Growth propensities under capitalism and profit-oriented market socialism.

Author:Yunker, James Arthur
Position::Statistical data
 
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  1. Introduction

    Prior to the seminal conceptual work of Oskar Lange enunciated in his essay "On the Economic Theory of Socialism" (1938), both orthodox economists and orthodox socialists would have summarily dismissed the notion of "market socialism" as a veritably ludicrous oxymoron. Lange's credentials as an accomplished neoclassical theoretician, however, lent considerable weight to his argument that a market socialist economic system, characterized by public ownership of the preponderance of capital utilized within large-scale corporate business enterprise, could successfully mimic the economic performance of a hypothetical perfectly competitive capitalist economy. In Lange's view, this gave the edge to market socialism since the real-world capitalist economy, as opposed to the hypothetical textbook capitalist economy, was (and remains) actually dominated by imperfectly competitive mega-corporations.

    Although Lange's central complaint against the contemporary capitalist economy is its microeconomic inefficiency owing to the breakdown of perfect competition (a static problem), writing as he did against the background of the Great Depression, he took it for granted that capitalism was also subject to the dynamic problem of long-term sub-optimal economic growth. The apparent success of Keynesian stabilization policy in preventing disastrous business downturns since the end of World War II, however, has restored most of the pre-Great Depression confidence in the overall economic performance of capitalism, static and dynamic--at least among the majority of contemporary mainstream economists.

    The level of enthusiasm among this majority for the economic performance of contemporary capitalism fluctuates with the condition of the economy, and has naturally been significantly reduced recently owing to worldwide economic vicissitudes throughout much of the 2000s. But as serious as they may be, these vicissitudes have apparently not seriously undermined overall mainstream support for the fundamental institutional status quo. Nevertheless, the possibility remains of a market socialist alternative to the capitalist status quo that would exhibit better performance, not only in terms of economic equality but also in terms of static efficiency and dynamic growth. With respect to dynamic performance, the suppression of serious depressions does not necessarily rule out the possibility that the economy is growing at less than the optimal rate, and the possibility exists that the optimal rate could indeed be achieved via some sort of social intervention--as, for example, through the establishment of a market socialist economy.

    The possibility of a "slow growth problem" under contemporary capitalism has indeed been considered by a number of economists such as Thurow (1987), Krugman (1987), Maddison (1987), Silk (1995), Lawrence (1996), Sachs and Warner (1997), Azam et al (2002), Sato (2002), Ibarra (2003), Mauro (2004), Hein and Truger (2005), Gibson (2007), and Joffe (2011). Many of these authors tend to attribute the blame, depending on their ideological predispositions, either to misguided public policies or to imperfectly competitive big business.

    Additional concern over possible slow growth has arisen out of the substantial "new growth theory" literature based on the seminal contributions of Paul M. Romer (1986, 1990): see, for example, Saint-Paul and Verdier (1997), Nelson (1998), Ruttan (1998), Lutz (1999), Roe and Mohtadi (2001), Salvadori (2003), Rima (2004), Bhaduri (2006), Falvey et al (2006), and Durlauf, Kourtellos and Tan (2008). Whereas the "old" neoclassical growth theory tends to assume that both the saving and technological growth rates are exogenous, the "new" theory postulates their endogeneity. More specifically, it has been argued that there are both increasing returns and external returns to technical knowledge, with the consequence that the market capitalist economy under-invests in scientific human capital and scientific research. Another perceived problem has to do with the high level of economic inequality under contemporary capitalism. Of course, the traditional economic hypothesis has been that economic inequality, in and of itself, fosters growth by putting more income at the disposal of wealthy households with higher marginal propensity to save (Kaldor, 1955). More recently, however, several economists have raised serious questions about this hypothesis on both statistical and theoretical grounds: see, for example, Galor and Zeira (1993), Alesina and Rodrik (1994), Persson and Tabellini (1994), Perotti (1996), Banerjee and Duflo (2003), Milanovic (2011), Berg and Ostry (2011). But whether based on "new growth theory," the high level of economic inequality under contemporary capitalism, or other considerations, the problem of "slow growth" as perceived by these various mainstream economists, to the extent that it exists, may presumably be addressed by measures short of any fundamental socio-economic reorganization (e.g., more income redistribution, or more discretionary government support of scientific education and research).

    But that small minority of economists who retain a sympathetic interest in Lange's brainchild of market socialism tend to look for deeper factors that are imbedded in the institutional nature of capitalism itself: specifically, the division of society into a minority class of capitalists primarily dependent on capital property income, and a majority class of workers who received little or no capital property income. This paper explores a mathematical approach to the question of slow growth (or "growth retardation") under capitalism as a consequence of the system's fundamental nature.

    This investigation is motivated particularly by extensive work on "profit-oriented market socialism," an evolution from the classic market socialism model of Oskar Lange. Profit-oriented market socialism would dispense with the technical elements of Lange's blueprint (the CPB centralized pricing system, the production rules, and the industry authority approach to investment allocation) on grounds that these elements represent an impractical attempt to reproduce in the real world the theoretically ideal Marshallian-Walrasian equilibrium. There are currently at least three separate and distinct proposed blueprints for profit-oriented market socialism in the systems literature: those of Leland Stauber (1975, 1977, 1987, 1993), John Roemer and co-authors (1991, 1992, 1993, 1994), and James Yunker (1992, 1993, 1995, 1997, 2001, 2007)

    Under profit-oriented market socialism, the publicly owned business corporations would be instructed to maximize long-term profitability, and their executives would be motivated to pursue this objective by the same sort of incentives currently operative under capitalism. The abandonment of marginal cost pricing would eliminate the possibility of achieving optimality in terms of microeconomic efficiency (assuming that the contemporary real-world economy approximates imperfect competition more closely than it approximates perfect competition), but this disadvantage would be counter-balanced by considerable reduction of the sort of incentive and monitoring problems perceived by numerous critics of Lange's plan, among them Hayek (1940), Bergson (1948, 1964), Roberts (1971), Feiwel (1972), Nutter (1974), Vaughn (1980), Murrell (1983), Milenkovitch (1984), Lavoie (1985), Steele (1992), Keren (1993), Makowski and Ostroy (1993), Shleifer and Vishny (1994), Milonakis (2003), Hanousek and Filer (2009), and de Soto (2010). Under profit-oriented market socialism, business enterprise would be conducted almost precisely as it is currently under capitalism: the difference would lie not in the production but rather in the distribution of capital property return (dividends, interest and so on). The principal difference between profit-oriented market socialism and contemporary capitalism would be the payment of capital property return to the general public as a social dividend (possibly in proportion to labor income, or possibly equally), rather than to individual capital owners on the basis of financial capital ownership.

    Although advocates of profit-oriented market socialism such as Stauber, Roemer and Yunker perceive the primary advantage of market socialism over capitalism to lie in a more equal and equitable distribution of capital property return, these advocates also claim various static efficiency and dynamic progressiveness advantages for their proposed systems--although obviously, the attainment of Pareto optimality through marginal cost pricing cannot be one of these. In the area of investment and growth, they argue that certain improvements would become possible since the general interest of society as a whole would take precedence over the private interests of the minority capitalist class. Improvements would be possible in terms of both the size of the investment flow, and its allocation over alternative uses. Stauber, Roemer and Yunker all perceive the likelihood that under market socialism there would be a public allocation to business capital investment to supplement the flow of private household saving devoted to this purpose, and that the total amount allocated to business capital investment would be larger than it is under capitalism. Business capital investment in this context includes research and development as well as plant and machinery.

    As is well known, there is no clear-cut case of market socialism anywhere in the real world. If there were, proponents could cite its favorable characteristics, while opponents could point out its faults and liabilities. However, if there were indeed one important nation in the contemporary world that is at least a distant cousin to the profit-oriented market socialism envisioned by Stauber, Roemer and Yunker, it would have to be the People's Republic of China. As everyone knows, the PRC has experienced remarkable...

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