by Murray Rothbard
(Contents by Publication Date)
A Socialist Stock Market?
Even in the days before perestroika, socialism was never a monolith. Within the Communist countries, the spectrum of socialism ranged from the quasi-market, quasi-syndicalist system of Yugoslavia to the centralized totalitarianism of neighboring Albania. One time I asked Professor von Mises, the great expert on the economics of socialism, at what point on this spectrum of statism would he designate a country as "socialist" or not. At that time, I wasn't sure that any definite criterion existed to make that sort of clear-cut judgment.
And so I was pleasantly surprised at the clarity and decisiveness of Mises's answer. "A stock market," he answered promptly. "A stock market is crucial to the existence of capitalism and private property. For it means that there is a functioning market in the exchange of private titles to the means of production. There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist."
And so it is particularly thrilling to see that in the headlong flight from central planning and socialism, several of the Communist countries are actually introducing, or preparing to introduce, a stock market. A prospect that would have been unthinkable only a few years ago! The process is already in its early stages in Communist China. And the Soviet Union is beginning to talk about introducing a stock market.
Stock markets already exist in several cities in China. So far, however, they are pitiful fledglings. Although the Communist leadership now allows the expansion of private firms and permits them to issue stock, only a few companies have issued stock and they are, so far, much more like bonds. Stock dividends are fixed very much like interest on bonds, and, more importantly, there is no free pricing system in these stock markets; instead, there is rigid price-fixing of the shares by the central government.
Even so these tiny stock markets are expanding, as state enterprises in China are selling off chunks of their shares to the public, while thousands of cooperatives are selling shares of ownership to their workers. Harry Harding of the Brookings Institution comments that "the idea is to have enough public ownership so that they can say it's still socialist," while at the same time they "make the enterprises accountable to someone other than the state bureaucracy." Despite great reluctance, China and other Communist countries are anxious to induce productive savings from their citizens, and channel savings from jewelry and art, into capital investment.
Another motive propelling China, Soviet Russia, and other Communist countries into establishing stock markets is the desire to attract foreign investors. But it is obvious to all, including the Communist leaders, that to attract foreign funds, the ruble and other Communist currencies must be removed from their current absurd controls and overvaluations, and become freely convertible into dollars and other Western currencies. It will take the Communist governments quite a while to bite this bullet, but they are definitely moving in this direction.
As might be expected, the most radical advance toward free stock markets in the Communist countries has been in Hungary. A tiny stock market has been open in Budapest for some time, but on January 1, 1989, Hungary began to allow foreigners to invest in Hungarian stocks, even permitting foreigners to own up to 100% of a number of Hungarian firms, public and private. At first, these shares will be traded in the current tiny market, but within six months, Budapest is scheduled to open a functioning daily international stock exchange--the first in Eastern Europe since World War II.
This first real stock exchange will have from ten to twenty companies listed at its opening, and will, unfortunately, also come with all the attendant trappings of an American stock exchange--including insider trading rules and a Hungarian type of Securities and Exchange Commission. Learning too well from the West!
Particularly enthusiastic about the new development is Szigmond Jarai, deputy director of the Budapest Bank and chairman of the government committee supervising the establishment of the daily stock exchange. Jarai declared that "the stock market is the heart of an effective economy . . . . . We need to reduce our bureaucracy and free up entrepreneurs," he added, sounding, as the New York Times commented, "more like a Wall Street free-mar-ket enthusiast than an official of a Communist government."
More freedom is coming soon. The Hungarian Parliament is considering a tax reform that would allow foreign equity investors to pay no Hungarian tax on either dividends or capital gains, and laws are being prepared allowing both Hungarians and foreign joint ventures to operate as stockbrokers. In addition, the way forward has been paved by the fact that Hungary already has in place the only bond market in Eastern Europe, as well as a system of bankruptcy laws so that insolvent firms can be forced out of business.
There is, of course, a long way to go, even in Hungary. But plans are in the works to privatize large sectors of the Hungarian economy within the next two years, and there are increasing mutterings about making the Hungarian forint convertible into Western currencies. Even in benighted Poland, there are bills now in Parliament to allow private commercial banking, and to eliminate exchange controls over the Polish zloty. Not only is socialism cracking all over the world, but, using Mises's criterion, we might be able to throw our hats in the air very soon and proclaim that Hungary is no longer socialist.