Why Socialism Collapsed in Eastern Europe

This appeared in the September/October 1990 edition of Cato Policy Report.

Why now? Why has Eastern Europe’s liberation happened in just the past year? Why not 10 years ago, or 25, if socialism was such a tremendous failure? Let me suggest several reasons.

Above all the other reasons is a sort of meta-reason, the Gorbachev factor. Gorbachev is no classical liberal; in fact, the origins of perestroika were immensely anti-liberal. Perestroika was an attempt to revive socialism, beginning with the law on unearned income, which was an attempt to smash the few elements of a free market there were in the Soviet Union, and a reduction of vodka production, which caused a massive sugar shortage as the Russians began making moonshine. But finally, it seems, Gorbachev and his advisers have figured out that you need market forces to make an economy work. They are now in the process of learning that you cannot have a market without property rights.

Gorbachev did not just decide to be a nice guy—to let Eastern Europe go and to allow people to speak freely. Instead, there was a realization that there was a very deep crisis in communism. In the case of Central and Eastern Europe, the empire was simply too expensive to maintain, and a kind of political decision was made—Moscow had to let those countries go. It could no longer afford to maintain the empire. Consequently, restraints were loosened and the communist leaders in Central Europe were told that they would get no further support from Soviet tanks and soldiers. The Czechs had a bit of good luck in that the major events of the Czechoslovakian revolution took place when Presidents Bush and Gorbachev were meeting in the Mediterranean; the story is that Gorbachev didn’t want to have a bloodbath on his hands during his meeting with Bush, so the word was sent to Prague to lay off.

Several factors combined to force the Gorbachev leadership to let Eastern Europe go. The first was exhaustion of the capital stock. The capital accumulated over hundreds, indeed thousands, of years has been used up. Through the 1960s and the 1970s there was near unanimity among Western economists that the rate of growth in Soviet-style economies was not only positive but higher than in Western Europe or the United States. Clearly, a positive rate of growth, over a period of 40 years or so, should produce wealth, but it didn’t. The mistake that was made, and pointed out by a few economists such as G. Warren Nutter, was to measure capital investment, the amount of inputs, not wealth creation. That was a big mistake. It led to what the Hungarian philosopher Michael Polanyi, a great critic of communism, called “conspicuous production”-production for the sake of production. Steel was produced to make a factory to make more steel to make more factories, but the whole process never produced any real consumer goods. It did not translate into an increase in the standard of living. And, indeed, it was often politically motivated.

The industrial proletariat was to be the new universal class, which would subsume all other classes and resolve all previous conflicts among them, according to the Marxian system. So the communists had to create an industrial proletariat, even where there had been almost none. In Romania, for example, during the forced industrialization that followed the Second World War, almost all the horses were killed because, after all, in a modern society no one would need them anymore; everyone would have a tractor. Well, the tractors were never produced, so people began to breed horses in secret. Today horses are the most common means of transportation in the countryside.

Instead of growing, the capital stock of socialist countries has been declining. They’ve been consuming it. Most of the textile mills in eastern Czechoslovakia were built before the First World War. They still operate with the original machinery. In East Germany, many of the buildings seem not to have been painted since 1945. In some cases, no one even painted over the old and faded Nazi slogans on the walls. In the Soviet Union, there are chemical factories built 110 years ago that are still producing the same chemicals in the same way. It is a general principle that under socialism no factory is ever closed.

The capital stock inherited from previous generations has been largely worn out, and there are real declines in the standards of living of many East European countries. Those declines would have taken place sooner had it not been for the enormous amount of Western capital that was pumped in by the International Monetary Fund, the World Bank, and other international lending institutions and used largely to finance current consumption.

A second factor that led to the revolutions of 1989 was the difficulty of controlling information. I mean not just political news but also the kind of information about how people live in other countries that you get from watching Western movies. The VCR and the Walkman have had a tremendous impact on life in socialist countries. Radio Free Europe was certainly important, especially in countries such as Romania that didn’t have much access to VCRs, but Radio Free Europe could always be discounted as propaganda. In other countries, principally Poland and Hungary but also the Soviet Union, there was a massive influx of electronic devices. Initially, the state tried to control or outlaw them because it knew how subversive they could be. But their suppression was simply impossible.

Western movies show people a picture of Western life—a very funny and distorted picture, but still a view of Western clothes, homes, and the like. When we watch movies, that kind of information just washes over us, but to people of a different society it can be very revealing. In Moscow last fall, for example, the Swedish movie Fanny and Alexander was showing, and a scene of a Christmas banquet had a big impact on viewers. There is a long table with wonderful food on it, and the camera begins at one end and very slowly, lovingly goes down the table, showing us turkeys, sauces, vegetables, and all sorts of fantastic things. At that point, the Soviet audiences stood up and applauded. Perhaps the silent heroes in the revolutions of 1989 were Sony and Mitsubishi and others who keep making more powerful and fantastic devices that convey more information in smaller packages at lower cost.

A third cause of the revolutions was virtual ecological collapse in many of the countries of Central and Eastern Europe. Many Western ecologists have argued for years that the causes of pollution are property rights and capitalism. That is an interesting hypothesis, and it is subject to an empirical test. Let us find an economy with no private property and no capitalism. The theory says that there should be no pollution or, at least, less pollution. But in fact, where there are no private property rights or capital markets, pollution is a nightmare. Some places in the Soviet Union have infant mortality rates that are higher than the rate in Burkina Faso, the poorest nation in Africa. Silesia in Poland has one of the highest rates of birth defects in the world.

The ecological movement that has arisen in socialist states quite naturally is supported by people who want to defend their homes and their children against being poisoned. And that has had several effects. One is simply the growth of political movements, which in some cases have been very important. In Bulgaria, the first public demonstrations against the regime were called by Ecoglasnot, an ecological movement. A major realization of the movement is that not only does the ruling class not have the people’s interests at heart, but central planning is to blame for a lot of their problems. When the order comes from the Central Planning Bureau to produce so much cotton, the head of a collective farm will do anything to meet the dictated quota for this year. Next year can take care of itself. If the way to meet the quota this year is to pour herbicide on the earth or exhaust the soil, that is what he does. In economic terms, there is no residual claimant, no one who profits if the capital value of the resource is maximized. Among intellectuals and academics there is a growing discussion of the value of property rights in solving environmental problems.

The final cause of the revolutions was the virtual collapse of socialist ideology and of the legitimacy of the ruling class. Mere power is usually not enough to sustain a tyrannical regime; in most cases there also has to be, on the parts of both the ruled and the rulers, some sense that the ruling class has the right to rule, that it has moral legitimacy. In the Soviet Union, the rulers claimed to act on behalf of the proletariat. Of course, their primary motivation was power and privilege, but an important additional element was their own sense of legitimacy. The rulers thought that they were morally justified, that they were acting in the interests of the working class, so it was reasonable to ask the people for just a few more sacrifices. I don’t think anyone really believes that anymore, but the people accepted the illusion for a very long time.

That illusion is gone for two reasons: One, according to Ibn Khaldun, a historian of the Islamic world, it takes about two generations for fanatical ideas to lose their steam. It has been about that long since communism was imposed on most of Eastern and Central Europe; in the Soviet Union, it has been longer, but we have to take into account the shot in the arm that Soviet communism got from the Great Patriotic War against fascism. Two, it is typically the ruling class that travels outside the country, and the communist rulers have been to a large extent demoralized by the experience. Rich and powerful people travel to America or Germany and realize that their standard of living is lower than that of the average industrial worker in a Western country. So the ruling class has been more demoralized, in a sense, than the average person, who has never seen the West. The rulers still want to hold on to power, but they have lost the sense of their right to rule.

The socialist ideology promised equality, fraternity, and prosperity. Did it keep its promise? Did it deliver equality? The answer is no. Many people in the West will say, although they say it less often now, “Well, yes, of course they wait in lines in Poland or the Soviet Union, but they have a sense of solidarity; they are more equal; there is less income disparity.” That’s nonsense. If you compare the standard of living of the average citizen of East Germany, the richest of the fraternal nations of the socialist camp, with that of the party members who lived in Wandlitz, the neighborhood of the party elite, you find incredible disparities of income-but until recently they were kept secret. Similarly, if you look at the 22 palaces of the Ceaucescu family in Romania, or the sports complexes in Bulgaria that were only for members of the Zhivkov family, or the dachas of the Soviet party elite, you find more inequality than in the market societies of the West.

The second promise of socialism was fraternity: everyone would live together as one big, happy family. But in fact, the fight over a shrinking economic pie generates a lot more hostility than is found in a system with property rights and market exchange. Often after waiting in line for hours for a bar of soap, clothing, shoes, and so on, would-be consumers in Moscow get to the front of the line only to have the window closed on them and be told, “Go away; we have no more.” Among the first things one sometimes hears is grumbling about the “goddamn Jews”-they are the ones who get all the goods-or the Armenians, or the Azerbaijanis, or whomever. Communism was supposed to subsume such malicious forms of nationalism, but it clearly failed.

And the third promise, prosperity? Socialism not only did not produce prosperity, it produced mass poverty.

So socialism is virtually gone as an ideology. Two other ideologies are emerging to replace it. First, nationalism, which takes two forms: very broadly, there are malignant nationalism and benign nationalism. Malignant nationalism, or chauvinism, is the desire to impose your culture, your religion, your language on another group. And, unfortunately, we see a lot of that in the countries of Central and Eastern Europe. There is another kind of nationalism, however, that has been very important: the desire not to be ruled by foreigners, which is quite understandable and consistent with liberal principles. Overall, I found in Central Europe very little hatred of Russians per se. Central Europeans just want the Russians to go home and leave them alone.

The other ideology is liberalism, in many cases aligned with the benign form of nationalism and, indeed, in explicit opposition to chauvinism. The one name that you hear more than any other throughout Central and Eastern Europe is Friedrich Hayek. Underground, or samizdat, editions and rare English copies of The Road to Serfdom are widely read.

It should be no surprise that that influential and powerful book was written by a Central European, who spoke to his readers’ condition most forcefully. Marx had failed. He had predicted something that didn’t happen. Hayek predicted something that did: that the effort to implement socialism would lead to tyranny and serfdom. And he offered an alternative—liberty, a market economy, prosperity, and the rule of law.

Now, having gone through a kind of exercise in political economy, I’d like to mention a historical thesis that might explain some of the most recent occurrences. I’m borrowing this from a Hungarian scholar, Istvan Bibo, who propounded a thesis about the three parts of Europe: Western, East-Central, and Eastern. According to Bibo, East-Central Europe is more or less the region east of the Elbe. Western Europe is identified with Roman or common law and the emergence of civil society from “little circles of liberty”— associations, groups, neighborhoods, clubs, farms, markets, cities, and so on-from which political authority flowed upward in a limited way. Eastern Europe is identified with the Byzantine and Ottoman systems in which the state was at the top and enforced its will downward.

The big difference between Eastern and Western Europe is the relative separation of church and state in the West, where it came to be recognized that the empire had secular authority and the church spiritual authority. They were separate forms of authority that even had separate court systems. Under the Byzantine system, the emperor remained the head of the church, so such a separation never took place. Also, because of its feudal inheritance and German folk law, political authority in the West broke up much earlier than it did in the East.

The countries of Western Europe are fairly obvious-Britain, Germany, Switzerland, France, and so on. Eastern Europe can largely be identified by the sway of the Orthodox church. Hungarian political scientist Laszlo Urban has pointed out that liberal parties have done well recently outside the areas long dominated by the Orthodox church. Liberal parties have not done so well in Russia, Romania, Bulgaria, and Serbia. The division even cuts across a country in the case of Yugoslavia where Catholic Slovenia and Croatia identify with the Roman West but Serbia is Orthodox and less liberal. The mixed countries, or Central Europe, include Poland, Lithuania, to some extent Czechoslovakia, Hungary, and perhaps the Ukraine and Belo-russia. Throughout their tempestuous history, those countries have been dominated or influenced by both the East and the West. Hungary was under Ottoman rule for quite a long time. Big pieces of Poland were once part of the Russian empire.

Thus there may be cultural factors that will make the transition to freedom easier for those countries than for the Eastern European countries. As Bibo points out, political developments that took place in Western Europe-liberation of the serfs and so on - usually hit East-Central Europe about 200 years later and took even longer to reach Eastern Europe. With our help and with the growth of technology we could accelerate that process, but the liberals in those countries have a harder job.

One of the reasons that I am so excited about what is happening in Central and Eastern Europe is that I see a very real chance that in the next l0 to 20 years an intellectual and political culture that is more liberal than the one we now have in Western Europe or North America will develop in those countries. I don’t mean necessarily a more liberal system; we must remember that Central and Eastern Europe are starting from a different base. The seeds of liberal intellectual and political ideas that have been planted there may sprout; produce mighty trees; and, if we are lucky, drop seeds back into our societies to reinfuse us with the spirit of liberty.

Tom Palmer is the director of Cato University.