Saturday, October 26, 2013

Starting a firm

So, you want to start a business under democratic communism. What do you do?

The first step is to deal with the bureaucracy, the civil service.

Please allow me to digress. The purpose of this exercise is to apply the theory of democratic communism to practical situations. So I want to talk briefly about the theory of the civil service bureaucracy under democratic communism.

Most people hate the thought of dealing with a bureaucratic civil service, but this hatred is mostly misplaced, and where it is well-placed, it is not because of the bureaucratic nature of the civil service, but because the present civil service is in the hands of the capitalist ruling class.

Most states' motor vehicle departments are entirely bureaucratic, but most people still manage to get drivers' licenses, and in many states (my own included), procedures have been streamlined and improved so that the process is relatively painless. A couple of years ago, my driver's license was stolen, and I spent only 25 minutes at the DMV getting it replaced. City planning is bureaucratic, and buildings still manage to get built. I attend a university, which includes a gigantic bureaucracy, and I still manage to get my financial aid, register for classes, and have my academic performance recognized and recorded. Sometimes bureaucracy becomes nightmarish, as in welfare, but that is always because the executive in our democratic republic (and often the legislature as well) is intentionally using the bureaucracy to prevent people from gaining certain benefits.

The only alternatives to a bureaucracy is official discretion, which leads to corruption, and a legal process, which puts even the most convoluted bureaucratic process to shame in its complexity, difficulty, and delay.

Democratic communism puts executive power in the hands of the people and their delegates, but puts structural checks on the power of the people. One check is an independent judiciary: no person may be deprived of life, liberty, or personal property without due process of law, but the judiciary steps in when things go wrong. The structural check on the power of the people is the civil service: the people must exercise their executive power through the agency of the civil service.

The essence of the civil service is that it operates by public, objective (consistently determinable), and universally applicable rules. The people exercise their executive power by defining and creating the rules that the civil service (which includes the police and the military) operate by. Operating by rules prevents the people from employing executive power arbitrarily or hastily. Rather than an impediment to the public good, the bureaucracy acts as an impediment to the unwise temporary majority, as well as the principle-agent problem that, while reduced, can never be completely eliminated.

Back to the problem. As I mentioned earlier, democratic communism is democratic. The actual processes and procedures used by individuals to start businesses are a matter of legislature, not fundamental principles, and are under the control of the people and their delegates, not some scholar such as myself. However, I do have a little experience in business administration, economics, political science, systems analysis, and finance, so I will speak not as an authority on democratic communism pronouncing ideology, but as a semi-expert in political-economic systems making practical suggestions. What follows is merely how I would structure the process.

First, the potential entrepreneur must apply for an economic analysis of her potential business from the civil service. The civil service evaluates the plan neutrally (those performing the analysis, for example, will not know the identity, and therefore the race, gender, ethnicity, religion, or anything else, of the entrepreneur. They then pass the recommendations to the appropriate democratic delegation (usually a municipal or regional/state delegation), which represents the entrepreneur and her neighbors, and at which the entrepreneur and any other constituent can speak. The people choose which business proposals to capitalize, and direct the civil service to capitalize them. Note that the power to capitalize a business is not an executive but a legislative power, i.e. the power to spend money, which falls under the discretion of the legislature and is subject to political, not bureaucratic, constraints.

If the people and their delegates do not fund the business, or if the entrepreneur does not want to ask them, there are alternatives.

Again, let me digress into theory.

There are two phases to communist development: the "socialist" phase and the "communist" phase. One core element of communist theory is that capitalism, i.e. the private ownership of the means of production, at a certain level acts not as a generative force but as "fetters" on the development of the means of production. Capitalism is more flexible than Marx thought, but I think he was correct in that there are structural limitations on the prosperity that capitalism can develop.

Hence, immediately after the fall of capitalism, the economy will need to grow past the bounds imposed by capitalism; this process constitutes the socialist phase. In this phase, people still need to make trade-offs between leisure and consumption, and between some level of risk and safety. In this phase, those who work more are permitted to consume more. There are still differences in nominal income. Unlike capitalism, however, no level of income or wealth by itself gives an individual any kind of economic power over others (other than the power to demand actual consumption).

At least in theory, when economic and political power can no longer be gained by exploiting workers and expropriating their surplus labor, after a certain level of development, the economy can grow faster and better than it can under capitalism, until enough prosperity has been developed such that the trade-off between work and leisure becomes irrelevant: there is enough social wealth that people can, by and large, simply do as they please.

Therefore, under socialism, which I am describing here, there are still financial incentives. Within reasonable limits (enforced by income and wealth taxes), the industrious, clever, hard-working, and, to a certain extent, lucky individual can consume more than a person who values leisure or immediately unprofitable work (such as writing a blog). No one lives in misery, no one has Bill Gates' or Warren Buffet's wealth, but within those limits there are still differences in income, wealth, and consumption, at least for a time.

Back to practice.

If the people capitalize a firm, and it goes bankrupt, the people just "lose" their capital. That's how investment works. Neither the entrepreneur nor any employee is personally liable for any losses, although the people may, of course, recover any physical capital.

If the people refuse to capitalize a business, the entrepreneur can borrow money from the government bank. Money borrowed from government bank to capitalize a firm becomes an obligation of the firm while it is operating, but if the firm goes bankrupt, it becomes a personal obligation of the entrepreneur, which cannot be discharged by personal bankruptcy. (How personal bankruptcy and repayment of individual loans operates is beyond the scope of this post.) The government bank, being part of the civil service, grants loans according to the rules mandated by the people and their delegates, but the people do not review individual loans.

Finally, the entrepreneur can make whatever agreements she wishes with other private parties to obtain capital or loans. Capital obtained privately is lost if the firm becomes bankrupt, and loans personally guaranteed by the entrepreneur can be discharged in personal bankruptcy.

This all sounds very "capitalistic," n'est pas? Well, to a certain extent, yes it is. There are is a good reason for the similarity, and there are substantial differences.

The reason for the similarity is that the socialist phase of communism has inherited the economy from capitalism. We have all of these structures and institutions in place, with a huge amount of practical experience in their operation and administration. While Lenin correctly notes that at a certain level we must literally smash capitalist institutions, we have to carefully distinguish between truly capitalist institutions, such as the democratic republic and individual official power, which must be thoroughly discarded, and merely technical institutions, which can be retained and transformed. I maintain (and will be happy to explain elsewhere) that charging rent for capital and interest for loans are, by themselves, (i.e. without the private ownership of the majority of money), technical institutions that can be co-opted by communism, just as capitalism co-opted (and communism, I believe, can co-opt) the feudal judiciary.

There are substantial differences. First, the majority of capital and loans are provided by the people and their delegates, not by private individuals. The people have the decisive advantage that the national government can arbitrarily create and destroy money, through spending, taxation, and the collection of economic rent. Private individuals simply cannot directly compete against the government; they can act productively only when, for some reason, the government fails or refuses to act. Second, employees have more practical freedom of action. They cannot, as under capitalism, be economically coerced; they always have the freedom to leave a job secure in the knowledge they can work directly for the government to provide the necessities of a civilized life. Similarly, because the political institutions are more democratic than in the capitalist republic, there is much less risk of wealthy individuals capturing the political process. Fourth, the people can, at their discretion, place whatever limits on income and wealth they choose. Because economic rent is inherent to the fact of the surplus value of labor, allocating this rent is an ineluctable element of every economy and cannot simply be ignored. Charging economic rent by the people is a necessary element of a socialist economy; the question is not whether, but how. Only after the productive forces have been perfect past the boundaries of capitalism can the notion of careful social management of the allocation of surplus labor be relaxed.

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