How a socialist economy would work

In Place Of Capitalism:

How a socialist economy would work

COMMENTING ON last November’s ESF in Paris, the Guardian columnist George
Monbiot acknowledged that the official anti-capitalist movement has "scarcely
attempted to tackle the big issue: what should be done about capitalism? With
what do we hope to replace it?"
JARED WOOD outlines how a socialist economy would work.

THE FALL of the Berlin Wall and the subsequent collapse of the so-called
communist bloc were greeted triumphantly by capitalist political and business
leaders and academics. Most famously one US academic, Frances Fukayama,
declared it was ‘The end of history’.

Along with many others, Fukayama believed the search for the most efficient
way of organising society had been settled for good. The liberal free market
had proved its superiority over socialist planning. Never again would the rule
of capital be challenged.

But the growth of the anti-globalisation movement has done just that. As we
enter the 21st century half the world’s population live on less than US$2 a
day. Multinational companies dictate government policies and dominate local
markets. Not since the 1970s, perhaps, have so many workers, students and
young people, across the world, sought an alternative to capitalism. The
question is what alternative?

Planned economy

KARL MARX proposed the alternative of a planned economy. Major industries
and financial services would be publicly owned and controlled by democratic
structures representing workers in those industries, local and regional
communities and the elected government.

Marx said that only public ownership could facilitate the democratic
control of production because firms operating in a capitalist market are
constrained by the laws of that system. At its most basic this means that in
order to attract investment (capital) a firm must maximise its profit. If
investors believe they can make a better return elsewhere they will withhold
funds and the firm goes bust or gets taken over.

Marx also observed that as powerful companies grow they are able to cut
their costs by producing on a bigger scale and using their revenues to invest
in new technology. This gives the biggest firms a competitive advantage and
allows them to become monopoly producers. Having driven their competitors out
of business these giants are able to fix prices and wages for entire

Marx believed that taxing or regulating these industries would ultimately
fail. Private firms will use their resources to find legal loopholes in tax
and regulatory regimes. In the event that this proves too difficult investors
will withdraw from an industry and look elsewhere. This is the process that
has come to be known as ‘capital flight’.

Once investors perceive an industry or even a country’s entire economy to
be unprofitable they withdraw their funds leading to a collapse in the local
currency and crippling recession. This has been the experience of many less
developed countries in recent years that have been told by the IMF to cut
taxes and privatise public services in order to attract capital investment.

The fact is that in a market economy a handful of hyper-rich people will
always decide what is produced, where and in what quantities, irrespective of
the greater needs of society.

Marx’s idea for a planned, socialist economy was the answer to these
problems. If the major industries and banks are publicly owned then we can, as
a society, democratically plan how to use our resources.

To put this into some sort of perspective consider this. Around 150
companies control about 75% of all commercial activity in Britain. These firms
are controlled by boards of perhaps a dozen or two dozen directors. A handful
of people make the decisions that determine the wages we will be paid, the
prices we will be charged and whether we have jobs or not.

Public ownership and democratic planning would allow everyone to have some
input into these decisions. Rather than considering profit margins and market
share, a system of democratic planning would consider how to use resources
most efficiently in order to satisfy people’s wants and needs.

Maximise production not profit

CAPITALIST ECONOMIC theory is based on the model of a ‘perfect market’.
This perfect market allows anyone to produce anything, it allows anyone to buy
from any producer and everyone has an identical supply of knowledge. Firms
maximise their profits by producing and selling as much as possible.

The model though is a fairy tale. Back on earth most production is carried
out by monopoly or oligopoly firms (an oligopoly being where a few large firms
share out a monopoly market). In order to maximise their profits monopoly
producers often restrict production in order to push the price up.

This can be possible because only so many people can afford to buy a
commodity at any given price. In order to increase sales a firm is likely to
have to charge less. If the required price cut outstrips the extra sales then
profitability will fall even though the firm is making and selling more. If
this is what a firm expects it will hold off investment in new technology,
plant and machinery – and workers.

Planning would also eliminate an enormous amount of waste in the form of
useless production. Well over half the price paid for many branded goods
(clothes, toiletries etc) can go to pay for the product’s advertising budget.
Retailing goods can also be ridiculously expensive. Clothing is typically
marked up by several hundred percent of the manufactured cost. And having paid
inflated prices products are made to fall apart after an artificially short
life so that we have to buy a replacement.

A planned economy would not allow individual firms to restrict production
or build in obsolescence to products in the way monopolies do now. Factual
information about products could be provided but resources wasted on brand
based advertising, trying to sell an aspiration or image, could be used more
productively. By utilising spare capacity and increasing investment in new
production economic growth would soar as a result of planning.

Democratic planning

IN ORDER to democratically plan production workers must first control their
places of work. Large scale workplaces would be run by elected committees of
representatives of the workers, the socialist government and the trade union

These committees would take decisions about the day-to-day running of the
workplace. A system of local, regional and national government would represent
communities and also have delegates from workplaces. This is where broad
priorities for the economy would be decided, including allocation of scarce
resources between different sectors and deciding how to distribute resources
for investment and wages.

Although business leaders (falsely) lambaste socialists for wanting to
control every economic decision centrally, there is a large element of this
already taking place within multi-national corporations. Of course not every
decision is taken by big multi-national firms but the decisions that really
matter are.

According to the 18th century capitalist economic philosopher, Adam Smith,
‘the invisible hand of the market’ would organise production and exchange. In
the long run, in a capitalist economy, market conditions will determine
aggregate levels of investment, prices and employment.

But the day to day decisions are organised, planned even, by teams of
economists and accountants who try to anticipate the market. They move
production around the world in search of cheap labour; they hide profits until
they turn up in an offshore tax haven; they estimate future demand and hire or
fire accordingly.

These are the decisions that must be taken democratically in a planned
economy. They are a relatively small number of decisions but have a massive
impact on society.

Alternatively there are millions of small decisions to be made that have
only a local or even individual impact. Whether to eat fish and chips for tea
or how to run the chip shop are decisions that can continue to be made by
individuals or small firms in the planned economy.

The crucial difference is that firms will be operating to new rules. Wage
rates, working conditions and prices will no longer be set by multi-national
firms but by democratic government.

Where the economy is unable to produce sufficient commodities to meet
demand then a price mechanism and market would continue to operate. But with
the profit motive removed many goods including basic foods, housing, fuel etc
could be provided for free.

Lenin (in State and Revolution) and Trotsky (in The Revolution Betrayed)
both explain how an administrative apparatus, a state, will be necessary
during the transition from capitalism to communism. But as the planned economy
develops it will be able to meet more and more of people’s wants until there
is no need to ration and limit distribution and the state can wither away.

They were writing in the early 20th century and today the distribution of
such goods could be achieved far more efficiently than they can be retailed in
shops, especially given recent developments in IT. What could be simpler than
ordering free, publicly provided goods on the internet? Inventories, demand
and future production needs could be monitored continuously and fed into the
planning process.

Socialism and democracy

LEON TROTSKY, alongside Lenin the co-leader of the Russian revolution,
wrote that socialism needs democracy as a body needs oxygen. Tragically, in
the conditions of extreme economic disintegration that existed after the wars
of intervention against the revolution by the capitalist West, Trotsky and his
followers were defeated by the forces of Stalinism in the isolated Soviet

Stalin represented a totalitarian wing of the administrative apparatus that
opposed any form of workers’ democracy and ruled instead in their own
interests. With that defeat went the chances of establishing a genuine
socialist democracy to control the USSR’s planned economy. A new revolution to
overthrow the Stalinist dictatorship would be necessary.

In the absence of any effective democratic checks the soviet economy was
held back by inefficiencies and lack of co-ordination. Nevertheless the Soviet
Union was still able to make progress, especially in the development of heavy
industry and infrastructure.

State planning, even under bureaucratic direction, proved effective in
managing huge national projects where one uniform product was required
everywhere. Infrastructure projects such as electrification and public
transport were developed at a speed unimaginable in the capitalist countries
while resources were also found for the provision of healthcare and education,
at least in the major cities.

But as Trotsky himself predicted in his book, The Revolution Betrayed, the
inability of the soviet economy to react to what people wanted in the form of
consumer goods eroded support for the system of planning.

Also, as the economy grew the bureaucratic decision-making process came
into sharper conflict with the needs of a modern society. The criticism made
of soviet planners making economic decisions for everyone from an office had
more than a little truth to it.

The nature of bureaucratic planning also failed to take account of the
quality of goods produced. Central planners set quantitative production
targets but in order to meet them many factories produced sub-standard goods.
With no democratic input the economy simply failed to provide the type and
quality of commodities needed.

Supply and demand?

ACCORDING TO what is known as ‘marginal utility theory’, which has been
incorporated into orthodox economic theory, the value of a commodity is
determined by the price a consumer is prepared to pay for one more unit of
that commodity.

This breaks with the classical economic ideas of David Ricardo and Adam
Smith who said that the value of a commodity is created by the labour of those
who produce it. This ‘Labour theory of value’ is also central to Marx’s work
in Capital.

Does it matter who is right? Yes. If it is true that value is determined by
the available supply of commodities and the corresponding demand for them then
it is impossible to produce efficiently without a free market.

How else could we know what to charge for something? How could planners
know whether a pair of shoes is overpriced at £40 or under-priced? Will the
state-owned shops be left with unsold goods or facing shortages and queues of
frustrated shoppers? Will the price charged be sufficient to cover production

Marxism maintains that the intrinsic value of any commodity is given by the
amount of necessary labour time employed in its production. Of course, in a
capitalist market place commodities can be traded, according to circumstances,
at a price that is above or below their labour value but they will tend to
oscillate around this level.

It stands to reason that if a commodity is sold at a price significantly
below its value for a prolonged time the producer will go bust as he/she will
not be able to meet the costs of paying wages to obtain the labour necessary
for production.

According to the labour theory of value then we can calculate a value, or
price, to commodities according to the costs of production. This can be
measured just as capitalist firms already do. Planning decisions can then be
made democratically in the light of accurate information about the costs of
producing different commodities.

Nationalised industries

IN 1979 many of Britain’s biggest industries, especially power and
infrastructure, were publicly owned ‘nationalised industries’. The Thatcherite
Tory government set about privatising them, arguing that nationalisation
caused inefficiency because no-one had a personal interest in the
profitability of the firm.

British Gas and British Telecom were two of the first high-profile
privatisations, culminating with British Rail. Blair’s New Labour government
has continued the trend, privatising schools, hospitals and the infrastructure
of London Underground.

The first and most obvious point to make is that privatisation has caused
some spectacular failures, nowhere more tragically than on the mainline
railways. This in spite of government subsidies to the private rail industry,
which are up to ten times higher than those given to the old, nationalised
British Rail.

But neither BR nor any of the old nationalised industries in Britain were a
model for a planned economy. Many, like British Leyland, did perform badly
(though they’ve hardly triumphed in the private sector either). Principally
the problem lay in the structure of these nationalised firms as
government-owned capitalist businesses.

Decisions on production, wages and employment were made by a board of
directors in order to compete with a much larger private sector in domestic
and world markets. The demand was often raised in the pages of Militant (now
the socialist newspaper) for the nationalised industries to be run by elected
boards made up equally of delegates from the firm’s workforce, the trade union
movement as a whole, and the government. This would have allowed real workers’
control over publicly owned industry.

Even then, nationalised firms and other forms of non-profit making
enterprises such as co-operatives, will never be able to flourish if forced to
play by the rules of a capitalist market. Failure to maximise profit for the
individual firm will mean losing market share and investment funds.

Only democratic planning and public ownership allows decisions to be made
on a co-ordinated basis in order to maximise production of what is needed for
all. Frederick Engels wrote in Socialism: Utopian and Scientific, that the
great accomplishment of capitalism was to take production out of the home
workshop and socialise it in the more productive form of mechanised,
specialist production.

The task of socialism, he wrote, is to socialise distribution. That is to
take the decisions about how to distribute production and profits out of the
hands of private firms. It is in this historic step forward that a democratic,
socialist, planned economy can begin to free humankind from poverty and
provide the opportunity for billions of people to develop their talents and
abilities beyond the ability to toil and survive.