The Market Socialism of the Former Yugoslavia

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The Market Socialism of the Former Yugoslavia
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Definition

• Public ownership of non-labor factors of
  production
• Decentralized decision making structure
• Decentralized information structure
• Both material and non-material rewards
• primarily material
• Coordination by markets

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A Prototype The Lange Model

• A more centralized version of market socialism
• Three decision-making levels
• central planning board (CPB)
• industrial ministries
• enterprises

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• CPB initially sets all prices arbitrarily
• thus enterprises face parametric prices just as
  perfectly competitive firms do
• Enterprises instructed to
• minimize costs
• produce output at which marginal cost equals price

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• Result will either be a shortage or surplus
• if shortage, price adjusted upward
• if surplus, price adjusted downward
• State owns non-labor factors of production
• Income (social dividend) used to
• finance investment to achieve growth goals
• achieve distributional goals

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• Control of pricing can be used to correct
  externalities
• State control of investment could be used to
  control business cycle

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• Criticisms of the Lange model
• information needs too great
• what motivates managers to follow the rules?
• what motivates managers of perfectly competitive
  firms to follow the PMC rule?
• do managers of perfectly competitive firms have
  to calculate MC in order to follow the PMC rule?

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The Cooperative Version of Market Socialism

• Market socialist system in which labor
  participates in decisions at the enterprise level

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• Major features
• enterprises managed by the workers
• equitable income sharing
• i.e., labor democratically decides how to
  distribute the enterprises income
• state owns non-labor factors of production
• market coordination
• freedom of occupational choice

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• Closer to a true market system than Lange version
  of market socialism
• prices set by markets, not by planners
• Still socialist because of state ownership of
  non-labor factors

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Modeling Cooperative Market Socialism

• Economic method requires that we start with some
  objective to be maximized
• maximize per-worker (or average) dividend
• dividend is revenue minus cost, not including
  labor cost

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• why?
• Look at it from individual decision maker/worker
  perspective
• If Q is the quantity of output
• L is the quantity of labor
• K is the quantity of capital

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• Then, if labor and capital are the only two
  inputs, the production function (which shows
  relationship between output and inputs) is
• Q f(L, K)

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• In the short run, capital (K) is fixed
• Suppose that the enterprise pays the government a
  tax (T) for the capital it is using
• since K is fixed in the short run, T is fixed
• So if we let Y total dividend and
• P the price of the
  output, then
• Y PQ - T

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• This equation says that dividend is revenue (PQ)
  minus the tax
• a more complicated (i.e., more realistic)
  production function would include more inputs
  (like fuel, intermediate products, etc.) but
  would not change the basic result we are after
  here
• Per-worker dividend (which we want to maximize)
  is just Y divided by L
• Y/L (PQ - T)/L

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• A little wizardry (i.e., calculus) shows that
  when per-worker dividend is maximized the
  following relationship holds
• VMPL (PQ - T)/L
• where VMPL is the value of marginal product of
  labor

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• Thus, to maximize per-worker dividend, the
  enterprise must employ just that quantity of
  labor such that per-worker dividend is equal to
  the value of marginal product of labor
• If VMPLgtY/L, then adding an additional unit of
  labor will raise Y/L

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• VMPL is the additional revenue when a unit of
  labor is added
• if T is fixed, the additional revenue raises
  dividend by the same amount, so VMP is marginal
  dividend
• if marginal is greater than average then average
  rises
• If VMPLltY/L, then reducing L will raise Y/L

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Relationship Between VMP and Y/L

Y/L
VMPL
0
L1
Le
L2
Labor
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Comparison With Capitalist Firm

• Assuming profit (J) maximization
• J PQ - wL - T
• where w wage

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• At the profit maximizing employment of labor
• VMPL w
• Value of labors marginal product equals wage

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Arguments in Favor of Cooperative Market Socialism

• Eliminates capitalist dichotomy between
  management and labor
• Greater social justice in distribution of income
• distribution according to decision of the workers
  involve

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Criticisms of Cooperative Behavior

• Misallocation of labor
• efficiency requires equality of VMP in all uses
• if VMPL w and all firms face same wage, then
  all firms VMPL will be the same

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• no such mechanism to equate VMPs in market
  socialism
• if VMP1 gt VMP2 then greater value can be produced
  by reallocating labor from Enterprise 2 to
  Enterprise 1
• We can show that the cooperative monopolist
  restricts output (i.e., misallocates resources)
  even more than the capitalist monopoly

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Yugoslavia

• Unique economic and social structures
• worker management and market socialism
• underdeveloped by European standards
• open economy

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• very diverse cultures
• extreme and troubling regional economic
  differences
• northern republics (Slovenia and Croatia) much
  better off
• combination of cultural and economic differences
  causes troublesome labor immobility between
  regions

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History

• Post-war
• much of Yugoslavia destroyed by German occupation
• war hero Tito emerges as leader and head of
  Communist Part
• initially follows Soviet mode

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• 1952-1965
• develops concept of worker management
• replace central planning with indicative planning
• non-binding macro goals
• rapid growth
• reduction of regional differences through
  investment in lagging regions
• integration into world economy

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• major decentralization of decision-making
  structure
• however, investment remains highly centralized
• significant forced saving especially through high
  taxes

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• 1965
• year of reform in response to high inflation and
  unemployment
• state basically gives up
• substantial decentralization and increased
  reliance on markets
• much less state control
• Enterprises get control of profits for investment
  or distribution

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• 1974
• new constitution
• creation of new institutional structures to
  enhance horizontal channels of information
• 1990-1992
• events leading to war in 1991 and final breakup
  in 1992

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Micro Organization

• Enterprises employing five or more workers must
  be organized as workers cooperatives
• Workers elect the workers council
• workers council elects a management committee

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• Workers council much like a board of directors
• focus on long range planning
• dividend sharing structure
• allocation of dividend between distribution and
  investment

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• Workers council hires a director to manage the
  enterprise
• very powerful and safe position
• Entry
• new enterprises could be formed by either private
  individuals or government
• when privately owned small firm grew to 5 workers
  had to be converted to cooperative

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• Exit
• exit was a real problem
• government would routinely bail out failing
  enterprises
• soft budget constraint

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Worker and Enterprise Organizations

• Basic Organizations of Associated Labor
• within enterprises, workers organized into BOALs
  with own workers council
• Work Organizations of Associated Labor
• BOALs combined to form WOALs

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• Composite Organizations of Associated Labor
• WOALs combined to form COALs
• Enterprises joined Economic Chambers
• These organizations combined workers within and
  among different enterprises

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• Purpose of these worker/enterprise organizations
  was to enhance horizontal communication
• Two outcomes of these organizations
• social compacts
• non-binding policy objectives to guide decision
  making by workers councils and government
  agencies

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• self-management agreements
• legally binding contracts
• e.g., SMAs drawn up to determine dividend
  distribution
• Slow and cumbersome
• Highly politicized
• Connection to price system uncertain

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The Public Sector

• Indicative planning
• bottom up
• informational
• Fiscal and monetary policy
• minimal
• no use of fiscal or monetary policy to stabilize
  economy

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• Role of Communist Party unclear
• party members participate in decision making at
  all levels

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Resource Allocation Capital

• Investment rate was high
• Poor allocation of capital
• during 50s and 60s many new enterprises were set
  up in the lagging south where lack of skilled
  labor made these investments inefficient

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• continued investment in the latter period to prop
  up these inefficient enterprises
• profitable enterprises would invest heavily to
  ensure future capacity while less profitable
  enterprises would under-invest dividends to keep
  workers incomes from falling behind
• exacerbates differentials in the future

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Labor

• Sharp differentials by region
• cultural and other barriers prevented market from
  equalizing wages
• skilled workers in north could not be used in
  south where they were needed
• unemployed workers in south could not seek jobs
  in north

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• Differentials by enterprise
• workers incomes depend on enterprise performance
• Overall distribution of income fairly equal
  compared to most capitalist economies
• Excess supply of labor overall
• many had to leave families for extended periods
  to work in Italy, Austria, etc.

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Foreign Trade

• Open economy
• very susceptible to world market conditions
• Trade balance worsened over time
• exports declined while imports rose

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• exports fell because of
• protectionist policies in Western Europe
• high inflation
• opportunities to develop comparative advantage in
  labor intensive industries wasted
• poor quality
• world recession of late 70s/early 80s

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• Became increasingly reliant on Soviet Union and
  Eastern Europe because West would not buy its
  products
• Communities of Interest for Foreign Economic
  Relations
• international trade decisions by CIFERs
• composed of BOALs with common interests

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Agriculture

• Mostly private, peasant farms
• Low investment in agriculture
• highly non-mechanized
• low productivity
• Agricultural share declined over time

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Performance

• Good growth performance prior to 80s
• structural change rapid as country industrialized
• Relatively equal distribution of income
• major differences regional

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• Poor macroeconomic stability
• high inflation
• high unemployment