Market socialism

Market socialism

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Market socialism refers to various economic systems where the means of production
Means of production
Means of production refers to physical, non-human inputs used in production—the factories, machines, and tools used to produce wealth — along with both infrastructural capital and natural capital. This includes the classical factors of production minus financial capital and minus human capital...

 are either publicly owned or cooperatively owned and operated for a profit in a market economy
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...

. The profit generated by the firms system would be used to directly remunerate employees or would be the source of public finance
Public finance
Public finance is the revenue and expenditure of public authoritiesThe purview of public finance is considered to be threefold: governmental effects on efficient allocation of resources, distribution of income, and macroeconomic stabilization.-Overview:The proper role of government provides a...

. Theoretically, the fundamental difference between market socialism and a traditional socialist economy
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...

 is the existence of a market for the means of production and capital goods.

Market socialism generally refers to three related but distinct economic systems.

Early forms of market socialism consisted of proposals for cooperative enterprises operating in a free-market economy, so that exploitation would be eliminated and individuals would receive the full product of their labor
To each according to his contribution
To each according to his contribution is considered by socialists and Marxist socialists as a characteristic of society directly following the transition to socialism, but preceding the final step to communism...

. Early market socialism was expressed by Ricardian socialist
Ricardian socialism
Ricardian socialism refers to a branch of socialist economic thought based upon the work of economist David Ricardo. The Ricardian socialists reasoned that the free-market was the route to socialism, and that rent, profit and interest were not natural outgrowths of the free-market...

s, mutualists
Mutualism (economic theory)
Mutualism is an anarchist school of thought that originates in the writings of Pierre-Joseph Proudhon, who envisioned a society where each person might possess a means of production, either individually or collectively, with trade representing equivalent amounts of labor in the free market...

, individualist anarchists and syndicalists.

The maturing of neoclassical economic theory led to various new proposals of market socialism in the early twentieth century. The traditional neoclassical market socialist proposals consisted of state-owned industries and a central planning board (CPB) that sets prices to equal marginal cost
Marginal cost
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good...

, thereby achieving pareto efficiency
Pareto efficiency
Pareto efficiency, or Pareto optimality, is a concept in economics with applications in engineering and social sciences. The term is named after Vilfredo Pareto, an Italian economist who used the concept in his studies of economic efficiency and income distribution.Given an initial allocation of...

.

Market socialism has also been used to refer to an economic system that utilizes a free price system
Free price system
A free price system or free price mechanism is an economic system where prices are set by the interchange of supply and demand, with the resulting prices being understood as signals that are communicated between producers and consumers which serve to guide the production and distribution of...

 for the allocation and distribution of all resources, with public ownership being reserved to "strategic" sectors of the economy. Within this model, the state would utilize market mechanisms to direct economic activity in the same manner governments affect economic decisions in capitalist economies, including the use of (external) regulation over the otherwise autonomously-operating enterprises. This allows for the public enterprises to function in a decentralized fashion.

Theoretical history


The earliest models of this form of market socialism were developed by Enrico Barone
Enrico Barone
Enrico Barone was a soldier, military historian, and economist.Barone studied the classics and mathematics before becoming an army officer. He taught military history for eight years from 1894 at the Officers' Training School. There he wrote a series of influential historical military works...

 (1908) and Oskar R. Lange (c. 1936). Lange and Fred M. Taylor
Fred M. Taylor
Fred Manville Taylor was a U.S. economist and educator best known for his contribution to the theory of market socialism. He taught mostly history at Albion College from 1879 to 1892. He taught in the department of economics at University of Michigan from 1892 to 1929 after receiving his Ph.D. in...

 proposed that central planning boards set prices through "trial and error," making adjustments as shortages and surpluses occurred rather than relying on a free price mechanism. If there were shortages, prices would be raised; if there were surpluses, prices would be lowered. Raising the prices would encourage businesses to increase production, driven by their desire to increase their profits, and in doing so eliminate the shortage. Lowering the prices would encourage businesses to curtail production to prevent losses, which would eliminate the surplus. Therefore, it would be a simulation of the market mechanism, which Lange thought would be capable of effectively managing supply and demand but could not work as efficiently or as effectively as the true thing. Time delays due to bureaucracy, distortions due to politics, and the lack of an entrepreneurial process that would come up with newer, better and cheaper products would seriously hamper the results of this approach vis-a-vis the real thing, which would also avoid the financial cost of paying for inessential government administrative staff.

A second form of market socialism has been termed "free market socialism" because it does not involve planners. Pierre-Joseph Proudhon
Pierre-Joseph Proudhon
Pierre-Joseph Proudhon was a French politician, mutualist philosopher and socialist. He was a member of the French Parliament, and he was the first person to call himself an "anarchist". He is considered among the most influential theorists and organisers of anarchism...

 developed a theoretical system called mutualism
Mutualism (economic theory)
Mutualism is an anarchist school of thought that originates in the writings of Pierre-Joseph Proudhon, who envisioned a society where each person might possess a means of production, either individually or collectively, with trade representing equivalent amounts of labor in the free market...

, which attacks the legitimacy of existing property rights, subsidies, corporations, banking, and rent
Renting
Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...

. Proudhon envisioned a decentralized market where people would enter the market with equal power, negating wage slavery. Proponents believe that cooperatives, credit unions, and other forms of worker ownership would become viable without being subject to the state
Sovereign state
A sovereign state, or simply, state, is a state with a defined territory on which it exercises internal and external sovereignty, a permanent population, a government, and the capacity to enter into relations with other sovereign states. It is also normally understood to be a state which is neither...

. Market socialism has also been used to describe some individualist anarchist works which argue that free markets help workers and weaken capitalists.

H.D.Dickinson published two articles proposing a form of market socialism: Price Formation in a Socialist Community (The Economic Journal 1933) and The Problems of a Socialist Economy (The Economic Journal 1934). Dickinson proposed a mathematical solution whereby the problems of a socialist economy could be solved by a central planning agency. The central agency would have the necessary statistics on the economy, as well as the capability of using statistics to direct production. The economy could be represented as a system of equations. Solution values for these equations could be used to price all goods at marginal cost and direct production. Hayek (1935) argued against the proposal to simulate markets with equations. Dickinson (1939) adopted the Lange-Taylor proposal to simulate markets through trial and error.

The Lange-Dickinson version of market socialism kept capital investment out of the market. Lange (1926 p65) insisted that a central planning board would have to set capital accumulation rates arbitrarily. Lange and Dickinson saw potential problems with bureaucratization in market socialism. According to Dickinson "the attempt to check irresponsibility will tie up managers of socialist enterprises with so much red tape and bureaucratic regulation that they will lose all initiative and independence" Dickinson 1938 p214). In the Economics of Control (1944) Abba Lerner admitted that capital investment would be politicized in market socialism.

Although the name is similar, it markedly differs from the socialist market economy
Socialist market economy
The socialist market economy or socialist market economy with Chinese characteristics is the official term used to refer to the economic system of the People's Republic of China after the reforms of Deng Xiaoping. It is also referred to as socialism with Chinese characteristics...

 and Socialist-oriented market economy
Socialist-oriented market economy
The socialist-oriented market economy is the official name given to the current economic system in the Socialist Republic of Vietnam, as a product of the Đổi mới economic reforms, which led to the displacement of the centrally-planned economy with a market socialist system based on commodity...

, which is practiced within the People's Republic of China
People's Republic of China
China , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...

 and Socialist Republic of Vietnam, respectively.

Advocates of market socialism argue that it combines the advantages of a market economy
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...

 with those of socialist economics
Socialist economics
Socialist economics are the economic theories and practices of hypothetical and existing socialist economic systems.A socialist economy is based on public ownership or independent cooperative ownership of the means of production, wherein production is carried out to directly produce use-value,...

. Proposed models include 'Coupon Socialism' (by the economist John Roemer
John Roemer
John E. Roemer is an American economist and political scientist. He is currently the Elizabeth S. and A. Varick Stout Professor of Political Science and Economics at Yale University. Prior to joining Yale, he was on the economics faculty at the University of California, Davis, and before entering...

) and ´Economic Democracy´ (by the philosopher David Schweickart
David Schweickart
David Schweickart is an American mathematician and philosopher. He holds a BS in Mathematics from University of Dayton, a PhD in Mathematics from University of Virginia, and a PhD in Philosophy from Ohio State University. He currently is Professor of Philosophy at Loyola University Chicago.He has...

).

Bardham and Roemer suggested a form of Market Socialism where there was a 'stock market' that distributed capital fairly between the workers. In this stock market, there is no buying or selling of stocks, which leads to negative externalities associated with a concentration of capital ownership. The Bardham and Roemer model satisfied the main requirements of both Socialism (workers own all the factors of production - not just labour) and market economies (prices determine efficient allocation of resources). A New Zealand Economist, Steven O'Donnell, expanded on the Bardham and Roemer model and decomposed the capital function in a general equilibrium system to take account of entrepreneurial activity in market socialist economies. O'Donnell (2003) set up a model that could be used as a blueprint for transition economies, and the results suggested that although market socialist models were inherently unstable in the long term, in the short term they would provide the economic infrastructure necessary for a successful transition from Socialist to market economy.

Theoretical basis


The key theoretical basis for market socialism is the negation of the underlying expropriation of surplus value present in other, exploitative, modes of production. Socialist theories that favored the market date back to the Ricardian socialists
Ricardian socialism
Ricardian socialism refers to a branch of socialist economic thought based upon the work of economist David Ricardo. The Ricardian socialists reasoned that the free-market was the route to socialism, and that rent, profit and interest were not natural outgrowths of the free-market...

, who advocated a free-market combined with state ownership of the means of production.

An important base for the first definition of market socialism in economic theory is the Lange Model, which states that an economy in which all production is performed by the state, but in which there is a functioning price mechanism, has similar properties to a market economy under perfect competition
Perfect competition
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...

, in that it achieves Pareto efficiency
Pareto efficiency
Pareto efficiency, or Pareto optimality, is a concept in economics with applications in engineering and social sciences. The term is named after Vilfredo Pareto, an Italian economist who used the concept in his studies of economic efficiency and income distribution.Given an initial allocation of...

.

Implementation


Peter Drucker
Peter Drucker
Peter Ferdinand Drucker was an influential writer, management consultant, and self-described “social ecologist.”-Introduction:...

 described the U.S. system of regulated pension funds providing capital to financial markets as "pension fund socialism". William H. Simon
William H. Simon
William H. Simon is the professor of Law at Columbia Law School holding the Arthur Levitt Professor of Law; and Everett B. Birch Professor in Professional Responsibility chairs. Simon's areas of expertise are Professional responsibility and Social Policy. Simon holds a bachelor's degree from...

 characterized pension fund socialism as "a form of market socialism", concluding that it was promising but perhaps with prospects more limited that those envisioned by its enthusiasts.

Other uses of the term


Market socialism has also been used as a name for any attempt by a Soviet
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....

-style economy to introduce market elements into its economic system. In this sense, "market socialism" was first attempted during the 1920s in the Soviet Union as the New Economic Policy
New Economic Policy
The New Economic Policy was an economic policy proposed by Vladimir Lenin, who called it state capitalism. Allowing some private ventures, the NEP allowed small animal businesses or smoke shops, for instance, to reopen for private profit while the state continued to control banks, foreign trade,...

 (NEP), but soon abandoned. Later, elements of "market socialism" were introduced in Hungary
Hungary
Hungary , officially the Republic of Hungary , is a landlocked country in Central Europe. It is situated in the Carpathian Basin and is bordered by Slovakia to the north, Ukraine and Romania to the east, Serbia and Croatia to the south, Slovenia to the southwest and Austria to the west. The...

 (where it was nicknamed "goulash communism
Goulash Communism
Goulash Communism or Kádárism refers to the variety of communism as practised in the Hungarian People's Republic from the 1960s until the collapse of Communism in Hungary in 1989...

"), Czechoslovakia
Czechoslovakia
Czechoslovakia or Czecho-Slovakia was a sovereign state in Central Europe which existed from October 1918, when it declared its independence from the Austro-Hungarian Empire, until 1992...

 and Yugoslavia
Yugoslavia
Yugoslavia refers to three political entities that existed successively on the western part of the Balkans during most of the 20th century....

 (see Titoism
Titoism
Titoism is a variant of Marxism–Leninism named after Josip Broz Tito, leader of the Socialist Federal Republic of Yugoslavia, primarily used to describe the specific socialist system built in Yugoslavia after its refusal of the 1948 Resolution of the Cominform, when the Communist Party of...

) in the 1970s and 1980s. Modern Vietnam
Vietnam
Vietnam – sometimes spelled Viet Nam , officially the Socialist Republic of Vietnam – is the easternmost country on the Indochina Peninsula in Southeast Asia. It is bordered by China to the north, Laos to the northwest, Cambodia to the southwest, and the South China Sea –...

 and Laos
Laos
Laos Lao: ສາທາລະນະລັດ ປະຊາທິປະໄຕ ປະຊາຊົນລາວ Sathalanalat Paxathipatai Paxaxon Lao, officially the Lao People's Democratic Republic, is a landlocked country in Southeast Asia, bordered by Burma and China to the northwest, Vietnam to the east, Cambodia to the south and Thailand to the west...

 also describe themselves as market socialist systems. The Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....

 attempted to introduce a market socialist system with its perestroika
Perestroika
Perestroika was a political movement within the Communist Party of the Soviet Union during 1980s, widely associated with the Soviet leader Mikhail Gorbachev...

 reforms under Mikhail Gorbachev
Mikhail Gorbachev
Mikhail Sergeyevich Gorbachev is a former Soviet statesman, having served as General Secretary of the Communist Party of the Soviet Union from 1985 until 1991, and as the last head of state of the USSR, having served from 1988 until its dissolution in 1991...

. During the later stages there was talk within top circles that the government should create the Socialist Market Economy; however, they never reached an agreement of how much socialism and market was to be featured.

Historically, these kinds of "market socialist" systems attempt to retain government ownership of the commanding heights of the economy, such as heavy industry, energy, and infrastructure, while introducing decentralised decision making and giving local managers more freedom to make decisions and respond to market demands. Market socialist systems also allow private ownership and entrepreneur
Entrepreneur
An entrepreneur is an owner or manager of a business enterprise who makes money through risk and initiative.The term was originally a loanword from French and was first defined by the Irish-French economist Richard Cantillon. Entrepreneur in English is a term applied to a person who is willing to...

ship in the service and other secondary economic sectors. The market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...

 is allowed to determine prices for consumer goods and agricultural products, and farmers are allowed to sell all or some of their products on the open market and keep some or all of the profit as an incentive to increase and improve production.

Socialist market economy


The Chinese experience with socialism with Chinese characteristics is frequently referred to as a 'socialist market economy
Socialist market economy
The socialist market economy or socialist market economy with Chinese characteristics is the official term used to refer to the economic system of the People's Republic of China after the reforms of Deng Xiaoping. It is also referred to as socialism with Chinese characteristics...

' in which the 'commanding heights' remain in state ownership, but a substantial portion of both the state and private sectors of economy are governed by free market practices, including a stock exchange for trading equity. The free-market is the arbitrator for most economic activity, with economic planning being relegated to macro-economic government indicative planning that does not encompass the microeconomic decision-making that is left to the individual organizations and state-owned enterprises. This model includes a significant amount of privately owned firms that operate as a business for profit, but only for consumer goods and services.

Directive centralized planning composed of mandatory output requirements and production quotas have been displaced by the free-market mechanism (for most of the economy) and directive planning in larger state industries. One of the major changes between the old planned economy
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...

 and the socialist market model is the corporatization
Corporatization
Corporatization refers to the transformation of state assets or agencies into state-owned corporations in order to introduce corporate management techniques to their administration...

 state institutions, with 150 of them reporting directly to the central government. By 2008, these state-owned corporations have became increasingly dynamic and generated lots of revenue for the state, with the state-sector leading the recovery of economic growth in 2009 in the wake of the financial crises.

The Socialist Republic of Vietnam pursued market-oriented reforms in 1986, resulting in what is officially called a 'Socialist-oriented market economy
Socialist-oriented market economy
The socialist-oriented market economy is the official name given to the current economic system in the Socialist Republic of Vietnam, as a product of the Đổi mới economic reforms, which led to the displacement of the centrally-planned economy with a market socialist system based on commodity...

', a system that utilizes market forces to distribute consumer goods produced by state-run, collectively owned and privately owned enterprises.

Proponents of socialist market economic systems argue from a Marxist perspective, stating that a planned socialist economy can only be brought about by first establishing a comprehensive commodity market economy and letting it fully develop until it exhausts its historical stage and gradually transforms itself into a planned economy. They argue that the economic system of the USSR and its satellite states attempted to go from a natural economy to a planned economy by decree, without passing through the necessary market economy phase of development. Proponents of socialist-directed market economies distinguish themselves from market socialists, and state that market socialists believe that only through utilizing the market mechanism can socialism be achieved, and that planned economies are ineffective or undesirable.

See also

  • Anti-capitalism
    Anti-capitalism
    Anti-capitalism describes a wide variety of movements, ideas, and attitudes which oppose capitalism. Anti-capitalists, in the strict sense of the word, are those who wish to completely replace capitalism with another system....

  • Criticisms of Socialism
    Criticisms of socialism
    Criticism of socialism refers to a critique of socialist models of economic organization, their efficiency and feasibility; as well as the political and social implications of such a system. Some criticisms are not directed toward socialism as a system, but are directed toward the socialist...

  • Mutualism
    Mutualism (economic theory)
    Mutualism is an anarchist school of thought that originates in the writings of Pierre-Joseph Proudhon, who envisioned a society where each person might possess a means of production, either individually or collectively, with trade representing equivalent amounts of labor in the free market...

  • Social capitalism
    Social capitalism
    Social capitalism , as a theory or political or philosophical stance, challenges the idea that the goals of socialism and the existing system of capitalism are inherently antagonistic. The essence of social capitalism is that markets work best and output is maximized through sound social...

  • Lange Model
  • Goulash Communism
    Goulash Communism
    Goulash Communism or Kádárism refers to the variety of communism as practised in the Hungarian People's Republic from the 1960s until the collapse of Communism in Hungary in 1989...

  • Ricardian socialism
    Ricardian socialism
    Ricardian socialism refers to a branch of socialist economic thought based upon the work of economist David Ricardo. The Ricardian socialists reasoned that the free-market was the route to socialism, and that rent, profit and interest were not natural outgrowths of the free-market...

  • Social market economy
    Social market economy
    The social market economy is the main economic model used in West Germany after World War II. It is based on the economic philosophy of Ordoliberalism from the Freiburg School...

  • Socialist market economy
    Socialist market economy
    The socialist market economy or socialist market economy with Chinese characteristics is the official term used to refer to the economic system of the People's Republic of China after the reforms of Deng Xiaoping. It is also referred to as socialism with Chinese characteristics...

  • Socialist-oriented market economy
    Socialist-oriented market economy
    The socialist-oriented market economy is the official name given to the current economic system in the Socialist Republic of Vietnam, as a product of the Đổi mới economic reforms, which led to the displacement of the centrally-planned economy with a market socialist system based on commodity...

     (the modern economic system in Vietnam)
  • New Economic Mechanism
    New Economic Mechanism
    The New Economic Mechanism was a major economic reform launched in the People's Republic of Hungary in 1968.- Reform :The period from 1956–1968 was one of reform in Eastern Europe...

  • Parecon

Further reading

  • Bertell Ollman ed. (1998). Market Socialism: the Debate Among Socialists, with other contributions by James Lawler, Hillel Ticktin and David Schewikart. Preview.
  • Steven O'Donnell (2003). Introducing Entrepreneurial Activity Into Market Socialist Models, University Press, Auckland
  • John E. Roemer
    John Roemer
    John E. Roemer is an American economist and political scientist. He is currently the Elizabeth S. and A. Varick Stout Professor of Political Science and Economics at Yale University. Prior to joining Yale, he was on the economics faculty at the University of California, Davis, and before entering...

     et al. (E. O. Wright, ed.) (1996). Equal Shares: Making Market Socialism Work, Verso.
  • Alec Nove (1983). The Economics of Feasible Socialism, HarperCollins.
  • David Miller
    David Miller (political theorist)
    David Miller is a British political theorist. He received his BA from the University of Cambridge and his BPhil and DPhil from the University of Oxford. He is currently Official Fellow and Professor in Social and Political Theory at Nuffield College, Oxford. Previous works include Social...

     (1989). Market, State, and Community: Theoretical Foundations of Market Socialism, Clarendon Press, Oxford.
  • David Schweickart
    David Schweickart
    David Schweickart is an American mathematician and philosopher. He holds a BS in Mathematics from University of Dayton, a PhD in Mathematics from University of Virginia, and a PhD in Philosophy from Ohio State University. He currently is Professor of Philosophy at Loyola University Chicago.He has...

     (2002). After Capitalism, Rowman & Littlefield, Lanham, Maryland.
  • Johanna Bockman (2011). Markets in the Name of Socialism: The Left-Wing Origins of Neoliberalism, Stanford University Press, Stanford. Preview.