Monday, May 25, 2015

The economics of democratic communism: investment

First, democratic communism is democratic. When I say the "government," I mean the people, in a direct or delegated democracy, advised by experts in the civil service. In a truly democratic government, several problems go away, or become much less severe, notably the principal-agent problem and regulatory capture. The "tyranny of the majority" is still possible, but we have enough political theory to ameliorate that, and c.p., the tyranny of the majority is preferable to the tyranny of the minority. Notwithstanding those considerations, a democratic government by definition cannot act against the interests of the majority nor act too strongly against the interests of any minority large enough to resist exploitation. If you don't like democracy in principle, we can talk about that, but most objections against the government doing things are objections fundamentally based in the undemocratic nature of modern republican governments.

Second, democratic communism is, economically, a socialist or transitional communist mode of production: to each according to his or her labor. The goal is to develop the productive forces sufficiently so that we can realize the higher phase of communist society: "From each according to his [or her] ability, to each according to his [or her] needs."

Third, I'm trying for an overview here. If you want clarification or expansion of any of my points here, feel free to ask in comments.

Under democratic communism, the national government is responsible for autonomous government spending (ordinary fiscal policy), autonomous investment, and full employment. Monetary policy mostly becomes trivial, since the interest rate is no longer subject to market forces. The central government just creates and destroys money as needed to stabilize the price level.

The national government creates money for direct government spending, direct investment, and its function as employer of last resort. Again, the people's delegates in the national government, with expert assistance from the civil service, will determine the optimal level of government spending and investment. Its spending as the employer of last resort (EoLR) is determined strictly by the number of people seeking such employment: the national government must hire and pay all applicants. (The administration of EoLR may be delegated to regions (states) and localities (cities, counties and towns.) Government spending and EoLR are pretty much the same as under capitalism, so I won't go into them in detail here. (Ask in comments if you want clarification or expansion.) Instead, I'll focus on autonomous investment.

The national government creates and destroys money freely: the national government is not budget constrained. Regional and local governments, on the other hand, are budget constrained.

The government mostly invests indirectly in worker-owned private cooperative businesses (a.k.a. soviets). The government makes investment capital available to these businesses directly. The national government will allocate investment directly to the few competitive businesses with national scope (e.g. possibly airlines). Most investment, however, will be allocated as money on a rough per capita basis to regional and local governments to distribute to private cooperatives. Individuals will get together and present plans to the the regional and local democratic governments, advised by experts in the civil service. The regional and local governments will decide how to allocate their investment money. Note that no level of government can just invest: some actual people have to create a private cooperative to use investment.

All investment money will carry a national proportional capital tax. Regional and local governments must pay the the national government directly a tax proportional to the total government investment it allocates. Regional and local governments may impose additional taxation, which they can spend or invest locally. Note that if a regional or local government misallocates its investment and cannot pay the national capital tax, the citizens of the region do not have to sacrifice consumption to pay back taxes; instead, the misallocated investment is written off, and the region or locality loses its autonomy over investment to the next larger level, until the region or locality gets its industry in shape to pay its taxes properly.

In addition to paying required capital taxes, cooperatives can optionally pay off the principal capital, thus incurring a smaller tax, and thus allocate more profit to compensate the workers.

The government directly operates productive businesses that have no competitive private alternative, mostly natural monopolies (i.e. production of rival/excludable goods and services with always-declining marginal costs, such as electric power). Unlike private cooperatives, businesses operated by the government are operated by the civil service, and have employees rather than cooperative owners. Government businesses are allowed to employ people as the employer of last resort. Employees of government businesses, including EoLR employees, are required to be unionized, always have the power to strike, and can bargain collectively over working conditions and, for non-EoLR employees, wages.

To prevent the government business sector from overwhelming private cooperatives, government businesses pay no capital taxes to the national, regional or local government. They are always operated at best on a break-even basis. Hence, regions and localities have no pecuniary interest in operating businesses directly. Although financing government operated businesses is technically considered investment, because these businesses produce rival/excludable goods, they operate almost exactly like government spending, which produce non-rival/non-excludable goods.

Thus, the government has three basic tools for managing the economy: government spending (ordinary fiscal policy), autonomous investment, and capital taxes. If the economy is overheated (high inflation, EoLR employment too small), the government can lower spending and investment and raise capital taxes. If the economy is depressed (deflation/low inflation, EoLR employment too high), the government can increase spending and investment, and lower capital taxes. Because some capital taxes are national, regions need not engage in a race to the bottom: if regional revenue is too low, the national government increases capital taxes and recycles the money to regions.

The big objection is the possibility of hyperinflation. Since there is no economic check to the government creating money, it might be tempting to just increase autonomous spending without limit, leading to hyperinflation. It should be noted, however, that a democratic government is not subject to the same kind of principal-agent problems that a republican government is: if the majority of people believe that inflation is too high, they will force the government to lower it; similarly, if the majority believe that the standard of living is too low, they will force the government to increase investment to improve it.

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