market "socialism," etc.

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

THE SHORT VERSION (but still too long!)

<ellipsis>

Justin writes > they [that famous rock'n'roll band, Hayek & the Austrians]
don't have the particular vices of the NCEists, math worthship, a
conception of markets that is essentially static, and based on utterly
counterfactual assumptions. They have a feel for real-world markets, if too
little appreciation of their limits.<

I respond It's a mistake to use the NCEists as one's standard of
comparison. It really doesn't settle anything, since there are a variety of
schools (the institutionalists, the post-Keynesians, and a lot of other
heterodox economists) that are better than the NCEs. Further, NC economists
like George Akerlof are much better than the Austrians, to my mind. (His
market for lemons paper is a classic. It's also a case where math is quite
useful.)  But many of the heterodox economists disagree with each other. If
anything, I learn much more from the PKs, among other things because they
have a serious theory of money and have learned Keynes' lessons, which is
something that the Austrians never will do.

The "Austrian" theory of competition is derivative from Marx and the
classicals. I'm pretty sure that Bohm-Bawerk developed most of his stuff in
response to Marx, while appropriating the parts of Marx he liked (e.g., the
dynamic vision of competition).

And the Austrians have their own "particular vices." Every time I try to
read the Austrian stuff, it (a) doesn't seem to add anything substantive;
and (b) gets into naturalist ideology. Similarly, though they talk about
business cycles (as well-summarized by Haberler), they (a) get stuff from
the Marxian tradition about how upswings create imbalances that need to be
purged in the recession (unlike the mainstream Keynesian tradition, e.g.,
Krugman or DeLong) but (b) assume Say's Law and that the downswing is
"natural" and/or painless. Crucially, they ignore the roles of the rate of
profit and aggressive accumulation (i.e., they ignore capitalism).

If I remember correctly, Nicholas Kaldor won his debate on business cycles
with Fred von H (connected with the latter's "triangles," I believe). But
the Austrians still like the idea of "letting nature take its course," so
that the business cycle recession can drive wages down, etc. Before Keynes,
the Austrian vision was dominant among policy-makers (as a rationalization
for explicitly pro-business rule of people like Treasury Secretary Mellon).
I think it was very apt for Robert MacEllvaine to title a chapter of his
book on the Great Depression "Nature Takes Its Course."

(Currently, Austrian economics seems popular among the shrinking number of
"new classical economists," who are much much worse than the more
NC-oriented Monetarists (a.k.a. "new Keynesians").)

The Austrians may not believe in the "utterly counterfactual assumptions"
of NC economics (which are what, by the way?) but a lot of them reject any
kind of empirical testing of their theories. Deductive knowledge is totally
privileged over inductive knowledge (while they can be dogmatic about their
deductions because they're "self-evident"). Rothbart's Austrian book on the
Great Depression starts with _an apology_ for using empirical evidence! He
then goes on to make utterly counterfactual assumptions about the
omniscience of his beloved entrepreneurs. That kind of stuff (a predecessor
of the notion of "rational" expectations) is just as bad as -- if not worse
than -- the Walrasians' assumption that an omniscient Auctioneer (the
modern version of Smith's Invisible Hand) rules the roost. And the
Austrians' belief in Say's law is quite counterfactual.

<ellipsis>

JS >... they [competitive markets] have postive results. Uncompetitive
markets involve monopollies or oligopolies or price fixing and other bad
things that lower production and increase prices while the gougers take rent. <

You may have noticed that I pointed to some advantages of monopolies. In
fact, it may be that monopolies and competition are equally good. (The
Industrial Organization economists seem to be going in that direction.) The
key question is whether or not an industry can be controlled by the people,
in a democratic way. Competition may make that _more_ difficult, by
allowing each firm to avoid responsibility "I had to dump toxic waste in
the woods (or put sawdust in the kids' meals or sell weapons to Hitler or
...) because _everyone does it_ and I'd suffer a competitive disadvantage."
A monopoly has a harder time evading responsibility. Note that most
government regulation give special treatment for smaller businesses. This
is not only because of the remaining clout of the petty-bourgeois types and
of their ideology. It's also because it's harder to get information about
them. (Nixon's price-control scheme -- after the initial freeze -- was
similarly aimed only at the bigger businesses, the oligopolies.)

Competitive markets also involve competitive rent-seeking. Of course,
rent-seeking also takes place in the political sphere (via lobbying,
lawsuits, etc.) The Chicago school -- including its Austrian branch --
makes the outrageous assumption that the political sphere can be cleanly
divided from the "economy" and that rent-seeking only takes place in the
former. But scarcity rents are regularly sought, for example, by trying to
capture the best corner for selling something, the cheapest place to take
raw materials out of the ground, etc. (Here, "cheapest" refers only to
private cost, ignoring environmental cost.)

<ellipsis>

JD>>More importantly, I think that the parenthetical remark has things
precisely backward. I'd say instead that in a planning context, some, even
much, market allocation is fine. This requires qualification and
explanation, of course.

>>First, I think ideas of "market socialism" (or even better, Diane
Elston's idea of "socialized markets") make sense as part of a
_transitional socialism_, since the idea of instantly abolishing markets is
crazy. ( Of course, _all_ socialisms are supposed to be transitional, but
it's important to emphasize this.) Almost every socialist experiment has
left the small business sector alone in the early stages, while relying on
markets for a lot of things.<<

JKS>Transitional to what? If to complete abolistion of markets, Hayek's
arguments raise their ugly heads again.<

I already rejected the idea of _totally_ central planning (where there's
only a single planning agency that makes all decisions), which is the only
place that H's ugly head is relevant. (In other words, it's irrelevant.)
More importantly, I repeat myself again the key thing is to avoid the tired
old plan/market dichotomy. Some _aspects_ of markets can play a role, along
with some _aspects_ of central planning. Democratic rule is central to
deciding how this _mix_ is organized. Since democracy is the most
fundamental principle of what socialists should be fighting for, planning
by its very nature takes precedence. The democratic plan must decide the
relative roles of decentralism and centralism. We can't let the "market"
make these decisions for us.

If we have to state a "dichotomy" it would be "centralized decision-making"
vs. "decentralized decision-making," where the latter does not need to be a
market and the former need not be the Hayekian all-knowing all-powerful
planner (i.e., the straw man he knocks down). Many decisions can be made
with both centralized and decentralized inputs, contrary to your
presentation of Hayek's ideas.

JD>>Second, markets should be subordinated to the democratic will of the
working people. . . . Anyone who proposes a market socialism should be very
conscious of the way that market institutions create barriers to the
further progress (democratization) of socialism.<<

JKS>I agree with this. I just think there are limits to democratization. If
we make the economy totally political we lose the incentives to get
accurate information, to minimize waste, and to inniovate that so far as I
have learned in 20 yeras of thinking about it, only markets provide.<

The economy _already is_ "totally political." The market "mechanism" is
just a way of hiding the politics (the social relations), as Marx's theory
of commodity fetishism indicates. I've already argued against "accurate
information, minimization of waste, and innovation," so I won't repeat
myself. Again the impasse...

<ellipsis>

JD>> One reason that planning is needed is that we need to plan to abolish
markets as much as possible. Market socialism seems a "necessary evil," but
it's still an evil. <<

JKS >I don't see this. It's not ideal, but it's a great enough improvement
to count as a positive good. And I don't think we have any business talking
about abolsihing markets until we have a plausible answer to the
calculation problem.<

Your point should be restated as "we have no business actually abolishing
markets altogether unless we have a plausible answer to H's calculation
problem." There can't be anything wrong with talking about it. In fact, if
we value democracy, we have to talk about it.

Further, as I've said before, the so-called "calculation problem" is
_irrelevant_ unless one accepts the Hayekian straw-man that there must be a
single centralized agency that makes all decisions. Repetition is again a
sign of impasse.

<ellipsis>

JD>> I'd start with one of those diagrams that the US Socialist Labor Party
(the deLeonists) used to pass out, showing a hierarchy of negotiations
among workers' councils. Or some notion of "guild socialism." These are
incomplete and abstract, but help us get away from the sterile plan vs.
market dichotomy. It emphasizes the key issue of who is supposed to be in
power.<<

JKS>OK, but how do such negitioans address the issue of how the councils
get and act on accurate information? Where are incentives to provide it and
discover it?<

Information is _never_ totally accurate, as a lawyer should know. People
never give the whole truth, despite their swearing under oath to do so.
Truth is a matter of Rashomon, or the visually-challenged people groping
the proverbial elephant. The truth is "out there," but it can never be
grasped entirely "in here," i.e., subjectively.

And as I've argued over and over again, but Justin has ignored, economists
since H (people like Akerlof) have used an information critique to develop
a much more sophisticated understanding of markets than H had. (I presume
he's dead.)

Now what about (necessarily) inaccurate information that's needed for the
coordination of the large number of co-operatives?

It's best to learn from experience rather than from deductive reasoning of
the sort that H uses. We know that the government collects all sorts of
information even from capitalist firms. Despite the fact that such
companies lie and cheat as part of their normal operating procedure, the
government gets pretty good information. One thing they do is have strict
rules about how information is reported (as with the Securities and
Exchange Commission). They also audit the capitalists' books. The very
strict system of financial regulations that exists in the US relies heavily
on audits. (When the US government decided to let H's free market ride in
the saddle, we got the Savings & Loan disaster, among other things.)

In addition to the government regulation, it's important to remember that
accreditation agencies and "industry-self regulation" groups should play a
role. There's no reason that all information has to be centralized. Also,
governments themselves aren't totally centralized (nor should they be).

I think that this kind of information-gathering can be furthered in a
"grants economy" that the late Kenneth Boulding studied. I'm not an expert
on his views, but the way it makes sense to me is that different co-ops
would receive grants from the democratically-elected central government (or
perhaps from different departments of that government), from the provincial
government (in the US, from state governments), and from municipalities.
Co-ops can also give grants to each other (a grants-economy version of
subcontracting). (Note that the grant-making power is not centralized in
H's God-like agency.) Each grant that a co-op receives involves a promise
to live up to pre-specified goals (not something simplistic like
profit-maximizing). Grants always involve penalties for non-compliance with
the predetermined agreement. At a minimum, grants that merely finance
featherbedding and the like are not renewed. Note that this kind of system
does not involve "soft budget constraints" the sum of a co-op's grants
would determine the size of its hard budget constraint.

I don't see why the source of grants has to be limited to government
agencies (federal, state, local). Political organizations, women's groups,
clubs, individuals, etc. can also provide grants. The ideal market story
has only individuals providing grants (which means that the system
disproportionately benefits the rich) with extremely well-defined benefits
being received by them (i.e., leaving out the externalities).

For a useful analysis of Boulding's work, see the paper by Tracy Mott and
pen-l's Don Roper at
http//csf.colorado.edu/authors/Boulding.Kenneth/paper/. One major point is
that Boulding saw the grants economy as "integrative," as encouraging
societal unity. Socialists should value such integration (as long as it's
organized democratically) as opposed to markets, which encourage
free-riding and disintegration. (The ideal market has as its counterpart,
the repressive state, to make sure that free-riding doesn't violate the
property rights of those with sufficient property to have political power.)

JD>> I participate in the library committee at work and I notice that the
Library presents an alternative to competitive markets and also to top-down
planning. (1) The Library has a mission statement, which defines a bunch of
different goals and objectives. . . . . The key point is that there's no
effort to reduce all of the Library's goals to a single number, as with
profit maximization. That's a _good thing_, since the world is too complex
to allow a single number to summarize the goals of an organization such as
a library (and most or all other institutions). <<

JKS> I agree, but real capitalit firms also do not focus on a single goal
of profit maximization. They seek market share, name recognition, a niche
that they will with goods of a certain quality, etc.<

Then you're coming to realize that H presented an excessively simplistic
vision of the market process. However, you miss the fact that all of those
other goals serve the Greater Good (from the corporation's perspective),
i.e., profits. They don't know exactly how to attain profit maximization,
so they go for all those other things, which can be achieved in more
obvious ways.

<ellipsis>

JD>> Of course, the library has a budget, which it cannot exceed for long,
so it minimizes costs (subject to constraints). It doesn't have a "soft
budget constraint," which need not be part of any process (either market or
plan). <<

JKS>This is crucial. OK, one way to get an incentive to minimize waste, and
thus seek accurate information, is to have a real hard budget constraint.
This will tell enterprizes they have to make do with a certain level of
resources, there aren't any more this cycle. Good. But there is a problem
with democracy here, as different interest group clamor for a bigger budget
share, for exceptioons to budgetary rules, subsidies, etc. <

I don't see why democracy has anything to do with soft budget constraints.
After all, the USSR, where soft budget constraints were supposedly rampant,
did not have political or economic democracy. Soft budget constraints
(i.e., free loans) are simply a matter of an economic unit having enough
power to influence the way the system works. The managers of the old USSR
were part of the ruling class and they conspired (informally or formally)
with their comrades in the planning apparatus and the CP to set up a system
-- involving soft budget constraints, among other things -- that attempted
to foist costs onto the working class. This suggests that, if anything, the
existence of "soft budget constraints" are a symptom of a _lack_ of democracy.

I would guess from what Paul said that soft budget constraints were
important in the old Yugoslavia for similar reasons (municipal politicians
in league with local co-ops to conspire against the rest of the country,
etc.) It seems to me that Schweikart's idealization of the Yugo economy has
to address the question how does my "market socialism" avoid soft budget
constraints? is it simply by theoretical fiat?

I should mention that capitalism as we know it involves soft budget
constraints. Given the uncertainty of investment decisions and the
fecklessness of some borrowers, there are some loans that go unpaid. The
bankruptcy court allows the borrowers to escape the consequences. Of
course, capitalism does perfectly well with this, since the bankers screen
and monitor the borrowers, use non-price means to ration credit, insist on
collateral, etc. (Charging an interest premium doesn't solve the problem,
as the theory of adverse selection suggests and as bankers know.) Unlike in
the intro econ textbook's image of markets (reproduced by Herr H), bankers
and other financial intermediaries are extremely nosy and intrusive. (Again
Mishkin's M&B textbook is helpful.) It's not simply a matter of prices
(interest rates) allocating resources between alternative uses. It's a very
personal interaction. The financial economy is in many ways a non-market
economy.

<ellipsis>

JD>> Libraries are necessarily not-for-profit institutions, as far as I can
tell. (A for-profit library is called a bookstore and is a very different
animal.<<

JKS >They are public goods, which is why they tend to be not-for profit,
publically subsidized enterprises. There were for-profit libraries in the
19th century, though.<

I think it's a mistake to draw a line between "public" and "private" goods
in an _a priori_ way. (Most economists are aware of this, even having a
hard time finding "pure" public goods.) This is a matter of degree, not of
kind. As a very conservative old libertarian (Anthony de Jasay, a man who
would probably admire people like H and Thatcher) pointed out, it's the
_public_ that decides what a "public good" is. That is, the line between
"public" and "private" goods is determined by the way in which the
prevailing political-economic system expresses collective wants. In some
societies, the _fire department_ is organized as a marketed good. In our
society, the decision of what is and what is not a "public" good is
determined in a large part by the overwhelming political-economic power of
the capitalists, who have a built-in bias toward privatizing (because they
can cream-skim the potentially profitable lines of business from the
government, because they've got the bucks to buy privatized products, etc.)

<ellipsis>

JD>> This story can be summarized by thinking of the "fingers" of Adam
Smith's "Invisible Hand"... This also helps us deal when an issue that
Justin doesn't address at all "what is a market?" <<

JKS >I'd say, roughly, a system where producers exchange products for money
(or things of value), seeking to satisfy the needs of others in exchange
for profits....<

but you seem to confuse an argument for decentralization with one for
markets. Also, needs are irrelevant in a market unless backed by purchasing
power and are actually known to the spenders.

JD>> ... The Library avoids using all four fingers, including the middle
(rude) one

JD>> 1) individualistic greed, the worship of a quantitative bottom line
this does not apply in the case of the library, since the goals are more
complex (as they should be). Instead of simply seeking profit, the library
has certain responsibilities (the mission statement) and is held
accountable for not living up to them.<<

JKS >But the library has an institutional self-interest, and the people to
run it have bureaucratic self-interests. It would be naive to think that
merely because the library does not operate for profit taht it conforms
selflessly to its mission statement.<

I never assumed that the head librarian or any librarian or any library was
"selfless." (He does seem like a good guy; he's also an anthropologist who
specializes in studying Native Americans; he may be as pro-Indian as Louis P.)

I think that may be the root of the problem. I wasn't assuming that people
should be "selfless" or "altruistic." (The self-interest/altruism dichotomy
is another one of those red herrings that floats around, unexamined, like
the plan/market one.) The pressure from the _stake-holders_ encourages the
librarian to keep his "bureaucratic self-interests" in line with what the
stake-holders want, as expressed in the mission statement. In a grants
economy, a slacker wouldn't get many grants.

It should also be noted that corporate bureaucracies have their own
bureaucratic self-interests, which sometimes go against pure profit
maximization for the firm, despite the wonders of the Market that the
Prophet Frederich gives us Good News about. This is the
famous  Principal/Agent problem (a theoretical cousin of moral hazard) in
the economics literature. The stock-holders are the Principal, while the
top managers are the Agent, who stray from the profit-seeking straight and
narrow (thus, the "problem"). (Contrary to von M, capital markets don't
solve this problem, since share prices are largely determined in a
speculative way.) Whether or not this can be "solved" depends on one's
perspective, one's definition of success. Efforts to give top management
stock and stock options to motivate them to serve the stock-holders has
encouraged a very short-term perspective that many observers of business
complain about. Efforts to put the top managers under the thumb of the
bond-holders (rentiers) has had similar results. This is one cause of the
wave of down-sizings in the early 1990s that meant that a lot of companies
gave up on employee loyalty...

Frankly, I don't think there's any real solution to the Principal/Agent
problem unless the Agent gives up narrow self-interest and tries to work
cooperatively with the Principal. Unfortunately, market institutions
encourage the Agent to stick with total individualistic greed. This is one
reason why we have to move in the direction of abolishing markets.

<ellipsis>

JD>> Yugoslavian worker co-ops didn't really follow the Ward-Domar model in
hiring. <<

JKS>Right, and neither does Mondragon. In fact, the Ward hypotheses are
pretty well controverted by all the empirical literature, except for one
thing Coops stay small and grow slowly. Mondragon grew by adding new coops,
not by increasing the size of old ones.<

Despite the tendency toward fraternity-like exclusivity, the small size of
the co-op has advantages, such as encouraging _esprit de corps_. It may
also prevent the equivalent of monopoly power that might prevail under
socialist decentralism. I think that democratically run co-ops are crucial,
though I think a pure market environment for these co-ops is the wrong way
to go. Markets encourage irresponsible individualism and undermine solidarity.

<ellipsis>

JD>>The problem with the Adam Smith model is that prices are supposed to be
the only signals. That means that the firm or co-op is only held
responsible to the person with the "dollar votes." That means that the firm
isn't held responsible to the community, the country, etc. This encourages
the standard irresponsible behavior associated with capitalists (or the
most economistic trade unions).<<

JKS >Well, it's not held responsible by the market. That's why we have laws.<

"we" have laws? I hadn't noticed that "we" controlled the state.

JKS >It may be economically rational for a firm to fix prices or redline
minority neighborhoods or discriminate against the handicapped. We make
these sorts of behavior illegal, imposing other costs on them, such as the
cost of litigation and the disgrace of being found to have violated the law.<

The problem is that the legal market follows the economic market, so that
those with the wealth predominate unless there is mass mobilization.
Without the latter, there's no way we can presume that the regulations do
anything to help the public.

Also, laws cannot only come from the center. We can't presume that our
Legislators and Judges are all-wise (as H might say), so we need all sorts
of other stake-holders to be involved.

JD>> 3) private property none of the librarians "owns" the organization or
its books. Rather, it is owned by the university or the municipality. <<

JKS >Right, but markets do not require private property. This is the weak
point in Hayek's own argument for capitalism. He was never able to state
persuasively why we need private property just because we need markets.
Dave and I would abolish private property title to productive assets would
best in the democrtaic state.<

I'm not sure one can drop private property from the market. If one doesn't
own an object, one can't sell it. Or if one is allowed to sell the results
of one's use of the collectively-owned capital goods, what is to prevent
the abuse of those capital goods by the co-op? The moral hazard problem
again! In comes the need for nosy and intrusive regulators or bankers.
Pretty soon the pristine beauty of H's market disappears...

JD>> 4) competition libraries don't compete with each other, at most
engaging in friendly rivalry. Note that there is "consumer choice"
nonetheless, since there are other libraries and no-one forces you to go to
the library. One can also get a lot of information from the
government-sponsored Internet or the private book-sellers, so libraries
also compete with institutions outside their sector.<<

JKS >Right, but it's not clear that this can be generalized. In fact, I'd
argue it can't. If we have several automakers who don't compete but only
engage in friendly rivaly, who have nothing at stake in making better cars,
why will they make better cars? Peple might complain, but they will have
little leverage. They can vote for someone who says, if you are
disastisfied, I will make better cars, but if we multiply this over the
entire economy with millions of productrs, I don't see that the library
model gives anyone a serious incentive to meet real needs.<

You implicitly make the unexamined assumption that auto-makers only make
cars. In any event, I wasn't saying that people shouldn't have choice about
which car to buy. And they don't have to buy cars at all (which is a good
idea, BTW, but one that's hard to swallow in a place like LA where market
logic was encouraged to rule, so that public transportation is pitiful).

<ellipsis>

JD >>My impression is that these [not-for-profit] organizations generally
do a good job at attaining their goals. <<

JKS>Perhaps. But why think that their methods can be extended outside the
context where not-for-profits flourish because markets won't meet those
needs to start with?<

Because the effects of the companies in the for-profit sector are much more
complex than in the simple market models purveyed by H, the Austrians, or
the rest of the Chicago school.

I already addressed the question of why can't steel mills be run as
not-for-profits? Not-for-profits minimize (private) costs. To deal with the
issue of social costs, other agencies are needed. Eliding some stuff, we
get to Justin's reply

JKS>Yes, but they also, and centrally, produce steel. The other concerns
you mention would be addressed by the institutional framework of market
socialism. A worker-self-managed steel mill would be unlikely to pollute
the environment where the workers lived. Nor will the mill shut down and
move to Malaysia, unless all the workers, or the majoririty of them, decide
that a trpical climate would suit them better. And they would try to
arrange their work so that it would be less dehumanizing.<

The problem is that there are a lot of other externalities -- both
technical and pecuniary -- that affect areas outside of the "neighborhood"
of a mill. H defines "externalities" simply as neighborhood effects, but
that's ruling out phenomena like global warming without actually studying
the issue. Also, when a co-op decides to move to Malaysia because "it likes
the climate," that has a lot of effects beyond the neighborhood, since it
will have an impact on subcontractors, their subcontractors, the national
market, etc.

JD>>Further, if you examine an actual steel mill, you'll find that its
owner is quite involved in the community, affecting collective decisions
about infrastructure, pollution, and even education. . . . . The problem
with these community relations is that most of the power is in the  hands
of the owner. <<

JKS >And in market socialism the "owner" isd the state and the managers who
make the day to day decisions are the workers.<

Without "middle level" agencies between the state and the managers to
monitor them, this system is much too simple.

that's it for now... no more missives today or Thursday.

Jim Devine jdevine@xxxxxxx & http://bellarmine.lmu.edu/~JDevine "Segui il
tuo corso, e lascia dir le genti." (Go your own way and let people talk.)
-- K. Marx, paraphrasing Dante A.