Ethical Socialism vs Marxism

Communist Yugoslavia followed Marx’s prescription for a stateless economy. It was a disaster.

January 11, 2021

This post is part of a series on my problems with Marxism and why I find ethical socialism to be the best approach to socialism. You can read the first post here and follow the entire series using the Ethical Socialism vs Marxism tag.

Many Americans are surprised to learn that Communist Yugoslavia was an American ally during the Cold War. The above photo was taken before a White House dinner honoring the Yugoslavian dictator and his wife (left), hosted by President Nixon and his wife (right). This alliance occurred because Yugoslavia and the United States shared an enemy: the Soviet Union.

Despite both being nominally “communist,” Stalin threatened to invade Yugoslavia due to ideological differences. Stalin sent at least six different assassination teams to take out the Yugoslavian dictator, Tito. After foiling all six, Tito reportedly told Stalin that he would only need to send one team to kill Stalin, and Stalin relented. More on that below.

The ideological dispute that so incensed Stalin came down to the role of government, or “the state.” As discussed in the first post in this series, Marx envisioned capitalism transitioning to socialism, which was a temporary phase that would give way to communism. Communism would be a stateless society. A state would be necessary under socialism, but could eventually “whither away” as it was no longer needed. The Soviets believed that the state should own the entire economy until capitalism was overthrown worldwide; this was their interpretation of Marx’s intermediate socialism phase. But the Yugoslavian Communists believed that they were ready to transition to a stateless society, and began the process of “whithering away” the state. The government scaled back and eliminated social welfare programs, as people’s welfare needs were to be met by the company they worked for. The government also stopped intervening in the economy.

Eliminating government-run social welfare? A free-for-all economy without any government regulation? Sounds like radical free market capitalism. But this experiment was not capitalism–far from it. In capitalism, shareholders own companies, managers manage the companies, and workers do the actual work. In capitalism, shareholders do no productive work, yet they are entitled to all of a company’s profits. They hire managers to run the company to maximize profits, which usually means keeping wages and benefits as low as possible. That is the central problem of capitalism: the people who control companies have an incentive to oppress their employees and otherwise act like sociopaths, pursing profits at the expense of society’s well being. All forms of socialism attempt to address this problem in different ways; on the left, we can generally agree on the problem, but not on the best solution.

The Yugoslavian solution to this was to change the ownership and management structure of companies. The capitalist structure of owners, managers, and employees was illegal under Yugoslavian communism. The only legal form a company could take was a worker-owned cooperative. All companies were owned and run by their employees: Yugoslavian law mandated that all companies be run by boards consisting of 15-120 employees who were democratically elected to 1-2 year terms by their coworkers.

Rather than being siphoned off by idle shareholders, profits were owned by the workers and could be used to fund the health care and retirement pensions of the workers themselves. And instead of hiring managers to run companies to maximize profits, workers selected coworkers to manage the company with priorities other than profit maximization. Rather than looking for ways to lower wages and increase working hours, these coworker-managers would look for ways to pay living wages, decrease working hours, and improve working conditions. We normally associate free market radicalism with capitalism, but capitalism is about how society’s productive resources are owned, and not a question of free markets. Even though Yugoslavian communism was a radically free market economic system, the incentives were designed to ensure that companies would be run to benefit ordinary people. Clearly, this was not capitalism; it was an experiment in building a better world. It was an experiment in socialism.

The results were a disaster. The point of this series is that Marxism would recreate some of the evils of capitalism; that is absolutely what happened here. The embrace of Marx’s vision of a stateless society really did recreate some of the evils of capitalism.

In free market capitalism, the rich get richer and the poor get poorer. This is basically what happened in Yugoslavia. Out of the ruins of World War II, Yugoslavia, like most European countries, experienced booming economic growth. But without a government taxing rich areas to support the development of poor areas, this prosperity was not shared. At one point, Slovenia’s unemployment rate fell to a shockingly low 1.5%; meanwhile, Kosovo and Macedonia had catastrophic unemployment rates exceeding 30%. Why did this go so wrong?

Croatia and Slovenia had been a part of the Austro-Hungarian Empire prior to joining Yugoslavia; fortunately for them, that empire allowed them a small degree of economic modernization and development. But areas that had been a part of the Ottoman Empire–areas like Macedonia, Montenegro, and Bosnia and Herzegovina–were brutally repressed and not allowed to develop or modernize (the Turks actually took captives from these areas for slavery). This meant that after World War II, Croatia and Slovenia had a head start on industrial development. In a free market, investments go to the companies that will yield the highest returns; in Yugoslavia, the most profitable companies were those handful of companies capable of light industry, all of them in Croatia and Slovenia. Capital thus flowed from the poorest areas of Yugoslavia to the richest. Croatia and Slovenia’s head start in development allowed them to flourish while those left behind were actually made even worse off.

A government based on ethical socialist principles would have funded social welfare and economic development in Montenegro and Bosnia and Herzegovina by taxing Croatia and Slovenia. But without government programs to do so, the rich got richer and the poor got poorer.

Even in Yugoslavia’s successful areas, progress was not even. It turns out that there was a shortage of white collar workers and a surplus of blue collar workers. In order to attract scarce white collar workers, companies needed to raise wages for white collar workers. Thus, even though firms were democratically managed, wages for blue collar workers were sacrificed to pay for increases in wages for white collar workers. The democratic nature of the workplace was no match for the tyranny of the free market. Even in successful areas, white collar workers got a bigger and bigger piece of the pie.

It’s not just capitalism: free markets take from the poor and give to the rich

The problem with free market capitalism is that it empowers the rich and powerful to become richer and more powerful. In part, this is because money naturally flows upward in a free market.

The Yugoslavian experiment of a radically free market socialism, then, only eliminated some of the evils of free market capitalism. White collar workers still got richer at the expense of blue collar workers, and better-developed regions of Yugoslavia became richer and better-developed at the expense of less-developed regions. Because money flows upward in a free market, growing inequality was guaranteed by eliminating government intervention in the economy.

This isn’t an argument in favor of a totally planned economy, but a cautionary tale against unregulated free markets. Had the Yugoslavian government taxed Croatia and Slovenia to fund development in Montenegro and Bosnia and Herzegovina, regulated wages to prevent inequality between blue- and white collar workers, or generally intervened to keep the economy working more fairly, they would have had a better outcome.

Stateless where it counts

Of course, Communist Yugoslavia was not a stateless society. As alluded to in the beginning of this post, Communist Yugoslavia was a police state. Stalin’s Cold War posturing, threats to invade, and assassination attempts had a profound effect on the direction of postwar Yugoslavia. In all likelihood, without threats from the Soviet Union, Yugoslavia would not have become a police state. Things would have turned out differently, with a freer, more open society.

Nevertheless, Communist Yugoslavia is a cautionary tale against free market socialism even though it was not actually a stateless society. Police state notwithstanding, the Yugoslavian economy and welfare system really were stateless: the state chose not to intervene in the economy and left social welfare up to worker cooperatives. It refused to tax the rich to support the welfare and economic development of the poor.

In a parallel universe with peaceful relations with the Soviet Union, Communist Yugoslavia would likely not have become a police state. Had they, in this parallel universe, pursued the same radically free market economic policy, they clearly would have arrived at a similar result: worsening gaps between rich areas and poor ones, and growing inequality between white- and blue collar workers. Yugoslavia’s massive security apparatus did not prevent the redistribution of wealth from rich areas to poor ones, nor the regulation of inequality between blue- and white collar workers. Take away Yugoslavia’s police state, and the economy would still have had the same vices.


The free market is vicious. We need a government to ensure resources go from better developed regions to less developed regions, and not the other direction. In other words, we need a state to resist the tendency of the free market to redistribute wealth from those who have least to those who have most–a tendency Yugoslavia proves will not end simply by ending shareholder capitalism. We also need a state to guarantee social welfare for everyone, regardless of what region they happen to be born in.

The failure of Yugoslavia’s form of communism argues powerfully that the Marxist goal of a stateless society is not a good idea. This isn’t to argue for a totally planned economy, but that the other extreme–a socialist spin on a radical free market economy–can’t work, either.