Did Horvat Answer Hayek? The Crisis of Yugoslav Self-Management

David L. Prychitko teaches in the Department of Economics at the State University of New York at Oswego. He was a recipient of a Fulbright Grant at the Philosophical Faculty of the University of Zagreb in Yugoslavia, from January-July 1989.

At a time when one Communist regime after another is toppling in Eastern Europe, Yugoslavia gets remarkably little press. We watched with excitement the collapse of the Berlin Wall, the rise of poet-statesman Vaclav Havel in Prague, the fall of the Party in Budapest, and the bloody fate of Nicolae Ceausescu in Bucharest. We haven’t heard much about Yugoslavia. The sweeping changes in the rest of Eastern Europe seem to be passing Yugoslavia by. But don’t let that fool you. The peoples of Yugoslavia, like those of the neighboring East Euro pean countries, are calling for, and slowly attaining, an end to the monolithic Communist Party, and the introduction of private property rights and a full market economy.

Yugoslav-style socialism, with its ideological emphasis on decentralization and workers’ self-management of socially owned resources, was once touted as a fundamental, more humane alternative to the command planning of the Soviet Union. Indeed, Yugoslavia was the first country to break away from Stalin’s yoke of power back in 1948 to create a perestroika of its own. Under Tito’s leadership, Yugoslavia attempted a massive decentralization toward workers’ self-managed socialism, which began in 1950 with the adoption of the Basic Law on Movement Of State Economic Enterprises and Larger Economic Associations bytheir Working Collectives. The central planning bureaucracy would be dismantled. State property would be erased. In Tito’s words,


The takeover of the means of production by the state has not made accomplished fact of the fighting slogan of the workers’ movement, “Factories to the Workers,” because the slogan “Factories to the Workers, Land to the Peasants” is more than just an abstract propagandistic battle cry. It contains deep and weightly [sic] meaning. It sums up the entire program of socialist relations in production; it speaks of social ownership, it speaks of the rights and duties of workers and—therefore—can and must be accomplished in practice if we want indeed to construct socialism.


Enlightened workers’ councils would be in charge of planning society from the bottom up, rather than the top down. “Social” ownership would replace state ownership. No longer the legal privilege of private capitalists or state bureaucrats, the means of production would officially be the property of society at large. State enterprises were to be freed from the hands of an oppressive bureaucracy and handed over to workers’ councils; a market for consumers’ goods would emerge, reducing the shortages and long queues that plagued other East European countries. Socialism would no longer restrict and destroy democracy. It would embrace it in the workshop, factory, and planning bureau.

The heyday of “market socialism” had arrived.

Claims of Rationality

The Austrian economists apparently suffered an intellectual beating. Seventy years ago Ludwig von Mises argued that socialism was impossible. By abolishing unhampered market exchange of the means of production—and thus market prices that reflect underlying economic scarcities—the central economic planners, Mises argued, would lack the knowledge necessary to rationally coordinate the economic system. They would stand confounded in the face of a “bewildering throng of economic possibilities,” as Mises so eloquently put it. F. A. Hayek agreed with Mises, and would later add that comprehensive economic planning, even if it begins with the most democratic and humane aspirations imaginable, must lead to a totalitarian dictatorship, “because dictatorship is the most effective instrument of coercion and the enforcement of ideals and, as such, essential if central planning on a large scale is to be possible.”

The Austrians wielded a double-edged sword. One side chopped to pieces the belief that central economic planning was possible in the complex, modern world. The other side cut through the veil of socialist democracy, and exposed the fact that any democratic ambitions must ultimately be abandoned in the utopian struggle to overthrow the market system. Or so the Austrians thought.

It seemed that, by the 1960s, Yugoslavia had finally proved that sword powerless. The Yugoslav model of decentralized socialism, which allowed markets for consumer goods as well as limited resource markets, along with its emphasis on democratic planning and management by workers, was considered by many comparative systems economists to be the final answer to Mises and, even more so, to Hayek.

At that time Yugoslavia enjoyed a relatively higher degree of economic growth compared with its neighbors behind the Iron Curtain. Queues for consumer goods dwindled. Workers were officially in charge of their workplaces and enterprise planning decisions. Yugoslavia’s borders were open to Western tourists.

Economists tended to consider Yugoslavia the closest practical application of the theoretical model of market socialism devised by Oskar Lange. Morris Bornstein, for example, claimed that “a number of the problems identified by Hayek have been met in the Yugoslav variant of market socialism.” Thomas Marschak wrote that “the classic idea (of Hayek for example) that the burden of assembling managers’ intimate technical information at one center is a major obstacle to any sort of central planning seems to lose weight in the Yugoslav context.”

Statements like these were not unusual among comparative systems economists in the 1960s and ‘70s. But the most forceful challenge to the Austrians was published less than ten years ago. Branko Horvat, Yugoslavia’s leading economist, made it loud and clear in his magnum opus, The Political Economy of Socialism:

Hayek framed his argument so as to prove the superiority of the free market over central planning. In the context of•this book, it may be of some historical interest to note the following claim made by Hayek in 1945: “nobody has yet succeeded in designing an alternative system in which certain features of the existing one can be preserved which are dear even to those who most violently assail it—such as particularly the extent to which the individual can choose his pursuits and consequently freely use his own knowledge and skills.” . . . I shall not leave this challenge unanswered.

Hotvat believes the blueprint of self-managed socialism answers Hayek:

Social control is maximally effective—and the possibility of managerial abuses drastically reduced—because management operates before the watchful eyes of the workers’ council and the entire working collective. It is both impossible and illegal to keep socially important decisions secret. Contrary to monopolistic tendencies elsewhere, the concentration of capital is discouraged. The working collective in a labor-managed firm is not inclined to overexpand the firm by mergers because it then loses control over the firm’s affairs. On the other hand, because of the • different social organization, financial power is no longer so important. A competitive firm can be neither bought nor owned. Thus, a labor-managed economy is likely to operate much closer to the textbook model of the competitive market. Social ownership implies planning, but does not eliminate the market. Consequently, the labor-managed economy achieves what Hayek considered to be impossible: an alternative form of organization in which genuine autonomy on the part of the firm is rendered compatible with ex ante coordination of economic activities and full use is made of the existing knowledge while losses due to market failures are avoided. Planning and social property render financial speculation almost impossible and substantially reduce the scope of wasteful advertising. Interventions by the state are minimized since decisions are automatically controlled at every stage, and taxation is simple because of egalitarian income distribution.

Horvat maintained that “The Yugoslav solution should not be regarded as the end of a process, but rather as a promising beginning in the development of a genuinely self-governing society.” But the Yugoslav experience with self-managed socialism—which has now entered its fifth decade illustrates anything but Horvat’s claims. Let us therefore consider those claims in light of the reality of Yugoslav socialism.

Worker Control versus Party Power

We begin with the most important point: the democratic, self-managed enterprise as a revolutionary vehicle of social control. Supported by Tito’s call for “Factories to the Workers” in 1950, Yugoslavia is considered to be grounded in workers’ democratic control of enterprise. The self-managed enterprise is composed of various workers’ councils. Communist ideology in Yugoslavia claims that, through democratic processes, workers elect a managing board that oversees and assists in coordinating the enterprise’s operation. Workers, in their respective councils, officially manage the “socially” owned means of production (it is as if they rent capital resources from the state, instead of holding full legal ownership claims). Not forced by the dictates of Stalinist command planning, the Yugoslav constitution allows workers to distribute any enterprise profits as they see fit, whether it be in the form of personal income (over and above the workers’ standard wages) or in the form of reinvestment into the enterprise itself.

The self-managed socialist enterprise is thought to be a relatively autonomous planning entity, an enterprise of the workers, by the workers, and for the workers. Furthermore, because the worker is also a citizen, because self-managed enterprises follow general planning procedures, such as entering into planning agreements with other enterprises, social councils, and government bureaus, and because this overall process is supposed to represent the best interests of society as a whole, the socialist system of self-managed enterprises is also thought to be a system of society, by society, and for society. The distinction between individual and society becomes, in such a Marxist utopia, blurred if not outright abandoned.

Hence, Horvat can say that social control is “maximally effective” and managers have little opportunity to abuse their positions. In actual practice, however, workers have enjoyed far less autonomy and power over decision-making than Horvat’s theory would have us believe.

The Communist Party in Yugoslavia has managed to maintain a great degree of power within the enterprise. One avenue of power is found in the aktiv, which is a crucial link between the enterprise and other socio-political organizations. Organized by Party members who generally hold important positions in those outside organizations, the aktiv has a tremendous degree of influence over internal enterprise policy.

The aktiv “assists” the enterprise in helping persuade officials within the local commune, the republic, or within the Party itself to secure bank loans, to attain higher prices for their output, receive construction permits, etc. But, because it enjoys such a strong position of power, managers within the enterprise have little incentive to resist Party pressure. Enterprise autonomy is thus sacrificed for new permits, loans, and licenses, lower prices on scarce inputs, higher output prices, and enhanced foreign exchange allocation, any of which may be necessary for the success of the enterprise.

The typical enterprise in Yugoslavia is riddled with both conflicts of interest and worker apathy. Workers tend to lack real interest in managing the enterprise. In fact, as Egon Neuberger and Estelle James have argued, the workers would rather not take responsibility for decision-making, because decision-making is too risky, Good decisions may bring about higher incomes, but they may also bring about greater expectations by the Party and thus greater responsibilities in the future. Moreover, bad decisions hurt immediately. Workers therefore tend to fall into routine. They attend council meetings, but lack initiative to introduce significant dialogue concerning most enterprise matters. The general apathy among enterprise workers further allows the Party, directly or indirectly, to assume control over the elected manage-hal board. Rather than the ideal of democratic self-management, a technocratic elite has emerged to control enterprise operations.

This is not to say that workers don’t become vocal, and fail to bargain or fight for certain issues within the enterprise. Apathetic as they may otherwise be, workers nevertheless have a huge personal interest in the distribution of enterprise profit. Bitter conflicts of interest appear over the issue of how much profit should be handed over to the workers for personal consumption and how much should be ploughed back into the enterprise for investment.

Though the Party would like to see investment increased, workers have little, if any, incentive to invest voluntarily in the socialist enterprise. Eirik Furubotn and Svetozar Pejovich have demonstrated this problem in a number of theoretical and empirical studies. Because the Yugoslav worker does not enjoy full ownership rights to the means of production, only the right of use, he is not free to recover any money invested into the enterprise in the event that he leaves the firm or is fired. From the worker’s point of view, it is more rational to “invest” one’s personal income in durable goods such as refrigerators, automobiles, and furniture—things that are treated as private property under the owner’s full control—rather than throw his money into a collectively owned pool that is not at his full disposal.

As a response, the Yugoslav state imposes huge taxes on gross enterprise income and engages in a policy of forced investment. Workers must then strike for higher wages. Strikes for increased wages are not unusual in Yugoslavia. In fact, thousands have occurred in the past few years. This is a source of tremendous embarrassment to Yugoslavia’s Communist Party with its self-management rhetoric. If Yugoslavian enterprise really were a “true” self-managed system, as the Party would have us believe, the workers would appear to be striking against themselves!

Market Socialism, Monopoly, and Privilege

Horvat claims that the “labor-managed economy is likely to operate much closer to the textbook model of the competitive market.” This is far from true, nay, it is outright ludicrous in light of the actual Yugoslav experience. The Yugoslav “market” historically has been plagued by a horrendous lack of entry. Citizens have the legal fight to form their own self-managed enterprises, but the compulsory screening of “Competition Committees” has, in practice, eliminated this form of entry. Instead of new rivals’ forcing existing firms to lower their costs of production and/or make products of better quality, incumbent firms (generally established by the state) have tended to expand by creating new plants. Curiously, though newly established plants have the right to secede from their founder, they have rarely exercised it and in many cases instead form what amounts to a cartel arrangement with the founding enterprise.

The lack of entry has also brought about, without surprise, a lack of exit. Inefficient, costly enterprises, enterprises that would surely go bankrupt in a true profit-and-loss economy, have typically been supported, like most socialist firms throughout Eastern Europe, through enormous state subsidies. In Yugoslavia, as elsewhere under socialism, enterprise survival depends mostly on political entrepreneurship—the ability to cooperate effectively with the Party—as opposed to the type of managerial adeptness necessary to survive truly competitive markets. Though political entrepreneurship of this sort helps to preserve jobs, it does so at a significant cost, including poor quality products, lack of innovation, and an overall decline in economic growth.

Planned Chaos

Horvat stresses that “social ownership” combines both market and planning; it does not eliminate the market in favor of centralized command planning. I agree with Horvat at least in that, for Yugoslavia, the market has yet to be eliminated. There has been a market for consumer goods that has, in fact, been more open than in other East European countries. But the full benefits of the market process in the means of production and higher order goods are severely restricted by state intervention.

The role of the Party aktiv that I mentioned above is one way the state intervenes in the exchange of scarce resources. The bureaucratic obstacle to entry is another. And the fact that the state has engaged in a policy of administrative pricing of scarce resources since 1965—by fixing the prices of 90 percent of industrial products—is a third example. Centralized state banking in Yugoslavia, which resorted to printing money in order to subsidize terribly inefficient enterprises, is responsible for Yugoslavia’s fantastic rate of inflation—which grew from roughly 40 percent per year in 1981 to over 2,000 percent by 1990 (the money supply grew by more than 9.5 times between 1985 and 1988 alone). Yugoslavia’s foreign debt has surpassed $20 billion.

As in the USSR, Yugoslavia’s extreme economic hardship has rekindled the fires of nationalism. Slovenia, Yugoslavia’s most Western-oriented republic, has threatened to secede. Croatia may soon follow. Ethnic tensions in Kosovo, the troubled province in southern Serbia, are currently pushing Yugoslavia closer to an outright civil war.

Yugoslavia, once hailed as a watershed in market socialism, now stands at the brink of catastrophe. President Stipe Suvar’s keynote address to the Presidency of the League of Communists in Yugoslavia (LCY) during the 17th Session of the Central Committee meeting in October 1988 is telling:

The past thirty years, since the adoption of the LCY Program, have been marked by our efforts to emerge from the stage of state socialism. All our efforts, in which milestones have been the LCY Program, the 1965 economic reform, the constitutional reform of 1971-1974, the model for the political system provided at the 11th Congress in Edvard Kardelj’s work, Democracy and Socialism, the Long-Term Program of Economic Stabilization, and the decisions of the 13th LCY Congress and stands taken at the LCY Conference held in May [1988], have aimed at further elaborating this original model of our revolution and at channelling the organized social energies of our society to realize them. The past three or four decades have seen a life-and-death struggle between state socialism and the forces of self-management waged over the character of production relations and the lines along which they should change. Society developed rapidly, but today all the post-ported crises and earlier mistakes have caught up with us, and society is in the throes of a profound structural crisis. In other words, today’s crisis is the culmination of all the social contradictions that have been building up over all these years. In the meantime, considerable confusion has been created in people’s minds; there are many ideological misconceptions and illusions, and attempts to cover up the real situation.

The argument put forward by Mises and Hayek—that the attempt to build socialism, even decentralized, democratic market socialism, will be plagued by gross inefficiency, waste, struggles for power and domination, blinding propaganda, and must eventually fail—that very argument applies with profound force to the Yugoslav system. As Suvar continues:

Today’s serious crisis in our society is the product of all the crises of yesterday, and for this reason it is all the more severe and disruptive. If there was nationalism in the past, today’s nationalism is its consummate expression; if there was bureaucracy in the past, today’s bureaucracy is totally hidebound and unproductive; if there was demagoguery and attempts to pull the wool over people’s eyes by false promises of homogeneous communities, the examples we see today far exceed anything from the past. In effect, the position of the creative strata of society which have been pushed into the background, and the status of workers, peasants and the vast majority of the intelligentsia are the best gauge of how much power has been concentrated in the hands of bureaucratic and technocratic forces in the past few decades.

Theory and Practice

Branko Horvat may have criticism similar to, if not stronger than, that of Stipe Suvar concerning the way the Yugoslav system of self-managed socialism has worked in practice, especially now that the crisis has become all-consuming. Something, indeed, “went wrong.” He would argue, I suppose, that in reality the Yugoslav economy needs more market exchange, a certain freeing up of prices, fewer technocrats and less Party pressure in the workplace, and more enterprise control in the hands of the workers.

This is just what the Yugoslavs are desperately trying to achieve in the midst of their present political and economic chaos. They are going even farther than that: Within the last year they have begun introducing other forms of ownership—private, cooperative, joint, and so on—to compete with socially owned, self-managed firms. They are taking some of the biggest steps in Eastern Europe to promote joint ventures with the West, and are preparing the framework for a unified, open stock market in Yugoslavia. With the traditional ideology of socialist self-management now illegitimate in the minds (and budgets) of the typical Yugoslav citizen, the potential for radical market reform and political pluralism indeed exists.

Without question, Yugoslav reality has failed, terribly, to live up to the theoretical blueprint of self-managed socialism.

This poses a dilemma to both the socialist theoritician and statesman. Who was at fault? What went wrong? If it were truly a worker-managed system, then the workers are the most likely candidates. But, of course, the crisis is not the workers’ responsibility. They are the victims. The ideo-1ogue must now consider whether the theory can still be salvaged, in light of its obvious practical failure. This question is reflected in Suvar’s statement at the 17th Session: “it is high time that we resolve the dilemma of whether this is the result of a crisis of theory and an imperfect system, or whether it is the result of poor implementation and incompetent people.” This, I am sure, will be debated for quite some time among the Yugoslav economists, philosophers, Party members, work ers, and citizens.

It also brings up an important point with regard to Horvat’s alleged “solution” to Hayek’s analysis. Does the Yugoslav blueprint refute the claim that socialism breeds both statism and inefficiency, and will eventually end in failure? Surely the fundamental problems in the Yugoslav experience were predictable from the Mises-Hayek position. But what of the ideal model itself?

The Austrian economists granted that socialism might “work” in theory. But that isn’t much of a concession, if a concession at all. After all, we can distinguish between good theory and bad theory. Given the appropriate assumptions, perhaps anything might work in theory. It is neither intellectually impossible nor logically contradictory to design an abstract theory which argues that, for instance, a cat could swim the Atlantic Ocean. The important thing is what is likely to happen when the cat is thrown in the water. That’s the test. A theory that cannot be tied to successful practice, though perhaps appealing in a purely intellectual or spiritual way, may not only qualify as a bad theory. It may be outright dangerous and inhumane.

Horvat did not answer Hayek. He responded to criticisms with bad theory, with an abstract modelthat had no potential for being realized through the actions of living men and women. In the meantime, Yugoslavia, once thought to be the epitome of socialist self-management, drowns in what is probably the most disturbing socio-political crisis it has ever faced.

1.   As quoted in Edvard Kardelj, Tito and Socialist Revolution of Yugoslavia (Belgrade: Socialist Thought and Practice, 1980), pp. 51-52.

2.   Ludwig von Mises, Socialism.’ An Economic and Sociological Analysis (Indianapolis: Liberty Classics, 1981), p. 101. This book originally appeared in German in 1922. Mises’ first statement was published in 1920, in the midst of the Soviet Union’s disastrous experience with central planning, and was translated into English in 1935 as “Economic Calculation in the Socialist Commonwealth,” in Friedrich A. Hayek (ed.), Collectivist Economic Planning (Clifton, N.J.: Augustus M. Kelley, 1975), ch. 3.

3.   Friedrich A. Hayek, The Road to Serfdom (Chicago: University of Chicago Press, 1944), p. 70. Hayek also criticized the so-called “market socialism” of Oskar Lange, an alleged alternative to command planning, in his “Socialist Calculation: The Competitive ‘Solution’” and “The Use of Knowledge in Society.” These two essays are available in Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948).

4.   Morris Bornstein (ed.), Comparative Economic Systems: Models and Cases (Homewood, Ill.: Richard D. Irwin, 1965), p. 78. Bornstein referred in particular to an article by J. Marcus Fleming and Viktor R. Sertic, “The Yugoslav Economic System,” which appears in the same book, pp. 23049.

5.   Thomas A. Marschak, “Centralized Versus Decentralized Resource Allocation: The Yugoslav ‘Laboratory,’” Quarterly Journal of Economics, vol. 82, #4 (November 1968), p. 569.

6.   Branko Horvat, The Political Economy of Socialism: A Marxist Social Theory (Armonk, N.Y.: M. E. Sharpe, 1982), p. 577, n. 56.

7.   Ibid., p. 208.

8.   Ibid., p. 165.

9.   See Harold Lydall, Yugoslav Socialism: Theory and Practice (New York: Oxford University Press, 1986), pp. 115-22.

10.   Egon Neuberger and Estelle James, “The Yugoslav Self-Managed Enterprise: A Systematic Approach,” in Morris Bornstein (ed.), Plan and Market: Economic Reform in Eastern Europe (New Haven: Yale University Press, 1973), pp. 245-84.

11.   See, for example, Eirik G. Furubotn and Svetozar Pejovich, “Property Rights and the Behavior of the Firm in a Socialist State: The Example of Yugoslavia,” Zeitschrift fur Nationaloekonomie, vol. 30 (1970); and Svetozar Pejovich, “The Banking System and the Investment Behavior of the Yugoslav Firm,” in Morris Bornstein (ed.), Plan and Market, pp. 285-311.

12.   See Stephen R. Sacks, Entry of New Competitors in Yugoslav Market Socialism (Berkeley: Institute of international Studies, 1973), ch. 1; and Jan S. Prybyla, Issues in Socialist Economic Modernization (New York: Praeger, 1980), pp. 103-104.

13.   Stipe Suvar, “Let Socialism Start Moving Forward Again to a Better Future,” Belgrade, October 17, 1988, reprinted in Socialist Thought and Practice, vol. 28, no. 7-10 (1988), pp. 3-50.