New Economic Mechanism

The New Economic Mechanism (NEM) was a major economic reform launched in the People's Republic of Hungary in 1968. Between 1972 and 1978, it was curtailed by the prevailing winds of Eastern Bloc politics. During the subsequent decade, until the revolutions of 1989 ended the era, the NEM's principles continued to affect the Hungarian economy, even in cases where the "NEM" name was not emphasized. Because of the NEM, Hungary in the 1980s had a higher ratio of market mechanisms to central planning than any other Eastern Bloc economy. The ratio was different to an extent that was politically challenging to bring about in the Soviet sphere because of the ideological mixture it required. The name Goulash Communism was jokingly (but tellingly) applied to this mixture. The Hungarian economy under the influence of NEM principles was widely viewed as outperforming other Soviet Bloc economies, making Hungary "the happiest barrack" in barracks communism. Many Soviet and Eastern European people enjoyed going to Hungary (for example, on work assignments or on vacations) because of the economic and cultural environment there.

The tensions and harmonies between market mechanisms and central planning, with neither having sole control, are a perennial challenge in all societies that temper capitalism with socialism or vice versa. In some ways Hungary's economic reform channels comparisons with the Chinese economic reform, in the sense that both were qualitative challenges to a Stalinist type of system—and thus that such reforms were not politically feasible in most of the Soviet Bloc.

The period from 1956–1968 was one of reform in Eastern Europe. The beginning of these transformations was marked by the Hungarian Revolution of 1956, which resulted in János Kádár’s placement as the communist leader of the People's Republic of Hungary and the creation of the Hungarian Socialist Workers' Party (HSWP). For the first ten years of his rule, Kádár’s objective was to create a united Hungary, announcing in December 1961 that "those who are not against us are with us." Having reached social peace, Kádár turned his attention to economic improvement.

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