” strategy. Since shortfalls of input deliveries were by far the most common reason for firms’ failure to meet their output targets, enterprise managers during the ex ante bargaining that led to the formulation of the plan sought assiduously to minimize the output targets they were expected to deliver while maximizing the input allocations they claimed to need. More broadly, firms hoarded inputs to guard against the danger that they would run out and find themselves unable to hit their output targets. But while individually rational for managers, “minimax” behavior was collectively irrational for the system as a whole: since one firm’s output shipments were another firm’s input deliveries, pervasive input hoarding led to chronic output shortfalls that cascaded through the economy, manifesting in shortages and bottlenecks.

Then there was “priority adjustment,” which involved managers choosing, among the plan’s conflicting objectives (quantity, quality, variety, etc.), whichever ones could be most readily fulfilled. In practice, the favored priority was usually the output target — a pattern satirized in the old Soviet joke about the factory that was assigned to produce 10 tons of sewing needles and ended up delivering one gigantic needle. Product quality and variety in the planned economies were generally kept to minimum acceptable levels.

Finally, managers in the planned economies exhibited a marked aversion to change. Anything that heightened the uncertainty of input supply was unwelcome, and this is always the case with any sort of new product or process innovation. As the American economist Joseph Berliner found in his landmark study of Soviet innovation, new products and processes tend to require new and unfamiliar inputs, as well as larger volumes of them to accommodate the necessary tinkering and experimentation. Input suppliers often must be asked to make custom modifications to their products, a nuisance that can impede the suppliers’ ability to meet their own output targets. And new products often turn out to be uneconomical in their intended uses yet highly effective in other, unexpected uses; yet to allow this sort of serendipity to play out freely would completely unravel the coherence of the plan. All of this made systematic innovation impossible.

After Stalin’s death and the loosening of ideological controls, economics experienced a rebirth in the socialist countries — especially in Poland. The result was emergence of a cohort of reform-minded economists who bemoaned the command system’s overcentralization and urged a wider scope for the use of prices, profits, and other “market-like” metrics while preserving the principle of “socialist ownership” — that is, collective ownership of the means of production. Brus’s 1961 book, later published in English as The Market In A Socialist Economy, served as a sort of economic manifesto for the movement.

In the 1960s and 1970s, halting experiments in this direction were half-heartedly undertaken in a number of socialist economies, including the Soviet Union itself. But Hungary pushed this line of reform further than all the others. Under the New Economic Mechanism (NEM) inaugurated in 1968, Hungarian firms were still owned by the state but were no longer subject to formal output quotas or input allocations. In fact, there was no longer any national “plan” specifying physical production targets at all. Each firm was still attached to a state ministry, which had sole power to dissolve, merge, or reorganize it, and the ministry still determined the firm’s permitted “sphere of activity” (i.e. industrial sector or sub-sector). Ministries also wielded hiring, firing, and pay-setting power over firms’ top managers. But enterprises now had to acquire their inputs and sell their outputs on the open market, with the state, in principle, guiding the economy and capital accumulation solely through macroeconomic means — that is, through control of taxes, interest rates, subsidies, and the like. The command economy of the Stalin era was a thing of the past.

The results were a disappointment. But, not a complete disappointment: any foreign visitor to Hungary in the 1970s could see a marked improvement in the quality, and variety of consumer goods now that firms had to pay attention to cost and demand. Yet innovative activity was still nonexistent and shortages persisted. Hungarian economists were nearly unanimous in finding no qualitative change in the overall operation of the economy. What had happened instead was a shift from “direct” to “indirect” bureaucratic control, a situation in which “the firm’s manager watches the customer and the supplier with one eye and his superiors in the bureaucracy with the other eye,” as the eminent Hungarian economist Janos Kornai put it. Under the new dispensation, a sort of “financial tutelage” replaced physical planning, in the terms of economist David Granick. Enforced through special taxes and subsidies imposed on individual firms on a discretionary basis, along with informal quotas, licenses, price controls, and so on, this financial tutelage largely negated whatever autonomy firms were supposed to wield under the New Economic Mechanism.

By the time Brus and Łaski wrote their 1989 book, a consensus had formed among Hungarian economists that the root cause of this puzzling persistence of bureaucratic control was the absence of a capital market. The NEM had envisioned the use of market mechanisms to govern decisions about the use of existing production capacity in product markets. But decisions about quantitative or qualitative changes in production capacity, requiring the mobilization of factors of production,  were still supposed to be a matter for national planning authorities to decide.

Yet it soon became clear that these two features of the system were in contradiction with each other: in the absence of a capital market, even decisions about the use of existing capacity in product markets could not sustainably be left to autonomous firms. As Brus and Łaski observed:

If a currently unsuccessful enterprise is prevented from attempting to raise capital in the market in order to restructure its operations, including branching out into other more promising fields, or cannot be taken over by a more dynamic firm which sees latent opportunities, strict application of the market rules of the game would actually lead to gross inefficiencies: not only would those enterprises unable to recover go out of business, but also those with good prospects although in temporary difficulties.

In effect, the state was forced to intervene. Non-intervention “would push an unduly large number of enterprises into bankruptcy,” the Hungarian economist Marion Tardos wrote at the time; and without a capital market, there would be no one to buy their assets once they had been liquidated.

Here is where Brus and Łaski made their most original contribution. At a time when the winds of history in Eastern Europe were blowing at gale force toward a full embrace of free-market capitalism, the two economists proposed an effort to place market socialism on firmer foundations, through the establishment of a socialist capital market mechanism. But how could Sidney Webb’s hallowed “common ownership” be reconciled with fragmentation of that ownership — a logical precondition for the buying and selling of financial and control rights over productive enterprises?

As Brus and Łaski put it, what was needed was “a firm separation between a number of roles hitherto performed by the socialist state in such close interconnection that they have come to be regarded as indivisible.” The role of the “owner state” must be clearly separated from the state’s role in levying taxes; in “setting business, health, safety and other standards”; in serving “as the center of macroeconomic policy”; and in dealing with all those societal problems “which cannot be defined in profit-and-loss terms (public goods, externalities).” All these roles were vital, Brus and Łaski believed; unlike many of their Eastern European colleagues in the 1980s they were no laissez-faire enthusiasts, and Łaski soon became a vehement critic of the IMF’s structural adjustment policies in Poland. But the legal basis of the state’s economic planning must be grounded in the state’s role as the democratic guarantor of the public will — not in its proprietorial interest in the productive infrastructure.

Although Brus and Łaski advanced these ideas as a path for reforming existing socialist economies, it is possible to imagine a transformation to such a system from the starting point of a modern capitalist economy. Suppose that a democratically constituted Common Fund were to carry out the compulsory purchase of all financial assets owned by households: stocks and bonds, but also mutual funds and other wealth instruments. Payment for the assets would be deposited in households’ bank accounts — with ownership of those banks now in the hands of the Common Fund itself. At the end of this process, all private financial wealth balances would represent the liabilities not of mutual fund companies or other private securities issuers, but of the Common Fund. Meanwhile, the firms that make up society’s means of production would now constitute the Fund’s assets, and could be allocated among newly constituted socialized investment funds. These funds would manage their portfolios on the Fund’s account, rather than the account of private owners. And newly formed private businesses could, in time, be sold into this socialized capital market (nudged along by incentives favoring such sales) to ensure that it remained the predominant owner in the economy.

Such a system would make it possible, as Sidney Webb wrote in Clause IV of the Labour Party constitution, “to secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof” as well as “the best obtainable system of popular administration and control of each industry or service.” Workers, in other words, would be able to obtain a far greater degree of managerial control over the firms they work for.

And more than that would be possible. For example, a number of advantages would arise in the area of macroeconomic management. Private financial wealth would no longer fluctuate chaotically with financial markets; instead it would be a matter determined by macroeconomic policy, just as one component of it—the size of the monetary base—already is today. Under such a system of socialized finance, bank runs and their counterparts in the shadow banking system would no longer pose a threat, since subjective expectations of future returns would no longer automatically determine the exchangeable value of individually owned financial assets—that, again, would be a matter for public policy to decide. Meanwhile, any public guarantees extended to financial institutions in times of crisis would no longer pose moral hazard concerns, since those financial institutions would already be public institutions, their managers could be removed at will, and no private actors would have profited “on the way up.”

Above all, the commanding heights of the economy would no longer constitute an archipelago of private empires ruled by Bezoses, Zuckerbergs, Kochs, or Trumps. They would instead be, to coin a phrase, “ours, not to slave in, but to master and to own.”

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