Market Socialism: An Evaluation of Profit-Oriented Proposals
POST-LANGE MARKET SOCIALISM: AN EVALUATION OF PROFIT-ORIENTED PROPOSALS James A. Yunker Department of Economics Western Illinois University Introduction A possible milestone may have been achieved in 1992 when the American Economic Association published John Roemer and Pranab Bardhan's article "Market Socialism: A Case for Rejuvenation" in the Summer issue of its Journal of Economic Perspectives. Aside from a handful of articles on the theory of cooperative production in the American Economic Review, the American Economic Association had not published any important work on market socialism since Abram Bergson's article on Oskar Lange's market socialist proposal ("Socialist Economics") in the 1948 Survey of Contemporary Economics. Implied in the concept of market socialism are very serious questions concerning the economic and ethical legitimacy of the capitalist status quo. Such questions were more natural during the ravages of the Great Depression of the 1930s, when Lange's proposal was first put forward. By the time Bergson's essay appeared in 1948, these questions were rapidly evaporating. Two factors may have been at work. The Second World War thoroughly eliminated the excess capacity problem of the Great Depression, and Keynesian anticyclical policy has effectively precluded any repetition of the problem in the postwar era. In addition, the rapid postwar rise of the Soviet Union to the status of chief menace to Western civilization greatly inhibited socialistic dissent within the United States and its First World allies. Now that the Soviet Union has been dissolved and its successor republics and erstwhile satellites are apparently making haste to rejoin the world mainstream of democratic market capitalism, conservatives everywhere are celebrating the "death of socialism" in human affairs. Such celebrations are conceivably premature. For a long time there has been a minority of individuals in the West who have believed that some form of democratic market socialism, as yet unimplemented anywhere in the real world, would provide a superior alternative both to the democratic market capitalism of the contemporary United States and to the oligarchic planned socialism of the ex-Soviet Union. Throughout the Cold War period, interest in democratic market socialism may have been restrained by the association of socialism with a dreaded national enemy. The capitalist economic system has been able to wrap itself up in the flag, to enlist in its own defense the powerful and unreasoning force of patriotism. Now that the Cold War is receding, it may be possible for many people to consider the idea of socialism in a calmer and more objective frame of mind. Thus--however paradoxical it may seem at first glance--it is at least conceivable that the death of Soviet Communism will in fact lead to a renaissance of interest in socialism. The publication of the Roemer-Bardhan article in the Journal of Economic Perspectives may be an indication of renewed interest in market socialism within the profession of economics, and renewed professional interest may lead ultimately to a serious real-world reform effort. This article surveys and evaluates three plans for a profit-oriented system of market socialism which have been put forward in the professional literature during the post-Lange period. The first published reference to my own proposal for "pragmatic market socialism" appeared in a 1974 article in the Review of Social Economics; the first published reference to the proposal of Leland Stauber for "municipal ownership market socialism" appeared in a 1975 article in Polity; and the first published reference to the proposal of John Roemer and various co-authors for "bank-centric market socialism" appeared in a 1991 article in Dissent. All three proposals have in common the key principle that the publicly owned firms would operate, as a rule, according to a profit-maximization incentive within a competitive environment. It is probably no accident that all three proposals have been put forward by Americans. There is something peculiarly American in the notion of profit-maximizing market socialism. For one thing, this notion is a natural outgrowth of American pride in the achieved level of economic welfare within the United States (as well as within the other industrial First World nations). For many decades, there has been a dramatic gap between the living standards of the First World population and those of both the Second World and Third World populations. A proper awareness of the relatively high level of economic success in the First World engenders great caution and conservativeness with respect to proposals for a socialist alternative to the contemporary capitalist status quo. Relative to other market socialist proposals, the profit-oriented proposals of myself, Leland Stauber, and John Roemer may be described as very evolutionary, marginalist, and incrementalist. They would involve very limited divergences (given the fact, of course, that they are very clearly and authentically socialist proposals) from the current economic institutions and processes of contemporary capitalism. At the same time, these proposals manifest a very American intolerance for unjustified economic privilege. There is something fundamentally troubling about the extraordinary level of inequality that has emerged within modern industrial economies in the distributions of capital wealth and property income.<1> This extreme inequality is offensive to American ideals of equality, justice, and fairness. The great majority of economists (and others) have for the moment resigned themselves to extreme inequality in capital wealth ownership on grounds that the socialist cure is worse than the capitalist disease: specifically that any equity gains from greater equality under socialism would be swamped by efficiency losses. But would a socialist economy necessarily be significantly inefficient relative to a capitalist economy? Even granting that communistic socialism has been irretrievably discredited by the ignominious collapse of the Soviet Union, surely it is conceivable that other socialist economic systems are possible which would achieve better efficiency than the real-world system of communistic socialism. This is an inherently intriguing issue, and it may attract more attention from the economics profession in the future than it has in the past. The remainder of this article is organized as follows. First, in order to provide proper perspective, there is a brief discussion of three competing concepts of market socialism (Langian, service, and cooperative) in which the publicly owned firms would operate according to criteria other than profitability. Then, the basic institutional features and intended purposes of profit-oriented market socialism are set forth. This is followed by a consideration of the specific proposals of James Yunker (the present author), Leland Stauber, and John Roemer, with attention to the respective special concerns, strengths, and weaknesses of each proposal. Having then specified what is meant by profit-oriented market socialism, we turn to a series of potential criticisms of the concept, together with possible responses to these criticisms. The article is concluded with an overall assessment of the potential relevance of profit-oriented market socialism. Non-Profit-Oriented Market Socialist Proposals Langian Market Socialism Although on a much smaller scale, the impact of Oskar Lange's work on economic thought is indeed comparable to that of the legendary J. M. Keynes. Through their professional stature, both men were able to bestow a measure of acceptability upon notions which previously had been considered veritably heretical among mainstream economists. Prior to Keynes, social control of business fluctuations had generally been deemed needless, misguided, and counterproductive. Prior to Lange, the implementation of market forces within a socialist economy had generally been deemed impossible if not nonsensical. In terms of tangible real-world impact, Keynes has of course been infinitely more successful than Lange. Although real-world implementation of Keynesian anticyclical policy might be described as somewhat half-hearted and haphazard, such policy has long been accepted by most governments as a major ongoing responsibility. On the other hand, there has never been any serious effort to implement Lange's market socialist proposal, not even in Lange's homeland of Poland which was forcibly communized by the Soviet Union in the aftermath of World War II. The predisposition toward Soviet-style central planning imported into Poland at that time precluded even minimal experimentation with Lange's market socialist proposal. In the West, Lange's marginal cost pricing market socialist proposal has been deemed a theoretical curiosity devoid of any practical significance. This judgment perhaps provides some insight into the indifference of most economists to the very theoretical principles which they themselves propound--when it comes to making practical policy judgments. Generally accepted theory holds that profit maximization by firms is inefficient under conditions of imperfect competition. It scarcely needs much emphasis that the imperfect competition model provides at least as good a fit to apparent realities in the modern industrial economy as does the perfect competition model. From a strictly theoretical point of view, therefore, Lange's proposal that the publicly owned firms under market socialism be operated not according to profit maximization, but rather according to the marginal cost pricing principle, has much to recommend it. Despite its theoretical attractiveness, Lange's proposal has been shrugged off on the basis of various more or less extemporaneous and off-the-cuff objections such as Bergson's qualm that in the absence of an observable success criterion such as profitability, the monitoring costs necessary to assure adequate compliance with the marginal cost pricing rule would be excessive. Not only is there no recognized economic theory of monitoring costs to compare with the Pareto-Hotelling theory on which the marginal cost pricing principle is based, but in addition there is no substantive basis for assuming that whatever monitoring costs are required under Langian market socialism to enforce this principle would necessarily be greater than the efficiency costs imposed on the economy by profit maximization by firms under imperfect competition. That Bergson considers the weight of this issue to incline against the Langian proposal seems more the result of a basic ideological predisposition in favor of the capitalist status quo than it is a compelling deduction from existing economic theory.<2> Beyond the predisposition in favor of the status quo, however, and unmentioned by Bergson and other economists who have considered the Langian proposal, there may be qualms about the potential efficacy of a principle taken directly from an economic theory textbook as a guide to real-world decision-making by the executives who manage modern large-scale corporations. These managers, of course, do not employ marginal analysis to any appreciable extent in their work. To begin with, the accurate determination of the marginal cost of any one product in a multi-product environment is a virtually hopeless task. Moreover, the marginal cost of any one product would be constantly in flux as production processes continuously change and evolve. Finally, costs are the relatively predictable input into business decision-making, the more difficult input being market demand conditions and potential product prices. Such considerations as these evoke images of corporation executives being virtually paralyzed, and rendered disastrously ineffective, by a sudden insistence by external government authorities that they guide their thinking and decision-making mainly if not entirely according to the marginal cost pricing principle. Service Market Socialism The nonprofit production principle has been widely applied in the real world to public enterprises within economies which remain predominantly capitalistic, and it is a natural extension to consider this principle as a potential general guide to production within a market socialist economy. A descriptive designation for this economic system would be "service market socialism."<3> From the standpoint of economic theory, profit maximization by firms generates inefficiency under conditions of imperfect competition and/or external effects. Although the conventional assumption within modern orthodox economics is that there are relatively few firms which have sufficient market power, and/or whose operations generate such important external effects, as to merit public ownership for purposes of suppressing the natural tendency under private ownership toward profit maximization, the fact remains that there is no significant objective evidence to support this assumption. In contrast to Langian market socialism, service market socialism would not have to get along without an observable success criterion on which to evaluate corporation executives. Some output-based measure could be utilized, such as sales revenue or physical quantity of production. The typical publicly owned firm could be a constrained optimizer, maximizing the output-based measure subject to a minimum profit constraint (possibly a zero profit constraint if capital is obtained from outside the firm) or a maximum loss constraint (if the firm, owing to external benefits of its operations, is subsidized from the public treasury). Such a firm might in many respects be equivalent to the sales-maximizing firm postulated by William Baumol as a better reflection of reality under modern conditions of separation of ownership and management than the profit-maximizing firm.<4> As a matter of fact, the sales-maximization model might indeed be--as suggested by Baumol--a closer approach to reality under contemporary capitalism than the profit-maximization model. Therefore in reality service market socialism might not be so much different from contemporary capitalism as might be imagined. Whatever its theoretical virtues under conditions of imperfect competition and/or external effects, the fact is that at the present time, the whole idea of nonprofit public enterprise is very much in retreat all around the world. There has been a remarkable resurgence of laissez faire ideology during the second half of the twentieth century, and as a result, a large proportion of traditional public enterprise either has been or soon will be privatized, and of the remainder, much of it is being operated on a more commercial basis (i.e., public subsidies have been reduced or even eliminated). Any qualms about the desirability of profit maximization by firms based on imperfect competition and/or external effects are increasingly shrugged off. Even if it is conceded that these factors may be theoretically sound and even empirically significant, it is held that government agencies cannot gather and properly process enough information to arrive at rational, efficient, and effective policies toward the publicly owned enterprises. Cooperative Market Socialism Interpretation of the labor-management or production-cooperative concept as a potential blueprint for an economy-wide system of market socialism has become common in economics since the seminal theoretical work of Benjamin Ward in the 1950s. Since Ward there has been a truly amazing proliferation of economic analysis of the cooperative enterprise. But it is probably safe to say that the overabundance of theoretical literature on the cooperative has not appreciably revised the consensus viewpoint within mainstream economics on this form. Long before the recent explosion of theoretical work the consensus viewpoint was basically skeptical, and it remains so today. Although there have been a few exceptions (notably Jaroslav Vanek and Alec Nove), in general the many contributors to the theoretical literature tend to follow the lead of Benjamin Ward (with his proposition of a "perverse" downward-sloping supply curve of output) in finding potential problems and flaws with the cooperative enterprise relative to its "capitalist twin."<5> Prior to the recent mushrooming of theoretical work on the cooperative, mainstream economists generally dismissed the cooperative as inefficient and/or unprogressive--in any case, an unviable competitor in most economic marketplaces. It was (and remains) the dominant view that any morale advantages of the "employees working for themselves rather than for outside owners" would be swamped by such things as the disincentive effects of excessive egalitarianism in distributing revenue, inadequate investment owing to the short horizons of the workforce, and the sluggishness and inflexibility of business decision-making owing to the democratic control of management by the employees. According to conventional judgments, these factors explain the generally poor track record of success of cooperative enterprises in competition with standard capitalist enterprises. Proponents of cooperation raise questions as to whether the competition between capitalist and cooperative firms in the past has actually been fair, in light of possible bias against the latter among financial institutions. Aside from these questions, it is clear that the particular set of adopted institutions and procedures under cooperative market socialism would have a great deal to do with the success of the system. Some of the more naive proponents of the idea seem to imagine the entire workforce of the firm voting--after prolonged discussion--on each and every one of the myriad decision issues which emerge in the conduct of business. This approach would quite likely generate paralysis and stagnation in very short order. But if, on the other hand, we more reasonably and realistically envision the workforce of a large firm democratically electing, once every ten years or so, a chief executive with extensive if not absolute powers of management between elections, we would have a legitimately cooperative firm which would probably operate in practice almost identically to any large "capitalist firm" with the usual outside ownership interest. Of course, one of the more serious impediments to meaningful evaluation of cooperative market socialism is the multiplicity of institutional forms through which it might be realized. How often would management be elected, and under what procedures? How much authority would be delegated to management, and how much would be retained by individual employees and small workgroups? What procedures would be followed in the termination of redundant or otherwise unproductive employees? Would the managers be permitted to hire "non-member employees" who would neither vote nor share in the distribution of net revenue? Would there be a "membership fee" assessed of new employees, and if so, how much? Would the managers be permitted to raise capital from external sources, and if so, would external providers of capital have any direct control over the determination of business decisions? The answers to the above questions and many others would have a great deal to do with the potential performance of cooperative market socialism. But as of the present time there is no appreciable consensus on the answers among proponents of cooperative market socialism. Profit-Oriented Market Socialist Proposals: Basic Features While it is clearly the case that the various problems which have been perceived by mainstream economists in the non-profit-oriented market socialist possibilities (Langian, service, and cooperative) are not necessarily theoretically and empirically valid objections to these forms, these perceived problems certainly constitute serious practical impediments to the implementation of any of these possibilities in the real world. In this light, it is an important feature of profit-oriented market socialist proposals that they do not dispute the consensus judgment within mainstream economics that the real-world economy is sufficiently competitive, and external effects in the real-world economy are sufficiently weak, that profit maximization as the predominant operative goal of business decision-making is economically beneficial. The acceptance of this proposition by proponents of profit-oriented proposals for market socialism greatly reduces the distance between these proponents and the typical mainstream economist. Ever since the monumental codification of socialist thought by Karl Marx in the nineteenth century, socialists have had two central objections to the capitalist economic system: the equity objection and the efficiency objection. The equity objection is based on the proposition of maldistribution of capital property income under capitalism, and the efficiency objection is based on the proposition of underutilization of available economic resources under capitalism. In the original thinking of Karl Marx, the equity objection was expressed through the surplus labor theory of exploitation, while the efficiency objection was expressed through the theory of long-term immiseration via recurrent, worsening business depressions. More than 100 years have passed since the death of Karl Marx, and a great deal of evidence has gradually accumulated during that time. The Marxian proposition of the fall of capitalism in the midst of catastrophic business depression was somewhat revived by the severity of the Great Depression of the 1930s. But the revival was short-lived, as the recurrent recessions of the post-World War II period have been far too mild to precipitate anything approaching a social revolution. It is plausible, if not certain, that a large factor responsible for the relative postwar success of capitalism has been the utilization of Keynesian anticyclical policy by most national governments. The availability of this policy calls into serious question whether business depression need be--or ever will be--responsible for the collapse of capitalism. Of course, while capitalism may not necessarily be doomed by its inherent propensity toward business depression, this is not necessarily to say that the system is optimal--it must still confront Marx's theory of surplus labor exploitation. The Marxist proposition of surplus labor exploitation, however, must itself confront the marginalist revolution in mainstream economic theory during the latter half of the nineteenth century. The marginalist revolution seriously discredited the labor theory of value, used by Marx as the conceptual basis for the surplus labor theory of exploitation. The marginalist revolution replaced the labor theory of value with the neoclassical theory of marginal factor productivity. Application of the neoclassical theory to the third factor of production (capital) in the traditional triad of factors (land, labor and capital) suggests that capital earns a legitimate economic return just as does labor. The conventional viewpoint is that the neoclassical theory of marginal factor productivity, applied to capital, establishes the economic and ethical legitimacy of the capitalist system. However, once the physical and philosophical distinction between inanimate capital and its human capital owners is fully recognized and appreciated, the possibility becomes apparent that this conventional viewpoint may be mistaken. Advocates of profit-oriented plans of market socialism do not deny that to attain an acceptable level of economic efficiency, business firms and other organizations which utilize physical capital should pay a market-determined rate of return on the financial capital which they obtain in order to purchase physical capital. What they do deny, however, is the additional proposition that in order for this process to work effectively, private households which own financial wealth must be paid a rate of return on this wealth. All forms of profit-oriented market socialism envision the role of private households in the disposition of financial capital throughout the economy being taken over by representatives of one or more public agencies. These representatives would receive in recompense for their efforts only a small proportion of the capital property income received by capital-owning private households under capitalism, leaving the large majority of this income available for public disposition in one manner or another. This transformation addresses the traditional equity objection of socialists against capitalism. In contrast to proponents of non-profit-oriented plans of market socialism, proponents of profit-oriented plans weight the equity objection to capitalism far more heavily than the efficiency objection. They are far more concerned to maintain the present level of efficiency than to achieve a higher level of efficiency. Therefore these plans envision an economy that in its various institutions and daily operations would appear very similar to, if not identical to, the capitalist economy of today. Households would confront the same basic economic environment that they do today, except that financial wealth would only represent a store of value and not a source of capital property income. Similarly business enterprises would confront the same basic environment: typically there would be a multiplicity of competing firms producing any given product, managers of these firms would be independently evaluated on the basis of the profits earned by their own firms, and bankruptcy would be the normal mode of exit for those firms whose revenues fail to cover costs. In raising investment capital, firms would have to rely entirely on retention of earnings or issuance of financial instruments to financial intermediaries: they could no longer issue financial instruments directly to private households. Beyond these basic principles, considerable flexibility exists in specifying the precise institutions and procedures through which the concept of profit-oriented market socialism might be realized in the real world. The following discusses some key aspects of the respective proposals of James Yunker (the author), Leland Stauber, and John Roemer. Pragmatic Market Socialism (James Yunker) The institutional crux of my own proposal for pragmatic market socialism is a national government agency to be known as the Bureau of Public Ownership (BPO).<6> This agency would take over all rights inherent in those stocks, bonds, and other financial instruments which are owned by private households under capitalism. Stocks, bonds, and other financial instruments owned by financial intermediaries and other organizations would not be surrendered to the BPO. Institutional investing would proceed much as it does under capitalism, with the major exception that all voting stock held by institutional investors would be converted into an equivalent amount of bonds. It is envisioned that under pragmatic market socialism all voting stock in publicly owned corporations would reside with the BPO. The proposal is similar to the other profit-oriented market socialist plans in specifying that small businesses in farming, retail trade, and professional proprietorships and partnerships would be exempted from public ownership. In addition, the pragmatic proposal envisions the private ownership of an entrepreneurial business by the founder-owner--whatever the scale or level of financial success achieved by the firm--so long as the founder-owner remains personally active in its management. All privately owned firms, whether in the category of small business or entrepreneurial business, would be subject to a "capital use tax," approximately equal to the normal rate of return on capital in the economy, assessed on the owner's net worth in the business. The Bureau of Public Ownership would take over the role performed by boards of directors under capitalism, with certain modifications. Under capitalism, boards of directors have the authority in principle to issue detailed operating instructions to the managing executives--although they rarely if ever exercise this authority in practice. Under pragmatic market socialism, the BPO would be explicitly prohibited from issuing any operating instructions whatsoever to the managing executives regarding the microeconomic decision variables of business enterprise: production levels, prices, marketing expenditures, retained earnings, investment expenditures, and so on. Its authority would be confined to approving the compensation plans designed by the executives for themselves, to approving nominations to the position of chief executive officer made by the top executives of a corporation, and to dismissing the chief executive officer of a corporation whose performance is inferior on the basis of objectively observable indicators of long-term profitability. The BPO's authority under pragmatic market socialism would be importantly decentralized and delegated. The national office of the BPO would be supplemented by a network of local BPO offices located in a large number of cities. Each local office would be staffed by several BPO agents recruited from managerial positions in business. Each BPO agent would be given sole authority over a number of publicly owned corporations operating in different industries. (These provisions are particularly aimed at reducing tendencies toward collusion among imperfectly competitive profit-maximizing publicly owned corporations.) The BPO agent's primary source of income would be a very small fraction of the profits and interest paid over by the corporations within his/her sphere of authority to the national office of the BPO. Decisions by the BPO to dismiss the chief executive of a poorly performing public corporation would be largely determined by that corporation's BPO agent. Mainstream economists frequently concede that a socialist economy might be more equitable than the capitalist economy owing to greater equality in the distribution of capital property income, but they immediately add that the equity gain under socialism would almost certainly be outweighed by an efficiency loss. Although proponents of profit-oriented market socialist proposals place a great deal of emphasis upon the operational similarities rather than the differences with the capitalist status quo (in order to highlight the equity issue in and of itself--presumably similar operations would imply similar efficiency), they typically envision at least some supplementary efficiency advantages of their proposals. In my own case, I have particularly emphasized two potential efficiency advantages of pragmatic market socialism over contemporary capitalism: (1) the centralization of the BPO's authority over any given publicly owned firm in one BPO agent might overcome the disincentive effects of the separation of ownership and control under capitalism; (2) the distribution of unearned capital property income as a social dividend supplement to the household's labor income might increase labor and output. With respect to point (1), the pragmatic market socialist proposal is very explicit about the centralization of the BPO's authority over any given publicly owned corporation in the hands of one single BPO agent, since this might be an effective means of eliminating the perverse incentive effects of the separation of ownership and control under contemporary capitalism.<7> It may be argued that under pragmatic market socialism, the chief executives of poorly performing corporations would be subjected to a significantly higher risk of dismissal than is the case under capitalism, and this will put greater pressure on these individuals to perform effectively in their extremely influential positions. This factor might be important enough to significantly improve the overall performance of the economy. With respect to point (2), this argument depends on the principle used to distribute social dividend income. Under pragmatic market socialism, this payment would not be an equal flat-rate amount to each household. Rather the amount of social dividend income received by each household would be a given percentage of its regular earned wage and salary income. Under the standard assumption of an upward-sloping supply curve of labor, this would tend to increase the typical household's labor provision, and hence the level of national output. I have recently provided some technical support for this particular efficiency argument via general equilibrium analysis (Yunker, 1993). Results obtained from numerical solution of the model (Table 4.2) indicate the possibility that pragmatic market socialism might achieve a level of national output in the United States 10.5 percent higher than that of capitalism, while at the same time achieving a Gini coefficient of consumption (s standard measure of observable inequality) 13.8 percent less than that of capitalism.<8> Municipal Ownership Market Socialism (Leland Stauber) The institutional crux of Leland G. Stauber's proposal for municipal ownership market socialism in advanced capitalist nations such as the United States would be a system of several hundred new investment funds (or banks), each one associated with a certain region.<9> Upon socialization, all financial instruments formerly owned by private households under capitalism would be equally distributed over this network of investment funds. Every citizen would become a part owner of one particular investment fund, depending on the location of his/her primary residence. The boards of directors of these investment banks would be appointed by elected local government officials within the regions, or alternatively, they might might be directly elected by the eligible voters in the respective regions. In either case, these funds could be described as "locally owned." They would be subject to the same kind of regulatory restraint as the typical financial intermediary under capitalism, but would not be subject to any direct controls by the national government. The locally owned investment funds would replace private households in the financial markets, but otherwise these markets would operate very much as they do under capitalism. Just as do the private investors and institutional investors of the present capitalist system, the locally owned investment funds would buy and sell financial instruments including stocks, bonds, and others. Some of these instruments involve voting rights in the corporations they represent, others do not. It would be within the authority of the managers of each local investment fund to decide how to allocate the fund's resources over different investment opportunities--whether to emphasize stocks or bonds, whether to concentrate on certain industries or firms. The property income received by each fund, less administrative and incentive expenses, would be utilized in accordance with the wishes of the board of directors: part of it would be directly distributed to the population of the region, and the remainder would be provided to local government agencies to finance their various projects and activities. The local investment funds would be very similar to the financial institutions of contemporary capitalism, but not exactly similar. There would be some important additional regulatory constraints on the flexibility of the local investment funds not applicable to other types of financial institutions. For example, each fund would be prohibited from investing in firms with major employment concentrations in the locality represented by that fund. This is to prevent political considerations of local employment maintenance from creating a soft budget constraint for firms in the area. Each local ownership fund would also be prohibited from distributing the proceeds from sales of capital assets directly to the population or to agencies of the local government. All such proceeds would have to be reinvested in other capital assets. This is to forestall any temptations to run down the value of the fund in order to meet current obligations of local government agencies or to finance the current consumption desires of the local population. All distributions from each fund must come from the current property income of that fund. Over time the fund values and investment incomes of the various locally owned investment funds would probably begin to diverge significantly. To counteract this, the national government would at periodic intervals carry out a redistribution from the more successful funds to the less successful funds. The intention would be to keep the distribution of property income over the entire national population relatively equal over an extended period of time. Whether these redistributions would constitute a significant disincentive to investment analysis effort by the staffs of the funds would depend on whether movements in fund values are more the result of random variation, or more the result of differential skill and effort among the respective staffs of the funds. Pro-socialist preconceptions, of course, hold that random chance is by far the dominant factor, and this implies that the periodic redistributions would not constitute a significant disincentive to productive investment analysis effort. Stauber argues that entrepreneurial propensities under municipal ownership market socialism would be virtually identical to those under capitalism. The aspiring entrepreneur could not invest his/her own wealth in the enterprise, but Stauber points out that already under capitalism the personal wealth of the entrepreneur normally accounts for only a tiny fraction of the new enterprise's initial capital value, the remainder being raised from outside sources. As far as outside sources for investment capital are concerned, only private households would be eliminated. The aspiring entrepreneur could borrow from the same array of institutional investors as exists currently under capitalism, and/or from the new locally owned investment funds. The aspiring entrepreneur's personal incentive to effort toward the establishment of a profitable new firm would be the potential ability to award himself/herself extremely large salaries and bonuses. Although formally considered labor income, these payments would be essentially equivalent to the large capital gains of the successful entrepreneur under capitalism. In order to overcome possible excessive risk aversion among investors regarding entrepreneurial firms, Stauber proposes that additional provisions be enacted to support entrepreneurial investment. One such provision would be partial national government insurance against losses sustained by investors with respect to entrepreneurial investments; another would be the establishment of a national government agency (similar to the National Entrepreneurial Investment Board under pragmatic market socialism) charged with the specific responsibility of establishing viable and profitable new firms. Leland Stauber is a professor of political science by trade, and he places a great deal of emphasis upon political considerations. To begin with, the subdivision of the public ownership authority over a large number of independent and autonomous local investment funds effectively counters the argument made against traditional socialist proposals (which envision national government ownership of capital) that national government ownership and control of all or most firms would constitute an extreme combination of economic and political power, and such a combination would seriously jeopardize political democracy.<10> Specifically, the argument holds that national government officials under socialism would utilize their control over firms to deny employment opportunities to political dissidents and members of opposition parties, while at the same time government control over the media would be unfairly used to turn public opinion against these dissidents and opponents. This line of argument is effectively nullified by Stauber's proposal for the subdivision of firm ownership over a large number of independent locally owned investment funds. Beyond the elimination of the political argument against socialism that it might jeopardize democracy, Stauber holds that the implementation of municipal ownership market socialism would significantly improve the quality of democracy in a modern industrialized nation such as the United States. Under contemporary capitalism, a substantial proportion of the total stock of capital wealth is held by extremely wealthy capitalists, and this wealth enables these individuals to exercise a disproportionate influence upon the political process and social decision-making. Equalization of the flow of capital property return under market socialism would tend to equalize the distribution of political power and influence, and thus to make the political process more genuinely democratic. As a result, some legislative changes might become feasible which could have a beneficial impact upon the efficiency of the economy. One example would be the enactment of restrictions on the amount of earnings which firms are able to allocate to retained earnings. Stauber shares the viewpoint of many economists that the external market for financial capital tends to be more demanding than the internal market, and that investment projects would be more carefully considered by firms if all or most of the capital needed for these projects had to be raised from outside sources. Another example would be the structural disaggregation of many large firms which have grown well beyond the size necessary to take full advantage of economies of scale. Many students of industrial organization in the past have recommended a program of structural disaggregation of large firms as a means of increasing the effective level of competition in the economy, but these recommendations have never been importantly implemented.<11> The failure to implement structural disaggregation Stauber attributes to the political clout of the "power elite" of wealthy capitalists--these individuals are far too comfortable with the status quo to want to see anything done which might seriously impinge on that status quo. Out of their excessive conservatism, they oppose many changes which might actually have worked out to their own benefit. Stauber perceives the political power of a class of ultra-rich conservative capitalists as a sort of dead hand which severely restricts the flexibility and effectiveness of the republic as a whole. Bank-Centric Market Socialism (John Roemer) The proposal of John Roemer for bank-centric market socialism is the most recent of the three proposals considered in this survey, and as of the time of writing, both the institutional description and evaluative commentary on bank-centric market socialism available in the published literature is still fairly limited.<12> The basic public ownership authority under bank-centric market socialism (equivalent to the Bureau of Public Ownership of pragmatic market socialism, and the network of locally owned investment funds of municipal ownership market socialism) would be a network of nationally owned but highly decentralized public investment banks. Groups of publicly owned corporations would be clustered around these so-called "main banks." Responsibility for maintaining the profit motivation among each group of publicly owned corporations would reside with the staff of its respective main bank. Roemer's market socialist proposal is particularly attuned to certain peripheral areas of economic inquiry (such as information, principal-agent, and property rights) which have not as yet been fully integrated into core neoclassical theory.<13> As mentioned above, prior to Lange, it was widely presumed that the marginal productivity theory of factor return, applied to capital, constituted a serious objection to socialism. After Lange, it was more widely appreciated that marginal productivity theory only constitutes an objection to socialism if an unsophisticated view is taken which fails to differentiate capital, in and of itself, from human capital owners. At the present time, certain objections to market socialism are sometimes encountered, based on information theory, principal-agent theory, and so on, which are (arguably) based on a combination of unsophisticated understanding of these areas of theory, together with a distorted perception of actual realities under contemporary capitalism. The Roemer proposal represents a serious, explicit effort to cope with some of these objections. Whether Roemer's explicit effort will be more successful than the implicit efforts already made to cope with these types of objections by myself and Stauber remains to be seen. It will be instructive, in this regard, to compare Roemer's approach to certain key problems of market socialism with those of myself and Stauber. The first central problem under any profit-oriented plan of market socialism is to adequately motivate executives of publicly owned corporations to maximize profits, in the absence of any direct participation by private households in the financial markets. The second central problem is to maintain an adequate level of competition among the publicly owned corporations, even though all such firms are owned by the unified public. With respect to the second problem, all three profit-oriented market socialist proposals considered here envision the continuation of the present situation under capitalism: the disaggregation of production over a wide range of separate and autonomous firms, the separate and independent performance evaluation of executives of different firms, and the elimination of unprofitable firms through the mechanism of bankruptcy. Another prerequisite for effective competition under market socialism is some degree of disaggregation of the public ownership authority in order to reduce tendencies toward the promotion of collusion among firms by the public ownership authority in the interest of higher profits. Thus my own pragmatic market socialist proposal calls for the delegation of public ownership authority over a large number of BPO agents physically segregated into a large number of local BPO offices, Stauber's proposal for municipal ownership market socialism calls for the division of public ownership authority among a large number of locally owned investment funds, while the Roemer proposal for bank-centric market socialism calls for the subdivision of public ownership authority over a large number of bank-centric groupings. All three proposals, therefore, are explicitly designed to maintain a reasonable level of competition among the publicly owned corporations, and genuine inter-corporate competition would in itself tend to support a profitability incentive among the managers. While inter-corporate competition puts indirect pressure on managers to maintain firm profitability, we must also consider the direct incentives toward profitability. In nineteenth century economic thinking, owner-management was considered the norm, and the manager's incentive toward profitability proceeded directly from his/her own status as the direct recipient of a large proportion of profits. By the early part of the twentieth century, the separation of ownership and management had developed to a point where owner-management could no longer be taken seriously for the great majority of large-scale firms. Attention shifted to the possibility of dismissal of top managers by the corporate board of directors. As in the case of owner-management, this mechanism has fallen into disrepute as the separation of ownership and management has proceeded. Unfriendly buyouts for purposes of unseating the incumbent management of large corporations via vote of the board of directors are occasionally observed, but it appears that a truly extraordinary condition of abysmal corporate performance has to transpire before this becomes a serious threat to the incumbent managers. Under anything less than abysmal corporate performance, the board of directors remains an inert group totally dominated by the incumbent managers. By the second half of the twentieth century, therefore, the primary source of profit incentive among managers was commonly perceived to reside not in the possibility of dismissal by boards of directors, but rather in the operations of financial markets: securities of poorly performing corporations would lose value in these markets, raising the effective cost of capital to the firm, and augmenting the probability of decline and bankruptcy. Clearly this is a rather roundabout and leisurely mechanism whose practical effectiveness might easily be questioned: nevertheless it is now considered to be the single most important mechanism for instilling a profit-maximization incentive in the managers of large corporations. It is important to note, therefore, that all three of the profit-oriented market socialist proposals considered herein do in fact envision the continuation of financial market activity under market socialism, activity which would be highly analogous to that which occurs under capitalism. Participants in these markets would include the various financial intermediaries already observed under capitalism (commercial banks, insurance companies, pension funds, and so on), and possible additional institutions such as my own National Investment Banking System, Stauber's locally owned investment funds, and the public "main banks" envisioned by Roemer. The salient departure from capitalism would be that private households would no longer directly participate in such markets. The crucial question is whether the elimination of a large number of private households from the financial markets, and their replacement by a much smaller number of representatives of one or more public ownership agencies, would significantly reduce the effectiveness of these markets in evaluating the relative values of corporate securities and thereby placing indirect pressure upon corporate executives to pursue profits diligently. The proponents of the market socialist plans discussed here all adduce various reasons for expecting adequate profit discipline under their respective plans. For example, Stauber points out that the personnel of the locally owned investment funds under the regional ownership market socialist plan would be professional investment analysts who might be expected to do a superior job to that done by "amateur" household investment analysts, for most of whom wages and salaries continue to be the primary source of income. I myself have emphasized that the BPO agents, who would effectively take over the role of private capital-owners under pragmatic market socialism, would possess a very formidable dismissal authority over the corporate managers owing to the concentration of all voting stock rights over any given publicly owned corporation in one single agent. Roemer proposes a system of "bank-centric insider monitoring" which would tend to compensate for any potential weaknesses caused by the elimination of private households from the financial markets. Inspired by the Japanese keiretsu system of groupings of corporations around a central investment bank, the Roemer proposal is that the public ownership authority be subdivided over a large number of public investment banks located in towns and cities across the nation. Each publicly owned corporation would be permanently assigned to one of these public investment banks (termed its "main bank"), which would operate as its primary source of new capital and also have a majority share of its voting stock. To reduce natural propensities toward anti-competitive collusion in the interest of maintaining profitability, corporations in significant competition with one another would be assigned to different main banks. Minority voting stock amounts would be held by other corporations within the bank-centric grouping, and representatives of these other corporations would be participating members on the board of directors of the first corporation, along with the dominant representatives from the main bank, and additional representatives from the workforce of the corporation and from the general public. The minority stock shares could be sold by the other corporations within the grouping back to the main bank. Such sales would be a signal to the main bank that the corporation whose securities were being sold was quite possibly not operating up to its full potential, and that pressure in the form of reduced bonuses and/or threats of dismissal may have to be applied to spur better performance. The advantage of this system, relative to simply looking directly at the profit performance of the corporation, is that it would involve managers of other corporations within the group in the performance evaluation of the first corporation. Under some circumstances, low current profitability may not be a bad omen concerning future profitability (perhaps the firm is investing heavily in a promising new technology). Presumably professional managers of other firms within the group would be better able to judge whether extenuating circumstances exist for poor profitability in the first firm than would the ordinary outsider investment analyst.
POST-LANGE MARKET SOCIALISM: AN EVALUATION OF PROFIT-ORIENTED PROPOSALS James A. Yunker Department of Economics Western Illinois University Introduction A possible milestone may have been achieved in 1992 when the American Economic Association published John Roemer and Pranab Bardhan's article "Market Socialism: A Case for Rejuvenation" in the Summer issue of its Journal of Economic Perspectives. Aside from a handful of articles on the theory of cooperative production in the American Economic Review, the American Economic Association had not published any important work on market socialism since Abram Bergson's article on Oskar Lange's market socialist proposal ("Socialist Economics") in the 1948 Survey of Contemporary Economics. Implied in the concept of market socialism are very serious questions concerning the economic and ethical legitimacy of the capitalist status quo. Such questions were more natural during the ravages of the Great Depression of the 1930s, when Lange's proposal was first put forward. By the time Bergson's essay appeared in 1948, these questions were rapidly evaporating. Two factors may have been at work. The Second World War thoroughly eliminated the excess capacity problem of the Great Depression, and Keynesian anticyclical policy has effectively precluded any repetition of the problem in the postwar era. In addition, the rapid postwar rise of the Soviet Union to the status of chief menace to Western civilization greatly inhibited socialistic dissent within the United States and its First World allies. Now that the Soviet Union has been dissolved and its successor republics and erstwhile satellites are apparently making haste to rejoin the world mainstream of democratic market capitalism, conservatives everywhere are celebrating the "death of socialism" in human affairs. Such celebrations are conceivably premature. For a long time there has been a minority of individuals in the West who have believed that some form of democratic market socialism, as yet unimplemented anywhere in the real world, would provide a superior alternative both to the democratic market capitalism of the contemporary United States and to the oligarchic planned socialism of the ex-Soviet Union. Throughout the Cold War period, interest in democratic market socialism may have been restrained by the association of socialism with a dreaded national enemy. The capitalist economic system has been able to wrap itself up in the flag, to enlist in its own defense the powerful and unreasoning force of patriotism. Now that the Cold War is receding, it may be possible for many people to consider the idea of socialism in a calmer and more objective frame of mind. Thus--however paradoxical it may seem at first glance--it is at least conceivable that the death of Soviet Communism will in fact lead to a renaissance of interest in socialism. The publication of the Roemer-Bardhan article in the Journal of Economic Perspectives may be an indication of renewed interest in market socialism within the profession of economics, and renewed professional interest may lead ultimately to a serious real-world reform effort. This article surveys and evaluates three plans for a profit-oriented system of market socialism which have been put forward in the professional literature during the post-Lange period. The first published reference to my own proposal for "pragmatic market socialism" appeared in a 1974 article in the Review of Social Economics; the first published reference to the proposal of Leland Stauber for "municipal ownership market socialism" appeared in a 1975 article in Polity; and the first published reference to the proposal of John Roemer and various co-authors for "bank-centric market socialism" appeared in a 1991 article in Dissent. All three proposals have in common the key principle that the publicly owned firms would operate, as a rule, according to a profit-maximization incentive within a competitive environment. It is probably no accident that all three proposals have been put forward by Americans. There is something peculiarly American in the notion of profit-maximizing market socialism. For one thing, this notion is a natural outgrowth of American pride in the achieved level of economic welfare within the United States (as well as within the other industrial First World nations). For many decades, there has been a dramatic gap between the living standards of the First World population and those of both the Second World and Third World populations. A proper awareness of the relatively high level of economic success in the First World engenders great caution and conservativeness with respect to proposals for a socialist alternative to the contemporary capitalist status quo. Relative to other market socialist proposals, the profit-oriented proposals of myself, Leland Stauber, and John Roemer may be described as very evolutionary, marginalist, and incrementalist. They would involve very limited divergences (given the fact, of course, that they are very clearly and authentically socialist proposals) from the current economic institutions and processes of contemporary capitalism. At the same time, these proposals manifest a very American intolerance for unjustified economic privilege. There is something fundamentally troubling about the extraordinary level of inequality that has emerged within modern industrial economies in the distributions of capital wealth and property income.<1> This extreme inequality is offensive to American ideals of equality, justice, and fairness. The great majority of economists (and others) have for the moment resigned themselves to extreme inequality in capital wealth ownership on grounds that the socialist cure is worse than the capitalist disease: specifically that any equity gains from greater equality under socialism would be swamped by efficiency losses. But would a socialist economy necessarily be significantly inefficient relative to a capitalist economy? Even granting that communistic socialism has been irretrievably discredited by the ignominious collapse of the Soviet Union, surely it is conceivable that other socialist economic systems are possible which would achieve better efficiency than the real-world system of communistic socialism. This is an inherently intriguing issue, and it may attract more attention from the economics profession in the future than it has in the past. The remainder of this article is organized as follows. First, in order to provide proper perspective, there is a brief discussion of three competing concepts of market socialism (Langian, service, and cooperative) in which the publicly owned firms would operate according to criteria other than profitability. Then, the basic institutional features and intended purposes of profit-oriented market socialism are set forth. This is followed by a consideration of the specific proposals of James Yunker (the present author), Leland Stauber, and John Roemer, with attention to the respective special concerns, strengths, and weaknesses of each proposal. Having then specified what is meant by profit-oriented market socialism, we turn to a series of potential criticisms of the concept, together with possible responses to these criticisms. The article is concluded with an overall assessment of the potential relevance of profit-oriented market socialism. Non-Profit-Oriented Market Socialist Proposals Langian Market Socialism Although on a much smaller scale, the impact of Oskar Lange's work on economic thought is indeed comparable to that of the legendary J. M. Keynes. Through their professional stature, both men were able to bestow a measure of acceptability upon notions which previously had been considered veritably heretical among mainstream economists. Prior to Keynes, social control of business fluctuations had generally been deemed needless, misguided, and counterproductive. Prior to Lange, the implementation of market forces within a socialist economy had generally been deemed impossible if not nonsensical. In terms of tangible real-world impact, Keynes has of course been infinitely more successful than Lange. Although real-world implementation of Keynesian anticyclical policy might be described as somewhat half-hearted and haphazard, such policy has long been accepted by most governments as a major ongoing responsibility. On the other hand, there has never been any serious effort to implement Lange's market socialist proposal, not even in Lange's homeland of Poland which was forcibly communized by the Soviet Union in the aftermath of World War II. The predisposition toward Soviet-style central planning imported into Poland at that time precluded even minimal experimentation with Lange's market socialist proposal. In the West, Lange's marginal cost pricing market socialist proposal has been deemed a theoretical curiosity devoid of any practical significance. This judgment perhaps provides some insight into the indifference of most economists to the very theoretical principles which they themselves propound--when it comes to making practical policy judgments. Generally accepted theory holds that profit maximization by firms is inefficient under conditions of imperfect competition. It scarcely needs much emphasis that the imperfect competition model provides at least as good a fit to apparent realities in the modern industrial economy as does the perfect competition model. From a strictly theoretical point of view, therefore, Lange's proposal that the publicly owned firms under market socialism be operated not according to profit maximization, but rather according to the marginal cost pricing principle, has much to recommend it. Despite its theoretical attractiveness, Lange's proposal has been shrugged off on the basis of various more or less extemporaneous and off-the-cuff objections such as Bergson's qualm that in the absence of an observable success criterion such as profitability, the monitoring costs necessary to assure adequate compliance with the marginal cost pricing rule would be excessive. Not only is there no recognized economic theory of monitoring costs to compare with the Pareto-Hotelling theory on which the marginal cost pricing principle is based, but in addition there is no substantive basis for assuming that whatever monitoring costs are required under Langian market socialism to enforce this principle would necessarily be greater than the efficiency costs imposed on the economy by profit maximization by firms under imperfect competition. That Bergson considers the weight of this issue to incline against the Langian proposal seems more the result of a basic ideological predisposition in favor of the capitalist status quo than it is a compelling deduction from existing economic theory.<2> Beyond the predisposition in favor of the status quo, however, and unmentioned by Bergson and other economists who have considered the Langian proposal, there may be qualms about the potential efficacy of a principle taken directly from an economic theory textbook as a guide to real-world decision-making by the executives who manage modern large-scale corporations. These managers, of course, do not employ marginal analysis to any appreciable extent in their work. To begin with, the accurate determination of the marginal cost of any one product in a multi-product environment is a virtually hopeless task. Moreover, the marginal cost of any one product would be constantly in flux as production processes continuously change and evolve. Finally, costs are the relatively predictable input into business decision-making, the more difficult input being market demand conditions and potential product prices. Such considerations as these evoke images of corporation executives being virtually paralyzed, and rendered disastrously ineffective, by a sudden insistence by external government authorities that they guide their thinking and decision-making mainly if not entirely according to the marginal cost pricing principle. Service Market Socialism The nonprofit production principle has been widely applied in the real world to public enterprises within economies which remain predominantly capitalistic, and it is a natural extension to consider this principle as a potential general guide to production within a market socialist economy. A descriptive designation for this economic system would be "service market socialism."<3> From the standpoint of economic theory, profit maximization by firms generates inefficiency under conditions of imperfect competition and/or external effects. Although the conventional assumption within modern orthodox economics is that there are relatively few firms which have sufficient market power, and/or whose operations generate such important external effects, as to merit public ownership for purposes of suppressing the natural tendency under private ownership toward profit maximization, the fact remains that there is no significant objective evidence to support this assumption. In contrast to Langian market socialism, service market socialism would not have to get along without an observable success criterion on which to evaluate corporation executives. Some output-based measure could be utilized, such as sales revenue or physical quantity of production. The typical publicly owned firm could be a constrained optimizer, maximizing the output-based measure subject to a minimum profit constraint (possibly a zero profit constraint if capital is obtained from outside the firm) or a maximum loss constraint (if the firm, owing to external benefits of its operations, is subsidized from the public treasury). Such a firm might in many respects be equivalent to the sales-maximizing firm postulated by William Baumol as a better reflection of reality under modern conditions of separation of ownership and management than the profit-maximizing firm.<4> As a matter of fact, the sales-maximization model might indeed be--as suggested by Baumol--a closer approach to reality under contemporary capitalism than the profit-maximization model. Therefore in reality service market socialism might not be so much different from contemporary capitalism as might be imagined. Whatever its theoretical virtues under conditions of imperfect competition and/or external effects, the fact is that at the present time, the whole idea of nonprofit public enterprise is very much in retreat all around the world. There has been a remarkable resurgence of laissez faire ideology during the second half of the twentieth century, and as a result, a large proportion of traditional public enterprise either has been or soon will be privatized, and of the remainder, much of it is being operated on a more commercial basis (i.e., public subsidies have been reduced or even eliminated). Any qualms about the desirability of profit maximization by firms based on imperfect competition and/or external effects are increasingly shrugged off. Even if it is conceded that these factors may be theoretically sound and even empirically significant, it is held that government agencies cannot gather and properly process enough information to arrive at rational, efficient, and effective policies toward the publicly owned enterprises. Cooperative Market Socialism Interpretation of the labor-management or production-cooperative concept as a potential blueprint for an economy-wide system of market socialism has become common in economics since the seminal theoretical work of Benjamin Ward in the 1950s. Since Ward there has been a truly amazing proliferation of economic analysis of the cooperative enterprise. But it is probably safe to say that the overabundance of theoretical literature on the cooperative has not appreciably revised the consensus viewpoint within mainstream economics on this form. Long before the recent explosion of theoretical work the consensus viewpoint was basically skeptical, and it remains so today. Although there have been a few exceptions (notably Jaroslav Vanek and Alec Nove), in general the many contributors to the theoretical literature tend to follow the lead of Benjamin Ward (with his proposition of a "perverse" downward-sloping supply curve of output) in finding potential problems and flaws with the cooperative enterprise relative to its "capitalist twin."<5> Prior to the recent mushrooming of theoretical work on the cooperative, mainstream economists generally dismissed the cooperative as inefficient and/or unprogressive--in any case, an unviable competitor in most economic marketplaces. It was (and remains) the dominant view that any morale advantages of the "employees working for themselves rather than for outside owners" would be swamped by such things as the disincentive effects of excessive egalitarianism in distributing revenue, inadequate investment owing to the short horizons of the workforce, and the sluggishness and inflexibility of business decision-making owing to the democratic control of management by the employees. According to conventional judgments, these factors explain the generally poor track record of success of cooperative enterprises in competition with standard capitalist enterprises. Proponents of cooperation raise questions as to whether the competition between capitalist and cooperative firms in the past has actually been fair, in light of possible bias against the latter among financial institutions. Aside from these questions, it is clear that the particular set of adopted institutions and procedures under cooperative market socialism would have a great deal to do with the success of the system. Some of the more naive proponents of the idea seem to imagine the entire workforce of the firm voting--after prolonged discussion--on each and every one of the myriad decision issues which emerge in the conduct of business. This approach would quite likely generate paralysis and stagnation in very short order. But if, on the other hand, we more reasonably and realistically envision the workforce of a large firm democratically electing, once every ten years or so, a chief executive with extensive if not absolute powers of management between elections, we would have a legitimately cooperative firm which would probably operate in practice almost identically to any large "capitalist firm" with the usual outside ownership interest. Of course, one of the more serious impediments to meaningful evaluation of cooperative market socialism is the multiplicity of institutional forms through which it might be realized. How often would management be elected, and under what procedures? How much authority would be delegated to management, and how much would be retained by individual employees and small workgroups? What procedures would be followed in the termination of redundant or otherwise unproductive employees? Would the managers be permitted to hire "non-member employees" who would neither vote nor share in the distribution of net revenue? Would there be a "membership fee" assessed of new employees, and if so, how much? Would the managers be permitted to raise capital from external sources, and if so, would external providers of capital have any direct control over the determination of business decisions? The answers to the above questions and many others would have a great deal to do with the potential performance of cooperative market socialism. But as of the present time there is no appreciable consensus on the answers among proponents of cooperative market socialism. Profit-Oriented Market Socialist Proposals: Basic Features While it is clearly the case that the various problems which have been perceived by mainstream economists in the non-profit-oriented market socialist possibilities (Langian, service, and cooperative) are not necessarily theoretically and empirically valid objections to these forms, these perceived problems certainly constitute serious practical impediments to the implementation of any of these possibilities in the real world. In this light, it is an important feature of profit-oriented market socialist proposals that they do not dispute the consensus judgment within mainstream economics that the real-world economy is sufficiently competitive, and external effects in the real-world economy are sufficiently weak, that profit maximization as the predominant operative goal of business decision-making is economically beneficial. The acceptance of this proposition by proponents of profit-oriented proposals for market socialism greatly reduces the distance between these proponents and the typical mainstream economist. Ever since the monumental codification of socialist thought by Karl Marx in the nineteenth century, socialists have had two central objections to the capitalist economic system: the equity objection and the efficiency objection. The equity objection is based on the proposition of maldistribution of capital property income under capitalism, and the efficiency objection is based on the proposition of underutilization of available economic resources under capitalism. In the original thinking of Karl Marx, the equity objection was expressed through the surplus labor theory of exploitation, while the efficiency objection was expressed through the theory of long-term immiseration via recurrent, worsening business depressions. More than 100 years have passed since the death of Karl Marx, and a great deal of evidence has gradually accumulated during that time. The Marxian proposition of the fall of capitalism in the midst of catastrophic business depression was somewhat revived by the severity of the Great Depression of the 1930s. But the revival was short-lived, as the recurrent recessions of the post-World War II period have been far too mild to precipitate anything approaching a social revolution. It is plausible, if not certain, that a large factor responsible for the relative postwar success of capitalism has been the utilization of Keynesian anticyclical policy by most national governments. The availability of this policy calls into serious question whether business depression need be--or ever will be--responsible for the collapse of capitalism. Of course, while capitalism may not necessarily be doomed by its inherent propensity toward business depression, this is not necessarily to say that the system is optimal--it must still confront Marx's theory of surplus labor exploitation. The Marxist proposition of surplus labor exploitation, however, must itself confront the marginalist revolution in mainstream economic theory during the latter half of the nineteenth century. The marginalist revolution seriously discredited the labor theory of value, used by Marx as the conceptual basis for the surplus labor theory of exploitation. The marginalist revolution replaced the labor theory of value with the neoclassical theory of marginal factor productivity. Application of the neoclassical theory to the third factor of production (capital) in the traditional triad of factors (land, labor and capital) suggests that capital earns a legitimate economic return just as does labor. The conventional viewpoint is that the neoclassical theory of marginal factor productivity, applied to capital, establishes the economic and ethical legitimacy of the capitalist system. However, once the physical and philosophical distinction between inanimate capital and its human capital owners is fully recognized and appreciated, the possibility becomes apparent that this conventional viewpoint may be mistaken. Advocates of profit-oriented plans of market socialism do not deny that to attain an acceptable level of economic efficiency, business firms and other organizations which utilize physical capital should pay a market-determined rate of return on the financial capital which they obtain in order to purchase physical capital. What they do deny, however, is the additional proposition that in order for this process to work effectively, private households which own financial wealth must be paid a rate of return on this wealth. All forms of profit-oriented market socialism envision the role of private households in the disposition of financial capital throughout the economy being taken over by representatives of one or more public agencies. These representatives would receive in recompense for their efforts only a small proportion of the capital property income received by capital-owning private households under capitalism, leaving the large majority of this income available for public disposition in one manner or another. This transformation addresses the traditional equity objection of socialists against capitalism. In contrast to proponents of non-profit-oriented plans of market socialism, proponents of profit-oriented plans weight the equity objection to capitalism far more heavily than the efficiency objection. They are far more concerned to maintain the present level of efficiency than to achieve a higher level of efficiency. Therefore these plans envision an economy that in its various institutions and daily operations would appear very similar to, if not identical to, the capitalist economy of today. Households would confront the same basic economic environment that they do today, except that financial wealth would only represent a store of value and not a source of capital property income. Similarly business enterprises would confront the same basic environment: typically there would be a multiplicity of competing firms producing any given product, managers of these firms would be independently evaluated on the basis of the profits earned by their own firms, and bankruptcy would be the normal mode of exit for those firms whose revenues fail to cover costs. In raising investment capital, firms would have to rely entirely on retention of earnings or issuance of financial instruments to financial intermediaries: they could no longer issue financial instruments directly to private households. Beyond these basic principles, considerable flexibility exists in specifying the precise institutions and procedures through which the concept of profit-oriented market socialism might be realized in the real world. The following discusses some key aspects of the respective proposals of James Yunker (the author), Leland Stauber, and John Roemer. Pragmatic Market Socialism (James Yunker) The institutional crux of my own proposal for pragmatic market socialism is a national government agency to be known as the Bureau of Public Ownership (BPO).<6> This agency would take over all rights inherent in those stocks, bonds, and other financial instruments which are owned by private households under capitalism. Stocks, bonds, and other financial instruments owned by financial intermediaries and other organizations would not be surrendered to the BPO. Institutional investing would proceed much as it does under capitalism, with the major exception that all voting stock held by institutional investors would be converted into an equivalent amount of bonds. It is envisioned that under pragmatic market socialism all voting stock in publicly owned corporations would reside with the BPO. The proposal is similar to the other profit-oriented market socialist plans in specifying that small businesses in farming, retail trade, and professional proprietorships and partnerships would be exempted from public ownership. In addition, the pragmatic proposal envisions the private ownership of an entrepreneurial business by the founder-owner--whatever the scale or level of financial success achieved by the firm--so long as the founder-owner remains personally active in its management. All privately owned firms, whether in the category of small business or entrepreneurial business, would be subject to a "capital use tax," approximately equal to the normal rate of return on capital in the economy, assessed on the owner's net worth in the business. The Bureau of Public Ownership would take over the role performed by boards of directors under capitalism, with certain modifications. Under capitalism, boards of directors have the authority in principle to issue detailed operating instructions to the managing executives--although they rarely if ever exercise this authority in practice. Under pragmatic market socialism, the BPO would be explicitly prohibited from issuing any operating instructions whatsoever to the managing executives regarding the microeconomic decision variables of business enterprise: production levels, prices, marketing expenditures, retained earnings, investment expenditures, and so on. Its authority would be confined to approving the compensation plans designed by the executives for themselves, to approving nominations to the position of chief executive officer made by the top executives of a corporation, and to dismissing the chief executive officer of a corporation whose performance is inferior on the basis of objectively observable indicators of long-term profitability. The BPO's authority under pragmatic market socialism would be importantly decentralized and delegated. The national office of the BPO would be supplemented by a network of local BPO offices located in a large number of cities. Each local office would be staffed by several BPO agents recruited from managerial positions in business. Each BPO agent would be given sole authority over a number of publicly owned corporations operating in different industries. (These provisions are particularly aimed at reducing tendencies toward collusion among imperfectly competitive profit-maximizing publicly owned corporations.) The BPO agent's primary source of income would be a very small fraction of the profits and interest paid over by the corporations within his/her sphere of authority to the national office of the BPO. Decisions by the BPO to dismiss the chief executive of a poorly performing public corporation would be largely determined by that corporation's BPO agent. Mainstream economists frequently concede that a socialist economy might be more equitable than the capitalist economy owing to greater equality in the distribution of capital property income, but they immediately add that the equity gain under socialism would almost certainly be outweighed by an efficiency loss. Although proponents of profit-oriented market socialist proposals place a great deal of emphasis upon the operational similarities rather than the differences with the capitalist status quo (in order to highlight the equity issue in and of itself--presumably similar operations would imply similar efficiency), they typically envision at least some supplementary efficiency advantages of their proposals. In my own case, I have particularly emphasized two potential efficiency advantages of pragmatic market socialism over contemporary capitalism: (1) the centralization of the BPO's authority over any given publicly owned firm in one BPO agent might overcome the disincentive effects of the separation of ownership and control under capitalism; (2) the distribution of unearned capital property income as a social dividend supplement to the household's labor income might increase labor and output. With respect to point (1), the pragmatic market socialist proposal is very explicit about the centralization of the BPO's authority over any given publicly owned corporation in the hands of one single BPO agent, since this might be an effective means of eliminating the perverse incentive effects of the separation of ownership and control under contemporary capitalism.<7> It may be argued that under pragmatic market socialism, the chief executives of poorly performing corporations would be subjected to a significantly higher risk of dismissal than is the case under capitalism, and this will put greater pressure on these individuals to perform effectively in their extremely influential positions. This factor might be important enough to significantly improve the overall performance of the economy. With respect to point (2), this argument depends on the principle used to distribute social dividend income. Under pragmatic market socialism, this payment would not be an equal flat-rate amount to each household. Rather the amount of social dividend income received by each household would be a given percentage of its regular earned wage and salary income. Under the standard assumption of an upward-sloping supply curve of labor, this would tend to increase the typical household's labor provision, and hence the level of national output. I have recently provided some technical support for this particular efficiency argument via general equilibrium analysis (Yunker, 1993). Results obtained from numerical solution of the model (Table 4.2) indicate the possibility that pragmatic market socialism might achieve a level of national output in the United States 10.5 percent higher than that of capitalism, while at the same time achieving a Gini coefficient of consumption (s standard measure of observable inequality) 13.8 percent less than that of capitalism.<8> Municipal Ownership Market Socialism (Leland Stauber) The institutional crux of Leland G. Stauber's proposal for municipal ownership market socialism in advanced capitalist nations such as the United States would be a system of several hundred new investment funds (or banks), each one associated with a certain region.<9> Upon socialization, all financial instruments formerly owned by private households under capitalism would be equally distributed over this network of investment funds. Every citizen would become a part owner of one particular investment fund, depending on the location of his/her primary residence. The boards of directors of these investment banks would be appointed by elected local government officials within the regions, or alternatively, they might might be directly elected by the eligible voters in the respective regions. In either case, these funds could be described as "locally owned." They would be subject to the same kind of regulatory restraint as the typical financial intermediary under capitalism, but would not be subject to any direct controls by the national government. The locally owned investment funds would replace private households in the financial markets, but otherwise these markets would operate very much as they do under capitalism. Just as do the private investors and institutional investors of the present capitalist system, the locally owned investment funds would buy and sell financial instruments including stocks, bonds, and others. Some of these instruments involve voting rights in the corporations they represent, others do not. It would be within the authority of the managers of each local investment fund to decide how to allocate the fund's resources over different investment opportunities--whether to emphasize stocks or bonds, whether to concentrate on certain industries or firms. The property income received by each fund, less administrative and incentive expenses, would be utilized in accordance with the wishes of the board of directors: part of it would be directly distributed to the population of the region, and the remainder would be provided to local government agencies to finance their various projects and activities. The local investment funds would be very similar to the financial institutions of contemporary capitalism, but not exactly similar. There would be some important additional regulatory constraints on the flexibility of the local investment funds not applicable to other types of financial institutions. For example, each fund would be prohibited from investing in firms with major employment concentrations in the locality represented by that fund. This is to prevent political considerations of local employment maintenance from creating a soft budget constraint for firms in the area. Each local ownership fund would also be prohibited from distributing the proceeds from sales of capital assets directly to the population or to agencies of the local government. All such proceeds would have to be reinvested in other capital assets. This is to forestall any temptations to run down the value of the fund in order to meet current obligations of local government agencies or to finance the current consumption desires of the local population. All distributions from each fund must come from the current property income of that fund. Over time the fund values and investment incomes of the various locally owned investment funds would probably begin to diverge significantly. To counteract this, the national government would at periodic intervals carry out a redistribution from the more successful funds to the less successful funds. The intention would be to keep the distribution of property income over the entire national population relatively equal over an extended period of time. Whether these redistributions would constitute a significant disincentive to investment analysis effort by the staffs of the funds would depend on whether movements in fund values are more the result of random variation, or more the result of differential skill and effort among the respective staffs of the funds. Pro-socialist preconceptions, of course, hold that random chance is by far the dominant factor, and this implies that the periodic redistributions would not constitute a significant disincentive to productive investment analysis effort. Stauber argues that entrepreneurial propensities under municipal ownership market socialism would be virtually identical to those under capitalism. The aspiring entrepreneur could not invest his/her own wealth in the enterprise, but Stauber points out that already under capitalism the personal wealth of the entrepreneur normally accounts for only a tiny fraction of the new enterprise's initial capital value, the remainder being raised from outside sources. As far as outside sources for investment capital are concerned, only private households would be eliminated. The aspiring entrepreneur could borrow from the same array of institutional investors as exists currently under capitalism, and/or from the new locally owned investment funds. The aspiring entrepreneur's personal incentive to effort toward the establishment of a profitable new firm would be the potential ability to award himself/herself extremely large salaries and bonuses. Although formally considered labor income, these payments would be essentially equivalent to the large capital gains of the successful entrepreneur under capitalism. In order to overcome possible excessive risk aversion among investors regarding entrepreneurial firms, Stauber proposes that additional provisions be enacted to support entrepreneurial investment. One such provision would be partial national government insurance against losses sustained by investors with respect to entrepreneurial investments; another would be the establishment of a national government agency (similar to the National Entrepreneurial Investment Board under pragmatic market socialism) charged with the specific responsibility of establishing viable and profitable new firms. Leland Stauber is a professor of political science by trade, and he places a great deal of emphasis upon political considerations. To begin with, the subdivision of the public ownership authority over a large number of independent and autonomous local investment funds effectively counters the argument made against traditional socialist proposals (which envision national government ownership of capital) that national government ownership and control of all or most firms would constitute an extreme combination of economic and political power, and such a combination would seriously jeopardize political democracy.<10> Specifically, the argument holds that national government officials under socialism would utilize their control over firms to deny employment opportunities to political dissidents and members of opposition parties, while at the same time government control over the media would be unfairly used to turn public opinion against these dissidents and opponents. This line of argument is effectively nullified by Stauber's proposal for the subdivision of firm ownership over a large number of independent locally owned investment funds. Beyond the elimination of the political argument against socialism that it might jeopardize democracy, Stauber holds that the implementation of municipal ownership market socialism would significantly improve the quality of democracy in a modern industrialized nation such as the United States. Under contemporary capitalism, a substantial proportion of the total stock of capital wealth is held by extremely wealthy capitalists, and this wealth enables these individuals to exercise a disproportionate influence upon the political process and social decision-making. Equalization of the flow of capital property return under market socialism would tend to equalize the distribution of political power and influence, and thus to make the political process more genuinely democratic. As a result, some legislative changes might become feasible which could have a beneficial impact upon the efficiency of the economy. One example would be the enactment of restrictions on the amount of earnings which firms are able to allocate to retained earnings. Stauber shares the viewpoint of many economists that the external market for financial capital tends to be more demanding than the internal market, and that investment projects would be more carefully considered by firms if all or most of the capital needed for these projects had to be raised from outside sources. Another example would be the structural disaggregation of many large firms which have grown well beyond the size necessary to take full advantage of economies of scale. Many students of industrial organization in the past have recommended a program of structural disaggregation of large firms as a means of increasing the effective level of competition in the economy, but these recommendations have never been importantly implemented.<11> The failure to implement structural disaggregation Stauber attributes to the political clout of the "power elite" of wealthy capitalists--these individuals are far too comfortable with the status quo to want to see anything done which might seriously impinge on that status quo. Out of their excessive conservatism, they oppose many changes which might actually have worked out to their own benefit. Stauber perceives the political power of a class of ultra-rich conservative capitalists as a sort of dead hand which severely restricts the flexibility and effectiveness of the republic as a whole. Bank-Centric Market Socialism (John Roemer) The proposal of John Roemer for bank-centric market socialism is the most recent of the three proposals considered in this survey, and as of the time of writing, both the institutional description and evaluative commentary on bank-centric market socialism available in the published literature is still fairly limited.<12> The basic public ownership authority under bank-centric market socialism (equivalent to the Bureau of Public Ownership of pragmatic market socialism, and the network of locally owned investment funds of municipal ownership market socialism) would be a network of nationally owned but highly decentralized public investment banks. Groups of publicly owned corporations would be clustered around these so-called "main banks." Responsibility for maintaining the profit motivation among each group of publicly owned corporations would reside with the staff of its respective main bank. Roemer's market socialist proposal is particularly attuned to certain peripheral areas of economic inquiry (such as information, principal-agent, and property rights) which have not as yet been fully integrated into core neoclassical theory.<13> As mentioned above, prior to Lange, it was widely presumed that the marginal productivity theory of factor return, applied to capital, constituted a serious objection to socialism. After Lange, it was more widely appreciated that marginal productivity theory only constitutes an objection to socialism if an unsophisticated view is taken which fails to differentiate capital, in and of itself, from human capital owners. At the present time, certain objections to market socialism are sometimes encountered, based on information theory, principal-agent theory, and so on, which are (arguably) based on a combination of unsophisticated understanding of these areas of theory, together with a distorted perception of actual realities under contemporary capitalism. The Roemer proposal represents a serious, explicit effort to cope with some of these objections. Whether Roemer's explicit effort will be more successful than the implicit efforts already made to cope with these types of objections by myself and Stauber remains to be seen. It will be instructive, in this regard, to compare Roemer's approach to certain key problems of market socialism with those of myself and Stauber. The first central problem under any profit-oriented plan of market socialism is to adequately motivate executives of publicly owned corporations to maximize profits, in the absence of any direct participation by private households in the financial markets. The second central problem is to maintain an adequate level of competition among the publicly owned corporations, even though all such firms are owned by the unified public. With respect to the second problem, all three profit-oriented market socialist proposals considered here envision the continuation of the present situation under capitalism: the disaggregation of production over a wide range of separate and autonomous firms, the separate and independent performance evaluation of executives of different firms, and the elimination of unprofitable firms through the mechanism of bankruptcy. Another prerequisite for effective competition under market socialism is some degree of disaggregation of the public ownership authority in order to reduce tendencies toward the promotion of collusion among firms by the public ownership authority in the interest of higher profits. Thus my own pragmatic market socialist proposal calls for the delegation of public ownership authority over a large number of BPO agents physically segregated into a large number of local BPO offices, Stauber's proposal for municipal ownership market socialism calls for the division of public ownership authority among a large number of locally owned investment funds, while the Roemer proposal for bank-centric market socialism calls for the subdivision of public ownership authority over a large number of bank-centric groupings. All three proposals, therefore, are explicitly designed to maintain a reasonable level of competition among the publicly owned corporations, and genuine inter-corporate competition would in itself tend to support a profitability incentive among the managers. While inter-corporate competition puts indirect pressure on managers to maintain firm profitability, we must also consider the direct incentives toward profitability. In nineteenth century economic thinking, owner-management was considered the norm, and the manager's incentive toward profitability proceeded directly from his/her own status as the direct recipient of a large proportion of profits. By the early part of the twentieth century, the separation of ownership and management had developed to a point where owner-management could no longer be taken seriously for the great majority of large-scale firms. Attention shifted to the possibility of dismissal of top managers by the corporate board of directors. As in the case of owner-management, this mechanism has fallen into disrepute as the separation of ownership and management has proceeded. Unfriendly buyouts for purposes of unseating the incumbent management of large corporations via vote of the board of directors are occasionally observed, but it appears that a truly extraordinary condition of abysmal corporate performance has to transpire before this becomes a serious threat to the incumbent managers. Under anything less than abysmal corporate performance, the board of directors remains an inert group totally dominated by the incumbent managers. By the second half of the twentieth century, therefore, the primary source of profit incentive among managers was commonly perceived to reside not in the possibility of dismissal by boards of directors, but rather in the operations of financial markets: securities of poorly performing corporations would lose value in these markets, raising the effective cost of capital to the firm, and augmenting the probability of decline and bankruptcy. Clearly this is a rather roundabout and leisurely mechanism whose practical effectiveness might easily be questioned: nevertheless it is now considered to be the single most important mechanism for instilling a profit-maximization incentive in the managers of large corporations. It is important to note, therefore, that all three of the profit-oriented market socialist proposals considered herein do in fact envision the continuation of financial market activity under market socialism, activity which would be highly analogous to that which occurs under capitalism. Participants in these markets would include the various financial intermediaries already observed under capitalism (commercial banks, insurance companies, pension funds, and so on), and possible additional institutions such as my own National Investment Banking System, Stauber's locally owned investment funds, and the public "main banks" envisioned by Roemer. The salient departure from capitalism would be that private households would no longer directly participate in such markets. The crucial question is whether the elimination of a large number of private households from the financial markets, and their replacement by a much smaller number of representatives of one or more public ownership agencies, would significantly reduce the effectiveness of these markets in evaluating the relative values of corporate securities and thereby placing indirect pressure upon corporate executives to pursue profits diligently. The proponents of the market socialist plans discussed here all adduce various reasons for expecting adequate profit discipline under their respective plans. For example, Stauber points out that the personnel of the locally owned investment funds under the regional ownership market socialist plan would be professional investment analysts who might be expected to do a superior job to that done by "amateur" household investment analysts, for most of whom wages and salaries continue to be the primary source of income. I myself have emphasized that the BPO agents, who would effectively take over the role of private capital-owners under pragmatic market socialism, would possess a very formidable dismissal authority over the corporate managers owing to the concentration of all voting stock rights over any given publicly owned corporation in one single agent. Roemer proposes a system of "bank-centric insider monitoring" which would tend to compensate for any potential weaknesses caused by the elimination of private households from the financial markets. Inspired by the Japanese keiretsu system of groupings of corporations around a central investment bank, the Roemer proposal is that the public ownership authority be subdivided over a large number of public investment banks located in towns and cities across the nation. Each publicly owned corporation would be permanently assigned to one of these public investment banks (termed its "main bank"), which would operate as its primary source of new capital and also have a majority share of its voting stock. To reduce natural propensities toward anti-competitive collusion in the interest of maintaining profitability, corporations in significant competition with one another would be assigned to different main banks. Minority voting stock amounts would be held by other corporations within the bank-centric grouping, and representatives of these other corporations would be participating members on the board of directors of the first corporation, along with the dominant representatives from the main bank, and additional representatives from the workforce of the corporation and from the general public. The minority stock shares could be sold by the other corporations within the grouping back to the main bank. Such sales would be a signal to the main bank that the corporation whose securities were being sold was quite possibly not operating up to its full potential, and that pressure in the form of reduced bonuses and/or threats of dismissal may have to be applied to spur better performance. The advantage of this system, relative to simply looking directly at the profit performance of the corporation, is that it would involve managers of other corporations within the group in the performance evaluation of the first corporation. Under some circumstances, low current profitability may not be a bad omen concerning future profitability (perhaps the firm is investing heavily in a promising new technology). Presumably professional managers of other firms within the group would be better able to judge whether extenuating circumstances exist for poor profitability in the first firm than would the ordinary outsider investment analyst.