Red Markets

Sometimes communist countries had to tolerate a little economic liberty just to survive.


Reason's December special issue marks the 30th anniversary of the collapse of the Soviet Union. This story is part of our exploration of the global legacy of that evil empire, and our effort to be certain that the dire consequences of communism are not forgotten.

One day in 1952, nearly six and a half years after the communists seized power in Yugoslavia, a member of the Politburo spoke to the nation's legislature. The old "exploiting elements of society" had been safely isolated, he announced. Bureaucracy was now the greater threat. To combat it, the country would take a step that Marxists typically relegated to a distant future.

It was time, he said, to commence "the withering away of the state."

He was speaking on April 1, but this wasn't an April Fools' joke. And while the Socialist Federal Republic of Yugoslavia did not wither away just then—that happened 40 years later, for rather different reasons—the place really was embarking on a new social system. It had, in fact, been making some hesitant moves in this direction for a couple of years already.

Yugoslavia had broken with the Soviet Union in 1948, but its government initially showed no signs of abandoning Stalinist economics. Indeed, it soon started a brutal drive to collectivize agriculture. By 1951, the number of state farms had leaped from 1,318 to 7,012, and in the process the government had not just seized land but demanded absurdly high production quotas—and sent many of the farmers who couldn't meet them to internment camps. The push prompted violent resistance in the countryside, most notably the Cazin Rebellion of May 1950, in which hundreds of peasants took up arms against the state.

Yet some of the country's leaders were starting to rethink their economic approach, especially as they watched newly nationalized industries churn out products with little regard for cost or quality. In 1950, Minister of Propaganda Milovan Djilas pitched a plan to two comrades while the trio sat in a car parked outside Djilas' home: Instead of forcing factories to answer to planners in the ministries, why not turn over each plant to its workers? You could still call that socialist—Djilas invoked a passage in Marx about the free association of producers—but you could avoid the dysfunctions of a centralized Stalinist bureaucracy.

One of those comrades, Deputy Prime Minister Edvard Kardelj, had already been flirting with similar ideas. Before long the trio had convinced the country's dictator, Josip Broz Tito, to back a much milder version of the concept. By the end of 1950, the federal assembly had passed its first reform bill.

The initial moves were small: Elected workers' councils were given some say in how most industries were run, but real power stayed with the state planners, who stepped in if they felt the firms were raising prices or wages when they could be investing in improvements instead. The government didn't even abandon its push to collectivize agriculture until the end of 1951. (All that armed peasant resistance made the regime more receptive to loosening its grip.) But over the next few years, planning was eased, various prices were freed, peasants were allowed to leave the collective farms, and those farms themselves were told to become self-supporting.

From 1951 to 1955, the number of agricultural collectives plunged from 7,012 to 688. Meanwhile, the mines and factories were now "social property" rather than "state property," though the exact meaning of this remained under dispute. In the 1960s, economic controls were rolled back further: Firms got more autonomy, tax rates were flattened, more prices were freed, and trade barriers came down. The historian Dennison Rusinow's tongue was surely in his cheek when he called the results "laissez-faire socialism," but you can see what he was getting at.

The government also started to allow, within limits, more personal freedoms and civil liberties. That made the culture richer—witness, for example, the so-called Yugoslav Black Wave of anti-authoritarian movies made in the 1960s and early '70s—and it made the economy freer as well. As Djilas wrote, there had still "hovered over the workers councils the continuing presence of the all-powerful secret police, and this went on until the Central Committee plenary session on Brioni in the summer of 1966, when the secret-police chiefs were dismissed." That change meant more practical autonomy for firms. Though even then, "fear of the secret police has not disappeared, although its methods are milder and its powers considerably reduced."

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Yugoslavia wasn't the only communist country to experiment with reform. Time and again, Leninist parties found they had to allow a degree of economic liberty just to survive. Lenin himself felt the need to replace the severe strictures of War Communism with the more permissive New Economic Policy in 1921.

Mao Zedong did something like that too—though it took a famine to induce it, and even then he might not have gone along with the changes if his power hadn't been at a low ebb. In the early 1960s, in the immediate aftermath of the disastrous Great Leap Forward, China adopted a series of policies that let peasants tend private plots, let smaller firms buy materials on the market, and let the market set some consumer prices. This was not because Mao was a Misesian deep inside. It was because millions of people had just starved to death and the country needed to stay afloat. "While the ideology remains orthodox," the sociologist Franz Schurmann wrote of China during this interval, "the country as a working system of organization seems at times suspiciously similar to Yugoslavia."

Needless to say, that doesn't mean these countries became lands of free minds and free markets. Even Yugoslavia could be highly bureaucratic and repressive in practice—hence Djilas' comments about the secret police. Djilas himself was expelled from the ruling Central Committee, and eventually imprisoned for several years, because of his steadily more radical criticisms of the party and state. These critiques culminated in The New Class (1957), a book-length assault on the communist system. In Marxist-Leninist countries, Djilas argued, the party bureaucracy had established itself as an exploitative ruling class. He explicitly included Yugoslavia in his indictment, despite those moves toward liberty in the marketplace and democracy on the shop floor.

With Djilas jailed, reform in Yugoslavia slowed to a crawl for several years. The balance of power then teetered back and forth between the reformers and the more authoritarian old guard, who derided the changes as "anarcho-liberalism."

Nonetheless, Yugoslavia was the freest communist country—and when necessity compelled other red regimes to allow more freedom, they sometimes looked to it for ideas. Czechoslovakia went through several periods of attempted economic liberalization, and sometimes political liberalization too; the most extensive of those, in the mid-1960s, ended with Soviet tanks entering Prague to bring the experiment to an end. Poland never did manage to collectivize its agricultural sector, and its private farms fed not just the Poles but some of their neighbors. (After a 1956 wave of strikes, marches, and occupations, nervous officials also granted firms a degree of self-management, though the Poles were even less willing than the Yugoslavs to give the ostensibly worker-run enterprises actual autonomy.) Bulgaria hopped onto the reform bandwagon at the last minute: In 1987, just two years before the Berlin Wall came down, it made room for small-scale private enterprise, started a gradual process of relaxing the central planners' powers, and made some gestures toward self-management.

Not every economic reform worked out well. In the 1980s, in the wake of mass protests led by the independent trade union Solidarity, the Polish government decided to "decentralize" the economy by loosening the central planners' control of each producer's resources and choices. But it didn't disentangle those producers from the government's broader web of subsidies and controls. "In effect," Jeffrey Sachs and David Lipton wrote in 1990, "the central plan was replaced not by markets but by an unending process of ad hoc negotiations between firms and the government." Bulgaria's bureaucrats recognized that the country's official prices bore little relation to supply and demand, but they were reluctant to actually let markets set prices. So they simply resolved to pay more heed to how much things cost in other countries while continuing to set prices by diktat.

Hungary, on the other hand, liberalized a great deal. The seeds of that process were planted after Josef Stalin's death in 1953: As part of a general thaw, the government allowed its economists more freedom to debate, to do empirical research, and to exchange ideas with their counterparts in other countries (including Yugoslavia). After two years of this relative openness, Prime Minister Imre Nagy was ousted from office. But with the revolt of 1956, as thousands of Hungarians marched in the streets, Nagy returned to power and adopted a much more radical program—among other things, he legalized opposition parties, withdrew Hungary from the Soviet military alliance, and allowed workers' councils to take control of the mines and factories. These councils were new institutions that had been formed at the grassroots, not organized from above; if they had continued to thrive, they would have had much more independence than their Yugoslav counterparts. Instead the Soviets invaded, Nagy was arrested and executed, and after a period of dual power the councils were repressed.

The authorities who suppressed the revolution were worried about the possibility of further revolts. One way to blunt popular dissatisfaction, they realized, was to allow more consumer pleasures. So over the course of the '60s, Hungary made more room for the profit motive, opened the doors to foreign investment, devolved decisions about production and pay to individual farms and factories, and let the peasants working the collective farms keep private plots on the side. And in the 1980s, it allowed many more small businesses to operate legally. A host of entrepreneurs—builders, brewers, taxi drivers, restaurateurs, dealers in secondhand cars—either launched new projects or moved out of the black market.

Couple those reforms with a relatively generous welfare state, and you had a system that came to be called goulash communism. It wasn't the full freedom that Hungarians had fought for in '56, but it did give them some of the highest living standards in Eastern Europe. As the joke went, Hungary was the happiest barrack in the camp.

When communist governments weren't feeling pressure from mass revolts, there was still the day-to-day disobedience that fueled those black markets. Illicit exchange helped keep people clothed and fed even when reform wasn't on the table. Indeed, sometimes it pushed reform onto the table. Years before Deng Xiaoping "permitted" the peasants on China's collective farms to tend their own private plots, many of them did it anyway; entrepreneurs in the cities ran quasi-covert businesses in the same manner. Eventually the authorities formally accepted what was already rampant, and the way was cleared for an economic revolution.

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This sort of thing was mostly a product of pragmatism, but at certain times and places there was an ideological component as well. The Yugoslavs who proposed a market-syndicalist system certainly seem to have honestly believed that they were devising a better kind of socialism. Even among the apparatchiks who earned Djilas' scorn, there was enough enthusiasm for the Yugoslav way to send advisers to countries ranging from Algeria to Peru. Some of that may have simply reflected Tito's interest in expanding his country's influence abroad, but the advice they offered was presumably sincere.

More importantly, the country's official ideology gave dissidents something to point to when they pushed for more freedoms. Yugoslavia's leaders had "offered the people working in the economy the illusion of power," the European journalist Paul Lendvai wrote in 1969. The changes that this set in motion "transformed the illusion of power into a power of illusion," and that in turn "became a prime mover of developments, animating them from below."

But the most curious connection between socialist ideology and market reform didn't emerge in Yugoslavia. It appeared in China during the first phase of the Cultural Revolution—the period, beginning in 1966, when Mao decided to fight his rivals in the country's power structure by declaring them counterrevolutionaries and urging his subjects to rebel against them. Before long, a chaotic mishmash of groups were violently contending for power. Some of these competing forces were basically pawns for officials bringing their power struggles out of the back rooms; some were students sincerely committed to one socialist vision or another; some were ordinary people taking the opportunity to press their grievances.

One of these factions was the Shengwulian movement, the self-declared "ultra-left" of the Cultural Revolution. And the most famous piece of writing to emerge from Shengwulian was "Whither China?," a 1968 tract by a teenager named Yang Xiguang. Yang wasn't the movement's leader—Shengwulian was a loose conglomeration that drew on different sectors of society, and not everyone in it adhered to the exact same political line—but his manifesto found hundreds of thousands of readers. Unconsciously echoing Djilas, Yang argued that China's problem wasn't simply reactionary elements within the Communist Party: The party itself was a privileged class. It should be overthrown, he declared, and replaced with a democracy modeled on the Paris Commune.

Every contending faction in the Cultural Revolution claimed to be acting in the name of Chairman Mao, and Shengwulian was no exception; the essay included some tedious passages straining to show that its ideas were what Mao really wanted. Unsurprisingly, Mao disagreed. (Shanghai had notionally adopted a Paris Commune–style system in early 1967. It lasted less than a month before the chairman put the kibosh on it.) The country's rulers did play a role in making "Whither China?" so widely read, but only because they distributed it as "material to be criticized." Those criticisms weren't exactly measured—Hunan Daily declared Shengwulian "even more stinking than dog excrement." The movement was suppressed, and Yang spent the next decade in a series of prison camps.

But a funny thing happened to Yang's manifesto: People kept reading it. Even after Mao was dead and the Cultural Revolution was over, this one essay kept getting passed around. In the democracy movement of the 1970s and '80s—not a world overflowing with nostalgia for the Mao years—"Whither China?" was embraced. When the Chinese dissident Liu Guokai published A Brief Analysis of the Cultural Revolution in 1980, he was caustic about Mao and his allies but praised Yang's essay as a "penetrating work."

The final irony came when Yang emerged from prison. While he was incarcerated, the erstwhile Maoist had started studying economics; he now pursued this as a profession. With time he became an admirer of Milton Friedman and Adam Smith. Now writing under the name Yang Xiaokai, he earned praise from the libertarian-leaning American scholar James Buchanan, who declared that he was doing "the most important and exciting research in economics in the world."

In his popular writing and his academic work, Yang argued both for economic liberalization and for civil liberties and democracy. Indeed, he argued that the first was doomed without the others. One of his final papers, from 2001, argued that the Communist Party's political monopoly and the dominance of state-owned firms made economic development "a hostage of the vested interests of the privileged class."

To the extent that "Whither China?" had an economic agenda, it had simply argued for self-management. But re-reading it now, with Yang's future trajectory in mind, you may be able to spot the seeds of something else. Under the Shanghai Commune, the manifesto had claimed, "without the bureaucrats and bureaucratic organs, productivity was greatly liberated. After the Ministry of the Coal Industry fell, production of coal went on as usual. The Ministry of Railways fell, but transportation was carried on as usual. All the departments of the provincial Party committees fell, but the various branches of their work went on as usual." Somewhere inside those old revolutionary ideas, another revolution had been lurking.