Financial Democratization and the Transition to Socialism*

• Date: 01 December 2019
• Author: Fred Block
• DOI: 10.1177/0032329219879274
• Published date: 01 December 2019
• Subject Matter: Special Issue Articles

https://doi.org/10.1177/0032329219879274

Politics & Society

2019, Vol. 47(4) 529 –556

© The Author(s) 2019

Article reuse guidelines:

sagepub.com/journals-permissions

DOI: 10.1177/0032329219879274

journals.sagepub.com/home/pas

Special Issue Article

Financial Democratization

and the Transition to

Socialism*

Fred Block

University of California, Davis

Abstract

Historically, there has been little agreement between advocates of radical

financial reform and socialist theoreticians. However, in the new circumstances

of the twenty-first century, a productive synthesis of these two traditions might

be possible. Drawing on the franchise model of credit creation elaborated by

Robert C. Hockett and the dysfunctions created by the extreme concentration of

private financial institutions, this article outlines a reform agenda that would both

democratize finance and facilitate the flow of funds into valuable forms of investment

that are currently starved for resources. If the new institutions envisioned in this

proposal were able to take root and expand, they could ultimately facilitate a

transition to socialism, defined as the subordination of the market to democratic

politics.

Keywords

real utopia, financial reform, democratization, socialism, transition

*This article is part of a special issue titled “Democratizing Finance” that includes an introduction, anchor

articles by Robert C. Hockett and Fred Block, and commentaries by William H. Simon, Lenore Palladino,

Mary Mellor, Michael A. McCarthy, and David M. Woodruff. The papers were originally presented at a

workshop held in Madison, Wisconsin, in July 2018 organized by the late Erik Olin Wright as part of his

Real Utopias Project.

Corresponding Author:

Fred Block, Department of Sociology, University of California, Davis, 1 Shields Avenue, Davis, CA 95616,

USA.

Email: flblock@ucdavis.edu

879274PASXXX10.1177/0032329219879274Politics & SocietyBlock

research-article2019

530 Politics & Society 47(4)

This article proposes a strategy for radical financial reform that could be implemented

in the United States or in other developed market economies.1 It builds on the argument

elaborated by Robert C. Hockett in “Finance without Financiers” that credit creation is

ultimately dependent on the power and resources of governments.2 As Hockett shows,

that authority has usually been deployed to underwrite the profitability of banks and

other for-profit financial institutions. The proposal here is that governmental authority

would be used to build up a network of decentralized, nonprofit financial institutions

that would significantly improve the allocation of credit with positive results for eco-

nomic welfare.3 If these positive economic results were to materialize, radical financial

reform might then provide the critical missing element that could facilitate a democratic

and gradual transition to socialism.4

The radical financial reforms proposed here are intended to extend the influence of

democratic decision making into the economy in several distinct ways. First, differen-

tial access to credit is now one of the central factors in reproducing social, economic,

and political inequalities.5 The very rich can borrow tens of millions of dollars at

extremely favorable interest rates whereas low-income households might be able to

borrow a few hundred dollars from payday lenders or loan sharks at confiscatory inter-

est rates. By improving credit access for poor and working-class people and for their

organizations, these reforms could narrow that gap. This, in turn, could increase the

ability of people to pursue both individual and collective plans such as starting a new

business that might be for profit or collectively owned, pursuing more education, or

working to upgrade a neighborhood.

Second, as private financial institutions are incrementally displaced by public and

nonprofit ones, there would be an increase in democratic input into decisions about

what activities are financed at the most favorable interest rates. At present, flows of

finance at low interest rates favor hedge funds, private equity funds, and speculative

investments in financial instruments. These flows have created “a winner takes all

economy” that has significantly increased employment insecurity and income and

wealth inequality and created the concentration of wealth and income documented by

Thomas Piketty and his colleagues.6

The alternative envisioned here involves two significant changes. First, there would

be a dramatic increase in the financial resources held by locally based and nonprofit

financial institutions that would prioritize the borrowing needs of those communities,

resulting in more financing of affordable housing, small businesses, nonprofits, and

employee cooperatives. Second, large-scale investments in research and development,

infrastructure, clean energy, and energy conservation would be financed by a network

of nonprofit financial entities structured to be responsive to public input.

Through these two channels, an ever-greater share of the investment flows in the

economy would be responsive to the preferences of the public.7 To be sure, this shift

would require an ongoing process of social learning—a different kind of financial lit-

eracy. People would need to understand the different consequences for society of sub-

sidizing investments in speculative financial instruments versus subsidizing

investments in affordable housing.8 Nor is the goal that all investment decisions would

be determined by public deliberations; there would still be significant room for private