Illyrian economics

markets are freer in socialism than capitalism

Things are heating up.

I got to the part in Joanna Bockman’s Markets in the Name of Socialism where she describes the basic outline of Yugoslavia’s socialist economic model, which ran from 1956 until oil and stagflation crises of the 1970s and 1980s. It’s really interesting!

In general I’m interested in forging socialist concepts for finance so that when I read the business news I can know where I stand.

The Yugoslavian model, or what Berkeley economist Benjamin Ward called ‘Illyrian economics’ (after the pre-Roman peoples that occupied the Balkans) is really great for that purpose.

Before I get to the outline, it’s important to note that the World Bank deemed Yugoslavian socialism successful beyond any doubt in 1975. The official reviewer said:

Still fewer would would take issue with the report’s observations that economic problems thought to be inherent to the operation of the workers’ managed firm—including inadequate levels of reinvestment, excessive personal income payments, a bias towards capital-intensive techniques of production, and allocative inefficiency resulting from capital immobility—are either nonexistent or capable of resolution through appropriate compensatory legislation and policy instruments.

Pretty ringing endorsement from the World Bank. Thinking about what happened to the Yugoslav federation thereafter, you gotta wonder if the model was just too good.

High production, low costs

The basic features of the Illyrian model are:

1. Try to minimize the (average) costs of production, and equate prices with the (marginal) costs of production.

2. State owns means of production, including capital and natural resources.

3. All residents receive a social dividend in addition to their income.

4. Workers self-manage firms, which compete in free markets (worker councils as entrepreneurs).

5. Local banks controlled by municipalities handle finance.

Statements 2 - 4 make sense for socialism. There isn’t private property. Rather than shares to private shareholders who buy and sell on a stock market, firms produce social dividends that get dispersed to residents.

And worker councils run and control firms. There are managers in each firm, but they merely implement the decisions that the workers make (because the workers have to get back to work). It’s what they called “self-management,” and was a cornerstone of the model. (Jacobin puts it in perspective here.)

I wracked my brain (and talked a lot with Aleksandra Perisic, who got me onto this subject in the first place—we’re doing a reading group) to understand the first statement about prices and costs.

The average cost of production is the total cost of production divided by the total number of things you produced (if 1,000 units are produced at a total cost of $50,000, the average production cost per unit is $50).

The marginal cost on the other hand is the amount total costs changes by producing one more unit of stuff.

To illustrate, suppose ABC Company produces 10 units at a cost of $525. The unit cost is $52.50. However, if the firm produces one more unit, only the variable costs increase. Fixed costs normally remain unchanged. If the marginal cost is $25 and ABC Company produces one additional unit, total costs increase to $550. This results in a lower unit cost of $50.

So the Illyrian model says that firms should minimize their average costs of production. That means they seek to spend as little as possible to make as much as they can. Be efficient.

Further, they should set their prices as equal to the marginal cost of production. That means they should charge per unit what it takes to make one extra unit.

To me, at this moment (in my project trying to understand economics) this all means that firms should focus on making as much stuff as they can for as little cost as possible.

And what should guide their pricing—their bottom line—is not how much they can get for their goods, but rather how well they’ve managed their costs. They all bring their goods to market and then compete. “Maximizing production, minimizing cost,” as Branko Horvat claimed.

The Illyrian bottom-line is therefore not profit margins, but production margins. Profits come in, but those go immediately back into the company and then into the social divided.

Laissez-faire socialism

The combination of worker self-management, state-owned capital and resources, and production-oriented bottom-line makes for “the superiority of independent enterprises interacting on a fully competitive global market.” It’s laissez-faire socialism

In fact, some economists like Jaroslav Vanek and Ward claimed that markets in socialism would be freer than in capitalism, because you’d have fewer monopolies. Plus the state has to intervene less and with firms starting up all the time, the markets produce more optimal results—so there’s purer competition.

Note that this market socialism is not Keynesianism, which is state-managed capitalism. In Keynesianism there’s private property. Capitalists own and control firms. Workers work for capitalists. Profits go to shareholders. But there’s a state that intervenes on behalf of everyone when it makes sense.

I’d like to end by saying that Bockman isn’t blind to the uneven complexity of the model, and neither am I. I don’t think it’s a panacea. It was successful under very specific circumstances (Tito held absolute power, eg) and had its pitfalls (self-management has serious flaws).

But what lasseiz-faire socialism does, at least, is lay a foundation to think about economics on socialist terms. And bot just economics, but neoclassical economics.