Karl Marx remains one of the most fascinating figures in history due not only to his contributions to the study of political economy and conclusion about the capitalist system, but his unique method of analysis, the dialectical view of social transformation. Dialectic analysis has confounded many and tends to be counter intuitive relative to historical advancement of knowledge via the more ubiquitous Cartesian approach. This by no means makes dialectics an inferior method of inquiry, but requires a re-orientation of focus on the multifaceted relationships and processes which can be extrapolated to form a comprehensive view of a given subject of study. The form of dialectics in Marx’s magnum opus, Das Kapital, is also unique to him; forming the basis of Marxism as a general socioeconomic method of analysis. David Harvey’s chapter on dialectics in Justice, Nature and the Geography of Difference provides clarity to Marx’s particular method of dialectics, which Marx implicitly argues for as a starting point for analysis in his published notes, Grundrisse, which were written prior to Das Kapital.
In Justice, Nature and the Geography of Difference, Harvey notes that Marx’s particular use of dialectics tends to be misunderstood as a pure adoption of Hegel’s view: thesis, antithesis, synthesis. However, as Harvey remarks, Marx “starts with Hegel, [but] achieved a radical materialist transformation of Hegel’s views (cf. Bhaskar, 1989: chapter 7). The effect is to dissolve the dialectic as a logic into a flow of argument and practices” (p.57). This is an important distinction to understand Marx’s use of dialectics throughout his work in Das Kapital as there are many instances of summation of Marx’s method through the interpretation of Hegel, but Marx’s dialectic is more nuanced then that. Harvey breaks down Marx’s dialectic method into a series of useful propositions to keep in mind as you read and attempt to interpret Marx. I will attempt to summarize these propositions and provide some examples to elucidate their meaning as I understand them. First, dialectics “emphasizes understanding of processes, flows, fluxes, and relations over analysis of elements, things, structures, and organized systems” (p. 49). For example, understanding the relationships between the factors of productions, e.g. labour, capital, commodities, as well the change in modes of production over time. Second, elements of a system are created out of flows, processes, and relations within the system and constitute the system. For example, capital (e.g. machines, land, and buildings) are created by the system, the flow of which constitutes the system of capitalism. Third, systems and the elements that make them up are in constant flux, changing over time creating new elements and new systems. Capitalism today is different from the capitalism of a century ago, or even a few decades ago. Fourth, everything can be deconstructed into other things. There are always more levels of understanding. Nation states can be broken down into territories, regions, etc. which can be broken down into municipalities and cities, which can be broken down into neighborhoods, precincts, buildings, streets, populations, etc. Fifth, the best way to understand the nature of something is to examine the processes and relationships it is involved in. For example, the best way to understand money is to examine how it is created (destroyed), its use, its circulation in the economy, and its relationship to institutions of banking, government spending (taxation), and finance. To better understand something, one should also look at the contradictions within it. For example, the currency of the state is simultaneously a liability, a promise to pay the face value printed on the currency, and a source of revenue by way of seignorage, the difference between the value of the currency and the cost to produce it which is born by the public. Next, space and time are not external factors to integral parts of any process, its elements, and the system they constitute. Parts and wholes constitute each other. For example, agents constitute an institution, and the institution constitutes the agents, they are not mutually exclusive. This also means they are interchangeable as subject and object. Harvey uses the example of individuals being both the subject of social change, in other words the cause of social change, as well the object of social change. And this said change or transformation arises out of contradictions, and is a continuous aspect of any system. Harvey’s tenth and eleventh propositions boil down to dialectics as itself a process which generates assumptions and theories which are subject to constant change and revision, space and time, and so one should attempt to envision alternative possibilities and revisit our assumptions. In Grundrisse, Marx is concerned with how to approach social analysis of political economy; implicitly advocating a dialectic approach. Marx begins with a critique of the typical bourgeois’ analysis, the Cartesian method, which presupposes the system and institutions, a sort of top-down approach (e.g. population, nation state, society, market), then abstracting general relationships which seemingly determine outcomes in the broader system. For example, the generalized relationship in neoclassical economics that supply and demand determine market prices. While an abstract model of supply and demand would confirm this prima facie relationship, such an analysis is shallow and ignores important social dynamics which factor into market prices. This relationship is then generalized to all markets. This analysis is flawed Marx’s argues, favoring a more bottom-up approach in the dialectic method which emphasizes the relationships between elements (e.g. labour, commodities, money, capital) and how they interact (e.g. production, exchange, trade) to draw a richer understanding of the whole (e.g. economy, global market, crises). Marx goes on a considerable rant here using some examples which are somewhat hard to follow, but his overall point is clear that he is advocating for a dialectical approach to socioeconomic analysis without explicitly stating as much and leaving us with a starting enumerated list by which one might proceed. This dialectical method as Harvey laid out would seem to provide some advantages over traditional Cartesian analysis which is predicated on the ceteris paribus assumption in order to extract relationships. Understanding that this is not the case that all elements of a system are in flux seems obvious, but leads to a predicament for the typical mathematical approaches of analysis. The challenge is defining legitimate quantitative methods consistent with a dialectic approach. Once upon a time, Yugoslavia represented the great hope for an alternative to Soviet-style central planning, what some referred to as the ‘third way.’ The Yugoslav experience, however, which resulted in its eventual collapse, prompted many social theorists to question the compatibility between social ownership and the market mechanism of resource allocation (Estrin, 1991; Flaherty, 1992). At the peak of its economic performance, between 1950 and 1961, the Yugoslav system was a period of transition which could be thought of as administrative self-management. The introduction of workers’ self-management granted autonomy to enterprises over decisions of production, wages, and even prices to an extent, but the federal government maintained administrative control over domestic prices, foreign trade, and investment. During this period, the economy boomed, experiencing the highest rapid growth in Europe. However, the market reforms introduced in 1961 exposed the country to market forces the country was not prepared for engendering business cycles, unemployment, inflation, and balance of payment deficits. The subsequent reforms of 1965 would double down on the market reform experiment resulting in a further deterioration in economic performance.
In this paper, I will walk through the various features of these reforms and problems that resulted from the market socialist experiment of Yugoslavia, as well as a comparison of performance of the system after. Section II will trace the political causes and rise of the workers’ self-management system in Yugoslavia, as well as the reforms by which it was instituted between 1950 and 1960. Section III follows the country’s evolution toward market socialism with the series of reforms between 1961 and 1973. Section IV will briefly address the BOAL reforms which can be viewed as a step backward from market socialism, but introduced bureaucracy into an already weak market structure; exacerbating republic relations and setting the stage for the country's inevitable collapse. Section V will conclude with consideration of the socialist features of these systems and propriety of such systems for a developing country like Yugoslavia. The rise of worker self-management Yugoslavia experienced catastrophic destruction during World War II. What little industrial development existed before the war had all but been wiped out by its end.[1] As it was the communist-led resistance which expelled the Axis powers in 1945, led by Marshal Josip Broz Tito, the Soviet Union was a natural ally. Given the urgent need to restore Yugoslavia’s industrial capacity and infrastructure, adopting the Soviet-style central planning, which had worked remarkably well in industrializing Soviet Russia, was met with little second thought by the Yugoslav communists. By the end of 1946, most large enterprises and industry were nationalized. Land reform followed shortly after redistributing farm land among peasants and beginning the process of collectivization. In 1947, the first five year plan based on the soviet model was introduced. By the end of the same year, productivity and output had surpassed pre-war 1938 levels (Allcock, 2000). By 1948, any remaining industries and retail businesses were nationalized; only artisan workshops, small retail outlets, and peasant farms were allowed to be privately owned. However, the era of central planning would be short lived as tension began to ferment between Soviet and Yugoslav leadership. Having liberated itself from the Axis powers with little assistance from the Soviets, Yugoslav President Tito behaved with an increasing sense of independence relative to the rest of the European socialist states of the Cominform. Increasing tensions with Western Allies resulted in several armed provocations, which Stalin opposed to prevent escalation of conflict with West. Yugoslavia also began to reconsider aspects of the Soviet central planning model, developing new strains of Marxist thought critiquing the political and economic structure of the Soviet Union. It would also begin developing an economic plan independently of Moscow. Political tensions eventually culminated in the expulsion of Yugoslavia from Cominform in 1948, at the behest of Stalin, forcing Yugoslavia into the position of the only independent socialist state in Europe. Stalin thought at the time that Soviet disapprobation of the Tito regime would cause it to lose favor with the people; Stalin underestimated the popularity of the leader that liberated the Yugoslav people from the Axis Powers. When that did not work, Stalin allegedly ordered Tito to be assassinated. Tito survived five assassination attempts on his life (Medvedev et al. 2003). A major consequence of the expulsion from the Soviet Bloc was the need to find new trading partners as Yugoslavia was dependent for nearly half of its imports from them at the time.[2] The break up also coincided with the onset of the Cold War, and Western Allies were quick to notice the fissure with the Soviets. Replacement trade partners were acquired fairly quickly and with no “indication that the terms of trade...were worse than those which they were forced to abandon” (Allcock, 2000). Yugoslavia also received frequent military and financial aid from the West, especially from the United States, increasing its influence on the country. Another consequence of the break up with the Soviet Union was to strengthen the independence of the country. The newly developing strains of Marxist thought now had to reevaluate central planning entirely. This predicament set Marxist theoreticians off in what Hovat (1976) called a “search for authentic socialism. They started by going back to Marx and Engels for guidance. As Hovat (1976) notes, “Marx and Engels maintained that commodity relations and the market would disappear along with private ownership; there would be comprehensive planning: production and distribution would be organized without the mediating role of money.” For a long time it was thought comprehensive planning meant central planning by the state and no private ownership meant state ownership. However, Marx and Engels had never drawn that conclusion. On the contrary, the state was the instrument of bourgeoisie class domination over the proletariat which Marx and Engels, especially Engels, denounced declaring “it would wither away in a classless society,” and, in its stead, “talked about the self-government of producers” as the owners of the means of production (Horvat, 1976). “Far from being truly socialist, state ownership turned out to be a remnant of capitalism, characteristic of backward countries that are building socialism and likely to generate dangerous bureaucratic deviations” (Horvat, 1976). This revelation led to the belief that workers’ self-management should replace the state apparatus, and the state would eventually no longer have a role in the operations of the economy. Worker self-management was introduced in 1950 with the passage of the Law on the Establishment of Workers’ Management over Enterprises and Higher Economic Associations. Employees now played a key role in decision-making of the enterprises. According to Estrin (1991), workers’ councils were formed to appoint managers, determine internal pay structures, recruitment procedures, as well as the allocation of profits between reinvestment and wage increases. Workers did not own the means of production however. Plants and equipment were considered to be assets of the state, but workers did have real autonomy not found in any other socialist economies of the time. In 1951, the legislature passed the Law on Planned Management of the National Economy which replaced the central planning with indicative planning by means of mandatory proportions. The mandatory proportions revolved around the wage fund to ensure some level of profits above input and wage costs. These regulations also set the minimum use of output capacity, and required investment in capital formation. In this way, the central government could regulate consumption and investment without administrative directives. The reforms also replaced the former Federal Planning Commission by two new bodies, the Federal Institute for Economic Planning and the Federal Statistical Institute, initiating a decentralization process which devolved many administrative functions to the republic level (Allcock, 2000). The 1952 reforms included liberalization of prices and foreign trade with a new exchange rate and tariff regime, and laid the foundation a commercial legal code (Estrin, 1991). The state also retained considerable control over investment allocation, which continued to be financed through high taxes on enterprises. It is also important to consider foreign trade in Yugoslavia at this time. Being a small economy with no monopoly of natural resources to export, such as oil, Yugoslavia was dependent on foreign sources for capital goods. Thus, its independence from the Soviet Bloc required Yugoslavia to integrate itself into the international community. This meant more pressure to open itself up to international trade as well. Prior to the 1952 reforms, the state monopolized foreign trade in accordance with its central planning objectives. The federal government acted as the middleman between Yugoslav enterprises and foreign trading partners requiring special licenses by the Ministry of Foreign Trade. The official exchange rate was established at fifty dinars, the Yugoslav national currency, to one dollar. Goods were exchanged at various parities established through the so-called Equalization Fund. The purpose of the fund was to bridge the difference between domestic, or planned, prices within Yugoslavia and external prices in the foreign market; which in practice, insulated Yugoslav enterprises from real price competition. After the 1952 reforms, the decentralization of planning and abolition of directorates left foreign trade decisions to enterprises. Foreign trade licenses lost their importance and price liberalization changed the role of prices to become stronger comparative measures of productivity and efficiency. The changes proved more challenging than expected. Yugoslav markets were weak and enterprises could not compete with the foreign sector (Adamović, 1982). A new mechanism was needed to absorb the shocks. The Equalization Fund was replaced with a new import-export coefficient system to bridge the gap between domestic and foreign prices, but amounted to a subsidy and tariff system to reward exports and discourage imports. If the coefficient was greater than 1.00 for this type of transaction, the Yugoslav firm received a subsidy. If the coefficient was below 1.00, it amounted to a tariff. (Adamović, 1982).[3] Despite these adjustment mechanisms, current account imbalances began to show themselves as imports grew faster than exports. Between 1953 and 1960, the balance of payments deficit was around three percent of the gross material product (Estrin, 1991). Through its transition to self-management, and eventually market socialism, Yugoslavia performed well economically. In 1957, a new five year plan was introduced. The plan of course differed from the 1947 plan in a clear shift from the direct central planning to the “indicative” approach. The plan achieved its targets within four years, a period which was referred to as “the great leap forward.” Presented in Table 1 are comparative growth figures between 1951 and 1990 provided by Gardner (1997). Average annual growth in real gross national product (GNP) between 1951 and 1960 was 6.2 percent, outperforming the Soviet Union and OECD averages for the same time period and thereafter until the 1980s. Although growth was spectacular during the period, there were other indications of instability. Table 2 presents average consumer price inflation. Yugoslavia had higher average [1] According to Allcock (2000), those losses included 82,000 buildings destroyed, 35 percent of its industrial capacity, and 50 percent of railway tracks, 77 percent of locomotives, and 84 percent of wagons. Approximately 3.5 million Yugoslav citizens were homeless. Yugoslavia was also the largest recipient of aid by the United Nations Relief and Rehabilitation Administration, receiving $415 million or one-fifth of total payments to European economies between 1945 and 1947. [2] For some imports, dependency was much greater: All of Yugoslavia’s coal and coke imports, 80 percent of its pig iron, 60 percent of its petroleum products, four-fifths of its fertilizer requirements and virtually all specialized machinery, steel tubes, railway cars and locomotives came from the Soviet Union and its satellites. Now trade from this source dried up completely (Allcock, 2000). [3] An example of how the coefficient system worked is provided by Adamović (1982). At this time the official exchange rate was 300 dinar per one dollar. If the coefficient was 1.20, an exporter selling goods abroad would receive 360 dinars (300 dinar x 1.20). If the coefficient was below 1.00, say at 0.60, then the exporter would receive 180 dinar. There are many underlying factors which contributed to both the financial crisis and the Great Recession. The trigger of crisis and recession begins with the burst of the housing bubble in mid-2007. As subprime mortgage default rates began to accelerate, overly leveraged financial institutions holding risky products such as mortgage backed securities (MBSs) and collateralized debt obligations (CDOs) triggered a crisis of asset devaluation. Financial institutions holding both MBSs and CDOs and financial derivative products such as default swaps took a double hit inducing a liquidity crisis and immediate default risk. According to Crotty (2008), there are two major underlying causes which led to the financial crisis. The underlying causes are as follows: The first was bad theories such as the efficient financial market theory, and, generally, New Classical Macroeconomics. Such theories made assumptions at odds with the real world. For example, efficient market theory included assumptions such as: a) investors can determine the true distribution of risk; b) liquidity is never a problem; c) markets maintain stable equilibrium; d) default is rare; e) agent borrowing is limitless at risk-free interest rates. All of these assumptions turned out to be false. The second underlying cause was the “New Financial Architecture” which primarily consisted of flawed institutions and erroneous practices related to aggressive risk taking, over leveraging, and light government regulation. These practices inevitably led to stimulated aggressive risk taking (not perceived as risky), pushed some security prices to unsustainable levels, dramatically raised systemic leverage and thus, to use Minsky’s phrase, financial fragility (the vulnerability of the financial system to problems that appear anywhere within it), and facilitated the creation of unprecedented financial market complexity and opaqueness. They also led to a secular rise in the size of financial markets relative to the rest of the economy, and created the preconditions for a global financial crisis (Crotty, 2008). Once the crisis was underway, a liquidity trap ensued. Despite the federal funds rate being dropped nearly to zero, credit dried up in the interbank market requiring intervention from the Federal Reserve to facilitate loans and buyouts. Credit also dried up for the non-corporate business sector, which included smaller businesses despite banks sitting on large sums of cash and reserves unwilling to risk making bad loans (Pollin, 2012).
Businesses and financial firms were not the only ones who were overleveraged, households also became debt constrained. From 2000-2006, households experienced a sharp rise in debt primarily due to new borrowing (95 percent of which was comprised of mortgage debt), but also in part due to a rise in debt servicing from real interest rate growth outpacing real income growth (Mason and Jayadev, 2012). The severe devaluation in housing prices after the burst of the housing bubble resulted in households no longer able to borrow against their homes, and instead had to start repaying their mortgage debt (if possible). Although borrowing turned negative, there was little reduction in debt ratios for households as real income growth stagnated relative real interest rate growth (Mason and Jayadev, 2012). Between 2006 and 2008, household wealth plummeted by 25 percent ($17.6 trillion decrease), which according to research by Maki and Columbo (2001), assuming a modest wealth of effect of 3 percent, would reduce household spending by approximately $525 billion (Pollin, 2012). Such a massive reduction in spending due to a loss of wealth combined with a debt constrained household sector depressed consumer demand, and prolonged both the recession and the recovery after (Mason and Jayadev, 2012; Pollin, 2012; Eggertson and Krugman, 2012). There is also some empirical evidence suggesting the rise of income inequality since the 1970s are directly related to rising household debt. For example, Van Treeck and Sturn (2012) reference Pollin (1988) and Christen and Morgan (2005) empirical studies which identify a negative correlation between declining real median incomes and household debt and a positive correlation between increasing income inequality and household debt, respectively. The conclusion of these economists and others, essentially, is that consumers have used credit to compensate for their lack of income growth since the 1970s (see Rajan, 2010; Pollin 1988, 1990; Van Treeck and Sturn, 2012). While the trend in income inequality has persisted since the 1970s, the Great Recession has exacerbated the problem with the 1 percent receiving 93 percent of total income growth in 2010 according Saez (2012) (Pollin, 2012). And rising income inequality has only continued to get worse since then. Piketty, Saez, and Zucman (2016) report that “Income has boomed at the top: in 1980, top 1% adults earned on average 27 times more than bottom 50% adults, while they earn 81 times more today. The upsurge of top incomes was first a labor income phenomenon but has mostly been a capital income phenomenon since 2000. The government has offset only a small fraction of the increase in inequality.” While the financial sector and upper strata of income earners have recovered, the rest of the country is still struggling with anemic growth and continued stagnation in wage growth; ironically, as we debate more tax cuts for the rich. References Crotty, J. (2008). Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’. University of Massachusetts - Amherst, Economics Department Working Paper Series No. 2008-14. Eggertson, G. B. and Krugman, P. (2012). Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo approach. The Quarterly Journal of Economics. 1469–1513. doi:10.1093/qje/qjs023 Mason J. W. and Jayadev, A. (2012). Fisher Dynamics in Household Debt: The Case of the United States, 1929-2011. Piketty,T., Saez, E. and Zucman, G. (2016). Distributional National Accounts: Methods and Estimates for the United States. The National Bureau of Economic Research. NBER Working Paper No. 22945. Pollin, R. (2012). The Great U.S. Liquidity Trap of 2009-11: Are We Stuck Pushing on Strings? Political Economy Research Institute. Working Paper Series No. 284. Van Treeck, T. and Sturn, S. (2012). Income inequality as a cause of the Great Recession? A survey of current debates. International Labour Office - Geneva: ILO, 2012. Conditions of Work and employment Series No. 39, ISSN 2226-8944 ; 2226-8952. |
AUTHORAaron Medlin is a PhD student at the University of Massachusetts Amherst studying macroeconomics of private debt, monetary economics, international finance, and comparative economic systems. Archives
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