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.
Keynes’ policy proposals in The General Theory were much more radical than you were probably taught in school
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.
One of the popular interpretations of the Soviet system by socialists is that it was a form of state capitalism in which the bourgeoisie class was replaced with a statist class. Some of the proponents of this view include Charles Bettelheim, Stephen Resnick and Richard Wolff, but each with their own slightly different take. The common version of this view is that the top officials of the communist party became a new capitalist class which appropriated surplus value from employees of the state. Beginning with Bettelheim’s version of this analysis, from his book Class Struggles in the USSR, he suggests that the Communist party came to dominate the working class, thereby becoming a “new” bourgeoisie class. Bettelheim’s analysis, however, suffers from some problems to put it mildly. In the Soviet system, there is no private ownership of the means of production, no commodity production, no competition, and no production for profit. Party elites had no drive or even means by which to accumulate capital. Rising within the rakes of the Communist Party or government administration was the only means by which to obtain greater status in the society, and the only way to do that was to perform well in your position. Furthermore, workers had guaranteed jobs; they could not be fired as it was against the law, so party members could not use unemployment as a disciplining device as is used under capitalism. And since most basic needs were met through the provision of public goods, workers were not dependent on any one elite for subsistence. This analysis also runs counter to Marxist theory which argues the bourgeoisie class exerts influence over the political class, and thereby state policy. In the Soviet system, there was no bourgeoisie class to offer patronage, and state policy was determined within the party. Therefore, the description of state capitalism appears to be inconsistent with what we know about how the Soviet system functioned.
Given these inconsistencies, Resnick and Wolff’s, in their book Class Theory and History, make the case by examining the relational structure of appropriation of surplus value. In the Soviet system, producers worked as wage laborers but were free to move between enterprises just like in capitalism. Workers contribute value above what they need for their own subsistence, thereby creating surplus value. Since the Communist elite had control over the surplus, they argue that this was exploitation. They argue if the Soviet system were a communist class system, workers would have control over the distribution of the surplus. Resnick and Wolff also argue that the Soviet system had some similar features to capitalism. Labor was free to move between enterprises. Industrial ministries were organized similarly to corporations. There was some competition among enterprises, and profit rates were one criterion to evaluate performance. However, this appears to be a dubious attempt to apply the label of capitalism to the Soviet system. Resnick and Wolff are arbitrarily narrowing the descriptive options of class relations — slavery, feudalism, communism or socialism, and capitalism — but exclude the possibility of a hybrid or mixed system wherein a new exploitative class could arise unaccounted for in traditional Marxian analysis.
Paul M. Sweezy attempted a more refined argument of a new class system in his article, a “Post-Revolutionary Society”, published in Monthly Review back in 1980. Sweezy claimed that the Soviet system did transform into a statist mode of production in which the Communist party elite were the new ruling class, but admitted that the system lacked the key features of capitalism such as commodity production and competition. However, it is not clear the party-state elite where a class, at least not in the way we would define it in Marxist theory where this argument typically begins. It is also not clear the party-state elite appropriated a surplus from workers. Profits were the first source of investment by enterprises, which were also taxed for government expenditure. Only a small portion went towards workers as a bonus for surpassing objectives. Party-elites had no mechanism by which to appropriate portions of those profits, or surplus generally in the aggregate. Furthermore, capital accumulation was not a measure of social status, nor could it be. As noted before, the only way to increase social status in the Soviet system was to rise up through the ranks of the party and government positions. It is also telling what the later generation of party-elite truly thought of the system when they did little if nothing to defend the system before its collapse. Many party-elites thought they had more to gain from capitalism. And many of them went on to become the oligarchs in former Soviet Union countries.
If the system was not capitalist, was it socialist? The claim that the system was socialist was made both by Soviet officials and Western specialists. The reasons they agreed upon were based on state ownership of the means of the production and central planning. Some socialists argued that the system was socialist at first, then mutated into a deformed workers’ state by Stalin and later leaders; this was the position taken by Trotskyists for example.
Nominally, one might regard the Soviet system as socialistic; there was after all social ownership of the means of production through the state which engaged in economic planning and production for use, not profit. The system had nearly all the trappings desirable of a socialist system — the right to a job, full employment, wide provision of public goods to meet basic needs, absence of property income, and relatively low levels of inequality. The non-socialist features, on the other hand, were substantive departures from the ideal socialist system. The two central tenets running through all ideals of socialist transformation is the social ownership of the means of production, and the democratic control of those means. But while democratic on paper, workers had little democratic rights in the Soviet Union. The state was governed by a single party which was ruled by a select privileged elite that revolved around the General Secretary of the Central Committee of the Communist Party. The state was highly hierarchical and authoritarian, and planning authorities and enterprises were as well. Civil rights and liberties were extremely limited throughout the Soviet Union; particularly during the Stalin era. Given these shortcomings, the description of socialism seems to be a stretch as its invocation suggests of a system which embodies both the central tenants of social ownership and democratic control. However, it is also a stretch to consider it capitalist for the reasons noted above. It is more persuasive then to characterize the Soviet system as a uniquely mixed system with both socialist and non-socialist features.
By convention the mixed system of the Soviet Union has been regarded as ‘state socialism’. But many socialists rightly cringe at the notion of conceding any term of socialism to the Soviet system because it failed to extend democracy in both its political and economic spheres —which is likely in part the motivation of the theorists mentioned to categorize it as an aberrant form of capitalism . Capitalism for its part has managed to maintain democracy, or a form of it, in the political sphere, and to a degree in the economic sphere as consumers have choice in their purchases. The goal of socialism is to extend democracy to additional spheres of human relations particularly that of production. In imagining a truly state socialist system, it is possible to conceive of a democratic state that owns the means of production, but is internally organized in a participatory, cooperative fashion, that would achieve both social ownership of productive property and workplace democracy. Thus by conceding the label of state socialism to the Soviet Union suggests socialist systems need not be democratic foremost in the political sphere, but also in all economic relations, and makes it that much more difficult to rid socialism of its Soviet baggage.
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.
Aaron Medlin is a PhD student at the University of Massachusetts Amherst studying macroeconomics of private debt, monetary economics, international finance, and comparative economic systems.