Desocialization Revisited

Merlin

The Main Idea: Looking back on the Albanian desocialization drive of the early ’90s, the failure to securitize state-owned assets and the insistence on a disastrous policy of physical land restitution stand out as the main failings.

1. Introduction

1.1 Something more than twenty years ago, the Socialist Regimes of Eastern Europe fell one by one after the unwillingness of the Soviets to resist such development by force became known. Despite having severed all meaningful political connections to its European fellows since the ’50 and its lone Chinese ally since the ’70, the Albanian regime still could not avoid joining the fate of the overt Socialism in Europe, and by 1992 a feverish desocialization effort guided by a new government was in the works.

1.2 Looking back on that effort, what can one say about the long-term effects of the route chosen to transform a state-run economy into a mostly private one? To what extent where the Austrian prescriptions on desocialization followed, and to what effect? I will try to answer these questions, without expecting my analysis to apply to every eastern desocialization effort.

Long time no see

2. Syndicalism

2.1 The privatization of Albanian productive state-owned assets followed three routes. Pseudo-syndicalism was implemented when agricultural land (and some other assets) were concerned, as the former cooperatives where split into patches of land and allotted to the individual members. A voucher-like scheme (similar to the Czech one briefly discussed in Rothbard’s piece) was designed but failed to transfer any reasonable amount of assets to the general public. Finally, outright sales of whole companies in competitive bids where common and continue to this day. Adding the many factories where just vandalized and scrapped by the local population trying to salvage something of value for sale completes the picture.

2.2 All three Austrian desocialization schemes (Rothbard’s, Hoppe’s and Herbener’s) posit syndicalist privatization as the ethical and economical optimum, citing the homesteading principle. Still yours truly can say that in any reasonably calm desocialization event, this would be far from the optimal policy.

2.3 As it has been noted before, what sets apart those Albanians who had the good fortune (or, more likely, the right connections) to work in a capital-intensive factory now worth millions from others who were sent to teach in an elementary school in some godforsaken mountain village? Surely not merit, for at least in the Albanian case those who build the factories where very seldom those who manned them subsequently. And what about the heavy sacrifices in the form of the lack of consumer goods (a fancy term for good ol’ bread, most of the time) made by the whole population, necessary for the industrialization drive?

2.4 Clearly then, there are no ethical reasons whatsoever to prefer the workforce of some factory when considering privatization. If, after all, most libertarians would concede that the taxpayers are entitled to own tax-funded schools or hospitals in the rich West of today, how infinitely stronger would the case for a generalized ownership allocation in the poor East of the early ‘90s, where the public sacrificed much, much more to allow for the erection of such assets?

I can’t afford that boat with such tax rates!

3. Privatization

3.1 Thus, for an idealized solution, absent real-world complications (but more of these later), I turn to an unlikely source: Mencius Moldbug’s Neocameralism:  the conversion of the whole Albanian territory (including the very last factory, school, stray dog or poplar tree) into a single, giant sovereign company, in which every single Albanian would be entitled to a share, perhaps proportional to age to better account for the sacrifices endured, and with due consideration for those who were expropriated or otherwise unjustly harmed by the regime. Newly subject to market pressures to turn a profit, such a company would have tried to select the best fashion to rid itself of unproductive assets, free to privatize whatever it took to maximize its market value. In time, every asset would have tended to move to its most productive owner, breaking up the giant corporation, and leaving only free, sovereign property holders.

But of course

3.2 Besides being the fairest and least disruptive way to get rid of the socialist system once and for all, such a plan would have been blunt, easy to implement and it would not simply have turned Albania from a socialist prison into a mostly private economy as those of Western Europe, but it would have actually been the beginning of a truly Free Society, with private property being recognized as the only just basis for sovereignty.

3.3 Of course, one can easily imagine the horror with which many fellow libertarians may view such a plan, for isn’t this but a variation on Rothbard’s “Privatized Kingdom”
scenario? There is scarce space in this post to fully discuss such a critique, so let yours truly just reiterate an argument made in a previous post when discussing the futility of trying to adjudicate the justice of a property claim which’s origin is lost far enough in time (*cough*cough*):

Aprioristic anti-statism among libertarians could be compared, if one had to provide some metaphor, to XIX century engineers abandoning the very concept of an internal-combustion engine because all such engines to that point where necessarily impractical. Or, more to the point, I think most readers will agree that there may be not a single current landed property holder who can trace his title to a just origin: somewhere along the line, someone stole the land form a homesteader, or just appropriated it by fiat. But few libertarians indeed would, form this point, jump to the conclusion that private property in land itself is thus unjust, or even that a general redistribution is in order. We trust the market to right the wrongs of the past. The same standard should, I daresay, be applied to the State.

3.3 The real issue with such a plan would have been that it is little more than wishful thinking: one cannot conjure a free market mentality out of thin air, and even the collapse of Socialism could not suffice to turn a statist population into a libertarian mob overnight. Such a company, even had it been created, would have faced violent revolts the moment that its policies began to grossly deviate from the general opinion. And let us not even think what the international reaction to such a bizarre form of desocialization would have been.

Looks like we will be needing these, after all

3.4 A less ambitious but more feasible version of this plan would have entailed the creation of a Holding Company, to which the ownership of all state-owned productive assets should have reverted. The citizenry should then have been issued with shares in this Holding Company, which would have than proceeded to sell off the shares of its assets on the newly erected Stock Exchange, funneling the funds into dividends. Once all assets had been sold, such a Holding Company would have been winded.

Honoring the inventors of capitalism

3.5 In the special case of agricultural coops, the workers of which often are the very same farmers who received the land form the Socialist government in the ’40s only to have it socialized later, some large minority of the shares should have been awarded to these workers right away. Further, if the Holding Company had no offers to buy the shares of some coop or small factory, the full ownership should have reverted to the farmers/workers in the end.

3.6 But even this plan would have been too good to be true. It would gave required an amount of gradualism, time, and steady planning which, in the hectic months of ’91 where completely out of the question. Perhaps a gradual transition following the 1985 death of the last strong socialist leader might have done the trick, but no plan nowhere near as complicated could have worked much latter.

3.7 Also, the state of rage which had seized many Albanians who were just realizing their astounding poverty compared to the West made any proposals of keeping the coops in place, if with new owners, completely unrealistic. In the end, “homesteading” turned out to be the only practical option in dealing with the situation, at least to a government bent of avoiding a violent revolution. Splitting the land and letting everyone get a slice was the only realistic option.

3.8 The situation was but a little better with factories, which faced the prospect of being attacked and scrapped by angry mobs. The realistic option, which in this case was not taken, would have been to immediately invest the workers with a large minority of shares and auction of the rest latter, in the hope of providing someone with an emergent incentive to keep the asset in place. But one must admit that the chances were slim.

3.9 The first real great and avoidable blunder of the whole desocialization experience was the failure to create a Stock Exchange. Ludwing von Mises was cited by Rothbard as saying the Stock Exchange made the difference between a mostly socialist and a mostly privately-owned economy.

3.10 Excepting coops, a few warehouses and many local factories which were sacked (but which were probably worth more as scrap than as factories anyways), many central state-owned assets survived the tumults of the early ’90s and where privatized as time went along. In every single one of these privatizations, closed bids to purchase the whole asset where used to privatize. Such a method, in which the government solicits bids from parties interested in purchasing the property, keeps such bids secret and finally selects the (allegedly) highest offer, is the least efficient path to privatization I can think of.

3.11 The decision to sell the whole enterprise instead of just shares deprived small investors, be they foreign or domestic, form the chance to invest, forced the savings of the nation into shady investment funds first, and later onto a still-booming property market (where such savings are almost wholly unproductive), and still allows only politically-connected large foreign companies to even attempting a purchase. The emergence of a true Albanian middle class in such conditions cannot be taken for granted.

If only we could close stock exchanges everywhere, everything would be so much easier

3.12 All in all, the decision to privatize by single bids and not by the equivalent of IPOs (along with vouchers for the general population) can easily be seen as the first great blunder of the Albanian desocialization experience, with the Austrian plans having been very right in insisting on such terms.

4. Compensation

4.1 Regarding those who where expropriated by the socialization drive of the ‘40s, a large program of restitution was enacted. Though mired by preferential treatment for some heirs, less than airtight quality of most claims, the scant availability of large swathes of claimed lands – formerly free but newly settled in a wave of mass internal migration – and other assorted difficulties, some significant degree of restitution was still managed by the governments of the last two decades.

4.2 On the point of restitution, both Rothbard and Hoppe are clear: so far as any heir can be identified, full restitution should be applied. Given that the socialization drive in Albania begun only in 1945, the whole process should have been much easier than in the former Soviet Republics, where much more time had elapsed since the original socialization.

4.3 Still, 20 years after the fact, it is now becoming painfully clear that restitution was the second gravest mistake of the desocialization drive. Even after “only” six decades, only the heirs of the original owners (and, in some cases, the heirs of the heirs) are alive to claim restitution, resulting in small plots of land or individual houses being owned by a myriad of cousins, most of whom do not even live in the country anymore, and all of whom find it tough to even talk to each other, let alone on making unanimous decisions regarding property management. Such a situation has sentenced whole areas to economic stagnation, with hordes of ‘owners’ bickering over petty decisions, as their property lies undeveloped.

4.4 More so, a whole new class of “restitution entrepreneurs” has emerged, bent on seeking out lands being developed by some private company, and suing for restitution based on very shaky claims (at times, based on little more than ottoman-era documents or even local hearsay). The amount of insecurity that such a regime instills is monumental, having stymied untold billions in investments. The worst part is, of course, that all of this continues 20 years after the desocialization drive began.

4.5 And indeed, what was to be expected from such a naïve conception of “restitution”? How to return land in a modernizing, urbanizing country of 3 million, to its original owners who lived in a an overwhelmingly rural, autarchic and at times outright feudal society of scantly a million? That such an insecure environment is being forced on the country on property-rights-based rhetoric is ridiculous. Left to their own devices, the landholders of 1945 would never have fragmented their claims into such stagnant myriads, and would never have dispersed their property deeds into creating such a shifty environment.

Dispersing property?! Stuff is confusing as it is, young man!

4.6 That the policy of restitution has not brought ever more damage has only been due to its limited application. A policy of full restitution would have created such a chaotic environment as to have made the days of state ownership seem prosperous and orderly in comparison. A violent revolution would have been a matter of months in such a country. And good riddance it would have been.

4.7 Pace Rothbard and Hoppe, the proper policy of restitution would have been one aimed at recreating, as much as possible, the situation that would have existed had the social expropriation policies never been enacted in the first place. The closest that one could get to such an impossible ideal (now that the route outlined in paragraph 3.1 is no longer open) would have been to provide the heirs with some degree of monetary restitution and be done with it all. A special provision on the Civil Code…

Uh, ask Louisiana

…should have been rushed in in 1992, stating that in no case would immovable property deeds emitted prior to 1992 have been considered valid proof in courts of law, thus nipping property insecurity in its bud. Separate provisions for state-to-heir restitution should have followed.

4.8 Libertarians may find the proposal of monetary restitution funded by the taxpayer as horrendous, but any alternative short of no restitution whatsoever would have imposed (as it, in fact, did) a much higher burden on the long-suffering public. A speedy monetary compensation program would have been, and still is, the only reasonable alternative.

4.9 That Rothbard would propose such a naïve program of returning property to big landowners of the past at any cost is rather puzzling, especially since an almost opposite plan was proposed in The Ethics of Liberty: 

 And yet, since agriculture is always the overwhelmingly most important industry in the undeveloped countries, a truly free market, a truly libertarian society devoted to justice and property rights, can only be established there by ending unjust feudal claims to property. But utilitarian economists, grounded on no ethical theory of property rights, can only fall back on defending whatever status quo may happen to exist — in this case, unfortunately, the status quo of feudal suppression of justice and of any genuinely free market in land or agriculture. This ignoring of the land problem means that Americans and citizens of undeveloped countries talk in two different languages and that neither can begin to understand the other’s position.

Murray Rothbard, The Ethics of Liberty, New York University Press, 1998, Chapter 11, p.70

4.10 If it is proper and libertarian to (let us not mince words) violently expropriate current large landowners, on what grounds should an entire economy be brought to a halt to accommodate the various heirs of past big landowners, whose claims where of just as a dubious origin in 1945 Eastern Europe as in any undeveloped country? In restitution, as in many other facets of the desocialization experience, the motto turns out to be the same: let bygones be bygones.

Sold!

5. Looking back

5.1 Looking back at the Albanian desocialization drive that began 20 years ago, one may see two huge (and avoidable) failings which haunt the country to this day. The lack of a comprehensive securitization-with-vouchers plan for most assets has left the country with no capital markets and no efficient outlet for foreign investments and local savings, directly causing at least one disastrous financial collapse in 1997. In this regard, the Austrian plans where vindicated in their insistence for creating a liquid capital market, as a watershed institution for leaving socialism behind.

5.2 On the other hand, a naïve, misguided, though thankfully incomplete policy of physical compensation has struck a heavy blow to the land market in Albania, holding back billions in foreign and local investments to this day. To the degree that the Austrians insisted on just such restitution wherever possible, such a portion of their advice to Eastern Europe can be seen as just as naïve and counter-productive.