The Yugoslav Economy 101

This past week we had the pleasure of sharing dinner with Professor Kadrija Hodzic and his wife Alinka. Kadrija is the Editor of Tranzicija, an economic journal that explores issues surrounding economies undergoing transition. Tranzicija was founded in 1999 as a platform for economists who were eager to critically assess the transition from self-managing socialism to free market capitalism since the death of Josep Broz Tito. Among its first editors was Branko Horvat, the Jewish-Croatian economist who had a larger hand in explaining and shaping the Yugoslav economy than any other economist. But it has enjoyed a team of editors since 1999 from Slovenia, Croatia, Serbia, Montenegro, and Albania who are among the most distinguished economists in the former Yugoslavia.

It has been a genuine pleasure to get to know Kadrija and Alinka, and not only because of our shared profession. They are the only Bosnians outside of clergy who share a genuine interest in sympathetically discussing religion and spirituality. They are both poets. And they both share our enjoyment of good food, music, and nature.

But Tuesday was a special treat because we brought Kadrija our white board and he promptly laid out in broad strokes the prototypical self-governing enterprise in Tito’s Yugoslavia. Here’s how it worked. Any final product is made up of several factors of production. In the example Kadrija used, these factors were cultivating, milling, baking, and selling bread. Each of these factors is a self-governing enterprise. All of the enterprises together establish the value they contribute to and derive from selling the final product. But Tito was a communist. And just how was this system communist?

Well, to begin with the workers own their enterprise. That is to say, when their product (bread, for example) goes to market, they share the proceeds with the state. The workers also own the physical enterprise socially: the farm, the mill, the bakery, and the shop. Beyond this, however, the communist party is also represented on “the shop floor,” so to speak, of each enterprise. The communist party representative is responsible for reporting back to the party about how the enterprise is operating. But the representative does not manage the enterprise. I am not sure how management was initially chosen, but Kadrija was clear about what happens when a management team is not performing well. In that case, the communist party steps in and another team is selected. This means that so long as an enterprise is doing well and prospering, the party is happy to assume a posture of non-interference. But if things go badly, then the party interferes usually by appointing someone to take over the enterprise.

This was not always how things worked. In the immediate aftermath of World War II and the defeat of the German occupiers by Maršal Tito’s anti-fascist Partisans, Yugoslavia adopted the same “soviet” system along with all of the other soviet socialist republics. But, then, in 1952, Tito told the ComIntern that it was going to chart a different course. Of course, this entailed purging those voices from the Yugoslav Communist Party who were more sympathetic with Stalin and then with Khrushchev than they were with Tito. But it also meant that Yugoslavia was poised from 1952 to 1965 to ride a wave of economic growth unparalleled elsewhere in the communist world.

As Patrick Patterson shows (Bought and sold : living and losing the good life in socialist Yugoslavia 2011), this growth created something else unprecedented in the communist world: a genuine consumer society whose members were free to travel anywhere they liked, buy anything they liked, produce anything they liked, and consume anything they liked. And, yet, because they owned their enterprises and returns from sales collectively, they were not only socialist, but genuinely communist. So what went wrong?

Here stories diverge. According to Professor Hodzic, the real problem lay in the fact that workers owned property socially. For, how can “ownership,” which is by its nature private, be simultaneously “public.” We can think of this problem as follows. If we look at the illustration Professor Hodzic drew out on our white board, you can appreciate that each collectively owned and operated enterprise will want to place the highest possible value on its produce and its assets. Its social “property” then bears a high value. So, for example, the farm sells its produce to the mill at the highest price possible; the mill then sells its milled grain to the bakery at the highest price possible; and so on. At each stage in production, then, the value of the collective social property increases exponentially. And, yet, at the end of the day, someone — in fact the workers — will buy a loaf of bread able to bear the cost of all of these stages of production extending all the way back to the farm. In order for workers to bear the relatively high cost for commodities, they must be sufficiently compensated. And this means that economic growth must increase at a rate not greater than wage and price expansion.

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This, in fact, is precisely what happened between 1952 and 1972. In other words, the implicit inflation was concealed behind unprecedented economic growth. According to Professor Hodzic, however, this was a ticking time bomb. Only if workers had been subject to the constraints imposed by real property ownership, where the value of assets cannot be underwritten by national economic growth and inflation, would they have had an incentive to hold prices in check. Instead, Yugoslavians had to bear some of the highest prices anywhere in Europe.

Unfortunately, this story largely ignores the real growth and real efficiencies producing that growth, focusing instead on the property and price mechanism. So, another way to inflect the period 1952 through 1972 is through the metric of time. Yugoslav workers were becoming incredibly efficient. But just as elsewhere in non-socialist and non-communist societies, Yugoslavs elected to spend their efficiency not by seizing time back from working time, transferring the difference to leisure time, but by plowing these efficiencies back into production and consumption. Short of the margin — i.e., short of market saturation — this means that prices and wages are safe so long as rates of growth continue unabated. Yet, once the margin is reached, continued growth can only lead to a decline in overall rates of profit, prices, wages, and so on.

This story differs from the story Professor Hodzic related because, where his story focused on property ownership, a focus that presumably would hold true only for economies with socialized property ownership, this story focuses on time-labour-value relations, relations that would hold good in the rest of the world as well. And, as a matter of fact, when the Yugoslav economy began to sour in the late 1960s, so too did the economies of Europe, North America, and Asia. And this would strongly suggest that the cause for these problems did not lie in property relations per se, but rather in value relations.

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What could policy makers have done in the late 1960s as rates of profit began to decline? They could have “cashed in” on the tremendous efficiencies produced by labour in the 1950s and 1960s, pulling labour from the labour market, but maintaining sufficient production of wealth to satisfy the needs and wants of the consuming public. But this would have required the de-coupling of private ownership from value. Note that asset values everywhere began to plummet in the late 1960s and early 70s. And this shows that even where property was “socially” owned, it was nevertheless pegged to labour-time-expended. This meant that as full production (and in fact overproduction) was reached, this by necessity meant a decline not only in labour value, but also in property value.

If, by contrast, property were completely removed from the equation — if it reverted to material wealth — we could safely withdraw labour from the market while retaining wealth.

This is not what happened. What happened instead was that throughout the 1960s western investors continued to believe in the Yugoslav miracle, plowing millions of dollars into the Yugoslav economy. With the slowdown in the world economy, this miracle began to evaporate. But then in 1972, Nixon pulled the Dollar from the Gold Standard, releasing another flood of cheap US dollars. Tito snapped up this “free” money. And so, the Yugoslav economy gained a second life.

Did anyone during this period ask what would happen, as was almost certain, when the US reigned in its dollar supply? Did anyone wonder what would happen to the Yugoslav debt? I don’t know. I am eager to find out.

What is certain is that all of the efficiencies of the 1950s and 1960s were completely lost, sold as near worthless assets and junk bonds during the 1980s and 1990s. Would private ownership have prevented this mass privatization of public assets? By definition, it seems unlikely.

In any event, I will have the pleasure of continuing to explore these issues as the most recent addition to the editorial board of Tranzicija.