Ota Šik

Ota Šik 1989

Socialism – Theory and Practice

Written: 1989;
First Published: MacMillan 1991;
Source: Socialism Today? The Changing Meaning of Socialism, Edited by Ota Šik;
Fair Use: pp. 1-29 of 178 have been reproduced in accordance to § 107 of Title 17 in US Copyright Law;
Transcribed: by Andy Blunden.

If we want to examine the current socio-economic meaning of the term socialism, and to subject it to scientific analysis, then we do this primarily with respect to increasing problems in the communist-controlled countries and to discussions and reform efforts now under way in those parts. We are not therefore concerned with the idea of socialism in its entire breadth of historical development, but with the Marxist-Leninist type of socialism which has found its real expression in the communist-controlled countries.

In this context, we must restrict the notion of socialism to that of a social system whose characteristics have been moulded both by specific theoretical works and, in the course of time, by practical political, legal and economic institutions and measures in communist-ruled countries. In our capacity as economists, we must then limit our view of this social system a little further, and primarily focus our examination on the socialist economic system – and, of course, its connection with the political system. However, since the socialist economic system represents the crucial structure of the entire socialist society, and is also regarded as the basis of society by the theoreticians of this social order, our narrowed view simultaneously enables us to receive a deeper insight into the socio-economic aspects of the socialist social system.

Proceeding from this understanding, I will deal first with the theoretical and practical evolution of the general basic characteristics that are typical of the socialist economic system in the communist countries. Subsequently, I will summarise the economic results, or rather the generally occurring deficiencies caused by the socialist system. This will then lead me towards all examination of how these deficiencies may have had their earliest roots in errors contained in the theory that was the starting point of communist practice. This will be followed by my ideas of the fundamental features of an economic system which would not only remove the defects of the socialist system, but would also prevent the defects of the capitalist system. Since I am observing certain essential changes now under way in today’s capitalist economic system, I will logically arrive at a theory of convergence that differs from that which has been known to date. My analysis will conclude with an outlook on the necessary reform developments and the problems they involve.

The Development of the Concept of Communist-Controlled Socialism

The genesis of the socio-economic meaning of the communist-controlled term ‘socialism’ has its main source in the theoretical works of Marx, Engels and Lenin, the so-called classics of Marxism-Leninism. How this concept has satisfied the fundamental criteria of the development of socialism in the course of its practical realisation in the Soviet Union and other socialist countries must now be examined, and whether it has resulted in the socio-economic development expected by the above-mentioned theorists.

To begin with it must be made clear that the term ‘socialism’ generally describes the social system which Marx had referred to as the ‘first and lower phase of communism’.[1] Marx inferred the characterisation of this lower form from the historical necessity of the development of communism, and from the fact that communism would directly emerge from capitalism and would therefore be characterised by capitalism for a relatively long time – the ‘first phase’. The notion of ‘socialist phase’ or more briefly, ‘socialism’ to denote Marx’s ‘lower phase’, has become common currency and I propose to use it in this sense.

Marx and Engels substantiated the historical necessity of the development of communist society by saying that capitalism would increasingly impede the further development of productive forces and – as always in history -only new economic and social conditions, that is ‘socialist conditions’, would cause productive forces to evolve at a substantially faster rate than they could under capitalism. This historical view gave rise to the fundamental criterion for the development of the socialist economy also held by Lenin. He was convinced that the expropriation of capitalists would result in an immense extension of social productive forces and in the achievement of a higher degree of labour productivity.[2]

According to the classics, the retardatory effect of capitalist production conditions on the development of productive forces would be the result of the contrast between private ownership of the means of production and the social character of production. Private appropriation of the results of production would lead to increasing exploitation of the workers, to their pauperisation. Production could not be oriented towards the development of social demand at the outset, but would be corrected after the event, in accordance with market price fluctuations.

The workers’ income, which would always lag behind production growth in relative terms, and their consumption capacity would cause cyclically recurring crises. The growth of the organic composition of capital would result in constantly increasing unemployment and in decreasing profit rates. The growing concentration of capital would first lead to the development of monopolies, and finally to a predominance of monopolies in the economy. All this would impede the development of productive forces to an ever greater extent, while simultaneously creating the economic and political preconditions for the abolition of capitalist production conditions.

Socialism, therefore, was meant to obviate its fundamental opposite, capitalism, by substituting social ownership of the means of production for their private ownership. This would adapt ownership conditions to the social character of production, while private production control and private appropriation of the results of production would be replaced by their social equivalents. Market relations would have to be eliminated, and production as a whole would a priori have to be oriented towards future developments of demand with the help of economic planning. Direct social labour on the part of the working population would result in a faster growth of labour productivity than under capitalism.

It was Engels who first drew conclusions from incipient state ownership in capitalism to a socialist state ownership of the means of production.[3] He assumed, however, that the socialist (proletarian) state would only effect the expropriation of the capitalists by means of the nationalisation of their companies. Subsequent to nationalisation of the means of production and the disappearance of the contrast between labour and capital, the state was meant to begin to wither away so that even during the first (socialist) phase, the policy characterised by overall state ownership would disappear. Lenin, however, extended the existence of the socialist state to the entire socialist phase[4] and developed the theory of the leading role of state ownership in socialism.

Lenin also pointed out Engels’ notion according to which, in socialism, the economy is something like a giant enterprise owned by the people, who are represented by the socialist state.[5] In this giant enterprise, the division of labour would remain unaffected by market forces and only be technical in nature; individual parts, that is, enterprises, would relate to each other like departments, plants, and so on. The activity of all the parts, the overall production by all enterprises, as well as the distribution of the means of production and the labour force among them, would have to be determined with the help of one single overall plan. Later, this idea of marketfree and natural economic planning was developed further by the so-called ‘Trotskyist’ economists, such as Prcobrazchenski,[6] Kricman[7] and others.

Although Lenin’s shift towards the New Economic Policy (NEP) resulted in the reintroduction of market relations in the economy, it did not change the idea of substituting systematic planning for market mechanisms in socialism. Lenin justified the reintroduction of market relations on the strength of the existence of private producers, chiefly farmers, during the transition to socialism. Lenin did not indicate anywhere that after the farmers’ ‘voluntary forming of cooperatives’ which he was aiming at, and after the emergence of socialism on the basis of social ownership in two forms – leading state ownership, and cooperative ownership – market relations should continue to exist. It was Stalin who enforced the farmers’ collectivisation instead of keeping it voluntary and then proceeded to retain formal market relations although the means of production were no longer in private ownership. Trotskyists have to this very day charged Stalin with deviation from Marxist theory while regarding their idea of the socialist economy as a market-free and naturally planned economy in harmony not only with Marxist but also with Leninist theory.

Stalin, however, understood the retention of market relations only in terms of formal commodity – money relations, and eliminated market mechanisms. Prices should not be market prices, but fixed on an administrative basis, competition between enterprises should be abolished, and the workers’ incomes should no longer depend on the market income, but oil the plans or the fulfilment of quotas. Production should no longer take its bearings from tile market, that is, from price and profit developments, but be directed by means of planning. With the exception of the formal calculation of production with the help of prices. Stalin retained the Marxist-Leninist idea of a comprehensive economic plan for the development of production and the distribution of goods.

Of course, such a planning endeavour calls for the setting up of a hierarchically organised system of command, in which mandatory tasks are issued by a planning centre and then passed down to the relevant enterprises through a host of institutions. Gradual disaggregation and concretisation of central aggregates will, in the last instance, be transformed into concrete micro-plans by the managements of individual works.

More than anything else, such a planning system requires the enforcement of central political objectives, with the help of a disciplined subordination of all lower levels of authority to the central will. This finds its clearest expression with Trotsky, who wanted to organise the socialist economy like a military system of command. The material (monetary) incentives of the works collective, which underwent varying developments under Stalin, did not greatly change this command economy either, since all remuneration was subject to planning and the fulfilment of quotas.

During Stalin’s rule, some characteristic features of the socialist economic system developed, whose theoretical reflections ossified into dogma, which in turn economists and other social scientists were not allowed to doubt. These fundamental dogmas consisted of the following theoretical postulates.

- The means of production must not be in private ownership. Rather, they must be in state ownership to a decisive extent, and in cooperation ownership only to a restricted extent, and under state leadership.

- The development of production must not be determined by market mechanisms. Rather, it must be fixed with the help of central plans, that is, with production and investment tasks, mandatory for each enterprise.

- Prices are only retained for the purposes of formal planning and calculation. They must, however, be fixed by a central state authority and must not be changed by enterprises in accordance with market conditions.

- There must no longer be any competition between enterprises, since this is a capitalist feature. For this reason, production must be organised in such a manner that every branch of industry is amalgamated into one single monopolistic giant with a standardised administration.

- The distribution and use of incomes accruing in the form of money is no longer within the competence of enterprises but is determined by state planning. This means that the development of incomes must not depend on market income, but must be fixed by plans.

- The board and management of any enterprise must not be elected by the works collectives. Rather, they must be appointed by state authorities. Only in this manner can the enforcement of a concerted, central will be ensured.

Such and further fundamental dogmas were meant to preclude the reappearance of capitalist ownership and the re-emergence of ‘economic anarchy while simultaneously ensuring the fast, effective and proportionate development of socialist production determined by planning. This form of production was meant to safeguard the satisfaction of social demand. The communist parties began to label a system organised along such economic lines as ‘real’ socialist.

Fundamental Defects in the Economic Practice of ‘Real’ Socialism

The development of a socialist economy has been going on in the Soviet Union for about seventy years – a period sufficiently long to warrant an examination of how socialist theory relates to reality. Not one of the objectives ever aimed at by a socialist development process was reached. This was not chiefly a consequence of subjective mistakes made by party and state leadership with regard to economic policies, rather, it was the result of defects inherent in the system, which had already been embodied in Marxist-Leninist theory.

Such objectives as faster development of productive forces, a more proportionate and economical form of production, and satisfaction of individual and social requirements that are an improvement on the capitalist system, have not been achieved. I have published comparative calculations in my book, Wirtschaftssysteme (Economic Systems).[8]

The vital proof brought forward to justify the necessity of the socialist system – the idea that in comparison with the socialist system, the capitalist system does not permit a faster development of productive forces could not he substantiated. Socialist product on is increasingly lagging behind capitalist production, particularly as regards qualitative development, the innovation of productive forces, and technological and scientific progress. As a consequence, the quantitative growth of production is also increasingly slowing down, or rather changing into fictitious (covertly inflationary) growth.

In comparison with capitalist production, socialist production has the following defects which cause it to lag behind:

- Production shows a lower degree of efficiency (production output-input ratio) than a free-market system, i.e. substantially more labour, materials, energy and investments are needed for a comparable production process.

- Production grows in a predominantly extensive manner (extension of the production factors), while its intensive growth (through technological progress and the qualitative development of the production factors) is absolutely inadequate.

- Production is not sufficiently geared to demand: on the one hand, it produces quantities of unrequired goods, while on the other, it does not satisfy concrete demand to any large extent.

- Production supplies few, high-quality and fashionable consumer goods, and the technological standards of capital goods are far behind those of western countries.

- Production is completely disinclined from innovative development, producing an insufficient number of new goods. The novelty of goods is frequently bogus, so that consumers will not enjoy a higher benefit from them.

- The proportion of consumer-goods in production as a whole is substantially smaller than in Western free-market economics. In other words, the proportion of capital-goods production is much too high, which is a consequence of the defects mentioned above.

If production continues along such lines, then the requirements of the population can only be inadequately satisfied, and the standard of living of the widest strata will increasingly lag behind that of the industrialised nations of the West. Quantitative and qualitative successes have been achieved in arms and space development, since those two industries are given preference in every respect. Even so, their efficiency is immensely low, and the growth of arms production is increasingly being advanced at the expense of consumption growth.

The official economic theory or, more accurately the ideological propaganda of the USSR, as well as of the other socialist countries, has ignored or concealed those economic defects for years. It only worked with the fast growth rates of production volumes in the initial years, overlooking the losses in efficiency which were increasing from the beginning. Many socialist reformers also make the mistake of asserting that the dirigist planning system had functioned well in the initial years of socialist development, i.e. in the years of extensive growth. In their view, it would only fall in a development phase in which intensive growth is required.

This does not correspond to reality. Only this much is true, that the planning system – with the help of extensive expansions of industrial production factors – achieved a relatively fast production growth in the initial Years. From the outset however, this system merely enabled a relatively slow qualitative improvement and innovation of commodities and therefore, with the exception of arms and space production, only inadequate technological progress, while capital productivity was strongly decreasing in the long term. As a consequence, uncommonly large and heavily increasing investment volumes were required for extensive production growth at the expense of consumption development.

Ever since its inception, the planning system has prevented a highly efficient investment development, not only because of slow technological progress, but also because it renders impossible a selection of the most profitable investment projects from among a great number of substitution options, which are very numerous in a free-market economy. Central investment planning and the allocation of investment funds is effected by means of a primitive accounting of input and output, without the existence of as many substitution options as in a free-market economy and without an optimal profitability selection.

Finally, the planning system has from the start prevented consumers from influencing the development of production through the market, and from assessing the performance of individual enterprises with the help of market selection. Only in conditions where buying involves a choice between differing products, with competition at work in all industries, are producers forced to make production more efficient and more flexible. Both in the free-market and in the planned economy systems, lack of balance between supply and demand is bound to occur with regard to certain commodities. In a free-market system, however, producers are compelled to overcome these imbalances as soon as possible if they are to achieve profits rather than sustaining losses. In a planned economy system, the extent of imbalance is substantially greater and is overcome considerably more slowly – if at all. The constantly inadequate supply of many commodities in relation to the demand for them is accompanied by goods produced in excess, which is reflected in stocks that are three to four times the size of those in a capitalist system.

From the beginning, all these mammoth losses in efficiency have been incurred at the expense of consumption development, in parallel with an exorbitant and unnecessary increase in capital goods production. This was production for the sake of production rather than for an optimal development of consumption: the growth of production became an end in itself. It sounds like mockery when official propaganda characterises such production as a process meant to safeguard the maximal satisfaction of society’s material and cultural requirements.

As long as this production development served to achieve an even faster increase in the immensely preferred arms production, it was retained despite all losses in efficiency. Once the Soviet arms race with the USA threatened to result in an enforced reduction of the miserable living standards of the Soviet population to an absolute low, however, those forces in the USSR (headed by Gorbachev, who had recognised the inefficiency and untenability of the Stalinist planning system) were enabled to act.

Errors in the Theoretical Justification of Socialism

Realist-socialist practice was founded on a false theoretical premise. It was assumed that socialist works-managements and collectives would always work ‘in a manner equal to social interests. The new socialist man should subordinate both his partial and his individual interests to the interests of society as a whole. It therefore the central controlling bodies were not in a position to draw up concrete plans for the microstructure of production, for innovative production development, for an economic utilisation of production factors and so on, then their subordinate enterprises should themselves carry out concrete measures in order to guarantee optimal production development.

In reality however, socialism still has conditions in which the producers’ immediate individual and partial interests have priority over the interest of society as a whole. As long as the old, rigid division of labour and the lack of consumer goods persist, both the individual workers’ and the works collectives’ immediate interest in a maximal increase in income, achieved with a minimal amount of work, will be of overriding concern. If the plans from above cannot be sufficiently concrete, if there is neither market interest nor competitive pressure, and if there is a constant excess of demand (seller’s market), then enterprises will always exploit all avenues in order to push incomes as high as possible with as little work as possible, and this also at the cost of the consumers, or rather at the cost of a possibly improved satisfaction of demand.

Enterprises will neglect the qualitative and innovative development of production; they will manipulate production structures in such a way as to achieve the formal fulfilment of quotas, even at the consumers’ expense; they will produce uneconomically. If real market interest, prevailed (real competitive pressure and a real buyer’s market) then enterprises could not operate in this manner. In conditions where market mechanisms functioned, partial and individual interests would be subordinated to social interests with much greater consistency.

In quest of the starting point of all these defects of ‘real’ socialist theory and practice, it is necessary to go as far back as Marx’s economic theory. It contained cases of bias, simplification and errors, which were then integrated into the theory of socialism, leading to concepts of a new economic system which have since proved to be unviable.

First of all, it must be said by way of summary that in his economic analysis, Marx basically disregarded the significance of the various economic interests and motivations in society as well as their effect on the development of economic activity. This has been reflected in the fact that three development factors have been ignored, giving rise to simplified ideas with respect to both the capitalist and the future socialist economic systems:

First, the importance of consumers’ interests and their influence on producers’ decisions through market mechanisms. Producers’ and consumers’ interests are not of the same nature and in certain conditions will undergo anarchic developments. The one-sided emphasis on capitalist producers’ and profit interest, which finds expression in Marx’s labour theory of value and production prices, has paid insufficient attention to the consumers’ assessment of the use value of commodities. Marx’s persistence in the scientifically unprovable labour theory of value and production prices as the basis for his notion of the market price, as well as his disregard for the consumers’ continually changing assessment of the use value of the huge number of commodities, was responsible for his underestimation of market-mechanisms. This is what led him to the conclusion that in a socialist economy the market would have to be eliminated and be replaced by a planned development in the distribution of production and goods in the economy as a whole. The resulting Marxist dogma of the incompatibility of socialism and market mechanisms has been a great burden for Marxists, as well as the greatest contributor towards immense economic losses.

The second Marxian simplification is his underestimation of entrepreneurial activity and its significance above all for the qualitative and flexible development of production. The one-sided emphasis on capitalist exploitation was at the root of this underestimation, and the Marxist movement completely overlooked the necessary knowledge, the initiative and the courage to take risks – criteria which in capitalism have found expression in the years of industrial expansion, in productive innovation, in technological progress, and so on, and which can never be replaced by an economically uncommitted bureaucracy. Economically interested managers of large-scale, independent enterprises working in conditions of functioning market mechanisms may be able to compensate for a lack of entrepreneurial activity in this field, but this will still not solve the problem of the flexible setting-up of new enterprises with a view to filling newly occurring market gaps in good time. The relevance of a capital market to the necessary flexible changes in production structures has also been ignored.

A third basic error in Marxist economic theory must be seen in the notion of decreasing growth impulses for capitalist production. With the concept of a constantly growing rate of surplus value (rate of exploitation) resulting in a proportionally decreasing consumption rate, and with the simultaneous tendency of a decreasing profit rate (yield), Marx created the idea that in capitalism the development of productive forces would he increasingly decelerated. Decreasing sales and reduced profits were meant to push capitalism to the limits of its development potential. In reality, capitalism has neither a constantly growing rate of surplus nor a constantly decreasing profit rate. The refutation of Marxian theory by the real development of productive forces in capitalism has not only undermined the fundamental Justification of socialist revolutions in capitalistically developed countries, but has unmasked so many political objectives set by socialist countries (such as Khrushchev’s idea of overtaking the USA within about 20 years) as subjectivistic wishful thinking.

On summarizing all these defects and errors of socialist practice and theory I have come to the conclusion that socialism, in its basic principles according to Marxist-Leninist ideology has no future. And yet this conclusion need not mean that the only alternative to the present ‘real’ socialist development must be a return to the capitalist system. By the same token it does not mean that capitalism is faultless and not in need of reform.

Serious defects in the capitalist system persist to this day: long periods of mass unemployment, periodically recurring economic crises, unnecessarily great differences in income unrelated to efficiency a concentration of private means providing individuals with an influence of power devoid of democratic legitimisation, or the alienation of large parts of the population from capital and the economy and so on. Marxism-Leninism tried to remove them in the wrong way. This does not, however, mean that they cannot be removed at all. As a scientist I cannot reconcile myself with the idea that such system defects cannot be precluded.

On the basis of analysis of both socialist and capitalist theory and practice, I reached the idea of a ‘Third Way’, which I have held to this day.

The Model of the ‘Third Way’

Since my model of the Third Way has become general currency. I will restrict myself to a brief sketch of its principles. To begin with I will address myself to the question of whether this model should be labelled ‘socialist’. This is not easy to answer, since it immediately raises the new question of what ‘socialism’ means. The socialist label must be vigorously rejected, however, if this term is associated with everything that developed under the influence of Marx, Engels, Lenin and Stalin, as characterised above by the principles of the socialist economic system – though so far I have not dealt with the Stalinist political system.

Since the term ‘socialism’ has been identified by large parts of the population in East and West with the ‘real’ socialism which emerged under Stalin and which has rightly been strongly proscribed, it would, after all, not be felicitous to call ‘socialist’ a new system which differs from both the ‘real’ socialist’ and the capitalist systems. For this reason I described the proposed target model, which should be built on the basis of reforms along the lines of the Third Way as ‘Humane Economic Democracy’.[10]

It must he assumed, however, that reforms in socialist countries would, for political reasons, be depicted as a ‘democratisation of the socialist system’. even if they moved in the direction of the fundamental principles of the Third Way. What happens to be politic at a given moment, need not always be scientifically correct. What is crucial, however, is not the political label used (such as ‘Democratic Socialist System’), but the contents of the target model aimed for, which should overcome the defects of both the ‘real’ socialist and the capitalist systems. I will now provide a brief sketch of my idea of the basis principles of such a target model, concentrating on its realisation in the socialist countries. In doing so, I will of course have to exclude the difficult problems of the transition to the conditions aimed for, which in any case may show considerable differences from country to country.

The target model must display conditions in which market mechanisms can function as perfectly as possible. This primarily requires the existence of independent enterprises, whose concrete activities must not be interfered with by any differentiated state intervention. The state should restrict itself to issuing generally valid, basic legal conditions with regard to economic activities, or it should strive towards fixed economic and social targets with economico-political instruments. Differentiated subsidies should only be granted to individual enterprises and industries in generally recognised and justified exceptional cases.

Competition should function in an optimal a manner as possible, so that every company will feel the pressure exerted by buyers who are in a position to exercise a choice, in both the domestic and foreign markets. With this aim in view, the state should create measures for the reorganisation of enterprises during the transitional period; it should also implement an effective anti-monopolist policy in the immediate future as well as in the long term. I have formulated proposals for such anti-monopolist measures elsewhere.[11]

Prices should develop as market prices which are freely fixed by sellers under pressure from buyers in conditions of functioning competition. State control should only serve the anti-monopolist policy that is, expose covert or overt monopolist price dictates, and bring about anti-monopolist measures. In order to provide such measures, as well as competition, with the necessary scope to become effective, existing seller’s markets (great surplus demand with adequate purchasing power) would have to be transformed into buyer’s markets during the transitional period.

The market should not only function as a commodity and labour market, but also as a capital market. This requires the existence of joint-stock companies, particularly in the field of large enterprises. At the same time, merchant banks with an orientation towards economic interest would have to take up operations. The necessary stock exchange system should also be made available.

A wide variety of forms of ownership should develop in the corporate sphere – there would have to be private, cooperative, mixed, joint-stock and state companies. However, in order to prevent the formation of large concentrations of private capital, combined with a simultaneous alienation from capital of wide sectors of society direct equity participation by employees in all market enterprises should be aspired to from the outset. Joint equity ownership, profit-sharing and co-determination by employees is what I describe as general participation. In one form or another, this general participation should exist in all enterprises, with the exception of small, private companies with a minimal amount of capital.

General participation is conceivable both in terms of collective equity ownership on the part of employees (cooperative enterprises, enterprises with neutralised capital) and in terms of individually expressed equity ownership on the part of employees (joint-stock companies). It would be of advantage if the large-scale enterprises, which were previously in state ownership, assumed the form of employee companies, that is, joint-stock companies of which employees are co-owners and on whose corporate policy they exercise a decisive influence. On the one hand, this would ensure the development of the requisite capital market. On the other, strong employee equity-holding interest), coupled with participation (share democratic rights to co-determination and the vote, would make it possible to create equal opportunities for the realisation of both capital and labour interests.

Private setting-up initiatives should be backed by the state (legal aid, tax relief, and so on). Once the profit rate has reached a certain level, however, profit-sharing should be implemented for employees, partly in the form of profit shares which remain available to the company as employee stock (neutralised or shave capital), partly in the form of profit shares to be paid out (shares in the equity participation fund or dividends in joint-stock companies respectively). This would also require the introduction of a tax system and of profit-sharing regulations which would promise private entrepreneurs profit-shares increasing in proportion with profit rates, so that they would he sufficiently motivated to enhance efficiency.

The Soviet decision that private enterprises are only allowed to employ next of kin and no strangers, since this would amount to capitalist exploitation of alien labour, is an expression of adherence to the Marxist theory of surplus value, which explains exploitation. I have already mentioned that I do not consider the Marxian labour theory of value and his theory of surplus value scientifically tenable, and that I count them among those dogmas which the communist movement takes particular care to keep alive. However, since it is not possible to evolve a discussion of this fundamental theory. I will restrict myself to pointing out one of Marx’s own theoretical views, which would allow for more flexibility in the Soviet approach to the development of private production.

Marx also regarded private entrepreneurs’ activities, their technical preparation of production, the management and organisation of production, the supervision of work, and so forth, as productive activities, which also created labour value.[12] As a type of work requiring particularly high qualifications, it also creates a relatively high labour value within a given number of working hours. It is therefore possible to argue in accordance with Marx that, in the case of a relatively small number of employees, the private entrepreneur’s profit is largely an expression of the labour value created by himself, and does not therefore represent exploitation.

If private production, even with the help of third-party employees, is permitted, and if private entrepreneurs may appropriate profit subject to the introduction of employee profit-sharing above a certain profit rate, then this need not be in contradiction with marxist theory at all. It means that above a certain profit rate, part of the profit is transformed into the employees’ profit share, which is again divided into employee equity shares (profit shares turned into net investments, or capital increase), and into profit shares to be paid out. In this way the private entrepreneur’s appropriation of the remaining profits would not represent exploitation, not even according to pure Marxian theory.

The USSR’s dogmatists, who object to any employment of third-party labour by private enterprises, could not therefore cite the Marxist theory of exploitation to justify their position. They also ignore the importance of private enterprise, of expertise, of organisational ability of management skills, or market initiative, and so on, which is required by such activities, and with which the Soviet commodity supply could be improved at quite a fast rate.

The evolution of private enterprise, combined with a safeguard of employees’ profit-sharing and equity participation, should be accompanied by the democratisation of the enterprises’ management systems. This means that employees would be involved in the fundamental corporate decision-making process (corporate policies), with elected councils in private, non-joint-stock companies, and with elected representatives on the board of directors or the supervisory board in joint-stock companies; the private enterprise and the management, respectively would remain in operative charge.

Employees should also be involved in the decision-making process both in management bodies and in autonomous working groups. In these autonomous working groups, such systems as job rotation and job enrichment would also be practised. Working groups would furthermore be important in terms of their initiative in looking for work for members of staff who have lost their jobs as a result of technological progress and structural change.

The development of incomes should be economically determined by means of planned increases in average wages. Profit shares to be paid out and dividends would also be linked to actual profits with the help of fixed formulae. Incomes planning would be a substantial component of macrocconomic distribution plans and of income policy.

The main objective of such macrodistribution plans would be the implementation of economico-political measures in line with the market, with a view to achieving socio-economic development aims. On the occasion of political elections, the population should be given the chance to choose from among a number of alternative

plans which differ from each other in their combinations of the main target factors (growth of private and public consumption, protection and improvement of the environment, development of employment, shorter working hours, and so on), and which would be realised with the help of corresponding incomes, fiscal, price, credit, monetary and currency policies.

The regulation of the functional distribution of income, i.e. the regulation of income growth, of the profit-sharing coefficient, of the coefficient for the withdrawal of profits for entrepreneurial consumption, as well as a division of credit into ‘investment and consumer loans, are expected to be capable of maintaining the equilibrium of investive and consumptive developments in the economy. The determination of resource allocation would be left exclusively to companies and to market mechanisms.

The linking of market and planning should preserve the advantages of the free-market economy in their entirety particularly as regards a highly efficient, demand-oriented and innovative production. At the same time, macrodistribution planning should help overcome disturbances in the macrodisequilibrium, the emergence of large surplus capacities, mass unemployment, the threatening destruction of the environment, as well as people’s insecurity about the future.

By the way of summary it may be said that the ‘Humane Economic Democracy represents an ideal type of a system model with the following characteristics:

- It contains conditions for market mechanisms that can function as optimally as possible, for a free foreign trade, as well as for a convertible currency.

- It enables the achievement of socio-economic and ecological objectives with the help of macrodistribution planning and a coordinated economic policy.

- It enables the prevention of macrocconomic disequilibria and mass unemployment by means of macrodistribution planning, its full-employment policy and its educational policy.

- It is capable of overcoming the alienation from capital of personnel employed by market enterprises, by means of equity participation, codetermination and autonomy.

- It fully admits private enterprise, while restricting the formation of excessive private capital and power concentration.

- It allows for democratic decisions on socio-economic planning objectives from a variety of alternative plans.

- It preserves non-market activities and state control to areas where (a) social security, equality of opportunity and ecological aims are more important than efficiency, (b) there are insurmountable monopoly conditions, and (c) state control ensures that the efficiency of an enterprise is higher than in competitive split-up (e.g. water supply).

These are the main concepts of a model of Humane Economic Democracy which could emerge from socialist reform efforts.[13] Would such a development contribute towards a convergence of the systems?

The Revival of the Theory of Convergence

At the beginning of the 1960s, Jan Tinbergen advocated his theory of convergence[14] which attracted worldwide attention. Tinbergen’s conviction that the two existing systems, the capitalist and the socialist, are developing towards each other in a process of mutual convergence, is not fundamentally wrong; at the time, however. Tinbergen based it on a number of simplifications which prevented his forecast from becoming reality in the course of time. I would like to point out these simplifications, so that once they are overcome it will be possible to achieve a further development of the theory of convergence which would be closer to reality.[15]

There were, above all, three simplifications:

- an inadequate differentiation between the two courses of development preventing the emergence of a homogeneous basic system.

- An inadequately critical attitude towards public or state ownership, which was regarded as a convergence objective to be aimed for.

- The underestimation of the role of the politics and interests of powerful social groups in the prevention of system changes aiming at convergence.

An inadequate differentiation between the two courses of development

In Tinbergen’s theory it looked as if in both systems, only such processes would increase as are characteristic of the other system. Conversely, certain system-specific processes would tend to decrease. In this way, both sides would develop system characteristics that should lead to the formation of a homogeneous system. This idea conceives of the pressure on system changes in both systems as being more or less the same. In reality, however, there is a great difference between the demand for a change in the system on both sides. The demand for a system change will always be higher in the system which lags behind the other in its quantitative and qualitative development.

It is the socialist economic system which is quite generally lagging behind the development of the capitalist system in major development results. Particularly in terms o f production efficiency the socialist planned economy has been inferior to the capitalist free market economy from the outset, as has been shown above. Also, socialist production efficiency is dropping back further year after year, which makes it increasingly difficult for socialist planned economies to guarantee that social objectives can be achieved. These shortcomings result in the necessity of a fundamental reform of the socialist planned economy system, with whose aid the causes of this development lag are to be eliminated.

A lack of market mechanisms and the non-existence of private enterprise are crucial causes of the low level of production efficiency in socialism. As mentioned before, centralised, dirigist planning is no substitute for market mechanisms, and bureaucratic administration has never been able to replace private initiative to its full extent either when it comes to the setting-up of new enterprises, technological progress, the flexible filling of market gaps, and so forth.

Such enormous and increasing disadvantages result in the necessity of reintroducing market mechanisms and private enterprise in socialist countries to some extent or other. This is one side of the convergence development, which was indicated by Jan Tinbergen but not expressed with sufficient clarity to say that a return to market mechanisms by overcoming the state bureaucratic form of property is necessary in socialist countries.

Now for the other side of the coin – the capitalist system, The developments in the capitalist system are also pointing in the direction of a Third Way but not in the direction of the old socialist system. Although in capitalist systems certain reforms which I mention below are called for, they are not of such a nature as to suggest the introduction of processes from the socialist dirigist planning system.

Tinbergen’s inadequately critical attitude towards public or state ownership

Tinbergen saw the other side of the convergence process in the expansion of both the state ownership sector and state investment activity in capitalist countries. This attitude towards the nationalisation of the economy as a remedy for the defects of private-capitalist economic development, harks back to one of the fundamental postulates of the Marxist, socialist concept of the economy.

In the capitalist economy -various significant state ownership developments were also in evidence. It must be pointed out however, that such state developments had partially taken place even before the emergence of socialist ideologies: to be exact, whenever and wherever a social demand for commodities and services arose which, for one reason or another, failed to attract private interest or for which there was not enough private capital (railways, postal services, electric power stations, and so on). Wherever it was however, in socialist or in capitalist countries, such state administration gave rise to bureaucratisation and thus to immense losses in efficiency.

The bureaucratic form of economic administration is, above all, an administration by people who have no immediate, income-related interest in the efficiency of the economic development they administer and direct. People whose personal incomes will neither increase nor decrease if the economy they direct makes gains or sustains losses, will not face the consequences of their economic decisions with adequate interest. Conversely, if the personal income gains or losses experienced by people with a certain economic responsibility is linked to the gains and losses of the system they are part of economic decisions will be accompanied by a high degree of efficiency .

The difference in directive efficiency between bureaucratic administration on the one hand, and economically interested management on the other, are so serious that it cannot really come as a surprise that not only capitalism, but also socialism is turning its back on state ownership and the bureaucratic management associated with it, moving instead towards free-market independence for enterprises, coupled with a style of management characterised by economic interest and responsibility.

Tinbergen’s expectation of convergence, according to which the systems would move closer together as a result of an expansion of the state sector and of state planning and dirigism in the capitalist system, could therefore not become reality on account of changes in perception to be observed in both camps. However, this does not mean (especially in the sphere of ownership) that capitalism might not undergo certain changes that would lead to a different kind of convergence of the two systems.

A case in point is the process of increasing equity, profit and decision-making participation (general participation) of personnel employed by free-market enterprises, which in the last decade has experienced an extraordinary growth in almost all industrialised nations. An American analysis, for instance, shows that in the USA, the number of corporations with employee equity participation rose from 1600 to 8100 between 1974 and 1985, while during the same period the number of personnel holding shares in their corporations increased from 250 000 to 8 million?’ A similar, and accelerating, development can be observed in almost all other industrialised nations.

In the USA, special economico-political measures have made a vital contribution to this development. It was, above all, potent forms of tax relief for the benefit of so-called Employee Stock Ownership Plans (ESOPs) which boosted employee capital participation, as a result of which the equity of the companies concerned experienced a comparatively faster growth rate.

This development reflects the discovery of the significance of economic interest, this time extended to all employees – the discovery that personnel with a share in the capital, in profits and in the decision-making process will be substantially more interested ‘in the development of their corporations’ efficiency. Also, profits and incomes of firms with such a form of participation rise a great deal faster than those of companies without participation. This, too, was shown by the American analysis.

Doubtless this development was also stimulated by theoretical works which pointed out the economic significance of general equity Participation as early as the late 1960s. The trail-blazer in this respect was a book by L. O. Kelso and P. Hetter,[17] who demonstrate that it is realistically possible for low-income families with no savings to buy shares on borrowed money with the help of tax-privileged share sales through special trust companies and insurance institutes. The possibility computed and substantiated by the authors, of a second-income plan which could, in the foreseeable future, turn all Americans into owners of a considerable fortune in shares, makes a fascinating impression.

If employees of large enterprises own a sufficient share in their companies to he able to he represented in the boardrooms, and thus to take a closer interest in both the necessary market efficiency of the company and their own social interest, then this constitutes a new way of surmounting the old opposition between labour and capital in society. The generalisation of the ownership of the means of production by nationalising them subsequent to be expropriation of capital owners, proved to be a course which led to the loss of market efficiency while the standard of living increasingly lagged behind that of the free-market economics.

There is, however, a modern solution to this old socio-economic problem: all members of society can be transformed into co-owners of the means of production used in line with the market, which means that market mechanisms will be retained, while everyone’s standard of living will reach a social optimum.

Thus popular capitalism turns out to be a feasible utopia!

New technological developments and an accelerated transition to a modern information society will entail a very fast increase in general employee participation. In the new computerised service companies, a novel cooperative development, that is, my forecasted development of employee companies, will be gaining ground at an ever faster rate.

The high qualifications and high educational level of the personnel of such service companies will gradually assume greater importance than the actual capital required for entrepreneurial activity. Highly qualified experts will be less and less satisfied with the position of a simple wage earner. They will themselves set up such service companies in the form of cooperatives; a strong trend emerging in America’s Silicon Valley. Employee interest and initiative in industrial companies, whose technological progress is growing increasingly faster, will also be of greater significance: this too will lead to a relatively rapid expansion of participation.

Considering that in the socialist countries a transformation of large-scale enterprises into independent free-market companies is proceeding in parallel with a gradual participation on the part of the employees of these enterprises, a completely new development in the field of convergence is represented.

In my view, a transition towards fundamental employee participation in the socialist countries could proceed in the following manner. Employees would receive an annual proportion of the company’s profits in the form of inalienable personal shares. These profit shares would be used for the company’s net investments. At the same time the company would issue, and sell to the third parties, normal shares with a view to faster capital expansion. Employees would receive the same dividends on their personal shares as external shareholders.

The peculiarities of such personal shares need not be looked at in any more detail: suffice it to say in general terms, that their allocation, maturity, personal nature, connection with dividend payments, voting rights and so on, should be provided with a legal frame work that would result in a fundamental change of the employees’ position in the company and in their relationship to entrepreneurial activity – they would in fact be the basis of employee companies where labour and capital are equal. This method should above all boost employees’ interest in the development of their company’s efficiency – not, however, in the short-term maximization of their profits, but in an optimal long-term development of profits and equity. In this sense, dividend payments to previous employees during their retirement would also have a beneficial effect.

At the same time, equity participation and democratic voting provisions should lead to a more effective protection of employees’ social interests, that is, in terms of compensation for the pursuit of efficiency. Decisions with regard to requisite technological progress, changes in production structure, increases in capital intensity and so forth, can be combined with measures preventing unemployment and offsetting inescapable redundancies with the taking on of new labour in good time. All efforts at humanising work, such as the creation of autonomous working groups, job enlargement and job rotation, would come into their own to a greater extent through the creation of employee ownership structures.

In this way, the development of employee companies and the democratization of the economy could result in conditions in which the efficiency principle would not only be preserved, but reinforced – yet simultaneously associated with the humanisation of the working world. If this development should gain ground in the socialist countries, with the simultaneous re-emergence of small- and medium-sized private enterprises, then this would constitute a development in the direction of a democratic and humane economy. In the case of a concurrent, but in all probability much slower, development of general participation in the capitalist economics, this would represent a convergence of the two systems without the traditional state bureaucracy hostility to efficiency.

Such a development of participation in the sphere of enterprises would, for instance, both enable and support the macrodistribution planning that I have been advocating. Increases in income would no longer depend on short-sighted power struggles between trade unions and employer associations, but could specifically be linked to the development of productivity. An equal growth rate of the economic quotas of consumption and investment could be better ensured in this manner. In other words, the coordination of fiscal, credit, monetary and income policies could be improved. I am convinced that such a long-term planned coordination of economic policy will sooner or later have a breakthrough in the capitalist economies.

To sum up, this is a matter of the development of certain system features, different in nature in either system, which would represent reforms while at the same time giving rise to a convergence of the two systems. The reforms of the socialist system, however, are more fundamental and more extensive than those of the capitalist system. Moreover, they are being enforced by the increasingly obvious efficiency advantages of a free-market economy.

Capitalist systems are not under pressure to institute reforms which are demanded on the strength of advantages displayed by another system. Reforms in capitalist economics mainly derive from an awareness of efficiency gains to be achieved by means of general participation in the corporate sphere. Even with a long-term planned coordination of economic policy such reforms will only take place if they are seen to be advantageous in terms of efficiency. It may be argued, however, that the increasing pressure for a humane solution to unemployment and environmental problems will accelerate the development of both participation and macroplanning.

The introduction of general participation in capitalist systems will take a relatively long time, however, so the social difference between capital and labour interests will remain active for some time to come. Nonetheless one may speak of a change in the direction of an economic democracy in this system also, which is being accelerated by new technological developments.

The underestimation of the nexus between political and economic development

Regrettably, the economy of all nations is linked with politics, and economic development is crucially dependent on whether conservative or progressive forces are at the helm. Precisely this nexus is what Jan Tinbergen underestimated most of all.

Now, it is – among other things – a function of economics to reveal certain connections in the economics which economically untrained, non-academic people, that is, the vast majority of the population, will not be able to recognise. All too often, however, economic discoveries of the causes of negative processes – of processes opposed to the interest of the great majority of the population – lead to reform demands opposed to the interest of frequently small but politically powerful social groups. As long as such groups retain political power, and as long as economists have no chance of convincing the vast majority of the population of the usefulness of certain reform processes, reforms will face enormous obstacles, even if they are supposed to serve the greater part of society.

Even in the conditions of a political democracy it is not always easy to acquaint the majority of the population with complex economic connections and certain reform requirements. In political dictatorships, where the groups in power enjoy large economic privileges and are therefore interested in maintaining the existing system unchanged, this ruling group is capable of almost totally preventing the population from being enlightened with regard to the long-term benefit of a reform. This is one of the decisive reasons why in the socialist countries, the beginnings of a convergence correctly identified by Tinbergen – a trend towards market-oriented changes in production – could not gain ground with the consistency that would have been the result of real economic improvement. If market mechanisms are to bring about increases in efficiency then this calls for changes to the system which are also far-reaching and complex enough to undermine the foundations of the ruling social group’s power and privilege. And it is precisely these groups who have so far always managed to stifle such complex reforms.

If the introduction of market mechanisms is merely partial – if say a works collective is granted a profit interest and an extension of its independence in production decisions, while prices remain centrally fixed, there is no competition in the market, production is organised monopolistically the seller’s market is preserved, and governments tirelessly subsidised loss-making enterprises and practice a protectionist economic policy – then market mechanisms are more likely to produce losses than gains for society.

In all the countries where certain reforms have been implemented – in Yugoslavia, China, now in the USSR, in Czechoslovakia and so on – but where the changes were either not thought out in all their essential interconnections, or politically suppressed in their requisite complexity they have without fail increased losses. Reforms have become unpopular with the population and fallen into disrepute. All such partial reforms have been for the benefit of the conservative rather than tile progressive political forces. And ultimately it has always been the old dogmatic and bureaucratic forces which have contrived to nip reforms of socialism in the bud.

Tinbergen did not at the time discover this nexus between politics and the economy nor did he reveal the detrimental effect of merely half-hearted, inconsistent reforms in the direction of market mechanisms. This is the decisive reason – along with those mentioned above – why the theory of convergence would not translate into reality.


It must finally be emphasised that I find the emergence of a new economic system in the socialist countries realistic only if it is accompanied by the creation of pluralist, democratic conditions.

The transition to an economic system in which market mechanisms may return to full working order, and where both private and cooperative corporate initiative may have full scope for developing, but where the concentration of private capital power and the alienation of the workforce from capital should be prevented, is an immensely difficult process which may be painful for large parts of the population. Many inescapable developments which will at first involve distress to the public (price increases, higher standards of performance, structural change entailing the closure of many enterprises, and so forth are de facto consequences of previous, unreasonable economic activity; they must, however, be endured if market mechanisms should become effective again, if economic efficiency should increase, and if the standard of living should experience a rapid growth later oil. These difficulties encountered during the transition period will be illustrated in more concrete terms in the Appendix, where a reform problem serves as an example.

Such difficult reforms can only be implemented by a political leadership which is capable of winning the strong and lasting confidence of the population. Without a real democratisation of the political system, and without a completely free spread of information throughout society this will be impossible. People can only be sure that they are no longer at the mercy of bureaucratic powers, and are the real sovereign in control of the political representatives, if the causes of the monumental losses of the past are revealed, if the media may give unrestricted voice to discussion and criticism, if all relevant positions in society are filled with cadres that have been democratically selected and elected, if people may freely form groups and organisations, and if various proposals and programmes for solutions to social problems and future developments are drawn up and then compared.

The communist leaderships which reject such democratisation have not been able to understand that without the people’s initiative, interest and sense of freedom, no highly efficient economic activity may be expected. The Chinese communist leadership has not grasped that a pure command system of subordination and obedience, based on fear and discipline enforced through punishment and drill, may provide the foundation for a military organisation, but will not give rise to inventive, enterprising and economic activities that will also involve the courage to take risks. Even in China, the time has passed when it was sufficient to mobilise masses of people in large columns to do the same unchanging and primitive work in the country in factories, in road construction, etc., and to control them with the help of an army of supervisors. In this way labour and capital productivity and consequently, the masses’ standard of living, will never be increased. It is the creativity of intellectuals, the spontaneity of the spirit of enterprise, and the innovatory initiative of million that are needed today. But all this cannot prosper in an atmosphere of fear, spying and denunciation.

At the time of writing, the Gorbachev leadership has so far rejected the necessity of a pluralist democracy for the Soviet Union. Even so it cannot be overlooked that with the implementation of glasnost, of the new election system and other measures, Gorbachev has made some important steps in the direction of democratisation. It is to be hoped that these have not been the last words of wisdom. Without a multi-party system, terrible relapses still remain possible. An excessive number of dogmatists in the monopolist parts, machine are sabotaging perestroika, provoking conflicts, and trying to undermine Gorbachev’s position. Only with the support of newly organised undogmatic forces from the people will he be able to implement his policies.

The anti-reformist communist leadership of some other socialist countries cannot objectively refute the complete failure of the Stalinist planning system. To an even lesser extent are they able to legitimise their claim to exclusive, monopolist political leadership, even if they invoke the so-called ‘scientific character of their theory. In their fear of democratisation, they are left with the attempt to maintain the old system with violence and repression. This is a short-sighted policy and doomed to failure. The later it fails, however, the greater the damage, and the greater the scale of human suffering in the countries concerned.


1. K. Marx, Kritik des Gothaer Programms’, VIEW. vol. 19.

2. V. I. Lenin, ‘Die grosse Initiative’. Schriften. vol. 29.

3. F. Engels. ‘Antidühring’, MEW. vol. 20.

4. V. I. Lenin, Staat und Revolution (Berlin: 1977) p. 101.

5. ibid.

6. E. A. Preobrazchenski, Viestnik kommunist. Akademii. vol. viii (1924) and vol. xi (1925).

7. L. N. Kricman. Viestnik Communist. Akademii. vol. ix (1924).

8. O. Šik, Wirtschaftssysteme, Vergleiche-Theorie-Kritik (Heidelberg: Springer Verlag, 1989).

9. cf. O. Šik. R. Holtschi and C. Rockstroh, Wachstum und Krisen (Heidelberg: Springer Verlag. 1989).

10. , Humane Wirtschaftsdemokratie (Hamburg: Knaus. 1979) and For a Humane Economic Democracy (New York: Praeger 1985).

11. O. Šik, Em Wirtschaftssystem der Zukunft (Heidelberg: Springer Verlag, 1985).

12. See K. Marx. Das Kapital (Berlin-East: Dietz. 1974), vol. i. p. 350ff. and vol. iii. pp. 396ff.

13. For additional information cf. O. Šik. Humane Wirtschaftsdepnokratie (Hamburg: Knaus, 1979), and For a Humane Economic Democracy (New York: Praeger, 1985).

14. Jan Tinbergen, ‘Do Communist and Free Economies Show a Converging Pattern?’ in: Soviet Studies, vol. 12, (Oxford. 1960-61) pp. 333ff.

15. For a more detailed discussion, cf. 0. Sik, ‘New Aspects of the Theory of Convergence’. Economic and Industrial Democracy (Stockholm, forthcoming).

16. C. Rosen and M. Quarry, ‘How well is employee ownership working?’ special report in Harvard Business Review. vol. 5 (1987) pp. 126-31.

17. L. O. Kelso and P. Hetter, How to turn eighty million workers into capitalists on borrowed money (New York: Random House. 1976).