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Page 229

216 CHAPTKK fi

alike. Finally, Tyson, applying a version of Janos Kornai’s argument that
socialist economies were based on soft budget constraints, focused on the
inflationary consequences of the political unwillingness of governmental
or bank authorities to enforce hard budget constraints on firms; to protect
the incomes anil jobs of employed workers, she argued, these authorities
extended credit to cover losses, which then worsened unemployment in
the long run.4'1

Although all three schools of argument concentrated on the economic
distortions and efficiency loss of not pricing labor and capital in competi­
tive markets, they also had political implications. The arguments on the
effect of labor management resembled those about the role of trade
unions in creating structural unemployment in capitalist econom ies.45 Ac­
cording to Estrin, after 1965 labor management became a vehicle for
urban-seetor workers to monopolize their control over their jobs and
wages and maintain an artificial scarcity against any reserve-army effects,
although he never specifies the agents or process by which this political
struggle occurred. For liberal economists within Yugoslav political cir­
cles, unem ployment was a concern only after the social unrest of 1968­
69, because it seem ed to lead the party leadership to suppress the market
reform of the 1960s in favor of a proemployment, proworker policy of job
protection. But, like Estrin, these economists never provided the politi­
cal details o f this backlash and its relation to the 1974 constitution and
1976 labor legislation to support their assertion. By the 1980s, more and
more economists were focusing on the apparent wage rigidity and infla­
tionary pressure of self-management as the primary cause of unemploy­
ment. Som e went so far as to say that only a true labor market would grant
the unemployed their rights.4H

T he first analysis of unemployment in the postwar socialist period— the
dissertation by Vladimir Farkaš that appeared in 1955, the same year as
the new wage regulations for self-management and the extension of
workers’ councils from the higher economic associations (which replaced
the branch directorates) to individual firms— was also the last analysis of
any kind to step outside the constraints defined by the new system and
official policy.47 On the developmentalists, Farkaš argued that they were
simply continuing the dominant interwar approach, defining unemploy­
m ent as overpopulation or hidden unemployment— whether measured in

u Tyson, “A Permanent Incom e Hypothesis.“
'lfi A survey can be Found in Piore, Unemployment and Inflation. T he insider-outsider

hypothesis would seem to apply only to the Slovene firms; see Lind beck and Snower, The
Insider-Outsider Theory o f Employment and Unemployment

,r> Letica, “Pravo 11a rad i načrt zakona o udruŽenom radii.”
1,7 Farkaš, "Naša (zv. prenaseljenost i naš problem nezaposlenosti ’; idem, “Odredjivanje

osnovnog uzroka nezaposlenosti u F N R J”; Panic, “Racina snaga i zaposlenost u Jugoslaviji.”

Page 230

U N E M P L O Y M E N T 217

Malthusian terms of too many people for the amount of food, or in neo­
classical terms of technical coefficients for the optimal quantity of labor to
increase marginal output as measured by labor’s cost (wage). He argued
that in contrast to Marx’s law on population, according to which unem ­
ployment depended on the character of the social order, the developmen-
talists conceived unem ployment as necessary in all econom ic systems, a
variable quantity taking the form of overpopulation in agriculture or the
level of employment (and therefore profit) in industry. In Farkas’s view,
the socialist idea was to build an order based on the assumption of full
employment, in which the population was the constant and the level of its
productivity the variable subject to social correction. Unemployment was
then a measure of the gap between people’s needs and their ability to
satisfy them, so that registered unemployment as one measure of the d e­
mand for earnings was only one small symptom of unemployment. Others
were increased productivity (hence its great variability) or the search—
whether registered or not— for paid work. One indirect measure of un­
employment was the negative correlation in 1 9 5 3 -5 4 between household
income and expenditures for most Yugoslavs (far more among rural than
urban households); but much more relevant to the decision to seek work
was the gap betw een individuals’ expenditures and their theoretical list of
needs (what Farkas called psychological poverty, in contrast to material
poverty). Indirect measures of this gap were such everyday phenom ena as
rural-urban migration, both periodic and permanent; multiple jobs,
moonlighting, and supplementary work; the movement of women on and
off unemployment rolls in direct relation to shifts in the cost of living; and
economic crime.

This concept of unemployment together with Yugoslav conditions led
Farkas to criticize ruling policy as a “mechanical” application of Keynes’s
general theory (“fashionable” at the time) to the profoundly non-
Keynesian conditions of underdeveloped and socialist Yugoslavia. U nder­
development meant that, contrary to Keynesian assumptions, (1) the cost
curve was distorted and employment did not depend primarily on costs of
production, so that real wages and employment were not in direct rela­
tion; (2) the propensity to consume was greater than one, so that the
multiplier and the accelerator did not work to translate higher investment
into higher employment; and (3) Keynesian policies in developed coun­
tries continually worsened the gap between desires and the capacity to
satisfy them in the less-developed countries with policies to increase de­
mand for developed countries’ products through foreign aid, continued
international inequality in the distribution of national income, and sup­
port for the production of raw materials in less-developed countries in
place of domestic industries that might satisfy those needs at home. The
socialist character of the country, moreover, meant that (1) the guaran­

Page 457

About the Author

Susan L. Woodward is a Senior Fellow in the Foreign Policy Studies Pro­

gram at the Brookings Institution.

Page 458

Lightning Source UK Ltd
Mi I Ion Keynes UK
21 January 2010

148917U K 0 0 0 0 1B/54/A

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