Sunday, October 27, 2013

Macroeconomics of democratic communism

Democratic communism uses Modern Monetary Theory. According to Modern Monetary Theory (MMT), the government creates and spends money whenever it needs to, and for whatever real goods and services it wants. It imposes taxes for two main purposes. The first is to give value to currency, and to spread the burden of its demand for real goods and services more broadly in society, and the second is to control inflation. Thus, unlike households, firms, and regional/local governments, the national government is not budget constrained: it cannot run out of money. The national government can, of course, demand so many goods and services from the citizenry as to substantially reduce their economic quality of life, and they can inject enough money into the system to cause inflation, but the government cannot run out of money itself.

Modern Monetary Theorists claim that this is not a normative or semi-normative claim. Instead, they believe MMT is what it means to have a fiat currency, and all the institutional apparatus of nation-states with their own currencies do is implement MMT in a more or less (usually more) opaque and undemocratic manner. Democratic communism makes MMT explicit and open.

The national government creates new money through several different channels. First, it creates money when it demands real goods and services directly for the general welfare of the nation (e.g. pays the armed forces or builds and maintains the interstate highway system). Second, it creates new money when it permits regions and localities to capitalize firms.* Third, as I mentioned earlier, the national government creates new money when it directly provides jobs, as it must to anyone who asks, at a wage sufficient to earn a dignified living.** Finally, the government bank creates new money when it loans money to firms and individuals.

*I suspect that it is inadvisable for the national government to directly capitalize any firm; any firm whose business is truly national in scope probably should be directly run by the national and/or regional governments.

**Jobs programs would probably be operated by local and regional/state governments, but these governments have no discretion as to whether or not to offer jobs, so the national government would probably pay for the jobs directly.

Similarly, there are several ways the national government takes money out of the system. First, obviously, there are direct progressive income taxes on individuals. Second, the national government collects a proportional rent on capital from firms it capitalizes. (The national government does not need to collect direct taxes from firms.) Third, the government collects rent on money loaned (i.e. interest).

Finally, the government can temporarily adjust the money supply by buying and selling bonds, and paying interest on those bonds. Under MMT, these bonds are not a source of revenue; the government is not "borrowing" money to fund its operations. Instead, government bonds just serve as a buffer for the supply of "high powered money" (i.e. cash and checking account money). When there is "too much" money in circulation, the government sells bonds at higher interest rates; when there is too little, the government lowers bond rates to induce people to exchange their bonds for currency. Because the government can always create new money, it can never default (fail to make timely interest payments) on bonds.

The question is not whether a modern national economy should operate in this way; as best we can figure out, this is how a modern economy actually operates. The question is whose hands are actually on these levers: private individuals, anarchically competing against one another and unaccountable to the people, or by the people themselves and institutions with clear and direct democratic control. Democratic communism sides firmly on the latter.

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.

Friday, October 25, 2013

Democratic communism is democratic

In the comments to Standing on one foot, HH asks how democratic communism would actually work. It's a fair question, and before I answer it in more detail, I want to give a non-answer. Democratic communism is democratic, so the general answer to the question, "How does does X work?" is "How do you want it to work?" Democratic communism places the allocation of capital in the hands of a process that is as truly democratic, as completely in the hands of the people, as is physically possible. In contrast, a democratic republic by design takes a lot of important political power out of the hands of the people, sometimes in the name of "efficiency," but also explicitly because the people are not to be trusted. Democratic communism trusts the people, at least to make their own mistakes, in preference to the mistakes of a ruling class. If you don't like democracy in principle, if you don't trust the people, well, ok, but we would then have an ideological difference, not a practical difference. We can talk about our ideological differences elsewhere.

I'm going to answer HH's question in more detail, but that answer will be with my hat of bastard semi-expert* in economics, business administration, legal theory, and bureaucratic theory. Here, I'll talk with my hat of authority on my own theory of democratic communism, about the theory of the firm.

*More semi than expert.

I define here an "entrepreneur" as someone who wishes to create a new business entity, a firm. An "employee" is a person who wishes to join an already existing firm. Both are workers, those who create something that (hopefully) has value to society, and who justly deserve compensation, i.e. deserve to receive value from society. Although some might act completely alone, an entrepreneur will typically want to recruit employees to staff her business.

The first structural constraint on an entrepreneur is that she is not legally privileged at the firm just because she is the one who created the business. If she acquires privilege within the firm, it is by virtue of the employees giving her privilege. Entrepreneurial privilege must be earned, not assumed. I'll address the specific mechanisms by which entrepreneurs can earn privilege in a subsequent post.

The entrepreneur she is always in competition with the government, who employs anyone who wants a job, and pays a living, dignified wage, i.e. a wage sufficient to support a family with the basic civilized necessities. This gives both more and less freedome to an entrepreneur. The firm (not the entrepreneur, as I will discuss below) can pay employees as much or as little as it chooses, but it must compete with the government at that basic level.

Although the entrepreneur typically receives her capital — the money necessary to acquire physical capital and to pay herself and the firm's employees until revenue is realized — from the government, except in special cases (such as the creation and destruction of money), the government cannot forbid or prevent private individuals from doing what it itself does. If she cannot, through the appropriate means, get capital from government, she is free to seek private capital, and make any agreement she wishes to get that private capital. (J. S. Mill makes some convincing arguments for this side-by-side arrangement.)

The government does have an inherent advantage in creating new capital, though: the national government alone can create money, and no individual or group has privileged access to this newly created money. It is allocated either directly democratically or indirectly through democratically controlled and/or accountable institutions. Again: democratic communism is democratic: if you don't like how the government is allocating new capital, because you yourself are ineluctably part of the government, you are free change the rules in a democratic manner. If the majority of your fellow citizens agree with you, you will change the rules. If not, too bad for you.

In the next post I'll talk more directly about specific mechanisms whereby an individual can create a new business.

Monday, October 21, 2013

Standing on one foot

I was asked to explain democratic communism while standing on one foot. Here it is:

No one is subject to another's arbitrary, undemocratic, economic power. The rest is commentary.

The bourgeois revolutions of the late 18th and early 19th centuries implemented the idea of popular sovereignty: Political power, the power of the state to use violence, belonged to the people, not the king. Before, political power could be owned by individual people just like individual people today own cars and houses. The republic is not just a different kind of government structure, it is a different way of thinking about political power at the most fundamental level.

Democratic communism extends that way of thinking to economic power, the ownership of money, credit, and productive assets like factories and stores. These objects of economic power are to be owned not individually, but socially and democratically.

Communism does not abolish the notion of personal property. By definition, personal property does not allow the owner to exercise any kind of control over another person. That someone owns her house, her car, her furniture, and her savings for personal use does not give her any kind of control over anyone else. No one else needs her property to live or work.

Instead, communism abolishes the notion of absentee ownership, especially over land, labor, and capital. No one but the tenant, or the democratic state, can own the land; no one but the worker, or the democratic state, can own the means of production; and no one but the worker — not even the state — can own his labor.

Capitalism requires the "individual liberty" to have economic power over other people, and as best it can, protects this "liberty" from regulation, control, or abolition by popular government. Communism, perhaps counter-intuitively, is more individualistic than republican capitalism. Communism abolishes only the "liberty" to use economic means to infringe the liberty of others; it takes an unjust liberty away from a small group, the owners of capital, and restores a just liberty to a large group, the tenants and workers.

If the protection of property in the Fifth Amendment and Article 17 is interpreted as the protection of personal property, democratic communism is entirely compatible with the United States Bill of Rights and the the United Nations Universal Declaration of Human Rights*.

*Assuming a delegated democracy is considered to employ "equivalent free voting procedures" per Article 21, section 3.

The democratic commune protects economic liberty in three basic ways. First, it borrows from capitalism the institution of constitutionally protected individual liberties upheld by independent courts. To the political liberties guaranteed by the Bill of Rights, a communist constitution centralizes Article 23 of the Universal Declaration, guaranteeing the right to work without employment or wage discrimination at an living wage. Second, it uses the state's power to create money to capitalize businesses and employ people directly. It also uses the power to create money to directly capitalize businesses of any kind. If people have an alternative, it is much more difficult to control them using the threat of unemployment. Finally, it uses democratic legislation to regulate how businesses are run, ensuring worker — not government or capitalist — control of ordinary businesses. The commune also extends these means to regulate tenancy as well as employment, the other primary way capitalists exert economic power over workers.

Democratic communism does not forbid absentee ownership outright, nor must it do so; it merely regulates absentee ownership and provides alternatives. If some workers want to privately capitalize their business, if some individuals want to rent a house or apartment from a private individual, they are free to do so. The critical point under democratic communism is that individuals always have a public, democratic alternative to private contracts. They may vote themselves capital and housing, and control that capital and housing democratically.

Although people exercise democratic control of capital and housing, democratic communism does not offer a free lunch. Workers must pay for the capital they vote themselves by productively employing it; and tenants must pay to build and maintain the housing they vote themselves. Democratic communism merely gives people the legal right to work for what they themselves want; they need not submit their economic will to the arbitrary will of the owners of capital.

How to actually implement such a scheme is non-trivial. Implementation is very complicated and, to a large extent, must be negotiated socially. But it is useful, I think, to have a good understand of the general principles of democratic communism.

Saturday, October 19, 2013

Communism and altruism

It has been alleged (and I use the passive voice on purpose) that communism entails a kind of "radical altruism," which is ineluctably contrary to human nature. In the most direct form, communism is criticized because it entails that every individual completely abandon his or her own well-being for the "good of society." I'm skeptical that very many canonical communist thinkers have actually made this case outside of a purely revolutionary context, e.g. "The fear of death is the beginning of slavery,"* but even if they did, the idea of absolute altruism can be discarded while still keeping the core elements of communism: worker ownership of the means of production and the ideal economic society of "from each according to his ability, to each according to his need." The best justification for communism is not altruism but utilitarianism: communism produces the society that creates the greatest good for the greatest number. Thus, a moral or psychological critique of communism entails showing either that communism cannot be reasonably expected to create the greatest good, or that utilitarianism (instead of radical altruism) is philosophically or psychologically untenable. The first critique is beyond the scope of this post; I want to focus on the philosophical and psychological status of utilitarianism.

*variously attributed

The philosophical critique of utilitarianism falls into three categories*. First, utilitarianism requires a "felicific calculus," to use Bentham's phrase, which is overly simplistic or unnecessarily elaborate. This critique, while mostly accurate, does not address utilitarianism at a fundamental level. It's clearly possible to talk about utility in a consistent way: we can, for example, just ask people whether they are happy or unhappy. To say that it is difficult to measure utility does not say that we should not maximize utility if we could measure it perfectly, or maximize utility as best we can measure it. It might or might not be a valid critique that we cannot indirectly measure utility well enough to make utilitarianism useful, but it is simply invalid to say that because we cannot measure utility directly or perfectly that utilitarianism is fundamentally unsound.

*There are actually four, but the fourth consists of arguments based on one or more logical or rhetorical fallacies, such as defining utility narrowly or objectively (contradicting a fundamental premise of utilitarianism), arguing that utilitarianism is flawed just because it is different from something other than utilitarianism, or the ad hominem argument that utilitarianism fails because Bentham was an architect of capitalism and had some very stupid, horrible ideas.

The second critique is the "Omelas" critique: even if we could measure utility perfectly, there are (approximate) maxima of utility that profoundly violate our moral sensibilities. Ursula LeGuin's short story, "The Ones Who Walk Away from Omelas," is the canonical example. I have addressed this particular criticism earlier at greater length; one obvious counterargument is that we have no reason to believe — and many reasons to disbelieve — that there could possibly be any causal relationship between torturing a child and a happy society. It's possible that different laws of physics might render a society like Omelas meaningful, but our own moral intuitions, like our physical intuitions, were constructed by and are about this world.
Furthermore, utility is fundamentally subjective; a social structure that causes many people to have severe moral pain is by definition counter-utilitarian. If Omelas did not cause such severe moral pain, there would be none who walked away. Omelas therefore does not, even within the premises of utilitarianism, maximize utility.

The Omelas critique is fundamentally empirical, not logical. All variations of this argument make two premises. First, we have perfect information about what maximizes utility; second, based on that perfect information, the maximum of utility violates our moral intuitions. There are three counterarguments. First, we do not and cannot have perfect information; if things were different they would be different, and we are concerned with morality in this world, not some hypothetical possible world in which people have perfect information about utility. Second, there is no reason to believe that if we did have perfect information, the maximum of utility would actually violate our moral intuition; if such a case could could be proven in this actual world, we might reconsider utilitarianism, but, as best I can tell, such scenarios are entirely hypothetical, not real. Finally, even if we could determine conclusively that some maximum of utility actually did violate our moral intuition, perhaps it is our intuition that is defective, not utilitarianism. Again, we would have to thoroughly understand the trade-off between utility and our intuition in the real world to make a reasoned judgment.

The third critique is the psychological critique. According to utilitarianism, each individual should choose each of her individual actions based on what is best for all people, with her own personal utility a mostly insignificant residuum of that calculation. It seems readily apparent from introspection and common sense that not only do people not actually think this way, it is completely unreasonable to expect them to. A moral system has to be built on the psychology of people who live here now, and it would be presumptuous to discuss the morality of our descendants a thousand years hence, who might have a psychology compatible with our notions of utilitarianism. While utilitarianism does not demand that individuals completely ignore their own well-being, the diminution of their own utility to statistical insignificance comes pretty close. However, this is a fundamental misreading of Bentham's own work: although it is one legitimate way of understanding utilitarianism, it is not the only legitimate reading, and it is not how Bentham explicitly asks us to read the fundamental principle of utilitarianism.

Crucial to understanding utilitarianism is the fundamental impossibility of actually computing the greatest good for the greatest number. There are two problems with such a computation. First, it is computationally intractable. There are too many dimensions, one for each individual's desire; even if each individual had only 100 identifiable desires, we would have to solve 700 billion simultaneous equations to compute maximal utility. Furthermore, there are dynamic effects: changes in the world produce changes in our desires, in our subjective opinions about utility. Second, as noted above, we do not have very good measures of how our actions will affect other people's utility. Even if we could solve 700 billion simultaneous equations, we don't have the numbers to plug into the equations. If utilitarianism required that we perform a computationally intractable task without data, it would be an obvious failure. Fortunately, utilitarianism does not require such a task.

We cannot calculate for every decision which choice is best for everyone, but we can estimate which choices make the total utility better. We cannot maximize total utility, but we can increase total utility. And to do so, we need not, as individuals, ignore or minimize our own utility. We cannot consider our own individual utility to be a priori better than others', but each individual can consider himself an "expert" on what his own utility actually is. In the Introduction to A Manual of Political Economy, Bentham makes this point clear: "[W]ithout some special reason, the general rule is, that nothing ought to be done or attempted by government." Bentham argues that in the general case, total utility is best improved by each individual maximizing her own utility: "Generally speaking, there is no one who knows what is for your interest, so well as yourself—no one who is disposed with so much ardour and constancy to pursue it. . . . Each individual bestowing more time and attention upon the means of preserving and increasing his portion of wealth, than is or can be bestowed by government, is likely to take a more effectual course than what, in his instance and on his behalf, would be taken by government." Generally, Bentham asserts that we can just satisfy our own interests without worrying about computing the effects on total utility, and when we can make larger statistical calculations, those calculations are "special," not general. Bentham himself does not expect individuals to reduce their own interests to statistical insignificance, and indeed it is only in special cases that we need to consider statistical calculations at all.

Bentham is not contradicting himself. When I improve my own well-being without harming others, insofar as I can actually calculate, I am thereby increasing total utility. And, by and large, that is what civilized people actually do. If I want a hamburger, I just go get a hamburger. I am improving my own utility without, as best I can tell from our social agreements permitting the sale of hamburgers, harming others. And I do not harm others in satisfying my desire: if there is a line at Burger King, I don't bully my way to the front: it is unacceptable to improve my utility by getting my hamburger now by making others wait longer. I don't steal the hamburger; I work to earn the money and then pay for it. Some might assert that eating hamburgers in general harms total utility more than it satisfies our individuals' desire for hamburgers, but they have to prove "some special reason" why this is true, and in making their case, no individual's desires are a priori more important than any others. We have the goal of always improving total utility, and we move closer to that goal using the tools we actually have; there is no need to require tools we do not and (probably) cannot have.

A lot of people, myself included, think that this is precisely how a civilized, liberal society ought to work. Generally, we satisfy our own desires, not because our own desires are a priori more important than others, but because we are experts in our own desires, and generally, we can more effectively improve total utility by exercising our expertise than by any other means. We fulfill our own desires, as best we can tell, without harming others. When our desires come into fundamental conflict, we have to look to special reasons, which do not take any individual's or group's desires as a priori more important than any others. To the extent that we have "moral principles," we use these principles not as absolute truths, but empirical regularities that we believe improve total utility under conditions of uncertainty, risk, and hidden information, and we can change these principles when our understanding of reality, or reality itself, changes. Far from being psychologically radical, utilitarianism is completely ordinary social reasoning for many people.

Communism is in principle utilitarian. We may be mistaken, but communists believe that communism is the greatest good for the greatest number. We focus on workers because workers are the largest segment of society, because workers can improve both their own and others' utility without harming anyone, and because everyone can be a worker. The only utility communists seek to diminish is the utility of rentiers, and only to the extent that rentiers' utility is, by definition, gained at the diminution of workers' utility. I cannot think of a better utilitarian argument.