The Control of Inflation: Lessons from East European Experience

Abstract

Economics is difficult enough, even if one manages to avoid studies in applied economics. Such efforts are inherently unreliable and incoinclusive. It is much simpler to model any single set of institutions and functional relations, using the data they generate to test hypotheses derived from the model, than to compare two different environments with each other in any useful way. With a model, one has an essential extra degree of freedom-one constructs it oneself. In applied economics, however, everything is given, and we are reduced to counterfactual hypotheses analogous to those of history; e.g., how would a policy directed towards narrowing wage differentials as in the USSR work in some other country?-supposing we do know, more or 1Pss, what has actually happened in the USSR. It is therefore easier to apply the analytical tools of Western economics to the socialist centrally planned economics (CPEs), whatever the data problems and the need to adapt our models, than to seek any lessons. One is especially reluctant to hypothesize the introduction of some CPE institutional pattern into a capitalist mixed economy. In our present circumstances, however, this is perhaps academic self-indulgence. Whether or not we are yet moving towards any international order, the old one surely has broken down; whether or not we can discern the future outlines of our own domestic system, the existing one isn't working very well. To proclaim a crisis of capitalism-or of orthodox economics-may be rhetorical excess, but in fact both are being seriously challenged, so far more by events than by new ideas. So it may be useful to put unfamiliar alternatives before a wider public, with a view to evaluating them and drawing implications, both positive and negative, for our own institutions and policies. At least this form of applied economics has some potential value, in contrast with comparative systems, which typically juxtaposes idealized models bearing little relation to actual economies; and it may not be so open to misinterpretation as East-West comparisons of growth rates and efficiency (see the critique in Hanson, 1971). I shall deal with the CPEs of Eastern Europe as a group. There are some significant differences between them in institutions and levels of development, but all allocate resources centrally in physical terms, and all have similar monetary systems. The USSR stands out for its size, Hungary for its market-oriented economic reforms of 1968, which took it partly outside the CPE category. Yugoslavia deliberately rejected central planning over two decades ago, but it is a socialist economy, and its workers' control and inflation justify a brief discussion (Section VIII).

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