National Sections of the L5I:

Against market socialism

Printer-friendly versionPDF version

Defending the very idea of socialism is one of the most important tasks for Marxists today. It has to be defended not only against its capitalist critics but also the theorists of “market socialism”. Although the ideological offensive of the free-marketeers in the 1980s was primarily aimed at the remnants of Keynesianism, their arguments originated as a critique of the economic policy of the early USSR. The dominance of the neo-liberals, and the paralysis and collapse of the Soviet Union, led many “socialist” economists to concede the need for market mechanisms even in a future socialist society. In the first two-part articles, Keith Harvey defends the need for socialist planning.

Capitalism long ago lost its generally progressive character. The human costs that have to be borne for economic development under its rule far outweigh the benefits. Absolute poverty has grown enormously within all the capitalist economies over the last 25 years. Over one billion people now live below subsistence level; each week in excess of 100,000 children die of malnutrition and other poverty related diseases.

Although capitalism has continued to revolutionise technique, it can only do so at the expense of productive employment.

Tens of millions are kicked off the land by capitalist agribusiness while industry and commerce cannot find them employment in the cities. Nor will the capitalist state take responsibility for the suffering imposed in this way. Welfare benefits are being pared back, leaving millions to depend on crime or charity for survival.

Social inequality has widened as the free market has let rip. A minority have enriched themselves from the sale of undervalued state assets, by an ever more ruthless exploitation of previously protected resources, the depression of their employees’ wage levels, and by tax cuts.

Workers find their conditions of labour increasingly intolerable. In some parts of the world capitalism still cannot survive without bonded labour; elsewhere millions are deprived of rights and forced to work longer and more unsocial hours. Millions more have had security of contract removed or undermined. Millions more again are trained for jobs that simply do not exist and are pressed into others out of desperation. In short, alienated labour grows year on year.

Alongside this waste of creative power, capitalism continues to squander other economic resources.

In the search for competitive advantage, modern machinery is scrapped while it still has on average around half its useful life ahead of it. Modern corporations waste billions duplicating research. Even larger sums are spent unproductively. Hundreds of billions of dollars annually are wasted in order to protect the capitalist class from its own working class—whether in sealing itself off from the effects of the urban nightmares it has created, or by arming and training its agencies of repression.

Similar amounts are spent on “defence”: protecting rival capitalist classes from their claims and counter claims against each other. Meanwhile, competition drives rival capitalists to spend millions on advertising: persuading workers of the importance of subtle differences between products that they do not need. The constant creation of ephemeral tastes, while the basic needs of tens of millions for housing and food go unmet for lack of “effective demand”, is a resounding refutation of the neo-liberal ideologues’ boast that the market provides for the maximum satisfaction of the maximum numbers.

Yet, despite all the evidence, these hired apologists of the market still insist that it guarantees the optimal allocation of resources, the equality of participants in exchange, freedom of choice and just rewards of the factors of production. When these arguments fail they shrug their shoulders and insist that at any rate the market is an eternal or natural way of regulating human economic activity.

Contradictions of capital

Regardless of what the apologists claim, the market was not a spontaneous creation of blind economic laws; Neither is it an a-historical institution as old as humanity itself. Rather, the capitalist market emerged in Europe in the sixteenth century as a qualitative extension of the simple commodity mode of production that had existed as a subordinate part within all class societies.

It was the creation of an entire class of people who had no means of survival apart from their ability to work which transformed simple commodity production into generalised commodity production. The emergence of a market in human labour power required political–above all state– intervention to break up traditional patterns of economic activity and to destroy the ties that bound labourers to the means of production and to the land. In this transition to capitalism alternative or supplementary sources of income—other than the sale of labour power—had to be forcibly denied to the mass of direct producers in this transition to capitalism.

Nor was this a once-and-for-all act in the dim and distant past of Europe. It was reproduced time and again on an ever more brutal and larger scale wherever imperialism conquered colonies and implanted capitalism among indigenous peoples.

Once forcibly established, the laws of the market became eternalised in the minds of those subject to them. The main task of bourgeois political economy for the last 150 years has been to “prove” the natural and eternal superiority of these laws. Karl Marx, however, scientifically revealed the real mode of operation of the laws of the market, in his re-elaboration of the classical labour theory of value.

He demonstrated that alongside the realm of equality of commodity owners in the market place there exists the despotic rule of commodity owners over workers in the factory. The purchase of labour power is but the first step to the exploitation of its use value and the extraction of the surplus generated by this ruthless enjoyment.

Misery, degradation, alienation all flow from the fact of commodity ownership once labour power has itself been made a commodity. Hence, the generalisation of the market brings forth wage slavery.

In a market economy, the allocation of economic resources, including human labour, is regulated by the law of value: the generalised exchange of all commodities according to the quantity of socially necessary labour-time worked up in them.

This law applies to the value of labour power itself and, indeed, it is only because it applies to labour power that the law of value can come to regulate an entire national economy. Such regulation requires a common measure for the value of the labour embodied in all commodities produced within the national economy and this can only be derived from a socially average price for labour power. Such a price can only be established where labour power has become a commodity, and was, therefore, impossible before capitalism.

The law of value regulates the production of goods and services and the modes of distribution and exchange that arise production. But it does so blindly, as a post festum result of the competing and clashing operations of many autonomous and private owners of capital. What is socially useful emerges only as a result of a blind process that generates much waste, disproportion and overproduction.

This capitalist market is doomed because of the crisis it generates. The Marxist critique of the market does not originate in an abstract, humanist desire for equality but, rather, from the recognition that capitalism generates social crises that can only be ended by the abolition of market regulation of economic life.

This capitalist market produces economic crises which no capitalist or government can forestall indefinitely. So long as the social rule of capital continues, such crises forcibly resolve the systematic disproportions and overproductions that are generated by the market’s operation. Production and consumption are forcibly and repeatedly brought back into line through the destruction of products for which no buyer can be found, despite the fact that many of these commodities are needed.

In its many attempts to stave off the effects of crisis, capitalism has always been forced to limit, or even partially negate, the operation of the law of value; in this regard it anticipates and mimics socialism. It prepares the working class—now larger than at any time in history—for the tasks of socialist transition.

It has created a working class numerous and educated enough to take over the functions of management in production for itself. It has created techniques of market regulation and manipulation that can be taken over and extended. It has created planning instruments—partially applied and incapable of lasting effect while private property owners predominate—by which capitalism seeks to minimise the wasteful consequences of anarchy in production.

These foretell the end of market regulation of economic life.

However, just as this market did not arise peacefully but had to smash aside obstacles in its way, so the end of the market in regulating economic life will be neither peaceful nor instantaneous. The forcible overthrow of the state machine that protects and guarantees this market is an essential first step. This allows the wealth and capital of the minority to be expropriated and placed in the hands of society.

Nonetheless, the eradication of the market will not be quick; the market, cannot be simply abolished any more than the state can. It must wither away. In post-revolutionary society, some scarcities will continue and the distribution of scarce resources may well be achieved, in part, through market mechanisms. The market will have to be manipulated as it becomes a declining factor in economic life; it must be forced to serve the cause of its own abolition. This is the aim of the transition period between capitalism and socialism under the direction of a revolutionary workers’ government.

Notwithstanding the blindingly obvious deficiencies of the operation of the free market, from the African continent to the urban ghettos of the USA, the left is on the ideological defensive.

The collapse of the Stalinist ruled states since 1989 has convinced many commentators on the right and left that there is no logic in seeking to put an end to the market regulation of economic life.

In addition, socialism’s critics discredit the cause of socialism in the West by pointing to the failure of public ownership and nationalisation in capitalist societies to prevent inflation and mass unemployment. Many activists in the international labour movement and in the new generation of youth are influenced by these arguments. Those seeking to replace capitalism with some form of socialist society have been placed on the defensive—politically and ideologically. It is time to go on the attack.

The neo-liberal defence of capitalism

In the years between the two world wars, the “Austrian school” of bourgeois economics (von Mises, Hayek) developed a critique of the political economy of socialism. Following hard upon the experience of “war communism” (1918-20) in Russia, Hayek and von Mises argued that it was impossible to organise a rational economic system without full use of money, competitive markets and prices. Hayek argued that socialism had no economic answer to “the general problem which arises everywhere when a multiplicity of ends compete for a limited quantity of means”.1

For Hayek, this problem can only be solved in a blind fashion as a result of the unplanned outcome of competing decisions by individual and atomised producers and consumers in the market place. Since for Hayek “value” has no objective foundation in labour, it can only exist in the subjective evaluation of the usefulness of a product to various competing consumers and producers. These colliding evaluations are co-ordinated by the market price system which sends signals to all consumers and producers about the relative value of goods.

A central plan, devoid of such a price system and market, cannot arrive at such an evaluation as to what is the most rational use of scarce economic resources.

A system of private property in the means of production was essential for the Austrian school so that an incentive system (profit on the one side and risk of failure on the other) could compel decisions. These decisions alone could stimulate innovation and enhance labour productivity.

The Austrians also insisted that planning was incapable of solving the “informational problem” that was solved automatically by markets. The millions of goods that existed were all different from each other, even examples of the same type of goods were in different states of wear and tear.

Moreover, technological improvements occurred incrementally and repeatedly. In short, no central plan could possibly collate and co-ordinate the necessary information to make operative plans work. Even if the information could be gathered, formulating a plan would require a set of equations of such a magnitude as would be beyond the scope of mathematical science. Any attempt in that direction would necessarily lead to a reduction in labour productivity as compared to capitalism.

During the course of the debate, Hayek shifted the weight of his argument on to a different plane. He insisted that a system of inharmonious competition between rival private property owners is the only way that fragmented knowledge (about product improvements, structure of demand) can be generated. He accepted that in a static system of demand and supply and of equilibrium prices (the price at which supply and demand are in balance) it could be possible to solve the problem of information. But this could not be done in a dynamic, ever-changing and competitive system.

In this sense, the Austrian argument is not about whether information can be gathered to make allocation possible, but rather that competition and rivalry are the only way that entrepreneurship and economic progress can be guaranteed. They also guarantee improved knowledge, collated ultimately via a price system.

The Marxist response to the ultra-free market views of the Austrian school has to start from a critique of its methodological assumptions about the nature of economic life.

Hayek adopts the standpoint of extreme individualism and subjectivism. The needs of the consumer are seen as the driving force of all economy. All of economic life is reduced to market exchanges between free and equal private property owners.

Marxists, while not denying the reality of such a sphere of economic life, contest the idea that this level of economic life provides an explanation of the key regulatory dynamic of economic development, that is, that it determines the allocation of economic resources in a capitalist commodity economy. Marxism, therefore, provides an alternative account of economy which insists on the historical and relative character of economic laws, and rejects a timeless and a-historical conception.

Hayek’s extreme subjectivist account of economic forces naturally clashes with the reality of capitalist development. A crucial argument, for Hayek, is that market prices contain all the information private commodity owners need to make rational decisions about resource allocation. But this is patently at odds with the way real capitalism works.

Hayek assumes that prices are parametric for all consumers (i.e. given in advance and non-influencable); consumers are price-takers. This is not generally true. Much production (e.g. defence procurement) is undertaken only after a tendering process in which the nature and quality considerations of the commodity have been decisive and the price is then given for that specification.

Moreover, contract enforcement, the firm’s reputation and delivery times, among other issues, affect decisions about market exchanges as much as, if not more than, price.

As for Hayek’s suggestion that entrepreneurial risk-taking provides the main dynamic for economic progress under capitalism, it is only necessary to contrast the real character of innovation and technological progress with this nineteenth century myth. Today’s multi-national corporations seek to monopolise products and research in a way which minimises risk-taking.

Furthermore, Hayek operates with an absurdly unrealistic concept of perfect competition in which producers have free and unrestricted entry into and out of markets. In truth, the market only offers up fragmented knowledge for any individual and this knowledge is only a partial and inadequate guide to the social effects of decisions taken. It is impossible for any individual to be aware of important and possibly decisive public and social facts that will affect the rationality of their own individual decision.

For example, the effect of a decision over the siting of public infrastructural developments near a town or factory cannot be foreseen. The effect on one individual of a decision taken by another person may, in turn, alter the assumptions under which the first decision was taken.

In particular, competition between egotistic rivals in the market place, guided only by current prices, cannot lead to optimum use of society’s resources when it comes to investment and accumulation, i.e, future production. This must be so since it is beyond any one individual to calculate future price movements that will render his/her current decisions about investment rational or not.

So the fragmented character of knowledge and its unforeseen trans-individual or social costs can render economic decisions wasteful. Resources are needlessly duplicated; or in that output may find no final consumer. Atomised decision-making is irrational in that it inhibits economic progress.

All these criticisms of Hayek’s economic model come back to the same point: he makes a false (idealistic) abstraction about the nature of economic life. Rather than generalising it out of the real class character of production under capitalism he does so from the one-sided nature of individuals in market exchange.

It has to be added that Hayek is also guilty of an idealistic abstraction about human nature in general, which is in full contradiction to all the results of modern psychology and other social sciences. Hayek conceptualises human individuals as essentially full blown bourgeois: independent from other individuals, sovereign in their decisions, judging all human relationships only according to the exchange value that others command, acting solely in the pursuit of their individual material interests.

Direct human relationships (as opposed to exchange-oriented ones), based on trust, solidarity or love, do not figure in this abstract concept or, if they do, are completely separated from the “economic sphere”. Therefore, for Hayek, capitalism not only fits with human nature, but even more, capitalism is nothing less than the full realisation of human nature. It flows logically that there cannot be any other social system “more human” than capitalism.

While it is true that capitalism subsumes everyone’s social life, it is completely false to suggest that this is in harmony with human nature. On the contrary, human beings are in need of direct social relationships if they are to realise their potentiality to the full.

The “market nexus” may not be so damaging in the case of bourgeois property owners, since the (successful) capitalists can draw psychological strength from their social power and wealth. Because the social power of capitalists is buttressed by the unpaid labour of their workers, capitalists are compensated for their alienation.

The workers, however, are robbed of their objective contribution to social and historical development. Their personalities are impoverished to the same extent as the capitalists enrich themselves. The increasing levels of psychological and psychosomatic disease within the working class is, in the last analysis, the result of capitalism’s destructive effect upon human relations.

Market socialism: old utopias for the new millennium

The intellectual challenge mounted by Hayek and the liberal free market tradition is comprehensive and consistent, even if it is wrong. It establishes its case for capitalism on multiple grounds; it is supposedly more efficient, uniquely innovative and guarantees maximum choice. Moreover, the argument is underpinned by a view of human nature that neatly dovetails economics and social philosophy.

Marxism can rise to this challenge. By contrast, the various schools of “market socialism” cannot. They are an eclectic, muddled blend of economic and philosophical logics. They do not withstand intellectual scrutiny and have failed the test of experience wherever they have been bench-tested in policy terms.

“Market socialism” has a long intellectual history. Its origin can be traced back to various utopian schemes in the early nineteenth century such as those of Saint-Simon, Owen, and Proudhon. In class terms, these corresponded to the yearnings of an intermediate social layer—the petit-bourgeoisie—crushed between the dominant classes of capitalist society.

The onward march of capitalism massively reduced this social class of artisans and shopkeepers and their intellectual saviours. More recently and the standpoint of market socialism has been adopted by intellectuals, academics, representing the liberal urban middle class: repelled by collectivism and class struggle on the one hand, and the dehumanising effects of capitalist exploitation on the other. While the specific policy prescriptions have moved on—from the labour coupons of Proudhon to the “stakeholder” shares in multinational companies much beloved by John Roemer—market socialism still yearns for the impossible: commodities without capital, capital without exploitation, money without speculation. In short, Utopia.

In modern times, the origin of “market socialism” lies in the 1930s. Stung by the attack of Hayek, various writers defended the rationality of socialism but mounted their defence from within bourgeois economics, reject Marxist political economy and the labour theory of value.

Fred Taylor and Oscar Lange were foremost representatives of this school. They approached their defence almost entirely from the standpoint of the efficiency of socialism. This in turn had two component parts. First, efficiency meant the most cost-effective use of available resources; secondly, the price mechanism should be used to guarantee equilibrium between demand and supply.

For them, “socialism” was nothing more than public ownership of the means of production and an egalitarian distribution of income. They assumed that political democracy would be similar to bourgeois parliamentarism but they believed that their economic model was also compatible with political authoritarianism, such as existed in the USSR.

Lange accepted that Marxism could explain the evolution of society from one class system to another but argued that it could not explain “everyday reality”. For him, bourgeois economics “understands static economic equilibrium under a system of constant data and the mechanisms by which price and quantities produced adjust themselves to these data.”2 While Marxism could explain the development of classes in production, the labour theory of value could not explain the distribution of goods and services between individual consumers and firms.

For this Lange relied on neo-classical marginal utility theory, a branch of bourgeois economics that arose from the 1870s and whose essence was to abstract the working of supply and demand in the market from production. As a branch of economics it revolved around subjective estimation of the value (utility) of goods to the individual. So the study of the subjective worth of an object to a person replaced the objective study of the social relations of people in the production and exchange of commodities. This theory more and more abandoned the study of “real costs” lying behind production in order to study “utility”.

Despite this, the work of Taylor (The Guidance of Production in a Socialist State) and Lange (On the Economic Theory of Socialism) was accepted as the most complete pre-war refutation of the Austrian claim that economic calculation was impossible under socialism. They assumed that the means of production were publicly owned but that there was complete freedom of choice in consumption and in the choice of jobs. Taylor argued that the method of allocating goods should essentially be the same as under capitalism. The state would own the means of production and be responsible for distributing income according to the requirements of social justice. Production would be guided by consumers’ preferences but these preferences would be expressed by “demand prices” in the market.

According to Lange, production is undertaken by independent and competing firms but they have to produce under two “parametric rules” as established by a Central Planning Board (CPB). The first of these rules is that the choice of the combination of factors must minimise the average costs of production, so that the marginal productivity of factors is equalised3; secondly, the scale of output should be determined at the level at which marginal costs become equal to the price of the product.4 If firms operate according to these rules then the prices of labour and consumer goods are determined by the market.

Prices of production goods should be set, initially, by the CPB based on a calculation of costs of a range of alternatives. Given these, the quantities supplied and demanded would be determined. If it appeared that the prices set out by the CPB failed to match supply and demand, then prices would be adjusted by a system of “trial and error” until they did. Hence, by mimicking the competitive market, the CPB would arrive at demand and supply schedules for all goods and services.

There are many criticisms to be made of the Lange solution from a Marxist standpoint, most of which flow from the insistence on abstracting the system of production from that of distribution. There can be no possibility of overcoming alienated labour or commodity fetishism in this model of “socialism”. Human labour and its all-rounded development is not the starting point for Lange; indeed he proceeds from the efficiency of production and the balance between supply and demand. Hence labour is treated as a factor of production whose price is to be set on the open market, at a level established by firms operating according to parametric rules to govern efficiency.

Moreover, the freedom and sovereignty of the consumer is, in fact, shallow and limited. The consumer is separated from his or her role as worker and hence the consumer cannot influence the production of consumption goods before production, or take any decisions about the introduction of new goods. Rather, the consumer is nothing but a passive price-taker of a given limited range of consumer goods which they are “free” to buy or not. The fact that a commodity is put on the market at a price that covers it‘s costs of production is no proof that it is the commodity that the consumer would have preferred, given full knowledge of the possible range of alternatives prior to production. Similarly, the “trial and error” procedure for mimicking the competitive market and arriving at equilibrium prices is a wholly unrealistic model of the way prices are arrived at.

As a system, it is based on Walrasian equilibrium theory. This model makes the completely unrealistic assumption that individuals can adjust their plans to produce or consume in response to price signals before they actually buy and sell. In this model, repeated responses to varying price signals reveal consumers’ preferences and the auctioneer (i.e. the CPB in this case) co-ordinates the process. Thus, the CPB would announce a set of prices and everyone would decide whether they wanted to buy and sell at these prices. This information would be processed by the auctioneer and then prices would be adjusted to bring supply and demand into line. Only then would sales and purchases take place. The problems associated with atomised sequential decision-making are neatly avoided by this process; in short, it is (falsely) abstracted from real time and, therefore, reality. In sum, Lange and Taylor simultaneously present both an unworkable model of the market under capitalism and a technocratic and social-democratic vision of socialism in which the working class remains exploited.

Market as a corrective to bureaucratic planning

The next stage in the market socialist debate arose out of attempts to reform bureaucratic command planning in the degenerate workers’ states.5 Here, market mechanisms (e.g. enterprise autonomy, profit-maximising behaviour) were advocated and/or introduced in order to correct the increasing tendencies towards stagnation (declining productivity), limited consumer choice and a poor record of technological innovation.

In the mid-1980s, Alec Nove, in his Economics of Feasible Socialism6 re-flected on the experience of market correctives to central planning. It was a negative assessment. The book became the bible of the left social-democratic intelligentsia in the West who tried to defend the possibility of “socialism” against the neo-liberal critique by lambasting the experiment of centralised planning.

Nove proposed that five types of property were needed, each possessing different advantages. First, centralised state companies should own the strategic parts of industry, commerce and finance. These would not be self-managed enterprises, but both administratively and financially centralised.

Secondly, Nove proposed “socialised enterprises”, that is, state owned enterprises with full autonomy and a management responsible to the workforce. They would be medium-sized and should cover the bulk of social production and services. They would work under conditions of “benign competition”, which he took to mean that “market success” would influence the earnings of managers and workers, but the means of production could not be sold or bought and the state would retain some powers in the case of bankruptcy.

Thirdly, co-operative enterprises would be privately owned by the workforce, self managed, small in size and fully responsible for their own success or failure. Next, there would be small-scale fully private enterprises, with capitalists allowed to employ not more than around 10 workers. Finally, Nove suggests that the right of self-employment be recognised (e.g. freelance journalists, plumbers, artists).

Nove accepts the neo-liberal critique that centralised planning is per se inefficient because of the irresolvable informational problems involved. So the “centre” would not attempt to plan the whole economy but would merely retain certain functions. Via parliament, it would decide on the distribution of social wealth between accumulation and consumption. This would be effected by the tax system. Crucially, the centre would decide on central investment needs (i.e. building of new factories and infrastructures). Meanwhile, the state banks would monitor decentralised investment as well, but intervene only in case of obvious duplication.

The central planning board would control the centralised state corporations and would define the market rules for the socialised and private enterprises. It could even intervene in this sector in exceptional cases. The state would promote environmental protection, transport planning, science and regional development through use of subsidies. As to the nature of current output there would be long term plans, but they would contain only recommendations, not orders, for the socialised enterprises.

Nove is very clear that this role for the centre would leave the bulk of the economy to be ruled by the market. Co-operatives and private enterprises clearly could go bust. In the socialised enterprises as well, the workforce would have to “take the responsibility for the management”, that is, become unemployed in the case of closure, except in cases where society had a strong and democratically expressed interest in protecting a particular enterprise. There would be a few state regulated prices for infrastructural services but most prices would be market prices.

Profits are problematic for Nove only if they are privately appropriated. In the socialised sector they are simply an indicator of efficiency and success. This is true only for the individual firm. The overall rate of profit obviously depends on the wage level which, for Nove, should be determined politically and not economically.

In this system, there would be no exploitation, says Nove, as the power to dispose of profits remains mainly in the hand of society (i.e. parliament). Wages should be closely correlated to productivity but, at the same time, there should be legal limits to wage differentials. For Nove, a labour market is indispensable because only wage differentials can channel the labour force to the most efficient uses. The idea of voluntary distribution of labour not only overestimates human altruism, but ignores the practical problem that the individual worker could not know where the socially most sensible workplace for him/her is.

All experience of self-management, under capitalism and in the degenerate workers’ states, shows that a lack of interest in the long term well-being of the enterprise emerges when there is no property relation between the enterprise and its workforce. Nove’s solution is that there should be an enterprise fund, equally owned by all employees. This would grow or shrink according to the development of business. Any new worker would have to buy into that fund and on leaving the worker would get this (expanded or reduced) share back.

Nove estimates that in this way the workers would develop the necessary entrepreneurial spirit to increase production in response to rising market prices because otherwise their enterprise would lose market share, incomes would fall when prices were coming down and, in the long term, this would lead to a devaluation of the enterprise fund. To prevent the most successful firms from achieving a monopolistic position, and thereby liquidating the competitive drive, Nove insists that anti-trust laws would be necessary.

Business cycles that are typical for market regulated economies can be prevented, according to Nove. He thinks that credit policy, strategic investment, price control in the centralised state sector, incomes policy and the tax system are all important anti-cyclical measures to correct a recessionary economy.

Nove wants to combine social ownership of the main means of production, democratic control of strategic investment and the rate of accumulation, on the one hand, with market regulation of production and distribution on the other. He thinks that this would be a harmonious supplement and does not see that within that system an aggressive contradiction would be lodged. Two modes of economic regulation would be set in motion that would represent (i.e. respectively serve) different classes.

Central directives set by the planning authorities concerning income and employment would, in Nove’s model, be constantly undermined by the decisions taken by autonomous enterprises, which would be guided in their micro-economic decisions by considerations of profit maximisation. It would be natural in the latter case that enterprises would be differentially successful. What response should be then forthcoming from the centre when some firms lost out in this competition? What if the goods produced were unprofitable but fulfilled a minority social need? What if a firm sought to shed labour or close a part of their production in order to get back into surplus?

It is likely from the outset that such unforeseen developments would immediately render sections of the plan redundant and throw the rest of the plan into disequilibrium. Further, any failure to stop unemployment or income inequalities between enterprises would contradict the structure of demand envisaged in the national plan and be incompatible with the egalitarian ethos of the transition.

The enterprise fund in Nove’s model is, in fact, the embryo of private ownership in the means of production. Managers would argue (and in successful enterprises they would find support among their workers) that they wanted to invest their enterprise fund to extend or improve the fixed capital of their firm, thereby acquiring ownership rights in it. Other managers would fight for the right to give credits out of their enterprise funds to other enterprises and, in the case of their inability to pay back, it would be an obvious option to turn these into ownership shares. They would organise politically for these aims, probably together with the small capitalists and co-operatives who would be demanding an extension of the limits for the size of private capital.

In other words, the bourgeoisie would fight first for more rights, and eventually for their unlimited class rule. On the other hand, the workers of the unsuccessful enterprises, who would face low wages and even unemployment, would demand state intervention. They would argue that the failure of their enterprises was not their fault but that objective changes in the market conditions (e.g. superior competition from a much bigger company that had been allocated greater investment, or from a more developed country) had made their success impossible.

Although Nove believes that state interventionism can avoid recessions, real life would show that the dynamism of the market was stronger and enterprise failures would be the simple result of declining overall demand. Why should some workers carry the consequences of “system errors” and others not? Of course, these workers would also politically organise to fight for a generalisation of state ownership, and consequently for thoroughgoing central planning.

Another factor would contribute to the development of class struggle. Under market conditions an average rate of profit is established in the whole economy. As the rate of profit represents the amount of profit per unit of advanced capital (constant and variable), it is independent of the specific amount of labour time extended in individual enterprises.

This means that enterprises with the same numbers of workers may “earn” completely different amounts of profit, depending on the value of the constant capital of the enterprise concerned. If the income or the enterprise fund share of the workers were in any way correlated to the profit of the enterprise there would be widely differing wages and/or fund shares. Obviously, those who took advantage of such a system would be politically inclined to defend it, whereas those who lose would be opposed to it.

Nove‘s “socialism” is conceptually unstable, because it tries to institutionalise a sort of dual power. Instead, such an arrangement would break down and a political fight would result in the definite victory of one side or the other. Either the freedom of private ownership would be restored and capitalism regain its full rights, or the workers would achieve their emancipation from market fluctuations, i.e. from the post festum determination of their individual (private) work as socially necessary work. And that is only possible under a democratically planned economy.

Markets, choice and innovation

The debate around the issues raised by Nove7 dominated the second half of the 1980s, up until the collapse of Stalinism. The fall of the Berlin Wall shifted the debate even further to the right. The West won the Cold War and capitalism began the process of reclaiming the planned economies. Even prominent advocates of market socialism in the East renounced their long held views.8

The theory of buttressing a central plan by the use of the market did not stand the test of experience. Various experiments in Hungary, Yugoslavia, and Gorbachev’s Russia between 1965-87 suggested that if the curbs on enterprise autonomy were substantial (e.g. inability to sanction investments for additional capacity, inability to cease trading or to sack workers) then enterprise autonomy could not lead to effective mimicking of competitive markets and the system descended into chaos.

A number of Western social democratic academics and economists (e.g. Roemer, Millar, Le Grand) have drawn the conclusion that there is no room for a plan at all in market socialism.

At their most extreme, these writers have abandoned any role for central state regulation in any type of production (or even workers’ management of the enterprise), including investment goods, and advocate a free competitive market in setting prices (and thereby supply and demand) for all goods and services (including labour). The claim that this is a “socialist” model at all rests on the advocacy of a specific form of public ownership of the means of production (citizens’ ownership of company stocks) and thereby the egalitarian distribution of profits.

These writers are, above all, concerned with choice and innovation. It has been suggested that removing the market allocation of commodities would lead to a reduction in the range of goods and services and in the level of consumer satisfaction. The market socialists argue that the market and the price system are the best way to co-ordinate the huge quantity of information about consumer needs and desires. By contrast, passing this information up and across any planning system without distortion would be impossible, it is said, and so no plan could ensure that production conformed to the (ever changing) pattern of demand.

In reality, consumer satisfaction under capitalism is restricted both on the supply side, by the demands of profit maximisation and competition, and on the demand side, by the structure of income. In the first place, under modern capitalism, the consumer is forced to pay far more than the average cost of production for goods and services due to the huge distribution costs (including advertising) involved in marketing any product. These can typically amount to more than 50% of market price.

In the second place, under capitalism, consumption patterns are not set by the consumers but by the producers. The growing monopolisation of production gives companies the power to substitute products with higher profit margins (e.g CDs over LPs) which leads to the narrowing of choice for the consumer. The clothes industry, for example, determines seasonal fashions according to the need of companies to increase their turnover.

On the other hand, consumer choice is irrelevant without income to make demand effective. The housing market, a key sector of all modern industrial and service economies, is fuelled by a core of second-home buyers while homelessness escalates alongside this demand. The idea therefore, that market price is an adequate, let alone the best, signal of consumer wants is grotesque. All it actually reveals is the structure of income established by exploitation and the inequality of private property ownership.

Many writers sympathetic to centralised planning of some sort (e.g. Itoh, Elson9) as well as all market socialists, have argued that even a de-centralised planned economy would have a problem generating innovation as there would be no competition between enterprises. They have argued that in order to stimulate improvements in technique, as well as new goods, enterprises would have to be allowed to command a “monopoly profit” as a result of devising a new product line or a new process.

This view must be rejected on the grounds that, far from reconciling individual and social needs, it brings them into conflict. It would mean de facto if not de jure recognition of private property (in a patent for a new product or technique for example). This would then obstruct the rapid diffusion of new inventions across society and, therefore, condemn part of industry to inefficiency and relative backwardness.

Market socialism, then, is an inherently contradictory combination of economic logics and regulations.

Competitive capitalist markets demand a multiplicity of private owners of capital who are each responsible for taking risky decisions about the pattern of investment, about the structure of productive capacity. These decisions have to be taken individually, in broad ignorance of decisions of the other producers and motivated by the desire to maximise profits over the longer term.

Only the interplay of these blind impersonal market forces establishes equilibrium levels of employment, prices and interest rates that confront all private capitalists.

Even the most weakened form of “socialism” which gives most free rein to competitive markets in setting production and price levels still has a core defect; namely, that the collective, egalitarian form of profit distribution and common ownership of property rights, conflicts with the mode of production of those profits.

“Market socialism”, then, is a late twentieth century form of petit-bourgeois socialism which, in the words of the ABC of Communism “protests against large-scale capital, but it does so in the name of the ‘freedom’ of petty enterprise.”10

In the nineteenth century this petty enterprise was artisanal in character; today’s market socialists preach the freedom of the self-managed or co-operatively run industrial enterprise; freedom not only from large-scale capital (i.e. monopolies and banks) but from central plan directives.

But such freedom will ensure chaos and anarchy. It will guarantee dislocation between the aims of the producing enterprises and the changing needs of the consumer. It will be “freedom” bought at the price of growing inequality.

In the end collective property rights will be deemed incompatible with such freedom. In short, it will make socialism impossible.