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EnterpriseandSocialismaretheycompatible?LessonsfromEastern
EuropeandChina
EnterpriseandSocialismaretheycompatible?LessonsfromEasternEuropeand
China
byWodzimierzBrus
Source:
PRAXISInternational(PRAXISInternational),issue:1/1988,pages:99108,onwww.ceeol.com.
DISCUSSIONS: SOCIALISM, MARXISM AND POLITICAL
ECONOMY
Enterprise and Socialism - are they compatible?
Lessons from Eastern Europe and China
Wlodzimierz Brus
Almost forty years ago, Joseph Schumpeter delivered an address to the
American Economic Association under the title "The March into Socialism."l
As he stressed, he did not advocate socialism, nor did he "prophesize" or
predict it; the title was merely to present, in his own words, "observable
tendencies and to state what results would be, if these tendencies should work
themselves out according to their logic."2 Among the tendencies that the
distinguished analyst of the entrepreneur's role in economic development had
in mind was the process by which the entrepreneurial function could become
obsolete in socialism. "The management of industry and trade would become
a matter of current administration, and the personnel would unavoidably
acquire the characteristics of a bureaucracy. Socialism of a very sober type
would almost automatically come into being."3
In the closing decades of the twentieth century, in most of the "real
socialist" countries (this is still the designation used in offical Soviet language
to describe countries ruled by Communist parties), a frantic search-is going on
to find tools to revive the entrepreneurial function - in order, again using
Schumpeter's terms, to be able "to reform or revolutionize the pattern of
production by exploiting an invention or, more generally, an untried techno-
logical possibility for producing a new commodity or producing an old one in
a new way,by opening a new source of supply of materials or a new outlet for
products, by reorganizing an industry and so on".4 This is true not only for
countries like Yugoslavia where the search is already almost 40 years old, or
Hungary, which introduced the (then) "New Economic Mechanism" in 1968,
but also of the two giants and ideological standard bearers of the communist
world: China, where reforms have been in full swing since the end of the
19705, and the Soviet Union, where from the platform of the Communist
Party's XXVII Congress and from pronouncements of Secretary General
Mikhail Gorbachev, the repeated calls for socialist entrepreneurship can be
clearly heard.
These calls cannot be attributed to the desire simply to find a more palatable
name for old practices. The term "enterprise" was, curiously enough, never
banned from Soviet, East European or Chinese official vocabulary. To the
contrary: it may come as a surprise, but when the foundations of the economy
(usually called the "command economy" or a "centralistic model" in my own
terminology), still dominant today in communist countries, were codified
(during the late '20s and early '30s) the enterprise was elevated in most
authoritative documents to the status of "the main link in the system of
Praxis International 8: 1April 1988 0260-8448 $2.00
100 Praxis International
management." However, not simply the designation "enterprise", but the
institution's actual role is what matters. In a centralistic model the enterprise
is the lowest distinct organizational and accounting unit in the economy, with
its own balance sheet and the formal right to conclude contracts with other
similar units (as well, although in a different respect, with the bank), but
without actual possibilities for taking aliocational decisions without disregarding
the rules of the system. Thus, the enterprise is in principle an organizational
unit designed to implement, in the most accurate way possible, decisions
coming from above (ultimately, from the centre) in the form of obligatory
targets and plan-determined resource limits. I am not in a position to offer
a more detailed description of the centralistic model here; however, we at least
have to be aware that under the conditions of this model, the "enterprise"
does not exercise the entrepeneurial function: it does not make choices either
about objectives or means, and it does not bear the resultant risks and
responsibilities. In a peculiar sense, one could say that the locus of the
entrepreneurial function is shifted upwards to the centre. Hence, the
frequently encountered references to "USSR Inc." in western literature on the
Soviet economy contains a grain of truth, yet it goes without saying that a
sovereign state in general, and a communist state in particular - because of
its monopolistic political and economic position - cannot behave as an
enterprise that adjusts itself to external pressures and constraints under the
peril of being driven out of business. Political responsibility ultimately does
exist, even in a highly coercive system, but - as experience shows - it
becomes manifest only when economic failures reach crisis dimensions. It
would therefore be wrong to accept the "USSR Inc." parable as an indication
that all that happens in a centralistic system is the replacement of, say, a
number of companies like Ford and General Motors with a single "USSR
Inc." which runs an aggregated profit-and-Ioss account, but otherwise
operates in a way similar to giant capitalist corporations. It is much more
accurate to state that in a communist command economy the entrepreneurial
function in the traditional sense disappears.
This does not mean that a unit called the "enterprise" is not concerned at all
with the monetary facet of the allocation process. Money is used in planning
(as a means of aggregation) and in the implementation of plans (as a control
device). It plays, however, a passive role in the sense that money-flow follows
the plan-determined flows of physical resources, and not vice-versa: crudely
speaking, if an enterprise is scheduled to build a new plant, use a given
amount of materials, or employ a particular number of people in particular
skill (and wage) categories, it will be provided with sufficient monetary
resources. There may be problems with "overspending" on the physical side.
This obviously has its monetary side as well, but because the final responsi-
bility for setting up the enterprise, describing its operations, selecting its
managers, and so on, lies with the state, the shortfall will, as a rule, be made
up. In the nowadays widely acepted conceptual framework introduced by the
Hungarian economist Janos Kornai, this means that enterprises in a command
economy operate under a "soft budget constraint" .
Two peculiar types of entrepreneurship must be mentioned in the context
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Praxis International 101
of the command economy: manipulation of the superordinate level of
economic admistration and informal t.ransactions between enterprises them-
selves. Both are linked to the limited capacity of the center (and its
subordinate agencies of economic administration) to collect independent
information and to process it ("imperfect knowledge"). The first type
amounts to exploitation of "imperfect knowledge" for the sake of local
"interest'; while the second amounts to a correction of its consequences. In the
first case, the center has to rely at least in part on information supplied by an
interested party: if an enterprise is rewarded for plan fulfillment and punished
for underfulfillment, it tries to hide its capacities (in order to receive a less
demanding target) and exaggerates its needs (in order to get a more generous
allocation of labor and material inputs). Skillfulness in these operations has
developed in communist countries to a degree comparable to the skillfulness
of western companies operating in a market environment, but the conse-
quences for the overall performance of the communist economies seem to be
much more unequivocally harmful. As for the second case, the mismatch
between supply of and demand for production factors on the spot is often
corrected by enterprises arranging swaps, which only go against the rules of
vertical channels of allocation, but - as some analysts think - are absolutely
essential for keeping the economy moving. This is undoubtedly a positive
piece of entrepreneurship - linked, however, with breaking free from the
straitjacket of the command economy.
Has the suppression of the entrepreneurial function damaged the commun-
ist economies? Insofar as this suppression is tied to the dominant position of
public ownership and central planning, this is still by no means obvious to
everyone and references to the achievements (e.g., of the Soviet Union, which
succeeded in transforming itself from relative backwardness to a super-power)
should not be lightly dismissed. On the other hand, the evidence from other
communist countries where the Soviet system has mainly been imposed from
without after the second World War is at least mixed, and the weaknesses of
Soviet-type modernization have come increasingly to the fore. In my view the
term "conservative modernization" is an appropriately paradoxical descrip-
tion of the results obtained: increase in output, mainly as an effect of larger
input of capital and labor, predominantly imitative technological change with
disproportionally little endogenous innovation, obsolescent industrial struc-
tures, and foreign trade which bears a striking resemblance to that of
underdeveloped countries.
6
One of the most visible signs of the weaknesses of
Soviet-type modernization is the strongly pronounced downwards growth
trend - a phenomenon which not only led to the abandonment of the once
confident claims of entering the "higher stage of communism" by the
beginning of the 1980s, but also to worries about the ability of the system to
maintain any dynamic poterltial over the long run.
It is obviously beyond the scope of this paper to discuss in depth the
consequences of the suppression of the entrepreneurial function for the past
and future development of the communist economies. However, the reform
efforts mentioned earlier seem to indicate unequivocally that the leaders
themselves - in China, in the Soviet Union, and in a number of European
102
Praxis International
countries, realize how important it is to imbue economic actors with the spirit
of entrepreneurship. Thus, we are entitled, I think, to put forward the
proposition that the damage from previous entrepreneurial practices was
substantial. Given this fact, what then are the chances of reviving genuine
within the framework of a communist system? A brief
survey of the essence of the reform ideas may help us in this task.
From this sketchy description of the centralistic (command) model, it
should be clear that the scope for entrepreneurship is related inversely to the
degree of administrative regulation and directly to the degree of market
regulation. Hence the dominant thrust behind reforming the system has been
a call to free the units, called enterprises, to make their choices
based on market considerations: prices, costs and demand. On the other
hand, the desire to retain the principles of national economic planning means
that the freedom of enterprises
l
could not be unlimited. Hence, compromise
solutions of various kinds, with the boundaries between administrative
regulation and market regulation were set differently. Conceptually the most
radical attempt at reform was the Yugoslav model of self-managed socialism,
which was supposed to evolve gradually towards full market regulation (with
enterprises taking decisions not only with regard to current operations, but
also with regard to investment, i.e., fixed capital formation). State regulation
was to be limited to some sort of indicative planning, conducted through a
network of agreements between the self-managed enterprises and state
authorities (also formed on the principles of self-management) at different
levels of the state organization. Yugoslavia - which in the first post-war
period was the most faithful imitator of the Soviet command model- started
its reforms soon after the break with the Soviet Union in 1948. By 1965, the
marketization measures reached their peak.
In other communist countries, the dominant reform trend was more
restricted. The prevailing idea hovered close to what this author described
(and advocated) as a "model of a planned economy with a regulated market
mechanism." This model distinguished between two types of economic
decisions: main macro-economic ones (including the determination of the
scale of investment activity and allocation of the main bulk of investment
funds among sectors, regions, or even large individual projects) on the one
hand, and current (standard) decisions (including smaller investment pro-
jects) on the other hand. Enterprises were to be free to take the second type of
decisions. With commands (obligatory targets of the plan) and administrative
allocation of production factors abolished, they were to be exposed to
market-type self-regulatory mechanisms in their current operations. Profit
was to become the main success criterion, as vvell as the source of incentives
for the workforce (wage rises dependent on financial viability plus a profit-
sharing fund for bonuses). Profit was also to be the source of self-financing for
autonomous illvestment activity. The coordination of the market-regulated
activites of the enterprises with the general provisions of the plan was
supposed to rest on: (1) the macroeconomic framework determined by
fundamental decisions taken directly by planners; (2) determination of the
"rules of behaviour" for enterprises (success criteria and their incentive
Praxis International 103
consequences) in such a way as to direct local interests onto a converging path
with the general ones; (3) fiscal, monetary and price policies which would
effectively support the regulatory features under points (1) and (2) (of
particular concern was to guarantee that enterprises became price-takers
only). Thus, the macroeconomic plan would remain effective in setting the
economy on a broadly delineated course, but without exercising direct
controls over the enterprises. It even relinquishes central control altogether in
matters outside well-defined social preferences (recognition of broad economic
"zones of indifference"). The interaction between an effective central plan so
conceived and a market mechanism was to be made possible by, on the one
hand, providing the central planner with the right to issue binding rules, but
on the other hand by making these rules general (except for major investment
projects) so as to create the necessity and the room for both the planner and
enterprises to adjust to changing conditions.
The Hungarian "New Economic Mechanism" of 1968 was conceptually
close to the model of a "centrally planned economy with a regulated market
mechanism". As far as one can tell, this idea also seems to appeal to the
Chinese reformers, although no formal blueprint has been adopted there. In
other countries, the officially proclaimed reform programmes have fallen short
of fully accepting this model (except, perhaps, in Czechoslavakia in 1968,
aborted after the Warsaw Pact military intervention, and the as of yet
unimplemented 1982 Polish reform blueprint). Nonetheless, the direction of
these reforms was to some extent similar: not abolition, but a substantial
reduction in the number of obligatory targets for enterprises and the amount
of producer goods allocated hv the ceptre.
When one turns to examine the experience of the implementation of these
reforms, one's overall impression must be of a very slow and limited process.
Even if we leave aside Yugoslavia, which found itself in special circumstances
after its break with the Soviet Union, a growing awareness of the need to
reform the command system became evident in most communist countries as
early as the mid-1950s. Several countries in the Soviet bloc tried to carry out
reforms unsuccessfully in the second half of that decade. Hungary abandoned
them after the bloody Soviet invasion; Poland slowly diluted its reforms
despite the fact that the new leadership (Gomulka) came to power under the
reform-banner; in the USSR, Kruschev's fall put a stop to the reform process.
Then came what I call "the second wave of economic reform" in the 1960s,
again directed toward strengthening the position of the enterprise: the "New
Economic System" in the GDR (formally condemned after some 8years of not
very consistent implementation), the "Kosygin reform" in the USSR in 1965,
(only to die slowly within a few years), similar attempts in Bulgaria (with a
similar fate), the economic component of the "Czechoslovak Spring" in 1968
(suppressed with only slight delay after the invasion), and two clumsy Polish
attempts (both short-lived, the second ending with the massacre of workers on
the Baltic coast in December 1970). The only reforms emerged in
Hungary. The 1970s were characterized by fewer attempts at reform: one in
Poland (the so called WOG-reform, WOG standing for "large economic
organizations" - again unsuccessful. The Hungarian "New Economic
104 Praxis International
Mechanism" survived despite mixed fortunes in the middle of the decade.
The 19808 in contrast, display a strong, although hardly universal revival of
reformist attitudes, undoubtedly partly due to the mounting pressures of
economic difficulties and the collapse of the earlier "import-led growth"
strategy which may have permitted political elites to avoid reforms. Apart
from the sharpening of reform tendencies in Hungary and a more comprehen-
sive blueprint in Poland, we are witnessing a return to the ideas of the
"Kosygin reform" in the USSR, and another move in the same direction in
Bulgaria. Moreover, the 1980s are marked by the Chinese economic reforms,
which, if for no other reason but their sheer scale, must be considered of
paramount importance.
Most interesting in the history of these reforms is (1) that they persist,
which should be taken as proof that a change is needed; that they (2) display
some convergence in concepts, despite differences between countries; the
elevation of the role of the enterprise is now a major preoccupation everyw-
here, and (3), that all this persistence and convergence notwithstanding,
practical results are meager - either because of non-implementation or
because reforms have failed to meet expectations. To explain this would be a
major step toward answering the question of whether entrepreneurship and
socialism are compatible.
There are numerous hypotheses about the failure of East European
reforms. I see the roots of these failures in the interaction of three groups of
obstacles: political, the vested interests of social strata, and substantive
dificulties in combining plan and market on the basis of public ownership. It
is the third of these groups which interests us most in our search for clarifying
the issue of the compatibility of enterprise and socialism, so, I shall examine
the first two very briefly. Political obstacles are rooted in the fear of the ruling
elites that economic reform presents a threat to the political system of
communist monoarchy.
8
It is by no means certain that there is a straight-
forward and simple relationship between the evolution of the economic and
political system. Still, in all countries such a relationship seems to have been
identified both by the supporters and opponents of the communist power-
monopoly, and some features of the command model are virtually inseparable
from the way political power is exercised: political principles of appointments
("nomenklatura") on all levels of management, subordination of resource
allocation to political priorities, control over both the price- and the wage-side
of income distribution, etc. It would be wrong to perceive the political factors
acting in an anti-reform direction only. If economic reform could prove
effective, it would bring obvious political dividends, too. On balance,
however, the political factor ought to be counted, in my view, as an obstacle.
Moreover, even in cases when this obstacle has been somehow surmounted (as
in Hungary), or when political interests demanded reform (as in Yugoslavia
after the 1948 break), the ruling elites tried to do their utmost to keep
reforms narrowly economic, preventing their spread to the political sphere.
This opens up a new fundamental problem. What is the impact of the
preservation of monoarchy on the consistency and effectiveness of economic
reform? I shall say a word on this matter before concluding.
Praxis International 105
vested interests is, the interests of various social strata) in
hindering economic reform is difficult to ascertain, let alone measure.
However, on basis of my own observations and those pieces of evidence
which can be gathered from sociological works published in the West as well
as some communist countries, I think that the following proposition can be
accepted: there is a constituency for economic reforms in all countries, but at
the same time there are considerable social forces against them, the latter not
only an10ng the upper strata close to the seats of power or at the middle levels
of the party- and state-apparatus (often the strongest resisters), but also
among rank-and-file workers, especially among the least skilled. The workers
may often be wary of the promise of greater efficiency and earnings if linked to
higher labor productivity, and they are wary of the possibility of losing the
familiar cushions of absolute job-security, overstaffing, and a "take-it-easy"
work atmosphere. Even among the managerial strata, regarded by conven-
tional wisdom as the most ardent supporters of economic reform, attitudes are
by no means uniform, especially in the USSR where the centralistic model has
operated for over half a century. Managers of an already third or perhaps even
fourth generation raised under this system are not adjusted - and therefore
often incapable and unwilling - to behaving in an entrepreneurial manner,
with all the risks that independent decision-making entails.
What then of the substantive difficulties? They are best observed in countries
which claim to have carried out economic reforms, i.e., in Yugoslavia and
Hungary, the latter providing us with the most information because it lacks
the special problems tied to the federal structure of Yugoslavia. As I said
earlier, according to conventional wisdom, the effects of reforms - without
denying some positive achievements - have fallen below expectations. By
this I mean not a country's economic performance (which varies between
different countries and periods inter alia and also under the influence of
external, non-systemic factors, but mainly the lesser than expected actual change
in the behavior of economic actors, particularly among enterprises within the
state sector of the economy. I stress this last aspect because the situation outside
the state sector in the private and cooperative spheres is different. This has
interesting implications for the issue of the compatibility of enterprise and
socialism. To most Hungarian economists (including Janos Kornai), the state
economy under the NEM is still coordinated in current operations, not by the
market, but by administrative means differing from the old model more in
form than in substance (indirect instruments instead of the direct ones). The
main manifestation of this is seen in the failure to apply to state enterprises the
general rules mentioned above. Enterprises have not been given the freedom
to act and to be exposed to the rigors of the market. Instead, the widespread
tendency has been to tailor financial norms in such a way as to keep every
enterprise afloat. Bargaining with the higher authorities over output targets
and input allocations has been replaced by new forms of bargaining over
financial conditions. This means again that dependence on superior adminis-
trative bodies arises with a concomitant weak resistance to their power.
9
To what extent are these weaknesses due to the very idea of grafting a
market mechanism onto a fundamentally planned (centrally managed)
106 Praxis International
economy, albeit in principle mainly on a macroscale? The pitfalls of such
grafting seem rather evident. The exigencies of central control generate
tendencies at variance with conditions propitious for the unhampered activity
of enterprises. Among them is the tendency to retain a strong center of
economic administration - supposedly for overall control purposes, but with
an obvious inclination to interfere with enterprise management. The tendency
towards industrial concentration is another consequence. It is easier to control
a smaller number of larger units from the center, but this in turn threatens to
undermine a number of preconditions for an effective market. It creates
monopolistic barriers to competition, especially as reliance on foreign compe-
tition quickly proves futile in view of balance-of-payment difficulties (this is
also the Yugoslav experience) and it also creates powerful pressure groups that
bend the financial rules mentioned above, particularly those which seek state
support for over-ambitious investment plans. Furthermore, it makes less
probable a refusal on the state's behalf to bail-out a huge concern in trouble
and hence the elimination of the "soft budget constraint".
These problems are tied to another aspect of combining plan and market in
a model of "central planning with a regulated market mechanism:"6 the
distinction between longterm investment decisions, largely assigned to the
center, and current operations left to autonomous decisions of the enterprises.
The latter can undertake minor investment initiatives, but they cannot
embark on a wide-ranging diversification programme, let alone break out into
a completely new field of activity. In a situation where an enterprise is stuck in
its old and unpromising line of activity, the choice often is between complete
closure and subsidization, the latter course usually the preferred one. This
again increases the degree of dependence of enterprises on their administrative
superiors. Then there is also the question of responsibility for poor quality
investment decisions taken by the center that adversely influence conditions of
current operationf (a source of frequent complaints about "lame ducks"
created by political decisions in Yugoslavia).
Thus, the Hungarian experience seems to indicate that in order to open the
door to entrepreneurship, the degree of administrative coordination must be
further restricted and particularly that the emphasis on product- and labor-
markets alone is insufficient: they ought to be supplemented by a capital
market which would make possible horizontal capital flows (between enter-
prises, enterprises and households etc.) through a commercial banking
system, bond issues, etc). This was recognized by the Yugoslav reformers
quite early on, and solemnly proclaimed as being introduced in 1965). In
actual fact, however, very little happened in the way of creating a genuine
capital market; the level of government control has merely been shifted from
the federal to regional level. Was this failure accidental, or did it have
something to do with such a basic feature of a socialist system as the
predominance of public ownership?7 There are indications that the latter
supposition might be relevant although other factors are probably involved,
too. The link is seen in the fact that the workers' share in enterprise income in
Yugoslavia is based not on any form of personal property rights, but
exclusively on employment, the loss or change of which means the dis-
Praxis International 107
appearance of any stake in the productive units' assets. In contrast, the
operation of a capital market, even in a rudimentary form, can hardly be
envisaged without a longterm interest in the growth of the value of assets. If
we take into account another piece of evidence, namely the much greater
success of reform measures outside the state sector in cooperatives and
particularly in the private sector - this is clearly the experience of Hungary,
and especially so in China, it looks as though the revival of entrepreneurship
would require reconsideration of the question of property rights. This does
not mean, in my view, that private ownership is the only possible environment
for the operation of the market, but a mixed economy - both in the sense of
having a larger share of non-state enterprises and a greater diversification of
ownership relations within the state sector itself - seems to me the necessary
condition for entrepreneurship.
It is in this context that another word is needed about the political factor:
the strong (some would say - asbolute) dominance of the political over the
economic system, as it is the case in countries of "real socialism", is clearly
incompatible with such a mixed economy. The success of communist
leaderships in countries like Yugoslavia and Hungary, in introducing changes
in the economic system while keeping the political system of monoarchy
basically intact must have been an important source of the meager effects of
past economic reforms. The more comprehensive and deeper changes in
economic life that we have been discussing stand a lesser chance of emerging
with the monoarchy left in place.
Needless to say, ours has been only a short discussion of the immensely
complex issues involved in the question posed in the title of this paper.
Nevertheless, I think, some kind of an answer can be given.
An enterprise - in the proper meaning of the term - is incompatible with
socialism as it exists now in communist countries, not only in the unreformed
version of a command economy, but also in the reformed varieties it has
reached so far. The minimum conditions necessary for entrepreneurial
behaviour require a far more profound change in the principles of operation of
both the economic and political systems. Whether creation of these condi-
tions is possible in "real socialist" countries, is a matter of speculation which
would have to take into account aspects well beyond my theoretical analysis
(for instance, the evolution of international relations). In any case, it is a much
more difficult task than any of us - who at some stage became part of the
reformist movement in communist countries - has ever envisaged. Still, as I
have indicated above, I do not regard the minimum conditions for entre-
preneurship as being outside the boundaries of a socio-economic order which
could rightly be called socialism.
My discussion focussed on the compatibility problem, and not on the
desirability of entrepreneurship. The latter was merely assumed as an indirect
corollary from the efforts undertaken in communist countries to revive it.
However it may well be that when the full scale of the problem comes into
view, not entrepreneurship's economic efficiency, but other economic goals
(stability, job security, relatively low income differentials etc.) would be
preferred. I am not suggesting that this might be a correct choice, but I should
108 Praxis
simply like to point out that even evidence the
entrepreneurship and socialism is not tantamount to asserting
lack of any historical alternatives, however they may be.
NOTES
1. Joseph Schumpeter, Capitalism, Socialism and Democracy (London, 1976).
2. Schumpeter, Capitalism, Socialism, and Democracy, 42.
3. Schumpeter, Capitalism, Socialism, and Democracy, 13l.
4. Schumpeter, Capitalism, Socialism, and Democracy, 132.
5. J.Kornai, Economics of Shortage (Amsterdam, 1980).
6. W.Brus and T. Kowalik, "Socialism and Development," Cambridge Journal of Economics, 7 (1983).
7. W.Brus, "General Problems of Functioning of the Socialist Economy", Market in a Socialist Economy
(London, 1972).
8. Monoarchy is a term I use to decribe a political system in which power is monopolized by a single
group (the upper echelons of the Communist Party) without the possibility of being contested by any
outside groups whic'h lack the to form independent organizations.
9. An econometric study published in the Journal afComparative Economics (no. 3, 1986) unveiled the
phenomenon of "storming," i.e., a visible increase in output towards the end of the planning period,
although obligatory plan targets were supposed to disappear in Hungary beginning in 1968.