New Socialism

A critical look at market socialism

2009-03-29T22:32:00.006+01:00

Advocates of the market compare it to a system of voting which makes the consumer `sovereign.' This it does, but as the consumers and the people are two different groups.

Consumers are those with money. Only those who already possess something can have their wants satisfied. The unemployed, with only their unwanted labor to offer, have no votes in this system.

If, however, we first assume a highly egalitarian income distribution this objection to the market would not apply. So long as the market is restricted to consumer goods, there is no reason why it should be incompatible with socialism.

The basic principle of a socialist market in consumer goods can be stated quite simply. All consumer goods are marked with their labor values, i.e. the total amount of social labor which is required to produce them. But aside from this, the actual prices (in labor tokens) of consumer goods will be set, so far as possible, at market-clearing levels. Market-clearing prices are prices which balance the supply of goods (previously decided upon when the plan is formulated) and the demand. By definition, these prices avoid manifest shortages and surpluses. The appearance of a shortage (excess demand) will result in a rise in price which will cause consumers to reduce their consumption of the good in question. The available supply will then go to those who are willing to pay the most. The appearance of a surplus will result in a fall in price, encouraging consumers to increase their demands for the item.

Suppose a radio requires 10 hours of labor. It will then be marked with a labor value of 10 hours, but if an excess demand emerges, the price will be raised so as to eliminate the excess demand. Suppose this price happens to be 12 labor tokens. The radio then has a price to labor-value ratio of 1.2. Planners (or their computers) record this ratio for each consumer good. The ratio will vary from product to product, sometimes around 1.0, sometimes above (if the product is in strong demand), and sometimes below (if the product is relatively unpopular). The planners then follow this rule: Increase the target output of goods with a ratio in excess of 1.0, and reduce it for those with a ratio less than 1.0.

The point is that these ratios provide a measure of the effectiveness of social labor in meeting consumers' needs (production of `use-value,' in Marx's terminology) across the different industries. If a product has a ratio of market-clearing price to labor-value above 1.0, this indicates that people are willing to spend more labor tokens on the item (i.e. work more hours to acquire it) than the labor time required to produce it. But this in turn indicates that the labor devoted to producing this product is of above-average `social effectiveness.' Conversely, if the market-clearing price falls below the labor-value, that tells us that consumers do not `value' the product at its full value: labor devoted to this good is of below-average effectiveness. Parity, or a ratio of 1.0, is an equilibrium condition: in this case consumers `value' the product, in terms of their own labor time, at just what it costs society to produce it. This means that the objective of socialist retail markets should be to run at break even level, making neither a profit nor a loss; the goods being sold off cheap compensate for those sold at a premium.

There are therefore two mechanisms whereby the citizens of a socialist commonwealth can determine the allocation of their combined labor time. At one level, they vote periodically on the allocation of their labor between broadly-defined uses such as consumer goods, investment in means of production, and the health service. At another level, they `vote' on the allocation of labor within the consumer goods sector via the spending of their labor tokens.

Payment in labor tokens

It was a common assumption of nineteenth-century socialism that people should be paid in labor tokens. We encounter the idea in various forms in Owen, Marx, Lassalle, Rodbertus and Proudhon. Debate centred on whether or not this implied a fully planned economy. The Critique of the Gotha Programme[marx1970mnp] contains a particularly clear account of the idea: `[T]he individual producer gets back from society-after the deductions-exactly what he has given to it. What he has given it is his individual quantum of labour. For instance, the social working day consists of the sum of the individual hours of work. The individual labour time of the individual producer thus constitutes his contribution to the social working day, his share of it. Society gives him a certificate stating that he has done such and such an amount of work (after the labour done for the comunal fund has been deducted), and with this certificate he can withdraw from the social supply of means of consumption as much as costs an equivalent amount of labour. The same amount of labour he has given to society in one form, he receives back in another' .

With the enthusiasm of a pioneer, Owen tried to introduce the principle into England via voluntary co-operatives. Later socialists concluded that Owen's goal would be attainable only with the complete replacement of the capitalist economy.

Whilst Marx was very complimentary about Owen, he was critical of the schemes of Proudhon and Rodbertus. It is worth considering the Marxian critique of 'labour money' schemes; for there may appear to be a tension between the latter critique and Marx's own proposals. Indeed, the 'critique of labour money' is open to a (mis)reading which takes it as critical of any attempt to depart from the market system, towards a direct calculus of labour time. This reading has been made by writers as far apart as Karl Kautsky and Terence Hutchison.

The basic object of Marx and Engels's critique might be described as a naive socialist' appropriation of the Ricardian theory of value. If only, the reformers argue, we could impose the condition that all commodities really exchange according to the labour embodied in them, then surely exploitation would be ruled out. Hence the schemes, from John Gray in England, through a long list of English 'Ricardian socialists', to Proudhon in France, to Rodbertus in Germany, for enforcing exchange in accordance with labour values. Marx criticizes Proudhon's scheme in his Poverty of philosophy ([marx1975pp] ), and deals with John Gray in his Contribution to the critique of political economy [Marx1859], while Engels tackles Rodbertus's variant in his 1884 Preface to the first German edition of The povertv of philosophy. Between Marx in 1847 and Engels in 1884 we find a consistent line of attack on such proposals. From the standpoint of Marx and Engels, such schemes, however, honourable the intentions of their propagators, represent a Utopian and indeed reactionary attempt to turn back the clock to a word of ,simple commodity production' and exchange between independent producers owning their own means of production. The labour-money utopians failed to recognize two vital points. First, capitalist exploitation occurs through the exchange of commodities in accordance with their labour values (with the value of the special commodity labour-power determined by the labour content of the workers' means of subsistence). Secondly, although labour content governs the long-run equilibrium exchange ratios of commodities under capitalism, the mechanism whereby production is continually adjusted in line with changing demand, and in the light of changing technologies, under the market system, relies on the divergence of market prices from their long-run equilibrium values. Such divergences generate differential rates of profit, which in turn guide capital into branches of production where supply is inadequate, and push capital out of branches where supply is excessive, in the classic Smith/Ricardo manner. If such divergence is ruled out by fiat, and the signalling mechanism of market prices is hence disabled, there will be chaos, with shortages and surpluses of specific commodities arising everywhere.

One point which emerges repeatedly in the Marxian critique is this: according to the labour theory of value, it is socially necessary labour time which governs equilibrium prices, and not just 'raw' labour content. But in commodity-producing society, what is socially necessary labour emerges only through market competition. Labour is first of all 'private' (carried out in independent workshops and enterprises), and it is validated or constituted as social only through commodity exchange. The social necessity of labour has two dimensions. First of all, we are referred to the technical conditions of production and the physical productivity of labour. Inefficient or lazy producers, or those using outmoded technology, will fail to realize a market price in line with their actual labour input, but only with the lesser amount which is defined as 'necessary'. Secondly, there is a sense in which the social necessity of labour is relative to the prevailing structure of demand. If a certain commodity is overproduced relative to demand, it will fail to realize a price in line with its labour value - even if it is produced with average or better technical efficiency. The proponents of labour money want to shortcircuit this process, to act as if all labour were immediately social. The effects within commodity-producing society cannot but be disastrous.

Now the lesson which Marx and Engels read to the labour-money socialists, concerning the beauties of the supply/demand mechanism under capitalism and the foolishness of the arbitrary fixing of prices in line with actual labour content, are obviously rather pleasing to the critics of socialism. It appears that Kautsky also read the critique of labour money as casting doubt on the Marxian objective of direct calculation in terms of labour content, so that by the 1920s the figure widely regarded as the authoritative guardian of the Marxian legacy in the west had effectively abandoned this central tenet of classical Marxism. From the account of the critique of labour money we have given, the limits of that critique should be apparent. What Marx and Engels are rejecting is the notion of fixing prices according to actual labour content in the context of a commodity-producing economy where production is private. In an economy where the means of production are under communal control, on the other hand, labour does become 'directly social', in the sense that it is subordinated to a preestablished central plan. Here the calculation of the labour content of goods is an important element in the planning process. And here the reshuffling of resources in line with changing social needs and priorities does not proceed via the response of profit-seeking firms to divergences between market prices and long-run equilibrium values, so the critique of labour money is simply irrelevant. This is the context for Marx's suggestion for the distribution of consumer goods through labour tokens.

The significance of labor tokens is that they establish the obligation on all to work by abolishing unearned incomes; they make the economic relations between people transparently obvious; and they are egalitarian, ensuring that all labor is counted as equal. It is the last point that ensured that they were never adopted under the bureaucratic state socialisms of the twentieth century. What ruler or manager was willing to see his work as equal to that of a mere laborer?

Labor tokens are payment for work done

The difference between a labor-token system and the hire of labor-power can be shown via some contemporary illustrations.

Suppose you engage a self-employed plumber to fix the toilet. The plumber will judge how long it will take and quote on that basis. On completion of the job you pay the plumber for parts and labor. You do not purchase his ability to work for a day, you pay for the actual work done. If he does not finish the job he does not get paid-it was up to him to judge how long it would take. Self-employed, he has an incentive to get his estimates right.

Suppose, on the other hand, you call out a repairman employed by a service company to fix the heating. You are likely to be charged for time actually taken. The service company need have no control over how hard or efficiently the repairman works, as the system of charging means that it can never lose. The company purchases his labor-power at $10 per hour and sells it on to you at $40. In this case you are being re-sold labor-power, not the labor actually performed.

Finally, suppose that you took out a maintainance contract for $80 per annum. The service company is now selling you the promise of work actually done, labor, and has the responsibility and incentive to ensure that the work is done efficiently and to time.

Payment in labor tokens implies payment for work actually done as in cases 1 and 3. When Owen proposed such payment for artisans, this was unproblematic. Proof of work done was provided by the product delivered to the `labor exchange.' In a modern economy it implies either a system of piecework, or detailed work study to arrive at estimates of time required under conditions of average skill to perform a task.

General argument against market socialism

Above sumarises the arguments about the role of the market under socialism that we presented in [cockshott93a]. Towards a New Socialism was written in the late 80s when ideas of market socialism were comming to the fore under Gorbachov in the USSR. The book was in a way a polemic against market socialism. Whilst it recognised a necessary role for a consumer goods market, it took strong issue with any generalisation of the market to labour and capital goods. The argument was that advances in information technology allowed an efficient planning system to be constructed which could replace the market in the allocation of means of production, whilst socialist concerns for equity should prohibit a market for labour. We took this stand because we believed that the idea of market socialism was fundamentally corrosive. It would undermine such socialist achievements as had been built up during the 20th century and would legitimate a transition to capitalism. Subsequent events validated this intuition.

In this section we present general arguments against market socialism before going on to look at specific Western market socialist writers.

It has long been noted by socialists that economies based on simple commodity production tend to give rise to capitalism. Lenin wrote : "small production engenders capitalism and the bourgeoisie continuously, daily, hourly, spontaneously, and on a mass scale"[lenin1999lwc], a view he probably formed from his extensive sociological research on the Russian agrarian economy[lenin1967dcr]. This view led orthodox communists to oppose the extension of market relations[stalin1939fl, chunchiao1975ear, sayers1980fpa], even if these did not initially involve explotative labour contracts. The suspicion was that some people would get rich and others poorer if market relations were extended, and that over time these differences would solidify into a new class hierarchy.

Market economies are fundamentally chaotic. The incomes of individual economic agents, be these people, firms or cooperatives are subject to constant random variation. A seller of commodities will have good and bad months, good years and bad years. This random process means that even if there is initially no buying and selling of labour power income inequalities must arise.

In a market economy, hundreds of thousands of firms and individuals interact, buying and selling goods and services. This is similar to a gas in which very large numbers of molecules interact, bouncing off one another. Physics speaks of such systems as having a 'high degree of freedom', by which it means that the movements of all individual molecules are 'free' or random. But despite the individual molecules being free to move, we can still say things about them in the aggregate. We can say what their average speed will be ( their temperature ) and what their likely distributions in space will be.

The branch of physics which studies this is statistical mechanics or thermodynamics. Instead of making deterministic statements, it deals with probabilities and averages, but it still comes up with fundamental laws, the laws of thermodynamics, which have been found to govern the behaviour of our universe.

When the methods of statistical mechanics are applied to the capitalist economy[wright2005sac, wright2imm, farjoun], the predictions it make coincide almost exactly with the labour theory of value as set out in volume 1 of Marx's Capital[marx1]. Statistical mechanics showed that the selling prices of goods would vary in proportion to their labour content just as Marx had assumed. Because the market is chaotic, individual prices would not be exactly equal to labour values, but they would cluster very closely around labour values. Whilst in Capital I the labour theory of value is just taken as an empirically valid rule of thumb. Marx knew it was right, but did not say why. Here at last was a sound scientific theory explaining it.

It is the job of science to uncover causal mechanisms. Once it has done this it can make predictions which can be tested. If two competing theories make different predictions about reality, we can by observation determine which theory is right. This is the normal scientific method.

Farjoun and Machover's theory made certain predictions which went directly against the predictions made by critics of Marx such as Samuelson. In particular their theory predicts that industries with a high labour to capital ratio will be more profitable. Conventional economics predicts that there will be no such systematic difference between the profit rates in different industries. When put to the test it turned out that Farjoun and Machover were right. Industries with a high labour to capital ratio are more profitable[cockshott2003]. But this is exactly what we should expect if the source of profit was the exploitation of labour rather than capital. Their theory made predictions which not only turned out to be empirically spot on, but at the same time verified Marx's theory of the exploitation of the worker.

The next big advance was made by the phsyicist Yakovenko, who showed[dragulescu, cockshott:cee] that money in a market economy played the same role as energy in physics. Just as energy is conserved in collisions between molecules, so money is conserved in the acts of buying and selling. So far so obvious!

What was not obvious was what this implies. Yakovenko showed that the laws of thermodynamics then imply that the distribution of money between people will follow the same form as the distribution of energy between molecules in a gas : the so called Gibbs-Boltzmann distribution. This sounds very scientific, but what does it actually mean?

What the Gibbs-Boltzmann distribution of money says is that a few people with end up with a lot of money and a lot of people with end up with very little money. It says that the distribution of money will be very uneven, just as we see in capitalist society. In fact Yakovenko showed that the distribution of wealth in the USA fits the Gibbs-Boltzman distribution pretty closely.

There is a tendancy to think that rich people owe their wealth to intelligence or effort, but physics tells us no. Given a market economy, then the laws of chance mean that a lot of money will end up in the hands of a few people.

In fact when we look at the USA we find that the distribution of wealth is even more uneven that we would expect from the Gibbs-Boltzmann law. If the Gibbs Boltzman law held, there would be millionaires but no billionaires. Why the disparity?

Yakovenkos original equations represented an economy that is rather like what Marx called simple commodity production. It assumed only buying and selling. More recent work by Yakovenko and Wright[dragulescu02a, wright2005sac], has shown that if you modify these equations to allow either the earning of interest on money, or the hiring of wage labour, then the equations predict a polarisation of the population into two groups. The great bulk of the population, the working class and petty bourgeois, follow a Gibbs-Boltzmann income distribution. But there is a second class, those whose income derives from capital, whose wealth with follow a different law, what is called a power-law. Again, look in detail at the distribution of wealth in and you provide exactly the distribution predicted by Yakovenko's theory. This, says Yakovenko, proves that Marx was right when he said that modern society was comprised of two distinct and opposed classes : capitalists and workers.

What conclusions can we draw from this with respect to market socialism?

The first point is that as soon as you have a set of private agents, be they individuals, firms or cooperatives engaging in monetary trade, the laws of thermodynamics mean that the maximal entropy ( most probable ) distribution of money between the agents will be very uneven. Since, as Adam Smith said, money is the power too command the labour of others, this uneven distribution of money translates into an uneven distribution of social power. Those agents with more money are in a position to hire other agents under contractual terms favourable to the hirers. As soon as this happens the process of differentiation of income accelerates, and you move from the Gibbs Boltzman to the even more unequal power-law distribution of income characteristic of capitalist society.

This is a prediction that arises from simulation models of economies, but if we look at a real examples of a socialist economy taking the market socialist path - China under Deng, we see in reality the sort of income inequalities the models predict.

It may be argued that in China the introduction of market relations went much further than is advocated by some market socialists. That may well be true, but this sort of process acquires its own dynamic:

My own work, inspired by the reform experience, contributed additional arguments for refuting the Lange-theory. It seems to be highly improbable to generate the strong cost-minimizing or profit-maximizing incentive, taken as granted in the world of Lange's theory, in a public firm under a soft budget constraint regime.

It is impossible to couple an arbitrarily chosen ownership structure and an also arbitrarily chosen set of coordination mechanisms. There is close affinity between certain ownership forms and certain coordination mechanisms. Decentralized market and private ownership belong together. A further important counter-argument comes from the political and ideological sphere. The smooth functioning of the market depends on the "climate". It requires a market-friendly environment. If the politicians ruling a country are sworn enemies of genuine decentralization, the market will be banned to the black and grey area of the economy and cannot become the fundamental coordinator and integrator.) [kornai200]

The converse of this is that if we want to stop a highly undequal distribution of income, we either have to remove the mechanism that generates it, or do work to reduce the entropy of the system. Marx's proposal for abolishing money and instituting labour accounts which do not circulate, do not function as money, removes the underlying random process which generates inequality. The Swedish model works to reduce entropy through redistributive taxes. It has to constantly work against the tendancy of the market economy to generate a high degree of inequality, and can at most partially mitigate this inequality.

2 An evaluation of Yunker

In a series of articles ( for instance [yunker1979mea, yunker1988npm]) Yunker has made out the case for a form of market socialism. In these articles his main concern has been to defend market socialism against the criticisms of neo-classical economists who may be favourable to a capitalist economy. Since readers may not be familiar with his ideas we will give a brief summary of his proposals and his defence of them, before going on to make a critical assessment of them.

Yunker envisages what he calls a profit oriented model of socialism. The economy would be run, as now, by companies whose legal status would be largely unchanged. The companies will be able to engage in the full range of commercial transactions currently engaged in by US firms. These firms would employ people under the same sort of labour contracts as a present, and attempt to maximise their profits. Firms would be allowed to own shares in or make loans to each other as at present. The only limitation on capitalist activity would be that beneficial ownership of shares could not be vested in individuals. Instead, all shares not held or managed by other companies would be vested with a public body which he terms the Bureau of Public Ownership (BPO). The BPO would be obliged to maximise the return on the capital that it held. Capital income would then be distributed by the BPO to all employees in the economy as a percentage supplement to their wage incomes.

It is evident that the form of socialism advocated by Yunker is very similar to capitalism. Whether it should be termed socialism or state owned capitalism is a moot point, but Yunker's intention is evidently to deflect much of the criticism that capitalist inclined economists level at socialism by saying : look, socialism could be pretty much like the capitalism you know and love, so your criticisms of socialism are mostly ill founded.

Yunker devotes considerable attention to the problem of incentives for socialist managers as compared to private capitalists. An owner manager gains the full benefit from any increase in profit which would not be the case for a salaried manager under market socialist conditions. Yunker points out that in practice most lareg firms today are already run by salaried managers so that in some ways the situation would be no different. The issue then becomes whether the fund managers of the BPO would pursue the efficient use of capital as well as private shareholders do?

Again one of his responses is to say that already a large portion of shares are held by institutional investors who pay salaries and bonuses to fund managers, so the situation is again not dissimilar.

He has done empirical studies of the effort that private shareholders have to expend to influence the rate of return that they get on their capital [yunker1974iai], from which he concludes that they needed only to spend 9 hours a month in order to get close to the maximal rate of return on their capital. He therefore concludes that the BPO could be expected to earn close to the maximal rate of return with only a relatively small effort of fund management.

He goes on to construct a relatively elaborate theoretical economic model which purports to help us understand the relationship between return on capital and the effort put in by managers, and concludes from this that efficient management could be obtained at much lower levels of incentives than are typical for CEOs in American companies.

2.1 Assessment

Yunker's work has to be assessed from the standpoint of the ideological milieu in which it is embedded, for its theoretical and scientific cogency and finally in terms of its social and political implications.

2.1.1 Ideological

The ideological context of his writing is very clearly that of mainstream academic economics in the USA. The economics profession in the USA is probably as hostile to socialism as that of any other country. This means that Yunker swims against a tide of hostility to any form of socialism, and exists within a universe of discourse that is quite quite different from that of Marxian socialists. He could have opted out of the milieu of neo-classical economics and formulated an external critique of capitalism, but he has chosen instead the path of internal critique. He uses the familiar conceptual apparatus of his opponents and the familiar institutions of American capitalism to make his case for socialism. In a sense this is to be expected. Spontaneously developed socialist critiques of the existing order can be expected to start out from the dominant economic ideas of the day. Owenite and Marxian socialism built themselves on a critical appraisal of classical British political economy, so it is not surprising that a modern socialism, arising in the USA builds itself on the conceptual framework of the dominant neo-classical economics. The advantage of this approach is that Yunker's socialism may be harder for neoclassicals to simply dismiss than Marxian socialism. The disadvantage is that his approach is unlikely to appeal so much to grass-roots activists, because it seems to offer a society that is only slightly different from today's. Even a cursory examination of current activist web discussion of socialism, as opposed to discussion in academic journals, shows that Yunker's vision has generated much less interest than the more radical vision of Michael Albert[albert1991pep] for example.

2.1.2 Theoretical

But ideological reception is not everything. One also has to asses the scientific status of his arguments. From our standpoint as Marxian socialists, we would want to know why Yunker chooses to reject planning as part of socialism. Support for planning as opposed to market competition has been the prevalent position among socialists, so one would expect that Yunker would devote some energy to justifying his rejection of it. On the contrary in [yunker1988npm] he contents himself with a single sentence:

Among Western economists, it is virtually axiomatic that the “market capitalist” economy of the United States is highly efficient relative to the “planned socialist” economy of the Soviet Union. ([yunker1988npm], page 71)

He then goes on to assume that this belief is justified and build all his further arguments on this assumption. His formulation is revealing in many ways. Firstly his use of the term “Western economists”. By saying this he can not just have meant economists who lived to the west of the Iron Curtain, since there existed at the time he was writing, a small, but still real, fraction of Marxian economists in Western countries. These economists would not have taken it as axiomatic that market capitalism was more efficient than planned socialism. By Western economists he meant those economists, wherever they lived, who adhered to the neo-liberal Washington Consensus. It was a reference to, and affirmation of ideological allegiance rather than geography that he was making.

The next revealing thing is his use of the word axiomatic. One has to ask why he thinks axioms are relevant to an empirical study like economics?

The place for axioms is in formal theories such as set theory, number theory or predicate logic. Axioms and laws of inference provide a means by which it is possible for the validity of some, but not all, propositions within such a theory to be evaluated. Given a set of axioms and rules of inference it is possible to use a deterministic procedure to divide propositions into those that are provably true, those that are provably false, and those for which no deterministic answer can be obtained. People constructing formal theories are at liberty to select axioms, and by selecting different axioms different formal theories arise, the most famous historical example probably being the alternative axiomatisation of geometry by Riemann in 1854.

Yunker's reference to “virtually axiomatic” reveals the bias that neo-classical economists have towards treating economics as a formal system rather than an empirical science. Neoclassical economics proceeds by a discourse of proof from axioms rather than by the contrasting method of the empirical sciences : hypothesis, experimental or observational tests, modification of hypothesis. Biology does not proceed in an axiomatic fashion, why should economics?

Is it not possible that the axiomatic approach says something about the social role of neoclassical economic theory?

Couldn't it be the case that the function of the theory is to prove certain political propositions -- that all is for the best in best of all possible worlds?

But then there is the adjective : virtually. It is “virtually axiomatic” that market capitalism is superior to planned socialism. Why the qualification?

Because neoclassical economists have not been able to prove the superiority of market economy to planned economy from their prior set of axioms. On the contrary, for the century since Barone [barone1908imd], it has been evident that the axioms of neo-classical economics could be used to show that planned socialism was just as efficient as market capitalism. So it becomes necessary for “Western economists” to add a final “virtual axiom”; to assume what they want to prove in the first place.

Yunker seems to have felt uneasy about disposing of hitherto existing socialism in one sentence, so he adds a footnote to the work of Bergson[bergson1978pas] who is claimed to have empirically validated this virtual axiom. We have a critical look at Bergson's work in section [sec:Appendix-on-Bergson]. But Bergson's work uses data from the 1960s and 1970s. It claimed to show that the Soviet economy was less efficient in its use of resources than the US one. Such comparisons are bedeviled by the difficulty of compensating for factors other than the social system that distinguish the two countries: stage of industrialisation, available level of technology, level of technical culture in the workforce, differences in national cultures etc. But such debates from the 70s are now history. We have the results of a controlled experiment in Russia to go on. From 1989 the Russian government took the advice of American economist who took it as virtually axiomatic that replacing the planned economy with a free market would result in an enormous improvement in economic efficiency. Had these economist been right, were it the case that the main thing holding back the Russian economy was the constraints imposed by central planning, then we should have expected a Russia to have experienced a leap in prosperity and economic growth post 1989. In fact the effect was completely the opposite. The institution of a market economy led to a catastrophic decline in overall economic output, (table [tab:Decline-of-Russian] ).

We are not saying that the Soviet planning system, or its system of economic calculation and valuation were adequate. We argue in TNS that considerable inefficiencies arose from the under-valuation of labour in the USSR; that planning was based on aggregate rather than detailed targets; that it failed to make effective use of modern computer and telecoms technology; that consumer goods prices often diverged excessively from labour values. But our response, writing in 1989, was not to advocate market oriented reforms, which we considered would have catastrophic consequences for the working classes of the USSR. Instead we advocated a modernised, technologically sophisticated, and democratic model of planning. We think, in retrospect, that our scepticism about the market socialist reforms then being advocated in the USSR have turned out to be well founded. In contrast the 1990s seem to have passed Yunker's by. He seems to have nothing to say about the signal failure of Gorbachov's market socialist trajectory. He still holds to a rejection of planning based on little more than US cold war prejudices.

One of the key points of Yunker's arguments concerns the role of management unders socialism and capitalism. He is concerned to show that salaried employees of the BPO would be as effective in the efficient management of publicly held capital assets as current fund managers or individual capitalists are with privately held funds. His concern here is with efficient use of capital as a key component of overall efficiency. He takes return on capital employed to be the key indicator of economic efficiency, and argues that if socialist industry were to be oriented towards this, it would be as efficient as current capitalist industry, whilst allowing for greater equity.

There are several theoretical questions to be addressed here:

1. What is meant by the management of capital?

2. Could a single agency like the BPO operate in a manner analogous to multiple private fund managers?

3. Is profit really a good indication of capital efficiency?

4. Is the return on capital determined by the effort of capital managers or by quite other factors?

In Yunker's empirical study of capital management[yunker1974iai] he focused on individual 'investors'. But these were investors only in a very limited sense. They did not engage in the direct purchase of plant or equipment, instead they bought and sold financial assets. They were what used to be called rentiers, people whose wealth consisted in paper titles to future income streams. Management of capital, understood this way, is a much simpler task than efficient management of real capital assets and real capitalist production processes. But it is the latter which affects the productivity of a real economy. The former does affect the income of an individual rentier, but in a zero sum game. When a Mr A sells a low performing stock and buys a high performing one, he gains, but only at the expense of a Mr B who bought the low performing stock, and a Ms C who sold him the high performing stock. Contrast this with the task of organising the production of the A380 super jumbo jet. This requires the efficient coordination of a huge number of distinct labour processes, spread accross multiple nations and using a vast variety of capital equipment. Efficient execution of this sort of management directly affects aggregate welfare. It determines the timeliness of delivery of the jets. I determines their reliability and safety. Such management decisions influence their fuel consumption, etc. So there are two quite different sorts of capital management involved here, one of which has purely selfish implications, the other has social implications.

In the sort of economy that Yunker advocates, with only one ultimate owner, the BPO, the private rentier type of capital management would be irrelevant. The state is the ultimate owner of all shares and can not affect its income by portfolio adjustments. So Yunker's empirical studies are irrelevant to the issue he is addressing.

He might object that whilst buying and selling existing stock may be a zero sum game, the same can not be said about new issues of stock. Here, a consequence of stock purchase is the funding of real capital investment, and judgements by the market as to whether or not to fund such stock issues, have a real effect on future production. It is in this context that we have to ask : could a single agency like the BPO operate in a manner analogous to multiple private fund managers?

No.

The BPO as the only ultimate shareholder will have a synoptic view of the investment plans of all firms in the economy. Since the investment plans of one firm will affect other firms, the BPO must take this into account. Knowing the planned investments of all airlines for example, and knowing the best projections available to these firms for the growth of the airtravel market, it will be in a position to judge if the overall investment plans are excessive. It will thus be subject to none of the 'animal spirits' that motivate private investors during a bull market. A system of capital investment funded by a BPO will be much less likely to engender the bubbles which have time and again caused disastrous waste of real capital in the US economy, from the railway bubble of the late 19th century to the real-estate bubble that collapsed so dramatically in 2008. Many would judge this a good thing. But note that in the process, the BPO will have to act more and more like GOSPLAN.

If it is to make sound investment judgements, it will have to construct increasingly sophisticated econometric input-output models of the whole US economy. Only then will it be in a position to assess whether or not a particular investment in new stock issues is likely to give a good overall return. In will, in other words, have to plan.

Social and political implications of Yunker's model

Given the position of the USA in the world economic and political system, and given the absence of any significant socialdemocratic workers movement there, discussion of American Socialism has a slightly artificial air. However, it is not inconcievable that during the course of the 21st century this will change. The USA has moved from being the world's greatest creditor to its greatest debtor. In China it is faced for the first time with an industrial rival with the population resources to potentially overtake it. At the time of writing (March 2009) it is entering what looks like being its worst recession in three generations. All of these factors could lead to a serious socialist or social democratic movement taking root in the USA over the next quarter century. But would the ideology put forward by Yunker's be a plausible basis for such a movement?

We believe not.

Yunker's proposals are to timid to inspire a new generation of working class organisers. Although his ideas would, if somehow put into practice, mean some improvement in the income of workers, they would leave most of the structure of society unchanged. The very top stratum of capitalists would be removed, but the rest of the class structure would remain. The managerial and professional classes would retain their position vis a vis the working class. Workers would be employed by the same companies, managed in the same way but with the sole difference that the state would be the ultimate shareholder. Bcause his proposals do nothing to narrow income differentials arising from wages and salaries, because they provide no guarantee of full employment, they would be seen as having little to offer to the working class. They might perhaps win a certain middle class following, but in the ideological struggles that would take place within a growing working class socialist movement, they would be displaced by more radical doctrines.

One has to realise that for socialism to become 'on the agenda' in the USA will presuppose

1. A political movement at least comparable to classical German or Swedish social democracy, or the large communist movements of the post WWII period,

2. A major war resulting either

(a) in a defeat, comparable to those suffered by France in 1870, Russia 1917 or Germany 1918/45

(b) a pyrrhic victory that could only be won after years of national sacrifice, in which the social democratic movement avanced its position like Britain in 1945.

In these circumstances, different socialist doctrines, memes to borrow Dawkin's term, will contend for extended reproduction. The laws of evolution will favour those best suited to the new political and economic environment. Yunker's doctrines have been tailored to a particular evolutionary niche on the margins of American economic orthodoxy, in a climate of US world domination. It seems unlikely that they will sucessfully reproduce themselves in a working class movement in a defeated or declining USA.
References

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[Bar08] E. Barone. II ministro della produzione nello stato collettivista', Englishtranslation ('The Ministry of Production in the Collectivist State') inFriedrich von Hayek. Collectivist Economic Planning: Critical Studieson the Possibilities of Socialism by NG Pierson, Ludwig von Mises,Georg Halm, and Enrico Barone, pages 24590, 1908.

[Ber78] A. Bergson. Productivity and the Social System: The USSR and theWest. Harvard Univ Pr, 1978.

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[CC92] Allin Cottrell and Paul Cockshott. Towards a New Socialism, volumeNottingham. Bertrand Russell Press, 1992.

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[CCM+09] P. Cockshott, A. Cottrell, G. Michaelson, I. Wright, and V. Yakovenko.Classical Econophysics: Essays on classical political economy, thermo-dynamics and information theory. Routledge, 2009.

[DY00] A. Dragulescu and V. M. Yakovenko. Statistical mechanics of money.The European Physical Journal B, 17:723729, 2000.

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[FM83] Emmanuel Farjoun and Moshe Machover. Laws of Chaos, a ProbabilisticApproach to Political Economy. Verso, London, 1983.

[Key36] J. M. Keynes. The General Theory of Employment Interest and Money.Macmillan, London, 1936.

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[Len67] V.I. Lenin. The development of capitalism in Russia. Progress publishersMoscow, 1967.

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[Mar70] K. Marx. Marginal Notes to the Programme of the German Workers'Party [Critique of the Gotha Programme]. Marx and Engels SelectedWorks, 3, 1970.

[Mar71] Karl Marx. A Contribution to the Critique of Political Economy.Lawrence & Wishart, London, 1971.

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[Say80] S. Sayers. Forces of Production and Relations of Production in SocialistSociety. Radical Philosophy, 24:1926, 1980.

[Sta39] J. Stalin. Foundations of Leninism. International Publishers New York,1939.

[Wri] I. Wright. Implicit Microfoundations for Macroeconomics. Economics:The Open-Access, Open-Assessment E-Journal, 2.

[Wri05] I. Wright. The social architecture of capitalism. Physica A: StatisticalMechanics and its Applications, 346(3-4):589620, 2005.

[YK74] J.A. Yunker and T.L. Krehbiel. Investment analysis by the individualinvestor. Quarterly Review of Economics and Business, 28:90101, 1974.

[Yun79] J.A. Yunker. The Microeconomic Eciency Argument for Socialism Re-visited. Journal of Economic Issues, pages 73112, 1979.

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The new Venezuelan law on community currencies

2008-08-27T22:17:00.001+01:00

After a quick read the law seems to be silent on certain key issues.

1. Who has the power of seigneurage over the communal currency. The bank of venezuela has the responsibility of regulating it, but who has the power to issue these new monies.

2. The bank has the obligation to ensure exchange at the ratio 1/1 with the bolivar, how will it do this if other organisations have the power to issue them?

For this to work one would need a communal bank for each area that was issuing the currency, and this bank would have to have strict reserve ratio enforced with respect to the Bolivars it holds relative to the communal units of currency that it issues.

The system is quite feasible with appropriate regulation, and the British currency system works this way, and has done for some three hundred years, so for example the banks in Scotland, Northern Ireland, the Isle of Man and the Channel Islands are able to issue local currencies to expedite local exchange. In Scotland the great majority of the currency circulating is locally issued. However this is only feasible because the banks that issue the currency are obliged to hold reserves of GB Pounds to back their issues of local currency. In this they are no different in principle from other banks who issue their own money in the form of credit cards, except that the Scottish and Northern Irish notes are bearer bills.

It is possible that the Bank of Venezuela will issue detailed regulations relating to this.

The grave danger here is that a power of seigneurage will pass to local groups who will issue currency in an uncoordinated fashion. This will be inflationary and would in short order lead to that local currency loosing its value relative to the Bolivar. If on the other hand the central bank has an obligation to back these local notes, the net effect would be to accelerate the devaluation of the Bolivar itself, whilst in the process opening up huge opportunities for corruption on the part of those responsible for the issuing of the local currencies.

Conclusion

If the aim is just to increase local liquidity and provide credit for local enterprises which could not readily obtain it from central banking institutions there may well be something to be said for the proposal, provided it is properly regulated to ensure that there is no inflationary creation of money. However, such a policy is not in itself socialist, but perfectly compatible with capitalist economy, since a system very like this underlay the expansion of capitalism in Britain since 1700.

How Physics is validating the Labour Theory of Value

2008-08-27T15:31:00.000+01:00

When I was a student my economics professor told us that whilst the labour theory of value had been an important historical stage in the development of economics, it was now known to be fatally flawed. 20th century economists such as Sraffa and Samuelson had shown that it was unnecessary to accord labour any special place in our understanding of prices. Instead, the structure of prices could be perfectly well understood as the result of the monetary costs faced by firms and the behaviour of profit maximising entrepreneurs. If there was in reality no such thing as labour value, it followed that Marx's theory of exploitation was an invalid incursion of moral prejudices into the 'positive science' of economics.

The professor who taught us this, Ian Steedman, was actually quite left wing, an active member of the Communist Party.

This is just an anecdote, but fact that even a prominent communist intellectual believed that the central component of Marx's theory was scientifically worthless is significant. In retrospect it gave an indication of how poorly prepared the intellectuals of the communist movement were to be, when faced with the very intense ideological attacks on socialism which unfolded in the 1980s and 1990s.

But 25 years ago help came from an unexpected source. Two mathematicians Moshe Machover and Emanuel Farjoun, wrote a book called the Laws of Chaos. Their book gave a radically new way of looking at how capitalism worked as a chaotic and disorganised system. Farjoun and Machover had the the insight to see that physics had already developed theories to describe similar disorganised and chaotic systems.

In a market economy, hundreds of thousands of firms and individuals interact, buying and selling goods and services. This is similar to a gas in which very large numbers of molecules interact, bouncing off one another. Physics speaks of such systems as having a 'high degree of freedom', by which it means that the movements of all individual molecules are 'free' or random. But despite the individual molecules being free to move, we can still say things about them in the aggregate. We can say what their average speed will be ( their temperature ) and what their likely distributions in space will be.

The branch of physics which studies this is statistical mechanics or thermodynamics. Instead of making deterministic statements, it deals with probabilities and averages, but it still comes up with fundamental laws, the laws of thermodynamics, which have been found to govern the behaviour of our universe.

Now here is the surprise! When they applied the method of statistical mechanics to the capitalist economy, they found that the predictions it made coincided almost exactly with the labour theory of value as set out in volume 1 of Marx's Kapital. Statistical mechanics showed that the selling prices of goods would vary in proportion to their labour content just as Marx had assumed. Because the market is chaotic, individual prices would not be exactly equal to labour values, but they would cluster very closely around labour values. Whilst in Kapital I the labour theory of value is just taken as an empirically valid rule of thumb. Marx knew it was right, but did not say why. Here at last was a sound physical theory explaining it.

It is the job of science to uncover causal mechanisms. Once it has done this it can make predictions which can be tested. If two competing theories make different predictions about reality, we can by observation determine which theory is right. This is the normal scientific method.

Farjoun and Machover's theory made certain predictions which went directly against the predictions made by critics of Marx such as Samuelson. In particular their theory predicts that industries with a high labour to capital ratio will be more profitable. Conventional economics predicts that there will be no such systematic difference between the profit rates in different industries. When put to the test it turned out that Farjoun and Machover were right. Industries with a high labour to capital ratio are more profitable. But this is exactly what we should expect if the source of profit was the exploitation of labour rather than capital. Their theory made predictions which not only turned out to be empirically spot on, but at the same time verified Marx's theory of the exploitation of the worker.

The next big advance was made by the phsyicist Viktor Yakovenko, who showed in his paper 'the Statistical Mechanics of Money' that money in a market economy played the same role as energy in physics.

Just as energy is conserved in collisions between molecules, so money is conserved in the acts of buying and selling. So far so obvious!

What was not obvious was what this implies. Yakovenko showed that the laws of thermodynamics then imply that the distribution of money between people will follow the same form as the distribution of energy between molecules in a gas : the so called Gibbs-Boltzmann distribution. This sounds very scientific, but what does it actually mean?

There is a tendancy to think that rich people owe their wealth to intelligence or effort, but physics tells us no. Given a market economy, then the laws of chance mean that a lot of money will end up in the hands of a few people.

In fact when we look at the USA we find that the distribution of wealth is even more uneven that we would expect from the Gibbs-Boltzmann law. If the Gibbs Boltzman law held, there would be millionaires but no billionaires. Why the disparity?

Yakovenkos original equations represented an economy that is rather like what Marx called simple commodity production. It assumed only buying and selling. More recent work by Yakovenko and Wright, has shown that if you modify these equations to allow either the earning of interest on money, or the hiring of wage labour, then the equations predict a polarisation of the population into two groups. The great bulk of the population, the working class and petty bourgeois, follow a Gibbs-Boltzmann income distribution. But there is a second class, those whose income derives from capital, whose wealth with follow a different law, what is called a power-law. Again, look in detail at the distribution of wealth in and you provide exactly the distribution predicted by Yakovenko's theory. This, says Yakovenko, proves that Marx was right when he said that modern society was comprised of two distinct and opposed classes : capitalists and workers.

So modern physics has shown that not only was Marx right in his basic analysis, but he was right because his conclusions follow from the most basic laws of physics, the laws of thermodynamics.

There is also a less obvious conclusion that we can draw from physics relating to the undesirablity of Market Socialism. We can see from Yakovenko's work that a market socialist economy would also have a very uneven distribution of money. There too the Gibbs-Boltzmann law would rule. A small number of people or co-operatives would end up with a lot of money, and many such people or co-operatives would end up poverty stricken. From this capitalism would be regenerated. As Lenin wrote : "small production engenders capitalism and the bourgeoisie continuously, daily, hourly, spontaneously, and on a mass scale".

File translated from T_EX by T_TH, version 3.80.
On 27 Aug 2008, 15:30.

Programmatic objectives of socialism today

2008-08-26T15:55:00.002+01:00

Been talking with a variety of international comrades about new socialist programmes.
The big danger of writing a program as a small group of people is sectarianism if it is
presented as a party programme. A programme is really only something that a real
political party can adopt it.

On the other hand it is possible to put out a theory of what would be an appropriate
programmatic strategy for the socialist movement, without the pretentions
that what you are doing is writing an actual programme.

One has to ask what is the function of a programme in the absence of a party?

I think that what is needed is a theory of how to make the transition to a socialist
economy. This involves:

a) transtional economic measures
b) political changes towards greater democracy
c) a strategy of pragmatic alliances towards these goals

In the current conjuncture I would put much greater emphasis on some things
that I believe are missing from the old Erfurt programme, though the old
SDF programme in Britain had one of them.

--- cancellation of all debts
the great bulk of the population are heavily in debt to the banks
and so would gain from this

--- right of redress for exploitation in the civil courts
workers to be able to sue collectively ( class actions by unions ) if
they are paid less value than they create, recognise in law that only
labour creates value

These are both simple populist demands that benefit the majority of the population
and help create a high degree of class polarisation.

They are analogous to the Peace, Land , Bread demands.

The proposals on
the blog page http://21stcenturysocialism.blogspot.com/2007/09/venezuela-and-new-socialism.html
for the Bolivar to be tied to the labour hour serve two roles in this context

1. Anti inflationary measure
2. Propaganda against exploitation, it becomes clear to everyone that labour is creating value
and that workers are being exploited

Other things -- law against usury, prohibition of the lending of money at interest
-- industrial democracy, right to introduce workers control if a majority
of workers vote for it
-- introduction of capital movement controls in most countries ( in Venezuala, since
it is an oil surplus state this is not important
-- establishment of standardised forms of accounting for all enterprises
with fully published accounts -- essential to prevent financial fraud
and siphoning off of funds into tax havens

Note that none of this directly involves the state taking over the means of production.
The goal is to undermine capitalist relations of production leading to a syndicalist
economy as a transitional stage to a fully socialist economy. But the aim is to mobilise
a mass of the population into actions which bring them into conflict with the most
reactionary section of the capitalist class : the banking system.

Last socialist premier of Germany interviewed

2008-02-22T23:05:00.005Z

Heinz Dieterich has recently published an interview with the last socialist premier of the DDR, Hans Modrow.

When I had read through Modrows article, it struck me that it says nothing very original, which, given his own failure at the time to vocally warn the population of the danger that they faced from western takeover, was not totally surprising. His ideas on socialist economy are notably vague, whilst his ideas on democracy are little more than traditional liberalism.

What seemed to me a key issue, the disarming of the factory militias, is never mentioned.

Who, though gave the order for the disarming of the factory militias, was it him or Krenz. Once the working class was disarmed there was no hope of defending workers property in the means of production.

Modrow talks about a decision not to fire on demonstrators fair enough, but does not mention a decision to actually disarm the factory militias. Both Hungary and the DDR had such militias. According to the classical analyses of such figures as Engels and Trotsky such a disarmament of the working class is a crucial issue in deciding where class power actually lies.

In 1945 in France and Italy the militias were disarmed, but in Greece and Yugoslavia they were not, only in the latter countries was bourgeois rule in question. Once the workers in the DDR were disarmed, normal bourgeois rule was possible once more.

Who ordered the militias in Germany and Hungary to surrender their arms in 1989?

Modrow's idea of reform is entirely liberal – free contest of political parties for elected offices.

This however is nothing more than the typical form of a bourgeois republic. It is the ideal form of state for the upper classes to gain power and establish a ‘civil’ or bourgeois society.

Some of us in Scotland started emphasising the need for random lot to replace elections in the late 80s because we saw the danger that free elections would provide the ideal platform for counter revolution. The only answer is to overstep bourgeois democracy by going directly to popular democracy. One needs a system in which ordinary people not the educated elite rule. Once the people have power directly in their own hands, they would not willingly give it up for the fraud that is the Bundesrepublik's form of rule.

The only stable forms of socialist state are either peoples direct democracy or communist party dictatorship. In between is the abyss.

Modrow and the like need to go back and read their Aristotle to understand their Marx, not only Aristotles critique of Chrematistic but also his explanation of the nature of democracy. ( The Athenian Constitution and The Politics)

2007-11-19T14:47:00.002Z

21st century marxism

2007-09-07T16:25:00.001+01:00

In certain respects the situation of Marxism in the early 21st century has much in common with that in the late 19th century. In both cases Marxism is faced with a world in which the capitalist mode of production dominates. During what Hobsbawm called the 'shorter 20th century', the period from 1914 to 1990, world politics cantered round the epochal struggle between capitalist and socialist economic systems, and that reality gave to Marxism a quite different character than in its first period 1948-1914. In historical terms then, we are some 17 years into the 21st century.

In each period Marxism has had to address itself to the theoretical and political challenges of the moment. The 19th century addressed two main problems:

1) The constitution of the proletariat as a class and thus as a political party - (The Manifesto of the Communist Party 1848)

2) The critique of bourgeois political economy and the establishment of a political economy of labour - (Capital 1867)

Certain questions were only touched on the form of a future communist society (Critique of the Gotha Program) and the political form of the rule of the working class (The Civil War in France).

If we look at the 20th century we see a quite different set of questions being addressed.

How were communist ideas to be propagated (What is to be Done, 1902) ?

How was the communist movement to actually take power (The State and Revolution)?

Once the revolution had taken place how was the economy to be re-organised (The New Economics, 1926)?

How were revolutions in societies that were not yet fully capitalist to take place (Why is it that Red Political Power can exist in China 1928)?

After the revolution how was the danger of counter-revolution to be combated (Documents of the Shanghai Left 1967)?

In retrospect one can see that the mid 1970s represented the high water mark of the socialist tide. Whilst the Vietnamese revolutionaries were driving the US out of Saigon, and the last colonial empire in Africa, that of Portugal, was falling, the failure of the cultural revolution in China was setting the economic scene for the triumph or reaction in the 80s and 90s. When, after the death of Mao, Deng threw open the Chinese economy to western capital investment, the balance of class forces across the whole world was upset. An immense reserve army of labour, hireable of the lowest of wages, was thrown onto the scales. The bargaining position of capital in its struggles with its domestic working classes was, in one country after another, immensely strengthened.

So today we are faced with a whole new set of questions. The general intellectual/ideological environment is much less favourable to socialism than it was in the 20th century. This is not merely a consequence of the counter-revolutions that occurred at the end of the 20th century, but stems from a new and more vigorous assertion of the classic tenets of bourgeois political economy. This re-assertion of bourgeois political economy not only transformed economic policy in the West, but also prepared the ideological ground for counter revolutions in the East.

The theoretical preparation for the turn to the free market that occurred in the 1980s had been laid much earlier by right wing economic theorists like Hayek and Friedman. Their ideas, seen as extreme during the 1950s and 60s gained influence through the proselytising activities of organisations like the Institute for Economic Affairs and the Adam Smith Institute. These groups produced a series of books and reports advocating free market solutions to contemporary economic problems. They won the ear of prominent politicians like Margaret Thatcher, and from the 1980s were put into practice. She was given the liberty to do this by a combination of long term demographic changes and short term conjectural events. Within Britain, labour was in short supply, but across Asia it had become super abundant. Were capital free to move abroad to this plentiful supply of labour then the terms of the exchange between labour and capital in the UK would be transformed. Labour would no longer hold the stronger bargaining position. The conjunctural factor making this possible was the surplus in foreign trade generated by North Sea oil. Hitherto, the workers who produced manufactured exports had been essential to national economic survival. With the money from the North Sea, the manufacturing sector could be allowed to collapse without the fear of a balance of payments crisis. The deliberate run-down of manufacturing industry shrank the social basis of social democracy and weakened the voice of labour both economically and politically.

The success of Thatcher in attacking the working class movement in Britain encouraged middle class aspiring politicians in the East like Klaus and presaged a situation in which Hayekian economic doctrines would become the orthodoxy. Thatcher's doctrine TINA, There Is No Alternative, (to capitalism) was generally accepted.

The theoretical dominance of free market economic ideas had by the start of the 21st century become so strong, that they were as much accepted by social democrats and self professed communists, as they had been by Thatcher. They owe dominance both to class interests and to their internal coherence. The capitalist historical project took as its founding documents the Declaration of the Rights of Man, and Adam Smith?s Wealth of Nations. Together these provided a coherent view of the future of Bourgeois or Civil Society, as a self regulating system of free agents operating in the furtherance of their private interests. Two centuries later when faced with the challenge of communism and social democracy, the more farsighted representatives of the bourgeoisie returned to their roots, restated the original Capitalist Manifesto, and applied it to current conditions. The labour movement by contrast had no such coherent social narrative. Keynes?s economics had addressed only technical issues of government monetary and tax policy, it did not aspire to the moral and philosophical coherence of Smith.

The external economic and demographic factors that originally favoured the turn to the market are gradually weakening. Within the next 20 years the vast labour reserves of China will have been largely utilised, absorbed into capitalist commodity production. Globally we are returning to the situation that Western Europe had reached a century ago: a maturing world capitalist economy in which labour is still highly exploited but is beginning to become a scarce resource. These were the conditions that built the social cohesion of classical social democracy, the conditions that gave rise to the IWW and then CIO in America, and led to the strength of communist parties in Western Europe countries like France, Italy and Greece post 1945. We see in South America this process in operation today.

These circumstances set 21st century Marxism a new historical project: to counter and critique the theories of market liberalism as effectively as Marx critiqued the capitalist economists of his day.

The historical project of the world's working classes can only succeed if it promulgates its own political economy, its own theory of the future of society. This new political economy must be as morally coherent as that of Smith, must lead to economically coherent policy proposals, which if enacted, open the way to a new post-capitalist civilisation. As those of Smith opened the way to the post feudal civilisation.

Political failures of both Social Democracy and Leninism indicate that socialist movement never developed a coherent constitutional program. In particular it has accepted the misconception of representative government either in its Leninist or Social democratic form. Representative government selects politicians, to stand in for, or represent, other people in the process of political decision making. This is what the Leninist party claimed: to be acting as a representative of the working class and making political decisions on its behalf. As such it is no more or less a representative form than a Social Democrat government. Despite differences, over who is represented and how they are represented, but the same principle remains : decisions are not taken by those affected but are monopolized by a group of professional rulers, whose edicts are legitimated in terms of some representative function.

Selection of our rulers by multiple party elections cannot abolish the distinction between rulers and ruled.

The contradictory character of socialist representative government was banally evident. The peoples representatives, through their control of the plan, and thus the method by which unpaid surplus labour is pumped out of the people, became effective controllers of the means of production. As such their individual class position was transformed and their ability to go on representing the working people, compromised.

Only if the distinction between ruler and ruled is abolished, when the people themselves decide all major questions through institutions of participatory democracy does the totalitarian inner secret at the heart of socialism cease to be contradictory. Only when the people in referenda decide the disposition of their collective social labour : how much is to go on defence, how much on health,

How much on consumer goods etc, can the political life of socialism cease to be fraudulent.

21st century Marxism can no longer push to one side the details of how the non-market economy of the future is to be organised. In Marx's day this was permissible, not now. We can not pretend that the 20th century never happened, or that it taught us nothing about socialism. In this task 20th century Western critical Marxists like Cliff, Bettleheim or Bordiga will only take us so far. Whilst they could point out weaknesses of hitherto existing socialism, it did this by comparing it to an ideal standard of what these writers thought that a socialist society should achieve. In retrospect we will see that these trends of thought were a product of the special circumstances of the cold war, a striving for a position of ideological autonomy 'neither Moscow nor Washington', rather than a programmatic contribution to Marxism. The very psychological detachment that such writers sought, deflecting from their own heads the calumnies directed at the USSR, prevented them from positively engaging with the problems faced by historically existing socialism. It is only if you envisage being faced with such problems oneself, that one would come up with practical answers:

"It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat." (Citizenship in a Republic, Roosevelt)

Instead we must recover and celebrate the advances in Marxist political economy that arose from the Russian experience: the method of material balances used in preparing the 5 year plans and systematised as Input Output analysis by Leontief; the method of linear programming pioneered by Kantorovich; the time diaries of Strumlin.

In the 19th century Marx's Capital was a critique of the political economy that underlay British Liberalism. 21st century Marxists must perform a critique of neo-liberal political economy comparable in rigour and moral depth to Marx's 19th century critique. In particular we must engage with and defeat the ideas of the Austrian school: Boehm-Bawerk, Mises, Hayek, whose ideas now constitute the keystone of reaction. Soviet Marxism felt strong enough to ignore the then, and the response in the West came in the main from non-Marxian socialists like Lange and Dickinsen. If we are to reconstitute socialism as the commonsense of the 21st century - as it was the commonsense of the mid 20th, then these are the ideas that must be confronted.

In attacking them we should not hesitate to use the advances in other sciences - statistical mechanics, information theory, computability theory. And, to re-establish Scientific Socialism there must be a definitive break with the speculative philosophical method of much of Western Marxism. We have to treat political economy and the theory of social revolution like any other science.

We must formulate testable hypotheses, which we then asses against empirical data. Where the empirical results differ from what we expected, we must modify and retest our theories.

To understand this new form of Marxist science consider the debate on the so-called 'transformation problem'. There was, in the 20th century, a huge and pointless literature attempting to rebut Boehm Bawerk's criticism of Marx's theory of prices of production. The net result of this debate was only to detract attention from the labour theory of value and Marx's analysis of exploitation. The eventual breakthrough, in the 1980s, against this Austrian critique of Marxism came from two mathematical logicians Farjoun and Machover. Their work 'The Laws of Chaos', was to my mind the most original contribution to Marxist theory of the late 20th century. They used methods derived from statistical mechanics to show that the assumption of a uniform profit rate, shared by Marx and Boehm Bawerk, was erroneous, and that in reality the classical labour theory of value (Capital vol I) operates. This was then confirmed by the empirical investigations of Shaikh and others.

This willingness to learn from other sciences and use them in the struggle against the reigning ideology can be seen in the work of Peters who brought the ideas of the computer pioneer Zuse into play in order to validate the possibility of rational socialist planning. We see again in Peters, what was evident in Shaikh and Machover, a re-assertion of the importance for Marxism of the labour theory of value. Whereas for Shaikh and Machover its role is causal in explaining the actual dynamics of capitalism. For Peters it becomes both a moral principle and an organising concept for the future socialism.

The theoretical advances I refer to, occurred as the 20th century gave way to the 21st. Vladimir Lenin said: "Without a revolutionary theory there cannot be a revolutionary movement." This is as true today as in 1902. In the late 20th century we came to lack such a theory. Thatcher's idea that 'There is no alternative', only seemed credible because we lacked a revolutionary political economy, one which not only interpreted the world but explained how to change it, how to construct a different world.

21st century Marxism is starting out along the path to build that revolutionary political economy. Let us hasten its achievement so that when the next major restructuring crisis hits the capitalist world economy we are in a position to equip progressive movements with the ideas that they need if they are to prevail.

Paul Cockshott 2007

Venezuela and New Socialism

2007-09-06T12:22:00.000+01:00

In 1989 Paul Cockshot and Allin Cottrell wrote a book on socialism which was published three years later in English as Towards a New Socialism. This book was addressed at an audience in the USSR and East European countries because it dealt with the problems that socialism was then facing in these countries. It had been the intention to have it translated and published in Russian. The book presented a model of how to run a socialist economy based on clear economic and moral principles and re-asserted the basic values of socialism against the pro-capitalist measures being introduced under Gorbachov. Events moved to fast to allow the to come out in Russian before the USSR fell, but since then what it says has been recognised to be sufficiently important that publishers in Sweden, Germany, Czechoslovakia and Venezuela have published translations under a variety of national titles.

In June 2007 at a workshop in Venezuela to launch the Spanish translation entitled Hacia el socialismo del siglo XXI, Paul was asked how the principles in the book could be applied to the process of establishing socialism in that country. This report tries to answer that question.

Clearly an economic model designed to answer the problems of a mature socialist industrial economy like the USSR can not be applied immediately to Venezuela. What it can do, is give people some idea where the process of socialist transformation may end up. It can warn them about avoiding some economic mistakes that were made in the USSR and Eastern Europe: for those who do not learn from history are doomed to repeat it.

When a society undergoes a transition to socialism there are decisions that have to be made, forks in the road that have to be chosen. If the wrong set of turnings are chosen, you can end up going in a circle. Starting off going towards socialism, you can end up on a path that eventually leads back to capitalism. We all know that this happened in several 20^th century attempts to go towards socialism. The worst thing is that the implications of decisions are not immediately obvious at the time they are made. This means that, almost up until the last moment, people can think that they are still on the right course.

This is not the place to repeat what was said in the book Towards a New Socialism, but let us summarise the 3 key features of the mature socialism that it describes:

The economy is based on the deliberate and concious application of the labour theory of value as developed by Adam Smith and Karl Marx. It is a model in which consumer goods are priced in terms of the hours and minutes of labour it took to make them, and in which each worker is paid labour credits for each hour worked. The consistent application of this principle eliminates economic exploitation.
Industry is publicly owned, run according to a plan and not for profit. Stage retail enterprises for example, work on a break even rather than profit making basis.
Decisions are taken democratically, both at a local and a national basis. This applies in particular to decisions about the level of taxation and state expenditure. Such democratic decision making is vital to prevent the replacement of private exploitation with exploitation by the state.

When we compare this with Venezuela today, we see that all three key features still need to be built. On some features the progress towards socialism has not yet started, on others it has started but the country has only taken a few steps along the path.

Let us look at these points one at a time.

Still a money economy

The Venezuelan economy is still based on money. In his great book Capital, Karl Marx showed how money was at the root of the evils of capitalism. The essence of capitalism is to start out with a sum of money at the beginning of the year and end up with a larger sum at the end. Marx denoted this by M—>M', where M might be $1,000,000 for example and M' might be $2,000,000.

Because capitalists have more money than working people, they can use this money to hire workers to work for wages. These wages are much much less than the value which workers create during the working week. Since the capitalist can sell the product for more value than they paid out in wages, the capitalists become richer and richer whilst workers stay as poor as ever.

This process is still going on in Venezuela. It is the root cause of the difference between rich and poor, between the oligarchy and the masses.

On top of this there is a secondary form of exploitation that allows capitalists to increase their money: lending money at interest. This process allows the money-lender to get richer year by year by doing absolutely nothing. This again, still occurs in Venezuela.

Still an unplanned economy

In Venezuela, unlike for example the USSR, the supply of most goods and services is regulated by the market. Whilst this is not entirely a bad thing, since it does, to a limited extent allow supply to be adjusted to peoples wants, the drawback is that the provision of goods and services is systematically biased towards the wishes and desires of the rich. Venezuela currently lacks the mechanisms by which the structure of the economy as a whole can regulated by a concious social plan both to achieve development and to equitably meet the needs of all citizens.

Towards a New Socialism, assumed public ownership of the economy. Most of the economy in Venezuela, is still privately owned, although this may be changing now.

Democratic revolution not yet complete

Whilst Venezuela has made great strides towards local participative democracy, it has yet to introduce participative democracy on key questions of national economic control. Issues relating to the raising of state revenue and the allocation of this revenue between major budget headings : defence, social care, infrastructure investment etc, are taken centrally rather than allowing the people as a whole to vote on them. If this is not addressed, it will in the long run, as the state comes to dominate more and more of the economy, be a serious danger. You could end up with a situation as occurred in the USSR where the state, and the bureaucracy of the state could be seen as being rather like a new exploiting class.

When we think of what happened in the USSR just before it collapsed, the desire of state bureaucrats to go from being like an exploiting class, to become outright capitalists like today's Russian oligarchs, must be counted as a key factor in the collapse.

How to effect the transformation

The great economist Keynes remarked that practical political men, whether they be cautious or bold, fond themselves unconsciously repeating the ideas of long dead economists. Politicians who advance neo-liberalism, whether they know it or not, are repeating the ideas of the reactionary Austrian economists Ludwig von Mises and von Hayek. The policies that we suggest below counter those ideas by drawing on the insights of others particularly the Scottish philosopher Adam Smith, the German economist Karl Marx, the Polish socialist economist Oscar Lange and the Englishman Maynard Keynes.

As economists and social scientists we can only sketch out possible courses of action and some of their likely consequences of these actions. Decisions on what course to take are essentially political and political community, the leaders and the citizens of the country concerned are responsible for their own destiny. What intellectuals can to is to suggest possibilities which influence the terms of debate.

In the last section we looked at key objectives in the socialist transformation of an economy and the extent to which they have been met in Venezuelan experience. We will now shift the focus to specific policy measures, which we will present one by one and whilst explaining how each of these helps to achieve the broader objectives we have described.

Currency stabilisation

There is, by world standards, a considerable degree of inflation in the Venezuelan economy. This is masked by administrative measures to stabilise prices of certain essentials of life but it is nonetheless real. Of itself, inflation is not necessarily against the interests of the poor and working classes, provided that wages keep up with prices. The people who are hit hardest by inflation are the rentier class whose holdings of money and interest bearing assets depreciate. Since these people are opponents of socialism anyway, a socialist government need not worry about any financial loss they suffer were it not for the other social effects of inflation.

Uncertainty about future prices can lead to a social psychology of instability leading to a loss of confidence in the government. We explain in an annexe how this sort of inflation played a role in the collapse of the USSR. For this reason alone, it will eventually be necessary for the Venezuelan government to take measures to regulate inflation.

However, if ones objectives are to establish a socialist economy based on the equivalent payment of labour, then currency reform can be a step towards this goal. What we suggest is that, following the introduction of the new strong Bolivar, the state place a legal obligation on the central bank to maintain a stable value of the currency in terms of labour¹. A prototype for this could be the successful monetary policy of the British Labour Government after 1996. At that time the government placed monetary policy under a committee of expert economists ( The Monetary Policy Committee) rather than politicians and gave them a clear legal obligation to achieve a particular target rate of inflation. One might have expected this policy to be severely deflationary, but it has actually been very successful, because committee are legally obliged to avoid both deflation and inflation in their policy.

Where our proposal differs from British policy is in the goal it sets – we advocate fixing the value of the Bolivar in terms of labour not in terms of the cost of living index. The reasons for this goal are twofold:

As labour productivity rises, a Bolivar fixed in terms of hours of labour, will be able to buy more each year, cheapening the cost of living.
Once the value of the Bolivar has been stabilised in terms of labour, then the labour value of Bolivar notes should be printed on them in hours and minutes. This step would be an act of revolutionary pedagogy. It would reveal clearly to the oppressed just how the existing system cheats them. Suppose a worker puts in a working week of 45hours and gets back Bolivars and sees that the hours printed on them amount to only 15 hours, then she will become aware that she is being cheated out of 30 hours each week. This will act to raise the socialist consciousness of the people, and create favourable public opinion for other socialist measures.

Instead of just having a committee of economists charged with regulating the value of the Bolivar, the principle of participative democracy implies that the Value Policy Committee should be made up both of economists and delegates from the trades unions and consumers associations. The Value Policy Committee would have to commission surveys of how much work was being done in different industries, and how much monetary value added there was in these industries, in order to guide its stabilisation policy.

Reform of accounting and pressure for fair prices

All firms have currently to prepare money accounts, The government should make it a condition of their accounts being approved for auditing, that they also produce labour time accounts. and that they mark on all products that they sell their labour content.

Initially firms need not be legally obligated to sell their commodities at their true values. They could attempt to sell them for a price that is higher or lower than the true value. But since the consumer can now see when they are being overcharged, consumers will tend to avoid companies that sell goods at above their true value. This will put psychological and consumer pressure on companies that are overcharging. This too will be an act of socialist mass pedagogy to raise consciousness.

In the first few months, before all goods have their labour values printed on their price tags, firms will have to impute labour values to the goods they purchase using the printed exchange rate between Bolivars and labour hours. The will add to the labour value of their inputs, the number of hours of work that are performed by their employees to get a labour value for the final product.

We mentioned earlier the need to establish labour accounting in industry for pedagogic purposes. The government should also move towards having a dual system of national accounts, labour accounts alongside money accounts because, at the level of national economic policy, there are many issues on which labour accounts would be more informative than money accounts. Money accounts hide the fact that what government economic policy really does is re-allocate society's labour. Money is the veil behind which real labour allocation occurs.

Enshrine the rights of labour in law

Scientific evidence shows that in the capitalist world the money value of goods is overwhelmingly determined by their labour contents. Studies find that for most economies the correlation between labour values and prices are 95% or above. So Adam Smiths scientific hypothesis that labour was the source of value has now been statistically verified.

This scientific fact should be incorporated in law.

The law should recognise that labour is the sole source of value and that in consequence, workers, or their Unions will have a claim in law against their employers if they are paid less than the full value of their labour.

If we consider the previous measures and the revolutionary pedagogy that would follow from them, it should be relatively easy to pass a referendum on such a law.

Following such a law being passed, there would be a huge wave of worker activism as workers and their unions sought to end the cheating and deceit to which they and their ancestors had been subjected. It would also bring about a very large increase in real wages, cementing support for the socialist government.

The employing class, on the other hand would see sharp fall in their unearned incomes. Employers who were active factory managers would of course still be legally entitled to be paid for the hours that they put in managing the firm, just like any other employee.

The cumulative effect of the three measures outlined so far would be to substantially abolish capitalist exploitation in the workplace – at least in the short term. There will be long term difficulties if other measures are not taken, and we shall examine these later.

Eliminating other forms of exploitation

In addition to the exploitation of employees by employers, there are other forms of unearned incomes, the most economically important of which are interest and rent.

Usury

Interest, the getting of money from money itself, was regarded for thousands of years as being sinful. Philosophers like Aristotle condemned it. Papal encyclicals banned it. Islamic law still forbids it in Muslim countries. But in capitalist countries, such was the social power of the banks and other money lenders that this moral objections came to be forgotten.

In capitalist countries which were undergoing very rapid industrialisation, for instance, Japan in the 1950s or 1960s, lending money at interest did serve a necessary economic purpose, since it allowed peoples savings to be channelled, via the banks, to fund industrialisation. But once a country has industrialised, firms finance most of their investment from internal profits. Indeed they normally have more profit than they know how to invest. Instead of borrowing from the banks, industrial firms run a financial surplus, and they themselves lend to the banks. The banks now channel the financial surplus of firms into loans to the third world, or to Northern governments and consumers. Lending at interest looses the temporary progressive function that it had during industrialisation and reverts to being what morality and religion originally condemned : usury.

Socialism abolishes interest as a form of income. It has no class of rentiers – people who do no work but just live off the interest on their money. So it is clear that at some point, that a government seriously intent upon socialism has to pass a legislation banning the lending of money at interest. It could specify, for instance, that interest on debt could not be enforced in the civil courts. It could impose severe criminal penalties on those who used threats of harm to extort interest.

Before moving to a step such as this, a socialist government needs to put in place replacements for the economic functions still served by lending, and charging interest.

Investment

It will still be necessary to fund new investments. This could be done by interst free loans from the state bank. But if this is not done with care, the resulting expansion of the money stock will lead to the type of suppressed inflation which occurred in the USSR.

Investment on credit is based on the illusion that you can push the cost of investment into the future. Whilst this can be true for an individual borrower, for society as a whole, today's investment has to be made using today's labour. We can not get future generations to travel back in time in order to do work for us. Socialist economies should thus rely mainly on tax revenue to fund investment.

Regulating price levels

Capitalist central banks try to control inflation by adjusting the interest rate. If inflation is too high, they raise interest rates. The effect is to choke off investment, reduce demand, and so reduce inflationary pressures. If interest is banned, how is the price level to be regulated ? – or, in the light of what we said earlier – how would the Venezuelan Value Policy Committee ensure that the value of the Bolivar in terms of labour was held steady?

An alternative control mechanism would be to adjust the term on which loans are made. The state bank could set maximum durations for loans. For example, if the Value Policy Committee thought the value of the currency was in danger of falling it could shorten the period for which loans could be had. If loan periods were reduced from 10 year to 5 years, then monthly repayments rise, just as happens with interest rate rises today.

Another means of regulating prices is tax policy. Paper money, like the Bolivar, is inherently worthless – just printed paper. It has value imputed to it, from the fact that the government will accept its own currency for tax debts. The fact that people need money to pay their taxes, forces them to value it. If governments tax less than they spend, the money stock will rise leading to inflation. The second way to regulate prices is thus to fine tune tax levels.

Rent

Rent is another type of exploitation. Socialists regard it as immoral since the owner of land enriches himself, not by his own labour, but by the labour of others combined with the bounty of nature. Rent is however an inevitable phenomenon in a commodity producing society. If there is some product, be it crude oil, or corn, the efficiency whose production depends on the land being used, then rent incomes will arise.

Suppose the price of a ton of corn is $200, then any land on which the corn's cost of production is less than $200 will be worth cultivating. By the cost of production we mean the ultimate labour cost translated into money – including the cost of fertilizers. If land will yield corn at a cost of production of only $50 – say because of its great fertility – then its owner can rent it out to farmers for $150 and they can still break even selling corn at $200. The same applies to oil production. If on the marginal oil field – say the tar sands of Athabasca in Canada, oil can be produced for $50 a barrel, then a productive oilfield like the Venezuelan where costs are much lower, say $15, will yield its owner (the state in this case) a rent of $35 a barrel.

In a socialist economy all rent income should accrue to the state and be used for the good of the community in general. Socialist states have usually nationalised land, but have not always charged a rent for using the land. In the case of mineral extraction this made no difference, since this was done by state enterprises and rent would just have been a fictitious transfer between sections of the state. Failure to charge agricultural rents to collective farms will, however, accentuate differences in income between fertile and less fertile agricultural regions.

In the immediate situation in Venezuela, the nationalisation of land may not initially be politically opportune since it could drive the small farmers into alliance with large landowners. An alternative, which over the long term would produce a similar effect, would be to introduce a land tax on the rentable value of land. The threshold for the tax could be set high enough to ensure that small farmers paid nothing or only a token amount, but for larger more fertile estates it could be set at a level that would confiscate the greater part of rent revenue. The effect on the landowners would be similar to that which would be achieved by nationalisation – depriving them of their unearned income and making it available for communal uses – but it is ideologically harder for them to mount a campaign to justify tax evasion than it is to mount one to justify resistance to expropriation.

State finance and foreign currency

This brings us onto the general topic of state finance.

Socialist economies typically have a higher level of state expenditure than capitalist ones at a comparable level of economic development. It is essential that the state has an efficient revenue raising mechanism, with taxes that are easy to collect and difficult to avoid. Venezuela is unusual in having large oil exports, which helps somewhat, but the principle still remains.

Social democratic states like Sweden relied mainly on income taxes along with an efficient civil service. East European socialist states like the USSR relied upon turnover taxes on industry and on profits earned by state firms. Because of the importance of oil revenue to the Venezuelan state, it currently leans more towards the Soviet model.

Which of these models of tax revenue should be used is one of the major strategic issues that has to be faced by Venezuela as it moves towards a socialist economy.

In their book Towards a New Socialism, Cottrell and Cockshott argue that the Soviet model of taxation had several drawbacks, which, in the long run, contributed the final collapse of the Soviet socialist economy.

The use of indirect taxation, such as turnover or value added taxes², and a-fortiori a reliance on profit income, puts the state in the position of being a collective capitalist vis a vis the workers.
The use of indirect taxation, has also traditionally been opposed by socialists as these are regressive rather than progressive forms of taxation³.
It resulted in a distorted price structure that systematically undervalued labour to the detriment of economic efficiency.
Reliance on the profit of state industry is a hidden form of revenue, which is not easily amenable to democratic control.

In the case of Venezuela there is the additional complicating factor that profits from oil revenue are dependent on the very volatile world market price of oil. This can cause unexpected fluctuations in state revenue. The recent sharp rise in oil prices has been very beneficial to the government, but it must be remembered that prices can go down as well as up.

It is said Venezuelan government has plenty of money thanks to oil, but it is important to understand in what sense it has plenty of money. What it has is plenty of dollars. These are fine if the government wants to directly purchases manufactured commodities made in other countries. Dollars are also fine for giving aid to other countries. But dollars are no use for paying the wages of government employees or when the government wants to buy domestically produced goods, for these the government needs Bolivars not dollars.

The government can get Bolivars in several ways:

It can raise them from taxes.
It can issue bonds denoted in Bolivars and sell these on the money markets.
It could purchase Bolivars on the open market using it's dollar reserves.
It can get the state bank to extend it credit.

The fact that the black market rate for the dollar is well above the official rate, and that there is significant inflation indicates that the state has been relying excessively on the last of these methods of finance.

It must be realised that dollars can not be used to meet a shortfall of tax revenue in Bolivars so long as foreign exchange controls are retained. Dollar revenue can only be freely converted to revenue in Bolivars by the state buying Bolivars on the open market. This in turn implies that Venezuelan citizens would have to be free to sell dollars in the open market.

It is understandable that the government maintains exchange controls to prevent the upper classes expatriating their Bolivar assets, and in the process using up the government's foreign exchange reserves, so there is obviously a dilemma here. This dilemma indicates that the government has not yet felt itself to be strong enough to face down the economic power of the oligarchy. We could suggest two possible policies under these circumstances:

Increases in higher rate income taxes and abolition of tax exemptions sufficient to fund government domestic expenditure from domestic tax revenues.
More radically, a sharp reduction in the amount of privately held Bolivars could be brought in along with the projected currency reform. If there was a limit to the amount that any one person could change from old Bolivars to new Bolivars – for instance this might be set at a certain number of months of average wages – then the money capital of the rich would no longer be sufficient for them to threaten the states foreign exchange reserves following the removal of exchange controls. It would also incidentally greatly reduce the social power of the capitalist class.

Each of these policies has obvious political risks involved, which have to weighed against the futur benefits of a more stable system of public finance.

Foreseeable consequences

The policies described above would go a long way to transforming the economy into a new socialist one. However, since they undermine what are important functional components of capitalism there would be consequences if alternative mechanisms were not put into place.

Ending the production of surplus value by paying workers the full value they create would make employment unprofitable. There is a danger under these circumstances that capitalists would find it more profitable to leave their money in the bank and earn interest on it than use it to employ workers.

It would thus be important that the payment of interest was abolished prior to introducing the right to the full value of labour.

It would might well also be necessary to introduce the right for employees to be able to vote for their firm to be co-managed with a co-management committee having a clear majority of employees on it, in order to prevent owners asset stripping and closing the now unprofitable firm.

Appendix A Economic Factors in the failure of Soviet Socialism

Paul Cockshott was asked by Gen. Jose Angel to elaborate on remarks made about the economic causes of Soviet Collapse. This is a very brief personal perspective on what is obviously a huge and very controversial subject.

The collapse of the Soviet and later the Russian economy under Gorbachov and then Yeltsin was an economic disaster that was otherwise unprecedented in time of peace. The world's second super-power was reduced to the status of a minor bankrupt economy with a huge decline in industrial production and in living standards. Nothing brings out the scale of the catastrophe than the demographic data which show a huge rise in the mortality rate brought about by poverty, hunger, homelessness and the alcoholism that these brought in their wake.

Soviet Economic collapse let to huge increase in mortality with 5.7 million Excess Russian deaths 1991-2001. Vertical axis 1,000 deaths per annum.

In determining what caused this one has to look at long term, medium term and short term factors which led to relative stagnation, crisis and then collapse. The long term factors were structural problems in the Soviet economy and required reforms to address them. The actual policies introduced by the Gorbachov and Yeltsin governments, far from dealing with these problems actually made the situation catastrophically worse.

Long Term

During the period from 1930 to 1970, and excluding the war years, the USSR experienced very rapid economic growth. There is considerable dispute about just how fast the economy grew, but it is generally agreed to have grown significantly faster than the USA between 1928 and 1975, with the growth rate slowing down to the US level after that⁴. This growth took it from a peasant country whose level of development had been comparable to India in 1922, to become the worlds second industrial and technological and military power by the mid 1960s.

Observers have given a number of reasons for this relative slowdown in growth in the latter period.

It is easier for an economy to grow rapidly during the initial phase of industrialisation when labour is being switched from agriculture to industry. Afterwards growth has to rely upon improvements in labour productivity in an already industrialised economy, which are typically less than the difference in productivity between agriculture and industry.

A relatively large portion of Soviet industrial output was devoted to defence, particularly in the latter stages of the Cold War, when they were in competition with Regan's 'Star Wars' programmes. The skilled manpower used up for defence restricted the number of scientists and engineers who could be allocated to inventing new and more productive industrial equipment.

The USA and other capitalist countries imposed embargoes on the supply of advanced technological equipment to the USSR. This meant that the USSR had to rely to an unusually high degree on domestic designs of equipment. In the west there were no comparable barriers to the export of technology so that the industrial development of the western capitalist countries was synergistic.

Labour was probably not used as efficiently in Soviet industry as it was in the USA or West Germany. In one sense, or course the USSR used labour very effectively, it had no unemployment and the proportion of women in full time employment was higher than in any other country. But a developed industrial economy has to be able transfer labour to where it can be most efficiently used. Under capitalism this is achieved by the existence of a reserve of unemployment, which, whilst it is inefficient at a macro-economic level, does allow rapid expansion of new industries.

The Soviet enterprise tended to hoard workers, keeping people on its books just in case they were needed to meet future demands from the planning authorities. This was made possible both by the relatively low level of money wages, and because the state bank readily extended credit to cover such costs. The low level of money wages was in turn a consequence of the way the state raised its revenue from the profits of state enterprises rather than from income taxes.

Although Soviet industrial growth in the 80s slowed down to US levels, this by itself was not a disaster, after all the USA had experienced this sort of growth rate (2.5% a year) for decades without crisis. Indeed whilst, working class incomes in the USA actually stagnated over the 80s, in the USSR they continued to rise. The difference was in the position of the intelligentsia and the managerial strata in the two countries. In the USA income differentials became progressively greater, so that the rise in national income nearly all went to the top 10% of the population. In the USSR income differentials were relatively narrow, and whilst all groups continued to experience a rise in incomes, this was much smaller than had been the case in the 1950s and 1960's. This 2.5% growth was experienced by some of the Soviet intelligentsia as intolerable stagnation – perhaps because they compared themselves with managers and professionals in the USA or Germany. A perception thus took root among this class that the socialist system was failing when compared to the USA.

Again this would not have been critical to the future survival of the system were it not for the fact that these strata were disproportionately influential within the USSR. Although the ruling Communist Party was notionally a workers party, a disproportionately high proportion of its members were drawn from the most skilled technical and professional employees, manual workers were proportionately under represented.

The slowdown in Soviet growth was in large measure the inevitable result of economic maturity, a movement towards the rate of growth typical of mature industrial countries. A modest programme of measures to improve the efficiency of economic management would probably have produced some recovery in the growth rate, but it would have been unrealistic to expect the rapid growth of the 50s and 60s to return. What the USSR got however, was not a modest programme of reform, but a radical demolition job on its basic economic structures. This demolition job was motivated by neo-liberal ideology. Neo-liberal economists, both with the USSR and visiting from the USA promised that once the planning system was removed and once enterprises were left free to compete in the market, then economic efficiency would be radically improved.

Medium Term

The medium term causes of Soviet economic collapse lay in the policies that the Gorbachov government embarked on in its attempts to improve the economy. The combined effect of these policies was to bankrupt the state and debauch the currency.

One has to realise that the financial basis of the Soviet state lay mainly in the taxes that it levied on turnover by enterprises and on sales taxes.

In an effort to stamp out the heavy drinking which led to absenteeism from work, and to poor health, the Gorbachov government banned alcohol. This and the general tightening up of work discipline, led, in the first couple of years of his government to some improvement in economic growth. It had however, unforeseen side effects. Since sales of vodka could no longer take place in government shops, a black market of illegally distilled vodka sprang up, controlled by the criminal underworld. The criminal class who gained money and strength from this later turned out to be most dangerous enemy.

Whilst money from the illegal drinks trade went into the hands of criminals, the state lost a significant source of tax revenue, which, because it was not made up by other taxes, touched off an inflationary process.

Were the loss of the taxes on drinks the only problem for state finance, it could have been solved by raising the prices of some other commodities to compensate. But the situation was made worse when, influenced by the arguments of neo-liberal economists, Gorbachov allowed enterprises to keep a large part of the turnover tax revenue that they owed the state. The neo-liberals argued that if managers were allowed to keep this revenue, they would make more efficient use of it than the government.

What actually ensued was a catastrophic revenue crisis for the state, who were forced to rely on the issue of credit by the central bank to finance their current expenditure. The expansion of the money stock led to rapid inflation and the erosion of public confidence in the economy. Meanwhile, the additional unaudited funds in the hands of enterprise managers opened up huge opportunities for corruption. The Gorbachov government had recently legalised worker co-operatives, allowing them to trade independently. This legal form was then used by a new stratum of corrupt officials, gangsters and petty business men to launder corruptly obtained funds.

Immediate

The Soviet economy had gone through the stages of slowdown, mismanaged crisis and now went into a phase of catastrophic collapse, quite unprecedented in peacetime.

Following a failed coup by sections of the armed forces and security services, Yeltsin, instead of helping restore the constitutional government of President Gorbachov, seized power for himself. Acting on the instructions of US advisers he introduced a shock programme to convert the economy from socialism to capitalism in 100 days.

In the old USSR there was no capitalist class. In the west governments could privatise individual firms by selling them off on the stockmarket where the shares would be quickly snapped up by the upper classes, or in the case of Thatcher's privatisation, by sections of the middle class. But in the USSR things were very different. There was no class of individuals wealthy enough to buy up state companies by legal means. Also the scale of the privatisation was so vast, that even in a market economy, the savings of the population would have been insufficient to buy up the entire industry of the nation. Logic alone would predict that the only way that industry could pass into private hands was through corruption and gangsterism. This is exactly what happened, a handful of Mafia connected oligarchs ended up owning most of the economy.

Neo liberal theory held that once enterprises were free from the state, the 'magic of the market' would ensure that they would interact productively and efficiently for the public good. But this vision of the economy greatly overstated the role of markets. Even in so called market economies, markets of the sort described in economics textbooks are the exception – restricted to specialist areas like the world oil and currency markets. The main industrial structure of an economy depends on a complex interlinked system of regular producer/consumer relationships in which the same suppliers make regular deliveries to the same customers week in week out.

In the USSR this interlinked system stretched across two continents, and drew into its network other economies : East Europe, Cuba, North Vietnam. Enterprises depended on regular state orders, the contents of which might be dispatched to other enterprises thousands of miles away. Whole towns and communities across the wilds of Siberia relied on these regular orders for their economic survival. Once the state was too bankrupt to continue making these orders, once it could no longer afford to pay wages, and once the planning network which had coordinated these orders was removed, what occurred was not the spontaneous self organisation of the economy promised by neo-liberal theory, but a domino process of collapse.

Without any orders, factories engaged in primary industries closed down. Without deliveries of components and supplies secondary industries could no longer continue production, so they too closed. In a rapid and destructive cascade, industry after industry closed down. The process was made far worse by the way the unitary USSR split into a dozen different countries all with their own separate economies. The industrial system had been designed to work as an integrated whole, split up by national barriers it lay in ruins.

The following figures show how far the economy had regressed. These figures show how little recovery there had been, even after 13 years of operation of the free market.

Output of Selected Branches of Industry in Russia in 2003 Compared to 1990 (1990 = 100)

Total Industry 66

Electric power 77

Gas 97

Oil extraction 94

Oil refining 70

Ferrous metallurgy 79

Non-ferrous metallurgy 80

Chemicals and petrochemicals 67

Machine building 54

Wood and paper 48

Building materials 42

Light industry 15

Food 67

Source: Goskomstat, 2004, Table 14.3.

If the economy had continued to grow even at the modest rate of the later Brezhnev years ( say 2.5%) then industrial production would, on this scale have stood at 140% of 1990 levels. The net effect of 13 years of capitalism was to leave Russia with half the industrial capacity that could have been expected even from the poorest performing years of the socialist economy.

Key Economic Lessons

I am ignoring for now, the political lessons, which we elaborated on at length in our book Hacia el Socialismo del siglo XXI,

It is vital that the state maintain a strong, honest and efficient system of tax revenues.
It important that when attempting to rapidly change social relations that one does not dismantle the old economic mechanisms faster than new ones can be put in their place.
One should never overestimate the ability of markets to organise an economy.
One should beware the risk that a corrupt managerial strata attempts to divert state property into their own private domain.
Allowing the existence of criminal black markets is dangerous in the long run.
Until such time as money can be phased out and replaced by direct labour accounting, it is dangerous to allow prolonged inflation to take hold.

1This should be contrasted to the current policy of attempting to fix the value of the Bolivar in terms of dollars.

2The German term for such taxes Mehrwertsteur translates incidentally as 'surplus value tax', encapsulating very well what its economic function is from the standpoint of marxian political economy.

3A progressive tax is one which bears most heavily on people with higher incomes.

4For more details see the attached appendix B which is reproduced from the web-site 21^st Century Socialism.