The Economics of Socialism

JASON SCHULMAN

Back when democratic socialism was a young political movement there seemed to be little need to spell out exactly how a socialist economy would work. When asked, many socialists would have said something along these lines: “The working class will take political power and create a radically democratic state. It will then bring the means of production and distribution into common ownership under workers’ management, and replace the anarchy of the market with conscious planning to meet the needs of all.”

Well, that sort of summation just isn’t enough anymore to convince most people. After the rise and fall of a “socialism” which democratic socialists have no intention of emulating (i.e., “Communism”), and the hollowing out of a movement which is no longer able to do very much to make capitalism more bearable (Social Democracy), most socialists see it as necessary to be able to provide some sort of picture of what a socialist economy might be like. There is no such thing as a flawless blueprint, of course, and it would be pointless for any intellectual to try to decide in advance the precise details of what can only be the result of a mass movement and a historical process. But as the saying goes, “you can’t beat something with nothing,” and socialists have to offer “something” if our project is going to seem convincing to mass numbers of people, particularly in the United States with its lack of a mass socialist tradition.

“Market Socialism” – A Valiant Attempt to Fry Ice?

Since the early 1980s the vast majority of formal socialist models have fallen under the rubric of “market socialism.” Alec Nove threw down the gauntlet in The Economics of Feasible Socialism: it is impossible to democratically plan a complex economy, and any attempt to do so will result in a USSR-style bureaucratic nightmare. A post-capitalist economy may involve substantial public ownership and even workers’ control of production inside individual firms, but the coordination and distribution (and pricing) of consumer goods should be left to market forces. The most popular (and attractive) of the market socialist models can be found in David Schweickart’s Against Capitalism. Schweickart’s vision – “Economic Democracy” – involves worker-managed enterprises, producer- and consumer-goods markets, and socially controlled investment. Firms are to compete against each other and apply to regional community banks to finance their investments in new perceived opportunities. That is to say, even though investment is no longer private, and other criteria are to be taken into account, market-driven prices and profit competition are major determinants of public bank investment strategies in Schweickart’s model.

And this is where the problems of “market socialism” begin. Market forces are not simply tools with both positive and negative attributes that just need to be used properly by socialists rather than improperly by capitalists. “Market socialism” wouldn’t reward people according to the value of the capital they own, but it would reward people primarily according to the productive contribution of their labor. Therefore, luck in the genetic lottery, even in an ideal meritocracy, would be of decisive importance in determining income. Moreover, significant redistribution of wealth through progressive taxation would be difficult due to the likely disproportionate political power of the highest income earners, and also because it would contradict the principle of allocation according to contribution. Also, if the experience of Titoist Yugoslavia is any indication, “market socialism” will likely reward managers, professionals, intellectuals and technicians with greater decision-making responsibility, income, and power, as market forces undermine workers’ management of production due to competitive pressures.

More generally, market ideals also contradict the distribution of subsidized public goods such as universal education, health care, child care, elder care, etc., as the immediate benefits of these investments (principally education) are appropriated privately in the form of higher personal income returns from greater productivity, in spite of the fact that they result from public investment. In the words of economist Samuel Bowles, markets encourage the development of “greed, opportunism, political passivity and indifference toward others,” the exact opposites of the “feelings of empathy and solidarity with others, and the capacity for complex communication and collective decision making” which are necessary to achieve socialist goals. The very traits that seem to make markets desirable or at least “easy” – that they encourage indifference, anonymity, and reliance on individual “exit” rather than on “voice” or communication, trust, and social decision making – make them hostile to the fostering of qualities essential to democracy and socialism.

Schweickart himself has acknowledged that market-based investment in particular suffers from a general miscalculation of the effects of pervasive “externalities” such as ecological damage and the growth of suburbia, and leads to oligopoly, volatility (the “business cycle”), and shuts off the possibility of politically setting a rate and allocating overall economic growth. What he does not address is that if worker-controlled enterprises merely pursue their own advantages in competition with other firms and their activities do not form part of an overall consciously and socially decided plan, then the result will not be much more stable and more subject to overall social control than capitalism, and the whole structure may very well unravel back into capitalism – or, in the context of a radically democratic state, push forward into something far less market-based, as workers get tired of decisions being made for them “behind their backs” by markets, and decide to institute society-wide conscious economic decision-making.

“Market socialism,” then, is not likely to be successful in meeting socialist goals. The original socialist prescription – democratic planning – is still necessary. The difference is that now we need to have a better idea how comprehensive democratic planning might work.

Participatory Planning Through Negotiated Coordination

The most feasible vision of a democratic planned economy has been offered by British economist Pat Devine. I reprint his words below, from Marxism Today, June 1988:

A possible model for the economic organisation of such a self-governing society is a process of what I call democratic planning through negotiated coordination. At the level of the economy as a whole, decisions have to be made about the broad allocation of society’s productive capacity between different uses — between investment and consumption, collective and personal consumption, different regions, and so on. These decisions are necessarily taken by the government and representative assembly but at the moment are subject to little serious public discussion or social control. One way of increasing participation in such macro-economic decision-making would be to focus the discussion around a limited number of ‘plan variants’, drawn up by a planning commission, which would set out realistic alternative policy packages based on different values and priorities.

The macroeconomic decisions taken in this way about investment, social provision and personal income distribution would, as now, be implemented through the distribution of purchasing power in the economy. For example, the funds available to social bodies responsible for services like education and health would reflect the social priority given to them. Similarly, the distribution of personal income would reflect among other things the priority given to movement towards greater equality.

The result would be a structure of demand for goods and services that represented the collective and individual preferences of society. Enterprises would then compete to supply what was demanded.

What has been outlined so far involves market exchange, with customers choosing between the output of different enterprises and enterprises making use of their existing capacity to meet customer demand.

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It is important to distinguish between market exchange and market forces. Market exchange consists of buying and selling. It generates information about what customers want and the extent to which different enterprises are supplying it. It is concerned with the use of existing productive capacity. The operation of market forces, however, is concerned with the process through which changes in productive capacity occur, with the movement of resources between enterprises and industries, with investment and disinvestment.

The changes in capacity brought about by investment and disinvestment need to be coordinated with one another. In systems based on market forces investment decisions are taken independently by each enterprise. If too much capacity is installed profits will be low and some enterprises will contract or leave the industry. If too little capacity is installed profits will be high and existing enterprises will expand or new enterprises will enter the industry. Thus, market forces coordinate investment decisions after they have been implemented, through the push of low and the pull of high profits.

Market exchange is a central feature of the model I am proposing but it is obviously not unique to it. The unique feature of the model is its rejection of both central command planning and market forces as the way of coordinating investment decisions. By contrast with these coercive methods, investment decisions in the model are coordinated through a process of negotiation between enterprises and other affected interests in what I call negotiated coordination bodies.

How would this work? Would it be efficient? How would restructuring occur? These questions can be addressed from the standpoint of the adequacy of the information that would be available and the motivation that would determine how the available information would be used.

First, enterprises would be run by a governing body consisting of representatives of all the groups affected by its activities. Those affected clearly include the enterprise’s workers, but they also include customers and suppliers, competing enterprises, the communities in which the enterprise is located, and groups concerned with equal opportunities, environmental issues, and so on. Thus, self-government by those affected at the level of the enterprise is not the same as worker control. However, the internal operation of the enterprise, within the guidelines set by the governing body, would be on the basis of worker self-management.

*

Second, decisions on investment within an industry would be made by the negotiated coordination body for that industry, which would again consist of representatives of those affected by the decisions. All the enterprises in the industry are obviously affected, since decisions on investment and disinvestment determine whether an enterprise expands or contracts. However, those affected also include major purchasing and supplying industries, other customers (social bodies and individuals), local communities and regions, and again groups such as those concerned with environmental issues.

Negotiated coordination bodies would have available to them two sorts of information. First, there would be the quantitative information about how each enterprise had performed in making use of its existing capacity. This would take the form of revenue from sales, production costs, and profitability as the difference between the two.

Second, there would be qualitative information consisting of the views of the groups represented on the negotiated coordination body and estimates from the planning commission of any major changes expected in the demand for the industry’s output. Negotiated coordination bodies would have to decide on whether any change in their industry’s capacity was required and then on the distribution of the change between the different enterprises.

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In deciding on where changes in capacity should occur, on the distribution of investment, negotiated co-ordination bodies would take into account both the overall interest, represented by the quantitative data on the performance of each enterprise, and the detailed interests of those most directly affected, as expressed by their representatives on the negotiated coordination body.

For example, if a relatively poor performance by an enterprise in an area with restricted employment possibilities was due to factors beyond its control, long-term subsidies might be agreed. If, on the other hand, the poor performance was due to factors within the enterprise’s control, it might be offered subsidies for an adjustment period but no longer.

Thus, the interaction of quantitative and qualitative information would enable the social interest in each case to be decided on the basis of both system-wide and local knowledge, consciously integrated by representatives of those affected. The model incorporates market exchange and makes use of the information generated by it. However, it rejects the use of market forces and the fragmented and atomised decision-making through which they operate in favour of the coordination of decisions through negotiation and agreement between those affected by them.

What of the motivation of those making the decisions? Might they not conspire to further their vested interests at the expense of the overall social interest? Moreover, even leaving aside such narrowly self-interested behaviour, people understandably tend to think that what they are doing and know about is particularly important, perhaps even more important than what other people are doing. Here the transformatory dynamic of negotiated co-ordination is crucial. The discussion and negotiation leading up to a decision would involve representatives of all interested groups. It would be a process of direct personal interaction in which people would have to justify the position they adopted in the light of the position adopted by others. As a result, people would be helped to modify their own narrow self-interested consciousness and develop a broader social awareness and sense of social obligation based on an understanding of their mutual interdependence.

Of course, agreement would not always be reached. Genuine conflicts of interest cannot always be resolved to everyone’s satisfaction. In the end, those affected would decide on a majority basis, with a right of appeal to a body responsible for decisions at a more general level. Sanctions would be available in the form of a refusal to allow subsidies or to authorise investment.

However, the logic of negotiated co-ordination is towards co-operative rather than antagonistic economic and social adjustment. It has a transformatory dynamic in the direction of a self-governing, self-activating society of informed, equal people living together on the basis of co-operation and mutual respect. In this sense, participation in the process of negotiating a collectively determined outcome has an intrinsic value in helping us to become more human.

To sum up, while a socialist economy may need to utilize market exchange, a core part of our socialist mission must be to categorically reject market forces as arbitrary and illegitimate regulators of economic decision-making, as the organizing principle of international and national economic growth and allocation. Instead, we must make democracy itself the regulator of the economy – to promote cooperation and recognition of interdependent common interest, as Devine has put it, while acknowledging that people have distinct interests which they need to be able to articulate. This, ultimately, is what “negotiated coordination” is all about – and to my mind it is the real “economics of feasible socialism.”

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21 Comments

  1. “In the words of economist Samuel Bowles, markets encourage the development of “greed, opportunism, political passivity and indifference toward others,”

    does he prove that or does he just say it? because I don’t think that’s true at all.

    “the funds available to social bodies responsible for services like education and health would reflect the social priority given to them”

    the free market does this alot better. People have an interest in schools, roads, police and so forth. it’s with democracy that all that money ends up going to subsidies for well connected peoples, wars, etc.

    “However, those affected also include major purchasing and supplying industries, other customers (social bodies and individuals), local communities and regions, and again groups such as those concerned with environmental issues.”

    these are constantly changing. new groups new issues. I don’t see how you could corral them all into a meeting of some kind.

    and how would all this be enforced? what if I decided this was the worst arrangement i’d ever heard and decided to work outside it? what are you going to do? close me down? I’m a very big strange man.

    “we must make democracy itself the regulator of the economy ”

    so we must take what people say they want rather than what they DEMONSTRATE they want. that seems like a prescription for disaster.

  2. I’m going to presume that Lester is a capital-L Libertarian. But most of what he says makes no sense.

    Lester, you can look up works by Samuel Bowles (he works with another economist named Herb Gintis) and see for yourself what he demonstrates. I would think that the current economic crisis would have done enough to demonstrate how markets affect human behavior, particularly the behavior of finance capitalists.

    You seem to be against democracy (good luck with that) and want a “free market” in roads, police, etc. Good luck convincing anyone of that idea. Even real capitalists will think you’re out of your head.

    Working outside of an economic system is, frankly, not possible. I can’t work outside of capitalism no matter what I do. I wouldn’t expect the majority of people who’ve made a socialist revolution to want to work outside of socialism, and those that would want to do so would be (ex-)capitalists who opposed the revolution, so…too bad for them. They lost. They can try to convince people to go back to the old system but they’re not gonna get anywhere, I bet.

    As for people saying what they want and/or demonstrating what they want when it comes making economic decisions. The main problem with capitalism is that it is undemocratically structured to express preferences in a way that is biased in favor of individual consumption over social consumption. For humanity to be truly free we need an economic structure where it’s as easy to register preferences for social as individual consumption. Hence the need for socialism, for “negotiated coordination.”

  3. “The main problem with capitalism is that it is undemocratically structured to express preferences in a way that is biased in favor of individual consumption over social consumption”

    first you would have to prove that that is a problem. How is favoring individual consumption over social consumption a problem?

    “Even real capitalists will think you’re out of your head.”

    and that means I’d be wrong?

    “you can look up works by Samuel Bowles”

    lol nice response. how about show your own work? If you can’t don’t attempt to make the point

    • “How is favoring individual consumption over social consumption a problem?” LOL indeed. Do you like unemployment, poverty, and general economic insecurity, Lester? Do you think that the existence of these social ills is a conscious choice made by the majority of people? If you do, then sure, an economic structure for expressing consumer preferences that is biased in favor of individual consumption over social consumption is just dandy. Me, I think it’s a disaster.

  4. “Do you like unemployment, poverty, and general economic insecurity, Lester? ”

    those don’t arise from favoring individual consumption over “social consumption” whatever that is.

    • Put simply, and I’m borrowing from Robin Hahnel for an example: Apples and oranges are consumed at an individual level, but when we “consume” education we typically do it along with lots of other people. That’s “social consumption” and it’s something that capitalism has problems with. So we need mechanisms of “social choice” — that’s what the process of negotiated coordination that Devine describes is for. Otherwise we’re left purely with “individual choice,” and the individual choices of some — the capitalist class — often result in whole communities and generations of people experiencing a drastic erosion of job, income and eventually educational and life opportunities — except maybe the “opportunity” to be poor, a drug dealer, a prisoner, etc.

  5. “That’s “social consumption” and it’s something that capitalism has problems with.”

    so why are private schools so much better than public schools? why are “public” police and roads so corrupt and full of potholes respectively?

    ” often result in whole communities and generations of people experiencing a drastic erosion of job, income and eventually educational and life opportunities — except maybe the “opportunity” to be poor, a drug dealer, a prisoner, etc.”

    that comes from planning not markets. the old soviet union had tons of planning and tons of prisoners poor and drug dealers. way more than here. theye wer ALL poor and all prisoners, basically. don’t know much about drugs probably they couldn’t afford them.

  6. The problems you describe are the result of underfunding. Again, the U.S. is dominated politically by those who value the private over the public. And not all public schools are inferior to private schools, particularly public schools outside the U.S. As for the USSR, democratic socialists advocate democratic planning, not autocratic planning, so that’s a red herring; in any case, life in Russia only got worse after mass privatization and a shift from command planning to free markets was attempted; the result was a general decrease in life expectancy and a decline in population.

  7. “The problems you describe are the result of underfunding.”

    right. the democratically elected people have chosen to underfund schools and roads and fund wars and subsidies and so forth instead.

    schools and roads are underfunded and are thus in bad shape.

    “Again, the U.S. is dominated politically by those who value the private over the public”

    if only that were true. most big companies are joined at the hip with the state and have benefited immensely from it and it’s regulations. Nike can force it’s domestic competitors to not pollute, then pollute in their third world factories.

    .”And not all public schools are inferior to private schools, particularly public schools outside the U.S. As for the USSR, democratic socialists advocate democratic planning, not autocratic planning, so that’s a red herring; in any case, life in Russia only got worse after mass privatization and a shift from command planning to free markets was attempted; the result was a general decrease in life expectancy and a decline in population”

    so are you for or against autocratic planning? you seem to be playing both sides of the fence in this statement

  8. so you think life in russia is worse now than it was under communism?

  9. It’s hardly any better now than it was before 1991. Ask anyone who lives there. There’s a lot of Stalin nostalgia, even, as awful as that sounds.

    • I can attest to this, since I just returned to the states from a six month stay in St. Petersburg. It must be noted that while capitalism à la America was heavily propagandized in the Soviet Union, it was the same vice versa. By no means do I advocate an autocratic economy, but the benefits and drawbacks under the Soviet system weren’t exactly as they’re portrayed here. The woman I lived with, Lyudmila, would reminisce of the time when there was full employment, no homelessness, and no drugs, while shuddering at the thought of returning to such political persecution. The rapid market-liberalization imposed on the Russian Federation through the policies of the Bretton Wood’s institutions was devastating, and though things are slowly improving, the effects still linger.

      I suggest to Lester to visit, and see how many homeless old women, бездомные бабушки, sifting through trash it takes to recognize the ‘potential’ consequences.

  10. Since we seem to be discussing Russia, I recommend this article by Hillel Ticktin:

    http://www.solidarity-us.org/node/461/print

  11. does he have anything to say about that massive spike in GDP post communism?

  12. Hello folks, long time no see. I’m still parsing the article here, but I’d like to chime in and say that, while GDP might be up quite high (new export markets help), GDP is a poor measurement of income disparity. GDP and disparity are mutually exclusive by most measurements. Not that most anti-democracy, pro-market anarchy proponents would care, but still.

  13. I recently read Devine’s “Democracy and Economic Planning: the Political Economy of a Self-Governing Society” through an on-line library (which I had to subscribe to). Jason’s article is a good basic summary of Devine’s proposals. A complete reading of it will show that many of the objections raised by market socialists have either been adequately discussed by Devine himself, or are so trivial as to constitute hair-splitting. Above all is the fact that Devine does not simply rely on abstract reasoning, but backs up his claims with empirical data. One of the most interesting sections of his book deals with the history of economic planning, where Pat Devine demonstrates that market socialism has been tried and found wanting, but that the negotiated cooperation process he advocates has been tried in limited versions and found promising. It is time for market socialist advocates to get out of the way. They have had their time and the left has suffered for it!

    As for free markets–give me a break. They don’t exist, never have and never will.

  14. This article fails to mention the fact that Schweickart’s model also includes a public/worker ownership of productive assets (community and regional ownership of certain productive assets, national ownership of major industries). Schulman has written this article as if investment is the only asset which is publicly-owned in Economic Democracy.

    In Schweickart’s model, the market is merely a tool for the furtherance of societal goals, not a value in and of itself in the manner of capitalism.

  15. I understand Schweickart’s model pretty well, I know who owns what. I am less sure than he is that the self-regulating market, even if supposedly only for goods and services, can be used as a tool for the furtherance of socialist goals.

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