The Hungarian Illusion; J. Bovard

economy providing a good life for its partici pants. The New Republic (October 27, 1986) recently implied that the quality of life in Hun gary is almost as high as in the United States. Both China and Russia are borrowing heavily from the Hungarian model, and the World Bank is pouring hundreds of millions of dollars (derived from U.S. government and other gov ernment sources) into the Hungarian govern ment's treasury. But, rather than being a utopia, Hungary is only another case of socialist failure. Real wages have fallen five per cent since 1980 and seven per cent since 1978. Industrial efficiency has sharply declined, as the government has suppressed incentives to modernize and ratio nally use resources. The citizenry's health ap pears to be rapidly deteriorating-life expec tancy has decreased sharply for males in recent years. Many Hungarian villages still do not Mr. Bovard, a widely published writer on economic affairs, recently visited Hungary. An earlier version of this article appeared in the Journal of Economic Growth (Vol. 1, No.4).

have telephones, electricity, or reliable drinking water. And the economic crisis is growing worse. The government recently froze all wages, while allowing prices to continue to rise-a further de facto cut in wages and living standards. In vestment is declining, and the aging machinery and deteriorating infrastructure are making Hungary more backward every year. Hungary has doubled its debts since 1982 from around $7 billion to over $14 billion, and shows no likelihood of being able to service its debt any time in the coming decade. Hungary could be much closer to default than many Westerners realize. Much of the apparent pros perity in Hungary is the result of heavy bor rowing, with billions squandered on consumer items that buy political peace but only add fu ture burdens to the country's economy. In Hungary, there is socialism and there is prosperity. But the socialist parts are not pros pering and the prosperous parts are not so cialist. And since the economy is over 90 per cent socialist and cooperative, Hungary is a de pressed, increasingly backward economy.

Hungary's experience is instructive for the rest of the world. How much benefit is there in allowing limited market competition in a fun damentally socialist economy? How much can a small amount of capitalism remedy the de fectsof a large amount of socialism? Is a mixed economy a viable alternative for today's slowly sinking socialist monoliths? Hungary's experi ence is especially valuable in gaining an insight into the Soviet Union's recently announced re forms, which are partly inspired by Hungary.

Historical Background Hungary is a small country with a population of 10 million. Because it is heavily dependent on foreign trade, Hungary is particularly ill suited for the socialist model of economic au tarky - where the government tries to achieve maximum national economic autonomy through total control of the economy. Socialists have always been biased against foreign trade, since central planners prefer to control all eco nomic factors-and they can rarely control businesses and individuals beyond their borders. For almost 40 years, Hungary's leaders and bureaucrats have tried to "plan" an economy whose survival and prosperity depend on rapid adjustments to changing world markets. Before World War II, Hungary had a highly developed pharmaceutical industry and was a world leader in some areas of agricultural ma chinery production, though its economy was primarily agricultural. When the communists took control of Hungary in 1949, they launched a crash industrial program based on the usual socialist goal of creating a "country of iron and steel" -"conspicuous production," as Mi chael Polyani terms it. But since Hungary was still an agricultural economy with a limited in dustrial infrastructure, this was a disastrous policy, and the government's widespread coer cion in pursuit of its economic policy provoked a popular revolt in 1956 that was crushed only by massive Soviet military intervention.

In the early 1960s, limited private incentives were permitted in agriculture-with excellent results. In 1968, convinced that the basic So viet socialist model was failing, Hungary an nounced the New Economic Mechanism (NEM). The NEM tried to replace central plan ning with limited market relations among state owned firms, to link domestic and world market prices, and to reform investment poli cies. NEM was an attempt to preserve so cialism without central planning -or, as Hun garian economist Tamas Bauer describes it, "neither plan nor market" (East European Economies, Spring-Summer 1984). In the first years of reform, Hungary's economy was one of the strongest in Eastern Europe. But the new prosperity created a back341 lash from those who felt they were not getting a fair share of it. In 1972, the trade unions and conservative Communist Party members, con cerned about growing inequalities in income and the Party's loosening grip on the economy, launched an attack on the reforms. Many of the reforms were scaled back or abandoned. Eco nomic decision-making was recentralized and central planners increasingly intervened in the day-to-day operations of companies. The cen tral planners then tried to isolate Hungary from rapidly shifting world markets and world prices for energy.

To implement this policy, Hungary bor rowed billions of dollars from the West. But despite a massive investment program, Hun garian leaders still could not produce a Western-type prosperity. Most of the invest ments were ill-chosen and poorly executed, and the net result is a huge foreign debt with little or no increase in productive resources to ser vice it. In 1979, Hungary again loosened some of the controls over economic activity. In 1982 some forms of private economic activity were legalized, private citizens were allowed to own their own taxi cabs and trucks, and small retail service establishments were tolerated. But, as a recent World Bank report noted, "Neither the 1968 reforms nor those beginning in 1980 fun damentally changed the dominance of state ownership" (Peter T. Knight, Economic Reform in Socialist Countries, 1983). Hungary adopted reforms in the early 1980s partly in an attempt to avert bankruptcy. The country was able to avoid default thanks to large loans from the World Bank and the Inter national Monetary Fund. Though this aid saved Hungary's credit rating and allowed it to con tinue borrowing from Western banks, in retro spect the 1982 bailout appears to have been a two-edged sword. By postponing the day of reckoning, the World Bank/IMF bailout al lowed the government to continue economi cally restrictive policies that have perpetuated the nation's poverty.

Though there is an active "second" (unoffi cial) economy in Hungary, it has not solved the problems caused by socialism. As Tamas Bauer concluded, "In this country, the common pre vailing opinion is that ... 'people' generally 342 THE FREEMAN. SEPTEMBER 1987 do not perform their work well, that the workers are not paid decent, and that one cannot obtain quality goods and services for his money." The Hungarian economy today is like a slowly sinking ship that just happens to have a very nice "private sector" sideshow on one of the decks. The sideshow is not good enough to keep the ship from sinking, but it keeps ev eryone entertained as the water rises. The Hungarian Labor Market Perhaps the best place to begin a study of Hungary's problems is in its labor market. As even Josef Stalin recognized, "Human beings are the most important and decisive capital in the world." Yet, the Hungarian system seems almost designed to squander and discourage workers' efforts.

In Hungary, there is guaranteed employment - but there are not many people actually working. In my recent visit, Budapest seemed to be a city of people leaning on brooms. The Party newspaper often denounces workers for their laziness. It is an old saying among Hungarian workers, "We pretend to work; they pretend to pay us." A Hungarian pension manager told me that the average Hungarian works only four hours a day at his government job - and spends the other hours smoking, talking, and generally avoiding strenuous effort. A Swedish engineer complained to Magyar Hirlap, the national newspaper, "Work discipline is bad ... An individual Hungarian worker does not do more than 5 and half hours of work a day .... Workers arrive for work an hour or even 90 minutes late, they have a long lunch break and disappear from time to time during the day." Ferenc Havasi, Secretary of the Hungarian So cialist Workers Party, recently complained that "15 to 20 per cent of the work time of five million active earners is lost for various reasons," and called for "the improvement of interestedness" of workers in their work (Hun garian Economy, January 1986).

Guaranteed employment has other effects on workers. According to the World Bank, "On many occasions, workers sabotaged technology taken from other enterprises, in part because they did not want their bonuses reduced to pay for that technology." As the World Bank notes, a guaranteed job "greatly reduces the concerns workers have about replacing old ma chinery or shifting to new products. Workers tend . . . to push for the continued use of cer tain machinery and production of traditional products, since they are familiar with them" (Kazimier Poznanski, The Environment for Technological Change in Centrally Planned Economies, 1985). The workers' unwillingness to learn new skills handicaps the entire economy. As a recent Organization for Economic Co operation and Development (OECD) study by Professor Paul Marer points out, "Labor is un derpriced because money wages in industry pay for only about 60 per cent of the personal con sumption of the wage-earner's family." (The other 40 per cent largely consists of govern ment-sponsored consumer subsidies.) This en courages firms to "hoard" labor-to rely on labor-intensive production methods and to be relatively apathetic about getting full value from their workers - because they are not paying the full cost of workers' wages. This discourages efficient utilization of labor.

The government also allows limited flexi bility in wages, so that engineers sometimes are paid little more than janitors. As Radio Free Europe recently reported, "The wage differen tial between Hungarian white-collar and blue collar workers is onlj 5 to 10 per cent, as op posed to 30 to 70 per cent in the developed countries. " Inflexible wages have created both pervasive labor shortages-and labor sur pluses. There is no effective mechanism to shift workers from one occupation or job to another - from a place where his efforts are less pro ductive to where they would be more produc tive in response to changing economic condi tions and emerging opportunities. The artificial shortage is so severe that the typical Hungarian white-collar worker can choose between two or three jobs at anyone time, and manual workers can choose between ten or fifteen jobs (Econo mist Intelligence Unit, Quarterly Economic Re view, February 1985).

The problems in the labor market have caused severe damage throughout the whole economy. OEeD estimates that labor productivity in the Hungarian chemical industry is only one-third that of world levels. The main Hungarian telecommunications factory, Be loiannis Telecommunications Factory, which employs 10,000 workers, has achieved a labor productivity rate of only one-tenth to one-fifth that of Western standards. Labor productivity in the textile industry is less than one-seventh that of developed countries' textile workers (Bela Balassa, The Hungarian Economic Reform, 1968-81, World Bank, 1982). One reason the government discourages the shifting of labor to better uses is because of the severe housing shortage. Since there are few available houses or apartments, the transfer of workers would create social strife. This is a typical case of a socialist bottleneck-harmful controls in one part of the economy causing a negative chain reaction throughout the rest of the economy.

One attempt to get around the constraints of the socialist wage system is the economic working associations-groups of factory workers who stay after their normal jobs to per form work on a contract basis, using factory tools and equipment. On the surface, this looks like a sure winner, and Western journalists have almost uniformly praised it. But, as one Hungarian enterprise director complained, ,'Contract work associations yield contradic tory results because sometimes they create a schizophrenic attitude: the worker has an in centive to do as little as possible for the basic wage since after work he can do the job for a much higher compensation. . . . It is absurd economically that identical labor has a dual price: on the free market it earns a multiple (occasionally tenfold or more) of what it is paid in the socialist sector" (quoted in Paul Marer, East-West Technology Transfer, GECD, 1986).

Hard work is also discouraged because Hun gary, like all socialist economies, has a per petual shortage of quality consumer goods. No matter how much a worker earns, there is little or nothing good to spend it on, especially since major items are rationed by queue, not price. Hungarians must wait up to six years for a car, and up to 12 years for a telephone. There is a seven-year wait to get an apartment. The cheapest new car costs the average worker three years' pay-and that car is basically a THE HUNGARIAN ILLUSION 343 wooden automobile with a motorcycle engine. The government recently increased the prison sentences for "workshirkers" - people who, in the opinion of the authorities, are not performing socially useful labor. As Heti Vi laggazdasag reported in December 1984, "A Budapest court found guilty a young girl who was capable of working but was supported by her parents because she would not accept em ployment after she completed her studies, spending her time instead mostly on reading. ' , Even if a person is working twice a week on an occasional basis, the courts will still convict him of "workshirking" and send him off to jail. Since the government can imprison people for the crime of not producing, the govern ment, in effect, owns the people-people exist for the good of the government, and not gov ernment for the good of the people.

The inflexible, unresponsive labor market also drives the government to use coercion in stead of voluntary agreement in other areas. Coal production has been declining, and the government recently ordered coal miners to work on Saturdays and Sundays. In a free so ciety, workers are enticed with higher pay to work longer hours. In a socialist economy, where many people consider wage incentives to be immoral and selfish, coercion is the only substitute. The Continuing Problems of Hungarian Industry Though Hungary is praised as having a working combination of socialism and capi talism' the Hungarians themselves are increas ingly critical of their malfunctioning economic system. Hungary's Ministry of Industry recently complained, "The productivity of Hungarian industry is approximately half of that of coun tries that are comparable to us in terms of size and industrial development. . . . We have not been able to reduce the proportion of defective production and have an excessive number of accidents" (quoted in Paul Marer, East-West Technology Transfer).

A recent World Bank report concluded that ,'industrial efficiency . . . appears to have de clined over the 1970s." According to Hun344 THE FREEMAN. SEPTEMBER 1987 garian technology expert Laszlo Pal, "It can be proven by facts that our backwardness com pared to the industrially developed countries is growing year by year" (The Washington Post, October 19, 1986). Lazlo Fodor recently com plained in Heti Vilaggazdasag (August 2, 1986), "We are lagging behind the interna tional development of science and technology, and our technology gap is widening year by year.... The Hungarian economy's competi tiveness and ability to generate income has de clined, its terms of trade have worsened, and its unprofitable economic activity has increased." Further insight into the Hungarian economy can be gained from a recent exchange on Hun garian radio (8/29/86). Interviewer Gyorgy Ney was speaking with Laszlo Bukta, Deputy Chairman of the State Office for Wages and Labor. Ney asked, "The budget devoted 157 billion forints [about $3.4 billion] last year to loss-making enterprises .... If my calcula tions are correct, this is roughly a quarter of the national. income. " Bukta responded, "The facts are correct and your calculation as regard the per cent is also right. This is an intolerable situation. "

The Hungarian government wants to struc turally transform the economy - while re maining totally in control of it. They want the benefits of capitalism while retaining the iron grip of socialism. As economist Kazimierz Poznanski concluded in a World Bank study, "The main result has been an expansion of new regulations, not a strengthening of the motiva tion for efficiency in industry. ' , And the government still has much hostility to the private sector. Fifteen private Hungarian investors recently opened the first privately built and managed hotel in the Eastern Bloc. But the hotel was driven out of business when government "forced the management to reduce the number of beds available and to meet sub sequently introduced laws governing private guest houses," according to an Economist In telligence Unit report in early 1986. Hungary has one of the most highly concen trated industrial sectors in the world. The economy is dominated by huge trusts that ef fectively make their own rules. In 1938, before the communist takeover, Hungary had almost 4,000 manufacturing enterprises. By 1960 there still were nearly 1,400 state industrial en terprises, but by 1980 the number had fallen to under 700. There has been some limited reform in recent years-but large firms still dominate the economy. Thus, the domestic economy is largely a handful of monopolies and monop sonies-with little real competition.

Many Hungarians view the large firms as economic dinosaurs which are dragging down the entire country. The highly respected Hun garian weekly economic paper, Figyelo, found "that for a wide range of measures, enterprise efficiency declined with size; in particular, en terprises undertaking dynamic investment pro grams were very likely to suffer a loss of effi ciency in terms of return on capital. ' , Not only do the large companies usually function poorly, they are also powerful oppo nents of reform. According to Andras Hegedus, a prominent sociologist who was Hungarian Prime Minister in 1955-56, "Managers of big enterprises are not only against reform in gen eral but, in view of their particular interests, also form obstacles to the achievement of par ticular economic policy aims. . . ." Hegedus believes that "the government's fear of auton omous economic units is today far greater than its wish for dynamic economic development"

(Economist Intelligence Unit, Quarterly Eco nomic Review, February 1984). Subsidized Failures The government repeatedly has announced its commitment to more competition-and then followed up by pouring in massive sub sidies to firms that founder. As economist Janos Kornai notes, "One of the means by which the 1979 reforms sought to 'toughen up' conditions for price formation by enterprises was to compel them to adjust their prices to those prevailing in Hungarian export industries, which try to compete on Western markets for hard-currency sales. When it appeared that only very few enterprises could live up to such high standards, their supervising ministries provided relief to as many as 741 out of 1136 firms" (Problems of Communism, p. 12). One test of whether a free market actually exists is whether firms are allowed to fail. If firms can't go bankrupt, then the economy never will be able to discard its most inefficient producers. In Hungary, profits and losses are largely dependent on political decision, and "losses" are very rare. As the World Bank noted, "Only 10 Hungarian enterprises of 1,735 showed a loss in 1980-a crisis year for Hungary." In 1984, only 28 firms showed a loss.

The problems of investment in Hungary were summarized recently by the Deputy Director of the Investment Division of the Ministry of Housing, Public Construction, and Town De velopment: "A comparison of similar kinds of investment projects found that in Hungary completion takes an average 30-50 per cent longer than in the other CMEA (Council of Mutual Economic Assistance) countries and 200-300 per cent longer as compared with the best firms in developed capitalist countries. Our costs are from three to seven times larger. " Maximum government intervention charac terizes Hungarian investments. As Miklos Ne meth, Deputy Director of the Party's Central Committee Economic Policy Department noted, "The collection of rules and regulations that control all of the important aspects of en terprise investment activities represent a 700 page book, in which one finds approximately 150 decrees. As one of the authors of the volume, I calculated that there are, on average, 1.6 changes in the decrees each week.... At the present time both the investor and con tractor have incentives to make the project as expensive as possible-and poor management provides plenty of opportunities to realize this"

(Heti Vilaggazdasag, March 17, 1984). Rational investment is difficult because the state still controls - and distorts-the prices of many key inputs, such as labor, energy, and raw materials. Investment requires central ap proval-and the central planners are still strongly biased in favor of the huge inefficient firms that dominate Hungary's economy. Labor is not the only scarce resource that the Hungarian economy squanders. Hungarian in dustry is extremely inefficient in utilizing raw materials. As the Economist Intelligence Unit noted, "Materials make up about 65 per cent of industrial production by value and studies show that Hungarian engineering products use too THE HUNGARIAN ILLUSION 345 much material, often one-and-a-half to three times higher than international standards" (An nual Report on Hungary, 1985). This higher cost base diminishes the competitiveness of Hungarian goods on the world market.

Socialism and Shabby Goods But probably Hungary's greatest problem in competing on world markets is the poor quality of its goods. As in everywhere else in the Eastern Bloc, shabbiness and socialism appear to go hand in hand. As Jan Vanous, research director for Planecon Consultants observes, "The Hungarian decision makers have selected the worst of all combinations in the area of ex ports. They have sufficiently weakened central control . . . while failing at the same time to put into place an alternative mechanism that would do the job (an open, competitive, market-driven system)." Though it has been obvious for decades that better quality production is Hungary's only hope of success on the world market, the economy has been unable to meet the chal lenge. There have been some exceptions Ikarus sells over ten per cent of its bus produc tion to the West. But most of the manufactured goods Hungary sells to the West contain a large amount of western components-and Hungary often makes scant profit on the sales.

Trade among Hungarian firms tends to be limited and highly inefficient. It is often diffi cult for a company to get recourse from another company that fails to fulfill its contract. As a result, Hungarian companies often go to great lengths to manufacture their own components - usually very inefficiently and at far higher prices than could be done with a more ad vanced division of labor. As an OECD study noted, "It is characteristic of Hungarian in dustry that many firms have their own foundry. Thus, products and inputs that manufacturers in much of the rest of the world would buy from outside suppliers or subcontract to specialized firms, are produced internally in Hungarian en terprises, typically under primitive workshop conditions. ' , Even when Hungary has a good idea, it often cannot cash in. The Rubik Cube was a Hun346 THE FREEMAN. SEPTEMBER 1987 garian invention-but the Taiwanese profited more from it because it took the Hungarians several years to boost their production of the cubes-and by then it was too late. The Hun garians even had difficulty exporting to the Eastern Bloc, because Hungarian industry could not produce high quality color labels for the blocks. Hard currency had to be spent for the color labels-which made the government reluctant to sell the cubes to socialist countries for soft currency. And, since Eastern Bloc trade agreements leave little or no room for new products, Rubik Cube exports likely would have displaced other Hungarian toy exports.

Hungary is also severely handicapped by its reliance on COMECON (Council of Mutual Economic Cooperation) trade. During the 1970s, the leadership borrowed heavily in the West in order to increase Hungary's sales to its fellow Warsaw Pact members, especially the Soviet Union. It was a peculiar strategy, since it is difficult to payoff hard-currency debts in near-worthless Soviet rubles. Trade among COMECON members usually is based on primitive barter arrangements trading two car tires for one truck tire, trading a rear axle for a front axle, and so on. A few years ago, Poland and Czechoslovakia were exchanging tractor parts-based solely on one kilogram of Czech parts for one kilogram of Polish parts. Since the centrally planned econ omies do not rely on prices, and each contrives its prices differently, they simply agree to ex change quantities of specified goods. This leads to numerous problems. As OECD notes, "If a component is imported from a CMEA supplier, the Hungarian customer has no direct recourse to solve problems of quality or delays in delivery." Hungary's reliance on COMECON trade has been particularly harmful to the competitiveness of its Ikarus buses. OECD found " ... the Hungarian party was regularly forced to accept and use subas semblies of unsatisfactory quality and techno logical standard, which impairs the technolog ical standards of the completed vehicles and their competitiveness" (Paul Marer, East-West Technology Transfer).

If companies want to use Western tech nology for their goods, they must get central approval for the imports. But the central planners are still strongly biased in favor of the huge enterprises. Thus, scarce foreign currency is squandered to provide inputs for companies that cannot efficiently use them while smaller and more dynamic companies or cooperatives are denied the resources that would give them a better chance to export to the West. The lack of market prices and market signals often cripples Hungarian export efforts. As Fi gyelo recently reported, some products which are exported in response to government pres sure are imported by other firms at higher prices. Hungary is also handicapped by its inade'quate infrastructure and the incompetent state organizations responsible for its upkeep. The Hungarian communications system is ex tremely backward. Hungarian estimates show that the telephone network is so poor that the extra work and costs it imposes on users (in terms of extra correspondence, delays in ar ranging transactions, etc.) may amount to as much as 10 per cent of national income.

The electric power supply is just as bad. Hungary receives much of its electric power from Russia-but the quality of the connecting grids is very poor and appears to be deterio rating. If power wavers too much, it could wreck sen~itive electronic components in com puters throughout the country. The one bright spot in the Hungarian economy has been agriculture-largely be cause of the long history of tolerating or en couraging private activity. In 1979, exports of slaughtered rabbits from private operations yielded the same amount of foreign exchange ($50 million) as exports of the entire state phar maceutical industry. But private agricultural activity is too limited to make a significant dif ference in the fate of Hungary's economy. Hungary on the World Market Since the 1960s, Hungary's performance on the world market has sharply deteriorated. Hungary has failed to increase significantly the dollar value of its exports since 1980-despite receiving billions of dollars of western credit and volumes of advice from the World Bank and IMF. Between 1980 and 1985, Hungary's market share in developed countries' imports of machinery and equipment fell by over a third -from 1.25 per cent to less than 0.8 per cent.

Hungary's inability to increase the dollar value of its exports prevents it from digging out from under its mountain of debt. Hungary·con tinues massive borrowings-pulling in $1.6 billion in 1985 and another $1 billion in 1986-rolling up its debts and postponing the day of reckoning. Hungary's main asset ap pears to be the illusion in the West that its eco nomic reforms are succeeding and that it con tinues to be a good credit risk. The Failure of Hungarian Socialism Economic mismanagement is having an ap parent effect on Hungarians' health. As in the Soviet Union, the mortality rate is rising-an anomaly for an industrial country and an indi cation that public health is seriously deterio rating. According to the United Nations, average life expectancy at age 35 for Hungarian males declined by 2.7 years between 1964 and 1982. There was an especially sharp increase in mortality during 1980-1982. Mortality for males ages 30-44 increased 4 per cent, ages 45-59 increased 5 per cent, ages 60-74 in creased 2 per cent (East European Economies, Spring-Summer 1984).

To fully appreciate the cost of Hungarian so cialism, it is instructive to compare the changes in per capita income for Hungary and other na tions after WorId War II. Clearly, Hungary has done dismally com pared to other countries. Hungary was on a par or in the same league with Austria, Italy, and not far behind West Germany in 1949. Now West Germany's standard of living is five times higher, Austria's is four times higher, and Italy's is three times higher. Japan's per capita income was less than half of Hungary's per ca pita income in 1949; now, it is five times higher and rising fast. The real cost of so cialism becomes apparent when seeing what THE HUNGARIAN ILLUSION 347 Changes in Per Capita Income 1949 1976 1984 Hungary $269 $2,280 $ 2,100 Austria 216 5,330 9,140 Italy 235 3,050 6,420 West Germany 320 7,380 11,130 Japan 100 4,910 10,630 Singapore n.a. 2,700 7,260 Taiwan n.a. 1,070 3,140 South Korea n.a. 670 2,110 (n.a. not available) Source: 1949: United Nations Statistical Papers, Series E, No.1, October 1950, pp. 14-16.

1976: World Bank, World Development Report, 1978, pp. 77-78. 1984: World Bank, World Development Report, 1986, pp. 180-181. might have been - seeing how much more prosperous other countries have become by fol lowing more market-oriented policies. Conclusion What has failed in Hungary is not the re forms-but the perpetuation of the basic struc ture. The economy has not suffered because government has allowed private citizens to drive taxis and sell ice cream, but because gov ernment continues to prohibit private citizens from combining to form large companies and to organize production according to market de mands rather than political imperatives. Hun gary remains poor not because of what it has allowed, but because of what it continues to ban. As economist Tamas Bauer observes, "The kind of 'renaissance' prevailing in Hun gary ... may easily discredit the entire idea of reform by destroying its validity."

Market socialism is the great illusion of the 1980s. As long as the government controls pro duction, distorts prices, and misallocates re sources, no amount of private initiative in re tailing or in selected services will resolve the fundamental problems of uncompetitive, low quality goods, depressed productivity, and an inadequate standard of living. D 348 Capitalism at a Crossroads: 1875-1900 by J. Brian Phillips T he last quarter of the nineteenth century was a turning point for American capi talism. Just when free enterprise seemed to be enjoying its greatest success-with tech nological advances creating many new indus tries, opportunities opening for millions of workers, and living standards on the rise - the intellectual roots of capitalism came under re lentless attack. When the proponents of capi talism were unable to mount an effective de fense, popular support shifted toward interven tionism, and the American era of laissez faire came to an end.