Academic journal article Independent Review

The Hidden Inequality in Socialism

Academic journal article Independent Review

The Hidden Inequality in Socialism

Article excerpt

The collapse of the socialist regimes in eastern Europe and central Asia brought an unprecedented increase in economic freedom for hundreds of millions of people. Many people, however, still believe that their lives have become worse since the start of the transition. One apparent reason for this belief is a perceived increase in income inequality, a perception supported by income surveys. However, an analysis of these survey results shows that the argument that democratization led to a real increase in income inequality is weak and that the pretransition survey data are poor and biased in an unknown direction (Henderson, McNab, and Rozsas 2004).

Unfortunately, reconstructing pretransition data with greater accuracy is not possible. Still, because nostalgia for the communist past is one of the major obstacles to further political and economic liberalization, it is important to understand as clearly as possible how equal or unequal economic conditions were in the socialist economies. Therefore, even though no one can reconstruct pretransition data, we can make a much more thorough analysis of the hidden inequality of socialism than anyone has made previously. This analysis helps to show whether the apparent increase in income inequality after socialism was just the revelation of existing inequalities or was real. In this article, we examine the hidden inequality of the socialist economies of eastern Europe and central Asia in the pretransition period and find much more inequality than the official statistics reveal.

Our exposition proceeds as follows. First, we illuminate why economic inequality was important for the operation of the centrally planned economies and how its real political purpose distorted its measurement and interpretation. Next, we identify several sources of inequality in the pretransition period, the effects of which researchers often overlooked or underestimated. Finally, we reach some conclusions and suggest courses for future research.


In view of the state of the data, we take an unorthodox approach to the pretransition period. Rather than trying to reconstruct inequality data from low-quality surveys, estimates, and assumptions, we show how the socialist system generated, tolerated, and concealed inequalities of the order of magnitude measured in Ukraine, Russia, and the Kyrgyz Republic today. Although many of these factors have been known to the research community, their cumulative effect has rarely been considered and, as a result, has been underestimated. It should be noted that within the Soviet bloc both physical conditions--weather, natural resources, and so forth--and institutions varied widely. In Russia, to take one extreme, there was no privately owned land. Even the so-called private plots that individual Russians used to produce vegetables and other important crops were not really private, but part of the collective farms. Individuals used the plots at the pleasure of the authorities and could neither sell them nor use them as collateral for mortgages. In Poland, at the other extreme, the government never nationalized all the land. Because of such variation in the area under consideration here, our analysis itself is necessarily full of variation: comments or insights about hidden inequalities in one socialist economy may not apply completely to others.

Market Forces and Socialism

The widely recognized inefficiency of the centrally planned economy was a fundamental reason for the high hidden inequality in socialism. One group or individual's desires could be fulfilled only at the expense of others' desires; thus, for central planning to work, central planners had to rank various people's wants and to compare the importance of, say, one person's desire for health care with another person's desire for housing. In a centrally planned economy, the planners did not attempt to ensure that production occurred so that prices and quantities approximated what they would have been in a market equilibrium because socialist leaders denied the importance of market forces. …

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