Chris Harman


The Market and the Future of Eastern Europe

(Summer 1989)

First published on Chris Harman’s Back Pages, 23 June 2009.
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

In the summer of 1989, just as the old order in Eastern Europe was beginning to disintegrate, left wng activists and academics discussed the way forward at a conference in Oxford. Here are the notes giving my perspective at the time.

All the time we are told that only the market can solve problems of Eastern economies. Yet three economies which have gone furthest in direction of market, Hungary, Yugoslavia and China have all been experiencing economic crises, although of different sorts.


Over only got 20 minutes to summarise what I recently wrote in a 25,000 word article, so I will only deal with what I would call the four great myths.

(1) The myth of the market as a smoothly functioning mechanism for relating the supply of goods to the demand for them. This myth is often expressed in talk of “consumer sovereignty”, of “economic democracy”.

It paints picture of market as allowing people who want goods to send out price signals which cause producers to turn our what is desired when it is desired.

This is not a picture of what we might call “actually existing capitalism”, with it monopolies and oligopolies. It is at best a picture of capitalism in Adam Smith’s time or of marginal parts of the present world system, the where a mass of small farmers continue to produce foodstuffs.

But even then it was not a system in which signals caused supply and demand to coincide. For production always takes place before consumptions, even if only by a matter of months as in farming.

Food is produced today. If there are shortages prices rises. But the increase in production to match these prices does not occur until next year. Hence the cyclical nature of production even in farming.

That is why almost every actually existing capitalist state intervenes to try to overcome the crises of the market.

According to a Financial Times report on Thursday, subsidies for farming in the OECD as a whole in 1988 are $157 billion, or 45 per cent of total agricultural output.

When we talk about more advanced forms of production, modern industrial production, the discrepancies between supply and demand can and do get much grater. It takes five to ten years to get a modern car or aerospace plant into operation. Yet no-one knows what the price of oil will be in two years time, let alone ten years time.

Such a system necessarily end up in rival firms responding to price signals by building plants in competition with each other.

The result inevitably is, at some point over-accumulation, production trying to expand faster than the inputs of raw materials, skilled labour and finance. – The result then is either a classic crisis of overproduction, as we saw in 1974 and the early 1980s, or state intervention to close down some of the capacity in order to let the rest prosper, i.e. market leads to cyclical crises, huge, painful and very wasteful adjustments of supply and demand.

(2) Second myth: That the market causes the capitalist firm to be as efficient and innovative as possible.

Most Western economists simply take this for granted, for their economics looks at the interconnection between firms, not the internal functioning. Their assumptions are then taken for gospel truth by Eastern European economists who have looked at the internal functioning of their own enterprises.

But what material there is on the internal functioning of Western firms points to a huge proliferation of waste, e.g. Harvey Leibenstein’s calculation of up to 50 per cent waste in terms of labour inputs.

Look for instance at David Halbersham’s recent book on the American motor industry or recent Wall Street Journal articles on IBM. Look also at earlier material, like the Vance Packard stuff of the 1950s.

There is a reason for this waste.

Modern capitalism is not small firms, but giant firms, and these giant firms are absolutely aware of the danger to themselves of getting caught in the crises of the market. They seek to protect themselves by non-productive expenditure – advertising, marketing, bribery, military contracts, if necessary war.

So vast non-productive expenditures, according estimates by Mike Kidron 20 years ago 50 per cent of US GNP, and vast waste inside corporations as they a cushioned against immediate competition.

(3) Third myth: That Eastern economies are qualitatively different to those of rest of world.

But in reality there is a continuum in terms of state ownership, from US at one extreme through South European states like Italy and Spain, then through many third world states to USSR.

Why? Because crisis of 1930s led many more backward capitalisms to turn to state to protect them against immediate market competition from more advanced imperialisms. Just as the advanced capitalist firms were using non-productive expenditure to protect themselves, so the more backward capitalisms combined these with state ownership and control.

But these states could not opt out of world system. Had to find means to protect themselves. Some key commodity they sold to rest of system, or huge military expenditures to defend themselves.

So Russian bureaucracy spends twice the proportion of its GNP on arms as its American rival. It has to have huge heavy industry sector to back up its arms spending.

Civilian consumption and real wages of workers are necessarily cramped as a result. Estimates by deputy head of USSR unions suggest that only 35 per cent GNP goes on wages and salaries.

Sselyunin shows that consumer goods fell from 60 per cent of output in 1928 to 25 per cent in 1985.

He says picture is one of an “economy working more and more for itself, rather than for man.”

The similarity of this with Marx’s description of capitalism should not need commenting: “accumulation for accumulation’s sake, production for the sake of production”

For a period they could develop under behind the carapace of the state in a way which would not have been possible otherwise. But the unproductive expenditures necessarily began to sap the dynamic of economic development in the long term.

These countries also affected by something else. Mistakes in investment policy in the more advanced states were magnified in the more backward states trying to compete with them.

The Eastern European states, near one extreme of the continuum were the most affected by these. E.g. half US missile projects are eventually abandoned, with waste of billions. We should expect same number to be abandoned in USSR, but impact to be twice as great.

(4) Fourth myth: that the market is the way forward in Eastern Europe or, for that matter, for socialists in West.

For those who want to reform the system in order to preserve it, the turn to the market is an enormous gamble.

For can the industries built up behind closed national boundaries survive in the face of competition from the giants of US, West Europe and Japan? AT a time when American giants have difficulty in the face of Japanese giants there is certainly no guarantee.

Direct impact of market competition throughout whole USSR economy might well be to create huge black holes.

So, just as trend to protectionism in US and Europe, no great rush to embrace world market in USSR.

But without world market you are talking of trying to get competition within USSR. But to match world productivity USSR firms have to be similar in size to great western firms. But this means they necessarily have a monopolist or semi-monopolistic position inside USSR. Hence way in which relaxation of controls over enterprises last year led to firms raising prices and producing more profitable goods, without regard to “demand”.

It is worth emphasising there are economic, as well as simple conservative political pressures, which lead burst of economic reform in Eastern Europe to give way to shifts back to central control.

Yet the limitations of the market are also beginning to lead some people in the USSR to look in different direction, not to market as such but to the global priorities of the economy.

As long as ago as 1957 Kalecki suggested that what was wrong in Poland was not so much the use of the plan as against the market, but the mistaken character of the plan, the disequilibrium which flowed from overambitious investment.

Today in USSR some economists beginning, under the impact of the mass awakened demand for better consumption, to ask the same thing, e.g. scientists who recently wrote to Izvestia protesting at huge investment in Western Siberia jointly with Western firms, saying it would destroy chances of raising living standards and cut world price of out puts so as not to make a profit.

Let’s return to Marx ideal:

“In bourgeois society living labour is but a means to increase accumulated labour. In communist society, accumulated labour is but a means to widen, to enrich, to promote the existence of the labourer.”

But we cannot get there without revolutionary action to rest control of the market from ruling classes, east and west. And the ideology of the market is designed to stop us doing so.

Last updated on 29 November 2009