Sunday, January 04, 2009

Socialist economics

DBB asks, how would a socialist economy actually work?

About the best we have historically is Maoist Economics and the Revolutionary Road to Communism: The Shanghai Textbook, written in 1975, which describes the basic principles of China's socialist economy and politics. (I'm still reading the book myself.) Of course the political and economic conditions in pre-revolutionary and revolutionary China were very different from our own.

There isn't a consensus in the socialist/communist community as to how an industrialized society such as our own would operate on socialist principles; what follows are my own personal speculations. I'm specifically talking about a socialist economy in the sense of economics that form the transition between capitalism and communism.

To simplify, I will assume here that all labor is of equal intensity (everyone works as hard as everyone else) and equal "desirability" (there's no difference between gardening and sewer maintenance). These factors can be adjusted for in practice, but the theoretical underpinnings don't change much. I'll ignore here the political structures and focus on the economics.

First, we have the subsistence economy, the production of goods and services that are required for people to just live: food, housing, basic clothing, sanitation, medical care, education and child-rearing, etc. We have the advantage that these endeavors (except for housing) are already low-profit under capitalism — some, such as sanitation, are already government-operated — and are presently very efficient. The government can directly run the subsistence economy.

Assuming about 125 million working people in the US at 8 hours per day there are about 1 billion hours of labor power per day available. We already know that the subsistence economy requires less than the total available labor power. For simplicity, we'll assume that 500 mh/d (million hours per day) of socially necessary labor time is required to operate the subsistence economy; this time creates 1,000 mh/d of labor power. Our subsistence economy then runs at 200% efficiency.

Everyone is guaranteed subsistence, and everyone is therefore required by law to contribute his or her share of labor to the economy: everyone is required to work at least 4 hours per day. A person can simply apply to the government for a job, in which case the government will employ the person in the subsistence economy.

The subsistence economy would be fully socialized; the extended economy, whatever can be produced by the surplus labor power not required by the subsistence economy, can be run on truly free market lines, since there the indirect coercion of starvation is absent.

A person or group of people have three options: They can simply work 4 hours per day in the subsistence economy, and have the remainder of the time for leisure (or participation in the "free" economy, doing things like blogging, writing free software, etc.). They can work 4 hours per day in the subsistence economy and work additional time in the extended economy. Or they can work all their time in the extended economy (offset by some other people working 8 hours per day in the subsistence economy).

If some group of people want to work in the extended economy, they would propose the endeavor to the government.

Constant capital for the extended economy is created within the extended economy itself. Constant capital is owned by the government, and rented to those using the capital on a time-basis.

If the group wants to work full time, the government provides a limited amount of variable capital: the right of the people in the group to consume subsistence resources while they work. The government also provides a stimulus, extended purchasing power equal to the time worked over and above the subsistence time of 4 hours per day.

The price of the commodity being produced cannot exceed the total time necessary to produce the commodity divided by the number of items produced.

Suppose a group of people 10 people want to work 8 hours per day making stylish shoes (i.e. shoes not required in the subsistence economy). The present a proposal to the government, with a business plan, market research, etc. and it's approved. The Great Proletarian Footware Revolution Company is born.

They will require a shoe-making machine, which takes 10,000 hours to produce and will produce 1,000,000 pairs of shoes over its lifetime. The government owns the shoe-making machine, and rents it to TGPFRC for 1/100 hour per pair. They provide the workers of TGPFRC with one year's variable capital and one year's stimulus capital: 8 * 5 * 42 (everyone gets 10 weeks/year vacation in our socialist paradise) = 1,680 hours per worker. Since they are working full-time in the extended economy, each worker is taxed 840 hours for the year; each worker thus has an initial 840 hours to spend in the extended economy.

We'll assume that these 10 people can make 10,000 pairs of shoes per year. The maximum price of one pair of shoes would be 16,800 / 10,000 + 0.01 or 1.69 hours; TGPFRC would be free to set the price lower if they wished. So long as they can sell shoes to other people in the extended economy for more than 0.85 hours per pair of shoes, TGPFRC is a going concern and can operate indefinitely. Anything over 0.85 hours per shoe would be allocated by mutual agreement to the workers in TGPFRC. If, however, people in the extended economy aren't willing to spend 0.85 hours per pair for their shoes, the operation will eventually go "bankrupt", and the people will either have to get jobs on a farm or convince the government to fund a new endeavor.

In a socialist economy, there isn't the desperate competitive pressure to increase efficiency. But remember: the people in The Great Proletarian Footware Revolution Company are there because they like making shoes (or at least they prefer it to working on a farm). Why wouldn't they innovate and become more efficient just because it's fun?

Even if they didn't, someone, somewhere is going to form The All Power to the Soviets Boots and Sandals Company and — just because its cool — will produce 20,000 pairs of shoes using 16,800 labor hours (and machinery of the same cost), with a maximum price of 0.85 hours per pair. The Great Proletarian Footware Revolution Company would then be forced to follow suit. But, because the government is involved, they'll help The Great Proletarian Footware Revolution Company operate more efficiently, for the benefit of everyone.


  1. I really don't like your visions of government. Especially a government of the size and power that you envision seems like a prime suspect for corruption and waste :-/

  2. You mean corruption and waste unlike that seen in capitalist economics?

  3. And I look forward as well to your alternative analysis of socialist economics.

  4. What about the number of labour hours that will have to go into running this massive government machine? While it would be nice if it could be automated, I'm not sure people would go for that, either... Also, what about jobs that are important but do not necessarily produce tangible products (like much of academia)? I know that would be part of the "extra economy", but it doesn't necessarily produce something which can pay back the investment.

  5. Administrative labor is part of the socially necessary labor time necessary to produce any sort of good, subsistence or extended.

    Our capitalist economy already expends time for administration, and we still manage to produce a hefty surplus. Why should government administration be vastly less administratively efficient? The present government builds roads, airports, bridges; it runs the Medicare program; it operates power systems and other infrastructure projects. And in all cases, the administrative efficiency is on a par with for-profit enterprises.

    Also, what about jobs that are important but do not necessarily produce tangible products (like much of academia)? I know that would be part of the "extra economy", but it doesn't necessarily produce something which can pay back the investment.

    These sorts of endeavors would probably be run in much the same way that they are now: paid for by taxes (tax labor); under socialism they would in effect be part of the "subsistence" economy.

  6. You mean corruption and waste unlike that seen in capitalist economics?

    No, quite alike it actually.

  7. So at least I'm not making things worse.

  8. I recognize that our current governments do expend a great deal of money on administration. However, the government you are proposing would necessarily require more, as it is doing more. Instead of just approving research grants and certain civil service jobs, it is now managing all employment in the country. That seems like a huge increase in administrative burden, as well as a drastic increase in the necessary expertise of those employed by the government so they can make knowledgeable decisions on the approval of endeavours.

    I am not American (I am Canadian), and in many ways our government resembles that which you describe to a greater degree than yours (as far as I can tell). However, our governmental bureaucracy tends to create a lot of waste and is in many ways unwieldy. The problem of managing a large government efficiently is one of those seemingly untenable problems that frustrates me with politics to the point where I stop thinking about it to ease the ache in my head.

  9. However, the government you are proposing would necessarily require more, as it is doing more. Instead of just approving research grants and certain civil service jobs, it is now managing all employment in the country.

    Indeed. But this administration is already being done by private companies. I'm not adding work; I'm just moving people around and making them accountable (somehow) directly to the people rather than to shareholders.

  10. Note that managing a large company efficiently has not been solved any more than government efficiency. Just try going to an HMO in the States.

  11. So at least I'm not making things worse.

    Well yeah but I thought we were aiming higher than that. :P

    PS: Don't you miss comment editing functionality already? ;)

  12. Don't you miss comment editing functionality already? ;)

    Not enough to switch. :p

  13. Hm, interesting construction. But I believe social engineering belongs back to 19th century. History proved many times that all societies are based on individuals. And individuals are usually pretty clever, how to bypass the obligation and gain as much as possible from the benefits .) Not to say about organization of such society. The main problem of communism was total disorganization and incapability to control things from the center...
    Take care

  14. Yes, large companies have all of the problems complained of with government - and can be even worse, because management often can't even be voted out. Hell, by law, a majority of shareholders can vote on an issue and the board can ignore them.

    As to the example - that was helpful, and you've hit on something that I've often thought about - a bifurcated economy - with substinence provided for everyone by the government and then for those that want more, you can go out and work to earn it.

    What is still missing is how your labor unit - hours of work - actually will work with things that aren't widgets. How many hours does it take to write a good screenplay, for instance? Estimating hours to do something in IT is more of an art than a science. And even with something like a shoe, how would you know in advance how many hours a good shoe requires to make? Maybe a quality shoe that lasts for ten years takes 10 hours to make while a piece of crap shoe that will fall apart after ten months takes 0.5 hours to make. And then maybe the number of hours to make it also depends on the materials you use - maybe if you make a shoe out of a material that takes 10 hours to create you make a shoe that lasts longer than from a material that takes 5 hours to create (i.e. mine or spin or whatever). But maybe then the shoe itself also takes a different time to make depending on the material. It seems like the formula for how many hours it is supposed to take for a very complicated widget with a lot of parts could get rather unwieldly rather fast. And then who gets to set the formula for how many hours it is supposed to take? It would seem like there would be a HUGE amount of power given to whomever sets that formula.

    And how does it work for jobs that don't produce widgets - like IT work, an advertising agency, a movie studio?

    I can see part of the picture from your example here, but I still feel like I'm missing much of it.

  15. The nice thing is that you don't have to really calculate out the socially necessary labor time necessary to create a widget, at least not where it's complicated.

    The socially necessary labor time can be calculated fairly easy for mature, non-creative industries: precisely those industries that are ripe for direct government control and placed in the "subsistence" economy.

    In the extended economy, you don't calculate the socially necessary labor time, you measure the actual labor time. If 10 people are working 8 hours per day making 100 widgets, you cap the price for that company's widgets at 80 / 100 = 0.80 hours per widget. If they have to buy materials from the extended economy, the government caps the price for the materials at their actual labor cost, and the widget makers pass the cost along to the consumer.

    The price can fall lower, though, which means companies will tend towards the true socially necessary labor time through free market competition. The cap just prevents companies from using scarcity to extract surplus value from the consumers.

    In my example, the government doesn't even try to calculate the socially necessary labor time to make stylish shoes. It provides the variable capital and stimulus based on the actual labor time, by simply counting the number of people and multiplying by the hours they'll actually work per year.

  16. Ok, I understand now your price setting for widgets, but what about the ad agendy? Or IT work? Or anything else where what you make is a unique entity, rather than a mass produced item?

    And as for materials - it seems the labor cost would not necessarily be appropriate in terms of hours - what about scarcity? If the material is gold, for instance, the labor cost first varies on the quality of the mine - it takes more labor to get gold out of an old one. But then I suppose that is covered by your formula. But what about the fact that you can use all of the hours you want, if there is no gold left in the mountains, you can't get any more. Then you are stuck with the finite abount of gold in existence, and there is no labor aside from shipping costs if you want to buy it. How, then, is the price set if you can't use labor hours to set it? Labor hours to move a lead brick are probably identical to the hours to move a gold brick, and yet you really can't price the two the same, can you?

  17. Super busy lately. I'll discuss your points in a new post, hopefully tomorrow.

  18. You hear that the free market distributes resources efficiently and productively - why does it not? It responds to consumer demand, does it now? And why would this planned economy really been any better?

  19. A free market responds to consumer demand only to the extent that consumer demand itself is not subject to free market economics.

    There are a lot of reasons why our capitalist system "throws a bone" to the ordinary worker, i.e. consumer. The benign reason is the degree to which labor, leveraging a vast post-WWII labor shortage, used its political power to raise the price of labor above its cost... an achievement which capitalists have been furiously working to subvert and destroy, with notable success.

    The more sinister reason is imperialism: Americans have been paid for almost 30 years from the surplus value created by people laboring in the developing world. Buying off the workers in a bourgeois "democracy" is easier when you're using someone else's money.

    A planned economy would be better because production would not maximize the amount of surplus value extracted from the workers; it would rather — if done correctly — maximize the social needs and wants satisfied by production.


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