Alec Nove

Overcentralization in economic administration : a critical analysis based on experience in Hungarian light industry

Originally published in 1959, this monograph by an Eastern European economist boldly and openly criticized socialist central planning. It is here reissued with a new preface. With this book, Kornai began a lifelong study of the economic organization of centrally planned economies. He identified several systemic failures of the centrally planned economy, and gave a prescient account of weak economic performance and eventual disintegration. Kornais aim was to observe the reality of the working socialist system, and to draw conclusions that were not distorted by the laws of Marxist political economy. He provided a positive analysis of conditions, along with normative recommendations which influenced the Hungarian reform process, culminating in the economic changes of 1968.

East-West Trade

What can be said that is new on this theme? The author of the present paper has written about it, on and off, for ten years or so. A further difficulty is that my colleague Imre Vajda, whose paper you will have before you, knows all there is to know about the subject, which had been his intimate concern for a great many years. I have not had the advantage of seeing what he has written. I am conscious, therefore, of multiple dangers: of overlap with my co-presenter, of repeating well known truths, worse still of repeating myself.

Efficiency criteria for nationalised industries

1. Diagnosis 2. Micro-economics and the Real World 3. The Argument applied to Eastern Europe 4. The Relation of Theory to Practice 5. Pricing and Investment Criteria 6. Duty, Purpose, Supervision 7. Theory, Nationalised Industries and Socialism

Soviet Reforms and Western Neoclassical Economics

It is known that Marx and Engels held that socialism and commodity production [that is, production for the market] were not only contradictory but also incompatible. Lenin adopted the same position. Even today no one would have the ‘theoretical cheek’ to claim that Lenin was the founder of the theory of commodity production under socialism. Was the theory of Marx, Engels, Lenin, about socialism then incorrect, or was their theory on commodity production incorrect?

Transition to the Market and Economic Theory

What does economic theory offer us today? Unfortunately, very little. The political economy of socialism, which is based on Marxs teachings, is entirely inapplicable to the problems that arise in the present stage of development. And economic science in the West, especially in America, is mathematized formalism based on the paradigm of general equilibrium. It is difficult, and more often impossible, to apply it to these problems. I find it altogether impossible to understand how one can dynamize equilibrium—a concept that by definition does not include reasons for changing the given situation, otherwise this would not be equilibrium.

Planning and Markets

We should, in my view, distance ourselves both from pure laissez-faire or crude Friedmanism which so influences Mrs Thatcher (‘the market can solve all our problems’) and from the untenable assumptions of traditional Marxism (‘the market can and must be replaced by conscious planning by the associated producers for the needs of society’).

The Fragmentationist Disease

While public attention has been focussed on the issue of privatization, another aspect of government policy has not received the attention it deserves. This is its tendency to fragment. One sees this in a variety of areas: public transport, local government, the BBC, schools, the electricity grid. This is partially explicable by the desire to stimulate competition, and/or by consciousness that there are dangers in turning public monopoly into private monopoly. However there seems to be a marked tendency to ignore the costs of such a solution, a neglect of the importance of system, network, interdependencies and complementarities. At the same time, an over-simplified theory of monopoly is combined with a downgrading of the concept of public service, of the external effects inherent in infrastructure, and of the relationship between efficiency and purpose. What could be called ‘myopic marginalism’ in combination with extremes of methodological individualism can lead to policy errors which it is the purpose of this chapter to examine.

Trotsky, Markets, and East European Reforms

The typical Western Trotskyist is apt to criticize reforms of the Hungarian or Chinese type as a step backwards, if not a betrayal. A Trotskyist such as Ernest Mandel is not against the temporary use of money and commodity relations, indeed would warn against trying to abolish them prematurely. None the less, they envisage the transition as a period in which markets are gradually replaced by planning, planning which functions democratically, which conforms to Marx’s vision of control ‘by the direct producers’ of the means of production and the product. This they believe was Trotsky’s own position. Not only they believe it. True, Stephen Cohen is on record expressing his belief that Trotsky was ‘a Nepist’. Also, Hungarian work on Preobrazhensky stressed, correctly, that the bitterness of the factional struggle of the twenties should not blind us to the fact that the protagonists shared many common assumptions and common views.1 None the less, it is quite widely believed that Trotsky was unhappy with the NEP compromise, and that Bukharin was the spiritual father of present-day economic reformism; Moshe Lewin wrote a whole book on these lines.2 When I read his book I recalled a senior Soviet professor, who recalled the controversies, saying ‘Bukharin and Preobrazhensky both believed that socialism and the market are incompatible, and both were wrong.’

Is Within-system Reform Possible?

Six years ago (in 1979) I wrote a piece, entitled ‘The economic problems of Brezhnev’s successors’, which appeared in the Washington Papers (published by the CSIS of Georgetown University). This took the form of an imaginary report of an imaginary committee, which had been (in my imagination) set up to recommend reform. In all countries, the powers-that-be tend to appoint committees which will give them the advice they want to hear. So it would have been improbable, to say the least, for Brezhnev to have appointed ‘my’ committee, which represented what might for short be called the Novosibirsk view, and was presided over by Academician Aganbegyan, known to favour fundamental change. Despite Brezhnev’s quite explicit recognition that ‘in the age of scientific-technical revolution, basic changes in our methods of economic management are essential’, as he told the last party congress but one, the prevailing policy was one of cautious drift.

Has Soviet Growth Ceased

My interest in index numbers began in the context of discussions on Soviet growth. Until 1950, this had been expressed in terms of so-called ‘1926/7 prices’, and official claims appeared to be both startling and exaggerated. Already by 1950 national income was alleged to be 17 times above 1913 levels, and industrial output was said to have soared since 1928 at rates which seemed (and were) incredible, though no one doubted that growth had been impressive.1 Critical literature on the subject in the West, beginning with Colin Clark’s pioneering Critique of Russian Statistics2 and Naum Jasny’s little volumes3 and a series of Western recomputations, e. g. by Bergson, Nutter, Seton and Hodgman,4 sought to arrive at more reliable and less exaggerated figures, using physical output data and/or price indices derived from such data. It is not the task of the present paper to analyze, let alone criticize, these computations. The point is that they drew attention to several distinct sources of possible distortion of the index numbers. The first was the use for too long of obsolete price-weights, at a time of rapid structural change. It is in connection with indices of Soviet machinery prices that we learnt of the ‘Gerschenkron effect’,5 that is, the fact that the use of early-year weights in an industrializing country will tend to yield a much higher rate of growth than would the weights of a later year.