The problem with evaluating the optimality of socialist systems based on the neoclassical model7/7/2018
I often get into debates online with generally smart people about the inefficiencies of socialism often revolving around the planned economy of the Soviet Union. I have argued elsewhere that the Soviet Union was not really socialist (so I'll avoid addressing that myth here). The most important point to get across to people is that central planning and state ownership of the means of production are not necessary conditions for a socialist economy. My own preference is a market socialist economy, one in which the majority of firms are worker-owned cooperatives or consumer cooperatives. However, although I agree that highly centralized planned economies have significant drawbacks (mainly principle-agent problems, incentive problems, and information problems), I disagree that planning is inherently less efficient than market economies (I'll explain why in a bit). The problem with the way in which people approach the debate is often from the stand point of the superior optimality and efficiency of markets. However, the problem with this approach is that the software running in the background is the neoclassical model.
This has also been generally the approach by Western economists in the comparative systems literature. The primary aim of the neoclassical approach to comparative systems has been to demonstrate the irrationality and inferiority of the planned economic system to that of the Walrasian competitive market system. The competitive market system is regarded by neoclassicals as producing the most efficient allocation of resources through the interaction of self-interested actors in voluntary exchange pursuant to the goal of profit and utility maximization. The achievement of the most efficient allocation of resources is considered “optimal”. However, the neoclassical definition of optimality is based on a fictional model of the economy, and has never been applicable to real world capitalism. The key claim of the neoclassical model is that prices carry all the information needed for agents in a competitive market economy to make rational allocation decisions. In theory, competitive markets achieve optimal efficiency at the equilibrium between demand and supply. When equilibrium is achieved, markets are said to be in Pareto optimum, a state in which any reallocation would only make someone else worse off. In the Walrasian model, Pareto optimality can be proven mathematically, but only under very restrictive assumptions.
The moment we relax any of these assumptions, the model falls apart. And so the Walrasian model has never been applicable to real world capitalism. The fact of the matter is in real world capitalist systems, economies of scale are widespread, there is asymmetric information between consumers and producers, and imperfect competition exists to some degree in nearly all markets. Thus the assumptions noted above are wholly unreasonable to infer any sort of dynamically stable equilibrium exists. The implications of this is that prices in market systems do not actually carry the information claimed by Friedrich Hayek (1945) and others. In the real world, markets exhibit a fair amount of inefficient allocation resources resulting in significant rents, and overproduction of goods indicated by excess inventories (e.g. cheese glut, food waste, etc.). Underproduction in modern capitalist economies is rare, but less perceived due to the veil of price rationing which prices the poor out of the market (e.g. 12.2% of Americans are uninsured, 1 in 8 Americans experience food insecurity). The most significant indication of market inefficiency is unemployment. Some of these inefficiencies are related to government intervention, but many people put the chicken before the egg forgetting that government regulation comes about due to the preexistence of market failure. Despite the inefficiencies of the market economy, capitalist systems appear to be fairly stable (when maniac politicians are not actively attempting to dismantle them), but that stability is due to the institutional features of those systems. A more realistic conception then of the strengths of capitalist systems is that the profit motive drives competition to keep costs and prices low in an effort to gain market share. Capitalist firms seek out what consumers want, and consumers communicate their demand through consumption. Capitalism has been able to achieve rapid technological innovation, accumulation, increasing consumption and living standards over time. And while capitalism has historically allowed a significant level of agent sovereignty in both consumption and enterprise, it has come at the cost of inegalitarian privileges and influence of a relatively small and wealthy capitalist class. The defining characteristics of capitalism—production for profit, competition, and wage-labor—are qualitatively different from that of socialism which seeks to build an economy and society based on production for use, cooperation, meaningful labor, and human development. It makes little sense to evaluate these systems on any notion of Pareto optimality, particularly when that notion has little basis in reality. A more appropriate comparative analysis would be on the basis of performance and outcomes in accordance with the goals and values of the system in question. Socialist systems also have qualitatively different values than capitalist systems. Capitalists systems value self-interest, competition, profit maximization, capital accumulation, protection of private property, access to wage labor, and growth. A socialist economy, on the other hand, values cooperation, meaningful labor, a non-commodity society, and human control over social evolution. To appropriately evaluate system design, an analyst should determine how well the system embodies these values. This does not mean comparative analysts have no means of comparison. Legitimate areas of comparison depend on the goals of the system. Advocates of capitalism generally defend its ability to increase average living standards overtime, stability of the system, and capacity for innovation and technological progress. Additional areas of comparison which have come to be important are income distribution, full employment, and environmental protection. The neoclassical notions of efficiency or optimality are not a legitimate area of comparison between capitalist and socialist systems as both have forms of waste. Instead, a better question is whether a socialist economy can utilize its resources to produce what is valued at costs acceptable to society. Capital Vol. I, chapter 1-3, provide some profound insights and lay the groundwork for the rest of Volume I. Thus, I will be going over them in a fair amount of detail by chapter and section. In the first section of chapter 1, Marx begins with the commodity as the foundation for his analysis of capital. He immediately suggests it has a dual character, a use-value and an exchange value. Behind the exchange value is a social relation which he defines as socially necessary labour-time. Labour time also has a dual character of being concrete and abstract; Marx goes into this further in the next two sections of chapter 1. As I understand it, concrete labor being the physical activity of particular kind to produce a commodity for use by others or the producer, giving the commodity use-value. “Labour, then, as the creator of use-values, as useful labour, is condition of human existence which is independent of all forms of society; it is an eternal natural necessity which mediates the metabolism between man and nature, and therefore human life itself” (p.133). Labour creates use-values. This is how Marx connects labour to the value of commodity. Abstract labour is that of socially valuable worktime which adds economic value to a commodity in the production process. Without labour, you don’t have commodities, and, thus, do not have economic value or exchange, so abstract labour cannot be determined until the point of exchange. Marx acknowledges the heterogeneity of labour processes, but decides to simplify this for his analysis by reducing all labour to “simple average labour”, then suggesting more skilled labour as “multiplied simple labour.” He says “Experience shows that this reduction is constantly being made” (p. 135). However, Marx does not explain what this experience is, he just alludes to it as some from tradition or convention. Given our recent discussions in prior classes about how classical economist use simplifications and assumptions, these seems at odds with what we have learned about Marx’s method. In section 2 of chapter 1, Marx addresses the act of exchange. The act of exchange has itself a duality of equivalent and relative forms. But the equivalent form is the expression of the relative form. Meaning between two commodities or products, the equivalence can only be measured by comparing it relative to another product. Marx then pivots in section 3 to the expression of exchange in the money-form, making the modest claim: Now, however, we have to perform a task never even attempted by bourgeoisie economics. That is, we have to show the origin of this money-form, we have to trace the development of the expression of value contained in the value-relation of commodities from its simplest, almost imperceptible outline to the dazzling money-form. When this has been done, the mystery of money will immediately disappear (p.139). Marx’s general line of argument in the next couple pages suggests that since abstract values cannot be determined from themselves. You can only determine the value of the commodity in relation to other commodities. In a barter society where exchange of this kind is generalized and systematic, exchange naturally tends towards using one commodity as a measure of exchange value; especially of that commodity is prevalent. As has been the historical trend, this universal commodity has tended to be a precious metal, e.g. gold, silver. However, this argument, while perhaps a little more nuanced than the classical economists, does not seem materially different than the argument for convenience for the money-form of exchange surmised in most economics textbooks. For any systematic or generalized market of exchange by establishment of a central authority. Throughout the history of civilization, there have been universal commodities such as grain, cattle, and even slaves. Precious metals, where available, have been preferred due to convenience, but the form of money has always been decreed by a state or monarchical authority going back to early money-forms in Mesopotamia. Marx notes a contradiction between use-value and exchange value, which will eventually be expressed between commodities and the money-form: The internal opposition between use-value and value, hidden within the commodity, is therefore represented on the surface by an external opposition, i.e. by a relation between two commodities such that the one commodity, whose own value is supposed to be expressed, counts directly only as a use-value, whereas the other commodity, in which that value is to be expressed, counts directly only as exchange-value (p.153). This internal contradiction will transform into an external contradiction between commodity and the money-commodity. The antagonism becomes expressed in the era of the gold-standard. As the economy grows, more gold is required to serve as the money-commodity of exchange. But regardless of the money-form, any shortage of that form can result in an economic crisis, unless another form is permitted. Thus, in many ancient societies, such as that of the Babylonians, more than one form of money was permitted for exchange and settle debts. However, during the era of the gold-standard in U.S., although paper money had no constraint in terms of supply, pegging money notes to gold created a de facto constraint to the supply of gold. This constraint created a problem for Weimar Republic for example after World Word I, which was one of many contributors to the issue of hyperinflation they experienced. This contradiction emerged in the U.S. and Western Europe during the 1960s, when the supply of gold was unstable and heavily influenced by production in the Soviet Union and South Africa. It became politically infeasible to maintain the gold standard, and thus it ended in 1971. Now that we are free of this constraint, economic growth is free of this specific antagonism. However, there are other political antagonisms that constrain money. Marx then talks about the fetishism of commodities, which he argues cannot be ignored: …the labour of private individuals manifests itself as an element of the total labour of society only through the relations which the act of exchange establishes between the products, and, through their mediation, between the producers. To the producers, therefore, the social relations between their private labours appear as what they are, i.e. they do not appear as direct social relations between persons in their work, but rather as material relations between persons and social relations between things (p.166). People under capitalism do not relate to each other directly as human beings, they relate through a myriad of products which they purchase in the market. But in the market, when examining why one product costs more than another, for Marx, it is the expression of social relations of use value and socially necessary labour-time. “It is however precisely this finished form of the world of commodities- the money form-which conceals the social character of private labour and the social relations between the individual workers, by making those relations appear as relations between material objects, instead of revealing them plainly” (p.169). When you go into the market, you are not seeing all the labour that went into the products you are purchasing. The purchaser is divorced from the labour that went into producing those products resulting in an alienation between people and labour, a blindness to an important aspect of society. In chapter 2, Marx is setting out the conditions of exchange. Commodities don’t go to market on their own, they are brought there by their owners; and so there must be a recognition of private property. The guardians must therefore recognize each other as owners of private property. This juridical relation, whose form is the contract, whether as part of a developed legal system or not, is a relation between two wills which mirrors the economic relation. The content of this juridical relation (or relation of two wills) is itself determined by the economic relation. Here the persons exist for one another merely as representatives and hence owners, of commodities (p.179). Individuals adopt many different roles. The roles are defined by individuals who have private property relations over different commodities. There is a reciprocity or recognition of private property rights necessary for functioning markets. However, for exchange to occur, the commodities must be alienable from the owner. “Things are in themselves external to man, and therefore alienable. In order that this alienation may be reciprocal, it is only necessary for men to agree tacitly to treat each other as the private owners of those alienable things, and, precisely for that reason, as person who are independent of each other” (p.182). Marx reintroduces the exchange equivalent form argument which is expressed in the market as commodities are exchanged for that universal commodity, money. “The universal equivalent form comes and goes with the momentary social contracts which call it into existence. It is transiently attached to this or that commodity in alternation. But with the development of exchange it fixes itself firmly and exclusively onto particular kinds of commodities, i.e. it crystallizes out into the money-form” (p.183). As argued previously in chapter 1, “value-form,” that is the money-form, conceals its true value, that is labour-value, and money becomes a mere symbol which is separated from the human labour required to produce it. Men are henceforth related to each other in their social process of production in a purely atomistic way. Their own relations of production therefore assume a material shape which is independent of their control and their conscious individual action. This situation is manifested first by the fact that the products of men’s labour universally take on the form of commodities. The riddle of the money fetish is therefore the riddle of the commodity fetish, now become visible and dazzling to our eyes (p.187). This is a construction of the classical vision of Adam Smith’s invisible hand theory of the market. Autonomous individuals in the market, led by the hidden hand of the market, a type of social coercion, would produce the best possible outcomes for everyone. This sets up Marx’s response to Smith’s volley, That Marx will argue later, that it will not in fact work for everyone, but only a few, the bourgeoisie. In chapter 3, Marx discusses money. This was a pretty difficult chapter to get through, and I’m not sure I entirely understand Marx’s position on it. In part, this chapter is harder to relate to as I understand money today as a creature of the state, a fiat currency which no longer has constraints to a commodity such as gold. So while some of the insights of money as Marx perceives it seem to no longer hold. Marx starts with the idea of commodity money, and finds (surprise!) a duality again. The duality is that it is a measure of values and a means of circulation. In the first part of the chapter will be on the former and the second will be on the latter. Marx assumes gold as the money-commodity. Money’s measure of value is a “necessary form of appearance” in the market. The price or money-form of commodities is, like their form of value generally, quite distinct from their palpable and real bodily form; it is therefore a purely ideal or notional form. Although invisible; the value of iron, linen and corn exists in these very articles: it is signified through their equality with gold, even though this relation with gold exists only in their heads, so to speak. The guardian of the commodities must therefore lend them his tongue, or hand a ticket on them, in order to communicate their prices to the outside world (p.189). If you have commodity, you do not know what the value is before you take it to market. But we tend to develop notional values of the commodity, a guess of its value in the market. This notional value is expressed through a price tag. The price depends on the substance of money. If the money-commodity can fluctuate in terms of supply, this can engender inflation (deflation). Marx assumes away this issue as gold tends to be fairly stable. It is not easily found, so large injection are unlikely to flood the market. And even in cases of inflation (deflation) due to changes in the money supply itself, the relative values of commodities are not affected by that; that is the ratio between commodities in terms of value should hold. What we are interested in then is the quantity of money as it relates to the value of the commodity being sold. Marx makes the connection to the money-names based on the weight of gold; thus, pound, etc. This seems specific to Britain. There are many other names for amounts or weights of money. Marx is explaining the transition that is happening from the value form in the money-commodity to this naming of elements of money which are then traded in exchange. The name of a thing is entirely external to its nature. I know nothing of a man if I merely know his name is Jacob. In the same way, every trace of the money-relation disappears in the money-names pound, thaler, franc, ducat, etc. The confusion cause by attributing a hidden meaning to these cabalistic signs is made even greater by the fact that these money-names express both the values of commodities and, simultaneously, aliquot parts of a certain weight of metal, namely the weight of the metal which serves as the standard of money. On the other hand, it is in fact necessary that value, as opposed to the multifarious objects of the world of commodities, should develop into this form, a material and non-mental one, but also a simple social form (p.195). Although we have all these names for different money values, there is a relationship between these nominal amounts and the monetary base. However, this relationship has been broken for the US since 1971 as mentioned previously, and other economies before that. The magnitude of the value of a commodity therefore expresses a necessary relations to social labour-time which is inherent in the process by which its value is created. With the transformation of the magnitude of value into the price this necessary relation appears as the exchange-ratio between a single commodity and the money commodity which exists outside it. This relation, however, may express both the magnitude of value of the commodity and the greater or lesser quantity of money for which it can be sold under the given circumstances. The possibility, therefore, of a quantitative incongruity between price and magnitude of value, i.e. the possibility that the price may diverge from the magnitude of value, is inherent in the price-form itself. This is not a defect, but, on the contrary, it makes this form the adequate one for a mode of production whose laws can only assert themselves as blindly operating average between constant irregularities (p. 196). If everything in market were presented at its value, and sold at its value, then there would be no way to adjust for fluctuations in supply and demand. Each day in the market, there may be a surplus or a shortage. Once you go to a price name, different prices can be realized at different times and different places. The actual value, based on socially necessary labour-time which is concealed by the money-form, is lost. The next section is on the means of circulations. In this section Marx introduces the analogy of “social metabolism” for commodity exchange, in which a commodity of non-use value to a seller becomes a use value to be consumed by the buyer. But this process is obscured by money. Commodities as use-values are related to exchange values in terms of money which are a measure labour value, and in turn the money is used to buy other commodities. Marx transitions to the metamorphosis of the commodity to commodity mode of exchange to the commodity to money, and money to commodity mode of exchange. The introduction of money creates a separation between sale, C – M, and purchase, M – C. This separation is a natural break in the circuit given that exchange between commodities is not instantaneous as in the case of commodity to commodity, C – C. This introduces the potential for crisis in the event of pessimistic expectations of the future, as just one example, causing people to hold on to money, an increase in liquidity preferences in Keynesian nomenclature, and arresting the process of circulation. The arrest of circulation then causes the demand for commodities to drop off resulting in a recession. Marx is criticizing Say’s law which says that supply creates its own demand; since every sale is purchase, and every purchase a sale demand and supply will always equilibrate. But what Ricardo and others in classical political economy that believed Say’s law misses the separation of sale and purchase. John Maynard Keynes would later make a similar argument and criticism of Say’s law. Marx then goes on to describe the theory of money. The role of money is to stay in circulation and act as a lubricant of exchange. The circulation of money is reflection of the circulation of commodities. The velocity of money then is the pace of circulation of commodities. When this velocity decreases, an antagonism arises. In the velocity of circulation, therefore, there appears the fluid unity of the antithetical and complementary phases, i.e. the transformation of the commodities from the form of utility into the form of value and their re-transformation in the reverse direction, or the two processes of sale and purchase. Inversely, when the circulation of money slows down, the two processes become separated, they assert their independence and mutual antagonism; stagnation occurs in the charges of form, and hence in the metabolic process (p. 217). But the money form conceals the antagonism of process between sale and purchase, and thus concealing the origin of the crisis.
Marx goes on about coinage and symbols of money or notes and so on which would naturally replace gold or precious metals. He also alludes to credit as a standard of payment, which is as it was even his time. Marx notes the role of the state in this process. He then goes on to talk about hoarding in which a fetishism develops with money as a means of power in the market. Hoarding is implicit in the time structure of the production of commodities. Thus, money poses a latent power which can be used by the capitalist class, with the ability to accumulate capital through money and exercise it in the market place. In chapters 26 through 33 of Capital, we see the application of Marx’s historical materialism in practice, a historiographical approach focusing on the developmental transition from feudalism to capitalism, and, particularly, the so called “primitive accumulation.” Marx’s systematically describes the process by which this transition began in fifteenth century England, the appalling role of the state in this transition, the separation of the agriculture from capitalist industry, and an exploration of the contradictions of colonialism using the perspective of one bourgeoisie economist. One of the of more enjoyable aspects of Marx’s writing, aside from his unique insights, is the flurry of sharp wit with which he cuts through the bourgeoisie idealism of the capitalist paradigm, of which I will highlight some my favorites in the my summary below. Chapter 26 is short, but an important introduction to this concept of primitive accumulation which Marx cheekily analogizes as the “original sin” of the bourgeoisie historical narrative. Basically, a perpetuated myth of the bourgeoisie elite of their “earned” place in capitalist society. “Adam bit the apple, and thereupon sin fell on the human race. Its origin is supposed to be explained when it is told as an anecdote of the past. In times long gone by there were two sorts of people; one, the diligent, intelligent, and, above all, frugal elite; the other, lazy rascals, spending their substance, and more, in riotous living” (p. 873, Penguin Classics Ed. 1976). A common demonization of the poor that perpetuates to this day. A consistent characterization of historians of the advent of capitalism as the dawn of freedom from servitude under feudalism. But, from Marx’s perspective, it was expropriation of the peasantry from one form of exploitation under feudalism, in which the serf had the benefit of land, to another form under capitalism, in which the worker only had his labour. Chapter 27 dives into this transition further, highlighting the role of the state in propping up the feudal system that provided protections for serfs such as the Act of Henry VII in 1489 which “forbade the destruction of all ‘houses of husbandry’ possessing 20 acres of land” (p. 880). Then quoting F. Bacon’s The Reign of Henry VII: ’profound and admirable, in making farms and houses of husbandry of a standard; that is, maintained with such a proportion of land unto them as may breed a subject to keep the plough in the hands of the owners and not mere hirelings.’ What the capitalist system demanded was the reverse of this: a degraded servile condition of the mass of the people, their means of labour into capital (p. 880). Then as time progressed, legislation was gradually implemented shrinking the entitled acres of land diminishing the serf’s independent livelihood, and driving them from their homes so the state may expropriate the land for capitalist agricultural production; divorcing the peasantry from the agriculture completely into industrial production. A process which was accelerated by the Reformation in the sixteenth century. “The property of the [Catholic] church formed the religious bulwark of the old conditions of landed property. With its fall, these conditions could no longer maintain their existence…by about 1750 the yeomanry had disappeared, and so, by the last decade of the eighteenth century, had the last trace of the common land of the agricultural labourer” (p. 883). Primitive accumulation, in sum, was accomplished not by disciplined frugality, but by plunder of the Church’s property, abdication by the state to protect the powerless, the seizure of feudal property and the transformation of it into ‘private property.’ “They conquered the field for capitalist agriculture, incorporated the soil into capital, and created for the urban industries the necessary supplies of free and rightless proletarians” (p. 895). Marx’s description is a near Romanization of the feudal arrangement between the serf class and lords. Although he acknowledges the exploitation of the serfs, the description would seem to suggest this exploitation was somehow a lesser degree than that of the capitalist class, which is arguable. What is not arguable is the atrocious, sometimes violent, usurpation of their land rights by the state driving them into a new form of subjugation as wage-labourers, “paupers,” and “vagabonds.” In the process, cultivating a false narrative of what put them there in the first place. Chapter 28 proceeds in a similar vein with examination of different legislation used by the state to suppress wages and collectivization. Many of these laws I was unaware of, and yet found unsurprising; no doubt such laws garnering only passing mention in most history books and courses, if mentioned at all, even when I was in undergrad. Many of laws of which punishing the poor and homeless for the crime of being so. “Legislation treated them as ‘voluntary’ criminals,” Marx remarked, “and assumed that it was entirely within their powers to go on working under the old conditions which in fact no longer existed” (p. 896). The perpetuation of the “original sin” narrative of the poor entrenched in law; much like the introduction of work requirements under welfare reform during the Clinton administration in the nineties. Chapters 30 and 32 examine the rise of the industrial capitalists and tendency of capital accumulation. Of particular interest to me was Marx’s discussion of the role of public or national debt in chapter 31. The national debt, i.e. the alienation of the state – whether that sate is despotic, constitutional or republican – marked the capitalist era with its stamp. The only part of the so-called national wealth that actually enters into the collective possession of a modern nation is – the national debt. Hence, quite consistently with this, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes the credo of capital. And with the rise of national debt-making, lack of faith in the national debt takes the place of the sin against the Holy Ghost, for which there is no forgiveness (p. 919). An example of Marx clever wit, referencing of course the “unpardonable sin” in Matthew 12:31. The management of the public debt, an article of faith in conservative politics. An apparent an odious contradiction. The national debt provides an illusion of need for financing it, which means treasury bonds sold by the state, giving capitalist a tax free method of capital accumulation. “As with the stroke of an enchanter’s wand, it endows unproductive money with the power of creation and thus turns it into capital, without forcing it to expose itself to the troubles and risks inseparable from its employment in industry or even in usury” (p. 919). Treasury bonds, a store of value insured (for the most part) against inflation, is indeed an expansionary means of capital accumulation and yet an unproductive one in the economy. Furthermore, the use of this instrument is nonetheless financed through taxes on the rest of us, while a biased persists towards lower taxes on nonproductive capital gains. The creation of the bonds has also led to bond markets, and, naturally, speculation. However, as one of a neo-chartalist persuasion, I would quibble with Marx’s explanation for the need of increasing taxation. As the national debt is backed by the revenues of the state, which must cover the annual interest payments etc., the modern system of taxation was the necessary complement to the system of national loans. The loans enable the government to meet extraordinary expenses without the taxpayers feeling it immediately, but they still make increased taxes necessary as a consequence…Over-taxation is not an accidental occurrence, but rather a principle (p. 921). The need to tax to pay interest on the national debt is not the driving force by which taxes must be raised. The necessity of taxes is to drive the acceptance of the currency. The state appropriates resources as needed by spending money into the economy. The money is accepted by the citizenry by decree or fiat, and or by the institution of taxation which requires the citizenry to pay in the unit of account specified by the state. The government does not need tax before it spends, and that is true of interest payments as well. Taxes drive money, but the level of taxation and who is taxed is entirely a political choice for which politicians have sided with the capitalist class for most of the history of capitalism. The national debt is simply the sum of all outstanding treasury bonds. The state could stop issuing bonds tomorrow, aside from what that would do to our standing in the present global financial system, the reality is that it would not inhibit the ability of the government to continue to spend with limited inflation risk short of full employment and maximum productive capacity. Chapter 33 was the more interesting chapter not only as a paragon of Marx’s wit, but because of the interesting contradiction of colonialization in America and Australia. In the colonies, the capitalist goal of capital enhancement through the exploitation of labour is continuously throttled by the abundance of land for which workers become their own producers. The prospect of owning land was a driving incentive of immigration to the American colonies. Poor Europeans who could not afford the expense of passage would often agree to indenture contracts between one and seven years in exchange for a small plot of land. It’s estimated between a half and two-thirds of white European immigrants were brought to the American colonies under these indenture contracts. However, this poses a natural problem for the capitalist. Once the contract is expired, the labourer is no longer dependent on the capitalist for subsistence. The labourer can now till and manage his own land, build his own residence, and profit from his own surplus. Thus, this required a steady flow of indentured labour, or wage-labour as the alternative. It should be noted that most of the labour force in the colonies were free wage-labourers as number of immigrants who migrated under no such contracts or the indenture had expired outweighed those who were. But this nonetheless created a problem for American capitalists, a problem recognized by E.G. Wakefield. Marx quoting Wakefield: ’If…all the members of the society are supposed to possess equal portions of capital…no man would have a motive for accumulating more capital than he could use his own hands. This is to some extent the case in the new American settlements, where a passion for owning land prevents the existence of a class of labourers for hire’” (p. 933). The contradiction of colonization here, the very purpose for which European immigrants colonize, land, undermines the capitalist class. The constant “understock” of labour inevitably leading to the dependence on slave labour to undermine what is essentially full employment in the colonies. From this analysis, I see better where Marx is coming from in chapters 26-27. Marx recognizes the relationship between land and labour in resisting the capitalists. Land was the key which capitalist understood they needed to strip from the labourers, thus the development of eminent domain, a means by which to use the state to procure the land, and capitalist private property rights for which to keep it from the labourer. In reading Engel’s Letters on Historical Materialism, one major theme emerges: Engels must repeatedly clarify the confusion of Marx’s followers and critics that the economic domain is not the only determinant of history; what Althusser referred to as Economism (I think). Clearly the misconception persisted into the twentieth century. “Marx and I are partly responsible,” Engels laments in his letter to J. Block in as late as 1890 (seven years after the death of Marx), “for the fact that at times our disciples have laid more weight upon the economic factor than belongs to it. We were compelled to emphasize this main principle in opposition; to our opponents who denied it, and there wasn’t always time, place and occasion to do justice to the other factors in the reciprocal interaction.” Engels makes similar statement in all the letters. However, seems to undermine this point in his letter to Hans Starkenburg. “The political, legal, philosophical, religious, literary, artistic, etc., development rest upon the economic.” But then acknowledges again that these domains interact on each other. “But they all react upon one another and upon the economic base. It is not the case that the economic situation is the cause, alone active, and everything else only a passive effect. Rather there is a reciprocal interaction with a fundamental economic necessity which in the last instance always asserts itself.” However, while Engels is acknowledging the interaction of these domains, it appears he is still placing an overemphasis on the economic. The Cohen reading, Forces and relations of production, is a defense of his previous writing on historical materialism, the explanation of which are functional explanations. Cohen asserts that relations of production are relations of power; the power capitalist have over labour and the means of production, and the power or lack thereof of the labourer over his own labour. In the case of the wage-worker, none over the means of production. These relations make up the economic superstructure, but do not explain its persistence. While Marx can be quoted as saying the history of society “is the history of class struggle,” Cohen is arguing there is more to it than that. “One may claim, in that spirit, that all history is the history of class struggle without implying that that is all history is, or even that that is what history most fundamentally is” (p. 19). But “if we want to know why class struggle effect is this change rather than that, we must turn to the dialectic of forces and relations of production which governs class behavior and is not explicable in terms of it, and which determines what the long-term outcome of class struggle will be” (p. 19-20). For Cohen, and I think for Marx based on chapters roughly 27-32 of Capital, the functional explanation for the dominance of the capitalist class in their struggle against the proletariat is the role of the state. Cohen sums this up well in this excerpt: In a capitalist society, capitalists have effective power over the means of production. What confers that power on a given capitalist, say an owner of a factory? On what can he rely if others attempt to take control of the factory away from him? An important part of the answer is this: he can rely on the law of the land, which is enforced by the might of the state. It is his legal right which causes him to have his economic power. What he is effectively able to do depends on what he is legally entitled to do. And this is in general true in law-abiding society with respect to all economic powers and all economic agents (p. 16). This aligns with Marx’s historical analysis of the creation of capitalist society in which the state played a central role in creating said society, and by which it is perpetuated. We see to this day the power of the capitalist class in the decisions of our own U.S. Congress despite popular opinion on a multitude of issues. The study by Professors Martin Gilens of Princeton University and Benjamin Page of Northwestern University looked at more than 20 years of data and demonstrated empirically that the opinion of the bottom 90 percent of American income earners had no impact on the decisions of Congress. From their abstract: …economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism. Karl Marx remains one of the most fascinating figures in history due not only to his contributions to the study of political economy and conclusion about the capitalist system, but his unique method of analysis, the dialectical view of social transformation. Dialectic analysis has confounded many and tends to be counter intuitive relative to historical advancement of knowledge via the more ubiquitous Cartesian approach. This by no means makes dialectics an inferior method of inquiry, but requires a re-orientation of focus on the multifaceted relationships and processes which can be extrapolated to form a comprehensive view of a given subject of study. The form of dialectics in Marx’s magnum opus, Das Kapital, is also unique to him; forming the basis of Marxism as a general socioeconomic method of analysis. David Harvey’s chapter on dialectics in Justice, Nature and the Geography of Difference provides clarity to Marx’s particular method of dialectics, which Marx implicitly argues for as a starting point for analysis in his published notes, Grundrisse, which were written prior to Das Kapital.
In Justice, Nature and the Geography of Difference, Harvey notes that Marx’s particular use of dialectics tends to be misunderstood as a pure adoption of Hegel’s view: thesis, antithesis, synthesis. However, as Harvey remarks, Marx “starts with Hegel, [but] achieved a radical materialist transformation of Hegel’s views (cf. Bhaskar, 1989: chapter 7). The effect is to dissolve the dialectic as a logic into a flow of argument and practices” (p.57). This is an important distinction to understand Marx’s use of dialectics throughout his work in Das Kapital as there are many instances of summation of Marx’s method through the interpretation of Hegel, but Marx’s dialectic is more nuanced then that. Harvey breaks down Marx’s dialectic method into a series of useful propositions to keep in mind as you read and attempt to interpret Marx. I will attempt to summarize these propositions and provide some examples to elucidate their meaning as I understand them. First, dialectics “emphasizes understanding of processes, flows, fluxes, and relations over analysis of elements, things, structures, and organized systems” (p. 49). For example, understanding the relationships between the factors of productions, e.g. labour, capital, commodities, as well the change in modes of production over time. Second, elements of a system are created out of flows, processes, and relations within the system and constitute the system. For example, capital (e.g. machines, land, and buildings) are created by the system, the flow of which constitutes the system of capitalism. Third, systems and the elements that make them up are in constant flux, changing over time creating new elements and new systems. Capitalism today is different from the capitalism of a century ago, or even a few decades ago. Fourth, everything can be deconstructed into other things. There are always more levels of understanding. Nation states can be broken down into territories, regions, etc. which can be broken down into municipalities and cities, which can be broken down into neighborhoods, precincts, buildings, streets, populations, etc. Fifth, the best way to understand the nature of something is to examine the processes and relationships it is involved in. For example, the best way to understand money is to examine how it is created (destroyed), its use, its circulation in the economy, and its relationship to institutions of banking, government spending (taxation), and finance. To better understand something, one should also look at the contradictions within it. For example, the currency of the state is simultaneously a liability, a promise to pay the face value printed on the currency, and a source of revenue by way of seignorage, the difference between the value of the currency and the cost to produce it which is born by the public. Next, space and time are not external factors to integral parts of any process, its elements, and the system they constitute. Parts and wholes constitute each other. For example, agents constitute an institution, and the institution constitutes the agents, they are not mutually exclusive. This also means they are interchangeable as subject and object. Harvey uses the example of individuals being both the subject of social change, in other words the cause of social change, as well the object of social change. And this said change or transformation arises out of contradictions, and is a continuous aspect of any system. Harvey’s tenth and eleventh propositions boil down to dialectics as itself a process which generates assumptions and theories which are subject to constant change and revision, space and time, and so one should attempt to envision alternative possibilities and revisit our assumptions. In Grundrisse, Marx is concerned with how to approach social analysis of political economy; implicitly advocating a dialectic approach. Marx begins with a critique of the typical bourgeois’ analysis, the Cartesian method, which presupposes the system and institutions, a sort of top-down approach (e.g. population, nation state, society, market), then abstracting general relationships which seemingly determine outcomes in the broader system. For example, the generalized relationship in neoclassical economics that supply and demand determine market prices. While an abstract model of supply and demand would confirm this prima facie relationship, such an analysis is shallow and ignores important social dynamics which factor into market prices. This relationship is then generalized to all markets. This analysis is flawed Marx’s argues, favoring a more bottom-up approach in the dialectic method which emphasizes the relationships between elements (e.g. labour, commodities, money, capital) and how they interact (e.g. production, exchange, trade) to draw a richer understanding of the whole (e.g. economy, global market, crises). Marx goes on a considerable rant here using some examples which are somewhat hard to follow, but his overall point is clear that he is advocating for a dialectical approach to socioeconomic analysis without explicitly stating as much and leaving us with a starting enumerated list by which one might proceed. This dialectical method as Harvey laid out would seem to provide some advantages over traditional Cartesian analysis which is predicated on the ceteris paribus assumption in order to extract relationships. Understanding that this is not the case that all elements of a system are in flux seems obvious, but leads to a predicament for the typical mathematical approaches of analysis. The challenge is defining legitimate quantitative methods consistent with a dialectic approach. Once upon a time, Yugoslavia represented the great hope for an alternative to Soviet-style central planning, what some referred to as the ‘third way.’ The Yugoslav experience, however, which resulted in its eventual collapse, prompted many social theorists to question the compatibility between social ownership and the market mechanism of resource allocation (Estrin, 1991; Flaherty, 1992). At the peak of its economic performance, between 1950 and 1961, the Yugoslav system was a period of transition which could be thought of as administrative self-management. The introduction of workers’ self-management granted autonomy to enterprises over decisions of production, wages, and even prices to an extent, but the federal government maintained administrative control over domestic prices, foreign trade, and investment. During this period, the economy boomed, experiencing the highest rapid growth in Europe. However, the market reforms introduced in 1961 exposed the country to market forces the country was not prepared for engendering business cycles, unemployment, inflation, and balance of payment deficits. The subsequent reforms of 1965 would double down on the market reform experiment resulting in a further deterioration in economic performance.
In this paper, I will walk through the various features of these reforms and problems that resulted from the market socialist experiment of Yugoslavia, as well as a comparison of performance of the system after. Section II will trace the political causes and rise of the workers’ self-management system in Yugoslavia, as well as the reforms by which it was instituted between 1950 and 1960. Section III follows the country’s evolution toward market socialism with the series of reforms between 1961 and 1973. Section IV will briefly address the BOAL reforms which can be viewed as a step backward from market socialism, but introduced bureaucracy into an already weak market structure; exacerbating republic relations and setting the stage for the country's inevitable collapse. Section V will conclude with consideration of the socialist features of these systems and propriety of such systems for a developing country like Yugoslavia. The rise of worker self-management Yugoslavia experienced catastrophic destruction during World War II. What little industrial development existed before the war had all but been wiped out by its end.[1] As it was the communist-led resistance which expelled the Axis powers in 1945, led by Marshal Josip Broz Tito, the Soviet Union was a natural ally. Given the urgent need to restore Yugoslavia’s industrial capacity and infrastructure, adopting the Soviet-style central planning, which had worked remarkably well in industrializing Soviet Russia, was met with little second thought by the Yugoslav communists. By the end of 1946, most large enterprises and industry were nationalized. Land reform followed shortly after redistributing farm land among peasants and beginning the process of collectivization. In 1947, the first five year plan based on the soviet model was introduced. By the end of the same year, productivity and output had surpassed pre-war 1938 levels (Allcock, 2000). By 1948, any remaining industries and retail businesses were nationalized; only artisan workshops, small retail outlets, and peasant farms were allowed to be privately owned. However, the era of central planning would be short lived as tension began to ferment between Soviet and Yugoslav leadership. Having liberated itself from the Axis powers with little assistance from the Soviets, Yugoslav President Tito behaved with an increasing sense of independence relative to the rest of the European socialist states of the Cominform. Increasing tensions with Western Allies resulted in several armed provocations, which Stalin opposed to prevent escalation of conflict with West. Yugoslavia also began to reconsider aspects of the Soviet central planning model, developing new strains of Marxist thought critiquing the political and economic structure of the Soviet Union. It would also begin developing an economic plan independently of Moscow. Political tensions eventually culminated in the expulsion of Yugoslavia from Cominform in 1948, at the behest of Stalin, forcing Yugoslavia into the position of the only independent socialist state in Europe. Stalin thought at the time that Soviet disapprobation of the Tito regime would cause it to lose favor with the people; Stalin underestimated the popularity of the leader that liberated the Yugoslav people from the Axis Powers. When that did not work, Stalin allegedly ordered Tito to be assassinated. Tito survived five assassination attempts on his life (Medvedev et al. 2003). A major consequence of the expulsion from the Soviet Bloc was the need to find new trading partners as Yugoslavia was dependent for nearly half of its imports from them at the time.[2] The break up also coincided with the onset of the Cold War, and Western Allies were quick to notice the fissure with the Soviets. Replacement trade partners were acquired fairly quickly and with no “indication that the terms of trade...were worse than those which they were forced to abandon” (Allcock, 2000). Yugoslavia also received frequent military and financial aid from the West, especially from the United States, increasing its influence on the country. Another consequence of the break up with the Soviet Union was to strengthen the independence of the country. The newly developing strains of Marxist thought now had to reevaluate central planning entirely. This predicament set Marxist theoreticians off in what Hovat (1976) called a “search for authentic socialism. They started by going back to Marx and Engels for guidance. As Hovat (1976) notes, “Marx and Engels maintained that commodity relations and the market would disappear along with private ownership; there would be comprehensive planning: production and distribution would be organized without the mediating role of money.” For a long time it was thought comprehensive planning meant central planning by the state and no private ownership meant state ownership. However, Marx and Engels had never drawn that conclusion. On the contrary, the state was the instrument of bourgeoisie class domination over the proletariat which Marx and Engels, especially Engels, denounced declaring “it would wither away in a classless society,” and, in its stead, “talked about the self-government of producers” as the owners of the means of production (Horvat, 1976). “Far from being truly socialist, state ownership turned out to be a remnant of capitalism, characteristic of backward countries that are building socialism and likely to generate dangerous bureaucratic deviations” (Horvat, 1976). This revelation led to the belief that workers’ self-management should replace the state apparatus, and the state would eventually no longer have a role in the operations of the economy. Worker self-management was introduced in 1950 with the passage of the Law on the Establishment of Workers’ Management over Enterprises and Higher Economic Associations. Employees now played a key role in decision-making of the enterprises. According to Estrin (1991), workers’ councils were formed to appoint managers, determine internal pay structures, recruitment procedures, as well as the allocation of profits between reinvestment and wage increases. Workers did not own the means of production however. Plants and equipment were considered to be assets of the state, but workers did have real autonomy not found in any other socialist economies of the time. In 1951, the legislature passed the Law on Planned Management of the National Economy which replaced the central planning with indicative planning by means of mandatory proportions. The mandatory proportions revolved around the wage fund to ensure some level of profits above input and wage costs. These regulations also set the minimum use of output capacity, and required investment in capital formation. In this way, the central government could regulate consumption and investment without administrative directives. The reforms also replaced the former Federal Planning Commission by two new bodies, the Federal Institute for Economic Planning and the Federal Statistical Institute, initiating a decentralization process which devolved many administrative functions to the republic level (Allcock, 2000). The 1952 reforms included liberalization of prices and foreign trade with a new exchange rate and tariff regime, and laid the foundation a commercial legal code (Estrin, 1991). The state also retained considerable control over investment allocation, which continued to be financed through high taxes on enterprises. It is also important to consider foreign trade in Yugoslavia at this time. Being a small economy with no monopoly of natural resources to export, such as oil, Yugoslavia was dependent on foreign sources for capital goods. Thus, its independence from the Soviet Bloc required Yugoslavia to integrate itself into the international community. This meant more pressure to open itself up to international trade as well. Prior to the 1952 reforms, the state monopolized foreign trade in accordance with its central planning objectives. The federal government acted as the middleman between Yugoslav enterprises and foreign trading partners requiring special licenses by the Ministry of Foreign Trade. The official exchange rate was established at fifty dinars, the Yugoslav national currency, to one dollar. Goods were exchanged at various parities established through the so-called Equalization Fund. The purpose of the fund was to bridge the difference between domestic, or planned, prices within Yugoslavia and external prices in the foreign market; which in practice, insulated Yugoslav enterprises from real price competition. After the 1952 reforms, the decentralization of planning and abolition of directorates left foreign trade decisions to enterprises. Foreign trade licenses lost their importance and price liberalization changed the role of prices to become stronger comparative measures of productivity and efficiency. The changes proved more challenging than expected. Yugoslav markets were weak and enterprises could not compete with the foreign sector (Adamović, 1982). A new mechanism was needed to absorb the shocks. The Equalization Fund was replaced with a new import-export coefficient system to bridge the gap between domestic and foreign prices, but amounted to a subsidy and tariff system to reward exports and discourage imports. If the coefficient was greater than 1.00 for this type of transaction, the Yugoslav firm received a subsidy. If the coefficient was below 1.00, it amounted to a tariff. (Adamović, 1982).[3] Despite these adjustment mechanisms, current account imbalances began to show themselves as imports grew faster than exports. Between 1953 and 1960, the balance of payments deficit was around three percent of the gross material product (Estrin, 1991). Through its transition to self-management, and eventually market socialism, Yugoslavia performed well economically. In 1957, a new five year plan was introduced. The plan of course differed from the 1947 plan in a clear shift from the direct central planning to the “indicative” approach. The plan achieved its targets within four years, a period which was referred to as “the great leap forward.” Presented in Table 1 are comparative growth figures between 1951 and 1990 provided by Gardner (1997). Average annual growth in real gross national product (GNP) between 1951 and 1960 was 6.2 percent, outperforming the Soviet Union and OECD averages for the same time period and thereafter until the 1980s. Although growth was spectacular during the period, there were other indications of instability. Table 2 presents average consumer price inflation. Yugoslavia had higher average [1] According to Allcock (2000), those losses included 82,000 buildings destroyed, 35 percent of its industrial capacity, and 50 percent of railway tracks, 77 percent of locomotives, and 84 percent of wagons. Approximately 3.5 million Yugoslav citizens were homeless. Yugoslavia was also the largest recipient of aid by the United Nations Relief and Rehabilitation Administration, receiving $415 million or one-fifth of total payments to European economies between 1945 and 1947. [2] For some imports, dependency was much greater: All of Yugoslavia’s coal and coke imports, 80 percent of its pig iron, 60 percent of its petroleum products, four-fifths of its fertilizer requirements and virtually all specialized machinery, steel tubes, railway cars and locomotives came from the Soviet Union and its satellites. Now trade from this source dried up completely (Allcock, 2000). [3] An example of how the coefficient system worked is provided by Adamović (1982). At this time the official exchange rate was 300 dinar per one dollar. If the coefficient was 1.20, an exporter selling goods abroad would receive 360 dinars (300 dinar x 1.20). If the coefficient was below 1.00, say at 0.60, then the exporter would receive 180 dinar. |
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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