Reform and Transformation in Eastern Europe

Soviet-type Economics on the Threshold of Change

János Mátyás Kovács, Marton Tardos, János Mátyás Kovács, Marton Tardos

• Publisher: Routledge
• Year: 1992
• ISBN:
  9781134920259
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Can the economics of Eastern Europe make the dramatic transition from centrally-planned to market-led economics? This book tries to understand the intellectual background behind this change and the problems of managing it.

Part I
Reform economics and economic theory and the west—missed opportunities

Introduction to Part I

According to a widespread view, reformism is tantamount to moving away from Stalinist orthodoxy in the direction of liberal economics. But what kind of liberalism? Vienna? Cambridge? Chicago?—they are all ‘more liberal’ than Moscow. What could the reform economists borrow from their western colleagues? Were the reformers able to profit from the position of being a ‘newcomer’? Was it worth while expecting a new synthesis (a ‘third way’) in reform economics, and a rapprochement of east and west in economic thought on the basis of this synthesis? The papers included in this chapter seek answers to these questions.

The socialist calculation debate which began more than half a century ago has not yet been digested by the reformers (and the transformers), whereas the Mises-Hayek thesis of the impossibility of rational economic calculation under collectivism seems to be proven by the decline of Soviet-type economies—a fact that has otherwise been thoroughly diagnosed by the reform economists themselves. The liberal message of the critics of collectivism about the dangers of extreme étatization and centralization—reads Balcerowicz—did not lead to radical changes in the world outlook of the reformers. They accepted the warnings about the distortion of information in hierarchical organizations, the lack of incentives for risk-taking and innovation, and so on, but ignored for a long time the private entrepreneur as the conditio sine qua non of marketization.

Duff Milenkovitch, Grosfeld, Leipold, Montias and Nove all focus on another missed opportunity in the intellectual communication between liberals and reform-minded socialist economists: they point to the apparent inexperience of the reform economists in new institutional economics. While the protracted rediscovery of the Austrian tradition prevented the reformers from building their programmes on a sophisticated dynamic theory of the market (Leipold), the fragmented knowledge of the new institutionalist concepts, such as property rights and transaction cost economics, the theory of the bureaucracy, constitutional economics, and so on, limited the understanding of the existing Soviet-type economic institutions (cf. the notion of institutional equilibrium with Montias), as well as impeded the comparison of market versus government failures in formulating the reform proposals (Grosfeld). The property rights idea will reappear in the papers of Bajt, Comisso and Tardos in the following chapters.

Nove argues with great passion that socialist reformers and post-socialist transformers cannot learn much from general equilibrium theory; they had better consult the neo-institutionalist critique of the neo-classical paradigm if they prefer realism to sophistication. Duff Milenkovitch lists a series of alternative concepts of socialist economic organization to conclude that the theory of non-profit organizations—coupled with the new concepts of bureaucracy—could have served as an adequate model for comprehending Soviet-type economic institutions. Finally, Dietz combines Simmel, Hayek and Luhmann to arrive at a market theory, based on the concepts of ‘exchange’ and ‘communication’, which could have helped the reformers lose their illusions concerning the symmetrical mix of plan and market.

There are, of course, a couple of related questions of great importance, which could not even be superficially dealt with in this chapter. Why did the reformers at a certain point become suspicious with regard to general equilibrium theory? How does this affect their expertise in economic science? Why have they remained uneducated even in welfare economics; a discipline that, in principle, must best meet their ‘taste’? How do the reform economists mix Keynesian-type and monetarist economic policies in their reform blueprints? Which are the typical limits to the rediscovery of the liberal tradition by the reform economists? These problems were widely discussed at our conferences and are also reflected upon in the chapters of Bajt, Brus, Comisso, Kovács, Kowalik, Podkaminer and Tardos.

1
The ‘socialist calculation debate’ and reform discussions in socialist countries

Leszek Balcerowicz

INTRODUCTION

The ‘socialist calculation debate’ (SCD) has been discussed in the economic literature many times (see, for example, Hoff 1949; Bergson 1948, 1967; Ward 1967; Delhaes 1983; Schoppe 1982; Neck 1982; Dore and Kaser 1984; Lavoie 1985; Bernholz 1987). It is known that before the Second World War, the participants on the ‘anti-socialist’ side included Ludwig von Mises, Boris Brutzkus and Friedrich A.Hayek, and on the opposite side Fred A.Taylor, H.D.Dickinson, Oskar Lange, Joseph A.Schumpeter and Maurice Dobb.¹ The debate continued in the post-war period. Various mathematical procedures for decentralized planning, partly based on the previous proposals of the ‘socialists’, were then elaborated by Arrow and Hurwicz, Malinvaud and others (for a comprehensive analysis of these schemes, see: Heal 1973). Some of the issues discussed during the SCD were generalized by Hurwicz (1960) in his concept of the ‘allocation mechanisms’. The literature on this topic and on the related problem of ‘incentive compatibility’ has been growing very fast in recent years (for a review, see Radner 1987).

Many participants of the SCD focused on the problem of rational calculation, or in other words, on the issue of the allocative efficiency of socialism. This is even more true of the commentators on the SCD. But it would be improper to reduce the SCD to the ‘calculation debate’ because some of the protagonists (mostly on the anti-socialist side) raised other issues as well.

In what follows, I will try to relate the SCD to the reform discussions in the socialist countries after the Second World War, that is, to investigate what kind of relationship (if any) exists between these two streams of economic thought. As far as the SCD is concerned, I will concentrate on the writings of the above-mentioned authors. With regard to the reform discussions, I shall focus my attention on those which have taken place in Poland and Hungary. I will disregard the question of to what extent the reform proposals (or the reform practice) in these countries have influenced the theoretical literature belonging to the SCD.² Finally, I will not try to trace the actual flow of ideas from the participants of the SCD to the reform economists, that is, to establish which of the latter were familiar with the SCD and which were not.

The relevant question is therefore this: Did the contributions to the SCD contain anything of potential value to the reform economists?

The writings of the latter typically consist of two parts. One is a critical examination of the established (that is, Soviet-type) economic system. This may be called a diagnosis, as it aims at identifying the main weaknesses in the economic performance and at linking them to some aspects of the system. The second part is a description of the proposed new system, which, if established, would hopefully eliminate the indicated weaknesses.³

I will first discuss the relevance of the SCD for the diagnostic part of the reform concepts and then for the reform proposals proper. One should, of course, remember that the diagnoses of the system may have an indirect impact on the reform proposals, as they influence the direction of the search for a better system.

THE ‘SOCIALIST CALCULATION DEBATE’ AND THE DIAGNOSIS OF THE FAILURES OF SOCIALISM

The problem of economic calculation

This problem can be broken down into two broad issues:

1. the availability of proper economic data for comprehensive central planning.
2. The informational capacity of the centre, that is, the capacity to assimilate and process the data in such a way as to arrive at rational decisions with regard to the allocation of resources.

The original challenge of the anti-socialist critics centred on (1). One can distinguish here two problems. Brutzkus (1922b:167–70) was one of the few authors who pointed out that identifying the consumer preferences and, consequently, determining the correct structure of the production of consumer goods in the absence of the market for these goods, may be a relatively easy task only at a very low level of economic development.⁴ With income per capita rising, there would be, however, an increasing differentiation of consumer preferences and the problem would become very complex. Physiological norms as the basis for consumption planning would not do. Similar points were made by Hoff (1949:74–5, 182–3). In contrast, Mises, widely perceived as the main protagonist on the anti-socialist side of the SCD, did not pay much attention to the difficulties in the central determination of the structure of the production of consumer goods. He even stated (1935:107) that ‘the economic administration [in the socialist state] may know exactly what goods are most urgently needed’.

The second problem, which lay at the very heart of the calculation debate, was the alleged lack of proper economic data for identifying the optimal combination of resources to produce a given output, that is, to establish which production technique is the cheapest. This point was emphasized both by Brutzkus and Mises. Both authors derive this assertion from the lack of markets for the means of production in socialism (as envisaged by the Marxists), and both try to show why the free market prices are the indispensable informational input for rational calculation. There is, however, one difference between them. Mises goes one step further and maintains that only the institutions typical for capitalism can ensure that proper market information will be generated,⁵ while Brutzkus admits the possibility of an efficient ‘market socialism’ and even provides its outline (see the third section).

On the other hand, Mises emphasizes that the problem of calculation only arises under the inherently dynamic, changing conditions of the real world:

if we assume that the socialist system of production were based upon the last state of the system of economic freedom which it superseded, and that no changes were to take place in the future, we could indeed conceive a rational and economic Socialism. But only in theory. A stationary economic system can never exist. Things are continually changing, and the stationary state, although necessary as an aid to speculation, is a theoretical assumption to which there is no counterpart in reality.

(Mises 1951:122)

Thus, contrary to the opinions of many later commentators, Mises’s challenge as to the impossibility of rational calculation in socialism referred to the real world and not to the imaginary world of economic theory (cf. Lavoie 1985:48–77):

The main response on the socialist side to Mises’s challenge was to propose procedures of iterative, price-guided planning, whereby the Central Planning Board takes the place of the Walrasian auctioneer by fixing the prices by trial and error and the enterprises’ and industries’ managers are instructed to follow the rules of welfare economics. Oskar Lange (1938) is widely considered to have elaborated the fullest non-mathematical version of these procedures. It was later formalized by Kenneth Arrow and Leonid Hurwicz (1960). Another version was elaborated by Malinvaud (1967). These economists concentrated on the convergence property of the proposed schemes and demonstrated that under some restrictive assumptions (for example, no incentive problem, no externalities, no increasing returns to scale) there is within the framework of their mathematical models, a convergence to Pareto-satisfactory equilibrium.

However, as soon as one leaves the realm of pure theory and tries to visualize the operation of these schemes in the real world, many doubts come to mind.⁶ Most of them were formulated already in 1940 by Hayek (1949:181–208). First, without dismissing the problem of the availability of proper data to the planning board, he emphasized its insufficient informational capacity, while referring to central price fixing by trial and error:

when…, one proceeds to consider the actual apparatus by which this sort of adjustment is to be brought about, one begins to wonder whether anyone should really be prepared to suggest that such a system will ever even distantly approach the efficiency of a system where the required changes are brought about by the spontaneous action of the persons immediately concerned.

Hayek adds, following Mises, that the difficulty arises out of the dynamic nature of the real world:

If in the real world, we had to deal with approximately constant data (…), then the proposal (…) would not be so entirely unreasonable. But this is far from being the situation in the real world, where constant change is the rule.

Other issues raised by Hayek include the omission of price expectations in the Lange-type schemes, and thus the disregarding of the problem of who is to bear the responsibility for the consequences of the decisions based on erroneous forecasts; the difficulty of identifying the marginal costs by the managers who are required to produce until these costs are just equal to the price of the good; the inability of the centre to set the prices in accordance with the differences in the quality of the goods, and so on.⁷

Hayek did not pay much attention to the q...