Part One
The Process of Political Decline

Two
Property Rights and Political Power: The Cumulative Process of Political Change in Hungary

Anna Seleny

East European state socialist systems are said to have collapsed in 1989. The Hungarian case, however, suggests a different formulation.^[1] Indeed, as this essay demonstrates, the Hungarian socialist system began transforming itself almost from its inception, and by 1989 was a hybrid produced by forty years of accommodation and compromise among the social, economic, political, and ideological forces it had suppressed or fostered.

Yet even in the late 1980s, most domestic and foreign observers doubted whether this history of compromises, typically expressed as economic reforms, would fundamentally alter Hungarian socialism. In fact, for many, the historical ubiquity of piecemeal reform seemed to confirm the system's essential stability.^[2]

In a more basic sense, however, prolonged transformation was ultimately

[1] The distinction drawn here between "collapse" and "transformation" is more than semantic. The institutional legacies of formerly socialist systems continue to shape the parameters of possibility today, limiting, for instance, the chances of success of some market initiatives, while creating a more hospitable environment for others. The notion of "collapse," while appealingly clear-cut, is thus misleading.

[2] This was true not only of understandably cynical Hungarian citizens, but also of many observers and analysts, who, as Andrew Walder 1990 has pointed out, now see these same factors as having contributed to the transformation of socialist systems.

startling, because unchanging political structures hid as much as they revealed. Put another way, the Hungarian socialist system, like its Polish and Chinese counterparts, underwent epochal internal systemic transformation first and regime change last. In this process, cycles of economic reform both determined change and obscured it, helping to maintain socialist political structures even as they altered economic management and, more subtly, the practice of politics.

This essay examines the internal transformation of Hungarian socialism, by focusing on the systemic impact of official and unofficial departures from central planning. It demonstrates that the sociopolitical effects of economic reforms and informal economic activity were often more profound than any appreciable economic improvements that flowed from them. Most analysts agree that efforts aimed at the improved efficiency of the classical model or the attainment of some ideal mix of plan and market failed to render socialist economies competitive. While this consensus is compelling, it tends to ignore the broader political impact of economic reforms, and is itself one reason why the complex process of socialist transformation remains so poorly understood.

The following analysis therefore explores some of the ways in which economic reforms and informal economic activity altered the implicit and explicit rights of the social groups that comprised the socialist system. I advance two general claims about Hungary, one of the countries where economic experimentation and reform under socialism went farthest. The first is that even when accurately assessed as relatively ineffective, economic reforms (and other departures from central planning) led to a redistribution of control over economic activities. They invariably resulted in redefined rights of particular groups to command obedience or resources as an expression of their positions in the socialist economy; and eventually opened up the possibility of the renegotiation of the basic assumptions of socialist ownership and control. The essay demonstrates, for instance, how informal relations of production fundamentally altered power relations between the larger population and the party state. It was in part these changed relations that led the Hungarian Socialist Workers' party to accept a significant reform of property rights by 1982. The party was also forced to make important concessions to autonomous economic actors thereafter, culminating in the new Association Law of 1989.

Reformers and second-economy participants had established less dramatic precedents long before, however. As we shall see, this extended process involved the de facto diffusion of property rights previously controlled

by state bureaucracies — and eventually, their de jure transfer — to the citizenry at large. But this was no zero-sum game in which one group always lost and another gained economic or political power, because the interests and ultimately the identities of actors were altered in the process. Socialist workers became entrepreneurs, but so did some party-state officials or their relatives. Still other officials went to work for private businesses or opened consulting companies. Later on, managers bought out their state firms, or parts of them, sometimes through spontaneous privatization. Like much of the citizenry, party and state officials followed property rights: where earlier they had acquired rights to various forms of property primarily on the basis of positions in the bureaucracy, now those same positions often helped them secure new footholds in an incipient market.

The second claim advanced here is that Hungary's economic reforms were more than either ideologically bounded or "rational," pragmatic responses to a systemic or external economic crisis. Leadership's choice of any particular reform must refer to the historical trajectory of reform in a given country, which in turn partially determines the strategies available to reformers. In Hungary, this trajectory limited the possibilities for a return to orthodoxy. Yet history, while important, is not in itself sufficient to explain divergent reform processes and outcomes within and across socialist systems. Although often overlooked, the leadership's conceptual use of history is crucial. Hungarian leaders, like their Chinese counterparts, generated innovative interpretations of domestic reform histories in order to increase their degrees of freedom in policymaking without appearing to betray the fundamental tenets of socialism.

Both claims — the one concerning the political character of economic reforms; the other concerning the centrality of history and its uses to the chances of particular reforms — are grounded in close analysis of what I have elsewhere called the "institutional residue" of economic reforms (Seleny 1989, 1991). Consisting of people, practices and ideas, including creative adaptations of received political discourse, the institutional residue of reform was the cumulative product of individual reforms and reform attempts — even those that were partially reversed and whose proponents were temporarily marginalized. Elements of this residue were observable in both the formal and informal institutions of the system, and came into play at critical junctures. Three stand out:

As we shall see, the formation of this institutional residue was both a manifestation of the state's inability to keep strict control of the economy in the face of systemic rigidities, and evidence of a subtle and complex subversion from within and below. Increasingly constrained to improve the performance of state firms, leaders implemented reforms in a cyclical pattern, while oscillating between repression and toleration of an expanding second economy, defined here as the sum total of all nonstate private economic activity: licensed and informal; legal, illegal, and on the borderline of illegality, both prior to and after its legalization in 1982.^[3] Second-economy activities were indirectly or directly influenced by reforms intended to improve state-firm performance, and the behavior of state-firm managers toward workers was in turn profoundly affected by second-economy expansion. Over time, this interaction fundamentally altered the substructure of state power and citizen politics.

Two Polar Notions of Politics

Through the history of Hungarian economic reform, and in the relationship between the second economy and the Hungarian socialist state, we see joined in practice the analytic duality so often posed between the economic and political realms. Moreover, we see reform-minded leaders of the Hungarian Socialist Workers' party blending two views of politics that have held sway under both capitalism and socialism.

At one extreme of this implicit polarity, the object of politics is the defense of collective identity: political decisions are ultimately reducible to the distinction between friend and foe, and political struggle inevitably pits the one against the other. At the other extreme, politics is a pluralistic contest over the allocation of goods and values enforceable by the state.^[4] In the

[3] By contrast, the state sector, or "first" economy, encompassed state-owned firms, state-controlled cooperatives, government agencies and registered nonprofit institutions. Definitions of the second economy vary significantly with the analyst's focus, assumptions, and ideological perspective. This simplified working definition draws on those used by Gábor and Galasi 1985, and Kornai 1986, 1992.

[4] This insight is from Gianfranco Poggi 1978, who analyzed the polarity typically posed between the pluralist worldview exemplified by the American political scientist David Easton and that of the German legal and political theorist Carl Schmitt. He also noted commonalities between them. As Poggi points out, Marxism can be understood as a radical variant of the Eastonian view: politics is essentially concerned with allocation by command. But for our purposes it is important to see that Marxist principles — as practiced in the socialist countries — also approached the Schmittian pole. To be sure, the protagonists of Schmittian politics are nation-states, and the identity formation of their collectivities is inextricable from political struggle. In classical Marxian analysis, class identity is determined by the members' position in the division of labor, and long-run political outcomes are thus preordained. Nevertheless, the notion of an existential clash is central to the concept of politics itself.

twentieth century, it has often been according to some variant of these views that practitioners have tried to shape the world and theorists to make it intelligible. Thus, beginning in the 1960s, as the rule of terror eased in the East, scholarly consensus in the West shifted from one view toward the other: moving away from totalitarian accounts of immutability and, via modernization / convergence theories, toward pluralist accounts of change.

In the totalitarian view, politics was fundamentally Schmittian: the party state subjugated society; foes were those who defied it and would pay a heavy price.^[5] Modernization theorists, on the other hand, posited that with economic progress, the politics of friend and foe would be subsumed under the allocative imperative. Interest-group theorists studied bargaining relations within the socialist state and tended to describe socialist politics as corporatist or, alternatively, as an "institutional" variant of pluralism (Hough 1969, 1977; Skilling and Griffiths, 1971).^[6] On this view, friends often fought about control over the allocative process, among other things. But this analysis of socialist political practice and struggle failed to specify the relative strengths of competing groups or the limitations and possibilities of the structure in which they operated. Class-based theories turned totalitarianism on its head: socialist politics and power structures were natural outgrowths of a prevailing logic of production and allocation that determined friends and foes. But such theories became entrapped in circularity, since the state itself had imposed the new economic order and set the parameters of class relations through its administrative policies.^[7] They simply could not explain the failure of class-based support for the classical bureaucratic socialist model (Kornai 1992), or the variation in departures from the model over the course of socialist practice in Eastern Europe and elsewhere. As a result, like the older totalitarian alternative and the present consensus on the fundamental "unreformability" of socialism, neither interest-group nor class theories had much to say about the process of reform and transformation.

In the 1980s, new institutionalists, building on the work of Eastern European scholars, drew attention to a variety of institutional adaptations under

[5] Two classic formulations of totalitarian theory are given in Arendt 1986 and Friedrich and Brzezinski 1965.

[6] For a sophisticated review of totalitarian, modernization, interest-group, neo-Marxist and other theories of socialist systems, see Comisso 1991.

[7] From the very start, the state regulated class conflict through its policies of demobilization and remobilization of the labor force; allocation of opportunities for education, workplaces, and housing; and redistributive fiscal measures. For a review of class-based theories as applied to socialist systems, see Szelényi 1982.

way in several socialist systems. These important studies elucidated the uniquely socialist institutional logic of systems that had often been treated as distortions of capitalism (Nee and Stark, 1989). Because of the shift of focus away from the Communist party, however, this approach cannot explain socialist countries' sharply different reform strategies, or the systemic political impact of these strategies. (See chapter 3 of this volume.)

The Links Between Socialist Politics and Economics

Except for the new institutionalists, both the totalitarian and the class-based theories all tended to separate the economic and political realms. Yet as we shall see, the institutional residue of reform revealed the intimate links between politics and economics in socialism. To be sure, politics and economics are always and everywhere connected. But somewhat paradoxically, this connection was more palpable under socialism than in most capitalist systems. The latter, especially if they operate in the framework of reasonably democratic politics, allow space for public struggles over economic issues to proceed within existing legal and political-institutional structures. Governments fall, but political systems remain in place. State-socialist systems, on the other hand, officially permitted only high-level struggles over economic issues, which were eminently political — not least since oversight of the economy constituted the primary justification for a massive party-state bureaucracy. Most other debate and bargaining, and a good deal of action, therefore occurred in the informal realm.

In Hungary, for instance, the formalization of informal economic activities by the early 1980s took on much greater political significance than similar changes in capitalist systems — for example, Spanish and Italian efforts to incorporate large informal sectors into the formal economy (cf., e.g., Benton 1991). In capitalist democracies, incorporation of informal businesses through legalization programs meant an increase of government control over them, as the state gained the power to tax and regulate. At the firm level, this was true in Hungary as well. In a socialist system, however, such incorporation also signified at least a de facto loosening of the state's extremely broad claim to control the economic realm. At most, over time, it meant a de jure repudiation of that claim.

Thus, although not generally appreciable in the short run, even relatively small losses of control over the economic realm eventually had direct or indirect political repercussions. One kind of evidence for this view can be found in the frequent reversals of economic reform: in a common pattern (e.g., contemporary Russian politics), reforms from above run up against the self-preserving instincts of bureaucrats. But in Hungary and elsewhere, such reversals could not prevent the resurgence of the same systemic troubles that originally compelled radical and reluctant reformers alike to undertake

reform programs. As an indirect consequence of these cycles of reform, reformers lost confidence in scientific socialism; and eventually socialism lost much of what remaining legitimacy it had in the view of the population. This process, in conjunction with social pressure from a society transformed over time partly by the experience of these same reforms, precluded the indefinite perpetuation of a zero-sum system of reform cycles.

Indeed, by the late 1970s, several such cycles had already resulted in a partially "privatized" public sector,^[8] and in a differently "politicized" economy. The party had always made economic decisions on the basis of political considerations, but now economic issues were increasingly subject to the influence of actors outside the party-state apparatus. The turning point in this process, however, was a 1982 restructuring of property rights that legalized much of the second economy and opened up important new channels for private and quasi-private enterprise. This reform is representative of important differences between Hungarian reform socialism and other Eastern European varieties, and of similarities to the Chinese variant. For the first time on a wide scale, the leadership felt obliged not only to acknowledge the right of individuals to own and operate private businesses but also to legitimize them through a public relations campaign that emphasized their importance to the improvement of the "market socialist" economy.

After 1982, private entrepreneurs were permitted to cooperate in various forms of partnership, and the formal private sector expanded dramatically. From 1982 on, the authorities could no longer refuse a license or otherwise prohibit any citizen from choosing to work on his or her own account, or from participating in the new partnerships, as long as certain basic legal and professional preconditions were met.^[9] The new private and quasi-private companies were excluded from only a few areas, such as banking and mining.^[10]

The statutes that brought these new companies into existence took effect on January 1, 1982, and specified several new forms of property, among them "business work-partnerships," "civil law partnerships," private cooperatives (known as "small cooperatives"), and quasi-private "enterprise business work-partnerships." The reform also ended restrictions on industrial production in agricultural cooperatives.

To be sure, the legalization was in some respects incomplete, and was

[8] I refer here mostly to de facto and not dejure privatization of state-sector firms or their subsidiaries, although both kinds of privatization are linked to the extension of the second economy's unofficial and after 1982 official role in the state sector. See, for example, Sabel and Stark 1982 and Stark 1985.

[9] The professional preconditions had to do mainly with minimum required investments for the various partnership forms and the presentation of a feasible business plan to local authorities.

[10] Some restrictions on international trade also applied.

perforce based on a confusing and often self-blocking regulatory system. Numerous further refinements and amendments would follow before it was possible to speak of a reasonably unfettered private sector in Hungary. Only with the implementation of the 1989 Law on Association was the mix of de facto and dejure rights granted the private sector in 1982 codified in a uniform law passed by Parliament, not contingent on state administrative directives (Sárközy 1988, 9).

But this was merely one more case of socialist law lagging behind the reality of socioeconomic practice and attempting to rationalize its earlier piecemeal legitimation. The 1982 statutes created new forms of private enterprise, but also legalized preexisting second-economy activities and called them "new"; the 1989 Association Law unified regulations introduced in 1982 and thereafter, and stated clearly that this was its purpose. This law was a direct continuation of the 1982 initiative (as well as of some earlier ones) and of other 1980s reforms affecting both private and state firms. Its authors in the Ministry of Finance noted that "results hitherto obtained in the field of company law enable[d] the maintenance of continuity," although it had become necessary to "place the regulations originating from different dates into a uniform context" (Act on Economic Associations 1988, g). In essence, and despite what it did not do,^[11] the 1982 reform expanded the scope and changed the basis of entrepreneurship and private business ownership from privilege —small numbers of licenses granted at the discretion of local authorities—to that of a right based in government decree and a broad regulatory mechanism.

The following section illustrates how the 1982 and subsequent 1980s reforms were tightly linked to the historical development of economic reform and the second economy. The third part of this essay explains why the 1982 reform represented a fundamental political compromise between labor and the Hungarian socialist state. The fourth part describes the leadership's effort to redefine socialism broadly enough to permit accommodation of the greatly expanded property rights of citizens. Finally, I consider the political and economic impact of this redefinition on the Hungarian socialist system.

[11] Many restrictions, unresolved issues, and legal ambiguities remained: for example, limited partnerships for individuals were not permitted until 1987, and then only if at least one member had juridical status; the number of employees for some forms of partnership was restricted; the manner and degree to which individual citizens could establish economic associations with private or state-owned firms was strictly regulated until 1989. In addition, until then, certain types of private partnership operated under a confusing two- and sometimes three-tier system of direct and indirect control: sectoral (e.g., retail vs. manufacturing); state administration (Ministry of Finance, the tax authorities, the economic police), and judicial (e.g. the Court of Registry).

Cycles of Reform and Recentralization

From the start, Hungarian socialism was caught in a seemingly insoluble dilemma. On the one hand, attempts by the party state at economic and political centralization led workers (often in collusion with pragmatic managers) to defend their autonomy and standards of living through a hidden organization of work antithetical to socialist ideology: the informal economy. On the other hand, subsequent reformist attempts to use the informal economy to support a state sector increasingly afflicted by systemic rigidities provided workers with opportunities to accumulate property rights implicit in private and quasi-private work, in turn antithetical to socialism.

During the Stalinist period, and indeed until 1956, the party state was impelled by notions of revolutionary duty to create and defend a socialist collective identity: statecraft came to be synonymous with politics, and the task of politics was entwined with the eradication of intraparty and societal pluralism, private property, free association, and autonomous relation to work. The party state took decisive punitive measures against those it identified as "foes": dissidents, "bourgeois" intellectuals and professionals, and individuals engaged in all manner and scale of private economic activity. At the same time, it drafted a centrally planned economic blueprint that left minimal space for independent decision making by actors in the state sector.

While the end of the Stalin era and the Hungarian revolution of 1956 did not lead to a fundamental revision of this narrow view of politics, they did soften the draconian conception of political objectives. Another cause of this softening, however, is traceable to the leadership's pressing need for workable responses to the rigidities of the classical bureaucratic socialist system, which were becoming clear by 1953. Indeed, as we now know, such rigidities became intractable long before 1989, and gradually eroded the party's effective control over the production and allocation of goods and services. This allocative aspect of politics, which took pride of place in official rhetoric, but had in fact been subsumed by the party's politics of maximal cohesion, became a systemic problem, which left the leadership determined to regain control over production and allocation without surrendering its view of politics. Accordingly, official treatment of all private economic activity alternated between repression and relative unofficial toleration, and economic reforms moved in a fairly clear cyclical pattern of one step back, two steps forward.

The leadership was resolute in its initial attack on the private sector. The nationalization of nonfarm enterprises employing more than ten workers was completed by the early 1950s, and most of the smaller units were forced to join state cooperatives. By 1963, only a miniscule portion of the economically

active population was still self-employed.^[12] And the collectivization campaign of peasant farms, which began in the late 1940s after the expropriation of large landholdings, occurred simultaneously with the institution of a forced delivery system that aimed to substitute centralized redistribution for market mechanisms and ensure agricultural exports to the Soviet Union. After the 1956 revolution, however, many cooperatives broke up, and by 1959 the number of small private farms approached the precollectivization figure (Róna-Tas 1989, 17). The second collectivization campaign was completed by 1962, but in a tacit concession to peasants in the after-math of the violence of 1956, each individual who was a full member of an agricultural cooperative was granted a small household plot for private production and consumption, and thus the opportunity to keep up with the living standard of the industrial wage earner.^[13] Indeed, a vital agricultural second economy eventually grew out of the relationship between the household plots and state cooperative farms.

Still, national economic management in this period aimed primarily at forced industrialization, which shortchanged both agricultural development and private consumption (Galasi and Sziráczki 1986, 3) and hinged on five-year plans that established obligatory targets in terms of macroaggregates and on annual plans for enterprises. This period of centralized planning was characterized by vertical organization of the economy and political institutions, central allocation of production inputs, and "commands" flowing from the authorities to enterprises concerning investment, employment, wages, and prices. The bias toward heavy industry and very large firm size was also clear (Galasi and Sziráczki 1986, 3–5). As long as reallocation and intensive application of previously underutilized resources made extensive growth possible, output and industrial capacity grew rapidly, but this process slowed as labor reserves were depleted and heavy industry was built up and diversified.

But even before the revolution of 1956, and long before the most dramatic expansion of the second economy, the larger society reacted against the elite politics of maximal cohesion. This was most widely evident in the behavior of individuals in the workplace, and in the behavior of firms as economic agents, which together engendered structural problems, such as the hoarding of materials and workers. Almost from the beginning, the

[12] In 1963, 1.9 percent outside agriculture, 2.1 percent among peasants (Andorka 1990, 4). By comparison, when the communists took power in 1948, about half the labor force was employed in small-scale production (Donáth 1977, 38–45).

[13] Andorka 1990, 4. Indications that the state would have to co-opt peasants and that dependence would run both ways appeared early on and contributed to the expansion of the second economy. For instance, allowing peasants to keep a larger number of animals was crucial, because they sometimes slaughtered their cattle rather than compulsorily give them up (Berend 1983, 287–88).

party's responses to such problems helped alter both the original economic blueprint and the political ideology underlying it. For example, the attempt to ease institutional problems led the authorities to make limited concessions to the private sector as early as 1953. Industrial cooperatives of former small firms had been so completely integrated with the state sector that they were producing almost exclusively for the large state enterprises and were thus unable to meet consumer demand (Galasi and Sziráczki 1986, 8). In one of numerous swings between orthodoxy and reform, Imre Nagy's "New Course" partially reversed the earlier attempt to abolish small-scale industry between 1953 and 1955. The new policy allowed members of cooperatives to resign and private artisans to apply for licenses; in a year and a half, the authorities issued more than 60,000 such licenses (Hegedüs and Márkus 1979, 275). But the number of employees in small-scale industry never even reached 1951 levels, a brief resurgence of the trend in 1956 and 1957 notwithstanding. By 1955, amid accusations that "speculators and former capitalists … [who] never pursued any productive activity" were taking advantage of liberalized licensing, increased taxation and cancellation of some licenses slowed the rapid growth of small-scale businesses (Hegedüs and Márkus 1979, 275). Economists proposed that the small-scale private sector be more actively encouraged in an effort to promote flexibility in the economy, but the party further restricted this sector after 1958, and its size consequently diminished (Galasi and Sziráczki 1986, 9).

Indeed, between 1957 and 1964, conservatism in socialist economic management predominated. Nevertheless, compulsory deliveries in agriculture were abolished in 1956–57, and by the mid 1960s, reform was high on the national agenda. In 1968, the New Economic Mechanism (NEM) introduced substantial changes. The NEM decentralized economic management to the extent that it eliminated the system of compulsory plan targets and gave state firms increased latitude in a number of areas (Kornai 1986). During the NEM period, official policy also eased some restrictions on the licensed nonagricultural private sector and on the operation of agricultural household and auxiliary plots. With the 1968 reforms, the household plots, which were supposed to have been "organically" (vertically) integrated into the state-controlled agricultural cooperatives, were encouraged to market their produce either directly or through the cooperatives, which frequently supplied the necessary inputs and technical advice, lent equipment, and often shared profits from the sale of privately or partially privately produced goods. In fact, the finances of state-controlled cooperatives and the private peasant producers were intricately intertwined, amounting to substantial symbiosis.^[14]

[14] For example, calves born in the cooperative were sometimes sold to individual members, who raised them on private household plots; the cooperative then bought them back and sold them to a state enterprise. Because the cooperative was considered part of the socialist sector (although nominally in cooperative ownership, it functioned essentially as a state-owned unit), it received a slightly higher price for the cattle than the peasants would have had they sold them directly to a state firm without the mediation of the state agricultural cooperative. The state cooperative farm typically split the premium with the individual cooperative members who had raised the cattle on their household plots (Andorka 1989).

Outside agriculture, the second economy arose, in the first instance, spontaneously and from below as a result of factors involving the worker as both producer and consumer. The worker as producer—the final arbiter in the socialist economy as in any other—responded to the need for greater autonomy, for demonstrable recognition of work through appropriate incentives, and for enhanced consumption possibilities. Thus, the workers' weak identification with work in the state sector and wish to increase earnings beyond their limited means to do so, together with the state's political decision to maintain full employment in a system characterized by firms' "soft budget constraints" and "investment-hunger" (Kornai 1980, vol. A, 306–9, 189–90), gradually embroiled the state in a struggle of defensive and counterdefensive competition: firms hoarded workers and workers hoarded labor power .

This hoarding of labor power by workers prompted endless debates in the Eastern European literature concerning how best to instill "interest in property"— how to interest workers in expanding enterprise capital (Antal 1985, 279). But workers acted in light of the macroeconomic fact of labor shortage in an economy where firms, ultimately invulnerable to failure, ran at full employment even when the marginal cost of labor was higher than its output. Independent labor unions would, of course, have recognized in this fact a source of political leverage, and the authorities would have been forced, in turn, to acknowledge them as a potential political force. But under socialism, the official labor union would have repressed such organizations. Instead, workers pursued their interests informally. This usually took the form of conserving labor power for second-economy work. Workers also used materials, vehicles, tools, and personnel from state-sector jobs for after-hours second-economy projects or businesses. Even hiring practices in the "official" economic sector were affected: for example, the manager of a state plumbing firm took care to hire workers skilled in bricklaying, wiring, or painting so that the new addition to the factory could help co-workers build their own houses on weekends; later the group might hire out as informal private contractors.

State-sector employees and pensioners could legally work part-time in private small-scale industry from 1968 on. Some of the more prohibitive tax rules were also eased. But it was the varied informal, illegal, or semilegal private activities that had managed to survive that increased the most in

response to the 1968 reforms (Galasi and Sziráczki 1986, 14–18). These activities were more severely punished at some times than at others, but in general the relatively liberal attitude of the authorities until 1972 contributed to their expansion. Private entrepreneurs in the 1960s and 1970s often operated without licenses and secured work orders through first-economy firms. Even in the more orthodox 1970s, harsh verdicts against transgressors could not stop private contracting, partly because it was either expedient or profitable for all concerned; partly because defensive networks of high-trust alliances often protected the individuals involved.

In order to escape notice by anonymous informers,^[15] as well as the jealousy and disapproval of neighbors and acquaintances, second-economy entrepreneurs and their clients developed a coded language of polite ambiguities, and a kind of informal referral service that, drawing on the accumulated information and experience of past transactions, identified trustworthy participants in activities ranging from the simplest exchange to the most intricate cooperative arrangement. Such informal social mechanisms further reinforced the strong incentive to private entrepreneurship born of the shortage economy, which was therefore preponderantly a seller's market (Kornai 1980, 1992). And thanks in part to informal networks of trust, the window washer and plumber, like the electrician, auto mechanic, dentist, or language instructor working after official hours, were far from paralyzed by the need for caution. A provider, to be sure, was always selective, but if satisfied with a client, might establish a durable professional relationship based on loyalty, not only to the individual, but often also to his or her close friends and relatives. Most evaded punishment for unlicensed private activity, which could be harsh: property was confiscated, heavy fines were levied, and people were sent to jail for terms of several years' duration (Hegedüs and Márkus 1979, 280).

During the recentralization of 1972–79, industrial concentration increased. The number of firms decreased, while the percentage of workers employed in firms of more than 1,000 grew as smaller firms were reorganized into larger enterprises and mammoth trusts. This was done on the theory that the bureaucratic chain of command would be simplified and macroeconomic planning rationalized, since consolidated firms would not compete against one another or duplicate productive efforts. Between 1972 and 1974, hard-liners also attempted to reverse the expansion of the agricultural second economy of household plots, citing the "threatening development of rural capitalism." A powerful agricultural lobby, which included directors of agricultural cooperatives and party leaders from agricultural

[15] Producers, and to a lesser extent also consumers, of second-economy goods and services could be reported at any time by anonymous informers—a well-established, very common practice in Hungary, which invariably led to investigation by the authorities.

regions, fought the reversal, however, with the result that the conservatives were only partially successful (Andorka 1990, 5). By the late 1970s, the process of commercialization of private small-scale agricultural production was well under way (see Szelényi 1988).

Nevertheless, the truncated process of economic reform and partial reversals of earlier liberalization left industry poorly suited to adapt to the new, more stringent international economic environment following the first oil crisis. Hungary responded to the oil crises and ensuing trade account imbalances with an effort to extend its long-standing model of extensive growth: since domestic inputs of labor, capital, and raw materials had already been mobilized, the country turned to external credit. By 1978, however, in the context of deteriorating terms of trade (owing partly to Hungary's increasing import-intensiveness and loss of market shares to the newly industrializing countries) and to rising interest rates, debt service could only be met by holding down consumption and expenditures on social services, and real wages fell between 1978 and 1980 (Andorka 1990, 5–6).

A new wave of reform measures began in 1979 with the attempt to bring domestic nonagricultural producer prices in line with world market prices. The new policy, which also included reduction of some food subsidies, was implemented as part of a larger effort to reduce foreign indebtedness through the restriction of domestic demand. This in turn led to a fall in real wages and to a trade surplus that helped reduce the country's foreign debt slightly (Galasi and Sziráczki 1986, 22). And in an attempt to increase economic efficiency, a number of large companies were now reorganized into smaller ones, while other large plants were decentralized, so that some three hundred new state-sector firms were established between 1980 and 1983.

As mentioned earlier, these cyclical reforms served temporarily to maintain the socialist political structure.^[16] But as we have seen, by the mid 1960s, a very real and somewhat ironic disjuncture between the "planned" and the "unplanned" economies had developed. On the one hand, the ubiquitous second economy operated on the basis of informally institutionalized high-trust alliances that entailed a retreat to seemingly antiquated forms of economic transaction, which turned on rituals of formal behavior and on the personal reputations of participants. On the other hand, the National Planning Office still struggled to construct balances with the aid of input-output models or mathematical programming in the pursuit of ever-greater plan consistency.^[17]

[16] For example, by solving specific problems, improving economic performance in a particular area, or at least giving the impression that the authorities understood the system's weaknesses and had the resulting problems well in hand.

[17] I refer here to the various methods used to improve on the "manual" method of elaborating material, product, semiproduct, manpower, and financial balances.

The elements of future change emerged from this disjuncture and began to accumulate as an institutional residue of reform, whether the architects of reforms intended to perfect "scientific" socialism or to create a "market" variant. Indeed, as the interplay between systemic economic crisis and social pressures forced party leaders to consider new reforms, they turned, not only to stories of partial success, but also sometimes to elements of once-repudiated programs and to progressively inclined officials and scholars who had enjoyed greater influence during earlier reform campaigns.^[18] All became essential components of the institutional residue that not only made imaginable and possible but also justified increasingly radical experiments: reforms like the 1982 property-rights reform, further liberalization of both the state and private sectors after 1982, and, ultimately, the transformation of the system as a whole.

Often, old concessions became the basis for new reforms, like buried blueprints for change later rediscovered and adapted to new circumstances. Take the party's acceptance of private plots in agricultural cooperatives and, later, of increasingly commercialized household-plot production. Seen as necessary evils, these plots were originally meant to be tolerated only temporarily on the way to large-scale, "modern" agriculture, and in the meantime were supposed to be fully vertically integrated into state cooperatives. But as we have seen, the outcome was quite different, especially after the 1968 New Economic Mechanism. Even as a growing number produced directly for the market, many of the private agricultural activities of these plots came to be symbiotically integrated financially and administratively with the statecontrolled cooperatives.

Some analysts, in fact, understand the 1982 reform of property rights as a straightforward, pragmatic extension to industry, construction, and services of reforms that had met with reasonable success in agriculture (see, e.g., Hare 1986, 35). Hungary's positive experience with household plots was indeed a crucial factor in the party's acceptance of the 1982 Statutes. But the implementation of the 1982 reform proposal (or of any other advanced in the 1980s) was not assured, and a functionalist explanation based on the success of predecessor reforms cannot fully account for the party's adoption of increasingly radical reforms. As we shall see, high-level officials had to wage an intramural political struggle on behalf of the 1982 reform, and ultimately prevailed through tactical maneuvering and innovative adaptations of reform discourse that harnessed a shared experience of reform to their purposes. To make sense of this battle, however, we must focus briefly

[18] A number of people in the Ministry of Finance or its associated research institute (Pénzügykutató Rt.) who were connected with the 1982 reform and other 1980s reforms had also been involved between 1963 and 1968 with the planning of the New Economic Mechanism (Székacs 1990).

on one of the principal political-economic forces that compelled these reformers to act. Specifically, we must examine how workers' second-economy strategies forced the socialist system to begin to internalize the realistic costs of highly motivated labor.

Internalizing an "Externality":
the True Cost of Labor and Applied Knowledge

The most rigid structural characteristics of the socialist system at times afforded workers the opportunity for resistance, and the rapid growth of the second economy in the 1960s both enabled and this resistance (Gábor 1988). From then until the 1982 reform, the second economy—originally a coping mechanism for an experimenting state and a forcibly reorganized society— served as socialism's silent counterpart to capitalism's adversarial bargaining. The second economy is, in fact, one indication of the limits of rationality under a centrally planned economy, much as unemployment indicates these limits under capitalism.

In the foregoing section we saw that state-firm managers tried to protect themselves from the exigencies of the plan by hoarding workers, and workers hoarded labor power largely because the shortage economy demanded the goods and services they could produce outside working hours and/or on the side at state jobs. In this context, the control that managers and union officials could exert over workers was further compromised by the expansion of second-economy earning possibilities after 1968. On the one hand, firm managers' ability to increase wages remained limited even after the 1968 reform, and the nonmonetary incentives they could offer workers (e.g., housing, preferred vacation slots, and desirable work assignments) were often in short supply. On the other hand, the guarantee of full employment and the party state's reluctance to use force, especially after 1956, blunted managers' credible threats against workers who shirked or withheld effort. Managers' ability to reward and punish was curtailed in other ways. For example, even an openly uncooperative worker could reasonably expect that he or she would eventually receive many of the benefits allocated through state firms. For one thing, housing and vacations accrued as rights to state-firm employees. For another, state-firm managers who maintained good relations with all available workers could expect an easier time meeting plan targets. Finally, managers' discretionary application of incentives was restricted by the fact that workers' "pay" came in several administratively determined forms (guaranteed subsidized housing, free education and medical care, subsidized food, etc.), of which wages were, in effect, a residual category: in a sense, pocket money granted by the "paternal" state (Kornai 1993).

In short, even as the socialist system of work unwittingly provided workers with subversive capability, the system also attempted to externalize the true

cost of labor power.^[19] Although this attempt was never fully successful, workers suffered the consequences of the lack of property rights of disposal over their time and energy — or of rights poorly defined — and of firm behavior minimally constrained by markets. In a capitalist system, workers are a long way from being free to set the price of their labor power. But whatever the costs and risks, their relative freedom to relocate, to choose selfemployment, to work with friends, to obtain further training without need of official permission, or to switch professions, is far greater than in the socialist system, where most labor power could officially only be sold to the monopoly buyer: the state, represented by its firms.^[20] Even in relatively liberal Hungary, where especially after 1968, workers were free to change jobs and relocate, and firms had more autonomy in investment and wage decisions, serious hindrances to the institutionalization of smoothly functioning labor markets remained (Galasi and Sziráczki 1986, 14). In the context of full employment and labor shortage, firms persisted in their efforts to hoard workers in a variety of innovative ways, even as these failed to satisfy their "labor hunger."

Paradoxically, despite the lack of organized collective bargaining through independent trade unions, this situation afforded workers increased informal bargaining power as firms developed internal labor markets in the effort to keep them (Galasi and Sziráczki 1986, 15–16; Stark 1986): in effect, a

[19] Externalities are generally understood as the beneficial or negative effects that the production activities of firms bring to bear on one another. However, I want to generalize the concept here to include the beneficial or harmful effects that a group of state monopolies — socialist firms — may have on a factor of production, in this case, labor. Here, there are several externality-generating activities that lower the production or utility of the externally affected parties, including maintenance of administrative labor markets prior to 1968, and thereafter, of firm-level and economywide wage controls by indirect means. But fundamentally, the externality-generating activity is the curtailment of workers' choice between self-employment and employment by the state—that is, the effective abolition of private entrepreneurship. For an interesting discussion of externalities, including an elucidation of the long-standing debates over the income effects of transaction costs (e.g., Coase's theorem, whether the identity of owners matters, etc.), see Demsetz 1988, vol. 1, esp. chs. 2 and 7.

[20] Two distinguished Hungarian economists have summarized the pre-1968 system in this way: "Central economic management attempted to restrict the enterprises' and employees' freedom of action in the allocation of labour as well as in the determination of wages. It tried to diminish unplanned labour turnover through legal punishments against 'migratory birds', and those who quit their jobs without employers' authorization ('unjustified turnover')" (Galasi and Sziráczki 1986, 12). The point, of course, is not that capitalist labor markets function purely through the price mechanism, or that socialist ones function solely on the basis of allocation; either characterization would be overdrawn. The authors show that in socialist practice, labor allocation "from the outset included some elements foreign to the nature of a system of obligatory plan targets" (ibid.). The foregoing is simply meant to illuminate differences in the degree to which administrative versus price mechanisms controlled classical socialist labor markets, which, in practice for most socialist workers, did amount to a difference in kind .

kind of micro-level internalizing of the "externality"— in this case a more realistic approximation of the cost of workers' labor power. Specialized and skilled workers were best situated to bargain up their wages, but virtually all workers could conserve a portion of their energies for second-economy projects. Thus state employees, the overwhelming majority of the population, maintained informal veto power over the only resource they effectively commanded at work: their own labor power.

By the early 1960s, with the rapid growth of the informal second economy, rigid wage-fixing and restrictions on labor mobility had become untenable. Even the changes wrought by the 1968 New Economic Mechanism could not, however, significantly moderate firms' demand for labor, worsening labor discipline, and the reduction in the ratio of wages to living standards, despite increasing wages. In the early 1970s, "drastic" direct intervention in the labor market proved unsuccessful and temporary (Hare, Radice, and Swain 1981, 49–53).

The 1982 reform of property rights represented a partial macroeconomic internalization of the externality. Workers had previously borne the financial and opportunity costs of administratively determined wages and forced state employment. At a deeper level, society as a whole bore the costs in loss of international competitiveness and comparatively low living standards. Now the party state would officially assume the "cost" of the highly motivated labor of the significant segment of the population willing to work intensively on their own account or for private-sector employers. It would, for instance, bear the practical costs of regulatory adjustment, as well as the ideological and political costs of an expanded private sector.

It appeared that the party and second-economy participants had made a mutually beneficial trade. On the one hand, the leadership would lighten the burden of the system's accumulating incapacities by allowing private production to meet consumer demand that state firms were unable to satisfy. The state could also collect tax revenue from private firms. On the other hand, citizens achieved the absolute right to dispose of their own labor power, as well as rights of control over, residual income from, and alienability of private enterprise.

Given this apparently mutually beneficial trade, then, it may be tempting after all to view the reform as a straightforward functional response to systemic economic exigencies. But if this is the case, why did other socialist countries not pursue a similar course? A combination of conjunctural and historical factors are frequently marshaled to account for the difference in the Hungarian response. The conjunctural factors have received widespread attention, especially Hungary's onerous foreign debt;^[21] among the

[21] Fearful of the social consequences of the price hikes implemented in 1979 and thereafter, the leadership hoped that the increases would be tolerated if they were not accompanied by serious shortages. The econonmic crisis made capital- or import intensive solutions to recurring shortages more costly, however, and writing on the wall was clear: they would soon be beyond reach even as temporary expedients. The assumption of a large foreign debt in the 1970s and early 1980s, for example carried tremendous new costs of its own in the form of debt services, pressure from international financial institutions and, by 1982, near-default. In addition, despite the fact that neither actually occurred on any significant scale, anticipation of wholesale reduction of subsidies to state firms and the possibilities of bankruptcies led reformers to think of private firms in terms of potential job creation in the event of state-firm layoffs.

historical factors, the social pact struck by leaders and society in the aftermath of the 1956 revolution figures prominently.^[22]

However, conjunctural and historical factors amounted to necessary, but not sufficient, conditions for the implementation of institutional reform. Many of the economic pressures experienced by the Soviet Union, Czechoslovakia, Bulgaria, Cuba, and even the much-vaunted former German Democratic Republic were as severe or worse than in Hungary, yet these countries undertook no comprehensive reform of property rights. And while the 1956 revolution helps explain the initial consumerist pact, it cannot account for its repeated renegotiation—for the dynamic process of reform and retrenchment, with its many points of political struggle.

Understanding what made Hungary different requires that we turn now to an analysis of a high-level reformer's perceptions of and justifications for the trade-off between decreased central control on the one hand and citizens' rights to engage in private enterprise on the other.

The Politics of Property-Rights Reform:
Tactical Lessons, Discourse and Adaptive Identity

In 1978, against a historical background of official denunciation and persecution of unlicensed second-economy activities, the Central Committee identified "the utilization of leisure time" — by then an unmistakable euphemism for time actually or potentially spent working in the second economy — as the most likely source of improved living standards (Fekete 1990, 16). Moreover, in open contradiction to socialist ideology, the Hungarian Socialist Workers' party legalized and began to foster the expansion of private enterprise. Why and how did the Hungarian leadership reach the

[22] The unspoken assumption of this social pact was that in exchange for its political quiescence, the population expected an improvement in the material conditions of life; that there was, in fact, an unmarked but strongly felt consumption frontier that necessarily set the broad parameters of economic policy. To be sure, these parameters were also determined by systemic pressures common to all socialist economies. But given the imperative of defending this consumption frontier, together with the fact that Hungary is a small and relatively open economy, these same systemic pressures left the leadership with fewer degrees of freedom than the Chinese, Soviet, Czechoslovak, or, for different reasons, perhaps even the Polish leadership to avoid institutional reform. See also Szelényi 1989, 221.

decision to legitimize activity that had until then been considered criminal; and, furthermore, to create new legal channels for private and quasi-private business?

Part of the answer has to do with social and political learning. By the late 1970s, experience with reform and the size and scope of the second economy had taught political leaders and academics alike new lessons about Hungarian social reality. The object of the lesson varied among groups, as did their adaptive responses. Even, before 1982, party and state officials, like their Polish counterparts, sometimes helped families and friends obtain leases on state shops or licenses to open private ones. Indeed, in Budapest lore, behind every fashionable boutique hid a powerful party member or government official. And if not every bureaucrat-politician was actually an incipient private businessman, the infiltration of the second economy into the state sector had nevertheless already done much to change officials' calculus of private interest (Hankiss 1989, 126).

If an official also advocated reform, then he belonged to a distinguished group that included both academic economists and members of the party-state apparatus who had been associated with the stalled 1968 reform, and whose intellectual and moral authority was fortified by the severe, accumulated economic pressures that account for the timing of the 1982 decrees. But some officials had also learned the specific tactical lessons that would make them possible, and knew how to put established procedure in the service of change. It was high-level functionaries of the National Planning Office who set about the process of drafting a reform proposal that they perceived as politically risky, and that one Hungarian sociologist describes as "coup-like" (Fekete 1990, 15–16), because it involved a small, specially selected group of technocrats relieved of their regular duties, working in near secrecy and with relative speed. If not for the self-conscious political decision by this small group of high-level reformist officials in the Ministry of Planning (and later, the Ministry of Finance) to harness the history of reform to the service of their program, it is doubtful whether the wider party would have approved the 1982 reform of property rights.

This process began with the establishment in 1979 of an "expert commission" that included economists and sociologists who had undertaken extensive research on the second economy.^[23] It continued in starts and stops over the next three years, and it met at various points with resistance from the central economic management and within both the party and government apparatuses. Eventually, the process broadened to include the participation of other ministries (Finance, Industry, Labor, Justice) and culminated in a proposal that, despite the best efforts of the reform's sponsors to avoid

[23] Among them were the economists István GáIbor and Péter Galasi and the sociologists Pál Juhász, Támás Kolosi, and Robert Manchin (Fekete 1990, 18).

controversy, ultimately became the subject of intense debate within the party and government. These debates and the public campaign^[24] that followed were conducted in an idiom carefully crafted to emphasize the innocuous, "socialist" nature of the reform. To this end, its sponsors took great pains to distance the "new" private sector to be "created" by the reform from the extant second economy—until then the subject of official disapproval even as unofficial toleration increased. In this ideologically correct public discourse, the "new" private sector was repeatedly referred to as a "helper" or "background" economy for the socialist firms: private partnerships—especially the intrafirm work partnerships-would be the "household plots of industry." These terms emphasized harmony and labor exchange between the state sector and its "helper" sector, and carried the reassuring implication that the latter would be self-limiting.^[25]

The redefinition of the second economy amounted to an effort to divide it into parts that would be ideologically acceptable and therefore "integratable." As mentioned earlier, the economic success of the agricultural mixed model turned out to be particularly reassuring to both reformers and conservatives among the leadership. Household plots, seen as "organically integrated" into socialist cooperatives, had not palpably upset the balance of domestic political power. Therefore, the reasoning went, the small manufacturing firms and service establishments that could be expected to grow from the 1982 reform would help industry as the household plots had helped agriculture.

For tactical reasons, the validity of the analogy, although occasionally questioned during 1981 debates within the state apparatus, was not seriously challenged. Nevertheless, the analogy was incomplete at best. Virtually all the household plots operated under the aegis of state cooperatives or other state institutions, and capital accumulation was severely restricted by their small size and because they were universally a part-time undertaking. Moreover, their "private" nature was ambiguous, since opportunities for expansion or transfer of the plots were quite limited.^[26] Thus their overall effect on the property structure of the economy was hardly appreciable, even if their impact on agricultural production was striking (Andorka 1990).

There was another difference, however. A much larger segment of officialdom might now either be threatened by, or gain from, the expansion of private industry and services beyond the confines of agricultural and other

[24] The purpose of the media campaign was to try to get people to accept the legalized second economy as a part of the plan to build a better socialism: it was necessary precisely because the public had become accustomed to rhetoric condemning informal private enterprise as corrupt and its practitioners as "exploitative speculators."

[25] David Stark makes a similar point, and analyzes the broader significance of factory work partnerships and other "mixed property forms." See Stark 1989, esp. 142.

[26] The plots could be given back to the co-ops.

state cooperatives. Depending on the position, connections, and skills of the official, granting private businessmen favors or eased access to shortage materials might now result in larger bribes, or even in a share of profits (see, e.g., Oi 1991). On the other hand, not all officials would be equally well positioned to take advantage of such rent-seeking activities, the scope for which might in any case presumably shrink as the economic and political clout of private business grew.

All of this was left unsaid, however. In fact, reformers tried hard to present the new regulations as a relatively insignificant matter. They framed the proposed reform as, at worst, a marginal expansion of the concept of state socialism. As former Minister of Finance Istváin Hetényi, one of the chief architects of the reform, put it:

If we had [already] been able to declare that for the state firms, the profit criterion and demand should be the engines, and not plan indicators, then it was much simpler to declare that this was so for the individual. The issue was, did private activities fit into socialism or not? They fit because by 1968 we had turned away from the Leninist conception of socialism as one large factory. What remained was that this wasn't an exploitative society. So everything that wasn't exploitative—private firms employing large numbers of people—was already included in the definition of socialism, or somehow got included. (Hetényi 1991)

However, both the secretive "coup-like" methods employed by its sponsors and their efforts to head off potential discord within the party-state apparatus suggest that at least some government and party leaders were aware that the proposed reform was an unprecedented ideological departure and a potential challenge to their authority from within their own ranks. Nevertheless, most did not seriously entertain the possibility that an expanded private sector might grow into a broader political challenge to the system as a whole. Hetényi confirmed this.

There was serious opposition in the ministries and in state management, which in the final analysis is explained by the fact that the reform decreased their power, as did everything that was permissible to do without them… [the private sector] wasn't controllable like large [state] firms — which, I need not remind you, were controllable even after 1968éafter the abolition of command planning. And in certain cases expansion of the private sector meant competition for the large [socialist] firms.

Because of the various political considerations, great juggling and wizardry were needed to find the new socialist forms that would be appropriate for small-scale private production. [Take] small cooperatives, for example. We explained that this socialist — or a little bit socialist, or half-socialist—type of activity wasn't foreign to socialism. Certainly, capitalist organization was not included here. Because we labeled these new forms partnerships, small cooperative[s], and so on, they received a patina of socialism, and the message was

that [they] hurt no one…we could solve this by the forms we chose and by emphasizing that this reform really provided opportunities for the workers. This eased the fears of many politicians: it wasn't about capitalism—or about capitalist entrepreneurs, but tens of thousands of workers would be able to earn additional income. (Hetényi 1991)

We see here that, despite the efforts of reformers like Hetényi to down-play the impact of this reform proposal, nothing less than the accepted definitions of both capitalism and socialism were at stake. It is not immediately clear how we should understand the statement that "capitalist organization was not included." Certainly, the economy remained organized largely along socialist lines. It bears repeating, however, that several of the property forms instituted in 1982 were unambiguously private. Even those that were nominally "socialist" (like the "small cooperative") were privately (albeit cooperatively) held; and—the different requirements for their establishment notwithstanding—functioned exactly like private businesses.^[27] No formal limits on investment were set for any of the new business forms, although some were restricted as to the number of partners or employees. No capital market existed yet, but in theory at least, private entrepreneurs would be able to obtain loans from Hungarian banks. By the late 1980s, the remaining restrictions on numbers of employees had been lifted,^[28] and the difficulties in obtaining formal credit had been eased.

The organizational forms chosen by the reformers functioned like a veil that partially obscured their nature, as Minister Hetényi himself indirectly allowed. By insisting that "capitalist organization was not included," Hetényi was trying to maintain nominal conformity with an inoperative ideology: the 1982 reforms provided opportunities, not for capitalist entrepreneurs, but for worker entrepreneurs. However, this was no simple case of maneuvering or posturing. It was the adaptive response of a socialist reformer to the contradictory requirements of his position. Hetényi was not the only high-level official who over the course of a long career attempted to reconcile the conflicting goals of a system he believed he served best by trying to improve it from within. Nor was he a capitalist in socialist guise. Indeed, while a few of the most fervent advocates of private enterprise may already have been looking ahead to a market-based system, they were not the norm. Looking back in 1991, Hetényi expressed it in the following way:

If someone says that they saw a private market economy in this reform, or a mixed market economy—well, perhaps; but it wasn't of the order of a system change, although in retrospect this is less clear. What was clear then was that in

[27] The one difference—the supposedly "indivisible capital" of the cooperatives—was easily bypassed through informal means.

[28] Unless one counts as significant the limit of five hundred employees. This final fig-leaf" restriction was also lifted after the first parliamentary elections.

Hungary, politics were highly pragmatic. Of course, we had to keep the rule: there should be no exploitation—that is, no private firms employing large numbers of people. (Hetényi 1991)

However, even if Hetényi and some of his high-level colleagues in the Planning and Finance ministries were relatively sanguine about the 1982 proposals at the time, the view from elsewhere in the bureaucracy was different. Middle-level officials of the National Planning Office who participated in the drafting of the proposal based on opinions expressed by the "expert committee" were "astonish [ed]" when in 1980, the party's Political Committee approved further work on the reform proposal (Fekete 1990, 20). These officials knew that although both licensed and informal private entrepreneurship had been increasingly tolerated since 1968, for as long as the party felt able to do so, it had resisted the step of legalizing most preexisting informal second-economy activities and creating new legal private business forms. In fact, at the eleventh hour, the party leadership allowed the project to languish because of a slight economic upturn: by the spring of 1980, the population had accepted the domestic price hikes quietly, and the balance of payments improved with a rise in convertible currency exports. But in early summer, a further deterioration in the external balance showed that the reprieve had been temporary, and the leadership demanded a stepped-up pace from the commission assigned to work with the various government agencies and ministries to formulate what would become the 1982 reform of property rights. Some in the Planning Office assigned to the project were highly skeptical about the chances of such a proposal ever being implemented, and refused to believe that it had received the "political green light" from above. Others were afraid of later political reprisal, and one department head actually refused to sign "such a document, [saying] he did not want to be jailed for ten years." Among the few officials with "informal knowledge" of the preparatory work under way, some "mocked" it ("Who is backing you that you dare such things?"), still others were concerned about the betrayal of socialist ideals, and very few openly supported the idea, although some "kept their fingers crossed in secret" (Fekete 1990, 21–22).

The party's application of historically and ideologically laden language was a reflexive process. Reformers used this language to conciliate the claim that an expanded market sector based on private ownership could coexist peacefully with the state sector and the political status quo, and their own tactical awareness that winning the larger party and government apparatus over to this viewpoint would be difficult. But peaceful coexistence seemed plausible in the first place because by the late 1970s, the Hungarian socialist system had become identified with its long history of pragmatism. The system had partially reformed itself often enough so that to most members of the party-state apparatus, the possibility of revolution seemed as remote as

the possibility of actually naming a part of that system not socialist. In effect, any "pragmatic" reform that was proposed came to be viewed as yet another manifestation of a reformist socialist regime. By this time, party leaders, once impelled by a mandate of vigilance against enemies internal and external, were either uninterested in distinguishing "friend" from "foe," or unable to do so, except in the narrow sense of tactical "enemies" —those who opposed their plan of the moment. The system was even able to accommodate champions of radical reform. The institutional residue of reform had unhinged expectations to the point where, at least from the perspective of reform-minded "insiders," the essence of the system was a certain malleability. In this context, a new discourse of property-rights reform was constructed under the safer rubric of liberalization of the second economy, with virtually no reference to ownership or property rights per se. This discourse altogether avoided the fact that the 1982 reform was much more than the liberalization of supplemental earning possibilities for workers—that it was, in truth, an institutional reform of property rights with far-reaching sociopolitical effects. The reform turned out to be a watershed in the process of de-étatization of the economy. But given the institutional residue of reform in Hungary, parties to any particular reform debate could always locate the "turning point" either in the past or in the future: it never had to be the reform under discussion. For many, the real turning point that made Hungarian socialism "different" was the New Economic Mechanism of 1968; for some, it was the early reforms of the 1950s; and for still others, it had yet to occur. In any case, proponents of reforms—especially later ones—had a good chance of defusing political debate.

Accordingly, in 1981 party debates, sponsors of the reform maintained that it was not a threat to political stability and would not alter power relations in any significant way. And, since in certain aspects the reform represented an ex post facto legalization of long-standing second-economy practices,^[29] some officials and potential entrepreneurs alike mistakenly dismissed it as just another phase in the familiar cycle of repression and toleration of second-economy activity.

However, by explicitly redefining both the legal limits and content of property rights, the party state effectively lost its three-decade battle to keep the second economy within boundaries it tacitly deemed "acceptable." In principle, the 1982 reform could have been rescinded, since it was not yet firmly anchored in the constitution and in the fundamental political changes of 1989.^[30] In practice, unless the reform had been rescinded very

[29] Notably the intrafirm work partnership, which institutionalized earlier informal bargaining between skilled workers and state-firm managers. See Stark 1989.

[30] Like almost everything else about the 1982 regulations, this too was somewhat ambiguous. Ultimately the day-to-day efforts to harmonize the complex regulations fell to the Ministry Finance, although some types of firms were registered with the Court of Registry, bringing them under constitutional authority.

soon after its enactment into law, the party would have had to launch a new national program of expropriation to take back the property rights it granted the citizenry. This would have required that hard-liners gain the upper hand within the party, and that they be willing to use force. Such a move, in turn, would have further undermined the already weakened legitimacy of the party, and not only in the obvious sense that the use of force might have rekindled the passions Of 1956. In addition, given the practical and ideological justifications for the "helper economy" that officials advanced in the aggressive media campaign to educate the population about the reform, reversal would have damaged the party's credibility beyond redemption.

Hybrid Economy and Polity

In our story, economic reforms have figured as the formal, ex post facto expression of underlying shifts in the system of socialist dependencies. We have seen that despite the hierarchical nature of this system, workers were able to force concessions from the state by rechanneling their labor power into informal economic activities. Eventually, the leadership faced an impossible choice. Either it had to implement economywide institutional reforms like those currently under way in postsocialist countries, explicitly restructuring the state sector and inciting a broad coalition of political opposition; or do nothing and risk serious political unrest on the part of a populace accustomed to a relatively high consumption standard.

Against this background, the 1982 reform of property rights was at once plausible and radical. It was a way out of the dilemma, and could be conceived of as part of a broader effort to stimulate market competition in the state sector.^[31] By adding "small enterprises on a large scale" (Buky 1981)— in short, by modernizing the second economy—reformers hoped to create a sector of small-scale firms that would increase the flexibility and efficiency of large state-owned firms.

[31] For example, small independent enterprises were formed by breaking off from a large trust or enterprise. The former were no longer subject to many types of detailed administrative interference and reporting requirements, and no longer received subsidies or access to materials through the parent organization, which, correspondingly, could no longer siphon off resources from the newly independent enterprises. Also, prior to 1982, only a ministry, some other national agency, or a local council could found an enterprise. After 1982, enterprises could establish subsidiary companies. See Hare 1983, 323–25; and Comisso and Marer 1986. For the rationale behind the whole range of institutional reforms undertaken in the early 1980s, a description of the "menu" of models needed to introduce flexibility into the Hungarian economy, and the legal and organizational forms employed, see Sárközy 1988, 80–103.

Party leaders attained their short-term goal of stabilizing consumption levels because the reform led to the population's almost incredible self-exploitation: in the 1980s, Hungarians worked the longest day in Europe (Economist Intelligence Unit 1990, 9). In the longer term, the reform had far-reaching, unanticipated consequences. The contention of some analysts that the 1982 statutes hardly altered the "statist character" of the Hungarian economy (e.g., Kovrig 1987, 122) is accurate only if we consider fixed capital assets or official measurements of the national product; and then only in the static sense. Although 80–90 percent of the means of production were still state-owned as of 1990, it was also estimated at that time that the second economy—in all its traditional and newer manifestations—accounted for up to 30 percent of GDP.^[32] Poor in capital, but rich in highly motivated and skilled labor power, this sector produced goods and services far out of proportion to its capital assets.

In addition, by 1988–89, economic work partnerships, small cooperatives, and independent craftsmen cooperated routinely in numerous ways that were important to their individual stability and growth prospects. This cooperation ranged from simple barter deals (one firm's microcomputer repaid by another's work on a rush project) and the subcontracting of overflow work, to informal information-sharing or the pooling of resources. And once the 1989 Law on Association eliminated the legal, if not all actual, discrimination against private firms, as well as the barriers to their interaction with the state sector, the earlier establishment of forward linkages with state firms began to produce new forms of cooperation between the two sectors, such as an increasing number of joint ventures.

In sum, private business expanded more rapidly and robustly than many officials expected (Fekete 1984, 28–29), and its political-institutional consequences imposed a significant burden of change on the government. The seemingly endless round of amendments, modifications, and subsequent reforms that the Ministry of Finance was forced to undertake between 1982 and 1989 indicates that once property rights are granted to groups thereby legally enfranchised, the pressure to broaden those rights grows from its own logic.

Many new issues arose in this period. If, for example, the party permitted private enterprise, it also had to allow the purchase of real estate on a commercial basis. If banks could lend the funds of private businesses to state firms and to individual borrowers, how would the party justify denying private businesses equal access to commercial loans? And if one purpose of the "helper economy" was to ease shortages and bottlenecks, on what basis would private firms be prevented from establishing joint ventures with domestic and foreign firms, or engaging in cross-border trade?

[32] István Gábor, quoted in "Italy on the Danube," 1991.

We have seen that the balance of power between the ubiquitous subterranean second economy and the state had been changing prior to 1982 as well. However, as long as the renegotiation of this balance remained largely tacit, it was essentially stable within broad institutional limits. Formalization of this relationship upset the balance. Simply put, prior to 1982, the state could pursue more or less tolerant policies toward the informal sector, but the limits of its authority were substantially redrawn with the institutional reform that redefined the rights of second-economy participants. Moreover, once legalized on an expanded basis, the party took on the official responsibility for the mediation of the internal systemic contradictions engendered by the conflicting logics of private and state-firm activities pursued in a socialist framework. These contradictions took the form of pressing daily problems in need of immediate attention, usually from the Ministry of Finance, which issued decree after decree in the effort to resolve them. The net effect of such decrees was the broadening of second-economy entrepreneurs' property rights and space for action, and a blurring of the lines of authority within and between various government institutions previously responsible for overseeing the small pre-1982 formal private sector.

These broadened rights posed challenges that extended beyond coordination of increasingly complex economic mechanisms. Once endowed with legal status, individual entrepreneurs and various organized groups pressed for further changes. For instance, transmission-belt organizations, responsible for "representing" the interests of the small traditional legal private sector of manufacturers and retailers, were internally disrupted because the government changed the economic landscape overnight without specifying their new mandates (Seleny 1993, ch. 6). In 1987, entrepreneurs formed their own independent interest-representation organization, which helped extract concessions for the private sector (e.g., on tax policy); and a year later, entrepreneurs formed a political party.^[33]

Finally, having partially internalized the cost of highly motivated labor and its applied knowledge, as well as the accountability for the systemic contradictions this implied, the government set in motion a process that would culminate in an even more radical internalization: the 1989 Association Law, whereby it all but abandoned pretense at controlling the number and organizational types of private businesses.

[33] The Entrepreneur's party was never very large or powerful, since the entrepreneurs were not a unified political bloc in Hungary, any more than elsewhere. But in 1988, the Smallholders' party, the strongest political party from 1945 to 1948, reestablished itself and again advocated a strong private sector, especially the reprivatization of land. Over the next two years, the interests of the private sector began increasingly to figure in the platforms of the other major independent parties as well.

Still, there had been significant opposition to the 1982 reform. Progressive officials were able to overcome this opposition and implement their program because they self-consciously cast the reform as a continuation of socialist tradition. The same reform discourse, to be sure, would not have resonated in the same way elsewhere. But in Hungary, this discourse was plausible even to hard-liners, because it drew on a forty-year history of greater and lesser departures from central planning, and was eventually accepted as "fitting into"—not threatening—a "pragmatic" Hungarian variant of socialism.

This victory by reformers marked the point of no return in the long transformation. As we have seen, a new program of expropriation and nationalization would have required force, and would have seriously destabilized a regime whose legitimacy had already been eroded. Secondly, this remarkable shift in official ideology had profound consequences. To the extent that a society is shaped by a common ideology, it is effectively governed by what one scholar calls the "regnant metaphor." Such a metaphor infuses the lives and struggles of those who believe in it with transcendental meaning; even skeptics and unbelievers cannot altogether escape its influence if it is pervasively institutionalized. A society that merely dethrones its regnant metaphor risks anarchy; one that openly supplants it may undergo revolution (Cruz-Sequeira 1994). In Hungary, as elsewhere in the socialist world, the party state upheld a metaphor of social life as an existential battle between friend and foe—and private enterprise had long been regarded as an archenemy. This metaphor was partially modified early on in practice; but it was explicitly and comprehensively altered only in 1982. The "foe" became "friend" and "helper" in official rhetoric and law; private enterprise would thereafter be society's enemy only if it transgressed limits established by socialist law.

Conclusion

The 1982 reform of private property rights—a late manifestation of recurring reform cycles—further destabilized party ideology, social attitudes, and behavior, even as it proved insufficient to stabilize the economy in the long run. Like earlier reforms, once enacted, the 1982 property-rights reform narrowed subsequent choices for the leadership. Unlike earlier reforms, the 1982 reform created new institutions and explicitly political actors: newly legal forms of economic association, ownership, and work that enfranchised a broad, but previously vilified, social group on a very different political basis. Moreover, by enfranchising groups upon which it had, ironically, become partially dependent precisely because it had marginalized them for so long, the state surrendered its exclusive control over ownership, production,

employment, and resource allocation. The system came to depend, in fact, on those it had excluded: second-economy entrepreneurs and "radical" reformers.^[34]

Most profoundly, the relationship between the second economy and the socialist state led to the mutual absorption of two extreme conceptions of politics: the one a balancing of socioeconomic interests, the other having to do with the formation of essential identity and the maintenance of maximal cohesion within the party state. In Hungary, neither conception triumphed, for neither state strategies to limit private economic activity—ranging from repression to tacit toleration and reform—nor the defensive oppositional strategies of second-economy participants were entirely "successful." As we have seen, the party leadership got much more than it bargained for, and the entrepreneurs less: the former lost "control"; and the private sector, however dynamic, operated under a variety of restrictions and impediments until 1989.

However, the process that culminated in a redefinition of property rights was also bound up with increasingly broad and diverse conceptions of self on the part of all involved. These conceptions often stood in opposition to official norms and thus undermined the very social categories on which the system rested. Even as they despaired at their own belief in the possibility of infinite "corruption" within the context of an "unchangeable" system, Hungarians were simultaneously drawn to what had officially been seen as "disreputable" second-economy activities. For many, such activities, initially a route to subsistence, became subtle acts of defiance, and gradually a source of self-definition and esteem, encompassing the concepts of time, knowledge, and relation to work as property. As Hungarians became house-builders, mechanics, software designers, private marketers of their own produce—indeed, as they became astute buyers and vendors of all manner of tangible and intellectual goods and services—they also constructed parallel identities and quasi-institutionalized networks of high-trust alliances. Second-economy production and consumption came to represent an incipient alternative politic so widespread as to leave virtually no one untouched. Over time, the informal and formal private sectors merged, and a sui generis private market took shape. This hybrid private sector, which throughout its development contributed to the expansion of the range of economic and political choice for previously excluded groups, still coexists with the remnants of a large state sector, and thus sometimes faces discrimination despite laws guaranteeing a level playing field for private and state-owned firms.^[35] At the same time, however, and especially in the far more transparent political and economic context following Hungary's first post-socialist

[34] Kornai 1986 distinguishes between "naive" and "radical" reformers. See esp. 1728–32.

[35] Notably in credit allocation and access to scarse inputs.

socialist elections, the private sector continues to grow and to recombine creatively with privatizing state firms.

Hungary's contemporary mixed economy thus represents, in part, the historical culmination of socialist economic reforms that, as we have seen, failed in their intent to "perfect" socialism, but had profoundly transformative consequences for state and society alike. These consequences were political in the broadest sense of the word, entailing not only the diffusion and formalization of property rights but enhanced notions of work and identity born of those expanded rights.

Five years after the fall of the Hungarian Socialist Workers' party, comparative assessment of the costs and benefits of Hungary's protracted transformation is still difficult. Yet two things seem clear on this reading of late socialist and early postsocialist Hungary. First, like the other countries of the region, Hungary will almost certainly remain a highly mixed economy for decades to come. While the need to reduce the size and influence of the state sector and to free economic space for private enterprise is pressing for all postsocialist countries, Hungary's precocious accommodation of private and quasi-private businesses led, as we have seen, to their informal and formal cooperation with state firms. This positive legacy of reform socialism is likely to enhance the possibilities for mutually beneficial cooperation among Hungary's contemporary hybrid economic institutions.

Finally, the political process that underlay reform socialism holds useful lessons about compromise for today's leaders; and it warns against extremes of political-economic reasoning and discourse, whether of international or domestic origin. At best, policy prescriptions born of such reasoning and rhetoric are simply out of touch with the complex reality of contemporary Hungary.^[36] At worst, they block efforts to use local experiences of adaptation and histories of compromise creatively.

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Three
The Second Economy as a Subversive Force: The Erosion of Party Power in Hungary

Ákos Róna-Tas

In the past decade and a half, few scholars of state-socialist societies disputed the political significance of economic activities outside the state-organized socialist sector, the so-called second economy. Now that state socialism has collapsed in Eastern Europe and the Soviet Union, one must ask what role, if any, the second economy played in the rapid demise of these regimes.

While there has been a virtual consensus on the political importance of the second economy, by no means everyone has claimed that it was a subversive force. Some have argued that the second economy lived in organic symbiosis with the first (Grossman 1982; Ericson 1984; Mattera 1985; Gábor 1986; see also Kemény 1984). It is claimed to have been a stabilizing factor in these societies, as it kept the wheels of an ill-conceived economic system spinning by nimbly correcting the inefficiencies of central planning (Stark 1986, 1989). In political terms, the second economy was a blessing to the regime, because it kept people busy, away from politics, pursuing their individual interests without the possibility of becoming collective actors through organized political action (Burawoy 1985, 194–95).

Those who believe that the second economy was a subversive force first pointed to the ideological hostility and suspicion with which party states viewed it. They argued that the second economy upset and interfered with the process of macroeconomic planning and control by creating a segment in the national economy that was not only impossible to plan and hard to influence, but was even difficult to observe systematically (O'Hearn 1981;

Galasi and Kertesi 1987). Worse yet, the alternative resources provided by the second economy and not controlled by the center created a new space of stratification, where new groups were forming with their autonomous group interests, soon to be converted into a political challenge (Rakovski 1978; Bloch 1986; Kennedy 1991; Kolosi 1984). At a deeper level, the second economy was also a force of socialization whereby people acquired values that eventually were bound to clash with the officially promoted value system (Szelényi 1988; Kovách 1988).

What was the role of the second economy in the collapse of communism? In this paper, through an analysis of the Hungarian case, I attempt to answer this question. I argue that the second economy undermined the regime's economic power, its control over the economy as a whole. Whatever corrective effect it had was very small, and even this effect resulted in unforeseen difficulties. Moreover, I contend that the legalization of the second economy also led to unanticipated social and political consequences that made the leadership weaker.

Admittedly, Hungary is a special case, because the second economy was more developed there than elsewhere in Eastern Europe, with the possible exception of Poland (Sampson 1986; Ékes 1986; Cochrane 1988; Szelényi 1988, 23–32; Los 1990; Jedrzejczak 1991). This development gave the second economy in Hungary the visibility and, possibly, the force it did not possess in most other countries in Eastern Europe. Yet this exceptional strength seems to contradict our preliminary claim about the subversive nature of the second economy. As this strength derived from the fact that the Hungarian party state accepted and legalized many forms of the second economy, one needs to explain why the communist party state embraced the second economy, if indeed it was subverting communist power.

One way to decide whether the second economy was subversive or remedial for the system is to assume the perspective of the party state itself. Using the expectations of the central apparatus can provide us with a convenient baseline against which the performance of the second economy can be evaluated. Yet if we claim that the second economy failed by the very standards of the central bureaucracy, we have to explain why the leadership kept to a policy it had to consider a failure.

What the Party Thought the Second Economy Could Do

Through an elaborate process starting in 1976, the leadership of the Hungarian regime came to the conclusion that, all in all, a carefully limited second economy could serve a useful purpose in the development of socialism (Fekete 1987, 1990; Berend 1990, 240–74). By 1980, the regime was in a difficult situation. Real wages in the socialist sector began to decline in the late 1970s (table 3.1). The economy was accumulating a foreign-debt burden

of as yet unknown proportions (Zloch-Christy 1987, 31–42), which had to be serviced with a sclerotic and inefficient industrial structure and under constantly worsening terms of trade (Berend 1990, 234).

At the turn of the decade, the Hungarian leadership was facing a dilemma. If it did not want to return to the coercive practices of the 1950s and wanted to maintain an acceptable level of economic growth, it had only two choices. It could radically loosen state control over the entire economy by carrying out a thorough and radical economic reform, completely overhauling the socialist sector in hopes that this would result in higher efficiency, increased productivity, and a better industrial structure. Or it could try to follow its earlier path of extensive growth and increase production by drawing new resources into the economy.

Radical economic reform was politically unfeasible. In the political backlash against the liberalizing economic reforms of 1968, the position of

large state companies was dramatically strengthened (Szalai 1990, 1991). Through a series of mergers in the 1970s, industrial production became highly concentrated (Kopátsy 1983), giving enormous power to company managers, who would have resisted radical changes, assuming the leadership had been willing to pursue this path.

Following its own inclinations and moving in the direction of less resistance, the regime chose the second alternative. The new resources that were needed to keep the economy going could not come from foreign sources, not just because the terms of trade had been shifting to the disadvantage of the country, but also because of rising interest rates that resulted from the tighter monetary policies of Western governments to fight inflation in the global recession (Zloch-Christy 1987, 87). In fact, Hungary had to maintain a positive balance in foreign trade—that is, allow resources to be taken out of the country—to be able to service its foreign debt. The state thus decided to draw new resources from the population in the form of labor and goods. This was very difficult. Virtually everyone who could work was in the labor force; in fact, the size of the workforce was declining (Galasi and Sziráczky 1983). Increasing labor time was politically unfeasible. Temporarily cutting consumption would have upset the bedrock principle of the Kádárist compromise, which promised slowly but securely rising living standards for political acquiescence, and was bound to create political tensions.

But while the political situation gave the leadership strong incentives to try to exploit the second economy, by the late 1970s, the reformers also had the proper ideology to frame the reform in an acceptable way. The language that was created by social scientists (Seleny 1993) allowed the leaders to think and talk about the second economy without open ideological hostility. The second economy could now be discussed as an economic rather than a political issue.

The resolution issued at the meeting of the politburo of the Hungarian Socialist Workers' party (HSWP) on February 19, 1980 (HSWP 1980b) officially endorsed an increased role for the second economy and spelled out the role the party leadership saw for it in building socialism. The document hastened to point out that the solution of the country's economic ills ultimately rested with the performance of the socialist sector, and that the interests of the socialist sector thus had to be protected above all. It would, however, be a mistake for the regime not to take advantage of the second economy—or secondary economy, as the party preferred to call it^[1] —since over three-fourths of Hungarian families had already allegedly participated in it (a mysterious figure that was subsequently often quoted).

[1] There was a heated debate in the late 1970s and early 1980s about the name that best described activities outside state-organized production. The second or secondary economy was often also called the auxiliary (kisegitö ) economy.

The document spelled out the following goals for the secondary economy:

1. It should help to satisfy the need for consumer goods and services, and should help in the protection and expansion of the residential housing stock. On this first point, the leadership was guided by previous experience with household farming, private residential construction, and private services. In the 1970s, all three played an important role in the consumer economy, especially in the countryside.

2. The secondary economy was also to help create small units of production. This was needed because the socialist sector was overcentralized, with too many large firms. Concerning this second goal, the leadership left the most important issue ambiguous: were small units needed temporarily, or were there segments of the economy where the small would always prevail? This ambiguity is well reflected in a strictly confidential internal memo prepared for the politburo meeting by the Economic Policy Commission, which first explained that the "basis for the presence of the secondary economy is those real and differentiated needs that come with the rise in living standards [and that] cannot be met — or cannot be met with proper efficiency — by the socialist economy within the framework of large-scale production" (HSWP 1980a, 1).

This wording still left open the possibility that the problem was the fundamental incompatibility of certain "real" needs with socialist production. Yet later the memo makes a clearer statement: "A segment of needs can be met properly only by small organizations, often with a few members. Currently , organizations of this kind rarely exist in the socialist sector; small firms [have] more or less disappeared" (HSWP 1980a, 3; emphasis added).

Half a year later, in an action plan written in preparation for the new laws by one of the chief institutional sponsors of the reform, the Ministry of Finance, the distinction was clearly drawn (MF 1980). The new laws had a double purpose: they were simultaneously to allow the creation of smaller firms alongside the already-existing large ones within the socialist sector and to make it possible to take advantage of the second economy. The socialist economy was not inherently incompatible with small firms; currently, however, there happened not to be enough of them, and the second economy could act as a temporary substitute.

3. The leadership also foresaw that the necessary restructuring of the economy would result in the reallocation of workers. The secondary economy would then help by absorbing frictional unemployment. Restructuring the economy away from loss-producing, inefficient industries and toward dynamic, modern, competitive firms was a battle cry that had kept returning since the early 1960s, when Hungary stepped out of autarkic isolation.^[2]

[2] "Restructuring" meant, not so much a change in the organization of production, as a switch from one line of products to another one, i.e., from iron and steel to chemicals.

Each time this desire got on the political agenda, the specter of unemployment was raised, inasmuch as workers in loss-making firms were expected to be laid off. When in 1968 the leadership decided to brave this specter, a series of elaborate measures was taken to ease the decline in state jobs. However, unemployment failed to develop at that time, and the measures turned out to be completely unnecessary. Restructuring returned to the political agenda by the late 1970s.

4. The leadership expected the secondary economy to draw more labor into production. The resolution was vague about mobilizing private capital through the secondary economy, but the confidential internal memo made this need explicit (HSWP 1980a).

The leadership was very uneasy about mobilizing private capital from the population. Letting individuals invest ran against its chief principle that income must be proportionate to work and should be earned by work alone. Making money without work was an ideological anathema; rent income of any sort was strongly frowned upon.^[3]

5. Finally, the new measures were to help to integrate the secondary economy into the socialist economy as a whole. It was claimed that the measures would allow better visibility, and thus more control over these activities. As the resolution put it:

We have to make it explicit that recognizing private activities politically does not mean that we widen their realm at the expense of the socialist sector, but that we connect them better into our entire economic system, into the reach of the planned economy. We wish to make the spontaneous economic activities of the population better serve our goals of economic policy, and we make an effort to make them more socially organized .^[4] (HSWP 1980b, section 9; emphasis added)

Illegal and invisible activities were supposed to decline as a result, making the second economy more amenable to a comprehensive system of regulation and planning. The internal memo also mentioned that new regulations should reduce monopolies in the secondary economy.

The need to control the second economy was quite obvious. Once the leadership was convinced that the second economy was not going to disappear anytime soon, it had only two alternatives: to try again to stamp it out or to make an attempt to draw it under its own supervision. The debacle of 1974, when the party state began to crack down on the second economy, which resulted in a serious meat and produce shortage by the next year, made it clear that only the second alternative was feasible (Róna-Tas 1989).

As to the social effects of these measures, the resolution suggests

[3] The only form that was tolerated at that time was renting apartments for tourists through state agencies or subletting one's own apartment.

[4] In official language, the "socially organized sector" is the sector organized by the state.

somewhat ambiguously that the secondary economy is "more usefully approached from the angle of the needs it serves than from that of the incomes [it generates]" (HSWP 1980b, section 2). Incomes earned proportionate to work were to be acknowledged. Again, the confidential internal memo was more blunt. It estimated that the number of people with very high incomes from the secondary economy was not more than a few tens of thousands; besides, very high incomes existed in the first economy as well. The memo also gave estimates about the participation of different social groups in the secondary economy. The lowest rate (10 percent) was for managers, and moving down the socioeconomic ladder, these rates increased. The memo made it clear that income earned from the secondary economy helped those worse off (people in need of housing, young couples, people with large families, and the elderly), thus relieving political tensions. Consequently, the leadership should anticipate no significant change in inequalities on the whole as a result of these measures.

Nevertheless, there was lingering nervousness about growing inequalities, so the action plan of the Finance Ministry tried to further ease these fears with the following reasoning in a discussion of the tax measures that had to accompany the new law:

initially the measures…, on the one hand, will increase inequalities within the secondary economy because of competition, and [on the other] will increase differences between the secondary economy and those … living from wages and salaries. Because of cutting back internal consumption, incomes in this latter group will fall, and for this same reason, incomes from the second economy and the numbers of its participants will rise…. Labor power will be sucked into this area, as that is where differentiation will seem to happen according to one's performance. Well, if we do not obstruct this process by administrative measures, increasing competition will weed out many. Not everyone will then be able to earn [a] high income from the secondary economy…. All this will equalize incomes. (MF 1980, 9)

This is the classic liberal argument for equality through market competition.

Clearly, at this time, the leadership envisioned a socialist economy controlled by the state, with small private units helping out only as long as necessary. The reforms were to enhance economic performance, which, in turn, it was thought, would increase the legitimacy of the regime. It was not that the politburo and the central committee were unaware of the possible dangers. They kept pointing out that the umbrella term "second economy" was too all-inclusive. As they put it in the resolution: "The Politburo regards the comprehensive treatment and the aggregation of different activities [as] appropriate only under exceptional circumstances…. As these are diverse activities, which cannot be treated in a unified manner, it is more useful to review and legislate individual areas separately" (HSWP 1980b, section 10).

With this caveat, the leadership wished to retain maximum flexibility to tailor regulations according to its interests, not to allow undesirable activities to sneak in on the backs of desirable ones.

The laws of 1981, following the political decision, promoted the creation of small units in the socialist sector, allowed and encouraged private individuals to set up small work partnerships, and at the same time liberalized the licensing and operating conditions for small artisans and tradesmen working alone or with their families. The new laws somewhat relaxed the limitations on the number of people that could be employed by private employers; new partnerships could now employ up to ten people. As an important concession, the laws allowed private enterprises to engage in business with socialist firms.

These laws contained several restrictive conditions as well. No work partnership could become a legal entity, which meant that they had to face discrimination in a legal and administrative environment that favored corporate actors and discriminated against private ones (e.g., a series of activities were open only to "corporations"). Members of private partnerships bore unlimited liability for any failure. The law did not allow for members not actually working in the partnerships, and no one could thus become a member by investment only. There were severe restrictions on credit as well.

What the Second Economy Actually Did

If the regime wanted to create a private sector that primarily attended to the needs of consumers, the reform clearly got out of hand. The majority of the new enterprises were either company work partnerships or cooperative work partnerships, partnerships founded in firms or cooperatives by employees using the resources of their mother company. These partnerships either subcontracted for their own firms or — less frequently — for other companies. In 1983, only 2 percent of their receipts came from consumers (CSO 1984). These figures did not substantially improve in the 1980s (HSWP 1985). Economic work partnerships, which were private partnerships founded solely by individuals with their own resources, and individual artisans and tradesmen also soon found out that doing business with state companies was much more lucrative than peddling to individual consumers. As a result, while consumer goods and services did improve somewhat overall, in many places their supply actually shrank as private entrepreneurs abandoned consumers to pursue more promising outlets among state firms.

As we have seen, the legalization of the second economy was intended to stimulate the creation of small companies. The predominance of large firms decreased in the 1980s, chiefly because of the multiplication of small private enterprises. Slowly the socialist sector, which included state firms and

cooperatives, also began to change its face, yet not much happened to state firms. Cooperatives were the ones to shrink by spawning so-called small cooperatives, cooperatives with fewer than a hundred but more than fifteen members. The number of cooperatives of the old type declined as well. Yet large state companies prevailed; only in a few cases did local plants become autonomous subsidiaries and form small companies.^[5] The socialist sector, especially the state sector, proved to be surprisingly resistant to change (table 3.2).

All in all, decentralization in the socialist sector succeeded only on its fringes, in the cooperative segment, but not in the segment where the state held direct property rights.

The expected restructuring of the economy failed to occur. There was no unemployment for the second economy to soak up. In fact, internal reports to the leadership claimed it as an achievement that private enterprises had not siphoned off labor from state firms, as they had in the late 1960s. Most of the participants in these new ventures kept their state jobs and engaged in their private activities part-time.

If anything, restructuring of the workforce was made more difficult by the reforms. Internal subcontracting made it possible for state firms to keep their workers. What attracted workers to a firm was its ability to provide lucrative subcontracting jobs, not its ability to pay higher wages.

It is also uncertain how successful the legislation was in mobilizing extra labor. The amount of time a person worked in 1986 was exactly the same as in 1977 (table 3.3). Time spent in the second economy increased, but this was counterbalanced by a two-hour cut in the work week in 1981–82. The

[5] Small cooperatives and small enterprises were legal categories. Together with the limitation on their size, there were other special regulations they had to obey.

main reason for this cut, originally heralded as a major step toward improving living standards, was that it had been promised much earlier, and the party had already begun phasing it in by 1980.

Yet if we look behind the number of minutes and hours counted, we find another picture. While the cut in work time in the socialist sector was two hours a week across the board, the increase in work time in the second economy was distributed very unevenly. Thus, those who worked in the second economy worked more in 1986 than in 1977, while those who did not work in the second economy worked less. As the free time of those engaged in the second economy was absorbed by that work, they increasingly began to draw on time at their state workplaces to do things they should have done after work. They would run errands, go home to receive the repairman, or even study for evening classes. This, of course, gave others license to do the same, even if they happened to have free time after work. This meant that the extra labor input in the private sector came at the expense of cutting effort in the socialist sector.^[6] In other instances, people worked hard during regular hours, but on tasks for their private partnerships. This was especially common among professionals, such as engineers or architects, who could not be supervised by factory-style methods (Laky 1984). The law of 1981 did not result in more labor being drawn into the economy; it simply resulted in a redistribution of efforts.

In terms of investment, very little capital got mobilized (table 3.4). None

[6] A study conducted by the Central People's Oversight Commission in 1983 revealed that half of the 8,400 surveyed clients attending to their own private business at various service outlets were doing so during the time they were supposed to be at work (Timár 1988, 115). One half of those absent from their jobs did not even bother to ask for permission. Finding reliable data on labor intensity that can be compared across years is impossible, but as discussed later, the leadership was convinced that labor discipline was not only poor but also declining.

of the company work partnerships needed any capital of their own, as they used their company's machines and premises. People in other types of private enterprise were reluctant to invest because of the lack of matching credit, legal limits on size of the operation, and, most important, because they did not trust the party state to keep to its political promises.

And, finally, did the reforms make the second economy easier to control? The proportion of illegal activity as a share of the gross domestic product did not decrease—in fact, it is estimated to have risen from around 15 percent in 1980 to 20 percent by 1987, the year before personal income tax was introduced. After that, this figure almost doubled in two years (Lackó 1992).

Where activities were the easiest to oversee, that is, in internal subcontracting partnerships, very serious and unanticipated difficulties arose. As early as November 30, 1982, the State Office of Wages and Labor (SOWL) critically described the practice by which firms circumvented wage regulations by giving out jobs to their workers through internal subcontracting (SOWL 1982). Because subcontracts were paid out of the expense fund and not the wage fund of companies, managers were able to pay more to their workers than they were supposed to. While workers performed quite efficiently when working under internal subcontracts, their total production on the job, which also included their inefficient and "undisciplined" regular work hours, was not proportionate to the overall income they received from their firms in two installments: as regular wages and as subcontractor fees. The memo sent to the party's Economic Policy Commission deplored the loss of control over wages and purchasing power, which resulted in inflationary pressures (SOWL 1982). This seriously upset the macroeconomic balance.

If, indeed, the reforms did not live up to the original expectations, why didn't the leadership turn around and put a stop to the experiment?

In 1984, for the first time in several years, the leadership closed the year with a foreign-trade surplus. This generated new optimism in top circles. The leadership believed that the recession was over and economic growth was back on track and felt sufficiently confident at that point to roll back the most undesirable features of the second economy.^[7]

In 1985, new regulations slapped extra taxes on contracts between state companies and work partnerships. This was designed to cut down on the outflow of wages, which was most dramatic in internal subcontracting. While the initial targets were the company work partnerships, this extra tax was applied across the board. The leadership, which in 1980 was fully aware

[7] "We are through with paying the penalty for our past mistakes," János Kádár reportedly said at a Central Committee meeting.

of the importance of handling parts of the second economy separately, had to realize that penalizing company work partnerships alone would simply make these partnerships turn into other forms of private work partnerships. It became clear that unless one were willing to erect an elaborate bureaucratic system of regulations and enforcement, only across-the-board measures could be successful. The extra tax was raised to 20 percent by 1987.

The leadership decided to mount an attack on a second front as well. In March 1985, the party's economic committee issued a directive in "defense of labor time." In October, in a draft for the action program that specified the steps to be taken, the State Office of Wages and Labor lamented: "In the last [few] years, several signs have suggested that labor discipline is deteriorating, and considering the past three decades, it can be stated that it is at its lowest point" (SOWL 1985, 1).

Ten months later, the final version of this document was submitted as the joint contribution of the State Office of Wage and Labor, the National Council of Trade Unions, and the Hungarian Chamber of Commerce, the organization representing company managers. A little more cautiously, but closely following the draft, and occasionally veering into metaphysical depths, the text argued that:

In a broader sense, labor discipline is a certain mode of being of the citizen, it is a form of behavior, the substantive expression of one's relationship to labor. It reflects the wide spectrum of behavior the citizen judges permissible for himself. Labor discipline is a segment of discipline in general, of the economy and of the development of economic policy. In recent years,— as widely observed — labor discipline in its broader and narrower sense has been deteriorating in many areas of the economy. (SOWL 1986, 2)

In the summer of 1987, Pártßlet (Party Life), the official organizational journal of the HSWP, published a roundtable discussion entitled "On Elementary Order." The participants bemoaned what they considered the complete breakdown of order, the lack of labor discipline, poor management and organization at the workplace, corruption, and the absence of discipline in society in general (Roundtable Discussion 1987). The representative of the State Office of Wages and Labor put it this way:

We even encouraged people: work at six [different] places! Take a second job, join the company work partnerships, work on Saturdays and Sundays! This is how it happened. But scattered effort, exhaustion, and the fact that one could make more money in the second economy led to the decay of respect for the first job. There is a loosening of a solid value system that linked one's material success to the clockwork precision of labor in large-scale industrial organizations, [i.e.,] to conformity to traditional work culture. (Roundtable Discussion 1987, 44)

In July 1986, a secret resolution by the Council of Ministers was issued to clamp down on undisciplined workers.^[8] This campaign, which in many respects bore the stamp of earlier discipline campaigns, replete with public exhortations and threats (Makó and Gyekiczky 1987), turned out to be the last of its kind and slowly fizzled out within a year.

Why Did the Leadership Continue to Support
the Second Economy?

In 1987, economic reform gained new impetus, partly because real wages began to decline again, and partly because foreign debt had been growing rapidly since 1985 (Zloch-Christy 1987, 42-58). In many respects, the country was back to where it had been in 1980 (Fekete 1987, 316). A report by three ministries to the party leadership reiterated the original objectives of 1980, but this time they called for more radical solutions, because otherwise "the small-scale organizations may undergo a process of slow atrophy and exclusion from the economy" (MF 1987, 4). The suggestions included the introduction of private limited liability companies, joint ventures between state and private enterprises, and rules liberalizing private investment. These were the first steps toward the transition that continued in the drafting of the new Enterprise Law of 1989, which for the first time declared "sector neutrality": the legal equality of private and state-organized economic activities.

However, the reason for the leadership's failure to retreat from its liberal course was not simply that external economic conditions forced it to make concessions on behalf of efficiency. It is true that most of the debate increasingly took place within the highly bureaucratic discourse of economic policy; arguments and counterarguments were all couched in economic jargon in which the original social and political concerns were not made explicit. While the 1980 politburo resolution still spoke openly about some of the possible social and political consequences of the 1981 law, it failed to foresee the most important political developments because it was so preoccupied with the issue of income inequality.

The first unanticipated consequence was that after some initial skepticism, company managers in the socialist sector, with a few exceptions, quickly became strong supporters of work partnerships. First of all, small private partnerships were a way of avoiding decentralization in the state sector, which meant that large firms could preserve their power. State firms could also improve their economic performance by contracting with capable outside private partnerships. In these relationships, state companies

[8] The campaign came on the heels of a similar campaign in the Soviet Union in 1985, after Gorbachev took power.

negotiated from a position of strength. Moreover, company work partnerships and cooperative work partnerships were attractive to state managers because they were instrumental in keeping the best workers in the firm satisfied. For these reasons, company managers resented the extra tax they had to pay on contracts with work partnerships.

Managers also resisted the disciplinary campaign. Despite all the complaints about increasing chaos and subsequent pressures to restore discipline, the number of disciplinary actions held steady, a little above seven thousand a year, during the early and mid 1980s, although it did slightly increase in industry (LIC 1982, 1985, 1988). This showed that company managers were reluctant to address the issue, or rather that they had other solutions to this problem.

The report filed by the State Office of Wages and Labor in July 1987, which evaluated the results of the disciplinary campaign, observed that

the execution of the resolution in certain respects met with the disagreement of workers and company managers. This is also related to the fact that in certain cases, central regulation was taken as limiting the autonomy of the company. In our opinion, the new regulation helps bar management from granting certain, sometimes unprincipled, concessions in the process of labor market bargaining that are not in harmony with the spirit of the law. (SOWL 1987, 2)

Enterprise managers preferred "unprincipled concessions," turning a blind eye to discipline problems as long as they could bribe key workers by offering them subcontracting jobs to do what needed to be done.

But managers were prone to other forms of unprincipled behavior as well. The 1981 reform created a serious conflict of interest for company managers. Top managers were forbidden to join company work partnerships formed and subcontracted by their own firms; however, this restriction was spelled out more vaguely for managers of cooperatives. Furthermore, it was far from obvious where the dividing line ran between top managers and other employees. It was impossible to devise a hard-and-fast rule about who should be excluded from these work partnerships.^[9] In the first years of the reform, the State Office of Wages and Labor was inundated with requests to evaluate the legality and appropriateness of particular cases. Seeing the impossibility of a legally coherent position, the office refused to give opinions and routinely directed applicants to consult a public memorandum published in 1976, five years before the reform had been announced. The normative void created by this sudden shift in the boundary between private and public led to general condemnations of corruption — the private mis-appropriation

[9] People excluded from taking any second job included judges, lawyers, and members of the armed forces and the police.

of public (i.e., state) property — but very few cases of actual prosecution (Szamel 1989).

The 1981 reform also gave some of the more adventurous managers, especially those in the cooperative sector, the opportunity to split off the better-functioning part of the firm and start a small company. It is thus not surprising that top company managers, who became even more independent from the state apparatus in the mid 1980s,^[10] gave their political support to small enterprises. This support found its institutional form when their political organization, the Chamber of Commerce, established a special Small Enterprise Division, which became the political voice of small companies and work partnerships.

There was a second unforeseen development that had serious indirect political consequences. In 1983, the Ministry of Finance asked for external opinions from all over the country for its next report on the status of the second economy. Károly Grósz, the first secretary of a northern county, who became prime minister in 1987 and first secretary of the HSWP in May 1988, wrote an eleven-page study generally supportive of small economic units, but also made the following observation:

It is our conviction that these new opportunities can contribute to the strengthening of consumerism. It distracts a portion of people interested and potentially active in public affairs, it reduces the pool of potential cadres, and [it] raises doubts in people who are unselfishly working for the public good. (Grósz 1983, 6)

The second economy was also ruining the socialist brigade movement and eroding the trade unions:

Many rightly see a contradiction in the fact that until now trade unions fought for shorter work hours, reduction in unhealthy jobs and in the retirement age, etc., and now workers in new enterprise forms completely ignore [these achievements] in pursuit of higher incomes and do not want them. In the long run, this can have undesirable effects for workers and can have [bad] consequences for companies and society. (Grósz 1983, 6)

The National Council of Trade Unions submitted a report voicing the same concerns about unregulated incomes and work conditions in partnerships. It also underscored the fact that the partnerships not only created tensions with the socialist work movement but weakened the "political activism" of their members, who were neglecting to attend union and party meetings (NCTU 1983).

"The new enterprise forms give two strata the opportunity of upward mobility: one is the progressive force of our society, the creative manual

[10] From 1984 on, they were elected by the factory rather than appointed by the state.

workers and intellectuals; the other is that stratum that is unable to pass on to others the burden of inflation, and who must work extra in order to maintain their living standards," the Patriotic Popular Front, the official umbrella organization of all public associations, pointed out half a year later (PPF 1984, 2).

This "progressive force" was precisely the base from which the party had drawn its membership since the 1970s (Szelényi 1987). Almost a third of all party members were actively involved in the second economy in one way or another, compared with a fourth of the rest of the labor force (table 3.5), and party members were twice as likely to participate in work partnerships as those who were not members of the party (table 3.6). Small enterprises attracted party members in disproportionate numbers, as party members could take advantage of their connections in finding good contracts with socialist firms,^[11] knew how to negotiate with bosses, and had organizational skills. Most of them were professionals and highly skilled workers; what had kept many of them out of the second economy before 1981 was that their specialized expertise often proved not to be very useful to individual customers, as few households needed the services of computer programmers or electrical, mining, and chemical engineers, not to speak of accountants, printers, machine-tool operators, and scientific researchers.

[11] Just how important connections were was clearly spelled out in a report by the National Organization of Artisans. Most artisans who worked alone or with family for private consumers were at a disadvantage in finding contracts in the socialist sector. As the report put it: "Many [artisans] felt 'on their own skins' the lack of proper personal connections, which had a strong influence on their abilities to cooperate with large firms" (NOA 1983, 2).

The opening up of the socialist economy to the private economy made the character of labor more alike in the two sectors. Now the person who made valuable contributions in his state company could make valuable contributions in the private sector by performing a similar job for better pay. The same person whom the party needed on the shop floor could find opportunities in the private sector, and his interests were no longer tied to those of the party leadership.

The party very soon found that many of its best activists were deeply involved in the second economy and had little time for public affairs. As another strictly confidential memorandum to the politburo euphemistically put it in 1985, "the activities of work partnerships — according to the experiences of meetings of local party cells — make leisure time more valuable, and that sets higher standards for the quality of political and voluntary work" (HSWP 1985, 3).

Acutely aware of this problem, the party conducted a study in 1986 that showed that it was hard to get people to enroll in party schools and other political training courses, and that it had become difficult to recruit young people into the party (Székács 1987, 40). Party members had an influence not only by "exit" — by not participating in party life — but also by "voice," letting their party bosses know what their preferences were.

The reforms of 1981 thus created a constituency that had a vested interest in their continuation. Worse yet, this constituency was recruited from among company managers and activists on whom the party depended for its

local presence.^[12] Discontinuing the reforms would have meant that the leadership would have had to turn against the party's own ranks.

Conclusion

The role of the second economy in Hungary was clearly a subversive one. It accomplished very few of the objectives the leadership had set for it, it destroyed the leadership's control over labor, and it upset its ability to plan the macro-balance of income flows. Moreover, it deprived the party leadership of its social base.

The New Economic Mechanism, introduced in 1968, was the first substantial departure from central planning in Hungary. It aimed at revamping the internal mechanisms of the socialist sector. Within five years, party hardliners in the leadership were able to mount a successful assault on economic liberalization. Conservative spokesmen claimed that the reformist course had dealt a blow to the flagships of the socialist economy—the large industrial state firms—and undermined the economic position of the cornerstone of communist power—the urban industrial workers. They also mounted a successful attack on "petit bourgeois" behavior that sacrificed the collective good to petty egotism. At that time, party hard-liners were successful in rallying workers and managers of large companies to their cause, and as a result, economic reforms were halted and reversed (Hegedüs 1984; Berend 1990). Despite this reversal, the balance of power between the central apparatus and the companies, which the 1968 reforms tilted in favor of the second, never returned to where it had been before 1968.

The 1981 reform was initially an attempt to avoid more substantial reforms in the state sector, but instead inadvertently further weakened the power of the party state. This occurred, not simply through the strengthening of civil society vis-à-vis the party state, but by a reconfiguration of the division between the party state and civil society. By redrawing the boundary between private and public, the 1981 reform uncoupled the interest of company managers and the party membership from the power interests of the party. Worse yet, since the party initiated the reforms, managers and party members could argue that by following their new interests they followed

[12] There were some company managers who were less supportive. A manager who complained that work partnerships disorganized the wage structure explained why he nevertheless allowed them to operate in his company and was waiting for the top authorities to ban them. "By now the party secretary, the trade union representative, the party steward, and the majority of the union stewards are all members of work partnerships. This has become a political issue; without a high-level political decision, there is little I can do about it" (quoted in Pongrácz 1990, 115).

the party line. As a result, conservatives in the party were paralyzed from within the party and it became impossible for them to repeat their earlier success. Like Cassandra and Laocoön, hard-liners tried to warn the party of the impending dangers, but this time the Trojans liked the big horse too much to heed their advice.

The theoretical compass for most of the research on the second economy was provided by a new institutionalist framework (Nee and Stark 1989; Gábor 1986). This framework was developed in opposition to totalitarian and modernization theories of socialism at a time when empirical research became possible in these countries, and it greatly contributed to our understanding of the inner workings of socialism by discovering the diversity of its institutional forms and by providing a glimpse of socialism from below. However, its focus on the diverse institutional logic of particular areas of socialist societies deflected attention from the centrality of the party state—a principle at the heart of totalitarian theories—and from the historically cumulative changes in the system as a whole due to large-scale unintended consequences—a point emphasized by modernization theory. There is no doubt that on the first point, the new institutionalism was also hampered by the empirical inaccessibility of the party state. Since the party state was the linchpin of the socialist regime, the demise of socialism had to occur through the demise of the party state. The cost of ignoring the party state as an institution was to miss observing the disintegration of socialism.

Once the party state as an institution was reduced to insignificance in its theoretical framework, the new institutionalism lost the key to the process by which unintended consequences accumulated and acquired large-scale importance. The institution that had to manage all institutions was the party state, and it had the task of negotiating the immense variety of institutional outcomes with one another and with its own power interest. Without insight into the internal mechanisms of the party state, the new institutionalism had to abandon macropolitical concerns for a kaleidoscope of diverse institutions.

The political reason for underestimating the subversive force of the second economy was that the political consequences of depicting the second economy as a useful and integral part of the socialist economy were more acceptable to most researchers. The best scholars on this topic in Hungary were strongly involved in pushing for the legalization of private activities, and so it was imperative for them to argue that the second economy had few undesirable political side effects. Scholars in the West, who often relied

heavily on the work of Eastern European researchers, were also reluctant to supply arguments for alarmist communist hard-liners.

While the second economy could not play a direct role in the rapid finale of the communist regimes, and thus will not supply either the final cause or an explanation for the timing of the collapse, it contributes to our understanding of how the collapse happened. It can partially clarify why the regime in Hungary was willing to give up its power with such surprising ease.

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