Socialist Yugoslavia (1945 – 1992) as a Failed Response to Mises and Hayek:
A Survivor’s Experience
Handout for the Mises Meet talk
March 22, 2012
· As most Yugoslavians did, I too cried, when the Yugoslavian dictator Tito died in 1980, but I cried for a different reason—I was a baby, and babies cry a lot. Other people cried because they thought “only he could keep the country afloat.” These people apparently knew something that the economists arguing that Yugoslavia proved Mises and Hayek wrong did not.
· I grew up in a credit bubble fueled by loans from the IMF
· When the repayment time came, there was nothing to extract from the bankrupted economy
· Interprovincial accusations of who stole whose money became ever louder
· And you probably know the rest from the war news in the 1990’s
This should make a pretty clear case that Yugoslavia was a failed economic project
However, in the 1970’s and 80’s, there were claims that Yugoslavia was a proof that decentralized, worker-managed “market socialism” is a viable alternative to Hayek’s and Mises’s arguments in favour of private ownership of mans of production.
Mises’s and Hayek’s argument:
· No single mind has all the time- and place-specific information dispersed among many individuals needed for economically feasible (rational) planning of the whole economy
· Market prices provide information to individuals that make their individual plans fit into the total pattern of production
· Private ownership of the means of production gives individuals the incentives to use these means based on the time- and place-specific knowledge they possess
How was the Yugoslavian economy structured?
· Markets for consumer goods
· Worker-managed firms
o Workers vote on decisions
§ elect managers
§ how to divide profits
§ how much to reinvest in the company
o But the worker “owned” firm capital assets could be sold and bought only at the state-determined prices, and only to the state or to other worker-managed enterprises
§ Structure of production not determined through he use of time- and place-specific dispersed individual knowledge but by a state order
o When leaving the firm, a worker cannot claim any of the capital assets of the firm
§ No incentives to vote for reinvesting
§ Strong incentives to vote for wage increases
· which would then be used to invest in private goods: cars, household items (electronics, furniture), farm equipment, home renovations, vacations, etc.
· stealing the firm equipment or products in collaboration with the management was not uncommon
· MALINVESTMENT—unsustainable structure of production
§ Wages determined by the kind of labour performed, not by the market demand for specific kinds of labour (labour theory of value)
· incentives to advance through the ranks just to get a desired wage
o decided by voting in worker assemblies
o incentives to please the “opinion makers”
o getting a desired job becomes a consequence of political entrepreneurship rather than economic entrepreneurship
o to advance through the ranks, you need to be a member of the Communist Party—respond to the desires of the communist oligarchy
§ unskilled and unqualified people often in key positions
· As a result, by the 1970’s many firms are insolvent—subsidized by the central government by using the profits of the successful firms, taxes, international loans, and by printing money
· By the mid-1980’s state imposed reinvestment standards (and thus wage cuts) to keep afloat the crumbling industrial complex, trigger rampant worker strikes.
· By the 1990—double digit daily inflation