India's National Magazine
From the publishers of THE HINDU

Vol. 16 :: No. 06 :: Mar. 13 - 26, 1999

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WORLD ECONOMY

The collapse of socialist economies

Three scholars probe the reasons for the collapse, in an approach fundamentally different from the propagandist accounts of those who celebrated it and of those who felt let down by it.

C. T. KURIEN

ALTHOUGH there were many in different parts of the world who were earnestly hoping and strenuously working for the collapse of socialist economies ever since the first of them appeared in 1917, the actual collapse, when it materialised in the late 1980s and the early 1990s, came as a surprising, bewildering event. Since then explanations of various sorts have been offered to make sense of what had happened. And, of course, more explanations will come as scholars and people with insight gather more information and take time to reflect on the revolutionary emergence, rapid spread and unexpected collapse of many of the socialist economies, all within a period of some three quarters of a century.

Three Indian scholars, Nirmal K. Chandra of the Indian Institute of Management, Calcutta, C.P. Chandrasekhar of Jawaharlal Nehru University, New Delhi and Amit Bhaduri, formerly of the same university, have recently contributed to this ongoing explorations. Their contributions have appeared in Economics as Ideology and Experience edited by Deepak Nayyar (Frontline, March 12, 1999). Their views deserve special attention because all three of them are acknowledged scholars and are known to be generally sympathetic to the socialist cause. All of them concentrate on an analysis of the Soviet experience.

According to Nirmal Chandra, one of the main causes for the collapse of the socialist economic order in the erstwhile Soviet Union was the "time bomb of consumer subsidy". That socialist regimes, particularly the one that existed in the erstwhile Soviet Union, played down the role of money and markets and that their prices did not, and were not meant to, reflect the laws of the market are well known. And in popular thinking at least it was held to be one of the great achievements of socialism that it gave the highest priority to meeting the basic needs of the entire population. If, therefore, subsidised provisioning of consumer goods was part of the design and strategy of socialism, how could it have been a cause, allegedly a major cause, of socialist collapse?

Chandra puts forward theoretical and empirical explanations for this puzzle. Socialism, in Marxist writing, is the transitional stage to communism after the proletariat seizes power. The theoretical argument that Chandra puts forward is that Karl Marx and Friedrich Engels had quite explicitly stated that during such a transitional stage, it was not possible, not even wise, to give to each according to needs. Chandra quotes Marx's writing on this from his Critique of the Gotha Programme (1875, pages 85-87). Marx said that "in the first phase of communist society" (that is, just after the proletarian seizure of power) "the individual producer receives back from society - after deductions have been made - exactly what he gives to it." Among the deductions is that which is intended for common satisfaction of needs, such as schools, health services, and so on. Only in a higher phase of communist society... (can) society inscribe on the banners: "From each according to his ability, to each according to his needs!"

Chandra's contention is that the Soviet Union, while still in the transitional stage, violated this injunction and instead of concentrating on the satisfaction of common needs ("public goods" in contemporary terminology) took on the task of subsidising the means of subsistence - food, clothing, housing, and so on - which eventually turned out to be too burdensome. I find this argument too simplistic, but shall not got into that aspect here. Instead, I shall present the empirical evidence that Chandra has marshalled on the growing burden of consumer subsidy in the Soviet Union from the early days to the late 1980s.

It is pointed out, for instance, that over the three decades from the 1960s, the people of the Soviet Union (and the Poles), at a much lower level of per capita income than the United States and Western European countries, had a higher level of per capita consumption of calories and proteins. Secondly, it is shown that while food prices showed significant increases in the Soviet Union in the 1940s and 1950s, in the post-1965 period there was an extraordinary stability in these prices contrary to the experience in most other countries. However, during the same period the cost of production of most food products at collective farms increased sharply. On this basis it is calculated that total subsidies, direct and indirect, increased more than threefold in the span of seven years from 1982 to 1989. Apart from subsidies to consumers the state heavily subsidised inputs supplied to state and collective farms. Says Chandra: "Agriculture was like a bottomless pit that sucked in during 25 years investible resources approximating 5 per cent of GNP each year, and a further 10 per cent by way of annual subsidies in the late 1980s."

Another large component of subsidies was on housing. Without going into the many details given, the extent of the subsidy can be seen from the fact that rent and utilities in family expenditure in the Soviet Union in 1965 was as low as 5 per cent, while in Britain at the same time it was as high as 27 per cent for families of comparable real income. Another estimate showed that an average worker needed to work 12 hours to pay for his apartment in Moscow in 1982, compared to 28 and 51 hours for a worker in London and Washington respectively. Then, of course, there were subsidies for public transport, health care, education and so on.

The point of all this is that "if a large proportion of the annual investment, say, 33-40 per cent, go into these sectors, is it not almost inevitable that investments elsewhere for technological upgrading, research and development, and so on, will suffer as a result?" asks Chandra. He, of course, admits that if other elements in the system had functioned well, rising consumer subsidies alone could not have brought about the collapse of the Soviet system. But other elements did not function well. Heavy subsidies led to excessive consumption and wasteful consumption, the defence burden kept mounting, and so on. Also, appeasing consumers became an easy way for bureaucrats and politicians to consolidate their power and to confer special privileges on themselves.

CHANDRASEKHAR is more general in his treatment. He attributes the collapse of the Soviet system to some intrinsic problems of centralised planning. Whatever may be the textbook claims of the advantages of the market principles of capitalism, when it comes to investment decisions capitalism is basically anarchic, contends Chandrasekhar, resulting in wastage of resources. Hence, overall planning coordinating investment decisions and activities has to be an essential ingredient of socialism. However, Oscar Lange, the socialist economist, in his arguments with capitalist economists in the mid-1930s had demonstrated that such planning need not necessarily have to be centralised. A centralised planning process could determine prices for the system as a whole and price-taking civil servants and managers could implement planned decisions on a decentralised basis.

PETER DEJONG/AP
Commuters are a blur as they pass by a woman and her three children begging in a Moscow subway, in a September 1998 picture. The socialist economic order had given the highest priority to meeting the basic needs of the entire population.

The problem for socialist economies was to design appropriate institutions to combine these elements of centralisation and decentralisation in the planning process. Efforts to bring about the combination ran into a problem; that is, decentralised decision-making in a real life situation was very different from what an ideal type model of a competitive market of price-takers had indicated. A typical situation arising from this fact was the emergence of chronic shortages because of what a more recent analyst of socialist economics, Janos Kornai, termed in the 1980s as "soft budget constraints" in socialist economies. As production came to be encouraged via credit and other subsidised inputs from the state, firms began to increase production and when they ran into shortages they began resorting to large-scale hoarding, leading to further shortages in the system. This situation resulted in a peculiar combination of external efficiency insofar as resources, including labour power, tended to be fully utilised, along with internal inefficiency because firms had few hard constraints to confront. Obviously this sort of systemic deficiency could not continue for long. Such were the problems that various shades of "market socialism" ran into.

A second kind of attempt to organise socialist production was by creating a socialist economy that brought resources under state ownership as in a big factory where, therefore, all decisions of coordination could be considered to be internal, which could be handled by bureaucratic procedures without resort to market principles. Such a view, however, failed to recognise the fact that the "as if" factory approach was based on a disastrous over-simplification of the complexities of a modern economy. It also overlooked the built-in tendencies of technologies to lead to excessive bureaucratisation and the equally built-in tendency of bureaucracies to become rigid and breed corruption. Indeed, all command economies manifested these problems at some time or the other.

Chandrasekhar makes an interesting observation on the consumption patterns in socialist economies. Capitalist economies, he points out, have succeeded in providing a growing and wide range of consumer goods, which is usually ascribed to technological progress, and so it is up to a point, but also due to "their ability to use resources released because of inadequate demand from the poor for even basic necessities for sustaining a trajectory of product and accompanying process innovations that cashed in on created markets among the upper income groups." On the contrary, socialist societies emphasised on an egalitarian society which provided the basics of cheap food, shelter, clothing, education and culture to the entire population and managed a high rate of growth in the initial stages. Soon, however, they got caught up with the desire to "catch up" with the affluent countries in terms of their product profiles as well as military strength. Not surprisingly, the system came under severe strain.

The strain manifested itself in different spheres. For instance, since practically all socialist societies permitted free choice of occupations and a market for labour with difference in wages between different types of work, it became increasingly necessary to open up consumer markets also to free market operations - for which the system was not quite ready. The situation also created a group of people with large money incomes which could not be used because of the non-availability of goods and services that they required. At the same time there were no satisfactory arrangements to mop up the forced savings thus generated. That, in turn, led to non-correspondence between the real and financial segments in the economy. When such problems arose, the key assumption that underlies socialist planning of an omniscient state came into question.

Chandrasekhar's analysis leads him to say: "Both theory and experience with socialism in practice suggest that the assumption of the possibility of an omniscient state underlying the 'planning principle' is extreme. Once we do away with that assumption, however, we are left without an alternative structure of functioning institutions in societies with social ownership. That is, even if we postulate a socialist economy as a planned economy, until we have specified the precise categories of decisions that are centrally planned, the institutions that would make decentralised decisions, and the fall-out of central decisions for the operational functioning of lower units of command, we have not fully specified the system."

BHADURI'S contribution concentrates on the patterns and problems of socialist accumulation. If production and accumulation are ultimately the work of human activity, the manner in which socialist economies have tried to allocate labour will reveal the characteristics of socialist accumulation. The socialist strategy, argues Bhaduri, was to strive for fuller utilisation of labour through a redistribution of consumption goods from the already employed to the previously unemployed who were being drawn into the labour force. The savings for investment and accumulation came from such redistribution of output. It constituted a change in the composition of output in favour of investment goods, into machines rather than an increase in consumption goods, and into land reclamation or irrigation rather than increase in foodgrains, for instance. These patterns were made possible by a bureaucratic management of the demand for goods. It led to a situation in which the system faced a double squeeze: "Real wage restraint was severe to finance investment accumulation and at the same time, wage goods were absent or hopelessly scarce because of a bureaucracy-driven investment programme." It may have worked or been accepted in the early stages of the socialist programme, especially where the new system was established after a successful popular revolution, but over time it led to "a growing separation between bureaucratic central planners allocating investments and ordinary consumers generating the pattern of demand."

The crucial point that Bhaduri mentions is that as the system did not and could not correct this malaise, it collapsed in the end. Bhaduri does not leave it at that. He goes on to say: "Without an independent self-correcting economic or political mechanism extraneous to the Party structure - either in the form of a reasonably functioning market mechanism or in the form of political democracy of countervailing centre of powers - the socialist experiment of creating a 'better society' could not have succeeded. It failed not because it made mistakes, but because doctrinaire rigidity ruled out serious attempts at correction."

THE incisive writings of the three scholars constitute daring probes into the reasons for the collapse of socialist economies, fundamentally different from the propagandist accounts of those who celebrated the collapse of socialism and of those who felt let down by such collapse. These probes may appear to imply "the impossibility of socialism" as some have been arguing. If by socialist economics one means an economy explicitly under human control to serve human ends, such possibility has already been demonstrated in many parts of the world throughout the 20th century and some of them still continue. The socialist experiments that we have seen so far must be thought of as similar to the early flights into space. They have irrevocably demonstrated new possibilities that until then remained in the realms of dreams and fiction. But, sure enough, there were mistakes and collapses, but also many successes. Successes make the next step easier. Mistakes, even collapses, do not mark the end; nor do they turn off further possibilities.

The writer is Professor Emeritus, Madras Institute of Development Studies, Chennai.