During a political satire program on Radio Budapest recently, a space ship from Jupiter was reported to have landed. The visitor aboard was taken into the studio, and from his greeting, “Good evening, comrades,” it was clear that Jupiter was Communist. In fact, he was up on Hungary’s current move away from strict central planning to a market-run economy, which is called the New Economic Mechanism.

It was soon apparent that Jupiter was far ahead of Hungary in developing Communism. It had long since completed the transition from socialism, and was itself working on a New Economic Mechanism. The Hungarian host was surprised: “We are in the early stages of development, and yet we, too, are introducing the New Economic Mechanism.” “Which one?” the man from Jupiter asked. “The first one.” “Oh, well. This is our eighteenth.”

The skit was suggestive both of Hungarian political liberalization in this twelfth year since the uprising and of popular skepticism about the economic reforms that went into effect January 1. The two arc closely related: if the plan for decentralization of economic responsibility works, it will lead inevitably to pressures for decentralization of political responsibility. For this reason, the Hungarian experiment, the most radical in the Soviet system, is being watched with the greatest interest by all of Eastern Europe.


The reforms were needed because Hungary, which earns nearly half its national income from exports, found it could no longer sell in competitive markets, particularly in the West. A report to the Central Committee on export shortcomings sounded as if it had been written by a skeptical Westerner: “The profitability of our exports to the capitalists is low as a result of the high production costs; the technical level of production is backward; the quality of export goods does not meet required standards; our structure of production does not follow the requirements of the market.”

There is another aim of NEM, less stressed by the regime but very much on the minds of Hungarians who must suffer two weeks’ pay to disappear for a topcoat, or stand in line because of recurrent scarcities. That is to bring prices and wages into some sort of reasonable relationship, to create a situation in which only one member of a family has to work, and to smooth out the eccentricities of the system of supply and demand.

For these reasons, NEM, and no longer the revolution, is the prime topic of conversation here, in the drab taverns in the Csepel industrial suburb, in the faded velvet and gilt surroundings of Budapest’s literary café, the Hungaria, and in the domed Parliament building on the Danube. But just as the bronze plaques and wreaths commemorating the victims of the 1956 street fighting are still visible in Budapest, the lessons of the revolution are never very far in the background of Hungarian conversation.


In a small second-floor apartment near the Lenin Boulevard, members of a typical family, the Horvaths, talked with me a few weeks ago about wages and budgets. But soon, with the same mixture of awe and pride that Americans would use in recalling a famous local flood or snowstorm, they were describing the scene in the street below when Russian tanks fired on Hungarian rebel troops in 1956, and how the concussion blew out all the windows in the Horvath home. There is no need today, as there was before 1956, to arrange with friends to ring the doorbell in a special way so that the family would know it was visitors and not the political police. Wages have increased by a third, and much greater variety is available in every shop, from the corner fruit stand to downtown department stores. Medical care has improved and is free, but one must wait five or six hours in the clinic. Colleges graduate eight times as many students as before the war, and most students get paid an allowance by the government. Every month or so another writer is rehabilitated. There are signs that Parliament is being given some real powers, if not of opposition, at least of review. Last fall, for the first time, a play written by a writer who fled to the West during the revolution was staged in Budapest. It got poor reviews, but quality, not politics, seemed to be the reason.

Soviet customer

It is a common saying in Budapest that Communist Party chief Janos Kadar, put in office to crush the revolution, has since granted all the rebels’ original demands. But the original demands were mild compared with those expressed in later stages of the uprising: neutrality abroad; and at home, multiparty democracy and worker control of factories.

The counterrevolution, as the uprising is carefully labeled here, gets constant re-examination in the Party journals. A recent issue of the historical journal Szazadok discussed the harm done to the regime because the Soviet Army had to intervene, or, in its words, “the negative consequences of the fact that the Hungarian working class and the revolutionary organizations were unable to defeat the counterrevolution unaided.” The cause of this, or perhaps the effect, was that “anti-Soviet and nationalist views had a great influence on the masses.” Whatever the liabilities of this dependence on the Soviets, there were important economic advantages as well, and in the years after 1956, the Soviet Union poured many millions of rubles into Hungary in the form of credits and technical help. The aid raised the standard of living. The cooperation led to trade agreements that even today provide for Russia to buy more than a third of Hungary’s exports (compared with .03 percent purchased by the United States). At the same time, the Soviets supply all of Hungary’s crude oil, 95 percent of its pig iron, and all of its semifinished aluminum, this produced from bauxite mined in Hungary.

For eleven years, there have been eager Soviet customers for whatever the Hungarians produced, from topquality pharmaceuticals and electronics to the rattly Ikarus buses one sees all over Eastern Europe. But this closed-circuit trading system, despite its political advantages, had diminishing economic returns. Hungarian goods were not selling outside the bloc, though the nation needed these sales to finance the Western equipment and technical help it must have to increase productivity. To break the cycle, the economists convinced the Party to introduce the New Economic Mechanism. Its higher quality and productivity standards, they hope, will return Hungary to world markets.

What is NEM? For an object lesson, hail one of Budapest’s hardsprung, Polish-manufactured Warszawa taxis. Hungarian hackies curse them — “invented by the Russians and made worse by the Poles” — and indeed, one gets accustomed to seeing the chugging Warszawa machine lose races to a tiny two-cylinder East German car. This cannot go on. So now there is an agreement for Hungarian plants to make ball bearings to sell to Volkswagen in West Germany and for a few expensive Volkswagens to be sold here. It will be some years before families like the Horvaths will buy a car from either bloc; for them, prices for the smallest models now represent two or three years’ pay.

The real price

Since about 1960, the Horvaths have been able to divert more and more of their money from food and necessities to household furnishings and better clothes. A huge varnished wood television set dominates their living-clining room. It is the best available here, and cost 8400 forints ($280), or about four months of Imre Horvath’s pay. The Horvaths’ relative affluence is based on a common practice in Hungary: all three members of the family work. Horvath and twenty-year-old Imre, Jr., are draftsmen in a plant on Csepel Island, and Mrs. Horvath is a government secretary. Their total income is a relatively generous one for Budapest—4900 forints a month, of which the husband earns 2100, the wife 1600, and the son 1200.

These figures from the Horvath budget illustrate a rule of Communist economics: where the government can easily control prices, it can keep them down to ridiculous levels, and thus keep down pressure for higher wages. The real price is paid by standing in line, putting up with cold, crowded transportation, and enduring the results of years of neglected building maintenance. But when intangibles like style, selection, and novelty enter the equation, prices and supplies are not so easy to control, and the government encounters surpluses of unwanted goods and shortages of wanted ones.

There will be a price for the selection, convenience, and style to be provided by NEM;. A 2 percent rise in living costs is officially predicted, and many Hungarians are worried that it will be double that. The Horvaths will be able to absorb the increase, but many families without the extra income, or pensioners living on as little as 800 forints a month, will be hurt. The government has assured them that wages will rise enough to compensate. The Horvaths are skeptical of this promise, but in any case are prepared to pay extra if NEM will really put the goods in the stores.

Profits and prices

NEM is really three separate programs, two of them to increase efficiency and one to protect the consumer, It goes far beyond the economic experiments in the Soviet Union, East Germany, and Czechoslovakia, not so much because of the innovations it has wrought but because it was introduced simultaneously across the entire economy rather than to selected plants or trade groups, as elsewhere in the bloc.

The first NEM program introduces profitability as the test of success instead of numerical “plan fulfillment.” Prices will be based mostly on cost. For the first time, the cost will include interest on government loans to enterprises. Premier Jeno Fock, who has been as impressed as Janos Kadar by the arguments of the economists, explained the new investment system to Parliament: “The state used to place buildings, machines, and other equipment at the disposal of enterprises free of charge. This did not encourage thriftiness or the most economic use of the means of production. Therefore, a levy on fixed and working capital will be introduced nationwide.”

Profitability will be the deciding factor when plant managers approach the state bank for loans. If the bank believes there is a need for a new product or expanded capacity, interest rates will be low. An unnecessary venture will be given a low credit rating and deterred by interest up to 10 percent. It is theoretically possible for Hungarian enterprises to go bankrupt, a new concept in Communist economics, though it is likely that government intervention would head off such catastrophes.

The second part of NEM extends the profit principle to the production line and managerial offices. Welders, sweepers, draftsmen, and directors will share in the profits if their plant earns money by producing salable goods efficiently.

Part of the profits go into a fund to be plowed back into the enterprise. The government takes another part. The rest will be shared, in varying proportions, by the engineers, idea men, and managers who play roles in creating what Marx called surplus value. Marx stipulated that the worker should be given the surplus value he creates, but under NEM, a profit-earning manager can get up to 80 percent above his pay in bonuses, an engineer or foreman 50 percent, and a worker 15 percent.

If the plant loses money, a reverse incentive system comes into play. The bonuses disappear; the manager, in addition, will have his pay cut as much as 10 percent. He cannot escape this penalty by finding another job; the pay cut will follow him wherever he goes as long as his original plant continues to lose money.

Mysterious lingo

The third NEM program is price protection, at least until the market takes over the whole function of price setting, which Premier Fock predicts will take ten to fifteen years. The price of bread, about five cents a pound, has remained stable in Hungary since the war, through Stalinism, revolution, and reform. Fock has promised it will remain so at least through 1968, along with the prices of milk, flour, sugar, rent, heat, and light.

Other prices will be allowed to fluctuate between top and bottom limits. This will permit overstocked shops to hold sales, and allow for seasonal changes in lood prices. There will be no price controls at all on about 25 percent of consumer goods, most of them in the luxury range.

Terms like credit ratings, free market, and profits are mysterious lingo to use about a Communist economy, and the ideologists are struggling to adapt to it all. In one mood, officials are careful to say that NEM does not mean scrapping of a planned economy; it is only a way of making the plan more effective. In another, their criticism of the stupidities of central planning is so complete as to make it plain that NEM’s aim is indeed to get rid of the old system.

On Csepel Island, the talk is more of unemployment and inflation than of ideology. The broad, flat island in the Danube has been Budapest’s factory quarter since the nineteenth century, when the foundries and armaments plants of Manfred Weiss began to grow there to supply the Austro-Hungarian armies. Now Csepel has refineries, docks, and steel and machinery complexes. But the horses and wagons, one-story cottages, and broad farmlands still give it the character of an overgrown Austrian village.

Class consciousness grew with industrialization, the official Csepel history says, and the workers on the island were in the forefront of the fight for Bela Kun’s short-lived Soviet Hungary in 1919, and for the Communist regime of Matyas Rakosi after World War II. This same view of the rights and wrongs of society led them to fight against Rakosi and Sovietism in 1956. For weeks after the failure of the revolution, Csepel’s workers’ councils held out with general strikes and protests, until arrests crippled their leadership. Now the workers" councils are an embarrassing but safely remote item of recent Hungarian history.

There seems to be no intention of reviving them under NEM. Plans call for more trade-union participation in factory affairs, but the new labor code consigns the unions to their traditional tame role of enforcing contracts they have had little part in making.

In the Rakoczi Restaurant on Cscpel’s main street, a young Communist engineer outlined the problems the reforms will bring in his plant. “The Hungarian worker considers the factory his club,” he said. “Too many of our workers use the plant to catch up on football results and gossip from the papers, to get cheap subsidized meals, and do as little work as possible.” Under NEM, the “clubs” are being disbanded. With bonuses depending on production efficiency, managers are beginning to break the unwritten rule that has governed Hungarian labor relations for twenty-two years: since you’re not getting paid very much, you don’t have to work very hard.

NEM will mean layoffs and unemployment as padded labor forces are cut in the name of efficiency. After decades of propaganda about jobless workers in the West, officials are understandably reluctant to use the same vocabulary. Former Premier Andras Hegedus put it this way: “Uneconomic activities will not be able to continue. Manpower will be released, and between industrial branches and enterprises, the movement of manpower will increase.”

Two methods have been introduced to cushion die unemployment. One is to pay new mothers a 600forint-a-month allowance to stay home for two years after their babies are born. This is designed to take women off the job market and save state nursery costs as it increases the birthrate. It is too soon to tell if it will work. The other is to emulate the “guest worker" system used in the Common Market countries to get labor from Italy, Spain, Turkey, and Greece.


NEM has not brought capitalism back to Hungary and will not do so. As long as the intertwining lines of Party and state participation remain dominant, profits will go to the state or its employees, and private ownership will be restricted, as it is now, to a few small shops and services. But the economic reforms raise a question far more important for Eastern Europe than the question of private ownership. That is the influence they will have in hastening erosion of political control that started in 1956 with destalinization.

Stalinism was condemned and dismantled not because it was immoral but because it was inefficient. In Hungary, the Soviet Union, and every other country in the bloc, the leadership had to face up to the fact that the police state and centralism were antiquated methods for running a modern industrial society. The economic reforms are a logical extension of this first, tentative political liberalization. They, in turn, will lead to further political freedoms.

“How is a factory manager in the provinces going to be able to exercise his new autonomy if the political control from Budapest remains?" the Csepel engineer asked. “All our lives we have been taught that the economic base determines the political superstructure. Both spheres will have to decentralize.”

Donald R. Shanor


Michael Junetway is anATLANTICeditor Mario Rossi covers the United Nalions for theCHIUSTIVN SCIENCE MONITOR.George A. Ranney ,Jr., is a lawyer in Chicago. Donald R. Shanor is the ChicagoDAILY News’sBonn correspondent.