Economics for Democratic Socialism

Drexel UniversitySpring Quarter 2009

Utopian• A good deal of the discussion for this unit will be “utopian” in two senses -- but not in Marx’ sense.– “a picture of society designed as though there were no other factors at work than conscious human will.” Martin Buber, Paths in Utopia

– “Examination of the ideal of a future society.” Peter Kropotkin, 1873, Selected Writings on Anarchism and Revolution (MIT Press, 1973)

Market Socialism• The controversies of the 1920’s-30’s led to the proposal that a market socialist economic system could combine public ownership of the nonhuman means of production with decentralized management and markets.

• This would enable a socialist system to make use of the capacity of markets to promote efficiency and to aggregate information.

Definition• Public ownership of non-labor factors of production

• Decentralized decision making structure

• Decentralized information structure

• Both material and non-material rewards–primarily material

• Coordination by markets

A Prototype: The Lange Model

• A more centralized version of market socialism

• Three decision-making levels– central planning board (CPB)– industrial ministries– enterprises

• CPB initially sets all prices arbitrarily– thus enterprises face parametric prices just as perfectly competitive firms do

• Enterprises instructed to– minimize costs– produce output at which marginal cost equals price

Price Adjustment 1

• Result will either be a shortage or surplus– if shortage, price adjusted upward– if surplus, price adjusted downward

• State owns non-labor factors of production• Income (“social dividend”) used to

– finance investment to achieve growth goals– achieve distributional goals

• Control of pricing can be used to correct externalities

• State control of investment could be used to control business cycle

Price Adjustment 2

–information needs too great–what motivates managers to follow the rules?•what motivates managers of perfectly competitive firms to follow the P=MC rule?

•do managers of perfectly competitive firms have to calculate MC in order to follow the P=MC rule?

Criticisms of the Lange model

The Cooperative Version of Market

Socialism (Participatory

Economy)•Market socialist system in which labor participates in decisions at the enterprise level

•Major features– enterprises managed by the workers– equitable income sharing i.e., labor democratically decides how to distribute the enterprise’s income

– state owns non-labor factors of production– market coordination Any central planning will be strictly of the indicative rather than of the command sort.

– freedom of occupational choice

Cooperative Socialism 1

Indicative Planning• This idea is associated with French planning, mainly 1950’s-1960’s -- planning for a capitalist market system.

• Targets for industries were announced but not enforced -- they were “indicative.”

• Cheap talk? • Could be effective as an information transfer. (My theory, conceived 1968, was finally published in the 1980s).

• Probably was effective, but depended on government credibility, destroyed by the “events” of 1968.

• Closer to a true market system than Lange version of market socialism– prices set by markets, not by planners

• Still socialist because of state ownership of non-labor factors

• Supposed to combine the best aspects of capitalism and socialism, the “third way”

Cooperative Socialism 2

The Lewis Program• Lewis proposed that the government run a surplus (based on a highly progressive tax system), pay off the national debt, and acquire shares in corporations.

• This would lead to something in the nature of market socialism.

• It would combine public ownership with decentralized, interested management.

• However, a further democratic step would be to convert the corporations to participatory enterprises.

Proposal 1• This would require the establishment of a sovereign wealth fund of some kind.

• Let us call it the Social Endowment Fund (SEF).

• Like the Fed, it should be independent of direct government control, – Operated on business principles that would themselves be determined by the democratic legislature.

– “Arms-length” required for decentralized management.

– Should be run essentially as a public index fund.

Proposal 1 Continued • The Obama administration must take this step in any case.– Acquisition of shares in banks, auto companies will require some asset-management structure.

– Short-term, there will be no arm’s-length relation -- central control seems an objective of the acquisition.

– Long-term, reprivatization is anticipated. But will it happen?

– Diversification would help to establish an arm’s-length relationship of SEF to corporate management.

Quangos• A Quango -- that is QNGO, Quasi-Non-Governmental Organization -- is a government agency organized and charged to operate as if it were a nonprofit corporation.

• (In other countries Nongovernment Organization is the term used for a nonprofit corporation.)

• In the US, the postal service is a quango. • The SEF would be a quango.

Norwegian Socialism 1• From the New York Times, May 13:• “OSLO When capitalism seemed on the verge of collapse

last fall, Kristin Halvorsen, Norway’s Socialist finance minister and a longtime free market skeptic, did more than crow. … she bucked the tide, authorizing Norway’s $300 billion sovereign wealth fund to ramp up its stock buying program by $60 billion or about 23 percent of Norway’s economic output.”

• “Norway’s economy grew last year by just under 3 percent. The government enjoys a budget surplus of 11 percent and its ledger is entirely free of debt.”

Norwegian Socialism 2• From the New York Times, May 13:• “Norway’s relative frugality stands in stark contrast to

Britain, which spent most of its North Sea oil revenue and more during the boom years. Government spending rose to 47 percent of G.D.P., from 42 percent in 2003. By comparison, public spending in Norway fell to 40 percent from 48 percent of G.D.P.”

• “For now, the air is clear, work is plentiful and the government’s helping hand is omnipresent -- even for those on the margins.”

Norwegian Socialism 3• From Wikipedia• “The Labour Party has been the largest party in Parliament

ever since the election of 1927 up to the recent 2005 election. Norway was ruled by Labour governments from 1945 to 1981, except for three periods (1963, 1965–71, and 1972–73). From 1981 … governments alternated between minority Labour governments and Conservative-led centre-right governments.”

• “A coalition between the Labour Party, Socialist Left Party, and Centre Party, took over government from 17 October, 2005 after the 2005 general election, where this so-called red-green alternative received a majority of 87 out of 169 seats in the Storting.”

Norwegian Socialism 4• But on May 20, the NYT reports that Norway has fallen into recession.

• It’s a pretty mild recession so far, with production declining 0.8% and 1% the last two quarters. (Annualized rates, I think.)

• This excludes petroleum-related activity.

Proposal 2• (Nader) A Federal corporation chartering law be enacted that requires corporations in interstate commerce to adopt a participatory form of governance.– At the first stage, this might be parity codetermination (Mitbestimmung mit parität)•Employees elect 1/2 of directors

• At a “mature” stage, shareholder representation would be eliminated.

• Shares in such participatory enterprises would not be held by individuals.

Proposal 2 Continued• Note that at the mature stage, the majority of shares would be owned by the SEF. – Eliminating shareholder representation would be necessary to retain decentralized management.

– Minority, private shareholders would have to be bought out at this stage.

• What about dividends?– For democratic firms, dividends required proportional to average compensation of labor. •Originates with McCain, 1977•Several other similar proposals, 1977-90’s.

Flows of Investment• In a mature stage, dividends flowing into the SEF would be one major source of investment for renovation and further growth.

• However, retirement savings would be another source.

• Even now, in our capitalist system, a very large proportion of investment capital comes not from the capitalist class but from the working class (Clark, Pension Fund Capitalism, 2000) in the form of contributions to pension funds.

• Thus, shares in participatory enterprises could be held by pension funds, as well as the SEF.

Ownership of Shares• Pension funds (in such a case) are not exactly private property.

• Call them “social property.”• (This term was used in Yugoslavia for its system of public property with participatory management).

• Other forms of social property: endowment funds of nonprofit corporations (such as Drexel), mutual insurance companies.

Corporations• At the mature stage, 4 kinds of

corporations would be chartered:A. Participatory enterprisesB. Lending enterprises (banks)C. Nonprofit enterprisesD. Pension and insurance enterprises

• Types C and D could own shares in A and B.

• Type D issues no shares but pays off only in non-inheritable benefits.

Entrepreneurship• So far, this would be workable in the world

of classical economics. It ignores two important real-world difficulties: 1. Unemployment2. Initiative and creativity in the formation

of new enterprises (entrepreneurship)• In a long run perspective, these

considerations pull in opposite directions, since vigorous initiative in the creation of new enterprises would tend to maintain high employment.

• “Entrepreneurship creates jobs” is an ideological phrase, but ….”

Proposal 3• At the local level, create a large number

of nonprofit Cooperative Initiative Corporations CIC.

• The mission of each such CIC would be to promote a high level of employment and income through cooperative or participatory enterprises in its region.

• Methods1. Starting new enterprises.2. Financing existing ones through purchase

of shares and/or lending. 3. Arranging transfers to re-employ members

of downsized enterprises.4. Information services.

Proposal 3 Continued• This is suggested by the Caja Laboral Popolar, in the successful

Mondragon complex in the Basque country. • Like that organization, the CIC might instead be a federation of

the participatory enterprises in the region. • Or a Quango, with some aspects of both. • CIC-like organizations are already fairly common, and often act as entrepreneurs in practice.

• I envision the CIC’s also as a source of “shovel-ready” projects in periods when “economic stimulus” is needed.

“Capital Markets”• Note that something in the nature of “capital markets” would continue to exist even in a mature market socialism in this conception.

• Participants would be the SEF, many CIC’s and nonprofits, pension funds and insurance funds.

• A domestic “Tobin tax” -- a small tax on each transaction -- might be needed for stability in these markets.

• Independent “market” valuations of enterprises would thus exist.

“Business Cycles” 1• As noted, some central control

of rates of investment could ameliorate “business cycles,” even if they are not eliminated. – This will certainly be

necessary in a transitional stage, in any case.

“Business Cycles” 2• In a prosperity, the SEF would

function much as Lewis described. – The net government surplus would

be transferred to the SEF.– The SEF would also receive

dividends from corporate shares that it owns.

– These funds would be used to acquire securities on the market.

“Business Cycles” 3• In a downturn, the operation of the SEF

would presumably shift to projects of initiation of new participatory enterprises and renovation of existing ones. – Solicit “shovel ready” proposals from

CIC’s. – Lend to CIC’s or purchase shares from

the CIC’s portfolios to assist finance.

– Grants to CIC’s could also be useful in particular cases.

Money• Our existing monetary system has a large component of “fiduciary” money -- created by banks.

• One does not have to be a socialist to have doubts about this.

• The role of banks is strategic enough that they would reasonably be an exception to the rule of democratic management by the employees.

• “Mutual” saving banks have a good record -- they are essentially cooperatives of depositors.

How Banks Create Money• The Bank of Erewhon makes you an auto loan. • They acquire your IOU and establish a checking account for you in return. – Bank assets increased by IOU, liabilities decreased by checking accoung.

– Money supply increased by checking account. • When you buy the car, the check is cleared by a transfer of FED deposits from the Bank of Erewhon to the car dealer’s bank.

• This system has never been stabilized successfully, despite many reforms aimed at this.

Proposal 4• Deposits that can be used for transactions -- checking accounts, debit cards -- should be provided by a Public Monopoly Depository Bank, PMDP.

• Like the FED, the PMDP would provide reserves to lending corporations, in the form of deposits.

• Lending corporations would be required to maintain 100% reserves against their deposits.

• Deposits in lending corporations would strictly be time (saving) deposits.

Proposal 4 Continued• The Bank of Erewhon makes you an auto loan. • They acquire your IOU and transfer a part of their deposits in the PMBD to you, in the amount of the loan. – Bank assets increased by IOU, decreased by transfer of deposit in PMBD.

– Money supply not increased. • When you buy the car, the check is cleared by a transfer of your account in PMBD to the car salesman.

• Money supply is strictly controlled by the PMBD, while individual loan applications are reviewed by decentralized lending corporations.

Can we get there from here?

• You know the old joke. • According to Marx, we make our own history -- but on the basis of history made by our predecessors, and that history may limit what we can, in fact, do.

• To ignore that is “utopian.”• On the other hand, revolutions are unpredicable and often bloody, and often bring about the opposite of the revolutionaries’ intentions.

• This is the case for Fabian and “evolutionary” socialism.

Evolutionary or Fabian Socialism

• Perhaps “evolutionary” is not the right term, as it implies an unthinking process. I believe we need to think it out carefully -- the Fabian idea.

• The use of the tax system -- progressive income tax, inheritance tax, wealth tax -- has the potential to “spread the wealth around.” But all these taxes already exist, and redistribution of wealth through the tax system could be decided by a democratic legislature and involves no bloodshed (unless there is a “pro-slavery rebellion” against the democratic socialist government) nor even any unprecedented interference with property rights.

Emerging Democratic Socialism

• Similarly, sovereign wealth funds are not new -- some of the biggest are maintained by monarchies that are either capitalist or precapitalist in their social systems.

• Worker cooperatives and financial mutuals are “tried and proven,” though the dividend proposal is not.

• Reliance on local initiative as a conduit of innovation is a major shift of emphasis, but not qualitatively new.

• Monetary reform would be a big shift, but is not a specifically socialist proposal.

Socialist Critique• I regard these continuities as advantages. However, I am sure that many socialists would criticize this program on the very same grounds: nothing new. – Self-interest remains the key motivation. – Markets are always interest-ridden, and capital markets are really terrible!

– No central role for planning or distribution according to need.

– What is important is the political mobilization of the working class to take direct political control.

A New Heaven and a New Earth

• If the human species survives for another thousand years, I am confident that new social forms will emerge that we cannot anticipate.

• I suspect that work and production will be far less central to life than they are now.

• However much we think and plan, even the immediate future will have surprises, perhaps major ones.

• “A New Heaven and a New Earth” is a promise of religion, not of politics.

Politics• What politics can offer is new ways of working together for our mutual benefit.

• Can this be done without the transfer of surplus productivity to a superior class?

• That is the hope of socialism and of this course.

Conclusion• Market socialism is a viable proposal in

two senses:1. It can combine public ownership of the means

of production with efficient allocation, so far as markets can attain that goal.

2. You can get there from here -- indeed many of the tools are already in place.

• However, it will not bring a “new heavens and a new earth” -- and its politics will, no doubt, include a strong socialist opposition from the left.