The Red and the Black
"The present system will either be replaced or it will go on forever". Ackerman searches for the "shortest possible step [...] to a society where most productive property is owned in common”. He asserts that "the lofty vision of a stateless, marketless world faces obstacles that are not moral but technical, and it’s important to grasp exactly what they are". To remove these obstacles, we need not only the "socialization of the means of production" but also the "socialization of finance".
Seth Ackerman is on the editorial board of Jacobin and a doctoral candidate in history at Cornell. He blogs and tweets.
Originally published in Jacobin Magazine (12/20/2012), a magazine offering socialist perspectives on politics, economics, and culture.
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R
adicals have a habit of speaking in
the conditional. Underlying all their talk about the changes they’d
like to see in the world is the uneasy knowledge that our social
system places rigid limits on how much change can be accomplished
now. “After the revolution . . .” is the wistful,
ironic preface to many a fondly expressed wish on the Left.
Why, then, are radicals so hesitant to
talk about what a different system might look like? One of the oldest
and most influential objections to such talk comes from Marx, with
his oft-quoted scorn toward utopian “recipes” for the “cookshops
of the future.” The moral of the quote, supposedly, is that a
future society must emerge from the spontaneous dynamics of history,
not from the isolated imaginings of some scribbler. This isn’t
without some irony, since two years later Marx the scribbler wrote
his own little cookshop recipe in his Critique of the Gotha
Program — it involved labor tokens, storehouses of goods, and
an accounting system to determine how much workers would get paid.
As it happens, Marx’s comment was a
riposte to a negative review he’d received in a Paris newspaper run
by devotees of the philosopher Auguste Comte, criticizing Marx for
offering no concrete alternative to the social system he condemned.
(That’s why, in the original quote, he asks wryly if the recipes
the reviewers had hoped to see happened to be “Comtist” ones.) To
grasp the context, you have to understand that like many utopian
writers of the era, Comte proffered scenarios for a future society
that were marked by an almost deranged grandiosity, featuring precise
and fantastically detailed instructions on practically every facet of
daily life. It was this obsessive kind of future-painting that Marx
was really taking aim at.
A related cause for reticence is the
feeling that to spell out ideas for future social institutions
amounts to a sort of technocratic elitism that stifles the utopian
élan of the people-in-motion. Great social change never happens
without multitudes becoming inspired to heroic acts of enthusiasm,
and patient attempts to grapple realistically with the material
problems of a functioning society are rarely so inspiring. This is by
no means a trivial objection; one of the oldest fallacies on the Left
is the illusion that change happens when someone comes along with a
brilliant ten-point plan and manages to convince everyone of its
genius.
Still, a successful radical project has
to appeal to every emotional register: not just those ecstatic
moments when history opens up and everything seems possible, but also
those pensive and critical moods when even inveterate
optimists-of-the-will find doubt and reflection taking over. Even a
struggle as epic and impassioned as the movement for the eight-hour
day — which “seemed one of the most striking utopias of
revolutionary socialism” at the time, as Elie Halévy remembered —
was, in the end, about a bureaucratic measure, enforced by legal
directives and factory inspectors.
Maybe the most fundamental reason the
Left has been suspicious of such visions is that they have so often
been presented as historical endpoints — and endpoints
will always be disappointing. The notion that history will reach some
final destination where social conflict will disappear and politics
come to a close has been a misguided fantasy on the Left since its
genesis. Scenarios for the future must never be thought of as final,
or even irreversible; rather than regard them as blueprints for some
future destination, it would be better to see them simply as maps
sketching possible routes out of a maze. Once we exit the labyrinth,
it’s up to us to decide what to do next.
In this essay, I start from the common
socialist assumption that capitalism’s central defects arise from
the conflict between the pursuit of private profit and the
satisfaction of human needs. Then I sketch some of the considerations
that would have to be taken into account in any attempt to remedy
those defects.
What I’m not concerned with here is
achieving some final and total harmony between the interests of each
and the interests of all, or with cleansing humanity of conflict or
egotism. I seek the shortest possible step from the society
we have now to a society where most productive property is owned in
common — not in order to rule out more radical change, but
precisely in order to rule it in.
There is nothing wrong with thinking
concretely and practically about how we can free ourselves from
social institutions that place such confining limits on the kind of
society we are able to have. Because of one thing we can be certain:
the present system will either be replaced or it will go on forever.
R adicals responded to the end of “really existing socialism” mainly in two ways. Most stopped talking about a world after capitalism at all, retreating to a modest politics of piecemeal reform, or localism, or personal growth.
The other response was exactly the
opposite — an escape forward into the purest and most
uncompromising visions of social reconstruction. In certain radical
circles, this impulse has lately heightened the appeal of a leap
toward a world with no states or markets, and thus no money, wages,
or prices: a system in which goods would be freely produced and
freely taken, where the economy would be governed entirely by the
maxim “from each according to his abilities, to each according to
his needs.”
Whenever such ideas are considered,
debate seems to focus immediately on big philosophical questions
about human nature. Skeptics scoff that people are too selfish for
such a system to work. Optimists argue that humans are a naturally
cooperative species. Evidence is adduced for both sides of the
argument. But it’s best to leave that debate to the side. It’s
safe to assume that humans display a mixture of cooperation and
selfishness, in proportions that change according to circumstances.
The lofty vision of a stateless,
marketless world faces obstacles that are not moral but technical,
and it’s important to grasp exactly what they are.
We have to assume that we would not
want to regress to some sharply lower stage of economic development
in the future; we would want to experience at least the same material
comforts that we have under capitalism. On a qualitative level,
of course, all sorts of things ought to change so that production
better satisfies real human and ecological needs. But we would not
want to see an overall decline in our productive powers.
But the kind of production of which we
are now capable requires a vast and complex division of labor. This
presents a tricky problem. To get a concrete sense of what it means,
think of the way Americans lived at the time of the American
Revolution, when the typical citizen worked on a small, relatively
isolated family farm. Such households largely produced what they
consumed and consumed what they produced. If they found themselves
with a modest surplus of farm produce, they might sell it to others
nearby, and with the money they earned they could buy a few luxuries.
For the most part, though, they did not rely on other people to
provide them with the things they needed to live.
Compare that situation with our own.
Not only do we rely on others for our goods, but the sheer number of
people we rely on has increased to staggering proportions.
Look around the room you’re sitting
in and think of your possessions. Now try to think of how many people
were directly involved in their production. The laptop I’m typing
on, for example, has a monitor, a case, a DVD player, and a
microprocessor. Each was likely made in a separate factory, possibly
in different countries, by various companies employing hundreds or
thousands of workers. Then think of the raw plastic, metal, and
rubber that went into those component parts, and all the people
involved in producing them. Add the makers of the fuel that fired the
factories and the ship crews and trucking fleets that got the
computer to its destination. It’s not hard to imagine
millions of people participating in the production of just those
items now sitting on my desk. And out of the millions of tasks
involved, each individual performed only a tiny set of discrete
steps.
How did they each know what to do? Of
course, most of these people were employees, and their bosses told
them what to do. But how did their bosses know how much plastic to
produce? And how did they know to send the weaker, softer kind of
plastic to the computer company, even though it would have been happy
to take the sturdier, high-quality plastic reserved for the hospital
equipment makers? And how did these manufacturers judge whether it
was worth the extra resources to make laptops with nice LCD monitors,
rather than being frugal and making old, simpler cathode ray
models?
The total number of such dilemmas is
practically infinite for a modern economy with millions of different
products and billions of workers and consumers. And they must all be
resolved in a way that is globally consistent, because at any given
moment there are only so many workers and machines to go around, so
making more of one thing means making less of another. Resources can
be combined in an almost infinite number of possible permutations;
some might satisfy society’s material needs and desires fairly
well, while others would be disastrous, involving huge quantities of
unwanted production and lots of desirable things going unmade. In
theory, any degree of success is possible.
This is the problem of economic
calculation. In a market economy, prices perform this function. And
the reason prices can work is that they convey systematic information
concerning how much of one thing people are willing to give up to get
another thing, under a given set of circumstances. Only by requiring
people to give up one thing to get another, in some ratio, can
quantitative information be generated about how much, in relative
terms, people value those things. And only by knowing how much
relative value people place on millions of different things can
producers embedded in this vast network make rational decisions about
what their minute contribution to the overall system ought to be.
None of this means that calculation can
be accomplished through prices alone, or that the prices generated in
a market are somehow ideal or optimal. But there is no way a
decentralized system could continually generate and broadcast so much
quantitative information without the use of prices in some form. Of
course, we don’t have to have a decentralized system. We could have
a centrally planned economy, in which all or most of society’s
production decisions are delegated to professional planners with
computers. Their task would be extremely complex and their
performance uncertain. But at least such a system would
provide some method for economic calculation: the planners
would try to gather all the necessary information into their central
department and then figure out what everyone needs to do.
So something needs to perform
the economic calculation function that prices do for a market system
and planners do for a centrally planned system. As it happens, an
attempt has been made to spell out exactly what would be required for
economic calculation in a world with no states or markets. The
anarchist activist Michael Albert and the economist Robin Hahnel have
devised a system they call Participatory Economics in which every
individual’s freely made decisions about production and consumption
would be coordinated by means of a vast society-wide plan formulated
through a “participatory” process with no central bureaucracy.
Parecon, as it’s called, is an
interesting exercise for our purposes, because it rigorously works
out exactly what would be needed to run such an “anarchist”
economy. And the answer is roughly as follows: At the beginning of
each year, everyone must write out a list of every item he or she
plans to consume over the course of the year, along with the quantity
of each item. In writing these lists, everyone consults a tentative
list of prices for every product in the economy (keep in mind there
are more than two million products in Amazon.com’s “kitchen and
dining” category alone), and the total value of a person’s
requests may not exceed his or her personal “budget,” which is
determined by how much he or she promises to work that year.
Since the initial prices are only
tentative estimates, a network of direct-democratic councils must
feed everyone’s consumption lists and work pledges into computers,
in order to generate an improved set of prices that will bring
planned levels of production and consumption (supply and demand)
closer to balance. This improved price list is then published, which
kicks off a second “iteration” of the process: now everyone has
to rewrite their consumption requests and work pledges all over
again, according to the new prices. The whole procedure is repeated
several times until supply and demand are finally balanced.
Eventually, everyone votes to choose between several possible plans.
In their speaking and writing, Albert
and Hahnel narrate this remarkable process to show how attractive and
feasible their system would be. But for many people — I would
include myself in this group — the effect is exactly the opposite.
It comes off instead as a precise demonstration of why economic
calculation in the absence of markets or state planning would be, if
perhaps not impossible in theory, at least impossible to imagine
working in a way that most people could live with in practice. And
Parecon is itself a compromise from the purist’s point of view,
since it violates the principle “from each according to ability, to
each according to need” — individuals’ consumption requests are
not allowed to exceed their work pledges. But of course without that
stipulation, the plans wouldn’t add up at all.
The point is not that a large-scale
stateless, marketless economy “wouldn’t work.” It’s that, in
the absence of some coordinating mechanism like Albert and Hahnel’s,
it simply wouldn’t exist in the first place. The problem of
economic calculation, therefore, is something we have to take
seriously if we want to contemplate something better than the status
quo.
B ut what about the other alternative? Why not a centrally planned economy where the job of economic calculation is handed over to information-gathering experts — democratically accountable ones, hopefully. We actually have historical examples of this kind of system, though of course they were far from democratic. Centrally planned economies registered some accomplishments: when Communism came to poor, rural countries like Bulgaria or Romania they were able to industrialize quickly, wipe out illiteracy, raise education levels, modernize gender roles, and eventually ensure that most people had basic housing and health care. The system could also raise per capita production pretty quickly from, say, the level of today’s Laos to that of today’s Bosnia; or from the level of Yemen to that of Egypt.
But beyond that, the system ran into
trouble. Here a prefatory note is in order: Because the neoliberal
Right has habit of measuring a society’s success by the abundance
of its consumer goods, the radical left is prone to slip into a
posture of denying this sort of thing is politically relevant at all.
This is a mistake. The problem with full supermarket shelves is that
they’re not enough — not that they’re unwelcome or
trivial. The citizens of Communist countries experienced the paucity,
shoddiness and uniformity of their goods not merely as
inconveniences; they experienced them as violations of their basic
rights. As an anthropologist of Communist Hungary writes,
“goods of state-socialist production . . . came to be
seen as evidence of the failure of a state-socialist-generated
modernity, but more importantly, of the regime’s negligent and even
‘inhumane’ treatment of its subjects.”
In fact, the shabbiness of consumer
supply was popularly felt as a betrayal of the humanistic mission of
socialism itself. A historian of East Germany quotes the
petitions that ordinary consumers addressed to the state: “It
really is not in the spirit of the human being as the center of
socialist society when I have to save up for years for a Trabant and
then cannot use my car for more than a year because of a shortage of
spare parts!” said one. Another wrote: “When you read in the
socialist press ‘maximal satisfaction of the needs of the people
and so on’ and … ‘everything for the benefit of the people,’
it makes me feel sick.” In different countries and languages across
Eastern Europe, citizens used almost identical expressions to evoke
the image of substandard goods being “thrown at” them.
Items that became unavailable in
Hungary at various times due to planning failures included “the
kitchen tool used to make Hungarian noodles,” “bath plugs that fit
tubs in stock; cosmetics shelves; and the metal box necessary for
electrical wiring in new apartment buildings.” As a local newspaper
editorial complained in the 1960s, these things “don’t seem
important until the moment one needs them, and suddenly they are very
important!”
And at an aggregate level, the best
estimates show the Communist countries steadily falling behind
Western Europe: East German per capita income, which had been
slightly higher than that of West German regions before World War II,
never recovered in relative terms from the postwar occupation years
and continually lost ground from 1960 onwards. By the late 1980s it
stood at less than 40% of the West German level.
Unlike an imaginary economy with no
states or markets, the Communist economies did have an
economic calculation mechanism. It just didn’t work as advertised.
What was the problem?
According to many Western economists,
the answer was simple: the mechanism was too clumsy. In this telling,
the problem had to do with the “invisible hand,” the phrase Adam
Smith had used only in passing, but which later writers commandeered
to reinterpret his insights about the role of prices, supply, and
demand in allocating goods. Smith had originally invoked the price
system to explain why market economies display a semblance of order
at all, rather than chaos — why, for example, any desired commodity
can usually be found conveniently for sale, even though there is no
central authority seeing to it that it be produced.
But in the late nineteenth century,
Smith’s ideas were formalized by the founders of neoclassical
economics, a tradition whose explanatory ambitions were far grander.
They wrote equations representing buyers and sellers as vectors of
supply and demand: when supply exceeded demand in a particular
market, the price dropped; when demand exceeded supply, it rose. And
when supply and demand were equal, the market in question was said to
be in “equilibrium” and the price was said to be the “equilibrium
price.”
As for the economy as a whole, with its
numberless, interlocking markets, it was not until 1954 that the
future Nobel laureates Kenneth Arrow and Gérard Debreu made what was
hailed as a momentous discovery in the theory of “general
equilibrium” — a finding that, in the words of James Tobin, “lies
at the very core of the scientific basis of economic theory.” They
proved mathematically that under specified assumptions, free markets
were guaranteed to generate a set of potential equilibrium prices
that could balance supply and demand in all markets simultaneously —
and the resulting allocation of goods would be, in one important
sense, “optimal”: no one could be made better off without making
someone else worse off.
The moral that could be extracted from
this finding was that prices were not just a tool market economies
used to create a degree of order and rationality. Rather, the prices
that markets generated — if those markets were free and
untrammeled — were optimal, and resulted in a maximally efficient
allocation of resources. If the Communist system wasn’t
working, then, it was because the clumsy and fallible mechanism
of planning couldn’t arrive at this optimal solution.
This narrative resonated with the
deepest instincts of the economics profession. The little just-so
stories of economics textbooks explaining why minimum wages or rent
controls ultimately make everyone worse off are meant to show that
supply and demand dictate prices by a higher logic that mortals defy
at their peril. These stories are “partial equilibrium” analyses
— they only show what happens in an individual market artificially
cut off from all the markets surrounding it. What Arrow and Debreu
had supplied, the profession believed, was proof that this logic
extends to the economy as a whole, with all its interlocking markets:
a general equilibrium theory. In other words, it was proof
that in the end, free-market prices will guide the economy as a whole
to its optimum.
Thus, when Western economists descended
on the former Soviet bloc after 1989 to help direct the transition
out of socialism, their central mantra, endlessly repeated, was “Get
Prices Right.”
But a great deal of contrary evidence
had accumulated in the meantime. Around the time of the Soviet
collapse, the economist Peter Murrell published an article in
the Journal of Economic Perspectives reviewing empirical
studies of efficiency in the socialist planned economies. These
studies consistently failed to support the neoclassical analysis:
virtually all of them found that by standard neoclassical measures of
efficiency, the planned economies performed as well or better than
market economies.
Murrell pleaded with readers to suspend
their prejudices:
“The consistency and tenor of the
results will surprise many readers. I was, and am, surprised at the
nature of these results. And given their inconsistency with received
doctrines, there is a tendency to dismiss them on methodological
grounds. However, such dismissal becomes increasingly hard when faced
with a cumulation of consistent results from a variety of sources.”
First he reviewed eighteen studies of
technical efficiency: the degree to which a firm produces at its own
maximum technological level. Matching studies of centrally planned
firms with studies that examined capitalist firms using the same
methodologies, he compared the results. One paper, for example, found
a 90% level of technical efficiency in capitalist firms; another
using the same method found a 93% level in Soviet firms. The results
continued in the same way: 84% versus 86%, 87% versus 95%, and so on.
Then Murrell examined studies of
allocative efficiency: the degree to which inputs are allocated among
firms in a way that maximizes total output. One paper found that a
fully optimal reallocation of inputs would increase total Soviet
output by only 3%-4%. Another found that raising Soviet efficiency to
US standards would increase its GNP by all of 2%. A third produced a
range of estimates as low as 1.5%. The highest number found in any of
the Soviet studies was 10%. As Murrell notes, these were hardly
amounts “likely to encourage the overthrow of a whole
socio-economic system.” (Murell wasn’t the only economist to
notice this anomaly: an article titled “Why Is the Soviet Economy
Allocatively Efficient?” appeared in Soviet Studies around the
same time.)
Two German microeconomists tested
the “widely accepted” hypothesis that “prices in a planned
economy are arbitrarily set exchange ratios without any relation to
relative scarcities or economic valuations [whereas] capitalist
market prices are close to equilibrium levels.” They employed a
technique that analyzes the distribution of an economy’s inputs
among industries to measure how far the pattern diverges from that
which would be expected to prevail under perfectly optimal
neoclassical prices. Examining East German and West German data from
1987, they arrived at an “astonishing result”: the divergence was
16.1% in the West and 16.5% in the East, a trivial difference. The
gap in the West’s favor, they wrote, was greatest in the
manufacturing sectors, where something like competitive conditions
may have existed. But in the bulk of the West German economy —
which was then being hailed globally as Modell Deutschland —
monopolies, taxes, subsidies, and so on actually left its price
structure further from the “efficient” optimum than in
the moribund Communist system behind the Berlin Wall.
The neoclassical model also seemed
belied by the largely failed experiments with more marketized
versions of socialism in Eastern Europe. Beginning in the mid-1950s,
reformist economists and intellectuals in the region had been pushing
for the introduction of market mechanisms to rationalize production.
Reforms were attempted in a number of countries with varying degrees
of seriousness, including in the abortive Prague Spring. But the
country that went furthest in this direction was Hungary, which
inaugurated its “new economic mechanism” in 1968. Firms were
still owned by the state, but now they were expected to buy and sell
on the open market and maximize profits. The results were a
disappointment. Although in the 1970s Hungary’s looser consumer
economy earned it the foreign correspondent’s cliché “the
happiest barracks in the Soviet bloc,” its dismal productivity
growth did not improve and shortages were still common.
If all these facts and findings
represented one reason to doubt the neoclassical narrative, there was
a more fundamental reason: economists had discovered gaping holes in
the theory itself. In the years since Arrow and Debreu had drafted
their famous proof that free markets under the right conditions could
generate optimal prices, theorists (including Debreu himself) had
uncovered some disturbing features of the model. It turned out that
such hypothetical economies generated multiple sets of
possible equilibrium prices, and there was no mechanism to ensure
that the economy would settle on any one of them without long or
possibly endless cycles of chaotic trial-and-error. Even worse, the
model’s results couldn’t withstand much relaxation of its
patently unrealistic initial assumptions; for example, without
perfectly competitive markets — which are virtually nonexistent in
the real world — there was no reason to expect any equilibrium at
all.
Even the liberal trope that government
interventions are justified by “market failures” — specific
anomalies that depart from the Arrow-Debreu model’s perfect-market
assumptions — was undermined by another finding of the 1950s: the
“general theory of the second best.” Introduced by Richard Lipsey
and Kelvin Lancaster, the theorem proves that even if the idealized
assumptions of the standard model are accepted, attempts to correct
“market failures” and “distortions” (like tariffs, price
controls, monopolies or externalities) areas likely to make things
worse as to make them better, as long as any other market failures
remain uncorrected — which will always be the case in a world of
endemic imperfect competition and limited information.
In a wide-ranging review of “the
failure of general equilibrium theory,” the economist Frank
Ackerman1 concluded:
“A story about Adam Smith, the
invisible hand, and the merits of markets pervades introductory
textbooks, classroom teaching, and contemporary political discourse.
The intellectual foundation of this story rests on general
equilibrium. . . . If the foundation of everyone’s favorite
economics story is now known to be unsound . . . then the profession
owes the world a bit of an explanation.”
The point is this: If a deterministic
story about free markets generating optimal prices, leading to
maximum output was no longer viable, then the failure of planned
economies could hardly be attributed to the absence of those
features. As Communist systems were collapsing in Eastern Europe,
economists who had lost faith in the neoclassical narrative began to
argue that an alternative explanation was needed. The most prominent
theorist in this group was Joseph Stiglitz, who had become famous for
his work on the economics of information. His arguments dovetailed
with those of other dissenters from the neoclassical approach, like
the eminent Hungarian scholar of planned economies, János Kornai,
and evolutionary economists like Peter Murrell.
They all pointed to a number of
characteristics, largely ignored by the neoclassical school, that
better accounted for the ability of market economies to avoid the
problems plaguing centrally planned systems. The aspects they
emphasized were disparate, but they all tended to arise from a
single, rather simple fact:in market systems firms are
autonomous.
That means that within the limits of
the law, a firm may enter a market; choose its products and
production methods; interact with other firms and individuals; and
must close down if it cannot get by on its own resources. As a
textbook on central planning put it, in market systems the
presumption is “that an activity may be undertaken unless it is
expressly prohibited,” whereas in planned systems “the prevailing
presumption in most areas of economic life is that an activity may
not be undertaken unless permission has been obtained from the
appropriate authority.” The neoclassical fixation with ensuring
that firms exercised this autonomy in a laissez-faire environment —
that restrictions on voluntary exchange be minimized or eliminated —
was essentially beside the point.
Thus, free entry and multiple
autonomous sources of capital mean that anyone with novel production
ideas can seek resources to implement their ideas and don’t face a
single veto point within a planning apparatus. As a result, they
stand a much greater chance of obtaining the resources to test out
their ideas. This probably leads to more of the waste inherent in
failed experiments — but also far greater scope for improved
products and processes, and a constantly higher rate of technological
improvement and productivity growth.
Firms’ autonomy to choose their
products and production methods means they can communicate directly
with customers and tailor their output to their needs — and with
free entry customers can choose between the output of different
producers: no agency needs to spell out what needs to be produced. To
illustrate the relative informational efficiency of this kind of
system, Stiglitz cited a Defense Department contract for the
production of plain white t-shirts: in the tender for bidding, the
physical description of the t-shirt desired ran to thirty small-print
pages. In other words, a centralized agency could never learn and
then specify every desired characteristic of every product.
Meanwhile, East European economists
realized that an essential precondition for firms to be truly
autonomous was the existence of a capital market — and
this helped explain the failure of Hungary’s market-oriented
reforms. In seeking an explanation for the persistence of shortages
under the new market system, the Hungarian economist János Kornai
had identified a phenomenon that he called the “soft budget
constraint” — a situation where the state continually transfers
resources to loss-making firms to prevent them from failing. This
phenomenon, he argued, was what lay behind the shortage problem in
Hungary: expecting that they would always be prevented from going
bankrupt, firms operated in practice without a budget constraint, and
thus exerted limitless demand for materials and capital goods,
causing chronic production bottlenecks.
But why did the state keep bailing out
the troubled firms? It’s not as if the Hungarian authorities were
opposed to firm failures on principle. In fact, when bankruptcies did
happen, the Communist leadership treated them as public relations
events, to demonstrate their commitment to a rational economic
system.
The ultimate answer was the absence of
a capital market. In a market economy, a troubled firm can sell part
or all of its operations to another firm. Or it can seek capital from
lenders or investors, if it can convince them it has the potential to
improve its performance. But in the absence of a capital market, the
only practical options are bankruptcy or bailouts. Constant bailouts
were the price the Hungarian leadership was forced to pay to avoid
extremely high and wasteful rates of firm failures. In other words,
capital markets provide a rational way to deal with the turbulence
caused by the hard budget constraints of market systems: when a firm
needs to spend more than its income, it can turn to lenders and
investors. Without a capital market, that option is foreclosed.
As resistance against Communism rose,
those in Eastern Europe who wished to avoid a turn to capitalism drew
the appropriate lessons. In 1989, the dissident Polish reform
economists Włodzimierz Brus and Kazimierz Łaski — both
convinced socialists and disciples of the distinguished
Marxist-Keynesian Michał Kalecki — published a book examining the
prospects for East European reform. Both had been influential
proponents of democratic reforms and socialist market mechanisms
since the 1950s.
Their conclusion now was that in order
to have a rational market socialism, publicly-owned firms would have
to be made autonomous — and this would require a socialized
capital market. The authors made it clear that this would entail a
fundamental reordering of the political economy of East European
systems — and indeed of traditional notions of socialism. Writing
on the eve of the upheavals that would bring down Communism, they set
out their vision: “the role of the owner-state should be separated
from the state as an authority in charge of
administration. . . .[E]nterprises . . .
have to become separated not only from the state in its wider role
but also from each other.”
The vision Brus and Łaski sketched
was novel: a constellation of autonomous firms, financed by a
multiplicity of autonomous banks or investment funds, all competing
and interacting in a market — yet all nevertheless socially owned.
A ll of this lays the groundwork for raising the critical question of profit. There are two ways to think about the function of profits under capitalism. In the Marxist conception, capitalists’ restless search for profit drives the pace and shape of economic growth, making it the ultimate “motor of the system”— but it’s judged to be an erratic and arbitrary motor that ought to be replaced by something more rational and humane. In mainstream economics, on the other hand, profits are understood simply as a benign coordinating signal, broadcasting information to firms and entrepreneurs about how to satisfy society’s needs most efficiently.
Each of these versions contains some
truth. Look at the mainstream account. Its logic is straightforward:
a firm’s profit is the market value of the output it sells minus
the market value of the inputs it buys. So the pursuit of profit
leads firms to maximize their production of socially desired outputs
while economizing on their use of scarce inputs. On this logic,
profits are an ideal coordinating device.
But the logic only holds to the extent
that that an item’s market value is actually a good measure of its
social value. Does that assumption hold? Leftists know enough to
scoff at that idea. The history of capitalism is a compendium of
mis-valued goods. Not only do capitalists draw from a treasury of
tricks and maneuvers to inflate the market value of the outputs they
sell (e.g., through advertising) and drive down the value of the
inputs they have to buy (e.g., by deskilling labor). But capitalism
itself systematically produces prices for crucial goods that bear
little rational relation to their marginal social value: just think
of health insurance, natural resources, interest rates, wages.
So if profit is a signal, it invariably
comes mixed with a lot of noise. Still, there’s an important signal
there. Most of the millions of goods in the economy aren’t like
health insurance or natural resources; they’re more banal — like
rubber bands, sheet metal, or flat-screen TVs. The relative prices of
these goods do seem to function as decent guides to their relative
marginal social values. When it comes to this portion of firms’
inputs and outputs — say, a steel company that buys iron and sells
it manufactured as steel — profit-seeking really does make
capitalists want to produce things people desire in the most
efficient way possible. It’s those crucial mis-valued goods —
labor, nature, information, finance, risk, and so on — that produce
the irrationality of profit.
In other words, under capitalism
firms can increase their profits by efficiently producing
things people want. But they can also increase them by immiserating
their workers, despoiling the environment, defrauding consumers, or
indebting the populace. How do you obtain one without getting the
other?
The standard answer to this dilemma is
what you might call the social democratic solution: let firms pursue
their private profits, but have the state intervene case by case to
forbid them from doing so in socially harmful ways. Ban pollution,
give rights to workers, forbid consumer fraud, repress speculation.
This agenda is nothing to sneeze at. The social theorist Karl Polanyi
saw it as part of what he called the long “double movement” that
had been underway ever since the industrial revolution. Polanyi
argued that liberal capitalism had always been pushed forward by a
drive to turn everything into a commodity. Because it required that
production be “organized through a self-regulating mechanism of
barter and exchange,” it demanded that “man and nature must be
brought into its orbit; they must be subject to supply and demand,
that is, be dealt with as commodities, as goods produced for sale.”
But that commodifying drive had always
produced its dialectical opposite, a countermovement from society
below, seeking decommodification. Thus, Polanyi’s double movement
was “the action of two organizing principles in society, each of
them setting itself specific institutional aims, having the support
of definite social forces and using its own distinctive methods”:
“The one was the principle of
economic liberalism, aiming at the establishment of a self-regulating
market, relying on the support of the trading classes, and using
largely laissez-faire and free trade as its methods; the other was
the principle of social protection aiming at the conservation of man
and nature as well as productive organization, relying on the varying
support of those most immediately affected by the deleterious action
of the market — primarily, but not exclusively, the working and the
landed classes — and using protective legislation, restrictive
associations, and other instruments of intervention as its methods.”
After the Second World War, the
pressure of the countermovement made decommodification the
unacknowledged motor of domestic politics throughout the
industrialized world. Parties of the working class, acutely
vulnerable to pressure from below, were in government more than 40%
of the time in the postwar decades — compared to about 10% in the
interwar years, and almost never before that — and “contagion
from the Left” forced parties of the right into defensive
acquiescence. Schooling, medical treatment, housing, retirement,
leisure, child care, subsistence itself, but most importantly,
wage-labor: these were to be gradually removed from the sphere of
market pressure, transformed from goods requiring money, or articles
bought and sold on the basis of supply and demand, into social rights
and objects of democratic decision.
This, at least, was the maximal
social-democratic program — and in certain times and places in the
postwar era its achievements were dramatic.
But the social democratic solution is
unstable — and this is where the Marxist conception comes in, with
its stress on pursuit of profit as the motor of the capitalist
system. There’s a fundamental contradiction between accepting that
capitalists’ pursuit of profit will be the motorof the
system, and believing you can systematically tame and repress
it through policies and regulations. In the classical Marxist
account, the contradiction is straightforwardly economic: policies
that reduce profit rates too much will lead to underinvestment and
economic crisis. But the contradiction can also be political:
profit-hungry capitalists will use their social power to obstruct the
necessary policies. How can you have a system driven by
individuals maximizing their profit cash-flows and still expect to
maintain the profit-repressing norms, rules, laws, and regulations
necessary to uphold the common welfare?
What is needed is a structure that
allows autonomous firms to produce and trade goods for the market,
aiming to generate a surplus of output over input — while keeping
those firms public and preventing their surplus from being
appropriated by a narrow class of capitalists. Under this type of
system, workers can assume any degree of control they like over the
management of their firms, and any “profits” can be socialized—
that is, they can truly function as a signal, rather than as a motive
force. But the precondition of such a system is the socialization of
the means of production — structured in a way that preserves the
existence of a capital market. How can all this be done?
Start with the basics. Private control
over society’s productive infrastructure is ultimately a financial
phenomenon. It is by financing the means of production that
capitalists exercise control, as a class or as individuals. What’s
needed, then, is a socialization of finance — that is, a
system of common, collective financing of the means of production and
credit. But what does that mean in practice?
It might be said that people own two
kinds of assets. “Personal” assets include houses, cars, or
computers. But financial assets — claims on money flows, like
stocks, bonds, and mutual funds — are what finance the productive
infrastructure. Suppose a public common fund were established, to
undertake what might be euphemistically called the “compulsory
purchase” of all privately-owned financial assets. It would, for
example, “buy” a person’s mutual fund shares at their market
price, depositing payment in the person’s bank account. By the end
of this process, the common fund would own all formerly
privately-owned financial assets, while all the financial wealth of
individuals would be converted into bank deposits (but with the banks
in question now owned in common, since the common fund now owns all
the shares).
No one has lost any wealth; they’ve
simply cashed out their stocks and bonds. But there are far-reaching
consequences. Society’s means of production and credit now
constitute the assets of a public fund, while individuals’
financial wealth balances are now its liabilities. In other words,
the job of intermediating between individuals’ money savings and
society’s productive physical assets that used to be performed by
capitalist banks, mutual funds, and so on, has been socialized.
The common fund can now reestablish a “tamed” capital market on a
socialized basis, with a multiplicity of socialized banks and
investment funds owning and allocating capital among the means of
production.
The lesson here is that the
transformation to a different system does not have to be
catastrophic. Of course, the situation I’m describing would be a
revolutionary one — but it wouldn’t have to involve the total
collapse of the old society and the Promethean conjuring of something
entirely unrecognizable in its place.
At the end of the process, firms no
longer have individual owners who seek to maximize profits. Instead,
they are owned by society as a whole, along with any surplus
(“profits”) they might generate. Since firms still buy and sell
in the market, they can still generate a surplus (or deficit) that
can be used to judge their efficacy. But no individual owner actually
pockets these surpluses, meaning that no one has any particular
interest in perpetuating or exploiting the profit-driven
mis-valuation of goods that is endemic under capitalism. The “social
democratic solution” that was once a contradiction — selectively
frustrating the profit motive to uphold the common good, while
systematically relying on it as the engine of the system — can now
be reconciled.
To the same end, the accrual of
interest to individuals’ bank deposits can be capped at a certain
threshold of wealth, and beyond that level it could be limited to
simply compensate for inflation. (Or the social surplus could be
divided up equally among everyone and just paid out as a social
dividend.) This would yield not exactly the euthanasia of the
rentier, but of the rentier “interest” in society. And while
individuals could still be free to start businesses, once their firms
reached a certain size, age and importance, they would have to “go
public”: to be sold by their owners into the socialized capital
market.
What I’m describing is, in one sense,
the culmination of a trend that has been proceeding under capitalism
for centuries: the growing separation of ownership from control.
Already in the mid-nineteenth century, Marx marveled at the
proliferation of what we now call corporations: “Stock companies in
general — developed with the credit system — have an increasing
tendency to separate this work of management as a function from the
ownership of capital, be it self-owned or borrowed. Just as the
development of bourgeois society witnessed a separation of the
functions of judges and administrators from land-ownership, whose
attributes they were in feudal times.” Marx thought this
development highly significant: “It is the abolition of capital as
private property within the framework of capitalist production
itself.”
By the 1930s this “socialized private
property” had become the dominant productive form in American
capitalism, as Adolf Berle and Gardiner Means signaled in The
Modern Corporation and Private Property. The managerial-corporate
model seemed to face a challenge in the 1980s when capitalist owners,
dissatisfied with languishing profit rates, launched an offensive
against what they saw as lax and complacent corporate managers. This
set off a titanic intra-class brawl for control of the corporation
that lasted more than a decade. But by the late 1990s, the result was
a self-serving compromise on both sides: CEOs retained their autonomy
from the capital markets, but embraced the ideology of “shareholder
value”; their stock packages were made more sensitive to the firm’s
profit and stock-market performance, but also massively inflated. In
reality, none of this technically resolved the problem of the
separation of ownership and control, since the new pay schemes never
came close to really aligning the pecuniary interests of the managers
with the owners’. A comprehensive study of executive pay from 1936
to 2005 by MIT and Federal Reserve economists found that
the correlation between firms’ performance and their executives’
total pay was negligible — not only in the era of mid-century
managerialism, but throughout the whole period.
In other words, the laboratory of
capitalism has been pursuing a centuries-long experiment to test
whether an economic system can function when it severs the one-to-one
link between the profits of an enterprise and the rewards that accrue
to its controllers. The experiment has been a success. Contemporary
capitalism, with its quite radical separation of ownership and
control, has no shortage of defects and pathologies, but an
inattention to profit has not been one of them.
How should these socialized firms
actually be governed? A complete answer to that question lies far
beyond the scope of an essay like this; minutely describing the
charters and bylaws of imaginary enterprises is exactly the kind of
Comtist cookshop recipe that Marx rightly ridiculed. But the basic
point is clear enough: since these firms buy and sell in the market,
their performance can be rationally judged. A firm could be
controlled entirely by its workers, in which case they could simply
collect its entire net income, after paying for the use of the
capital2. Or
it could be “owned” by an entity in the socialized capital
market, with a management selected by that entity and a strong system
of worker co-determination to counterbalance it within the firm.
Those managers and “owners” could be evaluated on
the relative returns the firm generates, but they would
have no private property rights over the absolute mass of
profits3.
If expectations of future performance needed to be
“objectively” judged in some way, that is something the
socialized capital markets could do.
Such a program does not amount a
utopia; it does not proclaim Year Zero or treat society as a blank
slate. What it tries to do is sketch a rational economic mechanism
that denies the pursuit of profit priority over the fulfillment of
human needs. Nor does it rule out further, more basic changes in the
way humans interact with each other and their environment — on the
contrary, it lowers the barriers to further change.
In a tribute to Isaac Deutscher, the
historian Ellen Meiksins-Wood praised his “measured vision of
socialism, which recognized its promise for human emancipation
without harboring romantic illusions that it would cure all human
ills, miraculously making people ‘free’, in Shelley’s words,
‘from guilt or pain.’” Socialism, Deutscher had written, was
not “evolution’s last and perfect product or the end of history,
but in a sense only the beginning of history.” As long as the Left
can retain this elemental basis of hope, it will keep a horizon
beyond capitalism in its sights.
NOTES
1 No
relation
2 The
economics of labor-managed firms is a huge topic that raises a host
of complex institutional questions lying beyond the scope of this
article. (See Gregory Dow’s Governing the Firm for a
comprehensive treatment.) But as a matter of politics, the important
thing to note is that with such firms there is no longer a systemic
conflict between an autonomous capitalist or managerial class and
the mass of the population. Of course, there are still clashing
sectoral interests. But those exist no matter what property form is
in place. Moreover, I think there is good reason to believe that the
sway of parochial sectoral interests on politics is greater when
there is an autonomous capitalist class than when there is none,
because that class has an intrinsic interest in maintaining the
porousness of the state to self-seeking minority interests in
general.
3 There’s
no need to assume that managers must necessarily collect pecuniary
rewards for better performance. But using that assumption makes
possible a simple mathematical illustration of how managers can be
evaluated on relative but not absolute profits. Suppose that at the
start of each year the authorities decided on a certain fraction of
national income that would be devoted to paying managerial bonuses
at the end of the year. The number could change each year, but let’s
say this year it’s 3%. When the year is out, national income is
added up, along with total profit. If total profit comes to 30% of
national income, that means total bonuses will be one-tenth of total
profits (3%/30%) — which means the bonus pool for each firm’s
managers will be equal to one-tenth of that firm’s profits.
Under a system like this, each manager would have an interest in
improving her own firm’s profit performance; but she would
have no rational reason to subvert or object to any general
profit-suppressing laws, norms, customs or regulations enacted in
the public interest, assuming they applied to all firms equally.
Again, what’s important here is the concept: whether it’s money
or praise that is awarded for good performance, the principle is the
same.
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