Socialist economics

Socialist economics

Socialist economics is a broad, and sometimes controversial, term. A normative definition held by many socialists states that all socialist economic theories and arrangements are united by the desire to achieve greater equality and give the workers greater control of the means of production (though not private control). Within the limits set by these principles, however, socialist economics can take many different forms. Another, less normative definition would define "Socialist Economics" as descriptive analysis of the economics of existing socialist systems. One example for this kind of analysis would be the works of Hungarian economist János Kornai [Kornai, János: "The Socialist System. The Political Economy of Communism". Princeton: Princeton University Press and Oxford: Oxford University Press 1992; Kornai, Janos: "Economics of Shortage". Munich: Elsevier 1980. A concise summary of Kornai's analysis can be found in Verdery, Katherine: "Anthropology of Socialist Societies". In: International Encyclopedia of the Social and Behavioral Sciences, ed. Neil Smelser and Paul B. Baltes. Amsterdam: Pergamon Press 2002, available for download [ here] .] .

Socialist economics is a term which refers in its descriptive sense to the economic effects of nations with large state sectors where the government directs the kind and nature of production. However, this definition is controversial because forms of socialism such as libertarian socialism are against government ownership and instead desire social ownership by producers and consumers in direct democratic cooperatives and workers' councils, which contradicts the idea of socialist economics as state ownership. In a normative sense, it applies to economic theories which advance the idea that socialism is both the most equitable and most socially serviceable form of economic arrangement for the realization of human potentialities.

Development of socialist economic thought

Although the values of "socialism" have roots in pre-capitalist institutions such as the religious communes, reciprocal obligations, and communal charity of Mediaeval Europe, the development of its economic theory primarily reflects and responds to the monumental changes brought about by the dissolution of feudalism and the emergence of specifically capitalist social relations. [Wallerstein, Immanuel "Historical Capitalism"] As such it is commonly regarded as a movement belonging to the modern era. Many socialists have considered their advocacy as the preservation and extension of the radical humanist ideas expressed in Enlightenment doctrine such as Jean-Jacques Rousseau's "Discourse on Inequality", Wilhelm von Humboldt's "Limits of State Action", or Immanuel Kant's insistent defense of the French Revolution. [Chomsky, Noam "Perspectives on Power"]

Capitalism appeared in mature form as a result of the problems raised when an industrial factory system requiring long-term investment and entailing corresponding risks was introduced into an internationalized commercial (mercantilist) framework. Historically speaking, the most pressing needs of this new system were an assured supply of the elements of industry - land, elaborate machinery, and labour - and these imperatives led to the commodification of these elements. [Karl Polanyi "Primitive, Archaic and Modern Economies"] According to influential socialist economic historian Karl Polanyi's classic account, the forceful transformation of land, money and especially labour into commodities to be allocated by an autonomous market mechanism was an alien and inhuman rupture of the pre-existing social fabric. This rupture triggered natural counter-movements in efforts to re-embed the economy in society. These counter-movements, that included, for example, the Luddite rebellions, are the incipient socialist movements. Over time such movements gave birth to or acquired an array of intellectual defenders who attempted to develop their ideas in theory.

As Polanyi noted, these counter-movements were mostly reactive and therefore not full-fledged socialist movements. Some demands went no further than a wish to mitigate the capitalist market's worst effects. Subsequently, a full socialist program developed, arguing for systemic transformation. Even if markets and private property could be tamed so as not to be excessively "exploitative", or crises could be effectively mitigated, capitalist social relations would remain significantly unjust and anti-democratic, suppressing universal human needs for fulfilling, empowering and creative work, diversity and solidarity.

Within this context socialism has undergone four periods: the first in the 19th century of socialism was a period of utopian visions (1780s-1850s), the rise of revolutionary socialist and Communist movements in the 19th century as the primary opposition to the rise of corporations and industrialization (1830-1916), the polarization of socialism around the question of the Soviet Union, and adoption of socialist or social democratic policies in response (1916-1989), and the response of socialism in the neo-liberal era (1990- ). As socialism developed, so did the socialist system of economics.

Utopian socialism

The first theories which came to hold the term "socialism" began to be formulated in the late 18th century, and were termed "socialism" early in the 19th century. The central beliefs of the socialism of this period rested on the exploitation of those who labored by those who owned capital or rented land and housing. The abject misery, poverty and disease to which laboring classes seemed destined was the inspiration for a series of schools of thought which argued that life under a class of masters, or "capitalists" as they were then becoming to be called, would consist of working classes being driven down to subsistence wages. (See Iron law of wages).

Socialist ideas found expression in utopian movements, which often formed agricultural communes aimed at being self-sufficient on the land. These included many religious movements, such as the Shakers in America.

Utopian socialism had little to offer in terms of a systematic theory of economic phenomena. In theory, economic problems were dissolved by a utopian society which had transcended material scarcity. In practice, small communities with a common spirit could sometimes resolve allocation problems.

ocialism and political economy

The first organized theories of socialist economics were significantly impacted by classical economic theory, including elements in Adam Smith, Robert Malthus and David Ricardo. In Smith there is a conception of a common good not provided by the market, a class analysis, a concern for the dehumanizing aspects of the factory system, and the concept of rent as being unproductive. Ricardo argued that the renting class was parasitic. This, and the possibility of a "general glut", an over accumulation of capital to produce goods for sale rather than for use, became the foundation of a rising critique of the concept that free markets with competition would be sufficient to prevent disastrous downturns in the economy, and whether the need for expansion would inevitably lead to war.

ocialist political economy before Marx

A key early socialist theorist of political economy was Pierre-Joseph Proudhon. He was the most well-known of nineteenth century mutualist theorists. Others were: agrarian radicals like Thomas Spence, William Ogilvie and William Cobbett; anti-capitalists like Thomas Hodgskin; communitarian and utopian socialists like Robert Owen, William Thompson and Charles Fourier; anti-market socialists like John Gray and John Francis Bray; the Christian mutualist William Batchelder Greene; as well as the theorists of the Chartist movement and early proponents of syndicalism. [Noel Thomson "The Real Rights of Man: Political Economies for the Working Class 1775-1850", 1998, Pluto Press]

Das Kapital

Karl Marx employed systematic analysis in an ambitious attempt to elucidate capitalism's contradictory laws of motion, as well as to expose the specific mechanisms by which it exploits and alienates. He radically modified classical political economic theories. Notably, the labor theory of value that had been worked upon by Adam Smith and David Ricardo, was transformed into his characteristic "law of value" and used for the purpose of revealing how commodity fetishism obscures the reality of capitalist society.

His approach, which Engels would call "scientific socialism", would stand as the branching point in economic theory: in one direction went those who rejected the capitalist system as fundamentally anti-social, arguing that it could never be harnessed to effectively realize the fullest development of human potentialities wherein "the free development of each is the condition for the free development of all." [] .

Das Kapital is one of the many famous incomplete works of economic theory: Marx had planned four volumes, completed two, and left his collaborator Engels to complete the third. In many ways the work is modelled on Adam Smith's "Wealth of Nations", seeking to be a comprehensive logical description of production, consumption and finance in relation to morality and the state.

It is a work of philosophy, anthropology and sociology as much as one of economics. However, it has several important statements:

* The Law of Value Capitalist production is the production of “an immense multitude of commodities” or generalised commodity production. A commodity has two essential qualities firstly, they are useful, they satisfy some human want, “the nature of such wants, whether, for instance, they spring from the stomach or from fancy, makes no difference,” [] and secondly they are sold on a market or exchanged. Critically the exchange value of a commodity “is independent of the amount of labour required to appropriate its useful qualities.” [] But rather depends on the amount of socially necessary labour required to produce it. All commodities are sold at their value, so the origin of the capitalist profit is not in cheating or theft but in the fact that the cost of reproduction of labour power, or the worker's wage, is less than the value created during their time at work, enabling the capitalists to yield a surplus value or profit on their investments.

* Historical Property Relations Historical capitalism represents a process of momentous social upheaval where rural masses were separated from the land and ownership of the means of production by force, deprivation, and legal manipulation, creating an urban proletariat based on the institution of wage-labour. Moreover, capitalist property relations aggravated the artificial separation between city and country, which is a key factor in accounting for the metabolic rift between human beings in capitalism and their natural environment, which is at the root of our current ecological dilemmas. []
* Commodity Fetishism Marx adapted previous value-theory to show that in capitalism phenomena involved with the price system (markets, competition, supply and demand) constitute a powerful ideology that obscures the underlying social relations of capitalist society. "Commodity fetishism" refers to this distortion of appearance. The underlying social reality is one of economic exploitation.
*Economic Exploitation Workers are the fundamental creative source of new value. Property relations affording the right of usufruct and despotic control of the workplace to capitalists are the devices by which the surplus value created by workers is appropriated by the capitalists.
* Accumulation Inherent to capitalism is the incessant drive to accumulate as a response to the competitive forces acting upon all capitalists. In such a context the accumulated wealth which is the source of the capitalist's social power derives itself from being able to repeat the circuit of Money-->Commodity-->Money', where the capitalist receives an increment or "surplus value" higher than their initial investment, as rapidly and efficiently as possible. Moreover this driving imperative leads capitalism to its expansion on a world-wide scale.
* Crises Marx identified natural and historically specific (i.e. structural) barriers to accumulation that were interrelated and interpenetrated one another in times of crises. Different types of crises, such as realization crises and overproduction crises, are expressions of capitalism's inability to constructively overcome such barriers. Moreover, the upshot of crises is increased centralization, the expropriation of the many capitalists by the few.
* Centralization The interacting forces of competition, endemic crises, intensive and extensive expansion of the scale of production, and a growing interdependency with the state apparatus, all promote a strong developmental tendency towards the centralization of capital.
* Material Development As a result of its constant drive to optimize profitability by increasing the productivity of labour, typically by revolutionizing technology and production techniques, capitalism develops so as to progressively reduce the objective need for work, suggesting the potential for a new era of creative forms of work and expanded scope for leisure.
* Socialization, and the pre-conditions for Revolution By socializing the labour process, concentrating workers into urban settings in large scale production processes and linking them in a world-wide market, the agents of a potential revolutionary change are created. Thus Marx felt that in the course of its development capitalism was at the same time developing the preconditions for its own negation. However, although the objective conditions for change are generated by the capitalist system itself, the subjective conditions for social revolution can only come about through the apprehension of the objective circumstances by the agents themselves and the transformation of such understanding into an effective revolutionary program. [Petras, James and Veltmeyer, Henry "Globalization Unmasked: Imperialism in the 21st Century"]

After Marx

Marx's work sharpened the existing differences between the revolutionary and non-revolutionary socialists.

Non-revolutionary socialists took inspiration from the work of John Stuart Mill, and particularly Keynes and the Keynesians, who provided theoretical justification for (potentially very extensive) state involvement in an existing market economy. According to this view, if the business cycle could be solved by national ownership of key industries and state direction of their investment, class antagonism would be effectively tamed; a compact would be formed between labour and the capitalists. There would be no need for revolution; instead Keynes looked to the eventual "euthenasia of the rentier" sometime in the far future. Joan Robinson and Michael Kalecki employed Keynesian insights to form the basis of a critical post-keynesian economics that at times went well beyond liberal reformism. Many original socialist economic ideas would also emerge out of the trade union movement (see Guild Socialism).

In the wake of Marx, "Marxist" economists developed many different, sometimes contradictory tendencies. Some of these tendencies were based on internal disputes about the meaning of some of Marx's ideas, including the 'Law of Value' and his crisis theory. Other variations were elaborations that subsequent theorists made in light of real world developments. For example the monopoly capitalist school saw Paul A. Baran and Paul Sweezy attempt to modify Marx's theory of capitalist development, which was based upon the assumption of price competition, to reflect the evolution to a stage where both economy and state were subject to the dominating influence of giant corporations. World-systems analysis, would restate Marx's ideas about the worldwide division of labour and the drive to accumulate from the holistic perspective of capitalism's historical development as a global system. Accordingly, Immanuel Wallerstein, writing in 1979, maintained that "There are today no socialist systems in the world-economy any more than there are feudal systems because there is only "one" world-system. It is a world-economy and it is by definition capitalist in form. Socialism involves the creation of a new kind of world-system, neither a redistributive world-empire nor a capitalist world-economy but a socialist world-government. I don't see this projection as being in the least utopian but I also don't feel its institution is imminent. It will be the outcome of a long social struggle in forms that may be familiar and perhaps in very few forms, that will take place in "all" the areas of the world-economy." [Wallerstein, Immanuel, The Capitalist World-Economy, 1979, Cambridge University Press]

Meanwhile other notable strands of reformist and revolutionary socialist economics sprung up that were either only loosely associated with Marxism or wholly independent. Thorsten Veblen is widely credited as the founder of critical institutionalism. His idiosyncratic theorizing included acidic critiques of the inefficiency of capitalism, monopolies, advertising, and the utility of conspicuous consumption. Some institutionalists have addressed the incentive problems experienced by the Soviet Union. Critical institutionalists have worked on the specification of incentive-compatible institutions, usually based on forms of participatory democracy, as a resolution superior to allocation by an autonomous market mechanism. Another key socialist, closely related to Marx, Keynes, and Gramsci, was Piero Sraffa. He mined classical political economy, particularly Ricardo, in an attempt to erect a value theory that was at the same time an explanation of the normal distribution of prices in an economy, as well that of income and economic growth. A key finding was that the net product or surplus in the sphere of production was determined by the balance of bargaining power between workers and capitalists, which was in turn subject to the influence of non-economic, presumably social and political factors. The mutualist tradition associated with Proudhon also continued, influencing the development of libertarian socialism, anarchist communism, syndicalism and distributivism.

In the real world, revolutionary socialists were confronted by the necessity of running an economy, and generally a war economy, and developed ideas and practice in response to the situations they found themselves in.

ocialist economies in theory

Robin Hahnel and Michael Albert identify five economic models within the rubric of socialist economics [Robin Hahnel and Michael Albert "A Quiet Revolution in Welfare Economics"] :

* Public Enterprise Centrally Planned Economy in which all property is owned by the State and all key economic decisions are made centrally by the State, e.g. the former Soviet Union.
* Public Enterprise State-Managed Market Economy, one form of market socialism which attempts to use the price mechanism to increase economic efficiency, while all decisive productive assets remain in the ownership of the state, e.g. China after reform.
*A mixed economy, where public and private ownership are mixed, and where industrial planning is ultimately subordinate to market allocation, the model generally adopted by social democrats e.g. in twentieth century Sweden.
* Public Enterprise Employee Managed Market Economies, another form of market socialism in which publicly owned, employee-managed production units engage in free market exchange of goods and services with one another as well as with final consumers, e.g. mid twentieth century Yugoslavia, Two more theoretical models are Prabhat Ranjan Sarkar's Progressive Utilization Theory and Economic democracy.
* Public Enterprise Participatory Planning, an economy featuring social ownership of the means of production with allocation based on an integration of decentralized democratic planning. An incipient historical forebear is that of Catalonia during the Spanish revolution. More developed theoretical models include those of Karl Polanyi, Participatory Economics and the negotiated coordination model of Pat Devine.

ocialist economies in practice

Western Europe

Many of the industrialized, open countries of Western Europe experimented with one form of socialist development or another during the 20th century. They can be regarded as social democratic or state capitalist experiments, because they universally retained a wage-based economy and private ownership and control of the decisive means of production.

Nevertheless, many Western European countries tried to restructure their economies away from a pure capitalist model. Elements of these efforts persist throughout Europe, even if they have repealed some aspects of public control and ownership.

They are typically characterized by:

*Nationalization of key industries, such as coal, steel, power, and transportation. A common model was for a sector to be taken over by the state and then one or more public corporations set up for its day-to-day running. Advantages of nationalization are:
**The ability of the state to direct investment in key industries
**The distribution of state profits from nationalized industries for the overall national good
**The ability to direct producers to social rather than market goals
**Greater control of the industries by and for the workers.
**Benefits and burdens of publicly funded research and development are extended to the wider populace.
*Redistribution of wealth, typically by progressive taxation of high earners.
*Minimum wages, employment protection, and trade union recognition rights for the benefit of workers. There were a number of different models of protection and trade union protection which evolved. Germany, for instance, appointed union representatives at high levels in all corporations and had much less industrial strife than the UK, whose laws encouraged strikes rather than negotiation. The objectives of these policies were to redistribute and to help produce full employment.
*National planning or state capitalism for industrial development.
*Demand management in a Keynesian fashion to help ensure economic growth and employment.

Union of Soviet Socialist Republics

The Soviet Union and some of its European satellites aimed for a fully centrally planned economy. They dispensed almost entirely with private ownership of capital. Workers were still, however, effectively paid a wage for their labour. Some believe that according to Marxist theory this should have been a step towards a genuine workers' state. However, some Marxists consider this a misunderstanding of Marx's views of historical materialism, and his views of the process of socialization.

The characteristics of this model of economy were:

*Production quotas for every productive unit. A farm, mine or factory was judged on the basis of whether its production met the quota. It would be provided with a quota of the inputs it needed to start production, and then its quota of output would be taken away and given to downstream production units or distributed to consumers. Critics of both left and right persuasions have argued that the economy was plagued by incentive-related problems. To ensure allocative efficiency central planners would have required accurate information about the productive capabilities of each enterprise (including labour), however the system incentivized enterprise managers to underreport their unit's productive capacities so that their quotas would be easier to achieve, especially since the manager's bonuses were linked to the fulfillment of quotas.

*Allocation through political control. In contrast with systems where prices "determined" allocation of resources, in the Soviet Union, allocation, particularly of means of production was determined by a bureaucratic elite, which was notable for its exclusion of democratic process. The prices that were constructed were done so "after" the formulation of the economy plan, and such prices did not factor into choices about what was produced and how it was produced in the first place.
*Full employment. Every worker was ensured employment. However workers were generally not directed to jobs. The central planning administration adjusted relative wages rates to influence job choice in accordance with the outlines of the current plan.
*Clearing goods by planning : if a surplus of a product was accumulated, then the central planning authority would either reduce the quota for its production or increase the quota for its use.
*Five Year Plans for the long-term development of key industries.


After gaining independence from Britain, India adopted a broadly socialist approach to economic growth. Like other countries with a democratic transition to socialism, it did not abolish private property of capital. India proceeded by nationalisation and redistribution in a manner more similar to Western European nations than to the USSR or China. It did however adopt a very firm focus on national planning with a series of Five-Year Plans.

People's Republic of China

China embraced a wholehearted socialist model after the Communist victory in its Civil War. Private property and capital were abolished, and various forms of wealth made subject to state control or to workers' councils.

The Chinese economy broadly adopted a similar system of production quotas and full employment by fiat to the Russian model. In the large agricultural sector, the state simply replaced peasants' existing warlord or landlord.

The Great Leap Forward saw a remarkable large-scale experiment with entirely abolishing wages based on work. Agricultural workers were assured that they would receive food regardless of the output of their village. This system was abolished soon afterwards, and is often considered to be one of the reasons for a significant famine in China in the 1960s, in which millions of Chinese starved.

In recent decades China has opened its economy to foreign investment and to market-based trade, and started to experience economic growth. It has carefully managed the transition from a planned socialist economy to a mixed economy, formally referred to as the socialist market economy.

Relation to other economic theories

In many senses socialist economics is the polar opposite of classical economics. While classical theories are about free markets producing allocative efficiency with no regard for the nature of the community that uses the goods, socialists usually advocate abolishing the market mechanism at least insofar as it is a determining force, and creating a socialist community which redefines allocative efficiency in terms of social serviceability.

The aim of implementing a socialist ownership structure is to create an economy that acts in the direct interest of workers, members, or the general populace, rather than a capitalist class. This is the source of the Economic calculation debate, an old argument between socialist and free market / Austrian school economists. Here the Austrian school economists have argued that the denial of private property ownership - as nearly all models of socialist economics promote - would inevitably create worse economic conditions for the general populace than those that would be found in market economies. Socialists, of course, reject this claim and argue that an economy based on private property inevitably benefits the wealthy few in the detriment of the poor and middle classes.

Many liberal or libertarian societies nevertheless allow the existence of some groups or institutions with a socialist flavour. Cooperatives or communes have existed, and competed, in market economies like the United Kingdom and Israel. Similarly, many western economies have had state controlled businesses compete against private companies, or state monopolies in some critical areas of otherwise market economies - for example Telstra in Australia.

While socialist economics can be green economics, it is not necessarily. Some have argued that economic bodies with socialistic ownership structures are not inherently more environmentally concerned than traditional businesses. However, socialist economists are inclined to suggest that the public "control" that accompanies public ownership is far more compatible to the project of sustainability than the private ownership model.


Further reading

* Albert, Michael & Hahnel, Robin: " [ The Political Economy of Participatory Economics] ", Princeton University Press, 1991. "(Available online)"
* Amin, Samir : "Spectres of Capitalism: A Critique of Current Intellectual Fashions", 1998, Monthly Review Press
* Cole, G.D.H. : "Socialist Economics", 1950, London : Victor Gollancz Ltd.
* G.A. Cohen : "If you're an Egalitarian, How Come You're So Rich?" : Harvard UP
* Horvat, Branko: "The Political Economy of Socialism", 1982, M.E. Sharpe, Inc.
* Kennedy, Liam (ed.) : "Economic Theory of Co-operative Enterprises: Selected Readings", 1983, The Plunkett Foundation for Co-operative Studies.
* Lebowitz, Michael A. : "Beyond Capital, Marx's Political Economy of the Working Class", 1992, 2003, Palgrave.
* Noel Thompson "Left in the Wilderness: The Political Economy of British Democratic Socialism since 1979" 2002, Acumen Publishing ISBN 1902683544
* Sweezy, Paul M. : "The Theory of Capitalist Development", 1942, Monthly Review Press.
* Veblen, Thorstein : "The Theory of the Leisure Class: An Economic Study of Institutions", 1899, New York Macmillan Company.
* Von Mises, Ludwig, "Socialism".
* Makoto Itoh, "Political Economy of Socialism".

ee also

*Economic calculation debate
*Fair Trade
*Feminist economics
*Gandhian economics
*History of economic thought
*Labour economics
*Market socialism
*Marxist economics
*Mutualism (economic theory)
*Participatory economics
*Welfare economics

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