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Yugoslav Economic Theory

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Monthly Review, April 1967, pages 40-49

Yugoslav socialism has acquired specific features, not only in practice but in theory.  In practice, it is a unique combination of workers’ self-management, extensive use of market mechanisms, and tight political monopoly of power by the Communist League of Yugoslavia, of which the positive side (greater workers’ initiative and larger span of ideological freedom) and the negative side (increasing social inequality, increasing abdication of central planning) can be easily recognized.   In theory, it is harder to seize these peculiarities, because the Yugoslav leaders have a way of formulating their ideas in a vague and fleeting manner which makes crystallization of a definite ideological trend rather difficult to achieve (perhaps that is precisely the reason why they express themselves in this way).  Therefore the appearance in English of Branko Horvat’s Towards a Theory of Planned Economy is to be welcomed. (1)  For here we have at last an attempt at a fully rounded Yugoslav economic theory, which has at least a semi-official character. (2)

Branko Horvat started his career as an official party economist in Yugoslavia during the 1950’s.  But he also took a PhD in economics at Manchester University, lectured at the postgraduate school of the Institute of Social Studies in The Hague (Netherlands), and functioned as chairman of the Working Group of the Committee of Industrial Development of the United Nations.  It is no exaggeration to say that he is much more an adept of the Cambridge school of welfare economics than a Marxist.  Internal evidence provided by Towards a Theory of Planned Economy easily confirms this diagnosis.

Traditional Marxist theory starts from the assumption that the building of a socialist society is identical with the withering away of commodity production and of market mechanisms.  True, most Marxist theorists have always recognized that the artificial suppression of the market immediately after the overthrow of capitalism is impossible.  They have always considered that some forms of market mechanism will survive during the period of transition from capitalism to socialism (or, as others formulate it, even during the “first stage of socialism”).  They have readily conceded that planning could make use of these market mechanisms in order to achieve greater efficiency.  But what has nevertheless always been basic to their thinking is the assumption that, historically, there is a definite incompatibility between socialism --or, put otherwise, a classless society and a high degree of social equality and economic efficiency -- and commodity production.

The conviction is founded on two fundamental bases.  Commodity production inevitably generates social inequality (and Lenin even went a step further when he stated repeatedly that simple commodity production inevitably reproduces primitive capital accumulation, i.e., potential capitalism).  Commodity production also inevitably produces waste of economic resources, which is inconsistent with the goal of maximizing social output and income.

Different currents of thought or political tendencies within the traditional socialist movement might strongly disagree about the amount of commodity production and market mechanisms which are unavoidable during the various stages of the period of transition from capitalism to socialism.  Some might think it utopian to introduce social ownership of the means of production and central planning into an agriculture still mainly based on simple commodity-producing farms.  Others, on the contrary, might think it utopian to conceive a centrally planned economy while commodity production and private ownership still dominate in the countryside.  The discussions around these types of questions are well-known from the history of the Soviet Communist party from the middle 1920’s to the early 1930’s.  But whatever differences have arisen among these schools of thought and action, they were bound together by a consensus about the socially objectionable character of a market economy -- even if it is a necessary evil for a long period.

Western European social democracy broke with this conception some time after the Second World War, and started to conceive of market economy as basically sound and desirable.  The Godesberg Program of German social democracy launched the formula: “Competition as much as possible; planning only as much as unavoidable.”  But one can hardly avoid the conclusion that Western European social democracy revised the classical socialist attitude toward market economy only to the extent that it rejected the classical attitude toward capitalism and socialism altogether.  In fact, social democracy now openly admits its integration into bourgeois society.  Its ideal nowadays is a smoothly run capitalism, purged only of its most glaring social ills: the welfare state.  It follows that the classical antithesis between market economy and classless society is fully confirmed by the social democrats’ option in favor of market economy, the other side of which is a frank rejection of the concept of a classless society.

The Yugoslav Communists are the first to try to reverse this antithesis.  For them, market economy is not a necessary evil during the period of transition between capitalism and socialism; rather it is here to stay even after the end of the construction of socialism.  Some of them still argue that commodity production will eventually wither away “under communism.”  But they are, in fact, inconsistent.  The more consistent theorists like Horvat daringly conceive of a communist society with commodity production in full bloom. (3)

The pragmatic and apologetic origin of this conception is evident.  What the Yugoslav theorists are really concerned with is an explanation and justification of what is happening in their own country.  As for the long-run theoretical implications of these justifications, they are unaware of them or, frankly, don’t give a damn.  This is not the only common trait between present-day Yugoslav theory and Soviet theory in the Stalin epoch.

The origins of the Yugoslav attempt to clothe the market economy with socialist respectability are not difficult to discover.  After the Cominform’s excommunication of Yugoslavia in 1948 and Stalin’s economic blockade against that country, the Yugoslav theorists were above all concerned with the question of explaining this utterly unsocialist and unfraternal attitude of the rulers of the USSR towards their country.  This question led them straight to a social critique of the Soviet state and economy.  They arrived at the conclusion that centralized administrative planning inevitably strengthens bureaucracy; that this bureaucracy, enjoying a de facto monopoly in the disposal of social surplus product, must inevitably dominate in all sectors of social life; and that such a bureaucratic monopoly of power becomes increasingly a fetter on progressive evolution toward a socialist society (as well as, incidentally, an obstacle to maximization of economic growth).

In order to avoid these pitfalls, one must strike at the root of the evil, centralized planning by administrative means; such was and is the Yugoslav contention.  In order to break the stranglehold of bureaucracy over socialist society, one must set into motion processes of self-management of producers and self-government of citizens everywhere.  But self-management of economic units can only be real if these units are permitted to retain the largest possible part of the social surplus which they produce.  They can do this only if they escape to the maximum extent direct administrative control by the planning authorities.  Hence the maximum of autonomy and of competition between economic units, and the maximum use of “elastic” market mechanisms by the planning authorities, become the chief characteristics of the ideal “model” of a socialist economy:  “In order to avoid the evils of bureaucratism … initiative and responsibility have to be transferred downwards and kept close to the place of direct work.  Consequently the enterprise, personified by the working kollektiv, becomes the basic economic [decision making] unit of an efficiently planned economy” (Horvat, p. 225).

From a sociological point of view, the basic weakness of Horvat’s theory is the complete lack of any definition or precise description of bureaucracy.  At some points, he seems to have inherited the old Stalin-school type of reasoning, which simply equates “bureaucracy” with “habits of those accustomed to lead from behind an office desk,” and which is inadequate to the point of being ludicrous.  At other points, he speaks fleetingly about “the interests of bureaucracy as a social group” (p. 86), but this concept is never elaborated nor integrated into a general analysis of the bureaucracy.

We think that from a Marxist point of view, the bureaucracy in a society emerging from the overthrow of capitalism can only be defined as the sum total of all materially privileged elements and layers which are not private owners of the means of production.  Once we accept this definition, we can immediately discover the fatal weakness of Horvat’s analysis.  What he has not proved, and cannot prove, is that centralized planning by administrative means is the only or the main avenue for strengthening the bureaucracy in the period of transition from capitalism to socialism.

His only thesis -- which is obvious to the point of being a tautology -- is that centralized planning through administrative means is the main source of a central bureaucracy.  But it does not follow at all that growing decentralization and substitution of market mechanisms for planning can somehow prevent the growth of types and layers of bureaucracy other than the functionaries of central planning boards or “industrial” ministries.

In fact, there is every reason to expect the opposite.  Increased use of market mechanisms must lead to increased inequality -- inequality between plants of the same industry; between different industrial branches, between workers of different regions, and between workers and managerial personnel in general.  These assumptions of socio-economic theory are fully confirmed by the actual evolution of Yugoslav society during the last ten years, which has shown a growing inequality of income between the different republics, between workers and managers, and inside the working class itself.  Therefore we arrive at the conclusion, supported by facts, that the growing use of market mechanisms strengthens bureaucracy at plant and commune level, exactly as over-centralized planning by administrative means strengthens it at the national level.

Economically, Horvat’s argument is no more valid than it is sociologically.  He is in favor of “full cost pricing” as opposed to “marginal pricing.”  He sets up a commonplace “guiding principle” -- “the price should be set so as to equalize demand with supply” -- (p. 30) and then jumps to a rather far-reaching conclusion: “Provided that the institutional set-up insures an identity of interests of the firm and the community, profit becomes a device for a continual correcting of productive choices in the direction of achieving maximum economic efficiency.” (p. 30)  Consumers “exercise their free choices within the restraints of their income and their scales of preferences.  This suffices to determine the price system …  Following the profit maximization rule, consumer goods industries combine their input in the most economic way and so transmit consumers’ choices to producer goods industries; the latter transmit them further to each other and back to consumer goods industries.  In this way, the total price-output structure of the economy is being continually determined.” (p. 31)

Horvat -- a Yugoslav Communist after all! --accepts only one limitation on this rather incredible imitation of the illusive “perfect” market of bourgeois liberals -- that is the role of the central planning board as a periodical price adjuster (to prevent exploding cobwebs, if pure market adjustment is followed), and as a corrector of consumer “irrationality” (prohibition of drugs and liquors; subsidies for publishing books; compulsory education and free health service).  What emerges resembles a bourgeois welfare state more than a socialist economy.

Horvat assumes that the profit of self-managing autonomous productive units can become a device for a continual correcting of productive choices in the direction of achieving maximum economic efficiency.  But this basic assumption is unrealistic and unrealizable.

From the moment the income of the firm (and its workers) depends to a large extent upon the firm’s profit realized through competition, it is impossible to ensure an “identity of interests of the firm and of the community.”  For the interest of the firm is then obviously maximization of the firm’s profit, and this is by no means identical with maximization of national income or social welfare.

In cases where the firm enjoys a monopolistic or quasi-monopolistic position, it will tend to raise its selling price, enabling it to “equalize demand and supply” at the expense of consumer satisfaction of thousands of millions of citizens.  In cases where there are one or a few big units and a number of smaller ones in the same branch of industry, competition and cooperation (price leadership!) will rapidly lead to a situation similar to that of the monopolized industry.  In cases where the producing units are many and only medium-sized, fierce competition is likely to cut prices to the point of forcing many units out of the market altogether, which then entails large losses of costly machinery and large-scale unemployment.  In cases where maximization of the firm’s profits leads it to export all or the main part of its production, the result may very well be lack of raw material or equipment for other firms, forcing the latter to operate at low levels and entailing huge losses of social output and income.

In fact, concrete examples of all these varieties of behavior can be cited from the actual operation of the Yugoslav economy, at least during the last few years.  Wherever we look, we have a balance-sheet of a huge amount of resources wasted or underemployed or employed in a socially inefficient way.  One can argue whether this waste is globally larger or smaller than it is in an over centralized economy of the Stalin-type.  But that both entail a huge waste of resources seems rather obvious.

Nor is this all.   Although Horvat mentions in passing that “equalization of demand and supply” through the market means that consumers exercise their “free choices within the restraints of their income,” he does not draw any conclusions from this.  But the conclusions are rather important.  If consumers have different incomes, they spend their money in different proportions on different goods and services.  Consequently, when the consumer goods industries simply transmit the “consumer choices” to the producer goods industries -- in other words, when investment is basically guided by effective demand -- the whole structure of industry will adapt itself to that unequal distribution of income.  Luxury goods will then be produced before the needs for basic goods of the poorer parts of society are fulfilled.  There will be an overproduction of washing machines before every household has a pair of good winter shoes.  Investment will tend to concentrate in the richer regions at the expense of the poorer ones, in the same way as it will tend to satisfy the needs of the higher incomes before the needs of the lower ones.  And even the modest “social priorities” still defended by Horvat will be subject to erosion.  Liquor can, after all, meet more “effective demand” than books on sociology or philosophy, not to speak of Marxist textbooks; so firms will find it profitable to increase the output of liquor rather steeply.  Financial autonomy of housing units will lead to “economic rents,” i.e., a monopoly of comfortable modern housing for the bureaucracy, with workers returning to slums.  The principle of a free health service will also clash with the same principle of “financial autonomy” and become more and more infringed upon.  Subsidized publishing houses themselves will tend to produce more and more comic strip books and crime novels, because “consumer choices” dictate such decisions. (4)

Horvat tries to argue that the interest mechanism alone should govern investment.  The only reservation he admits explicitly is the case of new industries.  He argues that “insofar as price fluctuations can be avoided, windfall gains and undeserved losses will be avoided as well… And insofar as stability is achieved, profits and losses of enterprises will depend on productive contributions of kollektivs.” (p. 119)

This is a nearly classical non sequitur.  Insofar as stability is achieved, profits and losses will depend on the initial relative productivity of the firms, combined with the productive contributions of the kollektivs.  This means that the kollektivs which the accidents of birth or merger, the migrations engendered by war and revolution, the disturbances caused by industrialization and exodus from the countryside, have endowed with higher productivity, can from the start -- and without any particular merit of their own! --hope for higher incomes than the kollektivs which these accidents have discriminated against.  This means that important unearned incomes (results of past investment) go to some of the kollektivs, while losses accrue to others.  Since a higher level of consumption normally stimulates productivity, and since richer kollektivs can afford to have more of their employees take out time for special training courses, these “gains” and “losses” of the richer and poorer kollektivs inevitably tend to become cumulative.  Again we find at the end of Horvat’s model a tendency toward an increase in social inequality.

Now Horvat himself argues convincingly that the “most egalitarian distribution of income consistent with maximum output… [is] the optimum distribution.” (p. 124)  We have already seen that this model does not provide the most egalitarian distribution of income.  Does it at least provide the best arrangement for maximizing output?  Here again we cannot follow him.

In order to share his optimism, one must assume that firms which offer ex ante the highest rates of return on credits they apply for, somehow automatically also produce ex post the highest accretions to national output and income.  We find implicit in this assumption the naïve hypothesis that the maximum national output results from the sum total of each firm’s attempts at individual output and profit maximization.  In reality, this hypothesis is wrong; and the greatest advance which socialist planning allows compared with “free enterprise” resides precisely in its capacity to provide for output and income maximization at the national level, which may very well entail deliberate losses (subsidies) to various individual firms.

Furthermore, the idea that ex ante assumptions and ex post results will somehow end up by coinciding under the pressure of efforts at profit maximization, is likewise unrealistic.  The anticipated rate of return will result from a sum total of concrete conditions in which the firm is called upon to demand additional credit; it will be influenced by monopolistic and quasi-monopolistic expectations described above; and it will often be influenced by incomplete information and wrong assumptions about the behavior of other firms, inevitable under conditions of competition and autonomy of investment.

We are therefore convinced that both for purposes of achieving the maximum social equality possible, and for purposes of output and income maximization on a national scale, demand and supply equalization should be achieved in many fields a priori through the central plan, and not a posteriori through the market.  This holds for all goods and services in respect to which it is considered a social priority to quickly attain certain average consumption levels, as well as for the main means of production.  We therefore believe that all large investment projects should be centrally determined, and that this implies to a large extent “administrated” prices of equipment.  Central planning should use market mechanisms to adjust periodically prices of certain consumer goods within these limits, and not beyond them.

Does this model imply the growth of a heavy bureaucratic machinery, complete with purges, concentration camps, ideological monolithism, socialist realism, and the absence of any freedom of initiative by the workers at the plant level?  Not at all!

In the first place, it leaves ample room for freedom of initiative of kollektivs with regard to the optimum utilization and combination of the existing equipment and labor force, at plant level.  It is for this reason that we are in any case opposed to detailed instructions from central planning boards to individual factories regarding the range of their products and their methods of production.  Once the priorities are assumed, workers’ councils and workers’ kollektivs should have freedom to increase output and income by the means which are at their disposal, taking into consideration the needs of society which can be consciously formulated (through regular questionnaires addressed to factories, trade units, and consumers). The supplementary income which they can achieve through better combination of the given “factors of production” should to a large extent remain at their disposal, thereby furnishing an incentive for constantly overfulfilling plan targets but without disorganizing the central plan or increasing social inequality.

In the second place, Horvat and many other critics of Stalinism seem to have lost sight of a simple truth.  There are two forms of centralization: bureaucratic centralization and democratic centralization.  The fact that, historically in the Soviet Union, the first has followed upon the second does not imply that this must necessarily happen always and everywhere.

It is not difficult to visualize a model of economic management and planning which, starting from workers’ councils of the Yugoslav type, combines them into a federal central body which wields supreme authority and can make decisions overriding any of those made by individual workers’ councils, without thereby becoming bureaucratized.  It would be sufficient to impose strict conditions on the composition of that central body, following the general rules formulated by Marx in his appreciation of the Paris Commune, or by Lenin in State and Revolution.  Provided the discussion of alternative economic plans remains free, and political and civil liberties are guaranteed to the workers, such a model would be vastly superior both to Stalinist over centralization and Yugoslav excessive decentralization. 

Our model would also have a tremendous social advantage.  It would strengthen and unify the working class, whereas both the Stalinist and the Yugoslav models tend to fragment and even to atomize it.  It would be obviously more ethical, because it would achieve a much larger equalization of income, and because all necessary sacrifices would be consciously accepted sacrifices.  And it would in addition avoid most of the waste of resources which both bureaucratic mismanagement and market mechanisms inevitably entail.  It would therefore come much nearer to a maximization of output and income than either of these models permits. 


1.  Branko Horvat, Towards a Theory of Planned Economy. Yugoslav Institute of Economic Research: Belgrade, 1964.

2.  Branko Horvat is Acting Director of the Yugoslav Institute of Economic Research, member of the Economic Council of the Yugoslav Federal government, and of the Collegiate of the Yugoslav Federal Economic Planning Bureau.

3.  In order to maintain such a conception, Horvat must completely revise Marx’s theory about distribution under communism, consistently defended from the German Ideology to the Critique of the Gotha Programme.  He now accepts the classical bourgeois criticism of the Marxist norms, by stating that “needs or wants of human beings are limitless [sic] and so Marx’s communism appears to be an obvious impossibility” (p.132).  As for Horvat’s conception of a communist society, in which “equality” would exist side by side with a generalized money economy and generalized commodity production, it is nothing but present-day Yugoslav society on a somewhat higher level of economic development!  It is easy to see how the author’s lack of social imagination or inability to conceive of a type of society other than the one he is living in is a typical form of ideological inhibition or alienation, the roots of which are course apologetic.

4.  We have deliberately limited ourselves to the purely economic contradictions of Horvat’s model.  But it is easy to show that the social, political, and moral contradictions are no less devastating for a socialist society.  Generalization and idealization of commodity production and market relations imply recognition of money values (“everything has a price” leads very quickly to “everyone has a price”) as supreme values of society.  The pursuit of individual enrichment becomes the universal ideal of all members of the community.  This then implies fierce individual competition in all fields of social behavior, at the expense of solidarity and cooperation.  Phenomena like widespread corruption, prostitution, venality of the pen and of the spirit, growing loss of social ideals and social idealism in youth, must then inevitably grow in such an atmosphere.  It will remain a mystery how Horvat can believe that, under conditions of universal commodity and money economy, alienation of labor could disappear, whereas for Marx commodity production is precisely one of the main roots of alienation!  Not to speak of “disalienated labor” which finds itself suddenly unemployed and without resources whatsoever!

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