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market socialism

  The idea of market socialism can be traced at least as far back as the New Economic Policy experiments in the USSR of the 1920s which partially and temporarily restored markets and private ownership. In this sense market socialism as a concept and set of programmes is inexplicable outside the actual or purported failures of socialist theory and practice. According to Roemer (1996, p. 13), market socialism is \'any of a variety of economic arrangements in which most goods including Labor are distributed through the price system and the profits of firms, perhaps managed by workers or not, are distributed equally among the population. By what mechanism profits can be so distributed, without unacceptable costs in efficiency, is the central question.\'

Socialist-type economies were characterized by the centrality of the plan over the market as a form of coordination, by state over private ownership (cf. central planning). More precisely the system of socialist economic planning turned on (i) targets for physical production (the plan); (ii) the absence of price signals for market clearing; and (iii) the absence of bankruptcy (the so-called soft budget constraint). The structural flaws in these sorts of economy — whether China in the 1960s, USSR in the 1940s or Hungary in the 1970s — turned on the conjunction of three characteristics: first, the allocation of most goods by an administrative apparatus under which producers did not have to compete with one another; second, the direct political control of firms; and third, non-competitive, non-democratic politics.

Actually existing socialisms have, as a number of commentators have observed, suffered from a number of ideal-typical dynamics. These included the lack of incentives (the fundamental criterion of the enterprise is the quantity produced determined by negotiation with a central authority), and uncertainty driven in large measure by (i) the systemic shortage of the right and proper inputs, which is reflected in limited inter-enterprise trade, bartering, hoarding, self-sufficiency, gigantism (the scale of enterprises) and hyper-centralization; and (ii) the deleterious consequences of low prices and a limited role of money (Isachsen, Hamilton and Gylfason, 1992). The brilliant Hungarian economist Janos Kornai (1992) systematized this socialist-type economy and inventoried the sorts of problems (forced consumption, rationing, suction, shortage) which emerge from the logic of the plan and the dominance of political over financial accountability. Kornai spells out in detail the mechanisms of softening the budget constraint (of keeping inefficient enterprises in business): namely, soft subsidies, soft taxation, soft credit, and soft administered prices. In the economics literature these attributes are typically seen to confer problems of information or agency, and of credible commitment on the part of the state (Bardhan, 1993). According to Roemer (1996, pp. 14-15), communist economies suffered from three principal-agent problems: manager-worker relations on the collective farm or in the state enterprise; the planner-manager relation; and the public-planner relationship.

Market socialism can be understood as a reformist response to the problems of \'actually existing socialism\' which emerged almost from the inception of the project in 1917. As a theoretical model it was developed by Oskar Lane and Abba Lerner in the 1930s (see Temkin, 1996) in response to a critique of socialism developed largely by Ludwig von Mises in the 1920s — what came to be called the debate on rational economic calculation under socialism (Hayek, 1940). Market socialist ideas have passed through a number of stages since (Bardhan and Roemer, 1993). The first was marked by the realization by socialists that prices must be used for economic calculation under socialism; they could not in other words use some kind of natural unit such as energy or labour (cf. labour theory of value). The second stage involved the use of Walrasian equilibrium theory to calculate the correct prices in a socialist economy by solving simultaneous equations (cf. neoclassical economics). The third stage was marked by the realization by Lange and others that markets of some kind would be required to find the socialist equilibrium. Lane\'s (1938) model was as follows: the socialist economy based on state ownership of capital and land is controlled by a Central Planning Board, which substitutes for the market and its price mechanism and imitates conditions of perfect competition. It creates a quasi-market by setting prices for capital goods and by providing firms with rules of micro-economic behaviour. This model was subsequently the object of intense critique, most notably by Hayek (1940), but was in any case a western theoretical debate that was rejected outright by the USSR.

The fourth stage was associated with the development of the idea of a market socialism by market reforms in Yugoslavia after 1950, in Hungary after 1968, in China after 1978, and in Poland and USSR in the 1980s. Prices were not fully free and the soft budget constraint was typically maintained with the result that so-called incentive compatibility remained a central theoretical conundrum (see Nove, 1983). Finally, the fifth stage was marked by the events of 1989 and the collapse of the socialist bloc. Here the attempt was to construct market socialism as a \'third way\' between the socialism of old on the one hand and the market-driven shock therapy on the other. Significantly, much of the work of this stage has been developed by western intellectuals — Roemer (1994), Stiglitz (1994), Blackburn (1991) — and rejected much of Lange\'s earlier model. In this new work public ownership is essentially abandoned and rather a multiplicity of different kinds of property rights are explored that would provide incentives for profit maximization but would preclude unequal profit distribution. Here the case of China and the dynamism of township and village enterprises (TVEs) characterized by so-called \'hybrid\' property rights have attracted much attention (Walder, 1995; Naughton, 1996). The most theoretically elaborate model of market socialism is provided by Roemer (1996).

The debate over market socialism embraces a diversity of programmes and practices which include questions of enterprise self-management, investment policy, incentive compatibility and forms of \'market socialization\'. While market socialism is especially associated with the cases of reformist post-socialist states and forms of experimentation (China, Vietnam, Hungary), other scholars include within the market socialist paradigm the Swedish social democratic model, new forms of so-called associative democracy (Hirst, 1994), and the so-called Third Way programmes of Blair and Clinton (Giddens, 1998). (MW)

References Bardhan, P. 1993: On tackling the soft budget constraint in market socialism. In P. Bardhan and J. Roemer, eds, Market socialism. Oxford: Oxford University Press, 145-56. Bardhan, P. and Roemer, J., eds, 1993: Market socialism. Oxford: Oxford University Press. Blackburn, R. 1991: After the fall. London: Verso. Giddens, A. 1998: The third way. Oxford: Polity Press. Hayek, J. 1940: Socialist calculation, Economica 7: 125-49. Hirst, P. 1994: Associative democracy. Cambridge: Polity. Isachsen, A., Hamilton, C. and Gylfason, T. 1992: Understanding the market economy. Oxford: Oxford University Press. Kornai, J. 1992: The socialist system. Princeton, NJ: Princeton University Press. Lane, O. 1938/1964: On the economic theory of socialism. In B. Lippincott, ed., On the economic theory of socialism. Minneapolis: University of Minnesota Press. Naughton, B. 1996: Growing out of the plan. Cambridge: Cambridge University Press. Nove, A. 1983: The economics of feasible socialism. London: Allen and Unwin. Roemer, J. 1994: A Future for Socialism. Cambridge, MA: Harvard University Press. Roemer, J. 1996: Unequal shares. London: Verso. Stiglitz, J. 1994: Whither socialism. Cambridge, MA: MIT Press. Temkin, G. 1996: The new market socialism. Communist and Post Communist Studies 29/4: 467-78. Walder, A. 1995: Local governments as industrial firms. American Journal of Sociology 101: 263-301.



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