Red Market: SOMETIMES COMMUNIST COUNTRIES HAD TO TOLERATE A LITTLE ECONOMIC LIBERTY JUST TO SURVIVE.

• Author: Walker, Jesse

ONE DAY IN 1952, nearly six and a half years after the communists seized power in Yugoslavia, a member of the Politburo spoke to the nation's legislature. The old "exploiting elements of society" had been safely isolated, he announced. Bureaucracy was now the greater threat. To combat it, the country would take a step that Marxists typically relegated to a distant future.

It was time, he said, to commence "the withering away of the state."

He was speaking on April 1, but this wasn't an April Fools' joke. And while the Socialist Federal Republic of Yugoslavia did not wither away just then--that happened 40 years later, for rather different reasons--the place really was embarking on a new social system. It had, in fact, been making some hesitant moves in this direction for a couple of years already.

Yugoslavia had broken with the Soviet Union in 1948, but its government initially showed no signs of abandoning Stalinist economics. Indeed, it soon started a brutal drive to collectivize agriculture. By 1951, the number of state farms had leaped from 1,318 to 7,012, and in the process the government had not just seized land but demanded absurdly high production quotas--and sent many of the farmers who couldn't meet them to internment camps. The push prompted violent resistance in the countryside, most notably the Cazin Rebellion of May 1950, in which hundreds of peasants took up arms against the state.

Yet some of the country's leaders were starting to rethink their economic approach, especially as they watched newly nationalized industries churn out products with little regard for cost or quality. In 1950, Minister of Propaganda Milovan Djilas pitched a plan to two comrades while the trio sat in a car parked outside Djilas' home: Instead of forcing factories to answer to planners in the ministries, why not turn over each plant to its workers? You could still call that socialist--Djilas invoked a passage in Marx about the free association of producers--but you could avoid the dysfunctions of a centralized Stalinist bureaucracy.

One of those comrades, Deputy Prime Minister Edvard Kardelj, had already been flirting with similar ideas. Before long the trio had convinced the country's dictator, Josip Broz Tito, to back a much milder version of the concept. By the end of 1950, the federal assembly had passed its first reform bill.

The initial moves were small: Elected workers' councils were given some say in how most industries were run, but real power stayed with the state planners, who stepped in if they felt the firms were raising prices or wages when they could be investing in improvements instead. The government didn't even abandon its push to collectivize agriculture until the end of 1951. (All that armed peasant resistance made the regime more receptive to loosening its grip.) But over the next few years, planning was eased, various prices were freed, peasants were allowed to leave the collective farms, and those farms themselves were told to become self-supporting.

From 1951 to 1955, the number of agricultural collectives plunged from 7,012 to 688. Meanwhile, the mines and factories were now "social property" rather than "state property," though the exact meaning of this remained under dispute. In the 1960s, economic controls were rolled back further: Firms got more autonomy, tax rates were flattened, more prices were freed, and trade barriers came down. The historian Dennison...