Centrally planned systems

The socialist experiments of the 20th century were motivated by a genuine interest in improving life for the masses, but the results instead delivered untold suffering in terms of economic deprivation and political tyranny. Nonetheless, the egalitarian values that inspired the socialist experiments continue to possess great intellectual and moral appeal. And while socialism has proved less attractive than democratic capitalism, many of the most normatively attractive elements of socialism have been incorporated into democratic systems, as evidenced by public support for spending on social programs.

The chief economic problem of socialism has been the efficient performance of the very task for which its planning apparatus exists—namely, the effective coordination of production and distribution. Modern critics have declared that a planned economy is impossible—i.e., will inevitably become unmanageably chaotic—by virtue of the need for a planning agency to make the millions of dovetailing decisions necessary to produce the gigantic catalog of goods and services of a modern society. Moreover, classical economists would criticize the perverse incentives caused by the absence of private property rights. Precisely such problems became manifest in the late 1980s in the Soviet Union.

The proposed remedy to the problems of socialism involves the use of market arrangements under which managers are free to conduct the affairs of their enterprises according to the dictates of supply and demand (rather than those of a central authority). The difficulty with this solution lies in its political rather than economic requirements, because the acceptance of a market system entrusted with the coordination of the bulk of economic activity requires the tolerance of a sphere of private authority apart from that of public authority. A market mechanism may be compatible with a society of socialist principles, but it requires that the forms of socialist societies be radically reorganized. The political difficulties of such a reorganization are twofold. One difficulty arises from the tensions that can be expected to exist between the private interests, and no doubt the public visions, of the managerial echelons and those of the political regime. The creation of a market is tantamount to the creation of a realm within society into which the political arm of government is not allowed to reach fully.

Another political difficulty encountered in the move from socialism to the market is the impact on the working class. The establishment of a market system as the major coordinator of economic activity, including labour services, necessarily introduces the use of unemployment as a disciplining force into a social order. Under socialist planning, government commands were used to allocate employment and thereby did not permit the hiring or firing of workers for strictly economic reasons. The problem with this was inefficient production, underemployment, and misallocations of labour. The introduction of a market mechanism for labour is, however, likely to exacerbate class tensions between workers and management. Some socialist reformers tried to overcome these tensions by increasing worker participation in the management of the enterprises in which they worked, but no great successes have been reported. Finally, socialist governments will tend to encounter problems when they come to rely on market coordinative mechanisms, because economic decentralization and political centralization have inherent incompatibilities.

Economic systems may lose some of the decisive differences that have marked them in the past and come to suggest, instead, a continuum on which elements of both market and planning coexist in different proportions. Societies along such a continuum may continue to designate themselves as either capitalist or socialist, but they are likely to reveal as many similarities as differences in their solutions to economic problems.

Historical analysis is presented in Robert L. Heilbroner, The Making of Economic Society, 11th ed. (2002). An excellent presentation along more functional lines, well-written but requiring some acquaintance with economic theory, is Frederic L. Pryor, A Guidebook to the Comparative Study of Economic Systems (1985). Morris Bornstein (ed.), Comparative Economic Systems: Models and Cases, 7th ed. (1994), a book of readings, is also recommended.

A history of the debate over the economic feasibility of socialism is available in Don Lavoie, Rivalry and Central Planning (1985). A comprehensive reference collection of the main texts in the socialist calculation debate (theoretical comparisons of centrally planned versus free-market economies) can be found in Peter J. Boettke (ed.), Socialism and the Market: The Socialist Calculation Debate Revisited, 9 vol. (2000). Other theoretical works include Alec Nove, The Economics of Feasible Socialism, 2nd ed. (1991); Branko Horvat, The Political Economy of Socialism: A Marxist Social Theory (1982); David L. Prychitko and Jaroslav Vanek (eds.), Producer Cooperatives and Labor-Managed Systems, 2 vol. (1996); and Jánus Kornai, The Socialist System (1992).

Discussions regarding China, eastern Europe, and the Soviet Union are in Andrei Schleifer and Daniel Treisman, Without a Map: Political Tactics and Economic Reform in Russia (2000); Jeffrey Sachs, Poland’s Jump to the Market Economy: The Socialist Calculation Debate Reconsidered (1993, reissued 1999); and Barry Naughton, Growing out of the Plan: Chinese Economic Reform, 1978–1993 (1995).

The classic work on the economic history of the Soviet Union is Alec Nove, An Economic History of the U.S.S.R., 1917–1991, 3rd ed. (1992). A political history of the Soviet Union that pays significant attention to the underlying ideology, including political economy, is Martin Malia, The Soviet Tragedy (1994, reissued 1996). Ed A. Hewett, Reforming the Soviet Economy: Equality Versus Efficiency (1988), offers thoughtful criticisms and considered appraisals on reforming the Soviet-type economy. Peter J. Boettke, Why Perestroika Failed: The Politics and Economics of Socialist Transformation (1993), discusses systemic problems with the Soviet-type system.

Two broad treatments of capitalism are Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776); and Karl Marx, Das Kapital, vol. 1, trans. by Samuel Moore and Edward Aveling as Capital: A Critical Analysis of Capitalist Production (1886); both works are available in many later editions. Robert L. Heilbroner, The Nature and Logic of Capitalism (1985), treats the social formation of capitalism. Fernand Braudel, Civilization and Capitalism, 15th–18th Century, 3 vol. (1982–84, reissued 1992; originally published in French, 1979), is a wide-ranging overview. Nathan Rosenberg and L.E. Birdzell, Jr., How the West Grew Rich: The Economic Transformation of the Industrial World (1986, reissued 1999), discusses the Industrial Revolution and the rise of capitalism. John Kenneth Galbraith, The New Industrial State, 4th ed. (1985), is a modern classic. Milton Friedman, Capitalism and Freedom (1962, reissued 2002); and Milton Friedman and Rose Friedman, Free to Choose (1980, reissued 1990), are perhaps the most accessible treatments of economics and public policy from a market-oriented perspective.