J.M. Keynes’ policy proposals were much more radical than you were probably taught in university6/29/2018
Contrary to what some economics textbooks might have you believe, John Maynard Keynes resoundingly rejected the classical paradigm, and, based on his policy prescriptions in The General Theory, he would have rejected the current mainstream macroeconomic policy tools of fiscal policy, taxation, and interest policy as the sole means of managing the business cycle. Rather, Keynes advocated for a much more interventionist role of government in public investment, “a somewhat comprehensive socialization of investment” as he referred to it, and a more long-term regime of low interest rate policy sufficient to push the economy to full employment. Keynes’ prognosis of the 1930’s economic malaise was due to the lack of effective aggregate demand which required sufficient investment to remedy. While public deficit spending could alleviate a downturn in the short-run, it would not be sufficient to prevent cyclical fluctuations in the long-run and keep the economy running at full-employment. As such, Keynes’ proposals could be considered quite radical relative to his time, and even current interventions used today. The current macro policy management kit consists of deficit spending and taxation (fiscal policy), and interest rates (monetary policy). Perhaps the best proxy for the mainstream (institutional) view on how these policy tools should be used is the current Federal Reserve Chair, Janet Yellen. Back in November, 2016, Yellen offered advice on fiscal policy just after the presidential election victory of Donald Trump. A major plank of Trump’s policy platform was infrastructure spending, but Yellen cautioned during congressional testimony to the Joint Economic Committee that “the economy is operating relatively close to full employment at this point,” so deficit spending would not have the same effect as it might have immediately after the Great Recession began in late 2007. She further cautioned that the new administration and Congress should be mindful of the debt: “With the debt-to-GDP ratio at around 77%, there’s not a lot of fiscal space should a shock to the economy occur, an adverse shock that did require fiscal stimulus.” Essentially, Yellen is suggesting that rather than wasting such an expenditure now, it would be better to save it until the next recession. On September 20th, 2017 Yellen gave remarks to the media regarding the Federal Open Market Committee’s decision to raise the federal funds rate from 1 percent to 1.25 percent, with a goal of 2.9 percent by 2020, as well as the announcement that the Fed will begin its “balance sheet normalization program” to reduce its nearly $4.5 trillion in securities holdings which resulted from its “quantitative easing” programs to reduce long-term interest rates. These decisions are indicative of the classical assumptions which have been embedded in New Keynesian macro theory, namely that the economy generally tends toward equilibrium, and these simple tools are sufficient for counter-cyclical management. As Yellen has testified, the mainstream establishment has the perception that the economy is doing better, and counter-cyclical tools are no longer necessary at this point. But, based on the proposals articulated in the The General Theory, Keynes would have disagreed. At the beginning of chapter 24 of his magnum opus, The General Theory of Employment Interest and Money, Keynes remarked that the two greatest flaws of modern capitalism were “its failure to provide full employment and its arbitrary and inequitable distribution of wealth and income.” The latter is made worse by the former, but both are viewed as non-issues in the classical paradigm. Progressive taxation has been one method by which to reduce inequality, but many worry about taking it too far; that it would reduce private investment and make the problem of unemployment and inequality that much worse. However, Keynes correctly identified that mass unemployment was caused by deficient aggregate demand, which in part was due to deficient investment. To address the issue of deficient investment, Keynes made two important proposals: 1) Low long-term interest rates equal to the marginal efficiency of capital. 2) The “socialization of investment.” The Fed’s quantitative easing (QE) program, which started under Chair Ben Bernanke, has been viewed as both innovative and extraordinary resulting in the long-term low interest rates since 2009. The purpose of this undertaking at the time was to provide a credible expectation to firms and entrepreneurs that rates of borrowing would be low for new capital investment. Despite QE, the shock of the downturn took a while to get over before private nonresidential investment began to pick up again in 2010 (see Fig. 1). While one might be inclined to think that such a policy was original to Bernanke, in fact, Keynes advocated for central bank management of long-term interest rates through purchases of long-term securities in The General Theory (1936): [A] complex offer by the central bank to buy and sell at stated prices gilt-edged bonds of all maturities, in place of the single bank rate for short-term bills, is the most important practical improvement which can be made in the technique of monetary management…[However] The monetary authority often tends in practice concentrate upon short-term debts and to leave the price of long-term debts to be influenced by belated and imperfect reactions from the price of short-term debts; — though here again there is no reason why they need do so. The central bank can lower the short-term interest rates via purchases of short-term term securities in open-market operations, but this has no impact on long-term rates. Entrepreneurs and firms generally make long-term planning decisions based on what the government will do to short-term rates and may choose to hold off investment if they have reason to believe rates will not be favorable to them in the future. The central bank can address this by buying and selling long-term securities to provide a credible expectation that rates will be low in the long-term. This is indeed what the Fed did under Bernanke. But Keynes’ proposal was not that long-term rates should be kept low until the downturn was safely over and then raise them again. Instead, Keynes proposed low interest rates not only for the bust but also during the boom; even when the economy appeared to be “overheating” with wasteful investment and spending. [E]ven if over-investment in this sense [of being wasteful] was a normal characteristic of the boom, the remedy would not lie in clapping on a high rate of interest which would probably deter some useful investments and might further diminish the propensity to consume, but in taking drastic steps, by redistributing incomes or otherwise, to stimulate the propensity to consume… Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest. For that may enable the so-called boom to last. The right remedy for the trade cycle [business cycle] is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom. The act of the monetary authority increasing interest rates has not only the effect of reducing investment, but also increasing unemployment, which in turn generates a further decrease in economic activity due to a decrease in demand. Thus, the current actions of the Fed to raise interest rates in a relatively meek growth environment, stagnant wages, and low labor force participation (relative to the pre-recession period) is exactly the opposite policy Keynes would have advocated. The level of aggregate demand depends on the level of employment and the propensity to consume, which is determined by the level of capital investment to create and expand firms to employ more people. However, due to the scarce nature of capital, sufficient investment alludes us and provides opportunity to the capitalist class to exploit that scarcity. “The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.” A means of reducing this scarcity, according to Keynes, is to “reduce the rate of interest to the level of the marginal efficiency of capital [net rate of return that is expected from the purchase of additional capital] at which there is full employment.” A low long-term interest environment can diminish the capacity to valorize capital in non-productive assets, pushing more investment into enterprise. [I]t would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instrument would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgement…Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital” (emphasis added). The “euthanasia of the rentier” would essentially be the castration of capitalist power over investment, and, therefore, over workers. However, interest rates alone are unlikely to be enough to ensure consistent investment up to the level of constant full employment, which brings us to Keynes’ other proposal. Looking at how “Keynesian” economics is practiced today, one would be inclined to think Keynes’ only contribution was to use government deficit spending on infrastructure, and, indeed, the U.S. infrastructure is in dire need of maintenance and would go a long way towards pushing the economy to full employment. However, Keynes wanted a more comprehensive intervention of the state in enterprise investment. “I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative.” Keynes held these views for a long time. Prior to the publication of The General Theory, Keynes was active politically with the Liberal Party in Britain. According to James Crotty, in his book Capitalism, Macroeconomics and Reality: Understanding Globalization, Financialization, Competition and Crisis, Keynes was probably the “major force” in producing Britain’s Industrial Future (1928), a collective work of progressive proposals to improve Britain’s economy. Keynes proposed a new politically autonomous institution, like the Fed, called the Board of National Investment. Under the coordination of this “new and powerful” institution the state will be able to regulate the aggregate rate of growth of the economy by controlling the pace of public capital accumulation and directing investment toward the industries and areas hardest hit by structural unemployment. The Board was to control all the financial capital made available to public and semi-public concerns. It could borrow on its own account and was even authorized to lend to private companies. Keynes estimates that it would control 4 percent of GDP a year to start, and up to 8 percent of GDP in the foreseeable future.” This did not mean Keynes wanted a complete takeover of the economy by the state which he was careful to qualify in The General Theory: But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community…[However] If the state is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. Keynes clearly saw advantages in maintaining individual capitalism, mainly efficiency and personal freedom, and thought a comprehensive takeover of the state would sacrifice both as appeared to be the case in the Soviet Union in his time. But Keynes recognized that capitalism wasn’t perfect, it needed the strong guiding influence of the state to maintain full employment and temper the tempestuousness nature of the human economic activity which manifested so often in crises (e.g. The Financial Crisis).
If we define Keynesianism as the assumptions and tools used by macroeconomists today, then one may easily make the case even Keynes wasn’t a Keynesian. Keynes rejected erroneous assumptions about agents in the economy such as perfect competition, rational expectations, perfect foresight, and self-equilibrating markets. Simple manipulations of the interest rate and deficit spending have proven not enough to manage the economy and prevent crises. Keynes thought bigger and bolder with a larger role in mind for government to compensate for the inadequacies of capitalism; mainly as proposed in The General Theory, state control of investment and low long-term interest rates. The Fed was heading in the right direction by keeping interest rates low, but now it is regressing back again toward the status quo prior to the recession, raising interest rates at a time when wages are still stagnant and growth still relatively anemic. It is at the same time amazing and disturbing that mainstream introductory economics textbooks still teach fractional reserve banking and the money multiplier. Undergraduate students, myself included when I was an undergrad, learn that banks operate as intermediaries between savers and borrowers. For those with sufficient income to set some aside, you deposit that savings in a reputable bank. The bank in turn loans out those deposited funds to someone else at a profitable rate of interest. By loaning out your unused funds, this creates a multiplier effect by which the borrower spends the money which becomes someone else’s income, and so on. This assumption is crucial to monetarist theory. Banks are merely intermediaries between savers and borrowers; thus it is assumed that the money supply can be directly controlled using interest rate policy by the Federal Reserve. The only new money that can enter the system is through the government. A low interest rate policy by the Fed can increase demand for money loans, increasing the money supply, and reducing the rate would do the opposite. Government spending into the economy either by direct fiscal expenditure or injection of reserves into the banking sector would increase the money supply causing inflation from “too much money chasing too few goods” as Milton Friedman would say. Friedman argued that inflation could be stabilized by controlling the money supply through the interest rate; which exposed his ignorance to how money is actually created in the economy. Milton Friedman’s monetarism was based on the quantity theory of money which made two erroneous assumptions: (1) The growth rate of the money supply is the fundamental source of inflation, and (2) the supply of money is exogenous. For the first assumption to be true, the economy would need to be operating at full capacity and employment such that any increase in the money supply would increase demand beyond supply. For the second assumption to be true, banks would have to be constrained by the amount of deposits they have and the money supply could be controlled by manipulating the interest rate. As it turns out, banks do not need deposits to make loans. In reality, while money does take the form of deposits, banks are not limited by the amount of deposits they have in order to make a loan to a borrower whether a business or individual(s). This fact has been known for decades. The most prominent case is Joseph Schumpeter who wrote in 1954, “It is much more realistic to say that the banks ‘create credit,’ that is, that they create deposits in their act of lending, than to say that they lend the deposits that have been entrusted to them.” When banks make a loan they create two simultaneous entries on their balance sheet: one on the liability side in the form of a demand deposit for the borrower, and one on the asset side for the repayment of the loan by the borrower. Thus, loans create deposits, i.e. money, increasing the money supply. Many others that would follow Schumpeter such as Hyman Minsky, Nicholas Kaldor, Basil Moore, and others would further develop what has come to be known as the endogenous money view. But if the Federal Reserve is not the only source of money creation in the economy, then what tools does the Fed have to constrain the money supply? The Fed does control the reserve requirement ratio. The reserve requirement is the ratio of vault cash plus reserves relative to deposits the bank has on the liability side of its balance sheet. However, the required reserve ratio is seldom used. The current reserve ratio is 10 percent of deposits over 124.2 million. This means that when a bank creates a deposit, it does have to meet the requirement ratio by increasing the reserves in their Fed account by 10 percent of the amount of the loan deposit or cash on hand. Banks have several options to meet this requirement: (1) Banks can increase cash deposits or reserves by attracting new customers; (2) borrow money from other banks at the Federal Funds rate (or interbank rate); and or (3) borrow funds directly from the Fed at the discount window. Option (1) is the cheapest for them, so banks offer services and small interest benefits on deposits to attract customers. Option (3) is the most expensive for them. Alan Holmes, former vice chair of the New York Federal Reserve Bank, remarked, The idea of a regular injection of reserves-in some approaches at least-also suffers from a naive assumption that the banking system only expands loans after the System (or market factors) have put reserves in the banking system. In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand… (Homes, 1969; emphasis added). There is some dispute among proponents of endogenous money as to just how the Fed “accommodates that demand,” but most recognize that one way or another banks do find the reserves they need and focus very little on the reserve requirements. Bennett and Peristiani (2002) find that “reserve requirements have declined significantly in effectiveness, in the sense that they no longer appear to be as important a binding constraint on banks’ holdings of assets that qualify as reserves”. Thus, banks manage their reserves less to comply with regulatory minimums than to meet business needs and consumer demand, chasing reserves as they need them. The Fed also uses the Federal Funds rate. While the interest rate does influence demand for loanable funds, the fundamental determination of whether the bank will make the loan is the creditworthiness of the borrower and the general state of the economy. But the Fed does control, for the most part, over the Federal Funds rate which is the overnight interest rate at which banks loan to each other. The Federal Funds rate does influence the relative interest rate banks ultimately charge to make loans to consumers and businesses, and thus the growth rate of the money supply; however, it is not a direct control mechanism. Pollin (2008) finds some evidence of a causal relationship between the Federal Funds rate and market rates in the short-term, but no significant correlation in the long-term. Market forces, instead, appear to be “a major force-and are in most cases the major determinant-of market interest rates, especially at the long end of the markets”. Which means that to an extent, even market interest rates are endogenous to the financial system. Today, the Fed strives to target interest rates rather than monetary aggregates, but is not capable of “fine-tuning” as many believe. It is capable of “gross-tuning” meaning that changes in the Federal Funds rate can influence to some extent market interest rates. The Fed has proven it can exert moderate influence on long-term rates through its unconventional quantitative easing program by purchasing long-term bonds and assets, including mortgage backed securities guaranteed by the Federal government. But the more important function the Fed plays is the lender of last resort. The Fed proved how important this function was during the Great Financial Crisis of 2007–08. As commercial banks such as Bear Stearns, and some non-bank financial institutions such as AIG, found themselves in a liquidity crisis, the Fed stepped up, through intermediaries in some cases, with additional funds. Additionally, the Fed facilitated buyout arrangements which, while producing some moral hazard concerns, likely prevented a prolonged credit freeze which might have resulted in a more severe recession or a depression. I have used the term endogenous money to describe the process of above by which banks create money through loans. However, since this endogenous expansion of the money involves extending credit, endogenous finance might be just as appropriate; especially when speaking of more complex financial assets. Money serves three important functions: (1) a means of exchange; (2) a unit of account, and (3) a store of value. Any asset that exhibit these characteristics bears a degree of “moneyness.” More narrow measures include only the most liquid assets, the ones most easily used to spend in the economy such as currency, demand deposits, etc. Broader measures add less liquid types of assets such as certificates of deposit, savings deposits, small time deposits, and retail money market mutual funds; each of these being a financial innovation at one point in history. According to Pollin (2008), Innovation is a persistent feature of financial markets practices…Innovation in financial markets are primarily driven by efforts to enhance both the liquidity and store of value functions of any given financial asset, such as a Certificate of Deposit, a credit derivative, or securitized mortgage. Basically, this means lowering the costs of converting relatively high-yielding illiquid assets into liquid assets. To the degree that these financial innovations exhibit “moneyness,” measures of the money supply (e.g. M1, M2, M3, etc.) need to become more sophisticated and inclusive to better understand the impact on the economy. However, financial innovation bears two contradictory tendencies: (1) It relaxes the “saving-constraint,” and (2) it increases financial fragility. I will discuss both of these in turn. The mainstream view assumes that investment, and consumption for that matter, is constrained by savings. In this view, banks operate merely as intermediaries between savers and borrowers, investment and consumption cannot exceed the available amount of savings in the economy. The economy is “self-financed” and thus “savings-constrained.” Once one accepts the endogenous money view, it becomes immediately evident that savings becomes less of a constraint. Thus, banking institutions themselves are a financial innovation which relax this constraint since loans create deposits and increase the money supply. As more complex financial institutions and innovations introduce new forms of financial intermediation, the savings constraint becomes more and more relaxed. As put succinctly by Pollin (1997): Financial intermediation is the process whereby market participants, private institutions, and governments act to reduce information and transaction costs of financial provisioning, as well as allow for diversification of the risks associated with such activities. All else equal, reducing costs and diversifying risks through intermediation implies both that interest rates and collateral requirements on loans should fall in conjunction with declining costs of the diversification of risks. Financial innovation, in turn, is the process in which market participants create new channels and techniques of intermediation. In particular, asset and liability management techniques devised by intermediaries have created thick markets for liquidity. As we introduce more complex financial institutions (e.g. mutual funds, shadow banking system, etc.), government functions of financial intermediation (e.g. Federal Funds market, treasury securities, Bond sale and Repo market, etc.), and foreign financial intermediaries, information and transaction costs tend to come down, risk becomes more diversified, and more liquid assets are created weakening the “saving-constraint” through greater credit availability. The government especially plays a unique role here as it is the only institution that can create an exogenous injection funds into the economy. While every dollar produced is a liability on the government’s balance sheet, it bears no inherent default risk. To the extent that the government “finances” its injections as conventionally believed it needs to do, “it broadens its role as a financial intermediary,” and “creates further possibilities for the allocation of liquid assets” (Pollin, 1997). Government monetary institutional structures, regulatory regimes, and monetary policy shape the development of financial innovation; which also means that such innovation and structural complexity will vary across economies. Additionally, regulatory structures and general market conditions vary over time, and thus the innovation and structural changes in financial markets are also likely to vary over time. This means that the savings-constraint itself is likely to be variable over time. Pollin further points out, as any system grows in complexity, the innovative financial products and institutional structures tend to become permanent even when the conditions that produced them revert to normal states. This permanents builds on complexity in each era of innovation which contributes to financial fragility. This brings us to the negative tendency of financial innovation. The government has the unique role of regulating financial intermediation. Pollin (2008) notes, “the effects of [financial innovation] on market outcomes increase as the degree of market regulation declines.” As noted above, given permanent tendency of structural change, regulatory regimes are crucial to ensure a sound financial system. “Normal unregulated financial market practices inherently generate states of systemic instability, as financial market participants, operating to maximize profit under conditions of uncertainty, systemically assume riskier financial positions as cyclical expansions proceed”. The Neoliberal era has been marked by a dogmatic view of financial liberalization and deregulation. This was more or less the conventional wisdom in US leading up to the Financial Crisis of 2007–08. In his book, How Markets Fail, John Cassidy chronicles the deregulation of Wall Street for which Alan Greenspan was a central figure. “During the 1990s, he [Greenspan] played a key role in the dismantling of the Glass-Steagall Act, the Depression-era legislation that prevented depository institutions, such as Citigroup and Wells Fargo, from taking part in investment banking activities, such as peddling stocks, bonds, and mortgage securities”. Greenspan would go on to encourage the near full repeal of Glass-Steagall with the Gramm-Leach-Bliley Act of 1999. As derivatives came into prominence in the 1990s, “Greenspan, along with the Treasury, called on Congress to bar the CFTC [Commodity Futures Trading Commission] from regulating credit default swaps and other derivatives-a proposal that was passed into law the following year”. This is not to say that had all these prior regulations stayed in place that the financial system would not have been susceptible to systemic risk, but rollbacks in regulation opened the floodgates for rampant financial innovation and over leveraging in financial markets which undisputedly contributed to the Financial Crisis. References Bennett, Paul and Peristiani, Stavros (2002). “Are U.S. Reserve Requirements Still Binding?” Economic Policy Review, Volume 8, Number 1. Cassidy, John (2009). How Market Fail: The Logic of Economic Calamities. New York, NY: Picador. Holmes, Alan (1969). “Operational Constraints on the Stabilization of Money Supply Growth.” Controlling Monetary Aggregates. Conference Series №1. Federal Reserve Bank of Boston. Pollin, Robert (1997). The Macroeconomics of Saving, Finance, and Investment. Ann Arbor, MI: University of Michigan Press. Pollin, Robert (2008). “Considerations of Interest Rate Exogeneity.” Draft, August, 2008. Schumpeter, Joseph (1954). History of Economic Analysis. New York, NY: Oxford University Press Mark Thoma has recently wrote about his take on Bernie Sanders misconception of Democratic Socialism. Mark is a respected macroeconomist and professor at the University of Oregon. He has an awesome blog which provides the best window into the debates among economists going on in the blogosphere. But he seems to suffer from the same misconceptions most Americans have of the term. This is bit disappointing since have watched his YouTube course on the History of Economic Thought. I would have thought he would have a better grasp on these terms.
Here is how he put it: "Democratic socialists reject capitalism as an economic system and want to replace it with state ownership of the means of production (i.e. the state owned factories, businesses, land, housing, and so on) combined with political democracy. This feature, democratic choice over political leadership, distinguishes democratic socialism from authoritarian Marxist-Leninist style socialism." First off, Democratic Socialism is synonymous with Socialism. A democratic political structure has always been the defining element of Socialism along with social ownership. The only reason it needs qualification is to avoid confusion with authoritarian forms such as Marxism-Leninism in which the state would have control of the economy. In a Democratic Socialist system, or just Socialist system, the means of production would be owned through a variety of social ownership structures: employee-ownership, consumer-cooperative, state ownership or public ownership. A (Democratic) Socialist economy can be market-based or centrally planned, both are compatible. Some argue market-based economies suffer from too much inefficiency and waste, thus the constant need for government intervention through social insurance programs. Social programs would still be required in a market-based socialist economy. But the dynamism and innovation you attribute to Capitalism should really be attributed to the Market-based structure. Whether the ownership structure of an enterprise is employee-owned or proprietary makes no substantive difference in terms of innovation. Although, one could argue that in an employee-owned structure innovation is more likely given that employees are more free to speak their mind and share their ideas. Capitalism is NOT unique because of its Market-based structure, what makes it different from any other system is its concentration of ownership. Markets do tend to allocate resources and goods more efficiently. But that question, however, is a separate problem from how the ownership of the means of production is allocated. Fundamentally, what we are talking about when we discuss a transition from Capitalism to Socialism is a broadening of the distribution of ownership of the means of production. How we get there, and what we do after is where the various iterations of socialist thought diverge. Should the economy be centrally planned? Is better for the state to takeover to initiate the transition? Do we need a Vanguard Revolution to get it done? Should we abolish money and come up with a different way to ascribe value? Should all enterprises be state-owned? Employee-owned? or some combination? These are separate questions. Americans just don’t seem grasp just how much of our economy is socialist already. According to the American Public Power Association, publicly owned utilities account for 60.9% of the total of electricity providers. Cooperative owned utilities own 26.5%. Only 12.3% can be considered private providers. Employee-owned businesses as of 2013 accounted for 12% of the private sector businesses, and are expected to continue to grow in the next decade. They have demonstrated resilience even in the face of recession with over 66% either growing or staying the same in 2009, the worst year of the Great Recession. According to a 2013 report by the National Cooperative Business Association, there are 29,000 cooperatives in the U.S. and 1 in 3 Americans are members of a co-op. It's worth noting every financial institution that calls itself a credit union or mutual company (e.g. Liberty Mutual Insurance, Mutual of Omaha, State Farm Insurance, Nationwide Mutual Insurance Company, etc.) is technically a co-op since customers are shareholders in those businesses. 92 million people bank with credit unions and 233 million were served by co-op owned and (or) affiliated insurance companies. Employee ownership, cooperative ownership, public ownership, these are ways to expand ownership. The expansion of the ownership of the means of production, or socialism, has been happening since the inception of the United States. The only thing that has really changed is what we define as the means of production, which should be really thought of as any component(s) of an enterprise engaged in providing a service or good for consumption. My main point here is do NOT assume (Democratic) Socialism means only state-ownership of means of production, because that is just one of many options to achieve a broader ownership of the means of production. It should also be noted there is such a thing as State Capitalism just as there is State Socialism. Mark also thinks that what Bernie Sanders really means is Social Democracy. I have trouble with this given that social democrats generally accept Capitalism and advocate a policy regime involving welfare state provisions, collective bargaining arrangements, regulation of the economy in the general interest, progressive taxation, and a commitment to representative democracy. I would agree that the Democratic Socialist label Sanders ascribes to himself is a bit misleading, although probably unintentional. Sanders seems to suffer from the same confusion of most Americans on this topic, and it has frustrated many whom are socialist thinkers and advocates because they know it's misleading. Most of his proposals are more or less just Social Liberalism. Social Liberalism endorses a market economy and the expansion of civil and political rights and liberties, but differs in that it believes the legitimate role of the government includes addressing economic and social issues such as poverty, health care, and education. If Sanders was serious about making our economy a more Socialist society, he would be advocating ways to incentivize employee-ownership, cooperatives, and public-ownership where there is market failure such as utilities and internet access. Mark also makes the mistake of thinking Sanders is unelectable due to the “Socialist” label, but there is growing acceptance of socialist ideas among liberals, especially millennials. With each new poll, it seems the unelectability myth is being turned on its head. One would think the enormous crowds at his campaign rallies (even in conservative states) and over 2 million individual contributions would begin to sway the doubters. But if that wasn’t proof of enough, poll after poll show Sanders trouncing the Republican candidates by greater margins than Clinton. And Sanders is gaining ground with each new poll in early state primaries and nationally. As to Sanders electability relative to Clinton, I think Mark underestimates the current of animosity towards Clinton by Republican voters and many liberals for that matter. She is broadly seen as dishonest and untrustworthy (a reputation I think is unwarranted). Her favorability ratings continue to decline with the most recent CNN/ORC Poll. Jan. 21-24, 2016 found 52 percent reporting unfavorable and 20 percent of regular democrats reported the same. Bernie Sanders on the other hand had only a 33 percent unfavorability rating among all voters and only 12 percent of regular democrats in the same poll. And if she is elected the Democratic nominee, all of her past history and political life will come roaring back. Clinton has only experienced a taste of what is coming if she wins the nomination, something she didn’t have to weather in 2008 given that she lost the nomination to Obama. If she does manage to survive both nomination and the general election in 2016, she will likely be as politically divisive as Obama has been. Sanders does not have this baggage. Sure the Socialist label will cause him some consternation. But he is fairly good at explaining what he means by the term. He is politically astute by linking what he means by Democratic Socialism to Denmark and other Scandinavian countries as well his vision to FDR. His message has been consistent for the 32 years he has been in political life. He is striking a chord with voters who recognize the inequality in our society. He is upfront and honest about what he believes and how he thinks the country needs to move forward. Even Republicans understand this about Sanders. Mark makes the following challenge: “Convince me that Bernie’s electable – and that the risk of a Republican winning is similar to what it would be if Hillary becomes the candidate – and I’ll change my mind.” There is probably nothing I could really say to convince you Mark that Sanders is the better choice. But I recommend you start asking your students what they think, and you will quickly realize the power Bernie Sanders has in this moment. I think he can win. If this country has any hope of furthering the social programs you espoused in your article, Bernie is our best shot. For my first post, I want to tackle one of the most misunderstood terms of modern American history, socialism.
Socialism is a term which gets thrown around a lot, especially by the political Right but without any real idea of its meaning. Now in this past year, there has been a sudden surge in curiosity about the concept of socialism thanks in no small part to Bernie Sanders, the independent senator from Vermont who is running for Democratic Presidential Nomination of 2016. Sanders describes himself as a “democratic socialist” – a dubious term given the policies he has proposed, which is a topic for another post perhaps – which has driven many to research the term. Mother Jones recently reported socialism was the most searched word of 2015 with a 169% increase in searches on the Merriam-Webster website since 2014. One problem I have is that this is the worst resource one could possibly use to learn about socialism. Their inaccurate definition reinforces many of the misconceptions people have on the topic. It’s as though folks at Merriam-Webster never bothered to do any research and made no effort to capture at least of the nuance the term. Merriam-Webster’s definition is full of inaccuracies and missing information. Let's take a look. Merriam-Webster simple definition: “a way of organizing a society in which major industries are owned and controlled by the government rather than by individual people and companies.” The first half of the definition is accurate in that government ownership is one form advocated by socialists. The second half is completely wrong. Merriam-Webster full definition: 1: “any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods.” Again, only half right. 2a: “a system of society or group living in which there is no private property.” Close, but not exactly; it matter how you define private property here. 2b: “a system or condition of society in which the means of production are owned and controlled by the state.” This is basically restating of the simple definition minus the collective part. 3: “a stage of society in Marxist theory transitional between capitalism and communism and distinguished by unequal distribution of goods and pay according to work done.” Definition 1 is a little more on the nose, but the emphasis on government ownership here is misleading like the simple definition since government ownership is also collective in a democracy. A more clarifying term is public ownership. 2a, again, is leaving out a lot of information and private property is not what you think it means. When we talk about the abolition of private property, we are not talking about your possessions, we talking about property such as a land and resources specifically used for production. And no one is really talking about the abolition of private property until we get to communism. 2b again emphasizes state ownership when that is not the case that socialists advocate only state ownership, they advocate collective ownership. First part of 3 is accurate, but the second part is not. While Marxist theory does consider socialism as a transitional system between capitalism and communism, the distribution is not necessarily based on the labor theory of value, although some argue that it should be but then those people likely don’t understand the labor theory of value. Before we dive in, a couple things when need to disentangle from the discussion: First, many Americans think socialism and communism are the same thing, they are NOT. They are really separate beasts. The confusion is understandable given the long history of propaganda by the U.S. against these ideologies during the Cold War. They also tend to be nebulous terms as they have evolved over a great deal of time and have many off shoots of thought and debate which can be confusing, but this is true of the concept of capitalism as well (a term coined by Karl Marx himself). If you asked average Americans: “can you define capitalism?” you would no doubt get an incoherent definition also. Second, abandon any notions of socialism - or communism for that matter - based on what you think you know about the political and economics structure of China, Cuba, and the former Soviet Union. These countries were socialist (communist) in name only and have never effectively practiced a true form of socialism (communism). One could argue that the Soviet Union was some form of state socialism, but, as you will learn, democracy is a central component of socialism. The totalitarian tendencies of the Soviet regime under Stalin obliterated any democratic component of their political system, which is a central component of a communist society. Understand that if communism had truly been achieved, you would have seen a "withering away of the state" as Marx and Engels said in the Communist Manifesto, not the centralization of power we witnessed instead. Finally, one should shed any conception of socialism as being purely about central planning. Although central planning is an important concept in socialist debate about how best to allocate resources more equitably, it is a means to an end and is not necessarily requirement to achieve a socialist economy. The reality is that there is a level of central planning practiced by every country, even in the U.S. For example during World War I, the Federal Government used centralized resource allocation and created a number of new agencies, such as the Food Administration and Railroad Administration, to direct economic activity in certain sectors to help the war effort. Even today, the government uses directs significant amounts of funding into R&D through the Department of Defense and through the Food and Drug Administration. Many of the products sold in the private sector are the result of federal R&D allocation which is responsible for half of all R&D conducted in the U.S. It is possible to take central planning to an extreme where is is counterproductive, but most countries fall on spectrum. It is not a binary choice between market allocation and centrally planned allocation. Most stable, especially developed economies, have a healthy mixture of both. An economy that is 100% centrally planned means all resources, production, and distribution are planned out by a single institution, usually the government. However, since central planners are not omniscient, the practice tends to be inefficient due to a mismatch of needs and wants resulting in waste. And the larger the population you are planning for, the more waste there tends to be. As you divide the population into fractions which are centrally planned, you move down the spectrum until eventually you get to the point where every individual is deciding for themselves what to produce and what to consume. As you move down the spectrum, markets start becoming useful. Individuals then seek out through markets the resources, goods, services, they want or require. If one has a demand for a good or service and another is willing to supply it, then you have a market. However, you rarely have individuals producing separately. Being the social species we are we learned to work together to produce goods collectively, which requires a modicum of planning does it not? Assuming there is a sufficient number of individuals who desire the intended product to be produced, which is more or less what we think of as the market today. Think about it, Apple has to centrally plan how to produce its iPhones and iPads for consumption. Lucky for them they have a strong collective demand for their products, so there is not a lot of guesswork required when planning how many to produce; it’s more a matter of not having enough resources since they seem to sell out with every new model. The point here is the U.S. economy is still centrally planned, it just is far less centralized than what we have seen in other countries. When we talk about capitalism vs socialism, what we are really talking about the distribution of the means of production. In a capitalist economy, the means of production (capital and resources ) are owned by individual capitalists who invest and take risk with their own or another’s wealth to form an enterprise engaged in producing goods and or providing services. Capitalists keep profits from such enterprises and pay workers only for their labor. Since capitalists get to keep the profits, inequality is a natural result of the system without redistributive intervention. Fundamentally, what we are talking about when we discuss socialism is broadening the distribution of ownership of the means of production. This is the central element of all socialist thought. Where the various iterations of socialism diverge is on how best to achieve this end. Do you achieve it through a revolutionary Vanguard Party which takes over the state and forms a dictatorship which establishes a socialist state? Do you achieve it through solely democratic means? Should the state be involved at all? How do you incentivize the transition? And what about after you have socialist economy. Do still have markets? What concentration of central planning is needed if any? Do we still use money or some other form of exchange? These are questions where the various forms of socialism begin to branch out. So it is entirely possible to have socialism and a complete market-based economy, they are not mutually exclusive. It is possible to still have money and possible to have no central planning by the state. The only distinction between capitalism and socialism is the distribution of social ownership. Social ownership comes in a variety of forms which includes, but is not limited to, worker ownership, cooperative ownership, state/municipal and public ownership. I think there are few who would argue against employee ownership or cooperatives, and most understand how they work. Employee ownership is pretty self-explanatory. In a cooperative, stakeholders typically pay into the enterprise and all profits or gains are shared equally among them. State ownership and public ownership is where there is the most controversy and misunderstanding take place. In a totalitarian regime or state, it is possible for you to have state ownership, but not public ownership. Public ownership means it is for the benefit of the public and accountable to the public in some democratic fashion. Public utilities are accountable to the municipality that they service. In Cuba, for example, all utilities are owned by the government controlled by the Castro regime, a dictatorship. The utilities exist for the benefit of Cubans to provide them power, but they are not accountable to the people. If the utility is not being run properly or there is corruption or price gouging, there is nothing Cuban people can really do except appeal to the dictatorship and hope it will be benevolent. They can complain to the regime, or local governor of the municipality, and maybe they will take some action to rectify the situation, but ultimately Cubans do not have any control or recourse. That is not the case for public utilities in the U.S. In the U.S. our public utilities are accountable to its municipality and the constituents of the municipality. Indeed, Americans don’t seem to grasp just how much of our economy is socialist already. According to the American Public Power Association, publicly owned utilities account for 60.9% of the total of electricity providers. Cooperative owned utilities own 26.5%. Only 12.3% can be considered private providers. Employee-owned businesses as of 2013 accounted for 12% of the private sector businesses, and are expected to continue to grow in the next decade. They have demonstrated resilience even in the face of recession with over 66% either growing or staying the same in 2009, the worst year of the Great Recession. According to a 2013 report by the National Cooperative Business Association, there are 29,000 cooperatives in the U.S. and 1 in 3 Americans are members of a co-op. It's worth noting every financial institution that calls itself a credit union or mutual company (e.g. Liberty Mutual Insurance, Mutual of Omaha, State Farm Insurance, Nationwide Mutual Insurance Company, etc.) is technically a co-op since customers are shareholders in those businesses. 92 million people bank with credit unions and 233 million were served by co-op owned and (or) affiliated insurance companies. Employee ownership, cooperative ownership, public ownership, these are ways to expand ownership. The expansion of the ownership of the means of production, or socialism, has been happening since the inception of the United States. The only thing that has really changed is what we define as the means of production, which should be really thought of as any component(s) of an enterprise engaged in providing a service or good for consumption. |
AUTHORAaron Medlin is a PhD student at the University of Massachusetts Amherst studying macroeconomics of private debt, monetary economics, international finance, and comparative economic systems. Archives
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