Market socialism became recognized as a concept in the 1960s as a result of the ferment in Soviet bloc countries, whose economies were administered nonmarket entities. As a concept it generally embraced the idea of a nationalized economy embedded in a market.
The process began in 1952, when Josef Stalin’s Economic Problems of Socialism in the U.S.S.R. announced that a market existed in consumer goods. In the Soviet Union Professor Evsei Liberman (1897–1983) of Kharkov University put forward market-type proposals in 1962. These were taken up briefly by Alexey Kosygin (1904–1980) when he was the Soviet Union’s premier, but were dropped again in 1968. In Czechoslovakia the reform ferment under Alexander Dubček (1921–1992), the Communist Party secretary, led to proposal of a limited market in 1968. This was aborted by the Soviet invasion of that year. Poland and Hungary proceeded more slowly toward the introduction of market-type reforms. The final denouement came when Mikhail Gorbachev (b. 1931), general secretary of the Soviet Communist Party, passed a series of laws in the Soviet Union that were intended to introduce the market, beginning in 1986 with the Law on the State Enterprise.
For most economists market socialism ceased to have any meaning because the issue had been settled in favor of capitalism. The Polish economist Wlodzimierz Brus and the Hungarian economist János Kornai effectively accepted capitalism. The concept, however, has continued to play a role in debates among Marxists and socialist theorists. Historically there were, and remain, two debates. The first concerns the possibility of the market being embedded in socialism. The debates in the U.S.S.R. and in other East European countries were variants of this question. The second concerns whether the market could coexist (or would be in conflict) with planning in a transition period to socialism. Nikolai Bukharin took the first view and Yevgeni Preobrazhensky the second. As an orthodox Marxist, however, Preobrazhensky rejected the view that a market (law of value) could exist in a communist society. At a 1924 debate on the subject in the Communist Academy, Ivan Stepanov-Skvortsov, the main speaker, appeared to argue for market socialism, but Preobrazhensky and Bukharin both opposed the concept very strongly, though they differed as above.
The Austrian Ludwig von Mises (1881–1973) argued in Socialism: An Economic and Sociological Analysis (1922) that calculation was impossible under socialism because value would be abolished. Oskar Lange (1904–1965), a Polish economist and later a member of the postwar Polish Communist government, took up the cudgels to argue that it was possible, writing in reply “On the Economic Theory of Socialism” (1936), as well as an essay with Abba Lerner. His argument hinged on a hypothetical pricing scheme worked out by planners, who in turn would base their studies on minimum costing. The idea that the market economy could be written into a series of equations, assuming equilibrium pricing, was already well established in orthodox economics. Lange was arguing that economic calculation was possible under socialism because it would plan as if it were a market economy. Lange was not a Marxist economist and therefore could not see that the essence of socialism, as perceived by Marxists, would be negated by this form of top-down “planning” because it involved control and discipline of workers by the planners. Leon Trotsky (1879–1940) writing at the same time argued that planning had to be democratic or else it would malfunction.
In a sense, Lange’s concept of socialism anticipated the later Soviet bloc reformers and their critiques. One of these was taken up by von Mises’s fellow countryman the Austrian Friedrich von Hayek (1899–1992), who pointed to the difficulty in calculating the millions of prices involved, a problem which the Soviet Union could not solve: At the time, the Soviet Union had 25 million prices that involved a huge process of calculation, given the interrelationships involved. Today Hayek would receive the reply that modern computing advances could solve the issue. However, few would want a central planner or planning ministry to decide all economic and social issues, even if computing would ensure consistency. In principle, computing could use either the Lange system of administered shadow prices or its own alternative schemes; that debate continues. Logically, in the interests of maximum control from below, there has to be a high level of devolution. The role of the market in a devolved economy is also a matter of continuing debate.
Alec Nove’s 1983 book The Economics of Feasible Socialism prompted a series of debates, most particularly with Ernest Mandel, in the New Left Review, and with others in the pages of the New Statesman. Nove argued that the central premise of a communist society—that it would be a society of relative abundance—was utopian, and hence it could not exist. Instead, it was necessary to adapt market forms and criteria to an economy with nationalized property. His book was a recipe for market reforms in the Soviet Union, and he later provided advice to the Soviet Union under Gorbachev.
The Soviet bloc countries of Hungary, Poland, and Czechoslovakia experimented with market forms, as did the Soviet Union. However, the reforms were always suspect among the working class, for whom they meant rising unemployment, greater inequality, and harder work, even if consumer goods were generally more available at lower prices. Reformers argued that the partial reforms were insufficient.
Departing from the classic case of market socialism, which presupposes an economy with most or all enterprises nationalized, but operating within a simulated or real market, the Scandinavian countries, Sweden in particular, generally have been regarded as successful examples of the coexistence of a large state sector and a developed welfare system, with a market economy. But the relatively high level of taxation and large state sector are regarded by some economists as responsible for lessening Swedish competitiveness in a global economy. The election in 2006 of a right-wing government that complained of a very high level of unemployment and promised to privatize and alter the taxation system seems to indicate a limit to the experiment. Debate continues on the reasons for the relative stability of the Swedish case.
The discussion on the role of the market, whether in the transition period to socialism or in socialism/communism, continues among Marxists. Debates around the subject of market socialism were held at the New York–based Socialist Scholars Conferences in the late 1990s and after. Most anti-Stalinist orthodox Marxists continue to maintain that the market will be abolished in socialism/communism. The difference among theorists as to whether the market is inimical to planning or whether it can exist in socialism/communism mirrors degrees of acceptance of orthodox economics.
Kornai, Janos. 1992. The Socialist System: The Political Economy of Communism. Oxford: Clarendon Press.
Lange, Oskar, and Fred M. Taylor. 1938. On the Economic Theory of Socialism, intro. and ed. Benjamin E. Lippincott. Minneapolis: University of Minnesota Press.
Mandel, Ernest. 1988. The Myth of Market Socialism. New Left Review 1 (May–June): 108–120.
Mises, Ludwig von.  1981. Socialism: An Economic and Sociological Analysis. Indianapolis, IN: Liberty Classics.
Nove, Alec. 1983. The Economics of Feasible Socialism. London: Allen and Unwin.
Nove, Alec, and Ian D. Thatcher, eds. 1994. Markets and Socialism. Cheltenham, U.K.: Edward Elgar.
Ollman, Bertell, ed. 1998. Market Socialism: The Debate among Socialists. New York: Routledge.
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
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.