The Free Market 8, no. 3 (March 1990)
It is generally agreed, both inside and outside Eastern Europe, that the only cure for their intensifying and grinding poverty is to abandon socialism and central planning, and to adopt private property rights and a free-market economy. But a critical problem is that Western conventional wisdom counsels going slowly, "phasing-in" freedom, rather than taking the always-reviled path of radical and comprehensive social change.
Gradualism, and piecemeal change, is always held up as the sober, practical, responsible, and compassionate path of reform, avoiding the sudden shocks, painful dislocations, and unemployment brought on by radical change.
In this, as in so many areas, however, the conventional wisdom is wrong. It is becoming ever clearer to East Europeans that the only practical and realistic path, the only path toward reform that truly works and works quickly, is the total abolition of socialism and statism across-the-board.
For one thing, as we have seen in the Soviet Union, gradual reform provides a convenient excuse to the vested interests, monopolists, and inefficient sluggards who are the beneficiaries of socialism, to change nothing at all. Combine this resistance with the standard bureaucratic inertia endemic under socialism, and meaningful change is reduced to mere rhetoric and lip service.
But more fundamentally, since the market economy is an intricate, interconnected latticework, a seamless web, keeping some controls and not others creates more dislocations, and perpetuates them indefinitely.
A striking case is the Soviet Union. The reformers wish to abolish all price controls, but they worry that this course, amidst an already inflationary environment, would greatly aggravate inflation. Unfortunately, the East Europeans, in their eagerness to absorb pro-capitalist literature' have imbibed Western economic fallacies that focus on price increases as "inflation" rather than on the monetary expansion which causes the increased prices.
In Soviet Russia and in Poland, the government has been pouring an enormous number of roubles and zlotys into circulation, which has increased price levels. In both countries, severe price controls have disguised the price inflation, and have also created massive shortages of goods. As in most other examples of price control, the authorities then tried to assuage consumers by imposing especially severe price controls on consumer necessities, such as soap, meat, citrus fruit, or fuel. As an inevitable result, these valued items end up in particularly short supply.
If the governments went cold turkey and abolished all the controls, there would indeed be a large one-shot rise in most prices, particularly in consumer goods suffering most from the scarcity imposed by controls. But this would only be a one-shot increase, and not of the continuing and accelerating kind characteristic of monetary expansion. And, furthermore, what consolation is it for a consumer to have the price of an item be cheap if he or she can't find it? Better to have a bar of soap cost ten roubles and be available than to cost two roubles and never appear. And, of course, the market price—say of ten roubles—is not at all arbitrary, but is determined by the demands of the consumers themselves.
Total decontrol eliminates dislocations and restrictions at one fell swoop, and gives the free market the scope to release people's energies, increase production enormously, and direct resources away from misallocations and toward the satisfaction of consumers. It should never be forgotten that the "miracle" of West German recovery from the economic depths after World War II occurred because Ludwig Erhard and the West Germans dismantled the entire structure of price and wage controls at once and overnight, on the ,glorious day of July 7, 1949.
In addition, the East European countries are starved for capital to develop their economy, and capital will only be supplied, whether by domestic savers or by foreign investors, when: 1) there is a genuine stock market, a market in shares ofownership titles to assets; and 2) the currency is genuinely convertible into hard currencies. Part of the immediate West German reform was to make the mark convertible into hard currencies.
If all price controls should be removed immediately, and currencies made convertible and a full-fledged stock market established, what then should be done about the massive state-owned sector in the socialist bloc? A vital question, since the overwhelming bulk of capital assets in the socialist countries are state owned.
Many East Europeans now realize that it is hopeless to try to induce state enterprises to be efficient, or to pay attention to prices, costs, or profits. It is becoming clearer to everyone that Ludwig von Mises was right: only genuinely private firms, private owners of the means of production, can be truly responsive to profit-and-Ioss incentives. And moreover, the only genuine price system, reflecting costs and profit opportunities, arises from actual markets—from buying and selling by private owners of property.
Obviously, then, all state firms and operations should be privatized immediately—the sooner the better. But, unfortunately, many East Europeans committed to privatization are reluctant to push for this remedy because they complain that people don't have the money to purchase the mountain of capital' assets, and that it, seems almost impossible for the state to price such assets correctly.
Unfortunately, these, free-marketeers are not thinking radically enough. Not only may private citizens under socialism not have the money to buy state assets, but there is a serious question about what the state is supposed to do with all the money, as well as the moral question of why the state deserves to amass this money from its long-suffering subjects.
The proper way to privatize is, once again, a radical one: allowing their present users to "homestead" these assets, for example, by granting pro-rata negotiable shares of ownership to workers in the various firms. After this one mighty stroke of universal privatization, prices of ownership shares on the market will fluctuate in accordance with the productivity and the success of the assets and the firms in question.
Critics of homesteading typically denounce such an idea as a "giveaway" of "windfall gains" to the recipients. But in fact, the homesteaders have already created or taken these resources and lifted them into production, and any ensuing gains (or losses) will be the result of their own productive and entrepreneurial actions.
