Challenges to Market Socialism: A Response to Critics
Weisskopf, Thomas E.
The idea of a market-based form of socialism was first given serious attention in the 1920s, when it was promoted by moderates within the socialist movement as an alternative to the marketless...
...Most research and development in capitalist economies is carried out in large research divisions of large corporations, where individual researchers face constraints and potential rewards very similar to what they could expect in a public or worker enterprise (indeed, some of the most innovative technical research has actually come out of public enterprises—for instance, the old Bell Labs in the United States...
...Some of these positive incentives are likely to be more effective in a context of long-term employment relations than in an environment in which job termination is always a credible threat...
...where this is not adequate, the second option is to replace price-and-market mechanisms by quantitative controls or direct state operation of enterprises...
...Komai's negative assessment of the viability of market socialism is set out in many of his recent writings...
...Under market socialism there may well emerge a kind of managerial class with disproportionate power...
...thus overall market demand will not disproportionately reflect the demands of a minority of wealthy individuals...
...4 Examples of recent models of market socialism characSPRING • 1992 • 259 terized by public management include those of John Roemer and Leland Stauber...
...180-182, for a comprehensive listof conditions for "an optimal democratic and self-managing economy " — most of which failed to be realized in Yugoslavia...
...For a stimulating debate on these issues, see the exchanges between N. Scott Arnold and David Schweickart—beginning with Arnold's "Marx and Disequilibrium in Market Socialist Relations of Production" — in Economics and Philosophy, 3 (1987...
...17 Empirical evidence from Sweden suggests that this type of "employment security" (as opposed to "job security") does not impair worker performance at the workplace...
...cit., pp...
...There are two principal variants of such social control, depending on the nature of the community in which control rights are vested: • Public management: enterprises' are run by managers appointed by and accountable to an agency of government (at the national, regional, or local level), which agency represents a corresponding politically-constituted community of citizens.4 • Worker self-managementi enterprises are run by managers appointed by and accountable to those who work in them (or their elected representatives), with control rights resting ultimately with the enterprise workers (on a one-person one-vote basis...
...33 As David Miller puts it in his "Why Markets...
...30 These considerations raise the larger question of whether enterprise ownership rights in a market socialist society should best be grounded in communities of citizens or communities of workers...
...on China's experience with market-oriented reforms in the 1980s, see some of the contributions to Peter Van Ness, ed., Market Reforms In Socialist Societies: Comparing China And Hungary (Colorado, L. Rienner, 1989...
...Most contemporary market socialist models in any case allow for individual or small-scale private enterprise...
...Such a plan would trade off some degree of management autonomy at the enterprise level for some degree of reduction in exposure to risk...
...These two different ways of assigning control rights and income rights under market socialism can generate a matrix of four different possible market socialist models, since there is no a priori reason why each set of rights must be assigned in the same way...
...33 Again, this is precisely what social democracy tries to do—albeit in a different way than market socialism...
...There can be no question that the market-reformed economies of Eastern Europe have indeed fared very poorly in the last decade...
...However, market socialist enterprises are clearly not subject to hostile takeovers, so their managers don't face the same ultimate threat as managers of capitalist firms...
...This is the proposal of Leland Stauber for a "democratic market economy," in which equity ownership and trading is permitted but restricted to public financial institutions and public enterprises...
...for another, they may wish to have access to their own savings in a time pattern differing from what would be forthcoming as returns to investment...
...Economic efficiency demands that enterprises be subsidized and investment funds be allocated not as an ad hoc response to appeals from firms but only as a matter of general policy designed to support clearly articulated social or economic goals...
...20 For some ingenious ideas along these lines, see Domenico Mario Nuti, "Financial Innovation under Market Socialism," Working Paper 87-285 (European University Institute, Florence, 1987...
...8. Won't worker enterprises undertake too little capital formation...
...Thus one potentially important problem is removed, with attendant savings in costs of monitoring and compliance...
...but this too would represent an experience familiar to entrepreneurs in capitalist economies, who often find themselves selling out to a bigger private corporation (with superior production, financing or marketing potential) after their initial success...
...24 See Roemer, op...
...25 Under the usual simplifying assumptions, these studies tend to show that worker enterprises adjust their output and employment more slowly (if not actually perversely) to fluctuations in the demand for their products...
...Market socialists are committed to full employment, whether the economy is characterized primarily by public or by worker enterprises...
...Should control rights— the rights to manage the enterprise—be vested in governmental agencies (democratically accountable to citizens) or in workers' councils (democratically accountable to enterprise workers...
...28 These accounts would involve no control rights...
...16 On this important point, see David Levine and Laura Tyson, "Participation, Productivity and the Firm's Environment," in Alan Blinder, ed., Paying for Productivity (Brookings, 1989...
...Measuring individual performance with any precision is difficult in any complex enterprise, and it is often not possible to tailor rewards to individual performance...
...31 While such proposals do not amount to the restoration of full capitalist private property rights, they often do open up opportunities for individuals to receive some forms of capital income...
...Yet two important points can be made against the skeptics...
...The horizon problem results from the absence of an identifiable and reasonably liquid capital stake for individual workers corresponding to their own contributions to enterprise capital formation...
...other such sanctions include not being promoted to better jobs and not being granted pay raises...
...29 Such proposals come close to meeting the standard of an ideal capitalist firm in the efficient use of capital, though they still leave something to be desired regarding the availability of external investment funds as long as potential investors cannot acquire any control rights...
...some apply only to worker enterprises...
...11 This argument goes back to Ludwig von Mises and is associated with Friedrich von Hayek and many other adherents of the "Austrian" school of economics...
...see Weisskopf, "Toward a Socialism for the Future, in the Wake of the Demise of the Socialism of the Past," Working Paper (University of Michigan, October 1991...
...Instead, full employment is to be assured through public programs to retrain and relocate unemployed workers along the lines of Swedish "active labor market policies...
...Advocates of public surplus appropriation stress its advantages with respect to equity at the societal level: channeling the residual income of enterprises into an aggregate "social dividend" recognizes the interdependence of all production activities, protects workers and citizens against the potential risk and inequity of having their capital income tied to the performance of a particular enterprise (which may do well or do badly for reasons of luck rather than merit), and can distribute society's surplus much more equitably than when individual enterprises retain much of their own surplus...
...Among the most successful competitors have been Japanese and German firms, in whose economies stock markets play a much smaller role and in which the monitoring of management performance is carried out mainly by large banks.' 8 4. Won't market socialist enterprises suffer from inadequate entrepreneurship and innovation in the absence of huge individual rewards for success...
...Advocates of public management stress its advantages vis-a-vis worker self-management with respect to "capital efficiency" —access to capital funds, encouragement of risk-taking, technological progress, and so on...
...To sustain the superiority of the market socialist over the social democratic approach, I would argue as follows...
...First, they should increase SPRING • 1992 • 253 the availability of funds for enterprise capital formation by extending the potential sources of such funds beyond internal retained earnings, government grants, and external debt finance to external equity finance—through which potential outside investors can acquire control rights along with income rights in the enterprise...
...Stauber's model is of course an example of public enterprise market socialism...
...retaining one's job remains a significant performance incentive even if the alternative is retraining and relocation to a new job rather than unemployment...
...Some of these arguments apply only to public enterprises...
...Where market socialism seeks to promote the public interest, greater equity, democracy, and solidarity primarily by transferring capitalist ownership rights to communities of citizens or workers, social democracy seeks to do so by government policy measures designed to constrain the behavior of capitalist owners and to empower other market participants...
...Although such tendencies are potentially problematic for market socialist systems in which worker enterprises play a prominent role, they are by no means inevitable...
...39 See Samuel Bowles and Herbert Gintis, "The Democratic Firm: An Agency-Theoretic Evaluation" (paper presented to the conference on "Microfoundations of Political Economy: Problems of Participation, Democracy and Efficiency," Uppsala, Sweden, 1990), for a persuasive demonstration that no organizational structure can be optimal simultaneously with respect to both laborefficiency and capital-efficiency considerations...
...Moreover, because of the self-interest of workers in preserving existing enterprises and the greater difficulty of raising capital to form new enterprises, labormanaged economies tend to discourage the liquidation of (unviable) old enterprises and the formation of (promising) new enterprises...
...For our purposes it will be useful to distinguish two such rights in particular: the right to enterprise control and the right to enterprise income...
...I will consider the more general issues first and then turn to the particular questions most often raised about public and worker enterprises, respectively...
...In this way exposure to risk would be reduced not by the diversification of individual asset portfolios but by the diversification of enterprise net revenues...
...Instead, it seeks: (a) to link differences in rewards more closely to corresponding differentials in actual productive effort (as opposed to differentials in the ownership of various kinds of assets...
...To deal with the problem of soft budget constraints, advocates of market socialism have urged that public enterprises be made as autonomous as possible...
...I will here address the first of these two lines of criticism...
...Different kinds of social control rights are advantageous with respect to different kinds of efficiency considerations, and different kinds of social income rights are advantageous with respect to different socialist objectives of equity, democracy, and solidarity...
...As far as cases of individual (basement or backyard) ideas and inventions are concerned, proposals for market socialism typically allow for independent individual and small business private enterprise —allowing thus for considerable individual rewards on a small scale...
...Under market socialism enterprise control is social rather than private...
...23 In such cases they would share with public enterprises both the potential advantages of direct national-level control over the pace and direction of capital formation and the potential efficiency problems associated with direct government allocation of investment funds...
...SPRING • 1992 • 261...
...see Schweickart, op...
...Advocates of worker SPRING • 1992 • 257 surplus appropriation stress its advantages with respect to labor efficiency and solidarity, as workers' incomes are linked collectively to the performance of their enterprises...
...For one thing, workers may be legitimately concerned that their enterprise may not survive future hard times...
...First, a democratic political environment —conspicuously absent in the East—can be expected to restrain the ability of government officials and enterprise managers to collude at the expense of the public...
...Regrettably, history offers us no good case study of a democratic market socialist system...
...The essential idea is to maintain all of the efficiency advantages of capital markets while avoiding their usual (vastly unequal) distributive consequences, by restricting participation to public institutions representing large communities of people such as local investment funds, public enterprises, and pension funds...
...It follows that worker enterprises will give rise to such problems insofar as there is any sharing of net revenues unrelated to individual performance...
...Why not simply provide a level market playing field in which all types of enterprises can compete on a truly equal basis...
...85-89, for a discussion ofvarious forms of variable-income debt instruments that could be used by worker-controlled firms to raise external finance...
...Second, pressures by enterprise managers to get special favors from government agencies are hardly unknown in capitalist economies—especially in the case of large and politically powerful private corporations that represent the capitalist counterpart to socialist public enterprises...
...Such a compromise could take the form of promoting public management in those industries and enterprises characterized by relatively large economies of scale or relatively extensive externalities and promoting worker self-management in industries and enterprises with smaller economies of scale or less significant externalities...
...These solutions tend not to meet fully the efficiency standard of an ideally functioning capitalist economy...
...see Jaroslav Vanek, "On the Transition from Centrally Planned to Democratic Socialist Economies," Economic and Industrial Democracy, 11 (1990...
...Should income rights accrue to the general public (via government agencies) or to enterprise workers...
...the salience of this problem can be reduced, however, by the development of imaginative forms of external finance that do not carry control rights—for example, "dequity" financial instruments that provide an income return that varies with enterprise performance but confer no control rights...
...and (b) to reduce the extent of differences in individual material rewards associated with differentials in productive effort, so as to reduce (greatly) the resultant distributional equity without reducing (much) the incentives they generate...
...There is one important exception to the generalization that efforts to meet criticism of market socialism on efficiency grounds fall short of capitalist standards of efficiency...
...The elimination of large-scale private property ownership under market socialism certainly leads to a much more equal distribution of income than obtains under conventional capitalism...
...but the evidence on market reform of CP-directed socialist economies is mixed...
...Could not the problems of excessive wealth and power associated with large-scale private enterprise be addressed as easily and successfully via taxation and regulation as via restrictions on private ownership...
...apart from any control and income rights in enterprises, the economic role of government in a market socialist system differs little from that of government in the more government-regulated (that is, social-democratic) capitalist systems...
...The surplus of the market socialist enterprise accrues to a community of people in a relatively egalitarian manner...
...Assuring autonomy with respect to government agencies would not appear to be a problem for worker enterprises, whose control in any case is not in the hands of government officials...
...19 See David Ellerman, op...
...instead, they attempt to create conditions in which the operation of a capitalist market economy will lead to more egalitarian outcomes and encourage more democratic and solidaristic practices than would a conventional capitalist system...
...17 There is a vast literature on the Swedish model of and experience with active labor market policies...
...32 And, indeed, to prevent autonomous public enterprises or worker self-managed firms from acting in their own particular interest, as against the general social interest, it would in all likelihood be necessary for government to regulate them or their markets just as is done by social258 • DISSENT democratic governments in a capitalist economy...
...Market Socialism and Social Democracy Advocates of social democracy share the socialist objectives of advocates of market socialism but differ as to the best means to achieve them...
...First of all, the threat of a hostile takeover does not exist for privately held companies—many of which have been very successful...
...This requires a system in which enterprise managers are rewarded for success and penalized for failure, and in which they have no special relationship with the government officials to whom they are ulti254 • DISSENT mately responsible...
...Is this likely to be a systematic source of weaker management performance...
...165-167...
...but the argument that it obliterates distinctions among enterprise types is based on a very unrealistic economic model of capitalism—one in which mechanically organized firms face no problems of contract enforcement, worker motivation, and so on...
...Schweickart's is predominantly a worker enterprise model, but includes some characteristics of a public enterprise model—that is, government control over net capital formation...
...3 The standard capitalist enterprise is owned by private individuals or shareholders who have (ultimate) control over management according to the nature and the amount of their ownership shares...
...7 For example, in both Schweickart's and Ellerman's models of worker self-management, the enterprise surplus accrues strictly to its workers—though there are taxes and other charges that must first be paid to government...
...Furthermore, there are many kinds of positive incentives—involving both material and nonmaterial rewards—which can motivate better work performance...
...14 On Yugoslavia's economic progress in the 1950s and 1960s, see Harold Lydall, Yugoslav Socialism (Oxford University Press, 1984...
...Here again there are two principal variants of such social claims to income: • Public surplus appropriation: the surplus of the enterprise is distributed to an agency of government (at the national, regional, or local level), representing a corresponding community of citizens...
...6 For example, in Roemer's model of market socialism, (most of the) enterprise surpluses flow back to the national government to be distributed (in large part) to the general public in an equitable manner as a "social dividend...
...and firms from the United States and the United Kingdom have been notably weak in international competition in recent decades...
...Market socialism has been challenged both by those who question the ability of markets to function efficiently in the absence of capitalist private property rights, and by those who question the ability of social ownership forms to meet socialist goals within the context of markets...
...This provides a boost to the case for a worker-enterprise variant of market socialism...
...On further reflection, one might well ask of market socialists: what compelling reason is there to restrict forms of enterprise ownership to types in which control and income rights accrue to (citizen or worker) communities rather than to private shareholders...
...Beginning with a seminal article by Benjamin Ward in the 1950s, economists have undertaken systematic theoretical analyses of the differences between the behavior of capitalist firms and producer cooperatives or worker self-managed firms, where the latter seek to maximize current net income per worker rather than profits per unit of capital...
...This is often attributed to the fact that these officials are dispensing not their own but other people's funds...
...Both in Yugoslavia (in the 1950s and 1960s) and in Hungary (in the 1970s) the early period of market reform showed considerable economic achievement, and the same appears to be true of China (in the 1980s...
...For informative analyses of the trials of the Swedish model of social democracy in recent years, see Erik Lundberg, "The Rise and Fall of the Swedish Model," Journal of Economic Literature, 23:1 (1985), and Jonas Pontusson, "Radicalization and Retreat in Swedish Social Democracy," New Left Review, #165 (1987...
...15 Yugoslavia's version of self-managed market socialism has often been cited as the actual experience coming closest to a desirable model of market socialism, but even Yugoslavia's model is profoundly flawed from a market socialist perspective...
...Ownership" is a complex concept encompassing a variety of rights, which can potentially be assigned to a variety of different people...
...However, there does remain some trade-off between efficiency gains with respect to labor and efficiency gains with respect to capital: the labor-motivational gains delivered by worker self-management come at the cost of some capital-supply and risk-taking losses...
...It is argued that workers tend to under-invest in the enterprises they control because of a "horizon problem": since investment yields returns only to future workers, present workers may prefer to SPRING • 1992 • 255 distribute net revenues to themselves as current income rather than invest in long-term capital formation...
...The idea of a market-based form of socialism was first given serious attention in the 1920s, when it was promoted by moderates within the socialist movement as an alternative to the marketless form of socialism identified with Marx's vision of full communism and embraced in principle by the Bolsheviks...
...29 See Gregory Dow, "Control Rights, Competitive Management, and the Labor Management Debate," Journal of Comparative Economics, 10 (1986...
...8 Although the replacement of private with social control and income rights at the enterprise level is what most clearly distinguishes market socialism from (market) capitalism, advocates of market socialism also generally call for a greater degree of government intervention into and/or control of the market than is the norm in capitalist economies...
...it proposes to do so by retaining one major feature of capitalist economies—the market—while replacing another major feature of capitalism—private ownership of the means of production...
...Note first that job loss is only one of a variety of negative sanctions that can be applied to workers who perform poorly on the job...
...In redefining and reassigning (to workers or communities) rights that form the point of departure for markets, market socialism intervenes into the market system before markets operate—while social democracy intervenes (mainly) after markets operate...
...only under such restrictive assumptions is there no room at all for discretionary decision making by firm management and is the market all-determining...
...For a useful survey of literature on labor-managed firms and economies, see Louis Putterman, Division Of Labor And Welfare (Oxford University Press, 1990), chapter 4. 26 For details, see Putterman, op...
...In no case, however, does the suggested solution require the embrace of traditional capitalist property rights in the means of production...
...The most prominent recent contribution to the literature on conceptualizing market socialism was Alec Nove's The Economics Of Feasible Socialism (Unwin Hyman, 1983...
...Advocates of worker self-management stress its advantages vis-à-vis public management in several different respects: (1) "labor efficiency" —motivation of work effort and quality, disciplining of management, organizational improvement, and so on...
...see Roemer and Bardhan, "Market Socialism: A Case for Rejuvenation," Working Paper No...
...14 Most important, evidence from any of the CP-directed socialist economies is very limited in relevance to a prospective market socialism in which government is to be democratic rather than authoritarian...
...Control of a market socialist enterprise is held by a community of people, each of which—in principle—has an equal say in management...
...see "The Reproduction of Shortage" and " 'Hard' and 'Soft' Budget Constraints," both in Kornai, Contradictions and Dilemmas: Studies on the Socialist Economy and Society (MIT Press, 1987...
...Such sharing is in fact very likely—if only because of the ideological commitment to cooperative effort and reward underlying most plans for worker enterprises...
...There can still be the classic divergence of interests between the collective of workers and the individual worker—but this is more likely to be reduced through horizontal monitoring among workers themselves when they all are in control of the enterprise...
...Abba Lerner also made seminal contributions to the early literature on market socialism...
...The New Palgrave: A Dictionary Of Economics (MacMillan, 1987...
...Won't worker enterprises be plagued by work shirking and free riding...
...see his "Economic Theory and Socialist Economy," Review of Economic Studies, 2 (1934), and "A Note on Socialist Economics," Review of Economic Studies, 4 (1936...
...76-91...
...32 Some critics of market socialism have argued that a market socialist system is fundamentally unstable, bound to veer back to a form of capitalism under the pressures on enterprises imposed by competition in a market environment...
...this means that they will typically have only limited leeway to steer the enterprises in a direction much different than would managers accountable to private shareholders...
...Managers of market socialist public or worker enterprises would have to answer for their management performance to government agencies or workers' councils, just as managers of capitalist firms are answerable to shareholders...
...34 The experience of Sweden since the mid-1970s is often cited to show the vulnerability of social democracy to pressures to move toward a more traditional form of capitalism...
...As for serving the general social interest, market socialists and social democrats agree that, where the unfettered market will not achieve important social goals, the first option is to try to guide the market toward socially optimal behavior (via appropriate taxes, subsidies, and so on, to internalize externalities by "planning with the market...
...24 This system would allow for some (indirect) national-level control over the pattern of capital formation while reducing the scope for discretionary decision making by potentially collusive government officials...
...Full employment is not to be achieved (as in CP-directed socialist economies) by requiring enterprises to retain or take on additional workers even when this leads to overstaffing and consequent "underemployment...
...Conventional economic analysis suggests that the more individuals are rewarded according to the collective performance of a whole group—rather than according to their own individual performance—the less incentive individuals will have to perform well and the more likely they will be to shirk work...
...in Julian Le Grand and Saul Estrin, Market Socialism (Oxford University Press, 1989), 30: "for markets to operate effectively, individuals and enterprises must receive primary profits, but the proportion of those profits that they need to keep as private income dependson how far they require material (as opposed to moral) incentives...
...250 • DISSENT within a market economy that is regulated—but not displaced—by national government planning...
...Public enterprises also depend on appeals to government officials to gain access to external funds for capital formation...
...5. Won't market socialist enterprises suffer from insufficient availability and inefficient allocation of investment finance in the absence of stock markets...
...Thus all kinds of enterprises confront difficult problems of worker motivation of a kind that may best be 256 • DISSENT solved by collective incentives associated with "team spirit" and enterprise goals...
...10 In a related paper I respond to critics who question the ability of social ownership forms to meet socialist goals in thecontext of markets...
...Certainly market competition restricts the scope of viable options for any kind of producing enterprise...
...Also, because of this kind of risk, workers might well prefer external savings accounts rather than internal capital accounts...
...These desiderata do indeed cut off a source of investment finance that would otherwise be available to enterprises...
...and some apply to both types...
...21 See Leland Stauber, op...
...cit., pp...
...in Stauber's model, local government agencies receive enterprise capital income qua shareholders and either use it for local public purposes or redistribute it to local citizens...
...see John Roemer, "Market Socialism: A Blueprint," Dissent (Fall 1991), and Leland Stauber, "A Proposal for a Democratic Market Economy," Journal of Comparative Economics, 1:3 (1977...
...Such Horatio Alger stories do occur from time to time, and they have certainly exerted a strong influence on public perceptions of the capitalist economic process...
...for a representative example, see Janos Kornai, "The Affinity Between Ownership Forms and Coordination Mechanisms: The Common Experience of Reform in Socialist Countries," Journal of Economic Perspectives, 4:1 (1990...
...The ultimate threat of a hostile takeover is supposed to ensure "management discipline" much like the ultimate threat of job loss is supposed to ensure labor discipline in capitalist enterprises...
...Under market socialism, income rights are held socially rather than privately...
...To do so, we must meet head on the following kinds of criticism...
...they would operate much like external savings accounts, building up individual wealth and generating interest income as if workers had received the retained enterprise revenues due to them and deposited them in a savings account...
...9 The difference between market socialism and capitalism in this respect is essentially one of degree rather than kind...
...9. Won't worker enterprises be insufficiently entrepreneurial and innovative...
...SPRING • 1992 • 251 1. Doesn't the experience of Communistpartydirected socialist economies with marketoriented reforms teach us that market socialism is unviable?' 2 This is precisely the lesson that economists such as Janos Kornai have drawn from the historical experience of those CP-directed socialist countries—notably Yugoslavia and Hungary—that have tried to reform centrally planned socialist economies by introducing a significant role for the market...
...Stock markets, in which enterprise ownership shares are bought and sold by private individuals or institutions, are said by enthusiasts of capitalism to serve two important economic functions...
...91-175 (University of California, July 1991...
...2 For a brief survey of the history of the idea of market socialism, see Wlodzimierz Brus, "Market Socialism," in John Eatwell, Murray Milgate and Peter Newman, eds...
...For at least medium- and large-scale enterprises in most sectors of the economy, market socialists propose some form of social ownership rights...
...As far as the pattern of enterprise management is concerned, there is also good reason to question how far market socialism really differs from social democracy...
...since then Nove has published an updated version of his book, The Economics Of Feasible Socialism Revisited (London: HarperCollins Academic, 1991...
...Critics argue that the assurance of a job will undermine "worker discipline," that is, workers will tend to shirk at the workplace if they don't face a credible threat of joining the unemployed for poor performance...
...This makes social democracy much more vulnerable to weakening or disintegration under political challenge, since tax-and-subsidy schemes and government regulation are much easier to reverse than changes in property rights...
...Markets Without Private Property Defenders of capitalism have long argued that markets cannot work properly unless they are embedded in a system of property rights that enables private individuals to own, buy and sell shares in the means of production...
...For contemporary developments of the Austrian critique, see Don Lavoie, Rivalry And Central Planning: The Socialist Calculation Debate Reconsidered (Cambridge University Press, 1985), and many of the readings in Erik Furubotn and Svetozar Pejovich, eds., The Economics Of Property Rights (Cambridge, Ma.: Ballinger, 1974...
...16 Market socialism is likely to provide for greater job stability than capitalism, but workers have no guarantee of retaining their current jobs...
...Only when and if such activities begin to turn into substantial business firms would they have to be socialized as public or worker enterprises...
...cit., and Ignacio Ortuno-Ortin, John Roemer, and Joaquim Silvestre, "Investment Planning in Market Socialism,"Working Paper (Department of Economics, University of California, Davis 1991...
...here there would seem to be comparable possibilities for success and abuse...
...Since income, unlike control, can easily be shared, it might be best to promote patterns of enterprise income rights in which there is both a social dividend claim and an enterprise worker claim...
...It is questionable, however, whether work shirking will be any more serious in worker enterprises than in more conventional firms in which management is responsible to nonworkers...
...Instead, it involves more extensive government regulation of enterprises, more extensive government provision of public goods and services, and more extensive use of taxes and subsidies to reflect social costs and benefits that would otherwise be ignored by individual consumers and producers in the market environment...
...6 • Worker surplus appropriation: the surplus of the enterprise is distributed to enterprise workers...
...22 As East European and Soviet experience has shown all too clearly, government officials responsible for public enterprises are often quite ready to respond to appeals from enterprise managers (and workers) for more funds regardless of firm performance (and indeed especially when firms are failing...
...Critics have some grounds for skepticism about achieving these objectives, in the light of historical experience with public enterprises—especially in the East...
...Most of the proposals for promoting efficiency under market socialism share the following characteristic: the more successful they are in obviating the problem posed by critics of market socialism, the more closely the suggested solution resembles the institutional framework of a capitalist market economy...
...31 This evolution in the thinking of advocates of market socialism toward an increasing role for markets can be seen very clearly in the work of Wlodzimierz Brus, from The Market In A Socialist Economy (Routledge & Kegan Paul, 1972) to From Marx To The Market (with Kazimierz Laski: Oxford University Press, 1989...
...2) democracy: worker self-management at the enterprise level is in and of itself democratic, and may well reinforce democracy at the political level...
...2 Out of this continuing literature has emerged a variety of different models, but all share the same central goals and the same basic means...
...5 In the standard capitalist enterprise, ownership by private individuals or shareholders conveys not only control rights but also income rights—again according to the nature and amount of their ownership shares...
...Even if some kind of internal accounts or nonvoting equity shares are established to provide workers with a capital stake in their own enterprise, critics are concerned that managers of worker enterprises will be reluctant to take (a desirable degree of) risk since workers will have most—if not all—of their capital assets tied up in their own enterprise...
...Partly because of the problematic experience of East European CPdirected socialist economies with limited marketoriented economic reforms, advocates of market socialism have come to support an increasingly wide scope for markets and increasing autonomy for public or worker enterprises operating within the market environment...
...cit., pp...
...25 Benjamin Ward, "The Firm in Illyria: Market Syndicalism," American Economic Review, 68 (1958...
...1° and I conclude with a brief discussion of whether there is really any fundamental difference between market socialism and social democracy...
...Market socialism seeks to promote the traditional socialist goals of equity, democracy, and solidarity while maintaining economic efficiency...
...34 Moreover, the maintenance of propertyowning capitalists under social democracy assures the presence of a disproportionately powerful class with a continuing interest in challenging social democratic government policies...
...his proposed public stock markets would be inconsistent with self-managed worker enterprises...
...typically a small number of individuals or shareholders have predominant control...
...First of all, the continuing economic literature on the behavior of labor-managed enterprises has shown that under more realistic assumptions than those made by early scholars such as Ward, or with such institutional innovations as an entrance fee payable by new members of an enterprise, the tendency toward sluggish or perverse output and employment responses is eliminated...
...5 Examples of recent models of market socialism featuring worker self-management include those of David Schweickart and David Ellerman (though in Schweickart's model the national government retains control over net capital formation, and Ellerman does not explicitly use the term "market socialism...
...27 Finally, it should be noted that even if pure efficiency considerations call for a more rapid process of change in the pattern of enterprises than is likely to be generated under a labor-managed system, the social goals of community and stability might well be better served by a system that is slower to change than capitalism...
...The first systematic theoretical exposition of the functioning of a market socialist economy was that of Oskar Lange in the 1930s, who has ever since been recognized as a pioneer of the idea.' Since then a great deal of work has been done by advocates of market socialism—many of them economists from or interested in the post–World War II Eastern European countries —seeking to improve upon Lange's model while dealing with various problems raised by critics...
...see Ludwig von Mises, "Economic Calculation in the Socialist Commonwealth," in F. A. Hayek, ed., Collectivist Economic Planning (Routledge & Kegan Paul, 1935...
...Second, they provide a measure of enterprise performance—that is, the stock market value of its assets —that should help investors determine where capital can be most effectively invested...
...The right to income confers a claim to the surplus generated by the enterprise—that is, the net (or residual) income after fixed obligations have been paid...
...27 Such a proposal has been advanced by Saul Estrin, "Workers' Co-operatives: Merits and Limitations," in LeGrand and Estrin, eds., Market Socialism (Oxford, England: Clarendon Press, 1989), drawing on the example of the Caja Laboral Popular in the Mondragon cooperative network of Northern Spain...
...A worker with a reputation for performing poorly on the job would face the likelihood of moving to a less satisfying and remunerative job upon re-entering the labor force...
...By the same token, socialist economies are believed to discourage such entrepreneurship and innovation because they preclude the huge capital gains and individual fortunes associated with success...
...The objective here is to guide rather than to replace the market, so as to bring market price and cost valuations more closely into line with true social benefits and COsts...
...In summary, advocates of market socialism can provide reasonably satisfactory (and often very ingenious) solutions to each and every one of the potential efficiency problems that have been raised by critics...
...Market socialists have traditionally been highly suspicious of social democracy, on the ground that its failure to attack head-on the source of capitalist power—private ownership of the means of production—would ultimately prevent it from attaining socialist objectives...
...I prefer "CP-directed" because it underlines in a compact way the authoritarian, hierarchical, bureaucratic nature of both the political and the economic system...
...A further refinement, to deal with the horizon problem as well as other potential capital inefficiencies, is to establish tradable nonvoting equity shares that would be purchased by each worker as he or she joins the enterprise and owned or sold by each worker as he or she leaves the enterprise...
...Most models of market socialism rule out stock markets, on the grounds that control of enterprises should be vested only in public agencies responsible to citizen constituencies or workers' councils responsible to worker constituencies and that individuals should not be able to reap large capital gains merely by virtue of the appreciation in value of their own property...
...In some models of market socialism, however, worker enterprises rely for most of their capital formation on government grants and loans...
...The historical experiences of Yugoslavia, Hungary, and China with a form of market socialism have been contaminated by the ubiquitous interference of a powerful Communist party organization—at the workplace, in enterprise management, and in local, regional, and national government...
...as Ellerman notes, they operate similarly to conventional capitalist "preferred stock" options...
...To the extent that worker effort and performance are promoted by participation in decision making, market socialist enterprises with a significant degree of worker self-management promise higher productivity than capitalist firms...
...This is probably the most frequently voiced concern about worker enterprises...
...Such control does not typically or primarily take the form of quantitative targets or restrictions, of the kind associated with the discredited system of centrally planned socialism...
...252 • DISSENT 3. Won't market socialist enterprises suffer from incompetent management in the absence of a "market in corporate control...
...But as models of market socialism have been refined over the years, the distinction between market socialism and social democracy has been somewhat blurred...
...18 John Roemer and Pranab Bardhan have proposed that independent public holding companies play precisely such a role in a market socialist economy...
...But how important is this kind of scenario in the overall innovation process, and how much would it actually be curtailed by smaller rewards to its practitioners...
...In response to this kind of concern, John Roemer and his colleagues have developed an ingenious proposal for indirect government control of investment via the use of variable interest rates (achieved by government taxes and subsidies) within a decentralized system of public banks...
...Market socialist enterprise managers, whether accountable to government agencies or to enterprise workers, are expected to operate their enterprises in such a way as to maintain profitability in a market environment...
...The typical capitalist success story is one in which an individual with a good idea is able to interest venturesome investors in his or her idea, set up a small business to begin operation, watch demand and production grow by leaps and bounds, and end up joining the ranks of self-made millionaires...
...Praeger, 1980) and David Ellerman, The Democratic Worker-owned Firm (Unwin Hyman, 1990...
...Social democracy achieves greater egalitarianism via ex post government taxes and subsidies, where market socialism does so via ex ante changes in patterns of enterprise ownership...
...but neither in practice do actual capitalist economies...
...26 To deal with potential problems of insufficient liquidation of old firms or formation of new firms, it may well be necessary to establish a separate entrepreneurial institution with the function of identifying new profitable opportunities, forming new selfmanaged enterprises to pursue them, and arranging for the liquidation of failing enterprises and the transfer of their workers to more successful enterprises...
...Clearly there are significant trade-offs here...
...Thus social democrats do not try to do away with either the market or private property ownership...
...Putterman, op...
...and these socially owned enterprises are expected to operate I am grateful to Joanne Barkan, Sam Bowles, Irving Howe and David Kotz for their constructive comments on earlier drafts of this paper...
...When workers themselves exercise control rights, rather than shareholders or public officials, there can be no collective conflict of interest between those in whose interest the enterprise is operating and those who are carrying out the operations of the enterprise...
...but its power will be much less disproportionate because enterprise control rights and personal wealth will be far less concentrated.See Oskar Lange, "On the Economic Theory of Socialism," part I and 2, Review of Economic Studies, 4 (1936-37), and Oskar Lange and Fred Taylor, On The Economic Theory Of Socialism (University of Minnesota Press, 1938...
...I remain, of course, solely responsible for the views expressed here...
...To overcome problems of risk aversion one could organize horizontal associations of worker enterprises and pool the risks of each enterprise by pooling some fraction of their net revenues with those of other enterprises...
...260 • DISSENT 22 This term was first coined by Janos Kornai...
...The case is at best a very questionable one...
...Both theory and the actual experience of social democracy, however, suggest that government taxation and spending programs can substantially reduce the extent of income and wealth inequalities within a capitalist economy...
...21 Each local government would have its local investment fund, a publicly controlled (and autonomously managed) financiarinstitution that would buy and sell securities in corporate enterprises, exercising stockholder rights, and so on, seeking to maximize the return on its investments—the net return of which would be turned over to the local government to be used in a way that is democratically accountable to its constituents (operating expenses, public programs, tax reductions, and so on...
...Under these conditions the market has been far from free, enterprises have been far from autonomous, worker self-management has been far from full, and bureaucratic central planners have continued to make many important economic decisions...
...9 Similarly, it is possible to replace the performance measurement of stock markets with "pseudo-stock markets" in which enterprise shares are traded and valued without actually conferring control rights on the traders...
...for a brief summary, see Andrew Zimbalist, Howard Sherman, and Stuart Brown, Comparing Economic Systems, second edition (Harcourt Brace Jovanovich, 1989), 72-80...
...Socialists who agree on the desirability of markets must therefore be prepared to defend the proposition that markets can indeed promote efficiency in the absence of capitalist private property rights...
...Managers of conventional capitalist enterprises are liable to lose their jobs if their poor management drives down the stock market value of the firm to the point where major shareholders decide that new management is needed, or to the point where new investors are tempted to buy a controlling share of the firm and install a new management team...
...15 In the absence of decisive historical evidence, many critics of market socialism have raised theoretically grounded arguments designed to show that markets cannot work effectively under socialist forms of ownership of the means of production...
...As it happens, most advocates of market socialism lean primarily in one direction or the other: there is one school favoring what I will label the "public enterprise model," characterized by public management and public surplus appropriation, and a second school favoring the "worker enterprise model," characterized by worker self-management and worker surplus appropriation...
...and (3) solidarity: through greater participation in workplace and enterprise decision making, workers may gain a stronger sense of solidarity with their fellow workers...
...see David Schweickart, Capitalism Or Worker Control...
...At a more fundamental level, market socialism does not dispense with the individual gain incentives and the related inequalities associated with capitalism...
...as a practical matter, this (ultimate) control is usually exercised via appointment of a managerial staff...
...12 I will consistently use the term "Communistpartydirected"(or the abbreviated "CP-directed") to describe the kind of socialism that has actually existed in the Soviet Union, Eastern Europe, China, Cuba, Vietnam, and North Korea...
...7. Won't worker enterprises respond too sluggishly to market signals and fail to provide enough employment opportunities...
...23 This is the case, for example, with David Schweickart's model...
...Even if most workers are relatively young and can reasonably expect to work for many years to come, this kind of horizon problem is potentially serious...
...A similar effect could be achieved by the creation of holding companies that would hold groups of diversified enterprises, with a substantial part of enterprise profits going to the holding companies in which enterprise workers would have individual capital accounts, and from which retained earnings would be allocated back to the enterprises...
...8 Roemer's and Stauber's models of market socialism represent different kinds of public enterprise models, whereas Ellerman's is a worker enterprise model...
...2° Finally, for those who believe that such alternatives fall too far short of achieving the putative economic benefits of true capitalist stock markets, there is a version of market socialism that allows for external equity ownership rights and fully functioning stock markets...
...There are of course many other adjectives that have been used to characterizethis type of socialism— "actually existing," "bureaucratic state," "centrally planned," and so on—and some have even called it a form of (state) capitalism...
...cit., pp.179-181, notes that the Mondragon cooperative network provides an instructive example of the use of internal capital accounts...
...Worker self-managed firms have some important advantages over both conventional capitalist firms and government-controlled public enterprises in stimulating workplace efficiency...
...3 In this context the enterprise surplus should be defined to include also any capital gains or losses...
...28 See Ellerman, op...
...The right to control confers the prerogatives and responsibilities of management: those who control the enterprise (or their representatives) make the decisions about how it will be operated, who will work in it and under what conditions, whether or not any aspects of the enterprise are to be expanded, contracted, sold or liquidated, and so on...
...Moreover, the threat of hostile takeover of publicly held corporations plays a significant role only in a minority of capitalist economies—notably the United States and Great Britain...
...6. Aren't public enterprises bound to be inefficient because they operate in an environment of "soft budget constraints...
...Perhaps the most widespread criticism of market socialist models is that public enterprises operate under "soft budget constraints...
...To overcome the problem, David Ellerman and others have recommended that "internal capital accounts" be established for each worker in the enterprise, to which would be credited in each year an amount representing their share of the retained earnings of the enterprise...
...9 Market valuations are expected to reflect "true" social benefits and costs to a much greater extent under market socialism than under capitalism not only because of the greater degree of internalization of externalities but also because of the more equal distribution of income that results from the socialization of enterprise income rights...
...A reasonable solution to the dilemma of choice—consistent with the overall spirit of compromise inherent in market socialism—would be to encourage a mixture of public and worker control and income rights, emphasizing each in the particular circumstances in which it would do the most good...
...2. Won't market socialist enterprises suffer from inadequate worker effort in the absence of a serious threat of job loss...
Vol. 39 • April 1992 • No. 2
