A Few Problems With Socialism

The following is taken from the book “Economic Thought in Communist and Post-Communist Europe.” This particular section was prepared by H. –J. Wagener. Pp. 13-14

                Several features of real socialism have been isolated that lead to the unreformability of the system:

·         Priority belongs to politics. The central taboo of the primacy of politics made universal state ownership control and universal interference of party organs a property of the system which could be abolished only together with the political power structure.  

·         Soft budget constraints. It has been disputed theoretically whether central planning is in principle incapable of making the firms’ budget constraints really hard and thus inducing the efficient use of scarce resources. In practice this has undoubtedly been the case.

·         State monopoly of foreign trade with a tendency to autarky. To subject foreign trade to political decision-making and to exclude the national economies from the international division of labor has grave consequences, especially for small open economies. Again, some theoretical solutions of the problem of calculating foreign trade advantage under such conditions have been offered. In practice, political foreign trade control remained on of the central instruments of socialist economic policy.

·         Secondary role of money and finance. Economic calculations and prices, despite valiant theoretical attempts and numerous policy reforms, never functioned properly. The Lange solution to this problem was never implemented – it may be assumed for good reasons. And where market socialism was tried out, as in Yugoslavia, it was unable to put all needed markets into operation (including a capital market and a foreign exchange market). The importance of economic calculation was theoretically recognized, but practically it collided with the party’s planning autonomy.

·         Unity of economic activity and social policy. The provision of a great part of social services and (existing) unemployment was the task of state owned enterprises, and this impeded the development of efficient business management and structural change. A separation of economic activity and social policy would have spoiled the systems alleged major achievement – full employment.

·         Closed shop system of nomenklatura (nomenklatura were a category of people within the Soviet Union and other Eastern Bloc countries who held various key administrative positions in all spheres of those countries' activity: government, industry, agriculture, education, etc., whose positions were granted only with approval by the communist party of each country or region). The selection mechanism for higher personnel was biased in favor of political conformity and against professional qualification, in order to stabilize the ruling elite.

·         Reliance on paternalism. Political control was exercised in a discretionary manner. This led to patronage by the party secretary on all hierarchical levels instead of the objective rule of law (a rational ‘Weberian’ bureaucracy). The ensuing governance regime resembles pre-modern enlightened absolutism and mercantilistic policy rather than the hoped for post-capitalist rationality and glasnost.