Hungary's Malaise
By Tibor Machan - July 24, 2010

Introduction to a Brief on Business Ethics, Hungarian Edition

Shortly after Hungary set off the fall of Soviet-style socialism in 1989, when that country's rulers allowed visitors from what then was East Germany to leave without any hindrance for West Germany, my mother, who had lived there for all of her life before being allowed to leave in 1975, made some interesting predictions. The decision by the Hungarian rulers was the first step toward the dismantling of the Soviet Empire. But my mother thought it wouldn't necessarily lead to panacea.

Her idea came back to me during the last few days when Prime Minister Ference Gyurcsany, identified by some as "the golden boy" of Hungary's Socialist Party, got himself into serious trouble with many Hungarians for having admitted, in a leaked closed-door party conference speech, that during his two years term as Prime Minister and the Socialist (post-communist) Party leader for the 2006 election which he and his party won, he was lying about the country's economy "morning, evening and night."

What my mother said to me back after the fall of the Soviet-style socialists was that unless all those who were part of the old, communist regime were put in jail, the country would eventually be retaken by the former bosses because there was no group of classical liberal leaders ready to lead the country away from its dismal socialist past. She was confident that without such a group of new leaders, with genuinely new ideas, Hungary would slowly return to its old socialist ways.

What my mother said seemed to me to echo the more scholarly reflections of Professor Janos Kornai, in his book Road to the Free Market Economy: Shifting from a Socialist System the Example of Hungary (Viking, 1990).

What Kornai focused on, in particular, is the temptation faced by the newly reconstituted but unreconstructed socialists – who were welcomed by the post-Soviet regime to take part in Hungary's political affairs – to produce a nominal free market system that is, in reality, merely a bit different from the old socialist economy. In short, they would attempt to forge a powerful welfare state, promising to provide all the impossible perks of the old regime, only without the accompanying totalitarian politics. Kornai warned that this is going to be impossible and will simply lead to economic collapse. As the saying goes, you cannot squeeze blood out of a turnip. A broken economy like that produced under Soviet-style socialism simply cannot sustain the burdens of a welfare state. Why?

Because where there is no wealth, one simply cannot steal much. While Kornai was too polite to put it just this way, the plain fact is that a welfare state depends on there being a sufficient number of wealthy enough people from whom the government can steal so as to provide the perks the politicians are always tempted to promise to the voters.

Hungarians are arguably experiencing the consequences of not heeding Kornai's advice, and of failing to come up with a genuine free market political leadership. Instead, for more than two decades, the country has been trying to make do with a hodge-podge post-Soviet regime that fails to actually give up the socialist dream. Most recently a new tax was voted in on banks, never mind that taxes are, as in most places, choking the country already and the credit crunch is killing economic growth.

While a country such as the United States of America can get away with such a hodge-podge system, since its basic infrastructure has for many decades provided reasonably firm protection to basic classical liberal institutions – e.g., the right to private property, freedom of contract, civil liberties, etc. – in Hungary there is no comparable history to fall back upon. So once the barrel has been scraped, there is nothing more left to steal. There are no rich companies, rich individuals, rich investors and so on who could be conscripted to come up with the funds to sustain the welfare state.

Given this reality, what else can a socialist do but lie, lie and lie some more? And once the citizens of the country discover this – and that's one benefit of having left the Soviet-style system behind, namely, considerable openness about what politicians are doing – the regime will meet with plenty of opposition. And this is why the PM was urged to resign. He was reluctant to do so but it is difficult to see where he could go after this. The jig is up, as the saying goes.

There is no socialist miracle. Unless the country generates some solid non-socialist leadership and these will persuade the citizenry to have some patience while the economy recovers, prospects for peace and prosperity are dim.

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