What is socialism? A guest post from Caronte

A socialist economy, i.e. characterised by dominating state ownership and state enterprises, necessarily is somewhat short of democratic institutions because of the threat of parties wishing to revert to private ownership and free enterprises. To some extent this is true of private ownership market systems, outlawing communist parties and indulging in McCarthyism and staging coups when communists win democratic elections, but by and large a private ownership system can cope with the communist threat maintaining a measure of democracy, for there is sufficient scope for debating issues other than the ownership regime, whereas invariably all socialist systems are more or less authoritarian, with the saving grace of often agreeing peacefully to an ownership changeover when the time comes (Ceaucescu resisted the changeover but was an exception).

A socialist economy as defined above could, in principle, be run as a market economy. Socialist values could be asserted by redistributing the incomes generated by markets, by funding public consumption and subsidising necessities and "merit goods", by following macroeconomic policies of high and stable employment.

Otherwise state enterprises could be made independent and managed by professional managers instructed to make profits in the domestic and global markets, reinvesting those profits where they wish once they have paid taxes, pay out dividends to the treasury and other shareholders if any. This was the kind of model that Oskar Lange had in mind (1936), with planners and managers simulating the functioning of markets; though he ignored the question of managerial incentives and their inclination to distort information to their advantage in relations with planners (making planned tasks easier, by concealing productive potential and demanding more resources than truly needed, etc.).

But you could have actual and not just virtual markets à la Lange; this is the kind of system that prevails today in China, Vietnam and Belarus - though China is no longer committed to equality (its income distribution is much more unequal than in Italy, and broadly as unequal as in the USA); Vietnam has been lucky, benefiting from oil coming on stream when they started reforming; and Belarus is highly dependent on cheap oil gas and material from Russia (and Putin is jeopardising its continued growth by raising the prices of Russian exports to Belarus). All three have unpleasant autoritarian regimes.

A socialist economy run not on markets but on central planning can be much more successful than a market economy in mobilising resources and achieving large scale single or related targets such as industrialisation, military might, space conquest. It is much less successful than a market economy in responding to changes in tastes and technology and foreign trade opportunities, and generally in coping with many competing objectives. Temporarily, multiple objectives can be handled by a priority system, but when there are several priorities the problem arises of how to trade-off one with another; under War Communism (1918-21) everything became a priority, including pen nibs at some point; when everything is priority nothing is, and all is chaos. Relative prices and specific budgetary allocations are a better way of expressing government preferences. Moreover, central planners have a tendency to overinvest with respect to labour available (bringing about over-full employment) and the population's willingness to sacrifice current for future consumption. They have a tendency to waste capital ( what Marx called dead labour, i.e. labour embodied in means of production) in producing objects unwanted or wanted less than others that could be produced. In the 1980s the USSR could go into space but was not able to produce enough soft drinks, pizza, hamburgers, shoes and jeans.

Markets have precisely the very great advantage of being automatic mechanisms for adjusting output to changing tastes, technology and foreign demand, and for adjusting actual to desired productive capacity. In the Soviet type system markets could have been easily introduced, except that 1) communist authorities feared that they would lose power by delegating economic decisions to markets; and above all 2) there was an endemic, permanent state of excess demand in those economies, visible under the guise of shortages (empty shops), queues, waiting lists, and black markets at which goods were re-traded at much higher prices than the official level. This state of excess demand had absolutely nothing to do with the original socialist blueprint, but was the necessary result of authorities keeping prices at artificially low levels for fear of inflation, lower than the level at which the planned and realised quantities of goods would have to be sold to balanced demand (of consumers and state enterprises) and supplies. Instead of fighting inflation by holding money incomes down, raising interest rates, producing more consumption goods, the authorities repressed inflation by decreeing lower than equilibrium prices. Instead of changing the world as Marx wanted, they simply pretended that they had changed it. And as a result 1) people spent inordinate amounts of time queueing and searching for goods, and were very unhappy as a result. "Do you often have queues as long as these?" "No, not often. Only when there are goods in the shops". 2) Markets could not be introduced unless prices were allowed to rise to find an equilibrium. Gorbachev - a great statesman - was a lawyer and neither he nor his hack economic advisors understood this.

In 1990 Nikolai Petrakov, Gorby's Chief Economic Advisor asked what was thought of their reforms and was told that to make them work they needed to raise prices to market-clearing level. He said that did not understand Russians’ hatred of inflation; higher prices were not politically possible. Prices were raised only a little bit, making imbalances greater because of inflationary expectations. Markets could not be introduced and the Soviet type system collapsed, with prices rising by about 1500% in 1992 the first year of the transition (in Poland it was 545% in 1990). The old system now exists only in Cuba and North Korea.

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