MARKET SOCIALISM

The economic doctrine of market socialism holds that central planners can make active and efficient use of "the market" as a mechanism for implementing socially desired goals, which are developed and elaborated through central planning of economic activity. Focusing on the elimination of private property and wealth, and on the central determination and control of all investment and development decisions, it posits that the planned determination and adjustment of producers' and asset prices could allow markets to implement the desired allocations in a decentralized manner without sacrificing central or social control over outcomes or incomes. Thus egalitarian social outcomes and dynamic economic growth can be achieved simultaneously, without the disruptions and suffering imposed by poorly coordinated private investment decisions resulting in a wasteful business cycle.

The idea of market socialism arose from the realization that classical socialism, involving the collective provision and distribution of goods and services in natural form, without the social contrivances of property, markets, and prices, was not feasible, since rational collective control of economic activity requires calculations that cannot rely consistently on "natural unit" variables such as energy or labor amounts. It also became clear that the existing computing capabilities were inadequate for deriving a consistent economic plan from a general equilibrium problem. This led, in the Socialist Calculation Debate of the 1930s, to the suggestion (most notably by Oskar Lange) that a Socialist regime, assuming ownership of all means of production, could use markets to find relevant consumers' prices and valuations while maintaining social and state control over production, income determination, investment, and economic development. Managers would be instructed to minimize costs, while the planning board would adjust producers' prices to eliminate disequilibria in the markets for final goods. Thus, at a socialist market equilibrium, the classical marginal conditions of static efficiency would be maintained, while the State would ensure equitable distribution of incomes through its allocation of the surplus (profit) from efficient production and investment in socially desirable planned development.

Another version of market socialism arose as a result of the reform experiences in east-central Europe, particularly the labor-managed economic system of Yugoslavia that developed following Marshal Tito's break with Josef Stalin in 1950. This gave rise to a large body of literature on the "Illyrian Firm" with decentralized, democratic control of production by workers' collectives in a market economy subject to substantial macroeconomic planning and income redistribution through taxation and subsidies. The economic reforms in Hungary (1968), Poland (1981), China after 1978, and Gorbachev's Russia (1987–1991) involved varying degrees of decentralization of State Socialism and its administrative command economy, providing partial approximations to the classical market socialist model of Oskar Lange. This experience highlighted the difficulties of planning for and controlling decentralized markets, and revealed the failure of market socialism to provide incentives for managers to follow the rules necessary for economic efficiency. Faced with these circumstances, proponents of market socialism moved beyond state ownership and control of property to various forms of economic democracy and collective property, accepting the necessity of real markets and market prices but maintaining the classical socialist rejection of fully private productive property. The early debates on market socialism are best seen in Friedrich A. von Hayek (1935), while the current state of the debate is presented in Pranab Bardhan and John E. Roemer (1993).

See also: perestroika; planners' preference; socialism; state orders

bibliography

Bardhan, Pranab, and Roemer, John E., eds. (1993). Market Socialism: The Current Debate. Oxford: Oxford University Press.

Granick, David. (1975). Enterprise Guidance in Eastern Europe: A Comparison of Four Socialist Economies. Princeton, NJ: Princeton University Press.

Hayek, Friedrich A. von, ed. (1935). Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism. London: Routledge.

Kornai, János. (1992). The Socialist System: The Political Economy of Communism. Princeton, NJ: Princeton University Press.

Lange, Oskar, and Taylor, Fred M. (1948). On the Economic Theory of Socialism. Minneapolis: University of Minnesota Press.

Richard Ericson