23 June 2009

The market and the future of Eastern Europe, from 1989

In the summer of 1989, just as the old order in Eastern Europe was beginning to disintegrate, left wng activists and academics discussed the way forward at a conference in Oxford. Here are the notes giving my perspective at the time•.

All the time we are told that only the market can solve problems
of Eastern economies. Yet three economies which have gone
furthest in direction of market, Hungary, Yugoslavia and China
have all been experiencing economic crises, although of
different sorts.


Over only got 20 minutes to summarise what I recently wrote in a
25,000 word article, so I will only deal with what I would call
the four great myths.

(1) The myth of the market as a smoothly functioning mechanism
for relating the supply of goods to the demand for them. This
myth is often expressed in talk of ''consumer sovereignty'', of
''economic democracy''.

It paints picture of market as allowing people who want goods to
send out price signals which cause producers to turn our what is
desired when it is desired.

This is not a picture of what we might call actually existing
capitalismœ, with it monopolies and oligopolies. It is at best a
picture of capitalism in Adam Smith's time or of marginal partsÜh
of the present wold system, the where a mass of small farmers
continue to produce foodstuffs.

But even then it was not a system in which signals caused supply
and demand to coincide. For production always takes place before
consumptions, even if only by a matter of months as in farming.
Food is produced today. If there are shortages prices rises. But
the increase in production to match these prices does not occur
until next year. Hence the cyclical nature of production even
in farming.

That is why almost every actually existing capitalist state
intervenes to try to overcome the crises of the market.
According to a Financial Times report on Thursday, subsidies for
farming in the OECD as a whole in 1988 are $157 billion, or 45
per cent of total agricultural output.

When we talk about more advanced forms of production, modern
industrial production, the discrepancies between supply and
demand can and do get much grater. It takes five to ten years to
get a modern car or aerospace plant into operation. Yet no©one
knows what the price of oil will be in two years time, let alone
ten years time.

Such a system necessarily end up in rival firms responding to
price signals by building plants in competition with each other.
The result inevitably is, at some point over accumulation,Üh
production trying to expand faster than the inputs of raw
materials, skilled labour and finance. ?The result then is
either a classic crisis of overproduction, as we saw in 1974©6
and the early 1980s, or state intervention to close down some of
the capacity in order to let the rest prosper.

ie market leads to cyclical crises, huge, painful and very
wasteful adjustments of supply and demand.

(2) ”Second myth
That the market causes the capitalist firm to be as efficient and
innovative as possible.•”•

Most Western economists simply take this for granted, for their
economics looks at the interconnection between firms, not the
internal functioning. Their assumptions are then taken for
gospel truth by Eastern European economists who have looked at
the internal functioning of their own enterprises.

But what material there is on the internal functioning of Western
firms points to a huge proliferation of waste, eg Harvey
Leibenstein's calculation of up to 50 per cent waste in terms of
labour inputs.
Look for instance at David Halbersham's recent book on the
American motor industry or recent Wall STreet journal articles
on IBM. Look also at earlier material, like the VAnce Packard
stuff of the 1950s. Üh
There is a reason for this waste.

Modern capitalism is not small firms, but giant firms, and theses
giant firms are absolutely aware of the danger to themselves of
getting caught inthe crises of the market. They seek to protect
themselves by non©productive expenditure©advertising, marketing,
bribery, military contracts, if necessary war.

So vast non productive expenditures, according estimates by
Mike Kidron 20 years ago 50 per cent of US GNP,, and vast waste
inside corporations as they a cushioned against immediate

(3) ”Third myth • œThat Eastern economies are qualitatively
different to those of rest of world.

But in reality there is a continuum in terms of state ownership,
from US at one extreme through South European states like Italy
and Spain, then through many third world states to USSR.

Why? Because crisis of 1930s led many more backward capitalisms
to turn to state to protect them against immediate market
competition from more advanced imperialisms. Just as the
advanced capitalist firms were using non©productive expenditure
to protect themselves, so the more backward capitalisms combined
these with state ownership and control.Üh
But these states could not opt out of world system. HAd to find
means to protect themselves. Some key commodity they sold to
rest of system, or huge military expenditures to defend
So Russian bureaucracy spends twice the proportion of its GNP on
arms as its American rival. It has to have huge heavy industry
sector to back up its arms spending.

Civilian consumption and real wages of workers are necessarily
cramped as a result. Estimates by deputy head of USSR unions
suggest that only 35 per cent GNP goes on wages and salaries.
Sselyunin shows that consumer goods fell from 60 per cent of
output in 1928 to 25 per cent in 1985.

He says picture is one of an ''economy..working more and more
for itself, rather than for man.''
The similarity of this with Marx's description of capitalism
should not need commenting: ''accumulation for accumulation's
sake, production for the sake of production''
For a period they could develop under behind the carapace of the
state in a way which would not have been possible otherwise. But
the unproductive expenditures necessarily began to sap the
dynamic of economic development inthe long term.

These countries also affected by something else. Mistakes in
investment policy in the more advanced states were magnifiedÜh
inthe more backward states trying to compete with them.

THe Eastern European states, near one extreme of the continuum
were the most affected by these. Eg half Us missile projects are
eventually abandoned, with waste of billions. We should expect
same number rot be abandoned in USSr, but impact to be twice as

(4)”Fourth myth: that the market is the way forward in EAstern
Europe, or, for that matter , for socialists in West.•

For those who want to reform the system in order to preserve it,
the turn to the market is an enormous gamble.

For can the industries built up behind closed national boundaries
survive in the face of competition from the giants of US, West
Europe and Japan? AT a time when American giants have difficulty
in the face of Japanese giants there is certainly no guarantee.

Direct impact of market competition throughout whole USSR economy
might well be to create huge black holes.

So, just as trend to protectionism in US and Europe, no great
rush to embrace world market in USSR.

But without world market you are talking of trying to get
competition within USSR. But to match world productivity USSR
firms have to be similar in size to great western firms. \but
this means they necessarily have a monopolist or semiªmonopolistic position inside USSR. Hence way in which relaxation
of controls over enterprises last year led to firms raising
prices and producing more profitable goods, without regard to

It is worth emphasising there are economic, as well as simple
conservative political pressures, which lead burst of economic
reform in Eastern Europe to give way to shifts back to central

Yet the limitations of the market are also beginning to lead
some people in the USSR to look in different direction, not to
market as such but to the global priorities of the economy.

As long as ago as 1957 Kalecki suggested that what was wrong in
Poland was not so much the use of the plan as against the
market, but the mistaken character of the plan, the
disequilibrium which flowed from overambitious investment.

Today in USSR some economists beginning, under the impact of the
mass awakened demand for better consumption, to ask the same

eg scientists who recently wrote ot Izvestia protesting at hugeÜh
investment in Western Siberia jointly with Wetern firms, saying
it would destroy chances of raising living standards and cut
world price of out puts so as not to make a profit.

Let's return to Marx ideal:

''In bourgeois society living labour is but a means to increase
accumulated labour. In communist society, accumulated labour is
but a means to widen, to enrich, to promote the existence of the

But we cannot get there without revolutionary action to rest
control of the market from ruling classes, east and west. And the
ideology of the market is designed to stop us doing so