Financial Control in the Transition from Classical Socialism to a Market Economy

The transition from socialism to capitalism poses severe problems of financial management that have yet to be resolved in principle, let alone in practice. One unfortunate consequence is continual financial turmoil as socialist economies of the Soviet Union and Eastern Europe attempt reform. Inflation, either open or repressed, first accompanies and then undermines attempts to decentralize decision-making. But why should the transition from central planning to a market economy be inflationary? Understanding the system of financial control in the preexisting regime of “classical” socialism is the key to understanding what might go wrong in the transition. I discuss how in a more deliberate transition, domestic tax and monetary arrangements might be managed to keep the average price level stable as the market prices of individual goods and services become free to fluctuate, and suggest complementary policies governing tariffs and foreign exchange convertability in the move toward free foreign trade.