Capital management under profit-oriented market socialism: an explicit function approach.

• Author: Yunker, James A.

1. Introduction

   Despite the dramatic collapse of Soviet Communism, predictions of the "death of socialism" may be premature. The system of Soviet Communism comprised at least five important characteristics: (1) socialism (public ownership of the preponderance of the capital stock); (2) central planning (extensive power over and tight control of the economy by a single bureaucratic agency); (3) political oligarchy (consolidation of power within an authoritarian Communist Party apparatus); (4) strict egalitarianism (implying limited wage and salary differentials, and very high job security among the workforce); (5) international activism (pursuit of worldwide socialist revolution by all means including force). The decline and fall of Soviet Communism might well have been the consequence of the latter four characteristics; socialism in and of itself, in the strict sense of public ownership of capital, might not have been a significant contributor to Soviet weakness.

   Ever since the negative characteristics of Soviet Communism first began emerging unmistakeably in the 1930s, socialist sympathizers in the West have argued that there are democratic market socialist alternatives to Soviet Communism which would effectively achieve the traditional socialist objective of economic justice without threatening either efficiency or democracy. Oskar Lange's 1936 essay "On the Economic Theory of Socialism" [15] was a major milestone in the development of the economic component of democratic market socialism. What has since become a consensus verdict on Lange's marginal cost pricing proposal in the Western economics profession was first reached by Abram Bergson in his influential 1948 essay on "Socialist Economics" [2]: interesting in theory, but unpromising in practice.(1) Despite this verdict, comparative systems textbooks almost invariably describe and discuss the Langian market socialist proposal.(2)

   Moreover, it is clear that Langian market socialism is not the only market socialist possibility, and that there may be other possibilities which are more promising. The two possibilities on which the more recent literature has mainly focused are cooperative market socialism (i.e., labor management), and profit-oriented market socialism. Since the seminal 1958 theoretical contribution by Benjamin Ward [37], a very large literature has developed on the theory of the cooperative firm, and also a reasonably substantial empirical literature, using data from the former Yugoslavia, the plywood industry in the Pacific Northwest, Mondragon in the Basque region of Spain, and so on.(3) However, cooperative market socialism does share with Langian market socialism one important disadvantage: it would represent a relatively drastic departure from the economic status quo under modem industrial capitalism. Given the relatively high level of satisfaction with the economic performance of modern industrial capitalism, among both the economics profession and the general public, a market socialist proposal would necessarily have to be very conservative and incrementalist in order to become a serious political possibility.

   Of the three principal market socialist possibilities on which the literature to date has focused (Langian, cooperative, and profit-oriented), the profit-oriented possibility would be the most similar to the existing economic status quo under modern industrial capitalism.(4) Three independently developed profit-oriented market socialist plans have been put forward in the economic systems literature: the "pragmatic" market socialist plan of James Yunker [39; 40; 41; 42; 43; 44; 45; 46], the "municipal ownership" market socialist plan of Leland Stauber [30; 31; 32; 33], and the "bank-centric" market socialist plan of John Roemer [24; 25; 26; 27]. A detailed discussion of the various institutional details of these three proposals would not be feasible here. However, they do share a number of important commonalities, as follows:

   Profit-oriented market socialist proposals envision the publicly owned corporations pursuing profits in a competitive business environment, subject to an outside ownership authority representing the interests of the owning public. The public ownership authority would exercise no powers of planning or coordination (it would not be a central planning agency along the lines of the Soviet Gosplan), but it would possess the authority to dismiss managers of corporations which are earning inadequate profits. Competition would be maintained through the decentralization of both business activity and the public ownership authority. Most commodities would be produced by at least several different independently evaluated publicly owned firms. In addition, public ownership authority would be dispersed over a large number of local offices which would operate autonomously and independently of one another. The property return produced by the publicly owned business sector would be collected by the public ownership authority, which would retain a small percentage to meet its administrative expenses and incentive payments to its personnel. The great preponderance of property return would be returned to the general public in some form, either as a direct social dividend payment to each household, or in the form of reduced tax liability. Thus would be achieved a substantial equity gain over contemporary capitalism, under which the distributions of capital wealth and property income are extremely unequal. These plans envision the retention of private ownership in the case of small business and entrepreneurial business. Entrepreneurial business enterprises would be established through private initiative and also by special-purpose public agencies.

   At the heart of any proposal for profit-oriented market socialism is a public ownership authority (POA) which would assume the legal rights and financial entitlements which under capitalism are exercised by private capital owners. Yunker's POA is called the Bureau of Public Ownership (BPO), and its authority would be dispersed over several thousand "BPO agents" located in several hundred local BPO offices in various towns and cities. The pragmatic market socialist proposal is distinctive in specifying that each publicly owned corporation would be largely responsible to one single BPO agent, as a means of gaining the perceived advantages of the sole owner situation [40; 44, 129-32]. The agent would retain a very small fraction of the dividends and interest paid over by the corporation to the parent BPO. The BPO agent of a particular corporation would enforce his/her personal interest in high return on the corporation's management through the use of substantial discretionary power in the retention or dismissal of the corporation's chief executive officer.

   Unlike Yunker, neither Stauber nor Roemer have suggested proper names for their proposed POA's. Stauber envisions a system of locally owned investment funds (or banks), which would trade among themselves in the various securities issued by the publicly owned corporations. Under this plan, the financial markets would work exactly as they do under capitalism, except for the exclusion of private households from these markets. Financial market trading would not be quite so free under the Roemer proposal, which envisions each publicly owned corporation assigned to one of several hundred public investment banks. Corporations within each bank's group could trade securities with each other and with the group central bank, but could not trade with other banks or corporations outside the group. In contrast to the Stauber plan, under the Roemer plan the profits of each investment bank would be collected by a central national office prior to being redistributed to the public.

   The concept of profit-oriented market socialism is motivated by the idea of achieving a substantial equity gain, in terms of a greatly equalized distribution of capital property return, at minimum risk to the efficiency and dynamism of the economy. The concept avoids the perceived problems of other socialist systems: the over-centralization and inflexibility of Soviet-style central planning socialism, the lack of an observable success criterion of Langian market socialism, and the lack of an outside ownership authority of cooperative market socialism. On the other hand, even granting a minimum level of feasibility and viability of such an economic system (e.g., that some level of competition could be achieved despite public ownership of most large corporations), there are several important problems concerning the potential performance of profit-oriented market socialism: agency issues involved in corporate supervision and management, private household saving, the dynamic issues of investment, innovation and entrepreneurship, and so on and so forth. Undoubtedly there are a great many diverse approaches that could be taken to these problems, ranging from informal institutional analysis based on experiences in the communist nations and nationalized industries, through to the higher reaches of axiomatic economic theory.

   The purpose of this paper is to try to gain some insights into the potential performance of profit-oriented market socialism by examining one of its core issues using the tools of basic neo-classical economic theory. The core issue is that of the public ownership agency (POA): how big should it be and how much should it take? More specifically, what proportion of the labor force should be assigned to the POA under profit-oriented market socialism, and what proportion of the flow of property return should be retained by the POA under profit-oriented market socialism prior to the distribution of the remainder as a social dividend? The desideratum used here will be maximization of a Benthamite social welfare function. The specification and solution of this problem sheds significant illumination on the potential economic performance of profit-oriented...