The Problem of the Socialist Market

by Emil Bjarnason

All visitors to the USSR (and the East European socialist states) were inevitably confronted by more or less incomprehensible shortcomings, some of which appeared to contradict the very essence of socialism. I refer, for instance, to the persistent presence of the black market, manifested by seedy characters offering to buy Western currencies at exchange rates many times more favourable than the official rates and to the existence of the so-called “dollar stores” where persons with access to Western currencies could purchase goods not available to the local citizens; to the incredibly inefficient telephone system, operating without benefit of telephone books; to the facilities of Europe’s largest hotel, the Rossia, with its 26 cafeterias with cash registers consisting of a cigar box and an abacus, and this in a country that was capable of outstripping the United States in the technology of space exploration. Another phenomenon apparent to many visitors was the casual approach to work in Soviet industries.

All of these negative phenomena are attributable to the failure to develop a socialist market. That, more than anything else, is responsible for the current well-nigh universal habit of contrasting socialism with the “market system” which in the present-day literature of both East and West is treated as being the distinguishing feature of capitalism. Nowhere in the works of Marx, Engels or Lenin will one find a description of socialism which requires that all enterprise from the corner kiosk to the manufacture of space satellites should be owned and operated by the state and that all prices should be determined by decree from the centre (it is reported that the central government decreed the unvarying prices of over eight thousand commodities).

The function of market prices is to regulate the allocation of resources in an efficient manner. This means that prices must be flexible. For example, the management of a factory manufacturing widgets should be able to reduce their price or curtail their output if they find that their product is accumulating, unsalable, in warehouse inventories, or to raise prices if the demand could not be satisfied at the existing price. Instead, the production decision was governed by a central plan, which laid down an increase of x%, and if the product could not be sold at that price there was compensation by subsidies. There is no question that this practice had a great deal to do with the precipitous fall in rates of growth which began during Krushchev’s seven year plan and continued under his successors.

The failure to develop a socialist market was also responsible for the failures of trade among the socialist countries. In defiance of the most elementary principles of economics all such trade was carried on in a bilateral way. This led to the fact that banks would exchange their own currencies for those of any capitalist country and vice versa, but they would neither exchange nor accept the currencies of fellow socialist countries except in government negotiated trade deals. If Poland, for example, were to sell agricultural products to Czechoslovakia, it would receive in exchange Czech currency which would be used only to buy Czechoslovakian goods. Since it would rarely happen that Poland’s need for Czechoslovakian goods would precisely match Czechoslovakian requirements for Poland’s goods, and the excess Czech currency could not be spent elsewhere, all the socialist countries found themselves in possession of huge unusable balances of each other’s currencies. What they were doing, in effect, was turning the clock back to the primitive era when the only form of exchange between neighbouring tribes was barter. An attempt was made in 1970 to remedy that situation by introducing the “transferable ruble” as a common trade currency for all socialist countries but only with respect to capital goods. It never advanced beyond that point and all of the socialist economies suffered accordingly.

In the Marxist classics, socialism is treated as a transitional form leading eventually to communism, which would only come about when the output of goods and services had reached the level where there was no need for restrictions on consumption. Few people other than Krushchev had any illusions that the communist stage could be attained, especially in Russia, without a long transitional period. In the meantime, as Lenin clearly recognised, socialism would continue to carry some of the features of capitalism, including market relations.

This does not have to mean that all enterprise has to be privately owned and operated unless one upholds the absurd notion that the ownership of the means of production by the workers means their ownership by the state, which is ultimately fated to wither away. In socialist society enterprises could be owned and operated by cooperatives, local soviets or governments, regional governments or indeed the central government. Each such productive unit would have to be accountable for its own operation and for adjusting prices in accordance with supply and demand, subject to national regulations with respect to safety, environment, etc. Price controls could also be maintained on certain items such as milk, medicines and rents. Suffocating bureaucracy did not have to be an inevitable feature of socialism.

Spark! #10, pg. 17-19