Market Socialism: A Blueprint

...The Bolshevik revolution was, in the beginning, a utopian experiment: its designers inherited from Marx an antipathy toward the market mechanism and believed that they could replace it with a system of central allocation...

...If some inequality is one undesirable feature of market socialism, a second is, as G.A...

...That's pretty vague, and this is not the place to try and sharpen it up, but the quick statement is that equality of income is a goal, subject to various caveats...

...That was not their most devastating error, but it was bad enough...

...The good news is that without a capitalist class and in a democratic setting, people will be able to think more objectively about, and act in their true interests, than under bourgeois democracy...

...If, as in Brazil, the rich consume 40 percent to 60 percent of national income, then the redistributive effect would be substantial...

...There are various levels at which the questions can be asked...

...In this sense there will be public control of the use of the economic surplus, a phrase with a socialist ring...

...But they will neither deserve those wages nor be entitled to them, because I do not believe they deserve or are entitled to returns on their arbitrarily assigned genetic compositions and family and 566 • DISSENT Market Socialism social environments, which largely determine their skills...

...One plank of the platform of a political party in such a society will be the direction that investment would take should the party be elected...

...For I do not think it is correct to say that a distribution of income in which each is paid the value of his or her labor contribution to the rest of society is just either...

...Pranab Bardhan, an economist at the University of California, Berkeley, has proposed a system wherein firms in the kind of market socialist economy I outlined above could be organized into groups modeled after the Japanese keiretsu...

...There were advocates of market socialism, in some aspects, throughout Soviet history, from Nikolai Bukharin in the twenties to Leonid Kantorovich (the only Soviet recipient of a Nobel prize in economics) and Evsey Liberman in the sixties and seventies...

...This is reflected in the extreme volatility of investment in large capitalist economies, which is responsible for the business cycle and therefore, in particular, the rise and fall of unemployment...

...Now there are various ways of decreasing real income differentials of workers that could be used by a market socialist society—to the extent, of course, that a democratically controlled society condones using them...

...interest forthcoming from savings, which will also vary across households...

...Put slightly differently, my claim is that markets are necessary to achieve an efficient and vigorous economy but that private ownership is not necessary for the successful operation of markets...

...The job of a socialist economist is to design an economic mechanism that would provide each person with sufficient material income to pursue his or her self-realization consistent with an equal degree of opportunity for self-realization provided for others...

...it is a mechanism for decentralizing the accountability of firm management to a small number of institutions, in this case other firms and banks, which are capable of monitoring the management...

...I shall modify it and fill it in a bit in what follows...

...The stock market has therefore been called the market for corporate control...

...The board of directors of a firm would consist of representatives of its shareholders, that is, of the various firms and banks in the group...

...Suppose that through workers' control of management, or some other kind of checks, no politically powerful managerial class develops...

...The inference that these commentators implicitly make is that socialism, too, is a dead letter...

...More generally, conflicts between different groups of people based upon their different economic interests will continue to exist...

...The inference that those proclaiming the death of socialism have drawn is that, because (1), (2), and (3) imply economic failure, therefore all of (1) through (3) must be negated to achieve a successful economic system...

...I believe that, if there is sufficient competition innovation will occur in these market socialist firms...

...Marx was a great teacher on the nature of capitalism...

...FALL • 1991 • 569...

...Labor will be hired on labor markets, and wages will be set by supply and 562 • DISSENT Market Socialism demand in the market...

...It is wrong, in my view, to maintain that any market system, with or without capitalists, allocates resources and incomes justly...

...Under market socialism people will receive differential wages, and that will reflect their differential economic value to society...

...Will entrepreneurial spirit be forthcoming...

...I do not propose that people vote on the composition of investment because of that ring but because I believe we lack the markets that would be necessary for investment to be allocated in a socially desirable way...

...Under these circumstances, I believe there would be a gradual increase in the fraction of resources so devoted, although this is surely not a foregone conclusion...

...Can Justice Exist with Market Socialism...

...Complete equality in the social dividend received by different households would be compromised in the interests of creating a mechanism for decentralizing the monitoring of firms...

...A clue to a possible answer comes from the experience of Japanese capitalism, where the stock market was relatively unimportant in the economy until recently...

...If a firm is being poorly managed, its profit prospects will darken and its stock price will fall...

...What is not planned in this vision of market socialism is the composition of output, the prices of goods, or the distribution of labor: just the composition of investment...

...All these millions of decisions, supposedly but impossibly made by the planning system in Soviet-type economies, are left to individuals to arrange through markets...

...If people continue to work about as hard as they do under capitalism, and technological change takes place about as it does under capitalism, then the two major differences between this kind of market socialism and capitalism are the direction of investment by a political process and a more egalitarian income distribution...

...If the government encourages the production of refrigerators that do not use chlorofluorocarbons by discounting the interest rate to firms that make them, this will give rise to a deficit in the state banks, which will be financed through taxation...

...I suggest that such private firms be permitted in market socialist economies...

...I have also mentioned the planning of investment—but this is neither a necessary part of the blueprint nor something that capitalist countries cannot in principle do, and so it would be wrong to stress it here...

...Firms may advertise deceptively and try, as they do under capitalism, to create in people tastes for goods by exploiting their feelings of insecurity and incompetence...

...All the usual things: public goods that a government provides, income transfers to those unable to work, subsidies to families that cannot earn enough to live decently, and so on...

...But there is no market for corporate control in Japan—at least, it does not take the form that it has in the United States, and capital is not directed to its most profitable uses by the stock market...

...Or the publicly owned IBM could buy out the small firm, subject to the usual antitrust considerations, which will be necessary under market socialism as well...

...Environmentalists and workers in the lumber industry may continue to clash...

...Now, profit maximization will lead to some antisocial behavior, and that will have to be regulated...

...In the blueprint that I shall now sketch, I attempt to support this claim as concretely as possible...

...Components of Market Socialism The viability of market socialism depends upon the claim that private ownership of the means of production is unnecessary for the successful operation of a market system...

...The social control over investment is achieved without setting ten thousand prices, or one million prices—the figure for the Soviet Union varies, depending upon the source...

...The good news is that markets do not require capitalists, that is, the concentration of economic power and wealth in the hands of a small class...

...Managerial culture in the Soviet Union is demoralized, to say the least: mostly, one can only get the inputs one needs by bribery and barter...

...If capitalists consume a small fraction of national income, as in Norway, then the change in income distribution effected by market socialism would be small...

...This system has been successful, if we take Japanese capitalism to be a successful capitalist variant...

...But we have no example of a large economy that has operated successfully without profit maximization as a goal of firms, and my attempt here is to propose a blueprint that is based, as much as possible, on the successes of capitalism but which deviates from capitalism in certain important ways...

...What will be equalized is that part of income due to corporate profits...

...The fraction of firm W's profits going to firms X, Y, and Z by virtue of their ownership of shares of W would constitute a significant other part of the social dividend of the workers of X, Y, and Z. Thus every worker in the economy would receive his or her social dividend from two sources: a centralized dividend from the government, made up of a small share of profits of all firms in the economy, and a decentralized part, consisting of a fraction of the profits of the other firms in his or her group...

...What can be said, I think, is that the influence of the capitalist class on educational policy will be absent, and it will be up to the population at large to decide what fraction of society's resources it is willing to commit to education...

...People will thus exercise some collective control, through democratic politics, over the use of savings in society...

...The problem with this argument is that it does not go far enough...

...These main banks also defend firms in their group against takeovers from firms outside the group...

...It is wrong to conclude from the experience of firms in a command economy what publicly owned firms would be like in a market economy...

...So much attention is paid to the efficient allocation of resources because, given the present level of technological development and needs of people on the globe, one cannot afford to waste a lot in the process of production and distribution, and because the achievement of efficiency requires some inequality, as, for instance, in the wage differentials of a labor market and in the differential social dividends that would come about in Bardhan's firm-monitoring scheme...

...That is, the firm manager will try to hire labor and produce output of such variety and quality as will maximize the long-run profits of the firm...

...One is at the level of economic theory...

...Thus, I do not think that the lessons of the communist experience include an admonition against planning as such, against the direction of the economy toward certain ends...

...Will a market socialist society be willing to devote the necessary resources to education...

...Stories abound about corrupt and incompetent management of firms in "socialist" economies: there was the famous Krokodil 564 • DISSENT Market Socialism cartoon of the manager of a Soviet nail factory who, to meet a quota of one ton of nails, produces a one-ton nail...

...The government will continue to provide public goods, financed by taxation of profits and wages...

...Profits, that part of the social product that remains after paying wages, interest, and taxes, are to be distributed on a more or less equal basis to citizens...

...That is bad logic: all we can infer from the failure of (1) + (2) + (3) is that at least one of the three characteristics must be changed to achieve economic success...

...Actually, the most effective planning requires the use of markets...

...I will argue here for the feasibility of market socialism, a politicoeconomic system in which firms are publicly owned, the state has considerable control of the "commanding heights" of the economy, and there is democratic control over society's use of its economic surplus...

...What the left must learn from the last seventy-five years is not that socialism is impossible, nor even that planning is unnecessary or harmful, but rather that the transition to socialism will be less dramatic than we had hoped...

...This is the level on which most economists are skeptical concerning the feasibility of market socialism...

...Value must be measured not, as Marx said, just as the labor embodied in producing the thing but in the total real resource cost that people are willing to sacrifice to make the thing available...

...The second socialist aspect of this economy is that the profits of firms will not go to a small fraction of society but will be divided, after taxes, more or less equally among all households, taking a form that Oskar Lange called the social dividend...

...What I have not yet discussed is politics, which I believe would be more democratic than in capitalist democracies because a class of capitalists who have the economic power enabling them to affect and to a great extent control state policy, both through the electoral process and by other means, would not exist...

...It is wrong to say, as leftists sometimes do, that the contribution of an unskilled worker is just as valuable to society as that of a physician: it could be if, counterfactually, almost no one had the capacity to be an unskilled worker and almost everybody with no training could be a physician...

...Of course, the education of middle-class children should be improved as well...

...Again, it would be wrong to conclude from the experience of firms in command economies that firms that are not privately owned will not innovate...

...Firms are organized into groups, called keiretsu...

...What I outline below is an economic mechanism in which (2) and (3) are indeed negated—there will be democratic, competitive politics and market allocation of most commodities and resources, but public ownership of the principal means of production is maintained...

...Thus debate will surely continue on all the big issues—war and foreign policy, the level of government transfer payments and public spending, the environment, equality of opportunity, racism, sexism, and so on...

...The discipline is provided via the stock market...

...But it is substantially the case that the demand for investment goods leads the business cycle in countries like the United States...

...Cohen has written, that the market "motivates contribution not on the basis of commitment to one's fellow human beings and a desire to serve them while being served by them, but on the basis of impersonal cash reward...

...My answer is that the firm belongs to everyone, and every household depends upon each firm as a source of part of its income via the social dividend...

...Will a market socialist society be a just society...

...My colleagues Joaquim Silvestre, Ignacio Orturio, and I have studied this question, and the answer is yes.' It is possible for the government to achieve any of a large variety of possible compositions of investment for the economy by the setting of discounts and surcharges on the market interest rate, and prices in all markets will then adjust in such a way that an equilibrium is achieved, in which the demand for each good by consumers is equal to the supply of that good by firms...

...I prefer not to call it a grant, because it is not a gift (which "grant" connotes...

...The market socialism I envisage has these components: firm will be managed by managers whose intention it will be to maximize profits, at going prices...

...The government, instead of IBM, would buy out the small computer firm...

...q References Ignacio Ortufio, John Roemer, and Joaquim Silvestre, "Investment planning in market socialism," Department of Economics, University of California, Davis...

...It is that part of the national income which is not distributed as wages or interest but which belongs to the people as owners of the means of production...

...The investment projects proposed by firms are evaluated by the staff of the bank, and in this way the bank is able to monitor the firms' behavior...

...Would it not be better to let workers manage the firms directly...

...The social dividend will be a form of guaranteed income, or what some European writers have called a universal grant...

...and a social dividend that will be, in principle, approximately equal across households...

...One practice of the social democracies is to tax income sharply and progressively and to redistribute it by providing some goods, such as health services, on an equal basis to all at no fee...

...For it is surely the case that different people make contributions of very different values to society, owing in large part to their differential training and abilities...

...Funds used under capitalism to finance the consumption of capitalists will here be distributed to all citizens...

...There are two socialist aspects to this economy...

...It is noteworthy that finance economists believe that private ownership of firms is insufficient to guarantee profit maximization...

...The bad news is that an 568 • DISSENT Market Socialism economic structure based upon markets will make the transition to "the socialist person" a more protracted process than we had hoped...

...Finally, consider the issue of education...

...Just as important, perhaps more so, is education...

...This mechanism should provide almost as much incentive to the entrepreneurial spirit as capitalism provides...

...Thus, if the government's intention is to decrease the production of automobiles, it will raise, above the market rate, the interest rate at which the state banks lend to automobile firms...

...Of course, a society such as the one I am describing might decide to distribute profits in some other way, such as in proportion to the value of labor that a person expends, but I would oppose that proposal...

...I have stated that socialism does not advocate equality of income as a right...

...One fears, of course, that managers of public firms and banks would become a class, in loco capitalisti, and exert political power to maintain their growing empires...

...Bardhan's proposal is not equivalent to introducing a stock market...

...Why Have Market Socialism...

...Making the System Work Will this system work...

...The first is that the government will have the power to intervene in the economy to direct the pattern and level of investment...

...It is the failure of both the right and the left to separate the concepts of private ownership and market allocation that has led to the premature obituaries of the socialism...

...Surely the income of citizens will depend upon the profitability of firms—perhaps the social dividend will make up 20 percent of the income of a typical household...

...Bourgeois" finance economics maintains that the only reason that managers pursue the interests of shareholders, which require maximizing profits, rather than their own selfish interests, is the threat of losing their jobs...

...The desired investment levels and pattern will not be implemented through a command system but by manipulating the interest rates at which different industrial sectors can borrow funds from state banks...

...But by that time, the ideological blinders of the labor theory of value and the physical entrenchment of a class of state and party authorities who derived their power largely from the absence of markets combined to render almost nil the prospects for a transition to market socialism, or, as many would say, to socialism...

...That part of profits of firm W, say, not going to the bank, to the other three firms, or directly to W's own workers would go to the state and would be distributed to all citizens as part of the social dividend...

...We have, as yet, very little empirical evidence that would enable us to evaluate this claim in a rigorous way...

...I believe the fundamental goal is equality of opportunity for self-realization, and in a historical era of material scarcity, where for most people more material goods will increase their opportunities for self-realization, equality of income is therefore a corollary goal, though not a postulate...

...But if the goal is equalization of opportunity among children, then the greater increase in educational expenditures must be to improve the verbal and mathematical literacy of working-class children, and especially, among these, of minority children...

...The failed "communist" experiment was characterized by the following three features: (1) public or state ownership of the means of production, (2) noncompetitive (that is, single-party) politics, and (3) command/administrative allocation of resources and commodities...

...Workers will need unions to protect them from overzealous managers even if they have the power to remove management...

...Certain private goods, such as health services, may also be provided gratis to the population—but this is nothing new, even for capitalist countries...

...This is an old Marxist point—in the introduction to the Critique of the Gotha Program, Marx wrote of payment according to the value of one's labor as a "bourgeois right...

...Leftists have usually attacked the justice of capitalist income distribution on the grounds that capitalists are not the rightful owners of their capital and hence their receipt of profits is an injustice, which, moreover, constitutes exploitation of those to whom the capital should rightly belong...

...To sum up, I think it is possible to use markets to allocate resources in an economy where firms are not privately owned by investors who trade stock in them with the purpose of maximizing their gain and that the government can intervene in such an economy to influence the level and composition of investment should the people wish to do so...

...Another level at which the can-it-work question may be asked is: will the managers of firms be motivated to maximize profits in an economy where firms are not privately owned by investors...

...Will technological innovation take place...

...The income distribution will be more equitable than in capitalist countries today...

...I have, thus far, not mentioned an important role for workers' control of firms—a control of which I am somewhat leery as it may impede profit maximization and its concomitant efficiency...

...The function of this decentralization is to give firms X, Y, and Z an interest in monitoring the behavior of firm W. In particular, if firm X thinks firm W is not profit-maximizing, then it can ask the bank B FALL • 1991 • 565 Market Socialism to buy X's shares of W. This in turn puts pressure on the bank to force W to do better...

...Why do I include as an integral part of this proposal the stipulation that firm managers maximize profits of the firm...

...What will taxes be used for in this society...

...What is important, however, is that managers try to maximize profit...

...A word about innovation...

...There must be highly concentrated private ownership, they maintain, with a few very large stockholders in whose interests it is to monitor the management closely...

...It will become an attractive target for a takeover by investors who will buy the firm cheaply, put in better management, and return the firm to a profit-maximizing program...

...Workers, in any case, should not be able to appropriate the profits of FALL • 1991 • 563 Market Socialism the firm they work in: that would lead to gross inequalities among workers...

...There can be no guarantee that any democratic society will do so, for such a reallocation of resources requires convincing the middle class to subsidize working-class education to a greater degree than it does now...

...Under capitalism, these people exist: if they succeed, they form small firms and are in almost all cases eventually bought out by large firms...

...What some will consider bad news is that socialism, at least for a long time, will require markets...

...Consequently, citizens in such a society would be less willing than capitalists to trade off peace, the environment, the welfare of the underprivileged, and so on, for increased corporate profits...

...They should be nationalized, with proper compensation to the owners, at some given size...

...They will also be used to subsidize the government's intervention in the capital market...

...Inequality will continue to exist in this society, due primarily to the differential wages that people will earn and also, to some extent, to their differential savings behavior...

...Almost all private goods and services will be allocated on markets, and prices will be determined in these markets...

...he was not competent to instruct us on how to construct socialism, a lesson we must learn from the history, both capitalist and socialist, of the twentieth century...

...It might be said that the kind of innovation that will not occur under market socialism will be that of the lonely inventor who, spurred on by the prospect of becoming a multimillionaire, invents a new kind of computer...

...a socialist society must devote resources to rectifying through education, as much as possible, the inequalities of opportunity that children will otherwise face due to their different backgrounds and talents...

...If communism is defined as consisting of the dictatorship of a single party, the administrative and central allocation of most resources and commodities, and the ownership of all firms by the state, then I agree with the diagnosis...

...So the argument must be, at this point, theoretical...

...2 Say firms W, X, Y, and Z are in one group, with bank B. Each firm would own some shares of the other firms in the group, and the bank would also own some shares of each firm...

...In a capitalist economy, a person's contribution consists not just of a labor contribution but also of his or her contribution of capital...

...What perfectly working competitive markets do is pay people according to the evaluation that other people in society put on their "contribution...

...Let us first take up the question of managerial discipline...

...But perhaps that danger is small compared to the danger of the growth of a managerial class in itself, and workers' control over the choice of management might be the best form of insurance against the latter...

...FALL • 1991 • 567 Market Socialism There will continue to be bourgeois parties—if this society guarantees the kind of civil liberties that the left is committed to, then surely ideological conservatives will organize, not to speak of those who may have historical claims to big chunks of now nationalized wealth...

...Indeed, one should not idealize the behavior of people in a market socialist economy...

...What are the attractive features of market socialism...

...Nor does the center tell any firm what to produce, or tell firms where to find their inputs and where to ship their outputs...

...But this, of course, cannot be the complete answer to the query...

...The methods of Soviet planning were ineffective and worse because they did not use markets as a way of decentralizing millions of small decisions...

...Will it maximize the potential for self-realization of its citizens...

...I think that the property relations in a system of market socialism will be the basis for a gradual shift to the left in mass politics, and for this reason: there will not be individuals who stand to gain so much from right-wing politics as there are in a capitalist system...

...Thus a citizen will receive income from three sources: wage income, which will vary depending upon the worker's skill and amount of time worked...

...This culture would be very different if inputs and outputs could be bought and sold on markets...

...These are the main lines of the blueprint...

...There would, however, be no class of citizens with great resources at their command whose incomes would depend so much on the profits of firms as the incomes of capitalists do...

...It is also large investors who organize takeovers...

...Each keiretsu is associated with a main bank, whose responsibility it is to lend to the firms in its group and to monitor the firms' managements...

...What kind of politics could we expect to see...

...We know, from economic theory, that profit maximization under the right conditions (which include a competitive environment for the firm) leads to an efficient allocation of resources—that is the main reason to use profit maximization as a tool...

...Yet by the adjustment of between five and twenty interest-rate discounts, the economy would realize the composition of investment that its planners aim to achieve...

...Firm managers will either be elected by workers or appointed by boards of directors, about whose composition I will speak presently...

...Yet in Japan, apparently, the accountants, economists, and industrial experts working for the big banks are sufficiently savvy to pass good judgment on investment proposals of firms...

...Worse was the strangulation of all opposition, which made almost impossible the rectification of errors in general...

...Is it possible for a market system to equilibrate an economy in which profits are distributed as I have described and in which the government intervenes in the investment behavior of the economy by manipulating interest rates if the managers of firms maximize profits, facing market prices, wages, and interest rates...

...This last point is worth emphasizing, for another plank of capitalist ideology is that bureaucrats cannot decide how to allocate capital: that is best done by a stock market, where millions of people express their opinions by voting with their dollars...

...To the extent that innovation takes place in organized research and development divisions in large firms anywhere, it can just as well take place in a socialist firm...

...I view the differential wages that will accompany a market socialist system as justifiable for only one reason: they are a by-product of using a labor market to allocate labor, and there is no known way to allocate labor more efficiently in a large, complex economy than by use of a labor market...

...If this is so, the quandary for market socialism is real: how can an economy whose firms distribute profits diffusely devise a mechanism to monitor firm management...

...I have stressed, thus far, income distribution...

...2 Pranab Bardhan, "Risk-taking, capital markets, and socialism: A note," Department of Economics, University of California, Berkeley...

...What I am saying is less true of small capitalist countries, where the demand for exports can lead the business cycle...