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Transition to a Market Economy

IN his book on the economic transition in Hungary, Janos Kornai emphasizes the importance of building a new middle class in that country. The idea discussed below would do much to build a middle class in any country moving away from centrally owned and administered economies. A plan has been floated in East Germany by Wolfgang Ullmann to distribute state-owned assets to the East German population in equal shares. A variant has also been proposed by the West German financier Albrecht Matuschka. Other variants have been proposed for the Soviet Union by the Soviet lawyer Vladik Nersesyants, and by the American economist Edgar Feige of the University of Wisconsin, who has written an especially detailed and sweeping proposal.

John Stehle, an economist at Villanova University, points to an interesting small-scale historical precedent in the United States. According to Professor Stehle, the Amana Society of German immigrants in Iowa, organized along lines of almost pure communism for three generations, decided in 1932 to become a shareholding cooperative, because the members of the society could see that the free-enterprise private economy which surrounded them produced a higher standard of living. The vote for economic conversion in this manner was over 90 percent.

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Making such a conversion in East Germany or the Soviet Union by the distribution of equal shares would be more difficult, but the financial communities of London, Frankfurt, and New York could suggest ways to handle the technical problems. One way to distribute might be by random sampling within and across sectors; another way could be through mutual funds.

Arguments against the distribution of state-owned assets sound disturbingly like the arguments against giving land to the newly emancipated slaves after the American Civil War: The ex-slaves, it was said, wouldn't work if given property, wouldn't know how to manage it, or would become too independent (see Eric Foner's book, ``Reconstruction'').

THE arguments for distribution are much sounder. It would tackle some of the most fundamental obstacles to making the transition from a centrally administered economy to a market economy:

1. The problem of valuation. No one knows what enterprises in Soviet-style economies are worth. Price information is either nonexistent or hopelessly distorted. But if shares were distributed to the population at large, then a process of valuation would begin as markets in the shares were formed.

2. Egalitarianism. There is strong public sentiment for economic equality in countries with Soviet-type economies, most of all in the Soviet Union itself. Economic differentiation is bound to occur in market economies, because some people have the Midas touch where money is concerned, while the rest of us don't; but under this proposal, everyone would start out with an equal share.

3. Enterprise autonomy. Enterprise managers would be accountable to shareholders, as in the West, rather than to irresponsible bureaucrats in the central ministries. If managers did a poor job, then someone else would come along and say to the shareholders, ``I can do a better job, make me the manager.''

4. Economic culture. People in centrally administered economies are not used to thinking in the ways required for the operation of a market economy. But if all had an equal stake in a new market economy, then they would be eager to learn. People would ask elementary and far-reaching questions. What are the shares worth? How can their worth be increased? Respect for entrepreneurial and managerial ability would grow.

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A chicken-and-egg problem exists, however. The proposal amounts to making everyone an instant capitalist, and it has be discussed in such market-oriented terms that it may have a hard time getting a hearing in societies where people have had the principles of a centrally administered economy drilled into them for two or three generations. Once heard, though, it would be quickly adopted. Few people would vote against their own enrichment.

5. Political support. A wide distribution of assets would avoid future resentments about give-aways to a favored class, a danger in selling state firms to their managers at fire-sale prices. A wide distribution of diversified assets would also ensure support for the temporarily painful measures needed to make those assets more productive, e.g., reforming monetary policy, freeing prices, and ending subsidies. Above all, a wide distribution of diversified assets would support democracy by greatly reducing the economic power of the nomenklatura and greatly increasing the economic power of the electorate.