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This chapter discusses the phenomenon of market socialism in the state sector. The practical changes involved in this constitute one of the major tendencies in the move away from classical socialism. Aspects addressed are ideological antecedents; the application of market socialism in selected socialist countries (Yugoslavia, Hungary, China, Poland, Vietnam, and the Soviet Union); alternative strategies for deregulation; the firm's vertical dependence; the softness and hardness of budget constraint, and the firm's responsiveness to prices; the affinity between public ownership and bureaucratic coordination; horizontal relations of firms in public ownership; the relative proportions of bureaucratic and market coordination, and the interactions between them; and the relation between publicly owned firms and the private sector.

This chapter begins with an outline of the Marxian image of socialism, and of the three socialist‐system prototypes: the revolutionary‐transitional system (the transition from capitalism to socialism), the classical system (or classical socialism), and the reform system (or reform socialism). This is followed by short analyses of the system before the socialist revolution, and of the revolutionary transition towards the classical system.

This last chapter on the classical socialist system identifies the main connections among the regularities in its constituent elements. First, the main lines of causality between the different phenomena of the system (undivided power, dominance of the state, bureaucracy, plan bargaining, and forced growth and shortage) are discussed, and the affinity among these main elements of the system is addressed. The socialist prototype and its national variations are described, and the possible importance of the Soviet effect in the development of the structure and main attributes of the classical socialist system is discussed. The last part of the chapter proffers the theory that the socialist system is not capable of a renewal (reform) that could free it from its dysfunctional features while retaining the sole rule of the communist party, and briefly addresses the viability of the classical system in terms of timescales.

An examination is made of the multiple causes of the two related phenomena of shortage and inflation in the classical socialist system, addressing these causes at both the micro and the macrolevel. The first two sections of the chapter contrast the behaviour of the firm in short‐ and long‐term decision making under the capitalist system, with that under the socialist system. The next seven sections discuss the behaviour of the bureaucracy managing production; the role of relative prices; repressed inflation in interfirm relations and in the consumer sphere; excess demand on the macrolevel; the propensity to inflation, and the relationship between shortage and inflation; and the self‐inducement and reproduction of shortage. The last two sections give an overview of the socialist system–specific nature of the causes of shortage and inflation, and point out the economic inefficiency and lack of innovatory technical progress in the system.

The material living conditions of citizens under a classical socialist system are considered. The first part of the chapter looks at consumption, material welfare, and economic security, and compares these under socialist and capitalist systems to the detriment of the socialist system. The second part examines the distribution of money income and material welfare among the various groups in society, again contrasting socialist and capitalist systems. Explanations are then advanced for the real inequality of distribution in welfare shown for the classical socialist system, and tendencies towards equalization and differentiation are discussed.

Changes in the macroeconomy can be observed in countries undergoing reforms of classical socialism, and can result in tensions if the economy has shifted appreciably from classical towards market socialism. These changes occurred most conspicuously in Poland in the 1980s, and the resulting insolvable contradictions have been called the ‘Polish Syndrome’. The macroeconomic analysis of the changes presented here addresses employment and wages; growth and investment; the state budget and fiscal policy; and the credit system and monetary policy. Two sections then review the macrotensions in the reform economy and their combined effects (1) in interlocking shortage and inflation in internal economic relations, and (2) on foreign trade and debt; the triple relation between shortage, inflation, and indebtedness, and then addressed. Lastly, the effect of the reform processes and macrotensions is assessed on the standard of living.

Aspects are discussed of the ideology of socialist systems, and of the ideas, beliefs, promises, values, and moral imperatives that contribute to the formation, stabilization, and maintenance of the classical socialist system. The various parts of the chapter cover: the official ideology; the socialist system's sense of superiority; the basic promises; self‐legitimization and the paternalistic nature of power; discipline, willing sacrifice, vigilance; and power and ideology.

The first part of the chapter explains the general concepts involved in ownership. It then considers some of the characteristic forms of private property (private ownership) typical of contemporary capitalism, before going on to a methodical examination of property rights (public ownership) under the classical socialist system. This covers the state‐owned firm, other forms of state property, the co‐operative, and the very restricted scope of private property and private production.

This chapter addresses long‐term economic planning under the classical socialist system. The first two sections describe the motives of the participants and the centralized institutional framework of the investment process. The remaining sections examine the structure and dynamics of economic growth—investment in relation to consumption, priorities in the allocation of investments, relations between production factors and output, growth cycles, the measurement of aggregate output, and the forced growth that is characteristic of the socialist system.

This chapter discusses political liberalization as one of the real reforming tendencies of classical socialism. Aspects addressed are the monopoly of power, the easing of repression, constant and variable elements in the official ideology, the seeds of pluralism, opening towards the capitalist world, and change in the scale of publicity and candour. The limits to political reform are discussed.

The final chapter provides a summary and appraisal of the reform process of classical socialism, and takes a further look forward at the transformation that supersedes the system. The four sections of the chapter are the depth and radicalism of the changes, and the main line of causality; the incoherence of the tendencies to reform; reforms and public sentiment; and preview: the socialist system's legacy and postsocialism.

A survey is made of the allocation of labour under classical socialism. This looks at the characteristics of labour allocation in the short and long term, and the behaviour of those taking part in short‐term labour allocation and their relations to each other. The different sections of the chapter discuss the road to full employment; the development of chronic labour shortage; direct bureaucratic control of employment and wages; employer–employee relations in the factory; and bureaucratic and market influences on wages.

The rise of the private sector is the most important tendency in the economic sphere during the process of reform of classical socialism. This is also matched by a no less strong tendency to obstruct and restrict the development of the private sector. The following aspects of this type of reform are addressed in the chapter: inducements behind the development of the private sector, types of private sector reform that have occurred in various socialist countries, the private sector in relation to official ideology, the affinity of private ownership and market coordination, the private sector and bureaucracy, and the economic role of the family.

This chapter looks at the causes for the move away from the classical socialist system and discusses the dynamics of the process. The inducements for the change, which may differ in depth and radicalism, are rooted in the accumulated tensions and contradictions of the classical system: the first group of symptoms is an accumulation of economic difficulties, the second public dissatisfaction, the third loss of confidence by those in power, and the fourth outside example. The distinction is made between change based on reform and that based on revolution, and a chronology is presented of reforms and revolutions in different socialist countries in which they have occurred

A coordination mechanism is a subsystem of the social system that coordinates the activities of the persons or organizations within it. Wherever a relation subsists between two or more persons or organizations , their activities require coordination in some form. This chapter defines and discusses the five main types of coordination mechanisms and notes their relative roles in the classical socialist system. The five types are bureaucratic coordination (the system applied most widely under classical socialism), market coordination, self‐governing coordination, ethical coordination, and family coordination.

The introduction of self‐management into firms in public ownership is an important tendency during the process of reform of classical socialism, although it is less radical than the intrusion of the private sector. Its basic principle is that the head of the firm is chosen by the workers rather than appointed from above as in a state‐owned firm; the workforce also disposes over the residual income after costs and taxes. The chapter discusses self‐management as an intellectual and political trend; political relations in self‐management—whether it is voluntarily initiated or imposed from above (as in the case of Yugoslavia, which is described); the economic effects of self‐management; relations between manager and workers; and ethical coordination.

One of the major tendencies in the move away from the classical socialist system is a modification of the price system. This is closely related to the revival of the private sector and reform of the control of the state sector towards market socialism. The price reforms described in this chapter alter the coordination mechanisms and behaviour of participants in the economy. They do not cause a radical change but are sufficiently important to qualify as part of the reform process. The different sections of the chapter discuss changes in the determination of product prices as a result of a change in the proportions of the areas in which each of the three types of price determination (administrative, pseudoadministrative, and market) occur; determination of the prices of production factors; principles and practice of state price determination and fiscal redistribution; and the scope and limits of price reforms.

Shortage is explained basically in terms of the inherent characteristics of the classical socialist system. The examination concentrates on the system's constant, lasting features, with factors influencing short‐term fluctuations in shortage phenomena covered, at most, in passing. Attention is trained on parts of the phenomena that distinguish socialism from other systems (primarily capitalism), and the focus in the analysis of production is mainly on the publicly owned sector. The different sections of the chapter are shortage phenomena and the shortage economy; the process of demand adjustment; horizontal and vertical shortage; shortage and surplus; market regimes: the buyer's and seller's market; normal shortage and normal surplus; and open, declared, and hidden inflation.

The ‘perfection’ of control described in this chapter refers to the sorts of apparently genuine changes to the classical socialist system seen in official declarations, regulations, and campaigns that, in fact, result in no alterations to the basic features of the system. These pseudoreforms are initiated by people who have realized that there is something wrong, but are still convinced that the system is basically right and would operate better if ‘perfected’. The ‘perfection’ tendency results in reorganization, and this is shown to have occurred at upper and lower levels during the course of disintegration of socialist systems. Another factor in the perfection tendency is the transformation of planning and direct control. Eventually, it is realized that no amount of reorganization or transformation of planning and control will improve the situation.