Market Socialism

Dear WSN,

A couple of weeks ago I sent out a blurb about the newly published, THE
SPIRAL OF CAPITALISM AND SOCIALISM: TOWARD GLOBAL DEMOCRACY, by Terry
Boswell and Chris Chase-Dunn. You might recall that Warren Wagar followed
my message with a strong endorsement of the book.

I mentioned in my post that the proposed economic model in SPIRAL was based
on the idea of "market socialism," a concept proposed by John Roemer in his
1994 book, A FUTURE FOR SOCIALISM. The notion of market socialism, which
undoubtedly seems an oxymoron to some people, has raised a lot of
questions, so I decided to summarize the concept as it is presented by
Chase-Dunn and Boswell.

Before discussing the authors' view of market socialism, however, it is
important to put it into the context of the entire book. The book is not
about market socialism per se. In fact, market socialism is discussed in
only one chapter (out of six), and the authors go to great lengths to fix
the notion squarely into the context of global democracy - the main thrust
of the book. Thus, the authors believe that market socialism must go hand
in hand with the creation of global democratic institutions, formed through
the unified efforts of workers and progressives in both the core capitalist
countries and the peripheral areas. In short, the idea of market socialism
is an intrinsic part of the movement for global democracy. 

It is also important to recognize that the proposal advanced in SPIRAL
comprises only an outline of the model. Many questions of detail remain. 


The Basic Concept 

The central premises underlying market socialism have been developed by the
economist John Roemer and others, and embody a state economy model that
would apply to core capitalist countries.  Chase-Dunn and Boswell have
revised this model, and extended it to the global level.

The first task is to look at why state socialism ("command economy") failed
as an economic model. Inherent to state socialism was a "principal-agent"
problem. Society was the principal, and managers were the agents hired by
the principals to manage the economy based on socialist ideals. But in
practice, the agents could ignore the principals, i.e., the managers could
ignore consumers and citizens. While there may have been some
accountability of managers to the state bureaucratic structure, there was
little or no accountability to the masses. 

A component of this problem was "soft budget constraints" wherein managers
of state monopoly firms did not need to be concerned with poor budget
performance (not to mention product quality) and thus had no incentive to
maximize efficiency.  Also, without the competition that markets stimulate,
there was little incentive to innovate.

Market socialism is aimed at alleviating these problems. Chase-Dunn and
Boswell define market socialism this way: "Essentially, it is a social
organization that uses market mechanisms to distribute goods and services,
and allocate capital and labor according to socialist ends, ends that
capitalist markets are incapable of attaining."

But, if markets are used, what distinguishes this model from capitalism?
The key difference between market socialism and capitalism is _property
rights_, and specifically what the authors describe as "control over the
investment process and distribution of surplus (profits)." 

Under market socialism, large enterprises are not privately owned. 
However, this does not mean that they are owned by the state (as in state
socialism).  Rather, stocks in firms are distributed among citizens in an
egalitarian manner, and investment decisions are subject to democratic
oversight. Therefore, the entire population has input into investment
decisions, and everyone benefits from corporate profits. 

However, to facilitate innovation, individuals are able to own and control
small businesses. When enterprises reach a certain size, they are
transferred into the public market.

Market socialism rests on the premise that all members of society have the
equal opportunity to put capital to work. This is the antithesis of
capitalism, which is predicated on private accumulation of capital. 


The Basic Model

Market socialism is centered on a "coupon" stock market. Workers' income
consists of two parts: the direct income from their labor, in the form of
wage or salary, and profits obtained through the coupon market.

Here is an outline of how the coupon market would work.  Upon reaching a
certain age, the state treasury issues every adult an equal number of
coupons (say, 1,000) to be used ONLY to purchase shares of mutual funds. 
The mutual funds, in turn, invest the coupons (i.e., buy shares) in a set
of various enterprises. The basic restrictions about coupon ownership
include: Coupons cannot be sold for money, coupons cannot be purchased with
money (thus, rich people cannot buy up poor peoples' coupons), and coupons
cannot be inherited (upon death, they are returned to the state treasury).
In short, coupons are nontransferable and, with the exception of certain
employee ownership plans (discussed below), cannot be accumulated.

Through the coupon market individuals receive a portion of the profits from
the mutual fund portfolios in which they are invested. In this manner,
everyone shares in the surplus produced in society. And, since coupons are
nontransferable, everyone has at least some lifetime income.

To complete the circular path taken by coupons, when the mutual fund
invests coupons in a firm, that firm would exchange the coupons to the
state treasury for investment funds. Thus, public firms would derive some
of their financing through the coupon stock market.  They would also obtain
a large proportion through loans from public investment banks, whose
capital would come from savings. 

Public firms would be monitored (for efficiency and profit maximization) by
public investment banks, and by the coupon stock market (via mutual funds).
The boards of directors for public firms and banks would be chosen
democratically by investors (like some existing credit unions) on a
strictly one vote per investor basis (eliminating any preference for
wealth). Since there would be no centralized control (as with state
socialism) political activism would play an important role in policy
formation for public firms and banks. 


Extending the model to make it global

Boswell and Chase-Dunn believe that simply translating the above design to
the international level would not work. They propose the following four
revisions that would extend this model to the global level with the primary
objectives in mind of ending unequal development, and eliminating the
hierarchy between core capitalist countries and peripheral areas of the
world: 

1) A federal world bank
2) Significant employee ownership requirements
3) Progressive interest rate plans for international development
4) Global standardization policies

Regarding the first revision, the world bank would be operated by a world
federal system, and would be structured to serve the mutual interests of
the core and the peripheral areas. The bank would get its funds from mutual
fund coupons. The bank would only directly invest coupons in transnational
corporations (TNCs) that do significant business in more than two
countries. 

World bank and government policies would strongly support small local
businesses, as well as the creation of socialist investment banks within
each nation.  The relationship between the world bank and the socialist
investment banks would be similar to the present Federal Reserve System in
the USA. 

As to the second revision, TNC employees would own nontransferable coupons
(shares) in the company they work for. Chase-Dunn and Boswell propose that
employees be given a certain number of coupons for each year of employment.
 Eventually the profits from such shares would make up a third of an
employee's income.  Also, they propose that, over time, employee ownership
would constitute a third of the ownership of the firm (the rest being
publicly owned coupons). As coupon owners, workers would be represented on
the board of directors through elections. This type of direct ownership
would spread the benefits of productivity increases to workers, giving them
a direct incentive to increase efficiency.

Of great significance from a global perspective, employees of TNCs in
peripheral countries would directly benefit from high profits generated in
their homeland. Initially TNC coupons (owned by mutual funds) would be
concentrated in the core (since that is where capital is concentrated now).
 Over time, TNC employee coupon ownership would hasten the spread of
capital ownership and profit returns to the periphery. This would enable
peripheral countries to invest more in education and training, thereby
increasing worker productivity, which, in turn, would lead to higher wages.
 In addition, TNC employee coupon ownership would, as the authors put it,
"give peripheral and core labor a common interest in organizing their vote
and voice on the TNC's boards of directors."

This employee ownership scheme would immediately raise the incomes of
workers without raising their wages, which would be of great importance for
Third World development. This would allow wages to go up as worker
productivity goes up, thus avoiding the capital flight and inflation that
might result from immediate substantial wage increases. 

The third key revision is the manipulation of interest rates. The world
bank, tied to state investment banks and TNCs, would have great influence
over interest rates. Discounted loans to state investment banks could be
used for long-term economic development, especially in the periphery. Lower
interest rates could be used to increase investment in progressive social
and environmental projects. The world bank would discount loans that invest
in the periphery in ways that link domestic suppliers with TNCs, which
would help develop local economies.  

The fourth revision is establishing global standards and regulations
through a democratic world government (consisting of a federation of
societal units), which would be dedicated to pursuing international peace
and raising global living standards. The world government would serve three
main functions: supporting international peacekeeping activities, providing
certain "public goods" best delivered or coordinated globally (e.g., social
and health programs), and, most importantly, enforcing global standards for
human rights and environmental conditions. 


Patrick Loy
Baltimore, MD USA
Ploy@compuserve.com
410-426-1996