- Email: [email protected]
Liberalization and entrepreneurship: Dynamics of reform in socialism and capitalism
JOURNAL
OF COMPARATIVE
ECONOMICS
l&720-722
(199
1)
BRANKO MILANOVIC, Liberalization and Entrepreneurship: Dynamics of Reform in Socialism and Capitalism. Armonk: M. E. Sharpe, Inc., 1989. 182 pp., $35.00. Privatization of state socialist economies in Eastern Europe and the Soviet Union is underway but there is very little theory available to assist policy makers and politicians. The issue of ownership was neglected for quite a long time, in part because of the dominant perception that the trend in modern economies is away from well defined property rights. Moreover, as state socialism seemed a permanent fixture, there was little incentive to study ownership changes. The great value of Milanovic’s book is not only that it addressed the question of privatization in Eastern Europe and the Soviet Union well before those countries embarked on the dismantling of state sectors. Even more impressive is the strength and depth of its theoretical treatment of the privatization issue and the author’s ability to identify the social forces that are likely to shape ownership reforms in the coming years. The first part of this valuable book concentrates on identification of basic modes of production, defined as different ways of combining (a) the modalities of ownership of capital and labor and (b) exercise of the entrepreneurial function. The major distinction is between modes in which labor has no right of ownership, i.e., slavery, feudalism, the Asiatic mode of production, and Chinese communes, and those where legal freedom of labor is guaranteed. The book is exclusively concerned with the latter as the most relevant, particularly in its two dominant forms: capitalism and state socialism. Milanovic also assessesthe comparative efficiency of various modes of production, where he argues that the condition for maximum efficiency in the application of capital or labor is that the legal owner of the resource also determines its use. This leaves only two types of production organization as fully efficient: cooperatives in which labor is self-employed and the so-called entrepreneurial system, but not capitalism itself, since private capital plays an entrepreneurial role but labor is hired out. The above argument is along the lines formulated more recently by Kornai (1990). His argument, however, is that strong systems are those where state control is combined with public ownership or where private property is accompanied by market coordination. Weak modes, hard to sustain, are those where the state owns capital but is not involved in the coordination 0147-5967/91 $3.00 Copyright 0 1991 by Academic Press, Inc. All rights of reproductmn in any form resewed.
720
BOOK
REVIEWS
721
process, i.e., the certain forms of second economy or black market under state socialism, or labor-managed enterprises with state ownership as in market socialism. The second part of the book looks into the politics of the currently unleashed liberalization, a movement away from systems in which the state is directly involved in production, in both capitalist and state socialist economies. Milanovic correctly argues that closest to state socialist system are those that preserve state ownership, i.e., the labor-managed model where state capital is hired out and workers play an entrepreneurial role, and public corporations, with hired state capital and with labor being hired too. Proof of that can be found in the current pattern of reforms, where the struggle, as in the case of Poland, is between bureaucracies pushing for treasury-owned joint stock companies and workers demanding controlling power for themselves (see Poznanski, 199 1). It follows that none of the forms that resemble state socialism can bring Eastern Europe or the Soviet Union close to the efficiency levels of the developed capitalist economies. This has already been a source of frustration to some noncommunist leaders in the region, eager for an immediate transition to the capitalist system. For instance, in the case of Poland, the impatient, noncommunist government of Bielecki decided in mid 199 1 to speed up transfer of assets to individual owners through a voucher system. In the third part, Milanovic looks into possible outcomes of the pressure on Eastern European liberalization. Milanovic finds it very unlikely that the workers will succeed in demanding the property structure of their choice, even if they acquired as much political power as workers have in Poland. This is because the working class intrinsically appears unable to lead a successful movement to overthrow any system and also because their preferences are in conflict with those of other social groups (p. 90). However, one must admit the greater the political power of workers, the more likely that their programs will be partially recognized, i.e., elements of co-determination, pro-union regimes, limited employee stocks. Most likely to succeed, Milanovic argues, are technocrats, this being consistent with long term trends in modem economies and in line with the arguments made by Schumpeter (1947). With the success of technocrats, Eastern Europe and the Soviet Union will redesign economic systems along liberal capitalist lines. Their victory will also put an end to what the author calls the fragmentation of technocratic elites caused by the spread of communism since 19 17. At the same time, this will provide for the reduction, if not necessarily the elimination, of inter-state conflicts (p. 47). While the book addresses the international implications of liberalization, it does not deal extensively with the role of international forces in shaping that process. The approach taken is basically to look at the progress of liberalization from inside, i.e., situations, needs, and conflicts within a given econ-
722
BOOK REVIEWS
omy. What is becoming clear, however, from the ongoing reforms in postcommunist Eastern Europe and the Soviet Union is that these countries are to a large degree being liberalized from outside, rather than liberalizing themselves, as stressed in a recent work by Milanovic (1990). REFERENCES Komai, Janos, The Road to a Free Economy. New York: Norton, 1990. Poznanski, Kazimierz, “Privatization of the Polish Economy: The Problem of Transition.” Soviet Studies (in press). Milanovic, Branko, “Privatization in Post-Communist Societies.” Washington, D.C.: The World Bank, August 22, 1990 (mimeo). Schumpeter, Joseph, Capitalism, Socialism, and Democracy. New York: Harper Colophon Books, 1947. KA~IMIERZ Jackson School of International Seattle, WA 98195
Studies University of Washington
POZNANSKI
OF COMPARATIVE
ECONOMICS
l&720-722
(199
1)
BRANKO MILANOVIC, Liberalization and Entrepreneurship: Dynamics of Reform in Socialism and Capitalism. Armonk: M. E. Sharpe, Inc., 1989. 182 pp., $35.00. Privatization of state socialist economies in Eastern Europe and the Soviet Union is underway but there is very little theory available to assist policy makers and politicians. The issue of ownership was neglected for quite a long time, in part because of the dominant perception that the trend in modern economies is away from well defined property rights. Moreover, as state socialism seemed a permanent fixture, there was little incentive to study ownership changes. The great value of Milanovic’s book is not only that it addressed the question of privatization in Eastern Europe and the Soviet Union well before those countries embarked on the dismantling of state sectors. Even more impressive is the strength and depth of its theoretical treatment of the privatization issue and the author’s ability to identify the social forces that are likely to shape ownership reforms in the coming years. The first part of this valuable book concentrates on identification of basic modes of production, defined as different ways of combining (a) the modalities of ownership of capital and labor and (b) exercise of the entrepreneurial function. The major distinction is between modes in which labor has no right of ownership, i.e., slavery, feudalism, the Asiatic mode of production, and Chinese communes, and those where legal freedom of labor is guaranteed. The book is exclusively concerned with the latter as the most relevant, particularly in its two dominant forms: capitalism and state socialism. Milanovic also assessesthe comparative efficiency of various modes of production, where he argues that the condition for maximum efficiency in the application of capital or labor is that the legal owner of the resource also determines its use. This leaves only two types of production organization as fully efficient: cooperatives in which labor is self-employed and the so-called entrepreneurial system, but not capitalism itself, since private capital plays an entrepreneurial role but labor is hired out. The above argument is along the lines formulated more recently by Kornai (1990). His argument, however, is that strong systems are those where state control is combined with public ownership or where private property is accompanied by market coordination. Weak modes, hard to sustain, are those where the state owns capital but is not involved in the coordination 0147-5967/91 $3.00 Copyright 0 1991 by Academic Press, Inc. All rights of reproductmn in any form resewed.
720
BOOK
REVIEWS
721
process, i.e., the certain forms of second economy or black market under state socialism, or labor-managed enterprises with state ownership as in market socialism. The second part of the book looks into the politics of the currently unleashed liberalization, a movement away from systems in which the state is directly involved in production, in both capitalist and state socialist economies. Milanovic correctly argues that closest to state socialist system are those that preserve state ownership, i.e., the labor-managed model where state capital is hired out and workers play an entrepreneurial role, and public corporations, with hired state capital and with labor being hired too. Proof of that can be found in the current pattern of reforms, where the struggle, as in the case of Poland, is between bureaucracies pushing for treasury-owned joint stock companies and workers demanding controlling power for themselves (see Poznanski, 199 1). It follows that none of the forms that resemble state socialism can bring Eastern Europe or the Soviet Union close to the efficiency levels of the developed capitalist economies. This has already been a source of frustration to some noncommunist leaders in the region, eager for an immediate transition to the capitalist system. For instance, in the case of Poland, the impatient, noncommunist government of Bielecki decided in mid 199 1 to speed up transfer of assets to individual owners through a voucher system. In the third part, Milanovic looks into possible outcomes of the pressure on Eastern European liberalization. Milanovic finds it very unlikely that the workers will succeed in demanding the property structure of their choice, even if they acquired as much political power as workers have in Poland. This is because the working class intrinsically appears unable to lead a successful movement to overthrow any system and also because their preferences are in conflict with those of other social groups (p. 90). However, one must admit the greater the political power of workers, the more likely that their programs will be partially recognized, i.e., elements of co-determination, pro-union regimes, limited employee stocks. Most likely to succeed, Milanovic argues, are technocrats, this being consistent with long term trends in modem economies and in line with the arguments made by Schumpeter (1947). With the success of technocrats, Eastern Europe and the Soviet Union will redesign economic systems along liberal capitalist lines. Their victory will also put an end to what the author calls the fragmentation of technocratic elites caused by the spread of communism since 19 17. At the same time, this will provide for the reduction, if not necessarily the elimination, of inter-state conflicts (p. 47). While the book addresses the international implications of liberalization, it does not deal extensively with the role of international forces in shaping that process. The approach taken is basically to look at the progress of liberalization from inside, i.e., situations, needs, and conflicts within a given econ-
722
BOOK REVIEWS
omy. What is becoming clear, however, from the ongoing reforms in postcommunist Eastern Europe and the Soviet Union is that these countries are to a large degree being liberalized from outside, rather than liberalizing themselves, as stressed in a recent work by Milanovic (1990). REFERENCES Komai, Janos, The Road to a Free Economy. New York: Norton, 1990. Poznanski, Kazimierz, “Privatization of the Polish Economy: The Problem of Transition.” Soviet Studies (in press). Milanovic, Branko, “Privatization in Post-Communist Societies.” Washington, D.C.: The World Bank, August 22, 1990 (mimeo). Schumpeter, Joseph, Capitalism, Socialism, and Democracy. New York: Harper Colophon Books, 1947. KA~IMIERZ Jackson School of International Seattle, WA 98195
Studies University of Washington
POZNANSKI