Once the communists consolidated their power in the satellite states of the Soviet empire, large-scale private enterprises and large private property were nationalized. Medium and small-scale private enterprises and private property, including peasant smallholdings, were nationalized shortly afterwards. The only exceptions to these massive urban and rural forced collectivizations were the Polish smallholdings, and a small percentage of the Hungarian, Polish and East-German industrial, commercial and service sectors.
Much research has already been done on the post-1945 history of small-scale private industry and commerce in Poland and East Germany and on the postwar history of Polish peasant smallholdings (see, e.g., Aslund, 1985, and Juhász—Magyar, 1984). The operation, at various periods, of specific branches of the legal private sector in Hungary—enterprises that were either spared nationalization, or were revived during the communist era—has also been examined in a number of outstanding books and studies. (See: Csillag, 1988; R. Gábor—D. Horváth, 1987; Gervai, 1960, 1965; Laky, 1987; Rupp, 1973; Seleny, 1991; Tellér, 1973). The illegal (or black) economy as a whole was extensively
studied in the 1970s and 1980s (see, e.g.: R. Gábor—Galasi, 1981; Kemény 1992; Kenedi, 1981; Héthy–Makó, 1984.)
Ákos Róna-Tas, Assistant Professor at the University of California, San Diego, is the first to present a comprehensive picture of the private economy in communist Hungary. He offers a great many carefully delineated new details, taking care to organize his material in chapters and sections, whose length reflect the relative weight of the events and turning-points that comprise his reconstruction of the story. He also offers a number of significant new theoretical interpretations of the workings and the collapse of the socialist order.

One nation, one factory

According to the author, the classics of
Marxist-Leninist thought (the “future-engineers”) envisioned the working of a socialist economy along the lines of a giant publicly-owned or state factory, where the production and distribution of products and services were governed by the directives of the central management (the planners). What they did, in effect, was to take the large enterprise and service sector model (postal services, railways, etc.) that came into being in the late 19th and early 20th centuries, and project this model onto the economy as a whole, and even onto the running of the state.
As the author rightly emphasizes, the idea of the factory management model and the corresponding expansion of the state sector appealed not only to the communists, but, for quite some time, to the social democrats as well. (Fascist dictatorships have also shown an affinity for factory-like management methods, as have a variety of Latin-American, African and Asian conservative—and revolutionary—presidential systems.) The communists attached great importance to the gains in efficiency to be derived from the factory-like management of the economy. Obviously, they believed that it would prove a better tool than a decentralized system for carrying out the transformation of society, i.e., for acquiring absolute control over the population.
One of the first and perhaps most important steps in Hungary’s Great Transformation was the establishment of universal state employment. The author cites a great many fascinating documents to describe how the regime went about nationalizing the big banks and large industrial and commercial enterprises, eliminating private retail business, and getting artisans to join cooperatives. He pays particular attention to the rules governing the obligation to work, and to the regulations and sanctions imposed by which the workless, idlers and those who frequently changed their jobs were taught “socialist work ethics”. Róna-Tas argues that the induction of the active work force into the socialist sector was a continuous effort albeit at times subjected to stop-go practices that continued until about 1961–1962, at which time hundreds of thousands of peasants gave in to pressure, and joined the cooperatives.

Inside the factory

By the early 60s, the “laying of the foundation of the socialist order”, i.e. the practically total liquidation of the private sector, was completed. This was the time when the “consolidation” which followed the post-1956 retribution was pronounced to have been achieved, and the communist leadership announced its new policy. “Anyone who is not against us is with us,” was János Kádár’s new slogan. The two developments—the liquidation of the private sector and the new policy of recon-ciliation—were closely related, Róna-Tas maintains. With the overwhelming majority of the population in employment—by then, in the socialist sector—the regime, which had always been keen to expand its social and political constituency, finally got its chance to strengthen its influence and win popular endorsement: on the one hand, by extending the range of the benefits it offered (health care and pensions), and on the other, by establishing and expanding the “basic cells of the socialist way of life” (the workers’ militia, the socialist brigades, etc.).
Perhaps the most important and most effective way in which the government augmented its influence with the population was the steady and noticeable rise in the standard of living, more particularly, in private consumption. The general feeling of well-being and satisfaction that resulted from it was not the only reason for the communist leadership’s encouragement of consumerism. The shortage of certain goods (housing, telephones, cars, etc.) was a fact of life which gave party and union officials as well as medium and top-level managers (who formed the backbone of the party) an opportunity to take an active part, not only in increasing the amount of goods made available to companies and institutions for distribution among their workers, but also in deciding who had priority among clients on waiting lists.
This kind of political patronage, how-ever, became less and less practicable when, in the mid-’60s, production declined in several of the socialist states, Hungary included. First came a few years of economic slowdown, and then, in 1965, Hungary’s GDP did not grow at all as compared to the preceding year. Most embarrassing for the leadership was the fact that production in the newly organized agricultural cooperatives fell way below the expected levels, and a shortage of some basic commodities, such as meat, ensued. As a result of measures aimed at creating economic equilibrium, including closing the trade gap, the earlier rise in real wages was arrested. Fewer and fewer people could rely on the socialist sector to provide the surplus income that would ensure the necessary purchasing power to increase consumption.
Róna-Tas’s analysis, too, makes clear that the Hungarian political leadership saw economic reform as the primary means of getting out of this predicament. He introduces a number of documents which demonstrate that the reform was first and foremost expected to improve production in the state and cooperative sectors. But, realizing that this would take time, as an interim solution the establishment started to tolerate, and to a certain degree even encourage, economic activity outside the socialist sector. The earlier regulations which restricted legal private industry and trade were relaxed, and health insurance and the old-age pension scheme were extended—though with certain qualifications—to self-employed artisans and tradesmen. Semi-private economic activity, which combined the state sector with private entrepreneurship, began to expand. The cultivation of household plots turned from a merely self-supporting activity into an income-producing proposition. Auxiliary operations, run within the framework of agricultural cooperatives, started to grow in number and significance. The individual contractor made an agreement with the profit-oriented cooperative management, which then undertook to legalize his activity (Rupp, 1973). Contracts with other firms or private individuals were made in the name of the cooperative, which received an agreed percentage of the profits.
The mushrooming of private and semi-private economic activity notwithstanding, the majority of the work-force stayed with the state sector. Their prudence was justified. By the early ‘70s, the opponents of the reform within the party leadership succeeded in curtailing the independence of state-owned firms, and in neutralizing the effects that market competition had on the high-priority giant enterprises. The Stalinist opponents of reform also launched a campaign designed to curb “excessive” income inequalities that had resulted from the activities of private entrepreneurs.

The weak and the strong

The opponents of the reform, the author maintains, had little to lose, for in attacking the private sector, they were attacking “the economy of the weak”. One
of Róna-Tas’s important insights reveals
that private entrepreneurship first started spreading among those segments of society which did not have sufficient bargaining power with the political and economic authorities to secure an extra income for themselves. The political leadership habitually neglected them when it came to the redistribution of profits, and tried to make up for this by supporting their private ventures, or at least tolerating them. At that time, “the strong”—those employed in areas essential to the central objectives, the workers and managers of priority, state-owned firms, party members, those in the workers’ militia, and those employed in state administration and the judiciary—worked primarily in the “official” economy, and their interests lay in increasing the quantity of goods and services redistributed by the central authorities. As new measures to suppress private ventures were introduced, “the weak”, who, at any rate, had only one foot in the private sector (they had taken out trade licenses to legalize their moonlighting, or worked their family plots while holding down full-time jobs), retreated into the state/cooperative sector.
The centralization wave of the early ‘70s, an economic policy based on big companies and central development programmes that underestimated the effects of the oil price explosion and remained committed to accelerated economic growth, proved to be totally mistaken. At the end of the ‘70s, one of the most important of economic indices, foreign debt, took a sharp upward turn.
By the early 1980s, the worsening situation compelled the country’s political leaders to initiate a new set of reforms. They did away with the taboos of 1968 (the notions that work—as opposed to capital—was the only legitimate source of income; that private activities had to be integrated into the socialist economy; and that socialist legality was the touchstone of all economic activity) and embarked in earnest on revamping property relations. While Róna-Tas touches on the revival of earlier known forms of private enterprise, such as household farming, what he focuses on is the new forms of semi-private economic activity that began to mushroom in industry and in the service sector at that time. He describes the activities of the small GMKs (“economic work partnerships”) that began to burgeon within (and outside) the various enterprises, follows up with a detailed analysis of the regulatory climate based on statistical data and a variety of other sources, and arrives at the highly significant conclusion that the economic upswing of the 1980s saw “the strong”, those who had previously eschewed participation in private economic activity, assume a key role—and a rapidly expanding one—in the new Hungarian private economy. Thus, at this juncture, party members formed a disproportionate percentage of those participating in the new economic forms. The development of a private economy dominated by “the strong”—the author contends—had far-reaching effects on the future of the regime, for those whose fortunes used to depend solely on the state and the party now looked to market transactions as a likely source of income growth. They became less interested in the survival of the socialist sector (if at all), and this attitude, as it later turned out, improved the odds of a peaceful transformation upon the (unexpected) demise of the system.
Here the story of the private economy in socialist Hungary comes to an end; Róna-Tas’s book, however, does not. Its most likely readership—historians, political scientists, sociologists and students of the transformation at American universities—will want up-to-date information, and the book provides it. Róna-Tas gives a clear and accurate account of the political transformation and of the establishment of the legal and institutional framework guaranteeing free scope for private property. He assiduously traces the development of the new economic elite (to 1993–1994), and points out that a substantial segment of the managers and owners has been recruited from younger members of the old nomenklatura. The older ones are also doing well, receiving above-average pensions, while their family members are taking an active part in the redistribution of power and property.

Another interpretation

Many of those who have undertaken to
analyse the communist system have failed to properly distinguish between the pipedreams of the leaders—the plans they drew up based on what they thought was reality—and the actual processes, developments influenced, in part, by events and popular actions outside the purview of the official circles. (These are factors which, admittedly, are difficult to reconstruct in retrospect.) Their failure to differentiate the vision from reality goes a long way towards explaining why some of these analysts have adopted certain indices (economic growth, foreign indebtedness, etc.) that show the classical Stalinist system based on explicit plan directives to be more effective, and its hierarchy and decision-making processes to be more transparent, than those of the post-Stalinist systems, muddled as these were by reforms and pseudo-reforms, and beset by slower economic growth and an ever-growing foreign debt burden. (There are suggestions to this effect even in János Kornai’s The Socialist System, first published in 1992.)
The classical, plan-directed socialism of the Stalinist era, however, did not function the way the revolutionaries and propagandists envisioned it. Its marked features were not consistent logic and clarity of purpose, but economic disasters, periodic famines and other serious aberrations (e.g., shortages), along with widespread wastage and chaos. Effective planning and evaluation were made impossible by the constant prevarications of the intimidated subordinates. The system turned to campaigns, aggressive propaganda and a variety of inventive techniques of terrorization to try to lessen the unexpected and harmful effects of unrealistic plans and regulations. More unfounded reports on “positive achievements”, more falsified statistics, and more botched plans followed. The ever more exacting task of trying to coord-inate the system both through administratively veiled pressure and blatant coercion left the leadership without the strength (and perhaps, after a time, without the will) to try to make the utopian dreams come true that had been so attractive to so many. Soon, all attempts to establish local and regional self-governments (Soviets), to introduce collective consumption, and to set up communes in the place of the traditional family structure were abandoned. Those in power had to concentrate on survival and on averting impending disasters. One can not help but wonder why, under these circumstances, the leadership was still bent on achieving the other key element of the tradition, universal state employment. (Or was it? And if it was, did it ever realize this ambition?)
The preoccupation with survival and crisis management was not restricted to those in power. Crisis management became the central concern of workers, of peasants and of the intelligentsia as well, deprived as they were of their human rights, and threatened in their very livelihood. People looked to the factory, the collectives, and the institutions of the welfare system as offering a range of opportunities to obtain (steal or illegally produce) goods of primary importance to their families and households. The workplace became the stage for brisk exchanges of information, goods and services, with regular bribes—and managers looking the other way—facilitating the undisturbed flow of transactions. The chances of discovery were minimized by the fact that slacks in production—counterbalanced by periods of highly productive overtime in end-of-the month/year rush work campaigns—made the otherwise effective system of incentives and accountability impossible to employ (Kemény, 1992; Haraszti, 1989). Like a family of mice ensconced in a large round of cheese, the private worlds of factories, cooperatives and even schools operated embedded in the institutional framework of state employment, the framework painstakingly described by Róna-Tas. These private worlds existed at the level of housing as well (where they tended to take the form of mutual assistance with family building projects), though housing had been identified as an ideal sphere for the exercise of total control. (The older generation still remembers: tenants’ meetings, house wardens, block wardens. Cf. Sík–Kelen, 1988.)
All in all, it was a situation that definitely obstructed the efficiency of the official economic policy, and it was not just the central leadership that sought to find a way out: so did the managers of factories and cooperatives, and local party officials. One school of thought expected “results” from tighter control, from heavier penalties, and even from the extension of gaol practices to the economy as such, i.e., the economy’s militarization (measures certainly tried in Hungary until the death of Stalin, and still in practice in North Korea today). The other group—cooperative bosses with common sense, party officials with a vein for innovation, etc.—advocated “integration”: they tried to channel private economic activity into the official flow of the economy. At first, whenever they became aware of some private activity, they simply looked the other way, in the hope of securing (and indeed securing) the loyalty of the “offenders” when it came to everyone pulling their weight at the crucial “campaign” times. (It was these people who suspended recruitment into cooperatives until after the position of the cooperative movement had consolidated.) Not much later, these champions of integration—primarily its resourceful Hungarian advocates—devised some extraordinary combinations of the state sector with private enterprise. Róna-Tas refers to most of these forms, although, in keeping with the chronology of his own research, he deals primarily with the operation of these alternative forms in the period subsequent to the time when universal state employment was already established.
The story, however, started much earlier. In Hungary, it was in 1953, when Prime Minister Imre Nagy first modified Mátyás Rákosi’s economic policy pushing for forced economic growth and cooperative association. Many left the cooperatives and applied for trade licenses at that time. These were the years when a great many state-owned restaurants leased their premises to private entrepreneurs. Came 1955, and the hard-liners once again gained the upper hand, only to retreat in 1957 when, fearful of the consequences of unemployment caused by economic recession, the newly-formed Kádár government cancelled the plans for forced collectivization, and the number of small artisans and retailers (especially those engaging in these activities on a part-time, or supplementary basis) began to grow.
The integrationists and the suppressors continued to take turns exercising effective influence even after 1968. Róna-Tas, too, makes a point of this. When the forced centralization and misdirected investment policies of the ‘70s led to greater foreign indebtedness, there came the new reforms of the early ‘80s, which provided for the intensive integration of the private sector into the socialist economy.
While the reformers (who tolerated/supported private activity), and the traditionalists (who hoped to satisfy the big enterprises’ labour requirements by suppressing private enterprise and strengthening central leadership) were taking turns suggesting ways to improve the productivity of the socialist sector (with very little success), the Hungarian households (families) who were engaged in private activities managed to work out and implement a highly effect-ive strategy for survival. They showed great flexibility in switching from one form of enterprise to another. The accumulated assets of their households and the skills and qualifications of family members gave them a chance to withdraw, when times were bad, into the state sector or into the household itself, only to revert, at times when the reformers got their way, into the world of private enterprise (most of them keeping one foot in the state sector all the while).

A different conclusion

On Róna-Tas’s analysis, the socialist economic order had two spirals: an
upward one and a downward one. During the former, the institution of universal state employment took root; during the latter it disintegrated. As I see it, socialism was plagued by serious operational
problems from the very beginning. The system crumbled as soon as the consumable reserves were depleted. The legal and illegal private sector, which was present throughout the period (though to various degrees), helped to alleviate the problems endemic to the system, and at times provided much-needed life support. We cannot (in the context of the communist era) speak of development as such. What we can talk about is an accumulation of survival skills and a refinement of techniques. This is what some people called reform.
But these are outdated issues, and there is no need for us to deal with them. On the other hand, whoever undertakes a comparative study of the period, or wishes to familiarize himself with Hungary’s most recent history, must read this exceptionally well-structured book. Róna-Tas’s work will not only provide an abundance of new information and a comprehensive picture of the history of this peculiar sector, but also confronts him with some original views that provide ample scope for debate. In this publish-or-perish world of pseudo-scholarship, what more can one expect from a real book?

References
 

Aslund, Anders: Private Enterprise in Eastern Europe (The Non-Agricultural Sector in Poland and the GDR 1945–1983), London-Oxford: Macmillan, 1985.

Csillag, István: “A reprivatizáció” (Reprivatization), in A tulajdon reformja (Property Reform), Edited and introduced by László Lengyel, Budapest: Pénzügykutató Részvénytársaság, 1988.

Gábor R., István and Galasi, Péter: A “második” gazdaság (The “Second” Economy), Buda-pest: Közgazdasági és Jogi Könyvkiadó, 1981.

Gábor R., István and Horváth D., Tamás: “Bukás és visszavonulás a magánkisiparban. Adalékok a nyolcvanas évek kisipar-politikájának felülvizsgálatához” (Failure and Retreat in the Small Private Sector. A Contribution to the Review of the Small-Private-Sector Policy of the 1980s), Közgazdasági Szemle 1987 (4), 404–419.

Gervai, Béla: A kisipar fejloýdése, helyzete és szerepe a népi demokráciában (The Development, Position, and Role of Small Artisans in the People’s Democracy), Budapest: Kisiparosok Országos Szervezete, 1960.
 

Gervai, Béla: A magánkisipar 20 éve (Twenty Years of Private Small Trading), Budapest: Kisiparosok Országos Szervezete, 1965.
 

Haraszti, Miklós: Darabbér. Egy munkás a munkásállamban (English edition: Workers in a Workers’ State. Intr. by Heinrich Böll. Pelican Books, 1977.

Juhász, Pál and Magyar, Bálint: “Néhány megjegyzés a lengyel és a magyar mezõgazdasági kistermelõ helyzetérõl a hetvenes években” (Some Comments on the Situation of Polish and Hungarian Small Producers in the 1970s), Medvetánc 1984 (3), 181-209.
 

Kenedi, János: Do it Yourself. London, Pluto Press, 1981.

Kemény, István: Szociológiai írások (Sociological Essays), Szeged: Replika Könyvek, 1,
1992.

Kornai, János: The Socialist System. The Political Economy of Communism, Princeton: Princeton University Press, 1993.

Laky, Teréz: “Eloszlott mítoszok, tétova szándékok” (Dispelled Myths, Faltering Intentions), Valóság, June, 1987, 34–49.

Rupp, Kálmán: Egy termelôszövetkezet melléküzemeinek gazdálkodása. Esettanulmány (The Economy of the Auxiliary Operations of a Cooperative. A Case Study), Magyar Tudományos Akadémia Közgazdaságtudományi Intézete (manuscript), 1973.

Seleny, Anna: Hidden Enterprise, Property Rights Reform and Political Transformation in Hungary (manuscript), 1991.

Sík, Endre and Kelen, András: Az “örök” kaláka. A társadalmi munka szociológiája (One Continuous Bee. The Sociology of Communal Work), Gondolat, 1988.

Tellér, Gyula: “A magyar kisipari szövetkezetek története 1945–1962” (The History of the Hungarian Small Producers’ Cooperatives, 1945–1962), Szövetkezeti Kutató Intézet Közleményei (84) 1973.
 

Mihály Laki
teaches Economics in the Department of Political Science of the Central European University. He has published widely on post-socialist enterprises.