For four decades during the latter half of the 20th century, Poland and its people were the subjects of a grand socio-economic experiment. Under the watchful eye of its Soviet masters, the Polish United Workers’ Party transformed the mixed economy of this nation of 35 million into a centrally planned, socialist state (albeit one with an irrepressible black market). Then, in the closing decade of the 20th century, under the leadership of Polish minister of finance Leszek Balcerowicz, the nation was transformed back into a mixed economy.

In this book, we document the results of this experiment. We show that there was a wide chasm between the lofty goals of socialist ideology and the realities of socialism as the Polish people experienced them. We also show that while the transition back from a socialist to a mixed economy was not without its own pain, it did unleash the extraordinary productive power of the Polish people, allowing their standard of living to rise at more than twice the rate of growth that prevailed during the socialist era. The experiences of the Poles, like those of so many behind the Iron Curtain, demonstrate the value of economic freedom, the immiserating consequences of its denial, and the often painful process of regaining lost freedoms.

The road to socialism and back also teaches us something about the intellectual development of economic thinking. As we will see, the debate surrounding economic calculation in a socialist economy highlighted not only a fundamental flaw in socialist planning, but also a critical feature that allows markets to work. Markets work because they permit economic decision-makers to engage in rational economic calculation. This calculation depends on the constellation of relative prices and the accounting of profits and losses that emerge from the free choices of individuals trading property rights. It allows us to sort out the economically viable projects from the technologically feasible ones. Without such a price system, these calculations are impossible, and this sorting does not occur. Resources are systematically wasted and inefficiencies in production and exchange abound.

In the middle of the 20th century, many economic theorists were blind to the basic but crucial point that the price system depends on the property rights arrangements within which it operates. The appreciation of this fact led to the emergence of property rights economics, the fields of law and economics, public choice economics, and the entrepreneurial theory of the competitive market process. It is those theories that were able to shed light on the failing socialist economies of the 1980s and their collapse between 1989 and 1992. Moreover, these ideas formed the theoretical underpinning of the transition from socialism to an economy grounded in private property and freedom of contract protected by the rule of law.

But it is one thing to state this basic formula and quite another to implement it and sustain it against the political pressures of a new class of interest groups. As memories fade and as the number of living witnesses to the socialist experiment dwindle, the temptation to jump back on the road to socialism grows stronger.

In chapter 1 we discuss the political economy of socialism. We focus on the three great challenges of socialist planning—the control problem, the knowledge problem, and the incentive problem—and describe how these challenges give rise to what we call the pathologies of privilege. In chapter 2 we discuss the socialist era in Poland, describing how the communist government took control and attempted to centrally plan the Polish economy. We describe the features of the socialist economy—from the elimination of private property and central planning to soft budget constraints, rampant shortages, favouritism, and black markets. We also discuss the different approaches taken by successive socialist administrations (though our discussion is only loosely chronological). The chapter ends with the economic and political crisis that emerged in the early 1980s. In chapter 3 we discuss the transition from socialism to a mixed economy. We address the so-called Washington Consensus and shock-therapy as well as the main components of Leszek Balcerowicz’s transition plan. In chapter 4 we assess the transition. We discuss both the good—hyperinflation was tamed, shortages disappeared, growth resumed, and living standards rose—and the bad—unemployment soared and remained high for decades. In chapter 5 we discuss the changed landscape of the new, mixed, Polish economy. In chapter 6 we describe contemporary economic and regulatory policy in Poland. And in chapter 7 we discuss three services that are typically provided in both socialist and mixed regimes—social safety nets, health care, and education—contrasting their provision under the socialist and mixed-economy regimes. In chapter 8 we offer concluding remarks.