The Economics of Socialism

Back when democratic socialism was a young political movement there seemed to be little need to spell out exactly how a socialist economy would work. When asked, many socialists would have said something along these lines: “The working class will take political power and create a radically democratic state. It will then bring the means of production and distribution into common ownership under workers’ management, and replace the anarchy of the market with conscious planning to meet the needs of all.”

Well, that sort of summation just isn’t enough anymore to convince most people. After the rise and fall of a “socialism” which democratic socialists have no intention of emulating (i.e., “Communism”), and the hollowing out of a movement which is no longer able to do very much to make capitalism more bearable (Social Democracy), most socialists see it as necessary to be able to provide some sort of picture of what a socialist economy might be like. There is no such thing as a flawless blueprint, of course, and it would be pointless for any intellectual to try to decide in advance the precise details of what can only be the result of a mass movement and a historical process. But as the saying goes, “you can’t beat something with nothing,” and socialists have to offer “something” if our project is going to seem convincing to mass numbers of people, particularly in the United States with its lack of a mass socialist tradition.

“Market Socialism” – A Valiant Attempt to Fry Ice?

Since the early 1980s the vast majority of formal socialist models have fallen under the rubric of “market socialism.” Alec Nove threw down the gauntlet in The Economics of Feasible Socialism: it is impossible to democratically plan a complex economy, and any attempt to do so will result in a USSR-style bureaucratic nightmare. A post-capitalist economy may involve substantial public ownership and even workers’ control of production inside individual firms, but the coordination and distribution (and pricing) of consumer goods should be left to market forces. The most popular (and attractive) of the market socialist models can be found in David Schweickart’s Against Capitalism. Schweickart’s vision – “Economic Democracy” – involves worker-managed enterprises, producer- and consumer-goods markets, and socially controlled investment. Firms are to compete against each other and apply to regional community banks to finance their investments in new perceived opportunities. That is to say, even though investment is no longer private, and other criteria are to be taken into account, market-driven prices and profit competition are major determinants of public bank investment strategies in Schweickart’s model.

And this is where the problems of “market socialism” begin. Market forces are not simply tools with both positive and negative attributes that just need to be used properly by socialists rather than improperly by capitalists. “Market socialism” wouldn’t reward people according to the value of the capital they own, but it would reward people primarily according to the productive contribution of their labor. Therefore, luck in the genetic lottery, even in an ideal meritocracy, would be of decisive importance in determining income. Moreover, significant redistribution of wealth through progressive taxation would be difficult due to the likely disproportionate political power of the highest income earners, and also because it would contradict the principle of allocation according to contribution. Also, if the experience of Titoist Yugoslavia is any indication, “market socialism” will likely reward managers, professionals, intellectuals and technicians with greater decision-making responsibility, income, and power, as market forces undermine workers’ management of production due to competitive pressures.

More generally, market ideals also contradict the distribution of subsidized public goods such as universal education, health care, child care, elder care, etc., as the immediate benefits of these investments (principally education) are appropriated privately in the form of higher personal income returns from greater productivity, in spite of the fact that they result from public investment. In the words of economist Samuel Bowles, markets encourage the development of “greed, opportunism, political passivity and indifference toward others,” the exact opposites of the “feelings of empathy and solidarity with others, and the capacity for complex communication and collective decision making” which are necessary to achieve socialist goals. The very traits that seem to make markets desirable or at least “easy” – that they encourage indifference, anonymity, and reliance on individual “exit” rather than on “voice” or communication, trust, and social decision making – make them hostile to the fostering of qualities essential to democracy and socialism.

Schweickart himself has acknowledged that market-based investment in particular suffers from a general miscalculation of the effects of pervasive “externalities” such as ecological damage and the growth of suburbia, and leads to oligopoly, volatility (the “business cycle”), and shuts off the possibility of politically setting a rate and allocating overall economic growth. What he does not address is that if worker-controlled enterprises merely pursue their own advantages in competition with other firms and their activities do not form part of an overall consciously and socially decided plan, then the result will not be much more stable and more subject to overall social control than capitalism, and the whole structure may very well unravel back into capitalism – or, in the context of a radically democratic state, push forward into something far less market-based, as workers get tired of decisions being made for them “behind their backs” by markets, and decide to institute society-wide conscious economic decision-making.

“Market socialism,” then, is not likely to be successful in meeting socialist goals. The original socialist prescription – democratic planning – is still necessary. The difference is that now we need to have a better idea how comprehensive democratic planning might work.

Participatory Planning Through Negotiated Coordination

The most feasible vision of a democratic planned economy has been offered by British economist Pat Devine. I reprint his words below, from Marxism Today, June 1988:

A possible model for the economic organisation of such a self-governing society is a process of what I call democratic planning through negotiated coordination. At the level of the economy as a whole, decisions have to be made about the broad allocation of society’s productive capacity between different uses — between investment and consumption, collective and personal consumption, different regions, and so on. These decisions are necessarily taken by the government and representative assembly but at the moment are subject to little serious public discussion or social control. One way of increasing participation in such macro-economic decision-making would be to focus the discussion around a limited number of ‘plan variants’, drawn up by a planning commission, which would set out realistic alternative policy packages based on different values and priorities.

The macroeconomic decisions taken in this way about investment, social provision and personal income distribution would, as now, be implemented through the distribution of purchasing power in the economy. For example, the funds available to social bodies responsible for services like education and health would reflect the social priority given to them. Similarly, the distribution of personal income would reflect among other things the priority given to movement towards greater equality.

The result would be a structure of demand for goods and services that represented the collective and individual preferences of society. Enterprises would then compete to supply what was demanded.

What has been outlined so far involves market exchange, with customers choosing between the output of different enterprises and enterprises making use of their existing capacity to meet customer demand.


It is important to distinguish between market exchange and market forces. Market exchange consists of buying and selling. It generates information about what customers want and the extent to which different enterprises are supplying it. It is concerned with the use of existing productive capacity. The operation of market forces, however, is concerned with the process through which changes in productive capacity occur, with the movement of resources between enterprises and industries, with investment and disinvestment.

The changes in capacity brought about by investment and disinvestment need to be coordinated with one another. In systems based on market forces investment decisions are taken independently by each enterprise. If too much capacity is installed profits will be low and some enterprises will contract or leave the industry. If too little capacity is installed profits will be high and existing enterprises will expand or new enterprises will enter the industry. Thus, market forces coordinate investment decisions after they have been implemented, through the push of low and the pull of high profits.

Market exchange is a central feature of the model I am proposing but it is obviously not unique to it. The unique feature of the model is its rejection of both central command planning and market forces as the way of coordinating investment decisions. By contrast with these coercive methods, investment decisions in the model are coordinated through a process of negotiation between enterprises and other affected interests in what I call negotiated coordination bodies.

How would this work? Would it be efficient? How would restructuring occur? These questions can be addressed from the standpoint of the adequacy of the information that would be available and the motivation that would determine how the available information would be used.

First, enterprises would be run by a governing body consisting of representatives of all the groups affected by its activities. Those affected clearly include the enterprise’s workers, but they also include customers and suppliers, competing enterprises, the communities in which the enterprise is located, and groups concerned with equal opportunities, environmental issues, and so on. Thus, self-government by those affected at the level of the enterprise is not the same as worker control. However, the internal operation of the enterprise, within the guidelines set by the governing body, would be on the basis of worker self-management.


Second, decisions on investment within an industry would be made by the negotiated coordination body for that industry, which would again consist of representatives of those affected by the decisions. All the enterprises in the industry are obviously affected, since decisions on investment and disinvestment determine whether an enterprise expands or contracts. However, those affected also include major purchasing and supplying industries, other customers (social bodies and individuals), local communities and regions, and again groups such as those concerned with environmental issues.

Negotiated coordination bodies would have available to them two sorts of information. First, there would be the quantitative information about how each enterprise had performed in making use of its existing capacity. This would take the form of revenue from sales, production costs, and profitability as the difference between the two.

Second, there would be qualitative information consisting of the views of the groups represented on the negotiated coordination body and estimates from the planning commission of any major changes expected in the demand for the industry’s output. Negotiated coordination bodies would have to decide on whether any change in their industry’s capacity was required and then on the distribution of the change between the different enterprises.


In deciding on where changes in capacity should occur, on the distribution of investment, negotiated co-ordination bodies would take into account both the overall interest, represented by the quantitative data on the performance of each enterprise, and the detailed interests of those most directly affected, as expressed by their representatives on the negotiated coordination body.

For example, if a relatively poor performance by an enterprise in an area with restricted employment possibilities was due to factors beyond its control, long-term subsidies might be agreed. If, on the other hand, the poor performance was due to factors within the enterprise’s control, it might be offered subsidies for an adjustment period but no longer.

Thus, the interaction of quantitative and qualitative information would enable the social interest in each case to be decided on the basis of both system-wide and local knowledge, consciously integrated by representatives of those affected. The model incorporates market exchange and makes use of the information generated by it. However, it rejects the use of market forces and the fragmented and atomised decision-making through which they operate in favour of the coordination of decisions through negotiation and agreement between those affected by them.

What of the motivation of those making the decisions? Might they not conspire to further their vested interests at the expense of the overall social interest? Moreover, even leaving aside such narrowly self-interested behaviour, people understandably tend to think that what they are doing and know about is particularly important, perhaps even more important than what other people are doing. Here the transformatory dynamic of negotiated co-ordination is crucial. The discussion and negotiation leading up to a decision would involve representatives of all interested groups. It would be a process of direct personal interaction in which people would have to justify the position they adopted in the light of the position adopted by others. As a result, people would be helped to modify their own narrow self-interested consciousness and develop a broader social awareness and sense of social obligation based on an understanding of their mutual interdependence.

Of course, agreement would not always be reached. Genuine conflicts of interest cannot always be resolved to everyone’s satisfaction. In the end, those affected would decide on a majority basis, with a right of appeal to a body responsible for decisions at a more general level. Sanctions would be available in the form of a refusal to allow subsidies or to authorise investment.

However, the logic of negotiated co-ordination is towards co-operative rather than antagonistic economic and social adjustment. It has a transformatory dynamic in the direction of a self-governing, self-activating society of informed, equal people living together on the basis of co-operation and mutual respect. In this sense, participation in the process of negotiating a collectively determined outcome has an intrinsic value in helping us to become more human.

To sum up, while a socialist economy may need to utilize market exchange, a core part of our socialist mission must be to categorically reject market forces as arbitrary and illegitimate regulators of economic decision-making, as the organizing principle of international and national economic growth and allocation. Instead, we must make democracy itself the regulator of the economy – to promote cooperation and recognition of interdependent common interest, as Devine has put it, while acknowledging that people have distinct interests which they need to be able to articulate. This, ultimately, is what “negotiated coordination” is all about – and to my mind it is the real “economics of feasible socialism.”

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