How a socialist economy would work

JARED WOOD outlines how a socialist economy would work.

THE FALL of the Berlin Wall and the subsequent collapse of the so-called communist bloc were greeted triumphantly by capitalist political and business leaders and academics. Most famously one US academic, Frances Fukayama, declared it was ‘The end of history’.

Along with many others, Fukayama believed the search for the most efficient way of organising society had been settled for good. The liberal free market had proved its superiority over socialist planning. Never again would the rule of capital be challenged.

But the growth of the anti-globalisation movement has done just that. As we enter the 21st century half the world’s population live on less than US$2 a day. Multinational companies dictate government policies and dominate local markets. Not since the 1970s, perhaps, have so many workers, students and young people, across the world, sought an alternative to capitalism. The question is what alternative?

Planned economy

KARL MARX proposed the alternative of a planned economy. Major industries and financial services would be publicly owned and controlled by democratic structures representing workers in those industries, local and regional communities and the elected government.

Marx said that only public ownership could facilitate the democratic control of production because firms operating in a capitalist market are constrained by the laws of that system. At its most basic this means that in order to attract investment (capital) a firm must maximise its profit. If investors believe they can make a better return elsewhere they will withhold funds and the firm goes bust or gets taken over.

Marx also observed that as powerful companies grow they are able to cut their costs by producing on a bigger scale and using their revenues to invest in new technology. This gives the biggest firms a competitive advantage and allows them to become monopoly producers. Having driven their competitors out of business these giants are able to fix prices and wages for entire industries.

Marx believed that taxing or regulating these industries would ultimately fail. Private firms will use their resources to find legal loopholes in tax and regulatory regimes. In the event that this proves too difficult investors will withdraw from an industry and look elsewhere. This is the process that has come to be known as ‘capital flight’.

Once investors perceive an industry or even a country’s entire economy to be unprofitable they withdraw their funds leading to a collapse in the local currency and crippling recession. This has been the experience of many less developed countries in recent years that have been told by the IMF to cut taxes and privatise public services in order to attract capital investment.

The fact is that in a market economy a handful of hyper-rich people will always decide what is produced, where and in what quantities, irrespective of the greater needs of society.

Marx’s idea for a planned, socialist economy was the answer to these problems. If the major industries and banks are publicly owned then we can, as a society, democratically plan how to use our resources.

To put this into some sort of perspective consider this. Around 150 companies control about 75% of all commercial activity in Britain. These firms are controlled by boards of perhaps a dozen or two dozen directors. A handful of people make the decisions that determine the wages we will be paid, the prices we will be charged and whether we have jobs or not.

Public ownership and democratic planning would allow everyone to have some input into these decisions. Rather than considering profit margins and market share, a system of democratic planning would consider how to use resources most efficiently in order to satisfy people’s wants and needs.

Maximise production not profit

CAPITALIST ECONOMIC theory is based on the model of a ‘perfect market’. This perfect market allows anyone to produce anything, it allows anyone to buy from any producer and everyone has an identical supply of knowledge. Firms maximise their profits by producing and selling as much as possible.

The model though is a fairy tale. Back on earth most production is carried out by monopoly or oligopoly firms (an oligopoly being where a few large firms share out a monopoly market). In order to maximise their profits monopoly producers often restrict production in order to push the price up.

This can be possible because only so many people can afford to buy a commodity at any given price. In order to increase sales a firm is likely to have to charge less. If the required price cut outstrips the extra sales then profitability will fall even though the firm is making and selling more. If this is what a firm expects it will hold off investment in new technology, plant and machinery – and workers.

Planning would also eliminate an enormous amount of waste in the form of useless production. Well over half the price paid for many branded goods (clothes, toiletries etc) can go to pay for the product’s advertising budget. Retailing goods can also be ridiculously expensive. Clothing is typically marked up by several hundred percent of the manufactured cost. And having paid inflated prices products are made to fall apart after an artificially short life so that we have to buy a replacement.

A planned economy would not allow individual firms to restrict production or build in obsolescence to products in the way monopolies do now. Factual information about products could be provided but resources wasted on brand based advertising, trying to sell an aspiration or image, could be used more productively. By utilising spare capacity and increasing investment in new production economic growth would soar as a result of planning.

Democratic planning

IN ORDER to democratically plan production workers must first control their places of work. Large scale workplaces would be run by elected committees of representatives of the workers, the socialist government and the trade union movement.

These committees would take decisions about the day-to-day running of the workplace. A system of local, regional and national government would represent communities and also have delegates from workplaces. This is where broad priorities for the economy would be decided, including allocation of scarce resources between different sectors and deciding how to distribute resources for investment and wages.

Although business leaders (falsely) lambaste socialists for wanting to control every economic decision centrally, there is a large element of this already taking place within multi-national corporations. Of course not every decision is taken by big multi-national firms but the decisions that really matter are.

According to the 18th century capitalist economic philosopher, Adam Smith, ‘the invisible hand of the market’ would organise production and exchange. In the long run, in a capitalist economy, market conditions will determine aggregate levels of investment, prices and employment.

But the day to day decisions are organised, planned even, by teams of economists and accountants who try to anticipate the market. They move production around the world in search of cheap labour; they hide profits until they turn up in an offshore tax haven; they estimate future demand and hire or fire accordingly.

These are the decisions that must be taken democratically in a planned economy. They are a relatively small number of decisions but have a massive impact on society.

Alternatively there are millions of small decisions to be made that have only a local or even individual impact. Whether to eat fish and chips for tea or how to run the chip shop are decisions that can continue to be made by individuals or small firms in the planned economy.

The crucial difference is that firms will be operating to new rules. Wage rates, working conditions and prices will no longer be set by multi-national firms but by democratic government.

Where the economy is unable to produce sufficient commodities to meet demand then a price mechanism and market would continue to operate. But with the profit motive removed many goods including basic foods, housing, fuel etc could be provided for free.

Lenin (in State and Revolution) and Trotsky (in The Revolution Betrayed) both explain how an administrative apparatus, a state, will be necessary during the transition from capitalism to communism. But as the planned economy develops it will be able to meet more and more of people’s wants until there is no need to ration and limit distribution and the state can wither away.

They were writing in the early 20th century and today the distribution of such goods could be achieved far more efficiently than they can be retailed in shops, especially given recent developments in IT. What could be simpler than ordering free, publicly provided goods on the internet? Inventories, demand and future production needs could be monitored continuously and fed into the planning process.

Socialism and democracy

LEON TROTSKY, alongside Lenin the co-leader of the Russian revolution, wrote that socialism needs democracy as a body needs oxygen. Tragically, in the conditions of extreme economic disintegration that existed after the wars of intervention against the revolution by the capitalist West, Trotsky and his followers were defeated by the forces of Stalinism in the isolated Soviet state.

Stalin represented a totalitarian wing of the administrative apparatus that opposed any form of workers’ democracy and ruled instead in their own interests. With that defeat went the chances of establishing a genuine socialist democracy to control the USSR’s planned economy. A new revolution to overthrow the Stalinist dictatorship would be necessary.

In the absence of any effective democratic checks the soviet economy was held back by inefficiencies and lack of co-ordination. Nevertheless the Soviet Union was still able to make progress, especially in the development of heavy industry and infrastructure.

State planning, even under bureaucratic direction, proved effective in managing huge national projects where one uniform product was required everywhere. Infrastructure projects such as electrification and public transport were developed at a speed unimaginable in the capitalist countries while resources were also found for the provision of healthcare and education, at least in the major cities.

But as Trotsky himself predicted in his book, The Revolution Betrayed, the inability of the soviet economy to react to what people wanted in the form of consumer goods eroded support for the system of planning.

Also, as the economy grew the bureaucratic decision-making process came into sharper conflict with the needs of a modern society. The criticism made of soviet planners making economic decisions for everyone from an office had more than a little truth to it.

The nature of bureaucratic planning also failed to take account of the quality of goods produced. Central planners set quantitative production targets but in order to meet them many factories produced sub-standard goods. With no democratic input the economy simply failed to provide the type and quality of commodities needed.

Supply and demand?

ACCORDING TO what is known as ‘marginal utility theory’, which has been incorporated into orthodox economic theory, the value of a commodity is determined by the price a consumer is prepared to pay for one more unit of that commodity.

This breaks with the classical economic ideas of David Ricardo and Adam Smith who said that the value of a commodity is created by the labour of those who produce it. This ‘Labour theory of value’ is also central to Marx’s work in Capital.

Does it matter who is right? Yes. If it is true that value is determined by the available supply of commodities and the corresponding demand for them then it is impossible to produce efficiently without a free market.

How else could we know what to charge for something? How could planners know whether a pair of shoes is overpriced at £40 or under-priced? Will the state-owned shops be left with unsold goods or facing shortages and queues of frustrated shoppers? Will the price charged be sufficient to cover production costs?

Marxism maintains that the intrinsic value of any commodity is given by the amount of necessary labour time employed in its production. Of course, in a capitalist market place commodities can be traded, according to circumstances, at a price that is above or below their labour value but they will tend to oscillate around this level.

It stands to reason that if a commodity is sold at a price significantly below its value for a prolonged time the producer will go bust as he/she will not be able to meet the costs of paying wages to obtain the labour necessary for production.

According to the labour theory of value then we can calculate a value, or price, to commodities according to the costs of production. This can be measured just as capitalist firms already do. Planning decisions can then be made democratically in the light of accurate information about the costs of producing different commodities.

Nationalised industries

IN 1979 many of Britain’s biggest industries, especially power and infrastructure, were publicly owned ‘nationalised industries’. The Thatcherite Tory government set about privatising them, arguing that nationalisation caused inefficiency because no-one had a personal interest in the profitability of the firm.

British Gas and British Telecom were two of the first high-profile privatisations, culminating with British Rail. Blair’s New Labour government has continued the trend, privatising schools, hospitals and the infrastructure of London Underground.

The first and most obvious point to make is that privatisation has caused some spectacular failures, nowhere more tragically than on the mainline railways. This in spite of government subsidies to the private rail industry, which are up to ten times higher than those given to the old, nationalised British Rail.

But neither BR nor any of the old nationalised industries in Britain were a model for a planned economy. Many, like British Leyland, did perform badly (though they’ve hardly triumphed in the private sector either). Principally the problem lay in the structure of these nationalised firms as government-owned capitalist businesses.

Decisions on production, wages and employment were made by a board of directors in order to compete with a much larger private sector in domestic and world markets. The demand was often raised in the pages of Militant (now the socialist newspaper) for the nationalised industries to be run by elected boards made up equally of delegates from the firm’s workforce, the trade union movement as a whole, and the government. This would have allowed real workers’ control over publicly owned industry.

Even then, nationalised firms and other forms of non-profit making enterprises such as co-operatives, will never be able to flourish if forced to play by the rules of a capitalist market. Failure to maximise profit for the individual firm will mean losing market share and investment funds.

Only democratic planning and public ownership allows decisions to be made on a co-ordinated basis in order to maximise production of what is needed for all. Frederick Engels wrote in Socialism: Utopian and Scientific, that the great accomplishment of capitalism was to take production out of the home workshop and socialise it in the more productive form of mechanised, specialist production.