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COMPARATIVE ECONOMIC SYSTEMS

LECTURE NOTES

Lecture Notes 1

Good Socio-economic System

Introduction

A good society is a society that is successful in fighting the scarcity problem in such away that it promotes material welfare as well as non-material weflare. The scarcity

problem is the basic economic problem everywhere. The performance criteria or success

criteria in relation to promotion of material welfare are achievement of (a) full

employment; (b) efficient employment not only in terms of technical efficiency but alsoallocative efficiency; (c) growth in terms of extensive growth as well as intensive growth;

and (d) equity or fairness in terms of distributive justice and/or commutative justice. Thesuccess criteria in relation to promoting non-material welfare are (a) avoiding alienation

from self; (b) avoiding alienation from others in terms of consumer sovereignty, worker

sovereignty and citizen sovereignty; and (c) avoiding alienation from nature. Weelaborate all this as follows.

The Scarcity Problem as the Basic Economic Problem

The basic observation about most people on earth is that they have desires for a truly

staggering variety and quantity of goods that they believe will enhance their welfare, and,thus, be good for them. Goods, which are objects of immense desire, are classified intocommodities and services. There are tangible commodities like food, clothes, cars, etc.

Intangible services refer to temporary use of physical objects or other people (e.g. a house

by the sea during summer; a seat for 8 hours on a jet aeroplane from New Delhi toAmsterdam; and 10 minutes of a doctors time).

How to make the various goods that people desire? We need resources and

technology to make goods.

Real resources or productive ingredients are put to work in the process of production in order to make goods. There are three kinds of resources, viz. human

resources (i.e. people able and willing to participate in the productive process by

supplying their mental and/or physical labour); natural resources (i.e. gifts of nature likesunlight, wind, ocean tides, virgin land, plants and animals, minerals and fuels, etc.); and

man-made capital resources (i.e. factory buildings, blast furnaces, warehouses, highways,

airport control towers, equipment of producers like computers, milling machines, orfleets of trucks, and producer inventories of rawmaterials, semifinished goods or even

finished goods that have not yet reached their ultimate users). With regard to human

resources, it may be noted that different people possess different amounts of an invisiblekind of human capital, consisting of health care, general education and training embodied

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in them. With regard to natural resources, it may be noted that natural resources which

are in a sense made by people like the animals that have been domesticated and specially

bred or soil that has been cleared, irrigated and fertilized or oil that has been pumpedfrom the ground and shipped far from its original place of deposit are treated as capital

resources by the economists. Further, capital resources do not include financial capital

such as money, stocks, deeds or bonds which are not directly productive.Technology refers to the knowledge in order to make goods. It is the set of known

methods of production. It is like the recipe book for converting inputs into outputs.

Now the empirical truth is that there are limited resources and limited technologyin this world. Limited resources plus limited technology yield limited flow of resource

services and so ultimately limited goods which are far less in relation to the combined

desire for goods by all the people. So, goods are scarce. This is what is meant by the

scarcity problem.

Fighting the Scarcity Problem

Obviously, people dislike scarcity. And they would like to go towards abundance.

According to economists, in order to move from scarcity towards abundance, certainspecific actions will have to be taken by people. The possible actions against scarcity, for

promoting material welfare and non-material welfare, constitute the success criteria forassessing the performance of a socio-economic system.

Promoting Material Welfare

In order to promote material welfare, the following actions must be taken bypeople.

(i) The full employment of resources

This means avoiding less than full utilisation of resources. However, the proper meaning

of full employment can be debated.

Take the case of human resources. Are they fully utilized only if every citizen isparticipating full time in the making of goods? Since the very young, the very old and

the very sick cannot possibly aid in the production of goods, we will have to focus on

able-bodied adults. But who is an able-bodied adult? Everyone aged 18 or above, 14 orabove, by excluding people above 65 or 70 or 75? Similarly, what is the meaning of full

time? For example, does that mean working 18 hours everyday of the year or in some

other way that supplies fewer labour hours to the productive process but gives people

more leisure to enjoy?Take the case of non-human resources, i.e. natural and capital resources. Should

these resources be utilized at the rate of 24 hours a day each day of the year? Or should

they be used less intensely, thereby extending the lifespan of the resources, particularly ifthey are non-renewable natural ones?

Clearly, every society must find some way of answering the above types of

questions and thus defining full employment.

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(ii) The efficient employment of resources

This means avoiding incorrect or inefficient utilization of resources, even after fully

employing them. In this connection there are two concepts, viz. technical efficiency andallocative efficiency.

The concept of technical efficiency, which focuses on each productive enterprise,

refers to achieving maximum possible outputs out of the inputs actually being employed,under the current technology. Technical efficiency is mainly due to inadequate motivation

of the workers and managers involved in the production process.

The concept of allocative efficiency, which considers the economy as a whole,means, inter alia, discovering possibilities for improvement by comparing the

circumstances of two or more producers. There exists allocative or economic efficiency

when it is possible to increase output through some reallocation of resources among

different producers to make some people better off without making others worse off.

(iii) Growth, extensive and intensive

The basic idea of growth is like this. People can think about the types of goods being

produced and give up any attempt to get the greatest possible set of goods for currentconsumption out of the limited resources currently available. They can divert some of

these resources from the current production of consumption goods, saving them foranother purpose. And they can turn to investing the resources so saved in the production

of more resources or better methods of production or higher-quality resources.

Consequently, their ability or capacity to produce goods over time increases immensely

so much so that scarcity gives way to abundance.Extensive economic growth means an expansion of production possibilities

resulting from the availability of more units of the very types of resources previously

available, technology being unchanged. Output can be increased by increasing the capitalstock, discovering new natural resources or reclaiming natural resources currently

considered useless for producing goods. An increase in labour force due to population

growth can increase output but any increase in population is bound to increase the overallquantity of goods people desire along with the production possibilities. Therefore,

scarcity can be reduced only if there is a population-reducing policy.

Intensive economic growth can be obtained through the promotion of basicresearch and applied research; tolerating and encouraging entrepreneurship in terms of

risky, innovating activity in the very proces of production itself; and production of

improved types of resources such as sophisticated machinery or of more productive

workers who are abundantly endowed with human capital through expenditures oneducation, healthcare and training for skill formation.

(iv) Economic equity

People will also have to focus on how the goods they are producing are being

apportioned among themselves. As long as there is scarcity, the matter of apportionment

or sharing or distribution is bound to be hotly debated issue in any society. In thisconnection there are notions of distributive justice and commutative justice.

According to the advocates of distributive justice, goods should be apportioned

among people by some central authority seeking to act justly in three ways. First, people

may receive goods in accordance with their true, material needs and not with material

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desires that are false. Secondly, Each person may get an equal share of the total set of

goods produced in any one year. And thirdly, each person may receive a share of societys

total output corresponding to the number of hours that person worked. There areproblems with the above three ways of achieving distributive justice. With regard to

apportioning goods according to need, there are two problems: first, how to distinguish

between true material needs and false material desires; and secondly, when all people areassured of getting what they truly need, they have no incentive either to contribute to the

process of production at all or to contribute in such a way as to produce just the types of

goods that are truly needed. These two problems can only be resolved through acentralised definition of needs as well as a centralised direction of labour. The problem

with equal distribution is that if everyone were assured of the same income as everyone

else no matter what, someone would have to make sure that people worked at all and also

that they produced the types of goods people wanted. Again, making people work andtelling them what to make will have to be done by a central authority. Apportioning goods

according to hours worked, unlike the earlier two ways, has the advantage of providing a

strong incentive to work, but it has two drawbacks in that the very young, the disabled or

the very old who could not perform labour will get a zero share; and there would exist noincentive for people to produce the right kinds of goods; a person working 40 hours

producing apples would get the same share of societys output as would someone elsespending 40 hours doing some work that nobody wanted. Thus, a central authority will

have to tell people what they should produce during the hours they worked.

According to the advocates of commutative justice, there is no need for a central

human authority to bring about equity. Justice can be brought about through animpersonal process. According to them, output shares ultimately received by people

would be fair (even if they should be highly unequal) as long as these shares had been

determined by the free choices of all people, all of whom enjoyed as nearly equalopportunities as possible in the process of allocating resources to the production of goods.

A just world is one in which all persons are given the chance, as far as possible, to own

equal quantitites of all resources and are given an equal freedom to use these resources toproduce goods and to trade resources and goods with others. The idea of commutative

justice can be appreciated by conceiving of economic activity as something like a card

game. As long as one distributes cards at the beginning of the game fairly (equalquantities of resources to all) and as long as one follows rules equally applicable to all

(equal freedom to use resources, to trade resources and goods), the end result is seen as

just. But in a fair card game, some win and others lose! Similarly, in a society aspiring to

commutative justice, the incomes of people (and, thus, their shares of output) can beexpected to differ in the end.

Promoting Non-material WelfareSo much on promoting material welfare. But it is well said that man does not live

by bread alone. Non-material welfare, i.e. spiritual aspects of human welfare, in the

process of promoting material welfare, has also been a botheration of mankind sincelong, i.e. since the beginning industrial revolution more than two centuries ago. Thus the

success of any society must also be judged by the degree to which all individuals are

given the chance to develop during their lifetime the manifold creative potential dormant

within them; to participate on an equal basis with others and free from coercion by others

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in all decisions affecting their lives; and to live in harmony with the natural world of

which all human beings are a part. All this is what is meant by avoiding alienation from

the self, others and nature, which is elaborated a bit as follows. Alienation meansestrangement or being out of touch with oneself, others and nature.

(i) Avoiding alienation from the selfThe root cause of alienation from the self is the larger production made possible by

detailed division of labour and specialisation and exchange that people in all societies on

earth have come to embrace rather than self-sufficiency based on small scale productionand mastercraftsmenship. While division of labour as the supreme organizing principle of

the productive process makes the society richer, it also enslaves people to repetitively

working machines, in central workplaces, following rigid schedules of work and thereby

causes degradation of human beings in terms of boredom, meaninglessness, atrophiedmuscles, tormented spirites, brainless and hated toil, etc. Work becomes joyless as the

work process has crippling effects so much so that people fail to discover and develop

their talents during their leisure time. And so, pursue the goal of challenging the scarcity

of material things but do not lose sight of peoples deepseated need to develop themselvesthrough a lifetime of creative activity, say the social critics.

(ii) Avoiding alienation from other people

The ideal in this regard is that individuals must have the chance to participate on an equal

basis with others and must be free from manipulation and coercion or force by others, in

all decisions affecting their lives. This can be realized by ensuring consumer sovereignty,worker sovereignty and citizen sovereignty. Consumer sovereignty exists when all

consumers share the power to decide what types of goods are being produced and

consumed. Worker sovereignty exists when workers share the power to decide what typeof labour is being supplied and under what terms and conditions it is rendered. Citizen

sovereignty exists when all citizens share the power to control their political leaders and

thus to ensure themselves precious individual liberties like right to free speech and press,to peaceful assembly, to privacy in their homes, to habeas corpus, to speedy trial by jury,

etc.

(iii) Avoiding alienation from nature

This means that people must learn to live in harmony with nature. People should not

treat the natural world as nothing more than a resource to be exploited and destroyed.

Mans hitherto disregard for nature, the ever-growing size of man-made world and thehigh levels of all kinds of pollution of the natural world not only undermine the natural

aesthetics, but, more importantly, could ultimately amount to the end of life on the planet

earth, given that even the experts still do not fully understand earth as a single vastecosystem, a system of interrelationships among plants and animals and people and

climatic forces.

Conclusion

It is clear from the above discussion that a good society is one which fights scarcity in

such a way as to promote not only material welfare but also non-material welfare of its

people.

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Lecture Notes 2

Defining Economic System and Classifying Economic Systems

Defining Economic System

The set of institutional arrangements through which people in a society make choicesabout the allocation of their scarce resources and the apportionment of their scarce goods

is called an economic system.

One could also say that an economic system is a social arrangement through

which people cooperate with each other on matters affecting their material or economicwelfare which, inevitably, affects their non-material or noneconomic wefare as well.

The institutional arrangements that we have in mind are (a) ownership status of

resources, human, natural and capital; and (b) incentives for coordination.

Classifying Economic Systems

There is no universally acceptable scheme of classifying the worlds economic systems.

However, two criterial have been employed quite often in order to avoid confusion in this

regard. These time-honoured criteria classfiy economic systems by asking two crucialquestions: Who effectively owns the resources and, therefore, has the power to make

choices with them? What types of incentives are used to coordinate the choices of

different resource owners? We elaborate the answers to these questions as follows.

Capitalism and Socialism: Classification by Resource Ownership

Modern economic systems can be classified on the basis of resource ownership, i.e.

property rights in natural and capital resources, which together are also known as the

nonhuman resources or the means of production. Nonhuman resource ownershipaccounts for the major differences among the worlds economic systems in the 19th and

20th centuries. Since in modern times, the ownership of human resources is widely

dispersed over many individuals, i.e. mosts persons have exclusive control over their own

labour power, the ownership status of human resources is not particularly helpful indifferentiating modern economic systems.

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Table 1 shows how we can distinguish between capitalism and socialism on the basis of

resource ownership.

Table 1

The formal ownership of

nonhuman resourcesresides in:(1)

The effective control of

nonhuman resources isexercised by:(2)

Name of the economic

system(3)

1. Private individuals a. Private individuals

b. Self-selected small

groups of privateindividuals

Capitalism

2. Groups of people(possibly even in all of a

societys people as a group)

a. A central governmentb. Designated individuals

or small groups

c. All group members

jointly

Socialism

Column 1 of Table 1 indicates two major arrangements with regard to resource

ownership. First, the total of nonhuman resources is divided into numerous subsets the

formal ownership of which is widely dispersed among many private households.

Secondly, the formal ownership of nonhuman resources is vested in groups of people,possibly even in all of a societys people as a group.

Column 2 of Table 1 indicates some of the major alternatives concerning the

effective control of nonhuman resources. Case 1a refers to a situation where privateindividuals are formal owners, while the same or other private individuals exercise

effective control. For example, the owner-managed single proprietorship or the

corporation run by a manager who has usurped most of the powers of individualstockholders. Case 1b describes a situation in which private individuals are formal

owners, but they have joined their resources with those of other such individuals and are

exercising control jointly as well. For example, partnership or corporation run by a

manager strictly controlled by individual stockholders. Case 2a describes a situation inwhich groups of people (or even all people as a group) are the formal owners, while a

central government is in fact exercising effective control. For example, public enterprises.

Case 2b describes a situation in which groups of people (or even all people as a group)are the formal owners of nonhuman resources, while effective control over many subsets

of these resources is exercised by designated individuals ( such as appointed or elected

managers) or small groups of people (such as all the people actually working with these

resources). For example, the Soviet collective farm or the Yugoslavian labour-managedfirm. Case 2c, finally, describes a situation where groups of people ( or even all people as

a group) are the formal owners of nonhuman resoruces, while the effective control is

exercised by all group members jointly. For example, a commune.The economic system in which the formal ownership as of nonhuman resources

resides predominantly in private individuals and the effective control of them is with

private individuals or self-selected small groups of private individuals is categorised ascapitalism; and the economic system in which the formal ownership of nonhuman

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resources resides predominantly in groups of people or even all people as a group but the

effective control is with a central government or designated individuals/small groups or

all group members jointly, is categorised as socialism.

Market Economy, Command Economy and Economy of Love: Classification by

Coordination IncentivesWhen different people own resources and independently make choices with them, it is

possible for these choices to be inconsistent with each other. That is why every economic

system needs some type of incentive to guide people into acting in such a way that theiractions mesh with those of other people.

There are three major types of incentive as follows:(i) Money

One can arrange matters in such a way that people are always free to exchange for moneyany scarce good or resource that they own. Thus, owners of resources who wish to make

choices requiring compatible choices by other owners of resources can apporach those

others with conditional offers in terms of units of money. Changing prices in terms of

money units can adjust the behaviour of people and make their choices consistent witheach other. People will come to know of others preferences and capabilities through

money.

(ii) Command

One can arrange matters in such a way that some people have the right to give specific

orders to other people, telling them what to do or not to do. In this scheme, the others canbe threatened for noncompliance and forced into acting or not acting in specific ways that

remove the inconsistencies in the choices of different people.

(iii) Love

Instead of being made aware of other peoples wishes by their offers of money or their

direct command accompanied by threat of harm, in this arrangement the internalincentive of goodwill or love solves the coordination problem.

In light of the above discussion, we can classify economic systems as marketeconomies if the money incentive is predominant; as command economies if the

command principle is most prevalent; and as economies of love if the rule of love is the

coordination incentive.

Market Capitalism, Centralised Socialism, Market Socialism and Communal Socialism:

Classifying Economic Systems by Combining Ownership and Incentive Criteria

As Table 2 shows, Capitalism plus money as the coordination incentive as pointed out

above results in market capitalism ( 1 plus A = market capitalism). Socialism with

effective control by a central government plus command economy results in centralisedsocialism (2a plus B = centralised socialism). Socialism with effective control by

designated individuals/small groups plus money as the coordination incentive results in

market socialism (2b plus A = market socialism). Finally, socialism with effective control

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by all group members jointly plus love as the coordination incentive results in communal

socialism (2c plus C = communal socialism).

Table 2

Resource ownership Coordination incentiveMoney (A) Command (B) Love (C)

1. Private individuals are

formal owners, while

effective control isexercised by private

individuals also or by self-

selected small groups ofthem

Market capitalism

2.Groups of people, possibly even all of a

society' people as a groupare the formal owners,while effective control is

exercised by

a. A central government Centralisedsocialism

b. Designatedindividuals/small groups

Market socialism

c. All group membersjointly

Communalsocialism

Conclusion

Modern economy systems can be classified in terms of the four general types or modelsof economic systems by combining the criteria of resource ownership and coordination

incentives. However, no real-world economic system fits any of these categories

perfectly, but all actual systems as observed in the 20th century tend to come closer to oneof these models than to the rest.

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Lecture Notes 3

Ideologies and Isms

or Different Ideologies and Different Economic Systems

Ideology

An ideology is a set of ideas, shared by a social group (e.g. a class or a nation) that (a)

represents a certain picture of social reality; and (b) sets up desirable values and goals forsociety to strive for, or preserve.

Capitalism

Capitalism is a system in which productive assets/means of production/nonhuman

resources are predominantly privately owned. Advanced western capitalist economiesalso contain smaller or larger publicly owned sectors and so they are mixed economies.

Production in this system is primarily for sale with profit motive. Profit motive of freeenterprise is considered the great engine of capitalism. In fact, according to some

historians, it is the greatest economic drive in all history to date. Profit motive over time

was subject to standards of humanitariansm and justice; in other words,it was subject tosocial restraints, moral as well as legal. Capitalism is also characterized by the

institutions of inheritance and the law of contract.

In order to better understand the evolution of capitalism, it is useful to distinguish

between Earlier Capitalism (i.e. during 19th century/early 20th century)) andContemporary Capitalism (i.e. during the post II World War).

Earlier Capitalism

The spirit of earlier capitalism is captured well by free enterprise, venturesomeness,

acquisitiveness, competitiveness, urge to innovate, and, above all, rationality. Rationalitymeans (a) deliberate subjugation of means to definitive end, which is the pecuniary gain;

(b) careful weighing of alternatives; (c) keeping of systematic records; and (d) break with

tradition, superstition and magic.A major debate concerns whether we can summarily say that the ideology of

earlier capitalism was typically Laissez Faire. Laissez faire in French means leave

business alone, let businessmen do what they want to do. According to this, earlier

capitalism was individualistic capitalism with no interference in economic activity by thegovernment. Government was only a night watchman in terms of protector of life and

property and enforcer of contracts.

According to some historians, such a depiction is unwarranted because laissezfaire prevailed only for a shorter period in England during the second half of the 19th

century. Before that, in England as also other European countries, the ideology of

Mercantilism prevailed. According to mercantilism, the state has the right and duty toboth regulate and protect private enterprise for the greater power and glory of the state.

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Even in USA of the late 19th century and very early 20th century (i.e. during the period

between the Civil War and the Great Depression), the dominant ideology was one of

modified laissez faire. There was government regulation of public utilities, there wasgovernment enforcement of competion in terms of trust busting, and large federal

subsidies were given for railroad construction. Free competion was diluted with tariff

protection. In relatively latecomers to industrialization such as Germany, France, Russiaand Japan, laissez faire was in fact considered as a luxury to be avoided. Active

government protection and promotion of domestic enterprises including state-owned

enterpises was pursued before the First World War. Moreover, monopoly, cartel andpowerful bank were the dominant capitalist institutions in these countries.

Downside of Earlier Capitalism and the Rise of Various Anti-capitalist Isms

The downside of the earlier capitalism was that it led to the immiserisation oflarge working classes it created; the workers were crowded in urban slums, worked long

hours for low wages and lived in harsh and unhealthy conditions inside and outside their

factories. This downside of earlier capitalism was the source various anti-capitalist isms

including radical/socialist ideologies and political movements, often of middle classorigin, for the workers and among the workers. Broadly speaking, socialist ideology

emerged as a challenge to the capitalist order.The various anti-capitalist isms as responses or reactions to early industrial

capitalism can be pointed as follows. First, there was opposition from the educated class

in terms of romanticisation of the past in relation to the rise of the dark Satanci mills

and the consequent loss of natural beauty of the rural landscapes. Secondly, the ordinaryworkers showed opposition by smashing the machines and they were known as the

Luddites. Thirdly, the skilled workers showed opposition by organising labour unions

despite police repression and hostile employers. Fourthly, the Utopian Socialists arguedthat private property and selfishness were the roots of social evil; and they imagined the

perfect society in terms of communistic or cooperative principles of work and income

distribution. Fifthly, Scientific Socialism fathered by Karl Marx and Friederich Engelsemerged as the most pervasive anti-capitalist ideology throughout the world, and inspired

the rise of various kinds of socialist economic systems in the world. In order to

appreciate the ideology of scientific socialism, we will have to understand the MarxianTheory of History and Marxs Analysis of Capitalism.

Marxian Theory of History and Marxs Analysis of Capitalism

In the Marxian theory of history, a society is constituted by the Base ( in terms ofeconomic facts of life) and the Superstructure (in terms of law, culture, religion, art,

philosophy, etc.). The economic facts of life are sharply capture by the concept of mode

of production which means on the one hand productive forces (i.e. production capacityand level of technology) and production relations (i.e. relation of various classes such as

landlords, capitalists, workers to the production process). According to Marxs theory of

history, all mankind must pass through six major historical stages with correspondingmodes of production, viz. (1) Primitive (tribal) Communism; (2) Slavery; (3) Feudalism;

(4) Capitalism; (5) Socialism; and (6) Communism. Under (1), (5) and (6), there is

absence of private property in that means of production/nonhuman resources are owned

in common. And there exists no exploitation in terms of appropriation of the product of

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labour of some class or classes (e.g. slaves, serfs, workers) by others (e.g. slave owners,

feudal landlords, capitalists). According to Marx and Engels, the history of society is

nothing but history of class struggle or antagonism between classes. In socialism whichcomes about after the overthrow of capitalism, egalitarianism matters and the collective is

above the individual. The scarcity problem continues to exist. External material

incentives are used to mobilise the energies of the people for increasing output whiledistribution of output is according to the labour performed. In communism as the ultimate

destination, there is abundance. There are no external incentives. Distribution is

according to needs. There is no money, no finance, no prices, and no state as thesupporter of an exploiting class.

In marching towards abundance, technological progress is the mechanism for

transition from one stage to another. Technological progress brings about radical

improvements in productive forces which in turn gives rise to a new class which seizespower and refashions the production relations to its own liking and needs. When

productive forces improve, production relations as institutions do not change to be

compatible with it. At first they correspond to productive forces, i.e. they enable the

technology and capacity of the economy to produce fully but they lag behind and becomea hindrance to the further development of the productive forces. This problem in respect

of capitalism is solved by the capture of power by the working class.In Marxs analysis of capitalism, there are two antagonist classes, viz. the

capitalists (owners, managers, employers of labour) on the one hand and on the other, a

large working class which is propertyless, i.e. it has no source of livelihood other than

sale of its own labour power. Labour is the source of all economic value. Workers selltheir labour power and get wages which are at the level which is just necessary for the

reproduction of labour force, i.e. for subsistence and bringing up next generation of

workers. There are always unemployment levels which do not permits the wages torise. Technology is so advanced that workers always produce more than their own

subsistence needs so much so that surplus value is approriated by the capitalists (for their

own consumption and savings to finance further investment and to make payments toother property owning classes in terms of interest for financiers and rent for land owners).

The dynamics of capitalism develops in such a way that the ownership of capital and all

power becomes more and more concentrated over time. Societys polarization increasesas the workers become poorer and poorer. Capitalists in their constant search for profits

overinvest resulting in crises due to decline in long run rate of profit or

underconsumptionism. The only way out of this mess is for the workers to overthrow the

capitalist order by seizure of power through a revolutionary battle against the capitalists.Although Marxs views were very appealing and widely influencing, his

predictions did not come true. Capitalist development did not show extreme polarization.

Nor did it show progressive impoverishment of the workers and rising revolutionaryfervour among the working classes. The material levels of the masses did indeed

increase. Moreover, there was rise and enlargement of a conservative white collar

working class.

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Rise of Socialism

The rise of socialism in Soviet Union (via Leninism and Stalinism), Yugoslavia (via

Titoism), China (via Maosim), Cuba (via Castroism) and many other countries in theearly and later 20th century was characterised by certain commonalities as follows: (1)

Seizure of power by a professional conspiratorial party led by a small revolutionary elite

which offers determined leadership and which is highly disciplined, internallyauthoritarian and which speaks in the name of the working class; (2) economic

backwardness in terms of a backward agrarian context; (3) a poor, disaffected land-

hungry peasantry as the instrument of victory; and (4) war against an invader or a

colonial power. As the ideology of the highly authoritarian small party which is obsessedwith the purpose of achieving industrialization and military power at any cost is not

shared by the bulk of the population, the revolutionary elite resort to political repression

and terror. Stalin was the most absolute of modern dictators as his regime was

characterised by the highest degree of ruthless and bloody totalitarianism. Maoist Chinaand Castroist Cuba differ from Stalinist Soviet Union in that the former two had different

internal structure and used internal moral incentives to mobilise the energies of people.

Contemporary Capitalism

Before 1950, capitalism was attacked for having caused terrible wars, business cycle of

the 1930s, great inequalities in income and wealth, colonialism, unemployment and muchsocial tension. But in the post Second World War period up until the mid-70s, capitalist

development went through a Golden Age in terms of rapid economic growth, rise in

average consumption levels and minimisationof business fluctuations and unemployment.The significant features of this golden capitalism were as follows:

(1) There was politico-economic equilibrium among and mutual acceptance of

business, especially big business, government and organised labour. Activeintervention of the government for stability, promoting growth and reducing

insecurity and inequality gained currency. In some countries, government

planning was deep enough to have substantial nationalised sectors.Collective bargaining by organised labour was accepted by the employers.

(2) New managerial ideology in terms of professionalism on the part of the

management in large corporations for taking care of not only profit motive but

also responsibility to various elements within and without the corporations(like employees, customers, suppliers, general public and stockholders).

(3) Declining militancy of labour which moderates its political goals by accepting

the social order.

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Democratic Socialism in Europe

Social democracy or democratic socialism as the ideology of moderate, reformistdemocratic socialist parties in countries such as Sweden and Germany was characterized

by the following features:

(i) Revisionism in terms of seizure of power through ballot (i.e. politicaldemocracy);

(ii) Emergence of Christian Socialism based on the ethical teachings of

Christianity, especially of the Protestant type against individualism, greed,

inequality, poverty of working class, alienation, unemployment, distortionof social and cultural values, crime, and war;

(iii) Respect for political freedom, democracy, individual security and

elimination of inequality of all kinds; and

(iv) Recognition of the middle class aspirations of the working class.

The means adopted by social democrats to achieve their goals were initially in

terms of welfare state and nationalization of most important industries. But later

on with the experience of excessive bureaucratization and enhancement ofgovernment power, the social democrats abandoned their obsession with

nationalisation and opposition to private property and began to believe in the

control of industry for private and social ends. Ultimately, democratic socialismshaping the mixed economic systems in Europe evolved to have the following

features: private ownership as a rule, public ownership only when necessary,

maximum reliance on market economy supplemented by government control andwelfarism, equality of opportunity in education and safeguarding of political

democracy.

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Lecture Notes 4Features of Centralised Socialism

as a Pure Model and as a Case Study of the Former Soviet Union

Centralised Socialism as Pure Model

The following features characterize centralised socialism as a pure model:

(i) There exists public ownership of all nonhuman resources or means of

production. These are effectively controlled by the central government.People as owners of their labour power cannot perform anything without

the use of complementary productive assets that the government controls.(ii) There is no private decision making at all. All economic power is

concentrated in the government hands. Making and enforcing decisions,

general to minute, is done by the government.

(iii) The various separate economic activities of all people, given theinterdependence in terms of division of labour and specialisation of the

modern economy, are coordinated by the system of Visible Hand, i.e.

preparing a Common Plan which specifies everyones future actions indetail and issuing verbal commands to various people who in turn execute

the governments will passively and obediently. Productive enterprises

receive verbal commands with regard to output quotas, i.e. minimalquantities of how much of what they should be producing and delivering

to designated recipients are specified. They also receive orders regarding

input norms, i.e. maximal quantities of inputs to be used per unit ofdesignated outputs. The productive enterprises are supposed not to use

input quantities more than the specified input norms. Verbal commands

specifying the quantities of nonhuman resources are also given to

administrators in charge of nonhuman resources. And households receiveorders regarding supply of labour. The government officials and

individual households are made to obey the output quotas and input norms

issued to them through positive and negative and material or moralincentives. Positive incentives include praise, medals, tying distribution of

consumer goods to the proper performance of assigned tasks, etc. For

example, those who went willingly to their designated places ofemployment and worked hard might get a larger share of consumer goods

than others who were less obedient. Negative incentives include

castigating (i.e. severe reprimanding), fining, jailing and shooting for non-

compliance.

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Centralised Socialism as Case Study of Stalins Economic System in the Former Soviet

Union

The major features of centralised socialism under Stalins rule in the Soviet Union during

the early 1920s to early 1950s were as follows:(a) The objective of the system was to achieve the most rapid pace of

industrialisation possible.

(b) There was predominantly public ownership of the means of production.Outside agriculture, there were state enterprises, including enterprises which

were simply nationalized and put under the control of the managers appointed

by the state). Within agriculture, private property was eliminated by

collectivisation. Private property was transferred to three kinds ofgovernment controlled institutions, viz. state farms (huge farms controlled by

government appointed managers, with the average size of 30,000 acres);

collective farms (large farms organised as compulsory producer cooperatives

by pooling of separate land and livestock holdings of numerous peasanthouseholds); and machine and tractor stations (state enterprises which

controlled all the agricultural implements of the formerly independentpeasants. As peasants protested against collectivisation by destroying their

buildings/inventories and slaughtering livestock, the machine tractor stations

were created to give equipment to collective farms in order to protect the

agricultural capital stock from damage that peasants might inflict upon itwhether out of ignorance or malice. Those peasants who resisted were exiled

or exterminated. Around 5 million peasants were killed for opposing

collectivisation.(c) The central planning process was one of a hierarchically organised system of

central planning wherein the leaders of the Communist Party to took

decisions at the top as all economic and political power was wielded by them.The Party leaders determined the objectives of the plan to be achieved on the

basis of the collection of data on the past performance of the economy and

the Party directives were conveyed to the Gosplan, the state planningcommission. Gosplan prepared the tentative Central Plan in terms of output

targets and input requirements which were conveyed to productive enterprises

producing thousands of important (i.e. high priority) commodities. And on

getting feedback from the enterprises officials from below, the Gosplanundertook revisions and finally made the Plan into a law.

(d) A mixture of command-love-money incentives was used by the Party

leadership in order to get the countrys peasants, managers, administratorsand workers to act precisely as specified in the final Plan. Positive incentives

included a system of Awards and Decorations (e.g. Order of Lenin, Heroes

of Socialist Labour) to individuals and groups who executed the commandswith great enthusiasm. Negative incentives were threats and often severe

punishment for disobedience. Punishments included, for example, demotion

of a manager to that of an ordinary worker, redeployment of a manager or

worker to a less desirable job in a less desirable location, criminal prosecution

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for mishandling of public property along with a sentence to a forced labour

camp in Siberia, etc. In order to make the people obey, punishments was

extended to parents, spouses and children, distant relatives, neighbours andfellow workers! Love incentives basically amounted to propaganda asking

people to do self-criticism and drive out selfishness and instill in them the

inner need to serve their fellow citizens, their country, and the cause ofsocialism. Money incentives included widespread use of money and

administrative prices.

(e) In order to influence the behaviour of the managers the following monetaryincentives were used. First, they were expected to do internal auditing by

keeping monetary accounts at government set prices, of the gross value of

output, input costs and profits in order to achieve technical efficiency.

Secondly, the Gosbank, the state bank which was the monopoly bank withthousands of branches in the country did external auditing of the productive

enterprises by monitoring the inter-enterprise transactions and keeping a

running account of plan execution. Thirdly, managerial bonus system was

used as the most powerful incentive. According to this, the managers gotsalaries plus bonuses for fulfilling and overfulfilling the output targets.

(f) In order to influence the behaviour of the workers, workers were givenmoney wages for labour performed and were allowed to spend it freely on

consumption goods either at the state retail stores or in the free collective

farm market. There were money wage differentials to account for the type of

work and geographical location. Individual and group bonuses were alsogiven to workers. There was also rewarding by in-kind distribution of

consumer goods.

(g) Stalin was clever enough to introduce powerful incentives in Sovietagriculture. Millions of acres of land were made available to collective farm

households, state farm workers and certain others (such as factories, hospitals

and schools) as private garden plots. Each of these plots was less than 1 acrein size. Their owners were free to grow anything they liked on these plots

and they could even hold some animals privately. More than that, they were

free to sell their privately produced output on so-called collective farmmarkets to anybody at any price freely determined by supply and demand.

The consequences were amazing indeed in terms of larger output creation.

Problems with Managerial Behaviour

Managers greed for maximising their bonus payments led to the following problems:

(a) Managers understated the productive capabilities of their enterprises in order

to get low output quotas from the central managers. Whenever theysucceeded, available resources were underutilized even as they personally

benefitted.

(b) Managers overstated their input requirements and when they succeeded, theyhoarded the resources in warehouses and there were idle workers on payroll.

They drew on these resources to fulfil and overfulfil the output targets or

whenever they needed inputs which they did not receive.

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(c) As output targets were specified in physical quantities, the problem of low

quality of output emerged. For example, if a manager were given the choice

between producing 100 tons of perfect steel and 110 tons of brittle steel, hetended to opt for the latter.

(d) There was shortage of spare parts and lack of service. Again, if there were to

be a choice between producing 500 tractors with spare parts and a goodservice organisation to back up their future operations and 550 tractors

without spare parts and service, managers would opt for the latter.

(e) There was disregard of the wishes of the customers as to composition ofoutput. This was the so-called assortment problem which simply meant

mismatch between what is produced and what is wanted in the system.

(f) The timing of production and deliveries was badly affected. This was known

as the problem of storming. Production and deliveries did not occur on aregular basis, given the quarterly accounting deadlines. In fact, it was typical

in the Soviet economy to produce at a fairly leisurely pace during the early

part of any calendar quarter, but later the pace of activities quickened and

turned into a furious tempo as the date of reckoning approached.

Problem faced by the Workers as Consumers

The typical problem faced by the people as consumers was the so-called Supply

Problem in terms of the problem of shortages and surpluses faced by them in the state

retail stores through which the government distributed the consumer goods due to the use

of fixed prices instead of flexible pricing. As the figure below shows, it was a rarity tofind the price fixed by the government (10 rubles per unit) as the equilibrium price in

terms of the demand D2 in relation to the supply of 16, 000 units offered for sale.

Typically demand was more or less intense as indicated by D3 or D1 so that there waseither shortage or surplus which could have been avoided through flexible pricing, for

example 15 rubles in case of shortage and 5 rubles in case of surplus.

Problem faced by the Peasants in Collective Farms

The collective farmers produced and delivered according to the governmentally setquotas. When they delivered, they were paid agricultural procurement prices that were

fixed by the government. Whenever they purchased inputs from the government

administrators, they paid the so-called enterprise wholesale prices which were again

fixed by the government for interenterprise transactions. Sales revenue (output produced

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multiplied by agricultural procurement prices) minus costs (inputs purchased at enterprise

wholesale prices) amounted to residual income which was divided among the collective

farmers at the end of the year (in accordance with labour-day points accumulated bythem during the year), and this dividend became their personal reward for working on

collective farms. By manipulating the prices involved, Stalin saw to it that the collective

farmers personal income was extremely small, which made it impossible for them to buyany significant quantities of industrial consumer goods. Not surprisingly, the collective

farm residual income was a poor incentive to induce collective farmers to their best.

Collective farmers typically malingered on the collectively owned land.

The Underground Economy

The problem with the official economy was the supply problem, i.e. the inability of the

people to obtain the types of goods they wanted. People were frustrated because somegoods were simply not provided and others were not available at the right time in the

right amounts or in the right quality. And so people very soon figured out semi-legal and

illegal ways of getting what they wanted. Thus, there emerged an enormous underground

economy beyond the control of the official economy, i.e. outside the control of theGosplan. In this economy, people performed semilegal and fully illegal activities in order

to enhance their welfare. They allocated resources and acquired goods in ways notspecified by the Central Plan.

The managers were notorious for their semilegal behaviour, i.e. for their adoption

of illegal means to achieve legal ends. Officially, this was deplored but tolerated. The

managers resorted to three kinds of illegal means. First, they created and carefullynurtured personal connections with influential people in order to get more input

allocations and lower ouput targets. Secondly, they promoted black markets barter. Most

enterprise managers surreptitiously employed special kinds of expediters or pusherswho scoured the economy for needed supplies and arranged illegal exchanges of

equipment and rawmaterials among enterprises, given the problem of wrong deliveries

faced by each enterprise. Thirdly, managers resorted to empire building. This meant thatthey they solved their supply problem through self-sufficiency, i.e. their own

production.

A vast illegal enterprise sector came into existence due to stealing of all types ofinputs and using them in illegal enterprises. They came into existence in three ways: first,

as operations behind an official faade, i.e. as private firms behind state enterprises;

secondly, through the putting out system wherein some private entrepreneurs engaged

large numbers of workers all of whom did piecework in their own living quarters. They provided the workers with the needed rawmaterial and marketed the product after

collecting it from them; and thirdly, as home-based operations, i.e. many commodities

and services were produced in their own homes by private producersThe underground economy thrived as bribery and corruption became a way of life

in the Soviet Union despite the bloody dictatorship of Stalin and his secret police.

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Lecture Notes 5

Performance Assessment of Centralised Socialism

as a Pure Model and as a Case Study of the Former Soviet Union

Introduction

Whether an economic system has fared well in fighting the scarcity problem is judged on

the basis of whether that system has done well in relation to the list of actions required to

be done to promote not only economic or material welfare through full employment,

efficient employment, growth, extensive and intensive and economic equity but alsononeconomic or non-material welfare through avoiding alienation from self, others and

nature. We elaborate this in respect of centralised socialism as follows.

Performance Assessment

(i) Full employment

In the pure model of centralised socialism, the central government defines and achieves

full employment. The central government achieves it easily because the central plannerscan draw a plan the execution of which would utilize the available resources precisely.

But the critics think that this is not possible. According to them what is logicallyconceivable may not be practically possible. According to the critics, in saying that thecentral government can achieve full employment always, the central government is

treated as God with the characteristics of omnipresence, omnipotence and more

importantly, omniscience. But this is a mistaken view. Take the case of omniscience. Thisis impossible due to the so-called knowledge problem which means that knowledge is

not available to a single mind in its totality but is found in billions of dispersed fragments

in the minds of countless separate individuals. Moreover, workers and managers can givefalse reports to the central planners.

The case study of former Soviet Union more than amply demonstrated that

unemployment was very much in plenty. There were three kinds of unemployment found

in plenty. First, there was seasonal unemployment. For example, agricultural andconstruction workers faced forced idleness during winter which was not reflected in

unemployment statistics. These workers were on payroll and received 50 per cent of their

wages eventhough they did not do anything. Their unemployment was therefore hidden.Teenagers looking for jobs during vacation were not hired by managers due to the law

that they should be paid full wages even for part time work. So, their unemployment too

was hidden. Secondly, there was frictional unemployment. This refers to unemploymentdue to the long delays between leaving school and taking a first job and unemployment of

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workers as rolling stones, i.e. those who made voluntary quits and hopped from job to

job. In Soviety Union, voluntary quits were not allowed till the mid-50s. In the pre-

1950s period, people were forbidden to quit jobs or absent themselves without permissionfrom enterprise managers. Moreover, there were penalties even for quitting with

permission (e.g. denial of sick leave for 6 months, loss of bonuses, etc.). Thirdly, there

was systematic unemployment due to the errors in plan formulation and executionresulting in the so-called supply problem in terms of shortages and surpluses. Due to

imperfectly formulated central plans, and delivery of the rawmaterials at the wrong time

or in wrong assortments, complementary workers and machines were idled.

(ii) Efficient employment

In the pure model of centralised socialism, there would be no technical inefficiency at allsince the central planners can enforce their decisions by commands backed by rewards

and threats. But the critics argue that technical inefficiency can arise for two reasons.

First, there could be misinformation from managers and workers. Secondly, in centralised

socialism distributive justice is pursued in such a way that peoples income is divorcedfrom their contribution to production and consequently the so-called incentive problem

arises. For example, if everybody get the same income, some may decide to work lessintensely.

The case study of former Soviet Union shows that technical inefficiency was very

common in that country for two reasons. First, given the monetary incentive of bonus,

the managers behaved in terms of understating output possibilities and overstating inputrequirements in order to fulfil and overfulfil targets by deliberately hoarding labour and

other inputs and drawing on them as and when required. Consequently, resources were

apparently employed but actually redundant. In so far as some resources were notutilised to produce output, there was technical inefficiency. Secondly, there was technical

inefficiency due to widespread lack of labour discipline in terms of workers working at a

snails pace, being absent for hours at a time, and being drunk on the job. Absenteeismand alcoholism were two terrible problems in Soviet Union in that they could not be

successfully tackled despite major campaigns against them.

As regards allocative efficiency, the pure model says that it is very much possiblebut the critics are sceptical about it due to the knowledge problem mentioned above.

Scientific knowledge of general applicability can be centralized but unorganised

knowledge of particular applicability which is present in fragments in countless

individuals cannot be completely appropriated by the central government.

(iii) Economic growth, extensive and intensive

According to the pure model, rapid growth can be achieved easily because the central

planners have total control over the composition of the set of final goods produced. The

critics argue that while extensive growth is possible, there is no scope for intensivegrowth under centralised socialism insofar as the managers of productive enterprises

cannot deviate from the tasks assigned to them by the central plan and take risks of

trying new ways. Even if they were to try innovation through permission, it would be

futile due to the inherent delays.

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The case study of former Soviet Union demonstrates that the strategy of extensive

growth, i.e. achieving more output through more inputs was pursued during the 1928-

1940 period. Primary emphasis was given to growth of industry rather than agriculture.Stalin was obsessed with the development of such basic and heavy industries as coal,

iron, steel, electric power, locomotives, tractors, machines, etc. Labour inputs in terms

of no. of hours worked increased due to pressure on adults not to remain voluntarilyunemployed and not to lead an antisocial parasitic way of life. Soviet Union witnessed

very high labour force participation rates of males and femalesin fact, the highest in the

worldalso because of shifting people from agricultural part time employment intoindustrial full employment. Soviet Union also maximised the discovery and exploitation

of additional natural resources.

The 1940-1950 period was a terrible disaster, with enormous losses in productive

capacity and all resource base due to German invasion and retreat, for Soviet Union. Thecountry was reduced to a wasteland with around 20 million Russian dead.

There was a steady decline in the rate of growth since the 1950s due to (a) fewer

opportunities to pursue the favoured strategy of extensive growth; and (b) an inability of

the central planners to harness the potential of the alternative strategy of intensivegrowth.

Extensive growth based on expansion in labour resources, capital resources andnatural resources could not be sustained due to the following reasons. In the case of

labour, the following barriers were found. As the labour force participation rates for men

and women were already pushed to their practical limits, this source of increased labour

supply was closed. The source of additional labour by means of shifting underemployedagricultural labour to the industrial sector was also dried up. Further, unlike Stalin who

forced people to work more hours per week, his successors reduced weekly hours. Worst

of all, the great disasters of the Soviet past in terms of emigration, famine, purges andSecond World War decreased the ratio of males to females in the population and

produced remarkably slower annual increase in the potential labour force. In the case of

capital, there were two reasons why capital resources could not be expanded despite theimposition of heavy sacrifices in consumption goods in order to ensure that a large

percentage of each years GNP consisted of new capital or investment goods. First, for a

given production of new capital goods, past increases in the capital stock were impossibleto repeat to the extent that an ever greater percentage of each years new capital goods

now just replaced the wear and tear of a much larger and older capital stock. Secondly,

unlike in the past, when investment was stressed in sectors with high marginal

productivity of capital, more of it was now channelled into sectors with low marginalcapital productivities. In the case of natural resources, new virgin lands could not be

brought under cultivation any more for increasing agricultural output. In the areas of old

land, more and more resources were required to get the yield per acre that was achievedin the past. The same problem was experienced in the exploitation of minerals and fuels.

Intensive growth could not be achieved for the following reasons. First, despite

commendable progress in expanding high quality education relevant for economic progress, output increases could not be obtained due to the motivational deficit as

reflected in widespread alcoholism, absenteeism and malingering. Productivity increases

based on improvements in health care could not be derived as there were many

drawbacks in health care provisioning. As regards, technical advance, the Soviets

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organised the wholesale copying of the most advanced production techniques from the

West, but did not update them continuously. At the enterprise level, there was no

innovative activity on the part of the managers in terms of experimenting on a small scaleand continuosly with new improved methods of production. Moreover, innovation

decided upon and commanded by the central planners was a slow process as reflected in,

for example, the slow Soviet changeover from coal to oil and gas as major energysources.

(iv) Economic equity

The Soviet government did not pursue distributive justice according to need or equality

or hours worked, yet it maintained that equity was achieved because (a) no one received

income from the private ownership of nonhuman resources and (b) the differences in peoples incomes were government determined and not the result of blind market

forces. The empirical truth was that there were enormous differences in the incomes of

the people. At the top of the Soviet income pyramid were the political and economic

leaders, followed by the military brass, the professional managerial elite, and superstarsin arts and sports. Below them, in turn, were the industrial workers, followed by the

peasants at the very bottom. There was no scarcity problem for those at the top of thepyramid.

(v) Avoiding alienation from self

Peoples alienation from themselves surely existed in the Soviet Union no less than in

other industrialzed countries due to the division of labour and the consequent

enslavement of people to machines, to work outside the home, to rigid work schedulesand to mammoth workplaces. Moreover, alienation from self was much worse as people

were taught to submerge their individuality in the community at large, to be a willing cog

in the great central plan, not to go off and do their own thing. The Soviet society was onewhere conforming to the Party line had the highest priority.

(vi) Avoiding alienation from others

Centralised socialism fares very badly in this respect. Powerful bureacracy with its

supposedly supreme wisdom, imposes its will on the people. In other words, people are

forced to accept the preferences of the central planners. There is no consumersovereignty, no worker sovereignty and no citizen sovereignty.

(vii) Avoiding alienation from nature

Although in the pure model of centralised socialism, the central planners hold the power

to preserve nature, the Soviet case study shows that the central planners were notsensitive to nature. All kinds of pollution were everywhere in Soviet Union, and they

were as bad as pollution elsewhere.

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Conclusion

Contrary to official propaganda, the Soviet case study shows that continuous full

employment does not exist. There is seasonal unemployment (due to weather) andfrictional unemployment (due to high labour turnover). Above all, there is widespread

hidden unemployment caused by errors in plan formulation and execution (the supply

problem).Technical inefficiency is widespread, in part the result of managerial input

hoarding, in part caused by a general lack of labour discipline. Allocative inefficiency is

also ubiquitous.Economic growth has been impressive until the late 1950s, but the overall rate of

growth has steadily declined since. This can be explained by vanishing opportunities for

extensive growth and an inability of central planners to harness the potential for intensive

growth (especially through technical advance).There is no distributive justice. But the Soviet government claims that its highly

unequal distribution of income is just.

As to alienation, whether from the self, from other people, or from nature, Soviet

society scores poorly on all counts.

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Lecture Notes 6

Features and Performance Assessment of Market Socialism

as a Pure Model and as a Case Study of the Former Yugoslavia

Market Socialism as a Pure Model

The Polish economist, Oscar Lange, had conceptualised socialist market economy as a

pure model. It is a world in which the nonhuman resources are collectively owned but the

effective control of these resources is shared by numerous individuals throughout the

economy. Their actions would be coordinated by markets in which all resources as well

as goods would be bought and sold. In a nutshell, he imagined the possibility of socialismin terms of ownership and its operation by economic rationality through market

competition.In the Lange model of market socialism, there are four major types of actors, viz.

the central planning board; private households; socialist enterprise managers; and

socialist industry managers.The central planning board oversees the economy. It performs 5 functions as

follows. First, it appoints tens of thousands of enterprise managers, one for each

productive enterprise. It also appoints a small number of industry managers, one for each

industry. Secondly, It determines the percentage of Gross National Product devoted toinvestment and makes available investment funds through a loanable funds market. It

gives the enterprise managers loanable funds for investment against interest payments.Thirdly, it supplies the available services of nonhuman resources (e.g. so many blastfurnace hours per year, so many acre hours per year) against the demand from managers

who pay rent for them. Fourthly, it taxes households and also collects net profits (total

profits minus total losses of the enterprises). The total income thus obtained is disposedoff in three ways: as loanable funds; as government spending (on defence, healthcare,

education, vocational training); and as social dividend (peoples share in interest, rent and

profit income). Fifthly, it plays a role in price setting. Prices of labour and privateconsumer goods are established in free markets. But all other prices of inputs and

outputs are fixed by trial and error in the offices of the central planning board so that they

approximate to equilibrium prices: if there exists surplus, price is reduced and if there is

shortage, price is raised.Members of the private households are free to work in the location and

occupation they liked for money wages. Their disposable income is wages plus social

dividend minus taxes collected by the government. They are free to spend the after-taxincome on consumer goods they liked.

The socialist enterprise managers make their own input and output decisions on

the basis of certain general rules. They determine optimum input quantitites to be usedby equating the falling marginal value product of the input used with the inputs price.

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They determine the optimum output level to be produced by equating the rising marginal

cost of production with the outputs price. The monetary receipts obtained (on selling

goods to other enterprises, households, and government) minus the monetaryexpenditures (i.e. costs incurred on buying services of resources in resource markets and

on buying capital goods in goods markets) is equal to profits. If an enterprise makes loss,

that is covered by the government from the profits made by the profit-making enterprises.The job of the socialist industry managers is to expand, contract or liquidate

existing enterprises or to create new ones. They also follow certain rules of behaviour.

They exapnd the size of an existing firm or establish new ones when the firm makesprofits. And they contract or abolish a firm when it makes losses.

Market Socialism as a Case Study of Former Yugoslavia

In the 1950s, Yugoslavia was the first to emerge as a socialist market economy. This wasa nation formed by six republics coming together, viz. Slovenia, Croatia, Bosnia-

Herzegovina, Montenegro, Macedonia and Kosova. The charismatic leader of the

country, Tito was famous for two reasons. Not only did he unite the potentially

conflicting six republics but also did he abandon the Stalinist centralised socialism whichhe embraced first. He angered Stalin and faced the threat of Soviet invasion not only for

this but also for opposing the domineering leadership of Stalin among the socialistcountries. The progress of market socialism under Tito can be appreciated by examining

three time phases, viz. 1950-1965; 1965-1971; and 1971 to 1980s.

(i) 1950-65 : Decentralisation, privatization and worker self-management

Tito executed brilliantly two ideas of Karl Marx, viz. that workers should collectively

manage, and that the state should wither away. The latter idea was implemented in termsof dismantling of central planning board in favour of markets. Political power shifted

from central government toward republican governments and still lower-level

governments. The role of the central government was to bother about 5 issues: decidingthe composition of Gross National Product between investment goods and consumption

goods; regional balance; volume and direction of foreign trade; economic equity; and

provisioning of collective consumption goods like defence, education, and research.Agriculture was privatized with the maximum size of a private farm being 25

acres. In industry and services, tiny private firms employing a maximum of 5 employees

were legalised in activities such as construction, handicrafts, retail trade, service sector,

etc. For example, private tailors, butchers, doctors, plumbers, restaurants, taxis, etc. wereencouraged in this regard.

All enterprises with staff more than 5 employees were categorised as socialist and

these were run like democracies, not as autocracies. In fact, larger socialist enterpriseswere run like representative democracies. The workers elected and supervised their

representatives (managers) constituting a workers council which in turn elected a

management board which in turn in conjunction with officials of local government andindustry trade association appointed an enterprise director.

(ii) 1965-71: Consolidation of self-managed firm

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Government, social organisations, existing enterprises and groups of individuals were the

founders of the firms. They took initiative in choosing the kind of firm, its location, and

in providing for its initial plant and machinery and labour, but the effective control of thefirm was left to the workers. Thus the separation of the founders from subsequent

decision making characterised a salient feature of the self-managed firm.

The workers not only offered labour services but also carried out entrepreneurialfunctions. And so wages and profits got mixed up. Their objective was to maximise

residual income per worker. Residual income is revenue from sales minus costs incurred

(on rawmaterials and services got from others, depreciation costs, interest to banks, taxesto government).

The third feature of the self-managed firm was in relation to how the residual

income was disposed. Residual income could be used in three ways: (a) reinvestment;

(b) collective consumption (i.e. construction of housing, swimming pools, tennis courts,etc.); and (c) distribution as personal income among workers on an equal or unequal

basis, whatever the workers decide, but subject to the central governments condition that

workers must get an amount at least equal to the minimum hourly wage. In case the

personal income does not meet this condition, the government ensured it throwborrowings from banks. When it comes to deciding on the disposition of the residual

income in the above three ways, the workers would obviously prefer maximising itsdispositon in terms of (c).

(iii) 1971 to 1980s: The bargaining society

While in the first phase Tito downgraded the central planning and preferred markets,

during this third phase, Tito downgraded the role of markets and instead preferred the

role of bargaining as a better coordination mechanism. Perhaps Tito thought that this wasa better way of preserving the unity of the Yugoslavian federation of six republics. How

to coordinate separate activities of people by means of bargaining which leads to

consensus via self-management agreements was the botheration of this phase.Bargaining is at three levels. At the intra-enterprise level, representatives of

different activities will exchange information and arrive at consensus. At the inter-

enterprise level, representatives of different enterprises will do the same. At the inter-regional level, representatives of different regions will also do the same. At the national

level, a similar procedure is followed by representatives of different economic, social and

political groups in order to arrive at consensus (social compacts) regarding

macroeconomic issues like balance of payments targets, inflation targets, regionaldevelopment, private versus public sector, etc.

Performance Assessment of Market SocialismWhile the pure model says full employment is possible, the case study shows larger open

unemployment. Unemployment was severe possibly due to the incentives peculiar to

worker collectives, viz. that workers were interested in maximising residual income perworker so much so that there is an incentive to decrease the number of workers in the

firm. Again, while the pure model does not allow for technical inefficiency and allocative

inefficiency, both inefficiencies were found to be high in Yugoslavia. For example,

agriculture was overpopulated and agricultural productivity was low. While the pure

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model talks about achieving optimum growth by determining the investment share of

Gross National Product, the case study shows that high growth was achieved initially in

terms of extensive growth but later on growth rates declined. Workers had an incentive tomaximise their personal income rather than to maximise the reinvestment portion of the

residual income. As regards economic equity, the pure model points out a mix of

commutative justice and distributive justice as people get an equal share of propertyincome in the name of social dividend, people are free to choose jobs and change them as

they wish, and all people are equally free to avail themselves of the generous

opportunities for healthcare, education and training. But the case study showsconsiderable inequality in the system.

As regards alienation from self, it was there in terms of division of labour and

specialisation but it was much less in terms of people having considerable freedom to

shape their lives.As regards alienation from others, the record is mixed, but undoubtedly superior

to that of the Soviet Union. Consumer sovereignty is fairly complete as far as the make

up of the consumption portion of the Gross National Product is concerned. Firms cater

to the wishes of consumers as expressed in market demand. So far as the size of theconsumption portion is concerned, individual consumers have considerably less power.

On the one hand, governmental units at various levels have consistently pushed for anextremely high rate of saving and investment, using taxation and persuasion for the

purpose. On the other hand, any individual workers can easily be forced through the

majority vote of fellow workers, to save more or to save less than is preferred. According

to the advocates of market socialism, worker sovereignty is more complete in Yugoslaviathan anywhere else in the world. But the critics say that it is a sham because the self-

management system did not emerge as a result of worker initiative but was imposed on

the workers from above. Furthermore, the workers soon realized that it was impossiblefor an entire firms workforce to exercise direct control over everything. As a result, the

workers do not manage; management is done by professional executives considered as

the new class. Citizen sovereignty was considerably more extensive in Yugoslavia thanin the rest of Eastern Europe. Although Yugoslavia was a one-party state and political

criticism was a taboo, at the same time, there were fewer signs of an all-devouring

bureaucracy and the secret police. Moreover, the Yugoslavs were the only socialistcitizens in Eastern Europe who could travel to the West in large numbers.

As regards alienation from nature, Yugoslavia did not fare well as pollution was

widespread.

Conclusion

It is clear that market socialism was relatively better than centralised socialism but it toohad many shortcomings with regard to both features and performance as highlighted

above.

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Lecture Notes 7

Communal Socialism

The Idea

Communal socialism is based on the vision of an intentional community or commune.This is a voluntary and deliberate association of people who value togetherness above all.

They seek to extend intimate, sharing relationships beyond the immediate family. They

want to establish a whole new way of life in which all barriers among people are brokendown and individuals merge with other individuals to become as one.

There are two significant obstacles to achieving communal socialism. First, there

is the institutional barrier of private property in the means of production (i.e. nonhuman

resources) as well as consumption. Secondly, there is the psychological barrier in terms

of the ego steeped in the deadly sin of selfishness.Karl Marx, the patron saint of all socialists, predicted, for example, that the

course of history would lead inevitably to such a society, i.e. communism. It would be asociety without scarcity. It would also be a society without egoism, i.e. it would be a

loving community of brothers and sisters who have shed self-centredness and are driven

by the inner necessity to serve their fellows and to do so to the best of their ability.In this kind of society, there would be mass participation in all production

decisions as the means of production are collectively owned. Every one takes according

to need as the means of consumption are collectively owned. People contribute to the

maximum of their ability to the creation of goods but do not need very much in terms ofconsumption. People are guided by internal incentives, i.e. stimuli arising from within

such as feelings of love, joy, goodwill or guilt. These internal incentives compel everyonein the new society continually to serve the social body with which they become one.There is no need for external incentives, i.e. stimuli coming from other people, such as

criticism or punishment or praise and money rewards, which ordinarily motivate people

to take or not to take an action. People in the new world live happy and joyful lives ofcreative leisure and work They are self-reliant by producing a whole variety of goods in

small workshops, at their own pace, with hands and brain and simple tools. And they live

in harmony with nature.

Small Scale Communal Experiments

While history testifies to failure of numerous small scale experiments in communal

socialism, Americas Bruderhof and Israels kibbutz represent a two successful examplesof communal socialism on a small scale.

The Bruderhof is a particular type of Christian community which was originally

founded in Germany in 1920 and which later migrated to the U.K., Paraguay, andUruguay, and, finally, to the U.S. In the late 1980s, it had a population of 750 persons

who lived in three federated colonies in rural Connecticut, New York, and Pennsylvania.

They live like one large family, by owning all things together, making all decisionstogether, having their meals together, working together, raising their children together,

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meeting almost every night together, and spending their entire lives togetherwithing

the geographic confines of their estate (i.e. their hof). The community relies on thought

reform in order to destroy egoism.The Israeli kibbutz means group in the Hebrew language. The first kibbutz was

founded in 1909. By 1987, there were 280 kibbutzim, containing a mere 3 % of the

Israeli population, but producing 10 % of the countrys Gross National Product. Mostconsumption is collective. The means of production are jointly owned. Ultimate

decision making power rests in a General Assembly of Members. They elect executives

such as a Secretary, a Treasurer, and a Work Coordinator as well as an EconomicCommittee. The latter draws up plans for production, consumption, and investment that

the General Assembly must approve. Everyone capable works. Incentives are mainly

external, but not monetary. Probably the strongest one is praise or disapproval by the

closely knit community. Nothing is more highly valued than being regarded as a good,selfless worker. By the same token, nothing is more feared than being considered as a

laggard or a parasite. Occassionally, such people are expelled. More often, they leave by

themselves. In many ways, life is like the dream: in the countryside, near the home, in

small workplaces.

Large, Nationwide Experiments

Maos China and Castros Cuba experimented with fighting scarcity as well as

egoism through communal socialism in vain.

China

Mao Zedong came to power in 1949 in China. And since then Chinese economic policies

followed a zig-zag course that mirrored an intense struggle between the pragmatists orexperts on the one hand and the reds or purists or revolutionary zealots on the other.

The former wanted to fight scarcity whereas the latter wanted to destroy egoism.

During the First Five Year Plan (1952-57), Mao adopted Stalins system ofplanning and managing the economy. But during the Second Five Year Plan (1957-62),

Mao rejected the crass m