Hahnel ABCs of Political Economy Modern Primer

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that he ignores the importance of what those who confront each other in the market place arrive with. As we saw in the corn model, when some arrive at the labor market with seed corn and others have none, it is entirely predictable that the seedy will end up being the employers and the seedless their employees. Moreover, as long as seed corn is scarce it is predictable that the seedy employers will capture the lion’s share of the efficiency gain from the labor exchange as profits, even though the employers don’t work at all. Similarly, those who arrive at the credit market with more seed corn will lend to those with less, and as long as seed corn is scarce the lenders will capture the lion’s share of the resulting increase in the borrowers’ productivity as interest, even though the lenders don’t work at all. Friedman can call these outcomes non-coercive if he wants, on grounds that the seedless volunteered to exchange their laboring capacities for a wage, and borrowers agreed to pay interest knowing full well what the consequences would be. But this merely displaces the source of coercion. It is their seedlessness that “coerces” employees and borrowers to “volunteer” to be fleeced. Are we to believe they would have “volunteered” to be the ones who showed up at the labor or credit market seedless in the first place?

Friedman opens the door when he acknowledges that exchange under non-competitive conditions is coercive even though exchanges under non-competitive conditions are also bilaterally voluntary, informed and mutually beneficial. In a one-company town since I am free to remain unemployed, I am presumably better off working than not working if you find me employed. In a onebank town since I am free not to borrow at all, I am presumably better off if I borrow than I would have been had I not. But not even Milton Friedman has the chutzpah to call these non-competitive market outcomes non-coercive – even though the agreement is voluntary and may be mutually beneficial in both cases. Once we recognize that voluntary exchanges under non-competitive conditions are coercive since only one party to the exchange has the opportunity to choose among different partners, it is easy to see how exchanges under competitive conditions can be coercive as well.

When initial conditions are unequal, voluntary, informed and mutually beneficial exchanges will be coercive and lead to inequitable outcomes even if exchanges take place under competitive conditions.

The third problem with Friedman’s assertion that market decisions are free from coercion is that buyers and sellers often come to agreements with adverse consequences for third parties who have

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no say in the matter whatsoever. Friedman acknowledges that victims of what he calls “neighborhood effects” are coerced, but presumes these are minor inconveniences that seldom occur. As we saw in chapter 4, many political economists believe that external effects are the rule rather than the exception in market exchanges, thereby leaving many disenfranchised and “coerced” when buyers and sellers make decisions that affect them without giving a thought to consulting their interests.

The fourth problem is that Friedman assumes away the best solution for coordinating economic activities. He simply asserts: “there are only two ways of coordinating the economic activities of millions – central direction involving the use of coercion – and voluntary cooperation – the technique of the market place.” In the next chapter we will explore the alternative of democratic planning. We will see how participatory economies permit all to partake in economic decision making in proportion to the degree they are affected by outcomes. Since a participatory economy uses participatory planning instead of markets to coordinate economic activities, Friedman would have us believe that participatory planning must fall into the category of “central direction involving the use of coercion.” But as you will see, this is most certainly not the case, invalidating Friedman’s assertion that there are only two ways of coordinating economic activities – a crucial assumption Friedman offers no argument for whatsoever.

In sum, few economic decisions are such that only those who own a property right that allows them to make the decision unilaterally are affected by the outcome. So to believe that when those whose ownership of property gives them the legal right to make decisions in the market place, others are not subjected to coercion, is to swallow a myth. It is best to have all those affected by a decision take part in making it. And it is more honest to recognize that not everyone usually gets exactly what they want when choices affect many people, rather than pretend that everyone always gets what they want in market decisions, while people are only forced to accept outcomes they don’t like from political decisions.

MARKETS ARE FAIR – NOT

Is capitalism unfair only because people get unjustifiable income from ownership of productive property? Or, are labor markets also unfair? Even if wages and salaries were determined in competitive

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labor markets free from discrimination, a surgeon who is on the golf course by 2 p.m. would consume ten times more than a garbage collector working 50 hours per week because the surgeon was genetically gifted and benefitted from vast quantities of socially costly education. Free labor and capital markets mean that most who are wealthy are so not because they worked harder or sacrificed more than others, but because they inherited wealth, talent, or simply got lucky. In chapter 2 we concluded that distribution according to maxim 2 – to each according to the value of her labor’s contribution

– is inequitable because income from human capital is unfair for the same reasons income from physical capital is unfair: Differences in the values of people’s contributions for reasons other than differences in effort or sacrifice are beyond people’s abilities to control, and carry no moral weight in any case.

But wages in real world capitalism are considerably more inequitable than marginal revenue product wages would be. Minorities and women are generally not paid the market value of their labor’s contribution. Because of economic discrimination in hiring, promotion, and pay, because of occupational ghettos, and because of unequal educational opportunities, inequities in real world capitalism are far worse than they would be in ideal models.

MARKETS ARE EFFICIENT – NOT

In chapter 4 we explored a number of reasons for believing markets are guided by a malevolent, invisible foot as often as by a beneficent invisible hand when they allocate our scarce productive resources. We discovered that Milton Friedman and received wisdom not withstanding, there are good reasons to believe markets allocate resources very inefficiently and concluded: “Convenient deals with mutual benefits for buyer and seller should not be confused with economic efficiency. When some kinds of preferences are consistently underrepresented because of transaction cost and free rider problems, when consumers adjust their preferences to biases in the market price system and thereby aggravate those biases, and when profits can be increased as often by externalizing costs onto parties external to market exchanges as from productive behavior, theory predicts that free market exchange will often result in a misallocation of scarce productive resources. Moreover, when markets are less than perfectly competitive – which they almost always are – and fail to

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equilibrate instantaneously – which they always do – the results are that much worse.”

When pressed, all economists concede that externalities, noncompetitive market structures, and market disequilibria lead to allocative inefficiencies. Since mainstream economists take capitalism for granted, the debate among them is whether “market failure” or “government failure” is worse. That is, mainstream economists argue among themselves over whether government policies aimed at reducing inefficiencies due to externalities, noncompetitive market structures, and disequilibria create even greater inefficiencies than those they eliminate. Conservative mainstream economists emphasize the dangers of “government failure” when politicians and bureaucrats sacrifice efficiency to their personal agendas. Liberal mainstream economists emphasize how much inefficiency due to market failures can be reduced by responsible government policies if only opposition from business special interests could be overcome.

Not surprisingly, political economists generally side with liberals in the mainstream in our attempts to ameliorate the inefficiencies and inequities of capitalism. But until recently most political economists also emphasized that as much as we try to reduce the ill effects of market failures, even the best efforts will always fall short of what a truly desirable economy could yield for a host of theoretical and practical reasons. While anti-trust policy can be used to make industries more competitive, they frequently sacrifice economies of scale and dynamic efficiency in service of allocative efficiency when they break up large firms. Moreover, even when the public interest is obviously served, anti-trust cases are hard to win when opposed by corporate power as the Microsoft anti-trust case attests. Using fiscal and monetary policies to “fine tune” real economies honeycombed with uncertainties and speculative dynamics impossible to capture in even the most elaborate macro economic forecasting models, is far more difficult than theoretical models lead one to suspect. Political economists also used to emphasize that an increasingly integrated global economy and powerful domestic business interests often obstruct effective fiscal and monetary policy.

Sectoral imbalances pose a different kind of disequilibria and inefficiency. When an industry expands less rapidly than industries it buys from and sells to, it can become a “bottleneck” retarding overall growth and under-utilizing productive capacities in related

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industries. “Indicative planning” or “industrial policy” attempts to reduce this kind of market inefficiency by anticipating sectoral imbalances and reducing them through differential tax and credit policies. Industries identified as bottlenecks are favored with lower business taxes and preferential credit to stimulate their growth, while “surplus industries” expanding more rapidly than related industries are discouraged by higher taxes and credit rationing in some form or another. Whether the government can guess better than the market, whether differential tax and credit policies are an open invitation to corruption, and whether indicative planning inevitably reduces economic democracy as economic elites dominate the planning process are all questions posed by mainstream and political economists alike.

It is ironic that from the 1930s through the 1970s when significant progress was made in the theory and practice of regulation, fiscal and monetary policies, and indicative planning, most political economists held firmly to the conviction that market failures were a serious, if not fatal flaw in capitalism. But since 1989 as environmental externalities become ever more apparent, and government after government abandons regulatory policies, full-employment stabilization policies, and industrial policies, many political economists have inexplicably altered their assessment. Now, problems due to market failures of one kind or another that were once deemed damning are considered by some political economists to be tolerable

– despite declining economic performances from more free market economies. Of course, I am not suggesting there are no reasons for the about face in opinion. The dramatic increase in the political and ideological hegemony of pro-market forces is obvious to all, as is the demise of what was widely assumed to be the only alternative to market allocations – central planning. As a result, economists who criticize market inefficiencies are even more marginalized within the profession than before – an obvious incentive for muting criticism once voiced more freely. However, the change in political climate has no logical bearing on the degree to which market allocations are, in fact, inefficient due to market failures. Market failures and their pernicious effects continue unabated no matter how impolitic it is to mention them.

In sum, private enterprise and markets both cause unacceptable inequities. Private enterprise and markets both cause significant inefficiencies. Private enterprise and markets both disenfranchise the vast majority from participating in economic decision making in

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proportion to the degree they are affected, and stand as a growing danger to, rather than bulwark of, political freedom. The only difference between twenty-first-century and twentieth-century capitalism will be that “born again” capitalism may well kill us all since it begins with “initial conditions” – 5 billion people, modern industrial technology, and an already damaged ecosystem – that can do in mother earth in fairly short order. God has given capitalism the rainbow sign. No more water, the fire next time.

WHAT WENT WRONG?

One hundred years ago economic radicals expected the twentieth century to be capitalism’s last. Progressives expected democracy and economic justice to advance in tandem and replace a wasteful system based on competition and greed with a more efficient, equitable economy in which workers and consumers planned how to cooperate through democratic procedures. But the heirs apparent to nineteenth-century anti-capitalism – twentieth-century communism and social democracy – each failed to advance the causes of economic justice and democracy. So instead of hearing its last hurrah, capitalism beat back all challengers, leaving us with economies that are no more democratic or equitable than economies a century ago.

Communist economies were public enterprise systems governed by central planning. After spreading its influence over large parts of the globe from 1917 to 1989, these economies vanished in only a few years at the end of the century.5 The Communist economic system did not suffer from the same deficiencies as capitalism. Centrally planned economies in the Soviet Bloc were terribly flawed in different ways. While the fatal flaw in capitalism is its antisocial bias, the fatal flaw in central planning was its anti-democratic bias. It is clear that centrally planned economies run by totalitarian political parties, largely immune from popular pressure, and increasingly free to feather the nests of their leaders and members, were not likely to produce the best outcomes. For this reason some progressive anti-capitalists continue to favor central planning on grounds that many of the problems that appeared could, conceivably, be blamed

5.See Michael Albert and Robin Hahnel, “Revolutions in the East” Z Magazine, April 1990, for an interpretation of the “demise of Communism” written before the collapse of the Soviet Union.

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on the negative effect of undemocratic political systems on the economy. But these apologists for central planning grossly underestimate the fatal flaw in even “best case” central planning: Central planning is terribly biased against popular participation in economic decision making. It was precisely this flaw that made central planning such a convenient accomplice for totalitarian political elites. The marriage of the single vanguard party state and economic central planning was truly a marriage made in the hell of two totalitarian dynamics, and predictably political and economic democracy were the first victims.

Combined with a more democratic political system, and redone to closer approximate a best case version, centrally planned economies no doubt would have performed better. But they could never have delivered economic self-management, they would always have been slow to innovate as apathy and frustration took their inevitable toll, and they would always have been susceptible to growing inequities and inefficiencies as the effects of differential economic power grew. Under central planning neither planners, managers, nor workers had incentives to promote the social economic interest. Nor did appending markets for final goods to the planning system enfranchise consumers in meaningful ways. But central planning would have been incompatible with economic democracy even if it had overcome its information and incentive liabilities. And the truth is that it survived as long as it did only because it was propped up by unprecedented totalitarian political power. In the end Communist parties sacrificed economic democracy along with political democracy in the name of economic justice and efficiency they never delivered.6

Social democratic parties avoided the totalitarian errors of communism only to abandon their commitment to pursuing the economics of equitable cooperation. While social democratic reforms within national economies gained ground for 30 years after World War II, these reforms proved ever harder to defend as capital became more mobile internationally, and as ideological and political opposition to capitalism crumbled with the “fall of the wall” in 1989. To rephrase an old adage: It proved harder and harder to build social

6.For a thorough critique of centrally planned economies written a decade before the “fall of the wall” see Michael Albert and Robin Hahnel, Marxism and Socialist Theory, and Socialism Today and Tomorrow both published by South End Press in 1981.

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democracy in one country. But social democracy also abandoned its base among the disadvantaged by accepting, rather than challenging, the ideological underpinnings of labor markets, and made peace with capitalism by accepting the inevitability of an economic system based on competition and greed. After more than a half-century of alternating in and out of power, European social democratic parties lost sight of the difference between “reformer of” and “apologist for” capitalism.

In the end, both would-be heirs to nineteenth-century economic radicalism delivered neither economic justice nor economic democracy. And, largely as a result, both communism and social democracy had one foot, if not both, firmly in the dustbin of history as the door closed on the century each presumed would bear its name.

Misconceptions about economic justice and democracy also undermined efforts to replace the economics of competition and greed with the economics of equitable cooperation in the twentieth century. For example, few union leaders today could tell you if they thought the workers they represent are exploited because they are not paid their marginal revenue product, or exploited precisely because they are paid their marginal revenue product. No wonder the most powerful progressive movement of the twentieth century, the union movement, became confused and hypocritical on the subject most central to its own mission. As passionate as union leaders are about economic justice, they have a remarkably difficult time saying clearly what it is. Instead, most union leaders find themselves in the position the late US Supreme Court Justice Potter Stewart found himself when required to make a ruling on pornography. In his immortal words: “I shall not today attempt further to define pornography, but I know it when I see it.” It seems few union leaders can define economic justice, but almost all believe they know economic injustice when they see it.

In a similar way “economic democracy” became an ever more vague “buzz” word as the twentieth century progressed, instead of standing forthrightly for decision making power in proportion to the degree one is affected. In this context it is easy to confuse total quality management (TQM), employee stock-ownership plans (ESOPs), and employee ownership accompanied by traditional management hierarchies with real economic democracy. TQM and ESOPs are concessions to the fact that people not only want a say and stake in what they are doing, but they perform better when they feel that they have a say. Since the essence of the capitalist labor

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exchange deprives employees of control over their labor, employers sometimes find it useful to resort to appearances and partial concessions.

While progressives have every reason to validate people’s desires for economic justice and real participation, and work to expand partial concessions, we should never fool ourselves – or others – that appearances are reality, or that real economic justice and democracy can be achieved until traditional ownership, management, and allocation institutions are replaced by new institutional forms. Progressives increasingly fell victim to this trap as the twentieth century unfolded.

Finally, some great opportunities to advance the causes of economic justice and democracy in the twentieth century were lost. To name a few examples: (1) While underdevelopment and international opposition were contributing factors, the primary blame for the failure of the Russian Revolution lies with anti-democratic choices made by the Revolutionary leadership in the first few years after overthrowing Czarist tyranny. (2) A living example of economic justice and democracy at work in the Spanish Republic did not die primarily because of internal flaws, but instead because it was crushed by fascist military might in the Spanish Civil War when progressives in the “democratic countries” failed to pressure their governments to effectively counter intervention by Mussolini and Hitler. (3) The liberatory potentials of national liberation movements in Africa, Latin America, Asia, and the Middle East after World War II were squandered by undemocratic political and economic models as much as they were casualties of the Cold War. And (4) the decline of the New Left in Europe and North America after the 1960s was due more to poor theory, analysis, and strategy than to political repression, much less improvements in the performance of capitalism. There was nothing inevitable about these and other failures. And there was no lack of opportunities to advance the cause of economic justice and democracy in the twentieth century, where a better performance on the part of progressives could have changed outcomes. The lesson we need to learn is that unless progressives respond better to the opportunities that present themselves to replace the economics of competition and greed with the economics of equitable cooperation in the twenty-first century than we did in the century that just ended, the outcome will be no better.

11What Is To Be Done?

The Economics of Equitable Cooperation

What should we do if we have the opportunity to start over again? We could hold a lottery – or perhaps have a brawl – to decide who owns what productive resources. The unfortunate losers would have to hire themselves out to work for the more fortunate winners, and the goods the losers produced could then be “freely” exchanged by their owners

– the people who didn’t produce them. Of course this is the capitalist “solution” to the economic problem which has been spreading its sway for roughly three centuries and now stands triumphant.

Alternatively, we could make the best educated – or perhaps most ruthless among us – responsible for planning how to use society’s scarce productive resources and for telling the rest of us what to do. But that was tried with unsatisfactory results. After a troubled threequarters of a century communism and “command planning” are where they should be, in the dustbins of history. So whether centrally planned economies caused more or less alienation, apathy, inefficiency, inequity and environmental destruction than their capitalist rivals is, practically speaking, a moot point.

The important conclusion from all our recent experiments in managing our economic affairs is that neither the economics of competition and greed, nor the economics of command, is the answer to our economic problems. In this last chapter we explore ideas of political economists who remain convinced that the economics of equitable cooperation is not beyond humanity’s grasp.

NOT ALL CAPITALISMS ARE CREATED EQUAL

Not all versions of capitalism are equally horrific. Moreover, since the capitalist ruling class shows no signs of relinquishing power as quickly and easily as Communist rulers did in Eastern Europe and

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