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Socialist economics is a term which refers in its descriptive sense to the
economic effects of nations with large state sectors where the government
directs the kind and nature of production. In a normative sense, it applies to
economic theories which advance the idea that socialism is both the most
equitable and most socially serviceable form of economic arrangement for
the realization of human potentialities.
There has developed a diverse array of ideas that have been referred to as
"socialist economics," from forms of "market socialism," which advocate
achieving economic justice through taxation and redistribution through state
welfare programs to the hardcore communists who advocate total state
control of all property and the economy, to the unique Chinese variation
known as "socialism with Chinese characteristics."
Contents
[hide]
1 Definition
2 Overview
3 Marxian economics
o 3.1 Das Kapital
o 3.2 Marxian theory after Marx
4 Market socialism
5 Socialist economics in practice
o 5.1 USSR and East European satellites
o 5.2 China
6 Critique of central planning
7 References
8 Credits
Definition
Socialist economics is a broad, and mostly controversial, term. Generally,
however, most theoretical economists would agree that the definition of a
socialist economy is based on four main features:
1. Public ownership of the decisive means of production
2. centralized control of the rate of accumulation
3. The existence of a market for consumer goods and for labor (a wages
system)
4. Managed pricing (Nove and Nuti 1972)
Altogether, socialist economics, as these four features suggest, is
characterized by large scale central planning of all possible types and
quantities of consumer goods and machinery for their production (with a
price system attached) and their quantitative regional allocation. Socialist
economics also plans the qualitative and regional distribution of labor and
the appropriate wage system. To be competitive with Western free market
systems, it has to plan for technical and technological innovation and quality
of products that are to be in demand.
Also, the four principles clearly define a necessary political condition for a
socialist economics to become a workable reality in any societys history: A
non-democratic authoritarian or totalitarian regime of one party that can
change the constitution to legally anchor all the above elements. Without
such authority, centralized control by government of the economy cannot be
achieved.
Overview
Karl Marx.
Theories of socialism first arose in the late 18th century in response to
the Industrial Revolution. Factoryowners were becoming wealthy and the
workers were impoverished. Thus, workers wanted a greater share in the
wealth that factories were making. Later a form of socialism called,
somewhat ambitiously, "Communism," emerged based on the writings of Karl
Marx and Friedrich Engels. The economics of Communism had not yet been
precisely defined; not by Marx (nor by anybody else since), as can been seen
in several editions of Das Kapital where the definitions changed (see Marx
I :793, 2nd edition and Marx I:728, 4th edition).
Communism advocated class struggle and revolution to establish a society of
cooperation with strong government control. In other words, this would
amount to politically totalitarian societies where the socialist principles could
be enacted into their constitutions. Such a doctrine with socialist economics
predominated in the former Soviet Union and much of Eastern Europe, as
well as in China and Cuba, at one time. Today its influence has lessened.
Western democracies were not considered to be examples of true socialist
economics at any time. Nationalization (the act of taking an industry or
assets into the public ownership of a national government) of major
industries, which has occurred in several Western European countries, is just
one of the four necessary conditions mentioned above; and this could be
(and has been) reversed when a different political party came to power.
Marxian economics
Marxian economics is one form of socialist economics, and the most
influential for the half of the world's economies during a large part of the
20th century. It was also, through the decades of its existence in
the USSR and the other COMECON (socialist countries of Eastern Europe,
Balkans, Central Asia, China, and Cuba) countries, the only government-
sanctioned economic doctrine. This is why Marx can be considered the
founder of socialist economic thinking.
There are two important points from Marx, drawn from Das Kapital (which is
discussed in more detail below), on which socialist economics rests:
1. First is the relationship between the basis and
the superstructure. "Basis," as defined by Marx, is an economic
(production) environment, and "superstructure" is the
society's culture, ideology, historically developed legal system,
accumulated knowledge,ethics, expectations, goals, and so forth. Marx
proclaimed that the "basis" should be the leading element and any
time there appears a discrepancy between the two, the
"superstructure" should change to accommodate the "basis." Class
struggle, at that point, is the obvious solution (Masaryk 1899: II, 132-
134).
2. The other is surplus value. In Marxian theory, surplus value is the
basis of the capitalist economy. It is generated as a result of ruthless
exploitation of the working class by capitalists. The worker has to
produce surplus value or he is paid less than he needs for living
(Marx I: 194).
Therefore, according to this theory, by destroying the capitalist system
surplus value would no longer be needed (for the enrichment of capitalists)
and, instead, the working class would have the fruit of its labor fully at its
disposal (Masaryk I: 319).
To summarize, from a political point of view socialism, which Marx referred to
as the "first phase," and communism, the "higher phase," involves the
destruction of the bureaucratic state: From the social point of view socialism
is the destruction of the class system, and from the economic point of view
socialism is the destruction of the compulsion to economic growth.
In other words, the capitalists optimized allocation of specific products
produced at competitive wages and logistics vis-a-vis specific markets
offered at competitive priceswhich, due to this constant competition, have
been automatically achieving constant growth in productivity and, hence,
economic growthwould no longer exist. The question is: How to substitute
the void?
Marx explained that, since the first stage of socialism would be "in every
respect, economically, morally, and intellectually, still stamped with the
birthmarks of the old society from whose womb it emerges," each worker
would naturally expect to be awarded according to the amount of labor he
contributes, despite the fact that each worker's ability and family
circumstances would differ, so that the results would still be unequal at this
stage, although fully supported by social provision.
Thus, the problem of substituting the capitalists' optimized allocation
translates into a question of marginal readjustments. Going slowly about the
"substitution," Oskar Lange, a theoretician of socialist economics, assumed
the retention of the existence of money and a wages system at the
beginning, in order to maintain at least some semblance of productivity
growth. Lange suggested that solving these readjustments as the socialist
economic system took shape (when the money and wages might be slowly
withdrawn from the system), would be done by central planning bureaus and
would be based on mathematical (quantity, quality, and logistic) optimizing
models. According to him, this was an adequate solution (Lange 1949).
Das Kapital
Marx, however, also showed that the structure of the commodity economy
causes things to play a particular and highly important social role and thus to
acquire particular social properties. He discovered the objective economic
bases which govern commodity fetishism:
Illusion and error in men's minds transform reified economic categories into
"objective forms" (of thought) of production relations of a given, historically
determined mode of a specific commodity production (Marx I, 72).
Market socialism
Market socialism is a variation of socialist economics that combines
government control with free market forces. It refers to various economic
systems in which the government owns the economic institutions or major
industries but operates them according to the rules of supply and demand. In
a traditional market socialist economy, prices would be determined by a
government planning ministry, and enterprises would either be state-owned
or cooperatively-owned and managed by their employees.
The earliest models of this form of market socialism were developed by
Enrico Barone (1908) and Oskar R. Lange (Hahnel 2005, 170). Several
suggestions on this topic were discussed in the 1930s, most notably by
Lange (1939), H. D. Dickinson (1933, 1934), and Fred M. Taylor (1939).
Lange and Taylor (1929) 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 (Skousen 2001, 414-415). Raising the prices would encourage
businesses to increase production, driven by their desire to increase their
profits, and in so doing eliminate the shortage. Lowering the prices would
encourage businesses to curtail production in order 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 (Kornai 1992, 476).
In this system, a regime, assuming ownership of all means of production,
could use markets to find relevant consumers' prices and valuations while
maintaining social and state control over production, income determination,
investment, and economic development. Managers would be instructed to
minimize costs, while the planning board would adjust producers' prices to
eliminate disequilibria in the markets for final goods. Thus, at a socialist
market equilibrium, the classical marginal conditions of static efficiency
would be maintained, while the state would ensure equitable distribution of
incomes through its allocation of the surplus (profit) from efficient production
and investment in socially desirable planned development.
Dickinson (1933, 1934) 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. Dickinson (1939) eventually 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 as Abba Lerner (1944) admitted that capital investment would
be politicized in market socialism. Lange insisted that a central planning
board would have to set capital accumulation rates arbitrarily. Lange and
Dickinson (1938, 1939) 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 1939, 214).
In sum, Oscar Lange, Abba Lerner, and H. D. Dickinson proposed state
control over credit and financial capital. While these market socialists
accepted trade and the use of money with consumer goods, markets for
capital goods would be simulated and markets for financial capital would be
wholly replaced by central planning. Capital investment would therefore be
determined by state officials, rather than by competition for funds in
financial markets. Lange was particularly clear about how the state would
determine the overall rate and pattern of capital investment. State officials
would set the overall rate of capital accumulation, instead of interest rates.
State officials would also determine the pattern of investment, instead of
profit-seeking capitalists and entrepreneurs.
China
Mao Zedong at Stalin's side on a ceremony arranged for Stalin's 71th birthday in Moscow in December 1949.
In 1950, China embraced a wholehearted socialist model after
the Communist victory in its Civil War. Private property and capital were
abolished, and in the large agricultural sector, the state simply
replaced peasants' existing warlord or landlord. The first attempt, the so-
called Great Leap Forward (GLF), saw a remarkable large-scale experiment in
entirely abolishing wages based on work. Agricultural workers were assured
that they would receive food regardless of the output of their village.
The central idea behind the Great Leap was that rapid development of
China's agricultural and industrial sectors should take place in parallel.
Substantial effort was expended on large-scale but often poorly planned
capital construction projects, such as irrigation works often built without
input from trained engineers. The hope was to industrialize by making use of
the massive supply of cheap labor and avoid having to import heavy
machinery.
To achieve the targets, Mao Zedong advocated that a further round of
collectivization modeled on the USSR's "Third Period" was necessary in the
Chinese countryside, where the existing collectives would be merged into
huge people's communes. An experimental commune was established at
Chayashan in Henan in April 1958. There for the first time private plots were
entirely abolished and communal kitchens introduced. At the Politburo
meetings in August 1958, it was decided that these people's communes
would become the new form of economic and political organization
throughout rural China.
This system was abolished soon afterward, and is often considered to be one
of the reasons for a significant famine in China in the 1960s, in which millions
of Chinese starved. Ironic considering its name, the Great Leap Forward is
now widely seen, both within China and outside, as a major economic
disaster, effectively being a "Great Leap Backward" that would adversely
affect China in the years to come. The official toll of excess deaths recorded
in China for the years of the GLF is 14 million, but scholars have estimated
the number of famine victims to be between 20 and 43 million (Xizhe 1987).
The subsequent economic reforms that led to China's rapid GDP growth
and poverty reduction at the end of the 20th century passed thirty in
number. The conventional wisdomoften called the Beijing Consensus"is
that incremental privatization is the key to China's economic growth.
China's economic system became known as a "Socialist market economy." It
is a market economy that combines substantial state ownership of large
industries with private enterprise, where both forms of ownership operate in
a free-pricing market environment. In contrast to the proposal of market
socialism put forth by Oskar Lange in the early 20th century, prices were not
set by a government central planning board. The transition to this socialist
market economy began in 1978 when Deng Xiaoping introduced his program
of "Socialism with Chinese characteristics."
The reforms in the 1980s were very far reaching and substantial for private
sector development, especially in rural areas led by township and village
enterprises (TVEs). In the 1990s, however, those reforms slowed, and rural
privatization was rolled-back (Pei et al 2008). Although a large part of the
Chinese population lives in rural regions, a new focus was put on developing
the urban regions. To pay for these urban reforms, the government heavily
taxed rural citizens and reduced services in rural health and education. The
migration from rural China to urban centers thus began.
The question became whether urban or rural economic growth should be
given higher priority. In the early years of the 21st century, the Chinese
Communist Party (CCP) returned to some of the policies of the 1980s: In rural
regions, they abolished the rural tax, reduced education and health fees, and
revised rural finance. The logic of such steps is easy to grasp. Most people
live in rural areas and to reverse the world crisis that hit China as a net
exporter, its own manufacturers turned to Chinese villagers rather than
American consumers. Nationwide schemes offering tax breaks to rural
buyers of such items as televisions and washing machines are evidence that
China began looking to tap its own potentiala milestone in the global
rebalancing story.
Regardless of whether urban or rural economic growth is given the higher
priority, it is clear that China's economic success in the early 21st century
came from abolishing its original socialist economy and replacing it with a
form that did not involve the setting of prices by a central planning board.
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