Monday, October 24, 2011

Investment in David Schweickart´s "Economic Democracy" (Part 2)

Welcome back.  In this post I will continue analyzing the way on which investment is funded and distributed in David Schweickart`s model of market socialism, denominated Economic Democracy (ED).  

As we saw in my last post, the system of funding in ED consist in a general tax over the capital assets of companies; the resultant income is later distributed by the state to a myriad of “social banks”.  Schweickart itself recognized in his book "After Capitalism" (2002) the possibility of a system of "laissez-faire" marksoc, but preferred to develop a system of banks that would invest in cooperative companies based in social goals, especially to reach full employment.  This alternative laissez-faire system would be structured in the following way: 

Banks would be charged a centrally determined interest rate on the funds they receive. They would be expected to make a profit, that is, to charge more than the baserate interest, adjusted according to risk. Bank officials, who are public officials, would be paid in accordance with performance. Banks would compete, as they do now, trying to balance the riskiness of their loans against the interest rates they charge. As under capitalism, managers of successful banks (i.e., the most profitable) would be rewarded, managers whose banks performed poorly would be sacked. In all cases, bank profits are returned to the national investment fund. (p.49)

For the author of this blog, this system constitutes a mix between what I call pure marksoc and Economic Democracy, since in the later banks are managed by public officials and not by its own workers, and the State controls part of the economy through its management of the "investment fund".  We should remember that in Economic Democracy the workers are not owners of their companies, which belong to all of society. Workers cannot sell the capital stock and use the resultant money as income. 

Let me describe some positive aspects of the ED proposition.  In ED investment is proportionally allocated among regions according to their population.  Following neo-classical economic theory, this allocation would be clearly inefficient, since profitable companies could lack access to funds while less profitable ones could receive them because of their location.  Bruno Jossa (2004) is right to point that labour also moves between regions (albeit more slowly than capital), thus we could see a population movement towards those regions where the returns to capital are higher.  Per-capita allocation of investment can mitigate the concentration effect, and it is based in the principle of fairness.  Being that in ED there is not interest earned for personal savings, the mechanism of tax over the capital stock of companies and fair redistribution of investment avoids the “problem of austerity” of capitalism, because S(avings) can then be equal to I(nvestment) with some slight manipulations.  Jossa argues that in ED we can dispense through the fiscal system with both “Keynesian” and even structural unemployment.

Public ownership and social investment constitute “protective” measures that show an overwhelming preoccupation about the possible destruction of companies and the increase of unemployment, preoccupation proper of developed service economies such as the United States.  In my opinion the gains in efficiency (and happiness) due to real ownership far outweigh the potential costs of the destruction and reconstruction of companies (still, in a mixed system where cooperatives and capitalist companies cohabit, this means that we could see our hopes for the establishment of marksoc dashed by the degradation of cooperatives and their eventual transformation in capitalist companies). 

Jossa agrees that banks should be cooperatives in themselves which can pursue profits, but desires to maintain the per-capita basis of the tax funds`distribution.  He also sustains that granting interest for personal savings (in the form of government bonds) is not a problem in an economy where workers are also company owners.  Jossa recognizes that letting the banks choose companies according to expected returns on their loans could greatly reduce the available funds for the creation of new cooperatives.  However, it is important to note that there is an intrinsic limit to the size of a cooperative company (depending on the sector).  This fact lets horizontal spaces to be filled by new potential enterprises in a specific market, existing also an interest on the cooperatives`side to spur other companies to work with along the production chain, in the way a federation does.

I think that is important to differentiate between complete ideal models such as ED and the possibilities of reality, shaped by political conflict and power struggles.  The conceptual transition from capitalism to pure marksoc, given its similitudes to libertarianism and other “free-market” philosophies, seems to be easier than the transition towards ED at this moment (2011). The most important problem to solve, if we are going to take the pure road to a marksoc system, is how we are going to facilitate the necessary funds for the establishment of the required thousands of new cooperative companies.  If we are right, with minor adjustments our system can quickly supersede the current “capitalism of chaos and friends in high places” (how else can it be described?) and from there further changes towards fairness can be implemented.  Am I too timid to make revolutionary changes?  We should discuss then the desirability of more involvement of the State in the structure of investment, the fairness principle in investment distribution, and the future effects this can have in the environment and personal happiness.  Fire away.

Bibliography

JOSSA, Bruno (2004): "Book Review: Schweickart and Economic Democracy", Review of Radical Political  Economics (36), pp. 546-561.
SCHWEICKART, David (2002):  "After Capitalism", Lanham: Rowman & Littlefield.

For the accumulated Bibliography and the Glossary please click here

Sunday, October 2, 2011

Investment in David Schweickart´s "Economic Democracy" (Part I)

Welcome back.
 
First, I want to give a hint to everybody.  If you like to study a subject, but you don´t have enough time (and money) to do it, a simple equipment upgrade can make wonders.  I recently bought a popular e-book reader, converted some of the PDFs of my extensive marksoc bibliography and uploaded them to the little machine.  The change in my disposition to read and the rate at which I can comment on articles and write posts based on them is nothing short of astonishing. Do not attempt to read articles in your computer.  You can print the articles (bad for nature, expensive and a pain in the head when you want to copy your notes into an usable digital format), or you go the e-book reader path.  Notes made to articles this way cannot yet be shared with other readers in the way is done in Google Docs, but it is only a matter of time until e-book readers can properly manage readable PDFs  in their native format, or export documents with their remarks in the right place, including highlighting and notes, and from there to a full collaborative effort there is only one small step.

Second, from now on  I will add a link to a Glossary and Bibliography post at the end of each new entry, so those of you new to the concepts in this blog can catch up, and the rest can have a long and nice list of articles to peruse and help with this project.

Third, today´s post! The theme of the current post is a central element in David Schweickart´s model of woc-marksoc that I previously misunderstood.  A marksoc model consist in three parts: a free market, more democratic companies, and a more democratic way of allocating investment.  The first one is implied in marksoc (is part of the name).  The second one is the core of the woc-marksoc model, since cooperatives are expected to be more democratic than their capitalist counterpart.  The third point, however, can be achieved in varied ways, ranging from social planning to private profit-driven investment.  It was my view that in marksoc, cooperatives would be financed by banks that would constitute cooperatives in themselves, which would be guided by profit to make the best possible choices between the companies (existing or future) competing for its funds.  However, according to Schweickart this is not the case.

Schweickart sustains that one of the main problems of capitalism is the dependence on "investors confidence". Capitalism needs continuous growth to work.  There needs to be an increase in consumption to convince private investors that there will be profits to be made at the end of the road.  Any bumps can be translated by some into a pessimistic outlook, and "their pessimism becomes a self-fulfilling prophesy" (Schweickart, 2008).  Then, decreasing investment means higher unemployment, which it means less aggregated demand, and there we are, trapped in a downward spiral (as an example, the current situation in the United States described here).  Now, in woc-marksoc we have a built-in corset for those people that own companies: they work there too, and they will be averse to act against their own workplace, so if they are not confident enough in the future to re-invest their earnings into new technology or an expansion, they will nevertheless look to maintain themselves occupied because they are the people on the line of fire.  I am sure that most folks do not like to commit economic "suicide".

But what about outside investors in marksoc?  Namely, those that can make the initial "investment" in the form of a loan or grant?  If those investors are cooperative banks, they must also be reticent to stop all their activity, because they must keep the bank running to obtain profits.  Closing the bank to do other stuff with the money would not work, since ownership is distributed between every employee involved.  But we cannot ensure that cooperative banks will use its funds to make loans to cooperative companies, instead of choosing other investment paths that could generate higher earnings.  Unless we make them do exactly that through regulation, of course.

The solution that Schweickart provides is to bring financial markets "under conscious collective control".  How does he plans to do that?  Exacting a tax on cooperative companies, which the State will later redistribute to social banks based on the population of each region of a country (per-capita basis).  I let him to explain here how this redistribution system would work:

These funds are then distributed to local and regional investment banks —public banks—charged with loaning them out to individuals and enterprises needing funds to start up, upgrade, or expand business operations. Loan applications are judged in terms of projected profitability, employment creation, and, if the community so desires, environment enhancement.
Loan officers are public officials, democratically accountable, charged with effectively allocating the funds entrusted to them. If their loan portfolios perform poorly, they can be discharged.
In this way, investment would be divorced from these harmful "animal spirits" that cannot agree in taking the economy out of the dump when the free market mechanism fails.  But can we still talk about market when investment is not guided by companies (banks) making independent decisions?  Let´s say that job creation is a decisive element to decide the continuity of a loan officer.  Should this officer benefit companies creating lots of low-paying jobs over companies creating fewer high-quality jobs?  Who decides if an investment portfolio has performed poorly? The State, the citizens of the region, or the employees of the particular bank?  And what does poorly means in this context?

There are many details to work on: first, we have the big choice between cooperative banks and "social banks", then the issue of the system of redistribution of funds gained through taxes over the capital stock of cooperative companies, and finally the criteria utilized to distribute these loans between producer cooperatives (which, again, in Schweickart´s system are not like regular loans, more about this in my next post).  Personally, I prefer a woc-marksoc system comprised exclusively of companies owned by their own workers, guided by their own interests (always under the law), with supporting government agencies that can bankroll investment in certain areas according to motives other than profits.  It seems that I will have a hard time letting go of my free market approach to the issue.

I will stop here, since the article I used as a base doesn't get much further.  In my next post I will be exploring ideas about investment under the guidance of an article written by Bruno Jossa that lingers on this very issue (see Bibliography below).  Please add any ideas that you can have about this, the comments box is below for you to use it.  See you next time (soon).

Bibliography

JOSSA, Bruno (2004): "Book Review: Schweickart and Economic Democracy", Review of Radical Political  Economics (36), pp. 546-561.
SCHWEICKART, David (2008): "Is Sustainable Capitalism Possible?", Beijing Forum: The Harmony of Civilizations and Prosperity for All -The Universal Value and the Development Trend of Civilization.

For the accumulated Bibliography and the Glossary please click here 

Accumulated Glossary and Bibliography

Glossary

BI - Basic Income. 

ED - Economic Democracy, system designed by David Schweickart.
I - Investment.
KOF - Capital Owned Firm.
LMF - Labour Managed Firm.  
marksoc - Market Socialism
(pure) marksoc - Pure Market Socialism (Vanek, Ward).  Free market of good and services with competition between cooperative companies, capital is not controlled by the State.
MAW - Maximum Allowable Personal Wealth (R. George)

S - Savings.
UGI - Universal Guaranteed Income (R. George)
woc-marksoc - "Worker-Owned Companies" Market Socialism



Bibliography utilized:

BUNGE, Mario (1998): Social Science under Debate: A Philosophical Perspective, University of Toronto Press Incorporated.

ERRASTI A., BRETOS I., and NUNEZ A. (2017). "The viability of cooperatives: The fall of the Mondragon cooperative Fagor". Review of Radical Political Economics, First Published February 2, 2017.

JOSSA, Bruno (2004): "Book Review: Schweickart and Economic Democracy", Review of Radical Political  Economics (36), pp. 546-561.

KALMI, Panu (2003): “The Study of Co-operatives in Modern Economics: A Methodological Essay, Helsinki School of Economics Working Paper No. 351.

MILL, John Stuart (1848, revised 1852): Principles of Political Economy: with some of their applications to social philosophy. Book IV,Chapter 7. John W.Parker, London. 

NAYERI, Kamram (2003): "Market Socialism: The Debate among Socialists (book review)", Review of Radical Political Economics, 35, pg. 362. 

OLLMAN, Bertell ed. (1998). With SCHWEICKART, David, LAWLER, James, TICKTIN, Hillel (1997): "Market Socialism: The Debate Among Socialist". Routledge; 1st edition.

RECTOR, Tully (2021): "Market socialism as a form of life", Review of Social Economy, DOI: 10.1080/00346764.2021.1886319

SCHWEICKART, David (1996): Against Capitalism, Westview Press.

SCHWEICKART, David (2002)After Capitalism, Lanham: Rowman & Littlefield.

SCHWEICKART, David (2006):  "Economic Democracy: A Worthy Socialism that Would Work", Presentation at the Book Launching of "Derecho a Decidir: Propuestas para el socialismo del siglo XXI", ed. Joaquin Arriola.

SCHWEICKART, David (2008): Is Sustainable Capitalism Possible?, Beijing Forum: The Harmony of Civilizations and Prosperity for All -The Universal Value and the Development Trend of Civilization.
  
WESTRA, Richard (2008): "Economic Life Beyond Capital" (review of books), Review of Radical Political Economics, 40, pp. 354-363.

WOLFF, Richard (2012): Democracy at Work: A Cure for Capitalism. Haymarket Books. 
 


Bibliography from articles ("the Utopia List"):
 
   Here I will include bibliography that appeared in the articles utilized to write my posts, but that I still haven´t got to use.  With time, these items will be copied to the upper section (meaning that they have been read, analyzed, and discussed).  In the end I hope that all existent articles about Market Socialism can be found in this page and constitute a more or less complete reference list about the subject.  If my blog comes to nothing, the least I can do is to compile a list of material for other people to make Utopian dreams come true.

Aspromourgos, T. 2000. Is an employer-of-last-resort sustainable? A review article. Review of Political Economy 12 (2).

Banerjee, Abhijit, Dilip Mookherjee, Kaivan Munshi, and Debraj Ray (2001): 'Inequality, Control Rights, and Rent Seeking: Sugar Cooperatives in Maharashtra', Journal of Political Economy, 109 (1): 138-90.

Benham, Lee and Philip Keefer (1991): ‘Voting in Firms: The Role of Agenda Control, Size and Voter Homogeneity’, Economic Inquiry, 29: 706-19. 

Ben-Ner, Avner (1988): ‘The Life Cycle of Worker-owned Firms in Market Economies: a Theoretical Analysis’, Journal of Economic Behavior and Organisation, 10:287-313. 

Blaug, Mark (1998): 'The Problems With Formalism', Challenge, May-June.

Bonin, John P. and Louis Putterman (1987): Economics of Cooperation and the Labor-Managed Economy, New York: Harwood.


Bonin, John P., Derek C. Jones and Louis Putterman (1993): 'Theoretical and Empirical Studies of Producer Cooperatives: Will Ever the Twain Meet?' Journal of Economic Literature, 31:1290-1320.


Bowles, Samuel and Herbert Gintis (1996): 'The Distribution of Wealth and the Viability of the Democratic Firm', in Pagano and Rowthorn, 82-97. 
 


Dickinson, H. D. 1933. Price formation in a socialist community. Economic Journal 43 (June).
 

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Davis, John B., D. Wade Hands, and Uskali Mäki (1998, eds.): The Handbook of Economic Methodology, Cheltenham: Edward Elgar.

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Doucouliagos, Chris (1995): 'Worker Participation and Productivity in Labor-Managed Firms and Participatory Capitalist Firms: A Meta-Analysis', Industrial and Labor Relations Review, 49 (1): 58-77.


Dow, G. 1993. Democracy versus appropriability. Can labour-managed firms flourish in a capitalist world? In Markets and democracy: Participation, accountability and efficiency, ed. S. Bowles, H. Gintis, and B.
Gustafsson. Cambridge, UK: Cambridge University Press.

1998. Review of Jossa & Cuomo, 1997. Journal of Economic Literature 36 (2).
Dow, G., and L. Putterman. 1996. Why capital (usually) hires labour: A review and assessment of some proposed explanations. MIMEO.

Dow, Gregory K. (2003): Governing the Firm: Workers' Control in Theory and Practice, Cambridge, UK: Cambridge University Press.


Dow, Sheila C. (2002): Economic Methodology: An Inquiry, Oxford: Oxford University Press.
 
Drèze, J. H. 1989. Labour-management, contracts and capital markets. A general equilibrium approach. Oxford: Blackwell.  
1993. Self-management and economic theory: Efficiency, funding and employment. In Market socialism: The current debate, ed. P. Bardhan and J. E. Roemer. New York: Oxford University Press.
Dubravcic, D. 1970. "Labor as an entrepreneurial input; an essay on the theory of the producer cooperative economy". Economica 37 (147).

Earle, John S. and Estrin, Saul (1996): ‘Employee Ownership in Transition’, in Roman Frydman, Cheryl Gray and Andrzej Rapaczynski (eds): Corporate Governance in Central Europe and Russia, vol. 2: Insiders and the State. Budapest:CEU Press.
 
Elster, J., and K. P. J. Moene, eds. 1989. Alternatives to capitalism. Cambridge, UK: Cambridge University Press.

Erlich, A. 1978. Dobb and the Marx-Feldman model: A problem in the soviet economic strategy. Cambridge Journal of Economics 15 (2).


Estrin, S. 1983. Self-management: Economic theory and Yugoslav practice. Cambridge, UK: Cambridge University Press.


Furubotn, Eirik and Pejovich, Svetozar (1970): 'Property Rights and the Behaviour of the Firm in a Socialist State: the Example of Yugoslavia', Zeitschrift für Nationalökonomie, 30: 430-454. 

Furubotn, Eirik (1976): 'The Long-Run Analysis of the Labor-Managed Firm: An Alternative Interpretation', The American Economic Review, 66: 104-123.

Furubotn, Eirik and Richter, Rudolf (1991): 'The New Institutional Economics: An Assessment', in Furubotn and Richter (eds.), The New Institutional Economics, Tübingen: Mohr, 1-34.

Gintis, H. 1989. Financial markets and the political structure of the enterprises. Journal of Economic Behaviour and Organization 1 (1).


George, Robley E. (2002): Socioeconomic Democracy: An Advanced Socioeconomic System, Wesport, CT: Praeger Paperback, 328 pp.

Hansmann, Henry (1996): The Ownership of Enterprise, Cambridge, MA: Belknap Press.

Hart, Oliver and Moore, John (1996): 'The Governance of Exchanges: Members' Cooperatives versus Outsider Ownership', Oxford Review of Economic Policy, 12 (4): 53-69.

Hart, Oliver and
Moore, John (1998): 'Cooperatives vs. Outside Ownership', NBER working paper 6421, February.

Hodgson, Geoffrey M. (1988): Economics and Institutions: A Manifesto for a Modern Institutional Economics, Cambridge: Polity University Press.
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Horvat, Branko (1982): The Political Economy of Socialism: A Marxist Social Theory, M.E. Sharpe.
 
Ireland, N. J., and P. J. Law. (1981): "Efficiency, incentives, and individual labor supply in the labor-managed firm". Journal of Comparative Economics 5 (1).

Ireland, Norman J. and Law, Peter J. (1982): The Economics of Labour-Managed Enterprises, London: Croom Helm.

Jensen, Michael C. and Meckling, William H.  (1979): 'Rights and Production Functions: An Application to Labor-Managed Firm and Codetermination', Journal of Business, 52(4): 469-506.
 
Jossa, B. 2001. L’impresa gestita dai lavoratori e la disoccupazione classica e Keynesiana. Rivista italiana degli economisti, 1, April.
2004. Marx, Marxism and the cooperative movement. Cambridge Journal of Economics.
Jossa, B., and G. Cuomo. 1997. The economic theory of socialism and the labour-managed firm. Cheltenham, UK: Edward Elgar.

Kaldor, N. 1972. The irrelevance of equilibrium economics. Economic Journal 82 (December).
 

Kornai, J. 1992. The socialist system: The political economy of communism. Princeton, NJ: Princeton University Press.

Meade, James E. (1972): ‘The Theory of Labour-Managed Firms and of Profit-Sharing’, Economic Journal 82: 402-28.

Meade, J. E. 1972. "The theory of labour-managed firms and of profit sharing". Economic Journal Suppl. No. 82 (March).
1979. "The adjustment processes of labor cooperatives with constant returns to scale and perfect competition". Economic Journal 89 (December).
Mygind, N. 1997. Employee ownership in Baltic countries. In Privatisation surprises in transition economies: Employee ownership in Central and Eastern Europe, ed. M. Uvalic and D. Vaugham-Whitehead. Cheltenham, UK: Edward Elgar.
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1962b. Mercato, pianificazione e imprenditorialità. La Rivista Trimestrale 3 (September).
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Pagano, Ugo and Rowthorn, Robert (1996, eds): Democracy and Efficiency in the Economic Enterprise, London: Routledge.

Pencavel, John (2001): Worker Participation: Lessons from the Worker Co-ops of the Pacific Northwest, New York: Russell Sage.

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Pica, F. 2000. Per un federalismo municipalista (I principi: il federalismo e la costituzione italiana). In Teoria e fatti del federalismo fiscale, ed. D. Fausto and F. Pica. Bologna, Italy: Il Mulino.


Pittatore, Silvia and Turati, Gilberto (2000): ‘A Map of Property Rights in Italy and the Case of Co-operatives: An Empirical Analysis of Hansmann’s Theory’, Economic Analysis: Journal of Enterprise and Participation, 3(1): 23-48.

Putterman, L. 1993. After the employment relation. In Markets and democracy: Participation, accountability and efficiency, ed. S. Bowles, H. Gintis, and B. Gustafsson. Cambridge, UK: Cambridge University Press.


Prychitko, David (1996): 'The Critique of Workers' Self-Management: Austrian Perspectives and Economic Theory', Advances in Austrian Economics, 3

Rey Patrick and Tirole, Jean (2000): 'Loyalty and Investment in Cooperatives', mimeo, University of Social  Sciences, Toulouse.

Rey, Patrick and
Tirole, Jean (2001): 'Financing and Access in Cooperatives', mimeo, University of Social Sciences, Toulouse. 

Roemer, J. E. 1992. The morality and efficiency of market socialism. Ethics 102. Reprinted in J. E. Roemer, Egalitarian perspectives; essays in philosophical economics. Cambridge, UK: Cambridge Economic Press, 1994.

1994. On public ownership. In Egalitarian perspectives; essays in philosophical economics. Cambridge, UK: Cambridge Economic Press.
Rusmich, Ladislav & Sachs, Stephen M. (2003): Lessons from the Failure of the Communist Economic System, Lanham, MD: Lexington Books, 380 pp.


Schweickart, D. 1993. Against capitalism. Cambridge, UK: Cambridge University Press.
1998. Market socialism; a defense. In Market socialism; the debate among socialists, ed. B. Ollman.London: Routledge.
Sen, Amartya K. (1966): ’Labour Allocation in a Co-operative Enterprise’, Review of Economic Studies, 33: 361-71.
 
Stephen, F. H. 1984. The economic analysis of producers’ cooperatives. London: Macmillan.

Thomas, H., and C. Logan. 1982. Mondragon; an economic analysis. London: Allen & Unwin.


Tortia, Ermanno (2002): The Internal Organisation of Labour Managed Firms: The Problem of Value Added Distribution and of Capital Accumulation, unpublished Ph.D. dissertation, University of Ferrara.
 
Vanek, J. 1970. The general theory of labor-managed market economies. Ithaca, NY: Cornell University Press.
 
Vanek, Jaroslav (1971): The Participatory Economy: An Evolutionary Hypothesis and a Strategy for Development, Ithaca: Cornell University Press.


Vanek, Jaroslav (1975): Self-Management: Economic Liberation of Man, Harmondsworth, UK: Penguin.


von Mises, L. [1932] 1981. Socialism; an economic and sociological analysis. Engl. translation. New Haven: Yale University Press.

Ward, Benjamin (1958): 'The Firm in Illyria: Market Syndicalism', American Economic Review, 48: 566-89.

Still Not In Proper Order, will be shortly:


Mäki, Uskali (1998): 'Realisticness', in Davis, Hands and Mäki, 409-13.Morduch, Jonathan (1999): ‘The Microfinance Promise’, Journal of Economic Literature, 37 (4): 1569-634.
Schotter, Andrew (1997): Microeconomics: A Modern Approach, Reading, MA: Addison-Wesley.Steinherr, Alfred and Jean-Jacques Thisse (1979): ‘Are Labour-Managers Really Perverse?’, Economics Letters, 2: 137-43.
Jean (1999): ‘Incomplete Contracts: Where Do We Stand?’, Econometrica, 67 (4): 741-81.
Tirole, Jean (2001): ‘Corporate Governance’, Econometrica, 69 (1): 1-35. 

Torgerson, Randall E., Bruce J. Reynolds, and Thomas W. Gray (1998): ‘Evolution of Cooperative Thought, Theory and Purpose’, Journal of Cooperatives 
Williamson, Oliver E. (1985): The Economic Institutions of Capitalism, New York: The Free Press.