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COMPARATIVE ECONOMIC SYSTEMS

LECTURE NOTES

Lecture Notes 1
Good Socio-economic System
Introduction A good society is a society that is successful in fighting the scarcity problem in such a way that it promotes material welfare as well as non-material weflare. The scarcity problem is the basic economic problem everywhere. The performance criteria or success criteria in relation to promotion of material welfare are achievement of (a) full employment; (b) efficient employment not only in terms of technical efficiency but also allocative efficiency; (c) growth in terms of extensive growth as well as intensive growth; and (d) equity or fairness in terms of distributive justice and/or commutative justice. The success criteria in relation to promoting non-material welfare are (a) avoiding alienation from self; (b) avoiding alienation from others in terms of consumer sovereignty, worker sovereignty and citizen sovereignty; and (c) avoiding alienation from nature. We elaborate all this as follows. The Scarcity Problem as the Basic Economic Problem The basic observation about most people on earth is that they have desires for a truly staggering variety and quantity of goods that they believe will enhance their welfare, and, thus, be good for them. Goods, which are objects of immense desire, are classified into commodities and services. There are tangible commodities like food, clothes, cars, etc. Intangible services refer to temporary use of physical objects or other people (e.g. a house by the sea during summer; a seat for 8 hours on a jet aeroplane from New Delhi to Amsterdam; and 10 minutes of a doctor’s time). How to make the various goods that people desire? We need resources and technology to make goods. Real resources or productive ingredients are put to work in the process of production in order to make goods. There are three kinds of resources, viz. human resources (i.e. people able and willing to participate in the productive process by supplying their mental and/or physical labour); natural resources (i.e. gifts of nature like sunlight, wind, ocean tides, virgin land, plants and animals, minerals and fuels, etc.); and man-made capital resources (i.e. factory buildings, blast furnaces, warehouses, highways, airport control towers, equipment of producers like computers, milling machines, or fleets of trucks, and producer inventories of rawmaterials, semifinished goods or even finished goods that have not yet reached their ultimate users). With regard to human resources, it may be noted that different people possess different amounts of an invisible kind of human capital, consisting of health care, general education and training embodied

in them. With regard to natural resources, it may be noted that natural resources which are in a sense made by people like the animals that have been domesticated and specially bred or soil that has been cleared, irrigated and fertilized or oil that has been pumped from the ground and shipped far from its original place of deposit are treated as capital resources by the economists. Further, capital resources do not include financial capital such as money, stocks, deeds or bonds which are not directly productive. Technology refers to the knowledge in order to make goods. It is the set of known methods of production. It is like the recipe book for converting inputs into outputs. Now the empirical truth is that there are limited resources and limited technology in this world. Limited resources plus limited technology yield limited flow of resource services and so ultimately limited goods which are far less in relation to the combined desire for goods by all the people. So, goods are scarce. This is what is meant by the scarcity problem. Fighting the Scarcity Problem Obviously, people dislike scarcity. And they would like to go towards abundance. According to economists, in order to move from scarcity towards abundance, certain specific actions will have to be taken by people. The possible actions against scarcity, for promoting material welfare and non-material welfare, constitute the success criteria for assessing the performance of a socio-economic system. Promoting Material Welfare In order to promote material welfare, the following actions must be taken by people. (i) The full employment of resources This means avoiding less than full utilisation of resources. However, the proper meaning of ‘full’ employment can be debated. Take the case of human resources. Are they fully utilized only if every citizen is participating full time in the making of goods? Since the very young, the very old and the very sick cannot possibly aid in the production of goods, we will have to focus on able-bodied adults. But who is an able-bodied adult? Everyone aged 18 or above, 14 or above, by excluding people above 65 or 70 or 75? Similarly, what is the meaning of ‘full time’? For example, does that mean working 18 hours everyday of the year or in some other way that supplies fewer labour hours to the productive process but gives people more leisure to enjoy? Take the case of non-human resources, i.e. natural and capital resources. Should these resources be utilized at the rate of 24 hours a day each day of the year? Or should they be used less intensely, thereby extending the lifespan of the resources, particularly if they are non-renewable natural ones? Clearly, every society must find some way of answering the above types of questions and thus defining full employment.

(ii) The efficient employment of resources This means avoiding incorrect or inefficient utilization of resources, even after fully employing them. In this connection there are two concepts, viz. technical efficiency and allocative efficiency. The concept of technical efficiency, which focuses on each productive enterprise, refers to achieving maximum possible outputs out of the inputs actually being employed, under the current technology. Technical efficiency is mainly due to inadequate motivation of the workers and managers involved in the production process. The concept of allocative efficiency, which considers the economy as a whole, means, inter alia, discovering possibilities for improvement by comparing the circumstances of two or more producers. There exists allocative or economic efficiency when it is possible to increase output through some reallocation of resources among different producers to make some people better off without making others worse off. (iii) Growth, extensive and intensive The basic idea of growth is like this. People can think about the types of goods being produced and give up any attempt to get the greatest possible set of goods for current consumption out of the limited resources currently available. They can divert some of these resources from the current production of consumption goods, saving them for another purpose. And they can turn to investing the resources so saved in the production of more resources or better methods of production or higher-quality resources. Consequently, their ability or capacity to produce goods over time increases immensely so much so that scarcity gives way to abundance. Extensive economic growth means an expansion of production possibilities resulting from the availability of more units of the very types of resources previously available, technology being unchanged. Output can be increased by increasing the capital stock, discovering new natural resources or reclaiming natural resources currently considered useless for producing goods. An increase in labour force due to population growth can increase output but any increase in population is bound to increase the overall quantity of goods people desire along with the production possibilities. Therefore, scarcity can be reduced only if there is a population-reducing policy. Intensive economic growth can be obtained through the promotion of basic research and applied research; tolerating and encouraging entrepreneurship in terms of risky, innovating activity in the very proces of production itself; and production of improved types of resources such as sophisticated machinery or of more productive workers who are abundantly endowed with human capital through expenditures on education, healthcare and training for skill formation. (iv) Economic equity People will also have to focus on how the goods they are producing are being apportioned among themselves. As long as there is scarcity, the matter of apportionment or sharing or distribution is bound to be hotly debated issue in any society. In this connection there are notions of distributive justice and commutative justice. According to the advocates of distributive justice, goods should be apportioned among people by some central authority seeking to act justly in three ways. First, people may receive goods in accordance with their true, material needs and not with material

desires that are false. Secondly, Each person may get an equal share of the total set of goods produced in any one year. And thirdly, each person may receive a share of society’s total output corresponding to the number of hours that person worked. There are problems with the above three ways of achieving distributive justice. With regard to apportioning goods according to need, there are two problems: first, how to distinguish between true material needs and false material desires; and secondly, when all people are assured of getting what they truly need, they have no incentive either to contribute to the process of production at all or to contribute in such a way as to produce just the types of goods that are truly needed. These two problems can only be resolved through a centralised definition of needs as well as a centralised direction of labour. The problem with equal distribution is that if everyone were assured of the same income as everyone else no matter what, someone would have to make sure that people worked at all and also that they produced the types of goods people wanted. Again, making people work and telling them what to make will have to be done by a central authority. Apportioning goods according to hours worked, unlike the earlier two ways, has the advantage of providing a strong incentive to work, but it has two drawbacks in that the very young, the disabled or the very old who could not perform labour will get a zero share; and there would exist no incentive for people to produce the right kinds of goods; a person working 40 hours producing apples would get the same share of society’s output as would someone else spending 40 hours doing some work that nobody wanted. Thus, a central authority will have to tell people what they should produce during the hours they worked. According to the advocates of commutative justice, there is no need for a central human authority to bring about equity. Justice can be brought about through an impersonal process. According to them, output shares ultimately received by people would be fair (even if they should be highly unequal) as long as these shares had been determined by the free choices of all people, all of whom enjoyed as nearly equal opportunities as possible in the process of allocating resources to the production of goods. A just world is one in which all persons are given the chance, as far as possible, to own equal quantitites of all resources and are given an equal freedom to use these resources to produce goods and to trade resources and goods with others. The idea of commutative justice can be appreciated by conceiving of economic activity as something like a card game. As long as one distributes cards at the beginning of the game fairly (equal quantities of resources to all) and as long as one follows rules equally applicable to all (equal freedom to use resources, to trade resources and goods), the end result is seen as just. But in a fair card game, some win and others lose! Similarly, in a society aspiring to commutative justice, the incomes of people (and, thus, their shares of output) can be expected to differ in the end. Promoting Non-material Welfare So much on promoting material welfare. But it is well said that ‘man does not live by bread alone’. Non-material welfare, i.e. spiritual aspects of human welfare, in the process of promoting material welfare, has also been a botheration of mankind since long, i.e. since the beginning industrial revolution more than two centuries ago. Thus the success of any society must also be judged by the degree to which all individuals are given the chance to develop during their lifetime the manifold creative potential dormant within them; to participate on an equal basis with others and free from coercion by others

in all decisions affecting their lives; and to live in harmony with the natural world of which all human beings are a part. All this is what is meant by avoiding alienation from the self, others and nature, which is elaborated a bit as follows. Alienation means estrangement or being out of touch with oneself, others and nature. (i) Avoiding alienation from the self The root cause of alienation from the self is the larger production made possible by detailed division of labour and specialisation and exchange that people in all societies on earth have come to embrace rather than self-sufficiency based on small scale production and mastercraftsmenship. While division of labour as the supreme organizing principle of the productive process makes the society richer, it also enslaves people to repetitively working machines, in central workplaces, following rigid schedules of work and thereby causes degradation of human beings in terms of boredom, meaninglessness, atrophied muscles, tormented spirites, brainless and hated toil, etc. Work becomes joyless as the work process has crippling effects so much so that people fail to discover and develop their talents during their leisure time. And so, pursue the goal of challenging the scarcity of material things but do not lose sight of people’s deepseated need to develop themselves through a lifetime of creative activity, say the social critics. (ii) Avoiding alienation from other people The ideal in this regard is that individuals must have the chance to participate on an equal basis with others and must be free from manipulation and coercion or force by others, in all decisions affecting their lives. This can be realized by ensuring consumer sovereignty, worker sovereignty and citizen sovereignty. Consumer sovereignty exists when all consumers share the power to decide what types of goods are being produced and consumed. Worker sovereignty exists when workers share the power to decide what type of labour is being supplied and under what terms and conditions it is rendered. Citizen sovereignty exists when all citizens share the power to control their political leaders and thus to ensure themselves precious individual liberties like right to free speech and press, to peaceful assembly, to privacy in their homes, to habeas corpus, to speedy trial by jury, etc. (iii) Avoiding alienation from nature This means that people must learn to live in harmony with nature. People should not treat the natural world as nothing more than a resource to be exploited and destroyed. Man’s hitherto disregard for nature, the ever-growing size of man-made world and the high levels of all kinds of pollution of the natural world not only undermine the natural aesthetics, but, more importantly, could ultimately amount to the end of life on the planet earth, given that even the experts still do not fully understand earth as a single vast ecosystem, a system of interrelationships among plants and animals and people and climatic forces. Conclusion It is clear from the above discussion that a good society is one which fights scarcity in such a way as to promote not only material welfare but also non-material welfare of its people.

Lecture Notes 2
Defining Economic System and Classifying Economic Systems
Defining Economic System The set of institutional arrangements through which people in a society make choices about the allocation of their scarce resources and the apportionment of their scarce goods is called an economic system. One could also say that an economic system is a social arrangement through which people cooperate with each other on matters affecting their material or economic welfare which, inevitably, affects their non-material or noneconomic wefare as well. The institutional arrangements that we have in mind are (a) ownership status of resources, human, natural and capital; and (b) incentives for coordination. Classifying Economic Systems There is no universally acceptable scheme of classifying the world’s economic systems. However, two criterial have been employed quite often in order to avoid confusion in this regard. These time-honoured criteria classfiy economic systems by asking two crucial questions: Who effectively owns the resources and, therefore, has the power to make choices with them? What types of incentives are used to coordinate the choices of different resource owners? We elaborate the answers to these questions as follows. Capitalism and Socialism: Classification by Resource Ownership Modern economic systems can be classified on the basis of resource ownership, i.e. property rights in natural and capital resources, which together are also known as the nonhuman resources or the means of production. Nonhuman resource ownership accounts for the major differences among the world’s economic systems in the 19 th and 20th centuries. Since in modern times, the ownership of human resources is widely dispersed over many individuals, i.e. mosts persons have exclusive control over their own labour power, the ownership status of human resources is not particularly helpful in differentiating modern economic systems.

Table 1 shows how we can distinguish between capitalism and socialism on the basis of resource ownership. The formal ownership of nonhuman resources resides in: (1) 1. Private individuals Table 1 The effective control of nonhuman resources is exercised by: (2) Private individuals Self-selected small groups of private individuals A central government Designated individuals or small groups All group members jointly Name of the economic system (3) Capitalism

a. b. a. b. c.

2. Groups of people (possibly even in all of a society’s people as a group)

Socialism

Column 1 of Table 1 indicates two major arrangements with regard to resource ownership. First, the total of nonhuman resources is divided into numerous subsets the formal ownership of which is widely dispersed among many private households. Secondly, the formal ownership of nonhuman resources is vested in groups of people, possibly even in all of a society’s people as a group. Column 2 of Table 1 indicates some of the major alternatives concerning the effective control of nonhuman resources. Case 1a refers to a situation where private individuals are formal owners, while the same or other private individuals exercise effective control. For example, the owner-managed single proprietorship or the corporation run by a manager who has usurped most of the powers of individual stockholders. Case 1b describes a situation in which private individuals are formal owners, but they have joined their resources with those of other such individuals and are exercising control jointly as well. For example, partnership or corporation run by a manager strictly controlled by individual stockholders. Case 2a describes a situation in which groups of people (or even all people as a group) are the formal owners, while a central government is in fact exercising effective control. For example, public enterprises. Case 2b describes a situation in which groups of people (or even all people as a group) are the formal owners of nonhuman resources, while effective control over many subsets of these resources is exercised by designated individuals ( such as appointed or elected managers) or small groups of people (such as all the people actually working with these resources). For example, the Soviet collective farm or the Yugoslavian labour-managed firm. Case 2c, finally, describes a situation where groups of people ( or even all people as a group) are the formal owners of nonhuman resoruces, while the effective control is exercised by all group members jointly. For example, a commune. The economic system in which the formal ownership as of nonhuman resources resides predominantly in private individuals and the effective control of them is with private individuals or self-selected small groups of private individuals is categorised as capitalism; and the economic system in which the formal ownership of nonhuman

resources resides predominantly in groups of people or even all people as a group but the effective control is with a central government or designated individuals/small groups or all group members jointly, is categorised as socialism. Market Economy, Command Economy and Economy of Love: Classification by Coordination Incentives When different people own resources and independently make choices with them, it is possible for these choices to be inconsistent with each other. That is why every economic system needs some type of incentive to guide people into acting in such a way that their actions mesh with those of other people. There are three major types of incentive as follows: (i) Money One can arrange matters in such a way that people are always free to exchange for money any scarce good or resource that they own. Thus, owners of resources who wish to make choices requiring compatible choices by other owners of resources can apporach those others with conditional offers in terms of units of money. Changing prices in terms of money units can adjust the behaviour of people and make their choices consistent with each other. People will come to know of others’ preferences and capabilities through money. (ii) Command One can arrange matters in such a way that some people have the right to give specific orders to other people, telling them what to do or not to do. In this scheme, the others can be threatened for noncompliance and forced into acting or not acting in specific ways that remove the inconsistencies in the choices of different people. (iii) Love Instead of being made aware of other people’s wishes by their offers of money or their direct command accompanied by threat of harm, in this arrangement the internal incentive of goodwill or love solves the coordination problem. In light of the above discussion, we can classify economic systems as market economies if the money incentive is predominant; as command economies if the command principle is most prevalent; and as economies of love if the rule of love is the coordination incentive. Market Capitalism, Centralised Socialism, Market Socialism and Communal Socialism: Classifying Economic Systems by Combining Ownership and Incentive Criteria As Table 2 shows, Capitalism plus money as the coordination incentive as pointed out above results in market capitalism ( 1 plus A = market capitalism). Socialism with effective control by a central government plus command economy results in centralised socialism (2a plus B = centralised socialism). Socialism with effective control by designated individuals/small groups plus money as the coordination incentive results in market socialism (2b plus A = market socialism). Finally, socialism with effective control

by all group members jointly plus love as the coordination incentive results in communal socialism (2c plus C = communal socialism). Table 2 Resource ownership Coordination incentive Money (A) Command (B) Love (C) 1. Private individuals are Market capitalism formal owners, while effective control is exercised by private individuals also or by selfselected small groups of them 2.Groups of people, possibly even all of a society'’ people as a group are the formal owners, while effective control is exercised by a. A central government Centralised socialism b. Designated Market socialism individuals/small groups c. All group members Communal jointly socialism Conclusion Modern economy systems can be classified in terms of the four general types or models of economic systems by combining the criteria of resource ownership and coordination incentives. However, no real-world economic system fits any of these categories perfectly, but all actual systems as observed in the 20th century tend to come closer to one of these models than to the rest.

Lecture Notes 3
Ideologies and ‘Isms’ or Different Ideologies and Different Economic Systems
Ideology An ideology is a set of ideas, shared by a social group (e.g. a class or a nation) that (a) represents a certain picture of social reality; and (b) sets up desirable values and goals for society to strive for, or preserve. Capitalism Capitalism is a system in which productive assets/means of production/nonhuman resources are predominantly privately owned. Advanced western capitalist economies also contain smaller or larger publicly owned sectors and so they are mixed economies. Production in this system is primarily for sale with profit motive. Profit motive of free enterprise is considered the great engine of capitalism. In fact, according to some historians, it is the greatest economic drive in all history to date. Profit motive over time was subject to standards of humanitariansm and justice; in other words,it was subject to social restraints, moral as well as legal. Capitalism is also characterized by the institutions of inheritance and the law of contract. In order to better understand the evolution of capitalism, it is useful to distinguish between Earlier Capitalism (i.e. during 19th century/early 20th century)) and Contemporary Capitalism (i.e. during the post II World War). Earlier Capitalism The spirit of earlier capitalism is captured well by free enterprise, venturesomeness, acquisitiveness, competitiveness, urge to innovate, and, above all, rationality. Rationality means (a) deliberate subjugation of means to definitive end, which is the pecuniary gain; (b) careful weighing of alternatives; (c) keeping of systematic records; and (d) break with tradition, superstition and magic. A major debate concerns whether we can summarily say that the ideology of earlier capitalism was typically Laissez Faire. Laissez faire in French means leave business alone, let businessmen do what they want to do. According to this, earlier capitalism was individualistic capitalism with no interference in economic activity by the government. Government was only a ‘night watchman’ in terms of protector of life and property and enforcer of contracts. According to some historians, such a depiction is unwarranted because laissez faire prevailed only for a shorter period in England during the second half of the 19th century. Before that, in England as also other European countries, the ideology of Mercantilism prevailed. According to mercantilism, the state has the right and duty to both regulate and protect private enterprise for the greater power and glory of the state.

Even in USA of the late 19th century and very early 20th century (i.e. during the period between the Civil War and the Great Depression), the dominant ideology was one of modified laissez faire. There was government regulation of public utilities, there was government enforcement of competion in terms of ‘trust busting’, and large federal subsidies were given for railroad construction. Free competion was diluted with tariff protection. In relatively latecomers to industrialization such as Germany, France, Russia and Japan, laissez faire was in fact considered as a luxury to be avoided. Active government protection and promotion of domestic enterprises including state-owned enterpises was pursued before the First World War. Moreover, monopoly, cartel and powerful bank were the dominant capitalist institutions in these countries. Downside of Earlier Capitalism and the Rise of Various Anti-capitalist ‘Isms’ The downside of the earlier capitalism was that it led to the immiserisation of large working classes it created; the workers were crowded in urban slums, worked long hours for low wages and lived in harsh and unhealthy conditions inside and outside their factories. This downside of earlier capitalism was the source various anti-capitalist ‘isms’ including radical/socialist ideologies and political movements, often of middle class origin, for the workers and among the workers. Broadly speaking, socialist ideology emerged as a challenge to the capitalist order. The various anti-capitalist ‘isms’ as responses or reactions to early industrial capitalism can be pointed as follows. First, there was opposition from the educated class in terms of romanticisation of the past in relation to the rise of the ‘dark Satanci mills’ and the consequent loss of natural beauty of the rural landscapes. Secondly, the ordinary workers showed opposition by smashing the machines and they were known as the Luddites. Thirdly, the skilled workers showed opposition by organising labour unions despite police repression and hostile employers. Fourthly, the Utopian Socialists argued that private property and selfishness were the roots of social evil; and they imagined the perfect society in terms of communistic or cooperative principles of work and income distribution. Fifthly, Scientific Socialism fathered by Karl Marx and Friederich Engels emerged as the most pervasive anti-capitalist ideology throughout the world, and inspired the rise of various kinds of socialist economic systems in the world. In order to appreciate the ideology of scientific socialism, we will have to understand the Marxian Theory of History and Marx’s Analysis of Capitalism. Marxian Theory of History and Marx’s Analysis of Capitalism In the Marxian theory of history, a society is constituted by the Base ( in terms of economic facts of life) and the Superstructure (in terms of law, culture, religion, art, philosophy, etc.). The economic facts of life are sharply capture by the concept of mode of production which means on the one hand ‘productive forces’ (i.e. production capacity and level of technology) and ‘production relations’ (i.e. relation of various classes such as landlords, capitalists, workers to the production process). According to Marx’s theory of history, all mankind must pass through six major historical stages with corresponding modes of production, viz. (1) Primitive (tribal) Communism; (2) Slavery; (3) Feudalism; (4) Capitalism; (5) Socialism; and (6) Communism. Under (1), (5) and (6), there is absence of private property in that means of production/nonhuman resources are owned in common. And there exists no exploitation in terms of appropriation of the product of

labour of some class or classes (e.g. slaves, serfs, workers) by others (e.g. slave owners, feudal landlords, capitalists). According to Marx and Engels, the history of society is nothing but history of class struggle or antagonism between classes. In socialism which comes about after the overthrow of capitalism, egalitarianism matters and the collective is above the individual. The scarcity problem continues to exist. External material incentives are used to mobilise the energies of the people for increasing output while distribution of output is according to the labour performed. In communism as the ultimate destination, there is abundance. There are no external incentives. Distribution is according to needs. There is no money, no finance, no prices, and no state as the supporter of an exploiting class. In marching towards abundance, technological progress is the mechanism for transition from one stage to another. Technological progress brings about radical improvements in productive forces which in turn gives rise to a new class which seizes power and refashions the ‘production relations’ to its own liking and needs. When productive forces improve, production relations as institutions do not change to be compatible with it. At first they correspond to productive forces, i.e. they enable the technology and capacity of the economy to produce fully but they lag behind and become a hindrance to the further development of the productive forces. This problem in respect of capitalism is solved by the capture of power by the working class. In Marx’s analysis of capitalism, there are two antagonist classes, viz. the capitalists (owners, managers, employers of labour) on the one hand and on the other, a large working class which is propertyless, i.e. it has no source of livelihood other than sale of its own labour power. Labour is the source of all economic value. Workers sell their labour power and get wages which are at the level which is just necessary for the reproduction of labour force, i.e. for subsistence and bringing up next generation of workers. There are always unemployment levels which do not permits the wages to rise. Technology is so advanced that workers always produce more than their own subsistence needs so much so that surplus value is approriated by the capitalists (for their own consumption and savings to finance further investment and to make payments to other property owning classes in terms of interest for financiers and rent for land owners). The dynamics of capitalism develops in such a way that the ownership of capital and all power becomes more and more concentrated over time. Society’s polarization increases as the workers become poorer and poorer. Capitalists in their constant search for profits overinvest resulting in crises due to decline in long run rate of profit or underconsumptionism. The only way out of this mess is for the workers to overthrow the capitalist order by seizure of power through a revolutionary battle against the capitalists. Although Marx’s views were very appealing and widely influencing, his predictions did not come true. Capitalist development did not show extreme polarization. Nor did it show progressive impoverishment of the workers and rising revolutionary fervour among the working classes. The material levels of the masses did indeed increase. Moreover, there was rise and enlargement of a conservative white collar working class.

Rise of Socialism The rise of socialism in Soviet Union (via Leninism and Stalinism), Yugoslavia (via Titoism), China (via Maosim), Cuba (via Castroism) and many other countries in the early and later 20th century was characterised by certain commonalities as follows: (1) Seizure of power by a professional conspiratorial party led by a small revolutionary elite which offers determined leadership and which is highly disciplined, internally authoritarian and which speaks in the name of the working class; (2) economic backwardness in terms of a backward agrarian context; (3) a poor, disaffected landhungry peasantry as the instrument of victory; and (4) war against an invader or a colonial power. As the ideology of the highly authoritarian small party which is obsessed with the purpose of achieving industrialization and military power at any cost is not shared by the bulk of the population, the revolutionary elite resort to political repression and terror. Stalin was the most absolute of modern dictators as his regime was characterised by the highest degree of ruthless and bloody totalitarianism. Maoist China and Castroist Cuba differ from Stalinist Soviet Union in that the former two had different internal structure and used internal moral incentives to mobilise the energies of people. Contemporary Capitalism Before 1950, capitalism was attacked for having caused terrible wars, business cycle of the 1930s, great inequalities in income and wealth, colonialism, unemployment and much social tension. But in the post Second World War period up until the mid-70s, capitalist development went through a ‘Golden Age’ in terms of rapid economic growth, rise in average consumption levels and minimisationof business fluctuations and unemployment. The significant features of this golden capitalism were as follows: (1) There was politico-economic equilibrium among and mutual acceptance of business, especially big business, government and organised labour. Active intervention of the government for stability, promoting growth and reducing insecurity and inequality gained currency. In some countries, government planning was deep enough to have substantial nationalised sectors. Collective bargaining by organised labour was accepted by the employers. (2) New managerial ideology in terms of professionalism on the part of the management in large corporations for taking care of not only profit motive but also responsibility to various elements within and without the corporations (like employees, customers, suppliers, general public and stockholders). (3) Declining militancy of labour which moderates its political goals by accepting the social order.

Democratic Socialism in Europe Social democracy or democratic socialism as the ideology of moderate, reformist democratic socialist parties in countries such as Sweden and Germany was characterized by the following features: (i) Revisionism in terms of seizure of power through ballot (i.e. political democracy); (ii) Emergence of Christian Socialism based on the ethical teachings of Christianity, especially of the Protestant type against individualism, greed, inequality, poverty of working class, alienation, unemployment, distortion of social and cultural values, crime, and war; (iii) Respect for political freedom, democracy, individual security and elimination of inequality of all kinds; and (iv) Recognition of the middle class aspirations of the working class.

The means adopted by social democrats to achieve their goals were initially in terms of welfare state and nationalization of most important industries. But later on with the experience of excessive bureaucratization and enhancement of government power, the social democrats abandoned their obsession with nationalisation and opposition to private property and began to believe in the control of industry for private and social ends. Ultimately, democratic socialism shaping the mixed economic systems in Europe evolved to have the following features: private ownership as a rule, public ownership only when necessary, maximum reliance on market economy supplemented by government control and welfarism, equality of opportunity in education and safeguarding of political democracy.

Lecture Notes 4
Features of Centralised Socialism as a Pure Model and as a Case Study of the Former Soviet Union
Centralised Socialism as Pure Model The following features characterize centralised socialism as a pure model: (i) There exists public ownership of all nonhuman resources or means of production. These are effectively controlled by the central government. People as owners of their labour power cannot perform anything without the use of complementary productive assets that the government controls. (ii) There is no private decision making at all. All economic power is concentrated in the government hands. Making and enforcing decisions, general to minute, is done by the government. (iii) The various separate economic activities of all people, given the interdependence in terms of division of labour and specialisation of the modern economy, are coordinated by the system of Visible Hand, i.e. preparing a Common Plan which specifies everyone’s future actions in detail and issuing verbal commands to various people who in turn execute the government’s will passively and obediently. Productive enterprises receive verbal commands with regard to output quotas, i.e. minimal quantities of how much of what they should be producing and delivering to designated recipients are specified. They also receive orders regarding input norms, i.e. maximal quantities of inputs to be used per unit of designated outputs. The productive enterprises are supposed not to use input quantities more than the specified input norms. Verbal commands specifying the quantities of nonhuman resources are also given to administrators in charge of nonhuman resources. And households receive orders regarding supply of labour. The government officials and individual households are made to obey the output quotas and input norms issued to them through positive and negative and material or moral incentives. Positive incentives include praise, medals, tying distribution of consumer goods to the proper performance of assigned tasks, etc. For example, those who went willingly to their designated places of employment and worked hard might get a larger share of consumer goods than others who were less obedient. Negative incentives include castigating (i.e. severe reprimanding), fining, jailing and shooting for noncompliance.

Centralised Socialism as Case Study of Stalin’s Economic System in the Former Soviet Union The major features of centralised socialism under Stalin’s rule in the Soviet Union during the early 1920s to early 1950s were as follows: (a) The objective of the system was to achieve the most rapid pace of industrialisation possible. (b) There was predominantly public ownership of the means of production. Outside agriculture, there were state enterprises, including enterprises which were simply nationalized and put under the control of the managers appointed by the state). Within agriculture, private property was eliminated by collectivisation. Private property was transferred to three kinds of government controlled institutions, viz. state farms (huge farms controlled by government appointed managers, with the average size of 30,000 acres); collective farms (large farms organised as compulsory producer cooperatives by pooling of separate land and livestock holdings of numerous peasant households); and machine and tractor stations (state enterprises which controlled all the agricultural implements of the formerly independent peasants. As peasants protested against collectivisation by destroying their buildings/inventories and slaughtering livestock, the machine tractor stations were created to give equipment to collective farms in order to protect the agricultural capital stock from damage that peasants might inflict upon it whether out of ignorance or malice. Those peasants who resisted were exiled or exterminated. Around 5 million peasants were killed for opposing collectivisation. (c) The central planning process was one of a hierarchically organised system of central planning wherein the leaders of the Communist Party to took decisions at the top as all economic and political power was wielded by them. The Party leaders determined the objectives of the plan to be achieved on the basis of the collection of data on the past performance of the economy and the Party directives were conveyed to the Gosplan, the state planning commission. Gosplan prepared the tentative Central Plan in terms of output targets and input requirements which were conveyed to productive enterprises producing thousands of ‘important’ (i.e. high priority) commodities. And on getting feedback from the enterprises officials from below, the Gosplan undertook revisions and finally made the Plan into a law. (d) A mixture of command-love-money incentives was used by the Party leadership in order to get the country’s peasants, managers, administrators and workers to act precisely as specified in the final Plan. Positive incentives included a system of Awards and Decorations (e.g. ‘Order of Lenin’, ‘Heroes of Socialist Labour’) to individuals and groups who executed the commands with great enthusiasm. Negative incentives were threats and often severe punishment for disobedience. Punishments included, for example, demotion of a manager to that of an ordinary worker, redeployment of a manager or worker to a less desirable job in a less desirable location, criminal prosecution

for mishandling of public property along with a sentence to a forced labour camp in Siberia, etc. In order to make the people obey, punishments was extended to parents, spouses and children, distant relatives, neighbours and fellow workers! Love incentives basically amounted to propaganda asking people to do self-criticism and drive out selfishness and instill in them the inner need to serve their fellow citizens, their country, and the cause of socialism. Money incentives included widespread use of money and administrative prices. (e) In order to influence the behaviour of the managers the following monetary incentives were used. First, they were expected to do internal auditing by keeping monetary accounts at government set prices, of the gross value of output, input costs and profits in order to achieve technical efficiency. Secondly, the Gosbank, the state bank which was the monopoly bank with thousands of branches in the country did external auditing of the productive enterprises by monitoring the inter-enterprise transactions and keeping a running account of plan execution. Thirdly, managerial bonus system was used as the most powerful incentive. According to this, the managers got salaries plus bonuses for fulfilling and overfulfilling the output targets. (f) In order to influence the behaviour of the workers, workers were given money wages for labour performed and were allowed to spend it freely on consumption goods either at the state retail stores or in the free collective farm market. There were money wage differentials to account for the type of work and geographical location. Individual and group bonuses were also given to workers. There was also rewarding by in-kind distribution of consumer goods. (g) Stalin was clever enough to introduce powerful incentives in Soviet agriculture. Millions of acres of land were made available to collective farm households, state farm workers and certain others (such as factories, hospitals and schools) as private garden plots. Each of these plots was less than 1 acre in size. Their owners were free to grow anything they liked on these plots and they could even hold some animals privately. More than that, they were free to sell their privately produced output on so-called collective farm markets to anybody at any price freely determined by supply and demand. The consequences were amazing indeed in terms of larger output creation. Problems with Managerial Behaviour Managers’ greed for maximising their bonus payments led to the following problems: (a) Managers understated the productive capabilities of their enterprises in order to get low output quotas from the central managers. Whenever they succeeded, available resources were underutilized even as they personally benefitted. (b) Managers overstated their input requirements and when they succeeded, they hoarded the resources in warehouses and there were idle workers on payroll. They drew on these resources to fulfil and overfulfil the output targets or whenever they needed inputs which they did not receive.

(c) As output targets were specified in physical quantities, the problem of low quality of output emerged. For example, if a manager were given the choice between producing 100 tons of perfect steel and 110 tons of brittle steel, he tended to opt for the latter. (d) There was shortage of spare parts and lack of service. Again, if there were to be a choice between producing 500 tractors with spare parts and a good service organisation to back up their future operations and 550 tractors without spare parts and service, managers would opt for the latter. (e) There was disregard of the wishes of the customers as to composition of output. This was the so-called assortment problem which simply meant mismatch between what is produced and what is wanted in the system. (f) The timing of production and deliveries was badly affected. This was known as the problem of ‘storming’. Production and deliveries did not occur on a regular basis, given the quarterly accounting deadlines. In fact, it was typical in the Soviet economy to produce at a fairly leisurely pace during the early part of any calendar quarter, but later the pace of activities quickened and turned into a furious tempo as the date of reckoning approached. Problem faced by the Workers as Consumers The typical problem faced by the people as consumers was the so-called ‘Supply Problem’ in terms of the problem of shortages and surpluses faced by them in the state retail stores through which the government distributed the consumer goods due to the use of fixed prices instead of flexible pricing. As the figure below shows, it was a rarity to find the price fixed by the government (10 rubles per unit) as the equilibrium price in terms of the demand D2 in relation to the supply of 16, 000 units offered for sale. Typically demand was more or less intense as indicated by D3 or D1 so that there was either shortage or surplus which could have been avoided through flexible pricing, for example 15 rubles in case of shortage and 5 rubles in case of surplus.

Problem faced by the Peasants in Collective Farms The collective farmers produced and delivered according to the governmentally set quotas. When they delivered, they were paid ‘agricultural procurement prices’ that were fixed by the government. Whenever they purchased inputs from the government administrators, they paid the so-called ‘enterprise wholesale prices’ which were again fixed by the government for interenterprise transactions. Sales revenue (output produced

multiplied by agricultural procurement prices) minus costs (inputs purchased at enterprise wholesale prices) amounted to residual income which was divided among the collective farmers at the end of the year (in accordance with ‘labour-day’ points accumulated by them during the year), and this dividend became their personal reward for working on collective farms. By manipulating the prices involved, Stalin saw to it that the collective farmers’ personal income was extremely small, which made it impossible for them to buy any significant quantities of industrial consumer goods. Not surprisingly, the collective farm residual income was a poor incentive to induce collective farmers to their best. Collective farmers typically malingered on the collectively owned land. The Underground Economy The problem with the official economy was the ‘supply problem’, i.e. the inability of the people to obtain the types of goods they wanted. People were frustrated because some goods were simply not provided and others were not available at the right time in the right amounts or in the right quality. And so people very soon figured out semi-legal and illegal ways of getting what they wanted. Thus, there emerged an enormous underground economy beyond the control of the official economy, i.e. outside the control of the Gosplan. In this economy, people performed semilegal and fully illegal activities in order to enhance their welfare. They allocated resources and acquired goods in ways not specified by the Central Plan. The managers were notorious for their semilegal behaviour, i.e. for their adoption of illegal means to achieve legal ends. Officially, this was deplored but tolerated. The managers resorted to three kinds of illegal means. First, they created and carefully nurtured personal connections with influential people in order to get more input allocations and lower ouput targets. Secondly, they promoted black markets barter. Most enterprise managers surreptitiously employed special kinds of ‘expediters’ or ‘pushers’ who scoured the economy for needed supplies and arranged illegal exchanges of equipment and rawmaterials among enterprises, given the problem of wrong deliveries faced by each enterprise. Thirdly, managers resorted to ‘empire building’. This meant that they they solved their ‘supply problem’ through self-sufficiency, i.e. their own production. A vast illegal enterprise sector came into existence due to stealing of all types of inputs and using them in illegal enterprises. They came into existence in three ways: first, as operations behind an official façade, i.e. as private firms behind state enterprises; secondly, through the putting out system wherein some private entrepreneurs engaged large numbers of workers all of whom did piecework in their own living quarters. They provided the workers with the needed rawmaterial and marketed the product after collecting it from them; and thirdly, as home-based operations, i.e. many commodities and services were produced in their own homes by private producers The underground economy thrived as bribery and corruption became a way of life in the Soviet Union despite the bloody dictatorship of Stalin and his secret police.

Lecture Notes 5
Performance Assessment of Centralised Socialism as a Pure Model and as a Case Study of the Former Soviet Union
Introduction Whether an economic system has fared well in fighting the scarcity problem is judged on the basis of whether that system has done well in relation to the list of actions required to be done to promote not only economic or material welfare through full employment, efficient employment, growth, extensive and intensive and economic equity but also noneconomic or non-material welfare through avoiding alienation from self, others and nature. We elaborate this in respect of centralised socialism as follows. Performance Assessment (i) Full employment

In the pure model of centralised socialism, the central government defines and achieves full employment. The central government achieves it easily because the central planners can draw a plan the execution of which would utilize the available resources precisely. But the critics think that this is not possible. According to them what is logically conceivable may not be practically possible. According to the critics, in saying that the central government can achieve full employment always, the central government is treated as God with the characteristics of omnipresence, omnipotence and more importantly, omniscience. But this is a mistaken view. Take the case of omniscience. This is impossible due to the so-called ‘knowledge problem’ which means that knowledge is not available to a single mind in its totality but is found in billions of dispersed fragments in the minds of countless separate individuals. Moreover, workers and managers can give false reports to the central planners. The case study of former Soviet Union more than amply demonstrated that unemployment was very much in plenty. There were three kinds of unemployment found in plenty. First, there was seasonal unemployment. For example, agricultural and construction workers faced forced idleness during winter which was not reflected in unemployment statistics. These workers were on payroll and received 50 per cent of their wages eventhough they did not do anything. Their unemployment was therefore hidden. Teenagers looking for jobs during vacation were not hired by managers due to the law that they should be paid full wages even for part time work. So, their unemployment too was hidden. Secondly, there was frictional unemployment. This refers to unemployment due to the long delays between leaving school and taking a first job and unemployment of

workers as ‘rolling stones’, i.e. those who made voluntary quits and hopped from job to job. In Soviety Union, voluntary quits were not allowed till the mid-50s. In the pre1950s period, people were forbidden to quit jobs or absent themselves without permission from enterprise managers. Moreover, there were penalties even for quitting with permission (e.g. denial of sick leave for 6 months, loss of bonuses, etc.). Thirdly, there was systematic unemployment due to the errors in plan formulation and execution resulting in the so-called ‘supply problem’ in terms of shortages and surpluses. Due to imperfectly formulated central plans, and delivery of the rawmaterials at the wrong time or in wrong assortments, complementary workers and machines were idled. (ii) Efficient employment

In the pure model of centralised socialism, there would be no technical inefficiency at all since the central planners can enforce their decisions by commands backed by rewards and threats. But the critics argue that technical inefficiency can arise for two reasons. First, there could be misinformation from managers and workers. Secondly, in centralised socialism distributive justice is pursued in such a way that people’s income is divorced from their contribution to production and consequently the so-called incentive problem arises. For example, if everybody get the same income, some may decide to work less intensely. The case study of former Soviet Union shows that technical inefficiency was very common in that country for two reasons. First, given the monetary incentive of bonus, the managers behaved in terms of understating output possibilities and overstating input requirements in order to fulfil and overfulfil targets by deliberately hoarding labour and other inputs and drawing on them as and when required. Consequently, resources were apparently employed but actually redundant. In so far as some resources were not utilised to produce output, there was technical inefficiency. Secondly, there was technical inefficiency due to widespread lack of labour discipline in terms of workers working at a snail’s pace, being absent for hours at a time, and being drunk on the job. Absenteeism and alcoholism were two terrible problems in Soviet Union in that they could not be successfully tackled despite major campaigns against them. As regards allocative efficiency, the pure model says that it is very much possible but the critics are sceptical about it due to the ‘knowledge problem’ mentioned above. Scientific knowledge of general applicability can be centralized but unorganised knowledge of particular applicability which is present in fragments in countless individuals cannot be completely appropriated by the central government. (iii) Economic growth, extensive and intensive

According to the pure model, rapid growth can be achieved easily because the central planners have total control over the composition of the set of final goods produced. The critics argue that while extensive growth is possible, there is no scope for intensive growth under centralised socialism insofar as the managers of productive enterprises cannot deviate from the tasks assigned to them by the central plan and take risks of trying new ways. Even if they were to try innovation through permission, it would be futile due to the inherent delays.

The case study of former Soviet Union demonstrates that the strategy of extensive growth, i.e. achieving more output through more inputs was pursued during the 19281940 period. Primary emphasis was given to growth of industry rather than agriculture. Stalin was obsessed with the development of such basic and heavy industries as coal, iron, steel, electric power, locomotives, tractors, machines, etc. Labour inputs in terms of no. of hours worked increased due to pressure on adults not to remain voluntarily unemployed and not to lead an ‘antisocial parasitic way of life’. Soviet Union witnessed very high labour force participation rates of males and females—in fact, the highest in the world—also because of shifting people from agricultural part time employment into industrial full employment. Soviet Union also maximised the discovery and exploitation of additional natural resources. The 1940-1950 period was a terrible disaster, with enormous losses in productive capacity and all resource base due to German invasion and retreat, for Soviet Union. The country was reduced to a wasteland with around 20 million Russian dead. There was a steady decline in the rate of growth since the 1950s due to (a) fewer opportunities to pursue the favoured strategy of extensive growth; and (b) an inability of the central planners to harness the potential of the alternative strategy of intensive growth. Extensive growth based on expansion in labour resources, capital resources and natural resources could not be sustained due to the following reasons. In the case of labour, the following barriers were found. As the labour force participation rates for men and women were already pushed to their practical limits, this source of increased labour supply was closed. The source of additional labour by means of shifting underemployed agricultural labour to the industrial sector was also dried up. Further, unlike Stalin who forced people to work more hours per week, his successors reduced weekly hours. Worst of all, the great disasters of the Soviet past in terms of emigration, famine, purges and Second World War decreased the ratio of males to females in the population and produced remarkably slower annual increase in the potential labour force. In the case of capital, there were two reasons why capital resources could not be expanded despite the imposition of heavy sacrifices in consumption goods in order to ensure that a large percentage of each year’s GNP consisted of new capital or investment goods. First, for a given production of new capital goods, past increases in the capital stock were impossible to repeat to the extent that an ever greater percentage of each year’s new capital goods now just replaced the wear and tear of a much larger and older capital stock. Secondly, unlike in the past, when investment was stressed in sectors with high marginal productivity of capital, more of it was now channelled into sectors with low marginal capital productivities. In the case of natural resources, new virgin lands could not be brought under cultivation any more for increasing agricultural output. In the areas of old land, more and more resources were required to get the yield per acre that was achieved in the past. The same problem was experienced in the exploitation of minerals and fuels. Intensive growth could not be achieved for the following reasons. First, despite commendable progress in expanding high quality education relevant for economic progress, output increases could not be obtained due to the motivational deficit as reflected in widespread alcoholism, absenteeism and malingering. Productivity increases based on improvements in health care could not be derived as there were many drawbacks in health care provisioning. As regards, technical advance, the Soviets

organised the wholesale copying of the most advanced production techniques from the West, but did not update them continuously. At the enterprise level, there was no innovative activity on the part of the managers in terms of experimenting on a small scale and continuosly with new improved methods of production. Moreover, innovation decided upon and commanded by the central planners was a slow process as reflected in, for example, the slow Soviet changeover from coal to oil and gas as major energy sources. (iv) Economic equity

The Soviet government did not pursue distributive justice according to need or equality or hours worked, yet it maintained that equity was achieved because (a) no one received income from the private ownership of nonhuman resources and (b) the differences in people’s incomes were government determined and not the result of ‘blind’ market forces. The empirical truth was that there were enormous differences in the incomes of the people. At the top of the Soviet income pyramid were the political and economic leaders, followed by the military brass, the professional managerial elite, and superstars in arts and sports. Below them, in turn, were the industrial workers, followed by the peasants at the very bottom. There was no scarcity problem for those at the top of the pyramid. (v) Avoiding alienation from self

People’s alienation from themselves surely existed in the Soviet Union no less than in other industrialzed countries due to the division of labour and the consequent enslavement of people to machines, to work outside the home, to rigid work schedules and to mammoth workplaces. Moreover, alienation from self was much worse as people were taught to submerge their individuality in the community at large, to be a willing cog in the great central plan, not to go off and do their own thing. The Soviet society was one where conforming to the Party line had the highest priority. (vi) Avoiding alienation from others

Centralised socialism fares very badly in this respect. Powerful bureacracy with its supposedly ‘supreme wisdom’, imposes its will on the people. In other words, people are forced to accept the preferences of the central planners. There is no consumer sovereignty, no worker sovereignty and no citizen sovereignty. (vii) Avoiding alienation from nature

Although in the pure model of centralised socialism, the central planners hold the power to preserve nature, the Soviet case study shows that the central planners were not sensitive to nature. All kinds of pollution were everywhere in Soviet Union, and they were as bad as pollution elsewhere.

Conclusion Contrary to official propaganda, the Soviet case study shows that continuous full employment does not exist. There is seasonal unemployment (due to weather) and frictional unemployment (due to high labour turnover). Above all, there is widespread hidden unemployment caused by errors in plan formulation and execution (the ‘supply problem’). Technical inefficiency is widespread, in part the result of managerial input hoarding, in part caused by a general lack of labour discipline. Allocative inefficiency is also ubiquitous. Economic growth has been impressive until the late 1950s, but the overall rate of growth has steadily declined since. This can be explained by vanishing opportunities for extensive growth and an inability of central planners to harness the potential for intensive growth (especially through technical advance). There is no distributive justice. But the Soviet government claims that its highly unequal distribution of income is just. As to alienation, whether from the self, from other people, or from nature, Soviet society scores poorly on all counts.

Lecture Notes 6
Features and Performance Assessment of Market Socialism as a Pure Model and as a Case Study of the Former Yugoslavia
Market Socialism as a Pure Model The Polish economist, Oscar Lange, had conceptualised socialist market economy as a pure model. It is a world in which the nonhuman resources are collectively owned but the effective control of these resources is shared by numerous individuals throughout the economy. Their actions would be coordinated by markets in which all resources as well as goods would be bought and sold. In a nutshell, he imagined the possibility of socialism in terms of ownership and its operation by economic rationality through market competition. In the Lange model of market socialism, there are four major types of actors, viz. the central planning board; private households; socialist enterprise managers; and socialist industry managers. The central planning board oversees the economy. It performs 5 functions as follows. First, it appoints tens of thousands of enterprise managers, one for each productive enterprise. It also appoints a small number of industry managers, one for each industry. Secondly, It determines the percentage of Gross National Product devoted to investment and makes available investment funds through a loanable funds market. It gives the enterprise managers loanable funds for investment against interest payments. Thirdly, it supplies the available services of nonhuman resources (e.g. so many blast furnace hours per year, so many acre hours per year) against the demand from managers who pay rent for them. Fourthly, it taxes households and also collects net profits (total profits minus total losses of the enterprises). The total income thus obtained is disposed off in three ways: as loanable funds; as government spending (on defence, healthcare, education, vocational training); and as social dividend (people’s share in interest, rent and profit income). Fifthly, it plays a role in price setting. Prices of labour and private consumer goods are established in free markets. But all other prices of inputs and outputs are fixed by trial and error in the offices of the central planning board so that they approximate to equilibrium prices: if there exists surplus, price is reduced and if there is shortage, price is raised. Members of the private households are free to work in the location and occupation they liked for money wages. Their disposable income is wages plus social dividend minus taxes collected by the government. They are free to spend the after-tax income on consumer goods they liked. The socialist enterprise managers make their own input and output decisions on the basis of certain general rules. They determine optimum input quantitites to be used by equating the falling marginal value product of the input used with the input’s price.

They determine the optimum output level to be produced by equating the rising marginal cost of production with the output’s price. The monetary receipts obtained (on selling goods to other enterprises, households, and government) minus the monetary expenditures (i.e. costs incurred on buying services of resources in resource markets and on buying capital goods in goods markets) is equal to profits. If an enterprise makes loss, that is covered by the government from the profits made by the profit-making enterprises. The job of the socialist industry managers is to expand, contract or liquidate existing enterprises or to create new ones. They also follow certain rules of behaviour. They exapnd the size of an existing firm or establish new ones when the firm makes profits. And they contract or abolish a firm when it makes losses. Market Socialism as a Case Study of Former Yugoslavia In the 1950s, Yugoslavia was the first to emerge as a socialist market economy. This was a nation formed by six republics coming together, viz. Slovenia, Croatia, BosniaHerzegovina, Montenegro, Macedonia and Kosova. The charismatic leader of the country, Tito was famous for two reasons. Not only did he unite the potentially conflicting six republics but also did he abandon the Stalinist centralised socialism which he embraced first. He angered Stalin and faced the threat of Soviet invasion not only for this but also for opposing the domineering leadership of Stalin among the socialist countries. The progress of market socialism under Tito can be appreciated by examining three time phases, viz. 1950-1965; 1965-1971; and 1971 to 1980s. (i) 1950-65 : Decentralisation, privatization and worker self-management

Tito executed brilliantly two ideas of Karl Marx, viz. that workers should collectively manage, and that the state should wither away. The latter idea was implemented in terms of dismantling of central planning board in favour of markets. Political power shifted from central government toward republican governments and still lower-level governments. The role of the central government was to bother about 5 issues: deciding the composition of Gross National Product between investment goods and consumption goods; regional balance; volume and direction of foreign trade; economic equity; and provisioning of collective consumption goods like defence, education, and research. Agriculture was privatized with the maximum size of a private farm being 25 acres. In industry and services, tiny private firms employing a maximum of 5 employees were legalised in activities such as construction, handicrafts, retail trade, service sector, etc. For example, private tailors, butchers, doctors, plumbers, restaurants, taxis, etc. were encouraged in this regard. All enterprises with staff more than 5 employees were categorised as socialist and these were run like democracies, not as autocracies. In fact, larger socialist enterprises were run like representative democracies. The workers elected and supervised their representatives (managers) constituting a workers’ council which in turn elected a management board which in turn in conjunction with officials of local government and industry trade association appointed an enterprise director. (ii) 1965-71: Consolidation of self-managed firm

Government, social organisations, existing enterprises and groups of individuals were the founders of the firms. They took initiative in choosing the kind of firm, its location, and in providing for its initial plant and machinery and labour, but the effective control of the firm was left to the workers. Thus the separation of the founders from subsequent decision making characterised a salient feature of the self-managed firm. The workers not only offered labour services but also carried out entrepreneurial functions. And so wages and profits got mixed up. Their objective was to maximise residual income per worker. Residual income is revenue from sales minus costs incurred (on rawmaterials and services got from others, depreciation costs, interest to banks, taxes to government). The third feature of the self-managed firm was in relation to how the residual income was disposed. Residual income could be used in three ways: (a) reinvestment; (b) collective consumption (i.e. construction of housing, swimming pools, tennis courts, etc.); and (c) distribution as personal income among workers on an equal or unequal basis, whatever the workers decide, but subject to the central government’s condition that workers must get an amount at least equal to the minimum hourly wage. In case the personal income does not meet this condition, the government ensured it throw borrowings from banks. When it comes to deciding on the disposition of the residual income in the above three ways, the workers would obviously prefer maximising its dispositon in terms of (c). (iii) 1971 to 1980s: The bargaining society

While in the first phase Tito downgraded the central planning and preferred markets, during this third phase, Tito downgraded the role of markets and instead preferred the role of bargaining as a better coordination mechanism. Perhaps Tito thought that this was a better way of preserving the unity of the Yugoslavian federation of six republics. How to coordinate separate activities of people by means of bargaining which leads to consensus via self-management agreements was the botheration of this phase. Bargaining is at three levels. At the intra-enterprise level, representatives of different activities will exchange information and arrive at consensus. At the interenterprise level, representatives of different enterprises will do the same. At the interregional level, representatives of different regions will also do the same. At the national level, a similar procedure is followed by representatives of different economic, social and political groups in order to arrive at consensus (social compacts) regarding macroeconomic issues like balance of payments targets, inflation targets, regional development, private versus public sector, etc. Performance Assessment of Market Socialism While the pure model says full employment is possible, the case study shows larger open unemployment. Unemployment was severe possibly due to the incentives peculiar to worker collectives, viz. that workers were interested in maximising residual income per worker so much so that there is an incentive to decrease the number of workers in the firm. Again, while the pure model does not allow for technical inefficiency and allocative inefficiency, both inefficiencies were found to be high in Yugoslavia. For example, agriculture was overpopulated and agricultural productivity was low. While the pure

model talks about achieving optimum growth by determining the investment share of Gross National Product, the case study shows that high growth was achieved initially in terms of extensive growth but later on growth rates declined. Workers had an incentive to maximise their personal income rather than to maximise the reinvestment portion of the residual income. As regards economic equity, the pure model points out a mix of commutative justice and distributive justice as people get an equal share of property income in the name of social dividend, people are free to choose jobs and change them as they wish, and all people are equally free to avail themselves of the generous opportunities for healthcare, education and training. But the case study shows considerable inequality in the system. As regards alienation from self, it was there in terms of division of labour and specialisation but it was much less in terms of people having considerable freedom to shape their lives. As regards alienation from others, the record is mixed, but undoubtedly superior to that of the Soviet Union. Consumer sovereignty is fairly complete as far as the make up of the consumption portion of the Gross National Product is concerned. Firms cater to the wishes of consumers as expressed in market demand. So far as the size of the consumption portion is concerned, individual consumers have considerably less power. On the one hand, governmental units at various levels have consistently pushed for an extremely high rate of saving and investment, using taxation and persuasion for the purpose. On the other hand, any individual workers can easily be forced through the majority vote of fellow workers, to save more or to save less than is preferred. According to the advocates of market socialism, worker sovereignty is more complete in Yugoslavia than anywhere else in the world. But the critics say that it is a sham because the selfmanagement system did not emerge as a result of worker initiative but was imposed on the workers from above. Furthermore, the workers soon realized that it was impossible for an entire firm’s workforce to exercise direct control over everything. As a result, the workers do not manage; management is done by professional executives considered as ‘the new class’. Citizen sovereignty was considerably more extensive in Yugoslavia than in the rest of Eastern Europe. Although Yugoslavia was a one-party state and political criticism was a taboo, at the same time, there were fewer signs of an all-devouring bureaucracy and the secret police. Moreover, the Yugoslavs were the only socialist citizens in Eastern Europe who could travel to the West in large numbers. As regards alienation from nature, Yugoslavia did not fare well as pollution was widespread. Conclusion It is clear that market socialism was relatively better than centralised socialism but it too had many shortcomings with regard to both features and performance as highlighted above.

Lecture Notes 7
Communal Socialism
The Idea Communal socialism is based on the vision of an intentional community or commune. This is a voluntary and deliberate association of people who value togetherness above all. They seek to extend intimate, sharing relationships beyond the immediate family. They want to establish a whole new way of life in which all barriers among people are broken down and individuals merge with other individuals to become as one. There are two significant obstacles to achieving communal socialism. First, there is the institutional barrier of private property in the means of production (i.e. nonhuman resources) as well as consumption. Secondly, there is the psychological barrier in terms of the ‘ego’ steeped in the ‘deadly sin’ of selfishness. Karl Marx, the patron saint of all socialists, predicted, for example, that the course of history would lead inevitably to such a society, i.e. communism. It would be a society without scarcity. It would also be a society without egoism, i.e. it would be a loving community of brothers and sisters who have shed self-centredness and are driven by the inner necessity to serve their fellows and to do so to the best of their ability. In this kind of society, there would be mass participation in all production decisions as the means of production are collectively owned. Every one takes according to need as the means of consumption are collectively owned. People contribute to the maximum of their ability to the creation of goods but do not need very much in terms of consumption. People are guided by internal incentives, i.e. stimuli arising from within such as feelings of love, joy, goodwill or guilt. These internal incentives compel everyone in the new society continually to serve the social body with which they become one. There is no need for external incentives, i.e. stimuli coming from other people, such as criticism or punishment or praise and money rewards, which ordinarily motivate people to take or not to take an action. People in the new world live happy and joyful lives of creative leisure and work They are self-reliant by producing a whole variety of goods in small workshops, at their own pace, with hands and brain and simple tools. And they live in harmony with nature. Small Scale Communal Experiments While history testifies to failure of numerous small scale experiments in communal socialism, America’s Bruderhof and Israel’s kibbutz represent a two successful examples of communal socialism on a small scale. The Bruderhof is a particular type of Christian community which was originally founded in Germany in 1920 and which later migrated to the U.K., Paraguay, and Uruguay, and, finally, to the U.S. In the late 1980s, it had a population of 750 persons who lived in three federated colonies in rural Connecticut, New York, and Pennsylvania. They live like one large family, by owning all things together, making all decisions together, having their meals together, working together, raising their children together,

meeting almost every night together, and spending their entire lives together—withing the geographic confines of their estate (i.e. their ‘hof’). The community relies on ‘thought reform’ in order to destroy egoism. The Israeli kibbutz means ‘group’ in the Hebrew language. The first kibbutz was founded in 1909. By 1987, there were 280 kibbutzim, containing a mere 3 % of the Israeli population, but producing 10 % of the country’s Gross National Product. Most consumption is collective. The means of production are jointly owned. Ultimate decision making power rests in a General Assembly of Members. They elect executives such as a Secretary, a Treasurer, and a Work Coordinator as well as an Economic Committee. The latter draws up plans for production, consumption, and investment that the General Assembly must approve. Everyone capable works. Incentives are mainly external, but not monetary. Probably the strongest one is praise or disapproval by the closely knit community. Nothing is more highly valued than being regarded as a good, selfless worker. By the same token, nothing is more feared than being considered as a laggard or a parasite. Occassionally, such people are expelled. More often, they leave by themselves. In many ways, life is like the dream: in the countryside, near the home, in small workplaces. Large, Nationwide Experiments Mao’s China and Castro’s Cuba experimented with fighting scarcity as well as egoism through communal socialism in vain. China Mao Zedong came to power in 1949 in China. And since then Chinese economic policies followed a zig-zag course that mirrored an intense struggle between the ‘pragmatists’ or ‘experts’ on the one hand and the ‘reds’ or ‘purists’ or ‘revolutionary zealots’ on the other. The former wanted to fight scarcity whereas the latter wanted to destroy egoism. During the First Five Year Plan (1952-57), Mao adopted Stalin’s system of planning and managing the economy. But during the Second Five Year Plan (1957-62), Mao rejected the crass materialism of the Soviet Union and sought to achieve ‘Great Leap Forward’ in industrialisation by destroying egoism. Most material incentives were abolished in order to meet the pressure to increase output at exceedingly high rates. This was done with a ruthlessness and a disregard of the individual that would have put even Stalin to shame. In agriculture, an army of 100 million peasants was organised on ‘mass irrigation projects’, building canals, dikes and reservoirs in ceaseless day and night shifts under unbelievably harsh conditions. 99 per cent of all peasants were forced into communes, institutions in which they were to live and work together and to own jointly all the means of production and consumption. Peasants lost title to their private family plots and with it the age-old hope for independence. The free private farm markets were closed. All private property was abolished. Peasants were made to work more and harder on the collective land, and for less, and they were virtually treated like draft animals. Even the individual family unit was abolished. Women were forced to work at all jobs as equals with men. Children were raised in government nurseries. People ate in common mess halls and slept in common barracks. Wages were mostly received in kind and in no way related to the amount of work performed. “From each according to his

ability, to each according to his need’ was put into practice here and now; and ‘need’ was defined as physical subsistence. Outside agriculture, the same principle of mass mobilisation of labour was used. Organised by military principles and driven to the limit of their endurance, 60 million students and women were to supplement the new modern industrial complexes by producing ‘steel’ (actually pig iron) in ‘backyard furnaces’. Others set up numerous tiny and widely dispersed factories to make fertilizer and agricultural tools. They, too, worked in night and day shifts. The above efforts for ‘Great Leap Forward’ were successful at first but very soon turned into ‘Great Crisis’ with disastrous fall in agricultural and industrial output. During 1962-66, anti-Mao forces (including the government bureaucracy) refused to cooperate with Mao and in order to revive output levels, they replaced Mao’s ‘purism’ in the realm of incentives by ‘selfishness’. But Mao retaliated through the ‘Great Proletarian Cultural Revolution’ during 1966-69. This meant mobilisation of youth of the country to destroy bureaucracy and revive internal incentives. The Great Cultural Revolution which sought to destroy egoism through equalisation of incomes and equalisation of status, came to an end as the struggle between the Maoists and the antiMao forces became intense and the latter gained ascendancy in Chinese politics. China after Mao’s death in 1976 gave up on communal socialism. China was led by Deng Xiaoping, the pragmatist leader who ushered in market oriented reforms in conjunction with political and cultural liberalization. Cuba Cuba also went through a zig-zag. Cuba experimented with communal socialism, gave it up and embraced the rigid Soviet model of central planning instead. Led by Castro and Che Guevara, Cuba turned to socialism during 1959-61. During 1961-64, Cuba adopted Stalin’s method of planning but rejected his ways of motivating workers through money and material incentives. But this turned out to be a failure. During 1964-1970, Cuba concentrated on sugar and foreign trade and sought progress in this regard not through the Stalinist 'superplans’ but through ‘miniplans’ and the pursuit of egalitarianism in incomes and status. But even this failed and consequently the Cuban leadership once again turned to Soviet methods of central planning but with material incentives. In the late 1980s, once again, Castro endeavoured to destroy egoism through moral incentives and equalisation of incomes and status. Critical Evaluation of Communal Socialism Communal socialism, small-scale or large-scale, did not turn out to be a viable alternative to either centralised socialism or market socialism. Most small-scale experiments failed because people were not selfless enough. First, when everyone was free to take consumption goods ‘according to need’, people took too much and there was not enough to go around. Then rationing by money or command became inevitable. Secondly, when internal incentives were relied upon to make people contribute ‘according to ability’, such contribution fell in an environment wherein real income could be had for nothing. Thus, people had to be induced to work by money or command. Thirdly, when living in cities and working in large workplaces and the like were replaced by working in small workplaces in the countryside, the inevitable fall in output and the total unavailability of

some goods caused dissatisfaction and abandonment of the scheme. Fourthly, even in small experiments, it became physically impossible to have everyone participate directly in all decisions. And so there was a lot of hierarchical decision making about consumption and production. All this surely holds good for nationwide communism as well, as demonstrated by the Chinese and Cuban examples. In a nutshell, the small scale as also nationwide experiments in communal socialism more than amply demonstrated the truth that any determined effort to destroy egoism interferes with the creation of abundance, while any determined effort to create abundance interferes with the destruction of egoism. As a result, none of the nationwide experiments survives today.

Lecture Notes 8
Features and Likely Performance of Market Capitalism as Pure Model
Features Individualism and free markets Market capitalism as an idealised economic system is based on the vision that champions individualism. The objective of this system is to maximise welfare by letting all the adult individuals in society define their own happiness in their own way and take whatever actions seem appropriate to achieve it. The advocates of this system suggest that coordination of independently decided but interdependent economic activities of millions of people engaged in a division of labour can easily be achieved by letting self-interested people follow the guidance of price signals generated in free markets. In other words, they point to the possibility of a spontaneous coordination or market coordination or to the working of the Invisible Hand advocated more than 200 years ago by Adam Smith, the father of economics. Thus, the advocates of this system see no need for any central economic planning. Coordination of the actions of different people is achieved and maintained by the price system, the set of interdependent prices in all the markets for goods and resources. These prices change as long as the independent actions of households and firms are not perfectly coordinated, making households and firms, in turn, change their behaviour until coordination is achieved. Being keenly aware of how their welfare is affected by the prices they can get for what they sell and by the prices they must pay for what they want, all people are habitual price watchers. For example, when people look for 16 million tons of apples, while only 8 million are being offered, anxious would-be buyers of apples will compete against each other and drive the price up. In response to these higher prices, two changes will occur: (1) some price-watching households will change their minds and decide to seek fewer apples at the higher price (using, perhaps, oranges instead); and (2) some price-watching owners of firms will change their minds too, and decide to offer more apples a the higher price(producing more apples at the expense of something else, reducing apple inventories, increasing imports, and so on). Before long, a balance will be achieved between the production and consumption of apples. Similar adjustments will occur in all other realms of activity. The role of government Although the advocates of this system glorify individualism, they believe that government has to play a limited but crucial role. The government would have to set the

framework for private choice. And it would have to fix the conditions under which widely dispersed resources could be used by their private owners for their private ends. In other words, a well-functioning capitalist market economy requires not only that economic power—the capacity to make and enforce decisions on the allocation of resources and the apportioning of goods—is put in the hands of private individuals but also that it is carefully distributed in such a way that all of them have as equal a share as possible. For this purpose, the government would have to tackle at least 3 subsidiary tasks as follows: (i) the government would have to assign property rights—rights to the exclusive use—for all scarce things. Otherwise, there will be chaos as people would try to take more of scarce things than was in fact available so much so that the strong and cunning would then end up with most scarce resources and goods at the expense of the weak and no so clever; or the usefulness of scarce things would be destroyed by too many people attempting to use them at the same time. (ii) the government would have to assign property rights in scarce resources as rarely as possible to itself and as often as possible to private individuals, and it would have to do the latter in such a way that all individuals came to hold, upon reaching adulthood, as nearly equal quantitites of resources as possible. Just like in the game of cards, every participant receives the same number of cards initially, so also in the game of choice which scarcity forces upon every society, every participant would start with an equal endowment of economic power. What does this mean? This might mean that government, at the time of death of all individuals, would redistribute their holdings of natural and capital resources to other individuals reaching adulthood, and it might mean that opportunities to gain labour skills would be made freely and equally available to all citizens, as in the form of publicly provided health care, general education, and vocational training. (iii) the government would have to guarantee to all individuals an equal opportunity to the freest possible use of the property rights it had assigned. In other words, having distributed the cards in the great game of choice, it would have to set up general rules of the game that applied equally to all. Anything one person was allowed to do, all others would have to be allowed to do, and anything forbidden to one person, would have to be equally forbidden to all others. When the government carries out the above three actions, all adult individuals would have the maximum possible freedom to promote their own welfare as they saw it—within the limits of inevitable scarcity and consistent with an equal freedom given to all others. Hence, people could use their resources all alone, hermit-like, without ever relating to others at all. Or they could enter into all sorts of voluntary agreements of cooperation with others, exchanging—at any terms acceptable to all parties concerned—the property rights to resources or to any goods they had made with those resources. Thus, people could be their own master, choose their own path, and do their own thing.

Perfectly competitive market and equilibrium price Under the conditions as mentioned above, the advocates of this system believe that a multitude of perfectly competitive markets would quickly emerge and equilibrium price be established in each. The features typical of a perfectly competitive market are as follows: (a) there would be many buyers and many sellers in each market. As a result, no one person would buy or sell a significant percentage of the total traded and be able, acting alone, to influence the price; (b) all units of the traded item would be viewed as identical by buyers; thus, no buyer would have any reason to prefer one seller over another; (c) all buyers and all sellers would possess full knowledge relevant to trading; and (d) all buyers and all sellers would be free at any time to enter into or exit from a market. Under the above circumstances and given all other factors that might influence people’s decision to buy or sell, a typical market would be one in which buyers would demand a larger quantity at lower prices than at higher prices, and sellers would supply a larger quantity at higher prices than at lower ones. This is illustrated by the sloping lines labelled ‘demand’ and ‘supply’ respectively in the figure below. The figure shows that the many buyers and sellers would interact in such a way as to establish an equilibrium price of Rs. 5 per unit at which the quantitites demanded and supplied would be just equal to each other (at 34 million units per year).

If the market price were to be higher than equalibrium price, say at Rs. 7 per unit, buyers as a group would wish to buy 20 million units per year, while sellers as a group would want to sell 48 million units per year. Thus, there would be a ‘surplus’ of 28 million units per year. This is a situation wherein many would-be sellers would be very frustrated. Before long, at least some of them would offer to sell the item in question for a somewhat lower price. Immediately, the surplus would diminish. Buyers would buy a larger quantity at the lower price; and sellers would offer a lower quantity. This process of competition among frustrated sellers would continue until price and quantity corresponded to the equilibrium values. Similarly, if the market price were to be lower than the equilibrium price, say at Rs. 3 per unit, then the buyers as a group would wish to buy 48 million units per year whereas sellers as a group would want to sell only 20 million units per year. Consequently, a ‘shortage’ of 28 million units would emerge. This is a situation wherein many would-be buyers would be frustrated. Before long, some of them would offer to buy the item for a somewhat higher price, and immediately the shortage would diminish. Sellers would sell a larger quantity a the higher price and buyers would demand a lower quantity. This process of competition among frustrated buyers would continue until price and quantity corresponded to their equilibrium values. Thus, in every market, an important piece of information would emerge: an equilibrium price at which any buyer could be sure to find a seller and any seller could be sure to find a buyer. The entire system of prices so emerging, furthermore, would serve like a system of telecommunication among all households and firms. It would serve the important function of continually coordinating the independent choices made by them. This is what is meant by the ‘invisible hand’. The very competition among sellers or buyers described above could be accepted as a valuable tool of cooperation. This is so because that competition would generate signals in the form of equilibrium prices that told everyone in condensed form what they could and could not do, if they wished to take part in the joint enterprise of allocating resources and apportioning the goods made with them. Surely, buyers would always prefer a lower price, and sellers a higher price. But, in the absence of a practical way by which millions of people could sit together and explain to each other why a lower or higher price would not work, the guidance of the equilibrium price could be accepted on blind faith as that of an all-knowing Invisible Hand. Performance Assessment Full employment This economic system would produce a full utilization of resources. The meaning of full employment would be defined simply as the undesigned outcome of a multitude of independent decisions of all resource owners. This is expected to happen as follows: All owners of resources would decide separately on the extent to which whey would like to have their own resources utilized in the process of production. From these independent decisions, a supply would emerge in each particular resource market, such as the line so labelled in the above figure concerning a typical market. The slope of this line

reflects the likelihood that a given number of resource owners would be likely to offer more units of a resource at a higher than a lower price. Similarly, private owners of firms would independently decide on the quantities of various resources they wanted to utilize. Thus, a demand would emerge in each particular resource market, such as the line so labelled in the above figure concerning a typical market.. The slope of the line reflects the likelihood that a given number of firms would be likely to demand more units of a resource at a lower than at a higher price. Competition among buyers and sellers would then establish some equilibrium price, and the corresponding employment of the resource would be deemed as the desirable one. For example, consider a labour market wherein the households supply labour and the firms demand labour keeping in mind the figure above concerning a typical market. At the equilibrium price of Rs. 5 per labour hour, anyone who wished to sell that particular type of labour at that price could find employment. Involuntary unemployment could only be a temporary phenomenon because it would represent a ‘surplus’ of the resource on the market. If the price of labour were to be Rs. 7 per labour hour, people offer 48 million hours for sale but firms would hire only 20 million hours. The suppliers of 28 million labour hours could find no job. A fall in the price of labour to Rs. 5 per labour hour, however, would quickly eliminate this unemployment. As the price fell, firms would hire more labour and households would voluntarily withdraw some of the labour previously offered. The same type of adjustment would occur in all other resource markets. In the end, whatever rate of employment the many resource owners had decided upon as desirable, that rate would come to prevail. The critics argue that the full employment adjustment process might require unbearably large changes in prices or might take an unacceptably long time. But the advocates of this model argue that the government would always be free to fight unemployment by using Keynesian fiscal and monetary policy tools. Efficient employment: Technical efficiency and Allocative efficiency Technical efficiency is possible because self-interest would drive the owner-managers of firms to minimize the use of inputs for any given level of output and, thus, to maximize output for any given set of inputs. Acting otherwise would not enable them to maximise profits. But the critics wonder whether this would happen if ownership were separated from management. Similarly, as regards allocative efficiency, the advocates of this system argue that it would be the accidental consequence of people seeking only their self-interest. Economic growth, extensive and intensive Extensive growth in terms of optimal private capital formation would happen as the undesigned outcome of all the separate decisions of all the people in society on the issue of foregoing consumption now for future rewards. All income recipients would be free to save part of their income and lend out the funds involved. Markets for loanable funds would emerge and every rupee lent at the equilibrium price would be invested. Intensive growth would also happen because the advocates of this system imagine the government to collect taxes and to use them to provide all citizens with an equal opportunity for

health care, general education, and training. Further, many important innovations would also occur as the result of random tinkering by a multitude of individuals engaged in the productive process. However, the critics are sceptical about the possibilities for innovation. If investment in basic and applied research and entrepreneurial innovation results in technical failure, the investors alone would have to bear all the cost. If it results in technical success, then production costs would be reduced and some profit will be made in the short run. Soon new firms will enter the scence and imitate the innovator and increase the supply and reduce the equilibrium price and eliminate profit. Thus, any long-range, high-cost investment in research and innovation would be discouraged. Economic equity The advocates of this model talk about the possibility of equity in terms of commutative justice. But the critics argue that it may not be possible or even desirable. The critics say that the type of even-handed initial distribution of resources might, in fact, not be carried out. Even if it were attempted, it would be quite difficult to carry it out with perfection. For instance, the blind, the crippled and the mentally retarded would be excluded. Moreover, it would be difficult to maintain over time the achievement of the initial degree of equality in resource endowment simply because some people would save a lot and others would not which will gradually shift the distribution of resource stocks. Thus, there would emerge, sooner or later, unavoidable differenes in people’s economic power. In addition, there would be people who would earn little or nothing due to the verdict of the price system, and so they need help. The critics argue for a compromise between the two conceptions of economic equity: to accept commutative justice in order to preserve incenives, while reducing the extent of income differentials by guaranteeing to all a certain basic minimum income through distributive justice in terms of a limited degree of governmental redistribution. Avoiding Alienation from Self, Others and Nature Alienation from self is not possible, according to the advocates of this system, because this system under conditions of equal economic power provides the greatest chance for people to develop themselves. Similarly, alienation from others is also unlikely because people have more power, indirectly though, to participate in decisions on an equal basis with all others in this system than in any other system. For example, there would be consumer sovereignty —consumers, like sovereign voters in a democracy, jointly would have determined the allocation of society’s scarce resources through casting their ‘dollar votes’ or ‘rupee votes’ in the stores. Similarly, worker sovereignty is possible in a context where ownership of resources is widely dispersed and a great many alternative opportunities are available to any one person. Citizen sovereignty is also likely because all individuals are free within a framework of general laws to make their own choices without coercion by other people. Finally, alienation from nature is unlikely; for example, problems of pollution or the threatened extinction of animal species would not arise in this system because the government would perform the function of assigning property rights in all scarce

resources. To illustrate, let us take the case of pollution due to dumping of wastes in a river. Suppose there is a clean river which could assimilate a maximum dumping of 4 millions tons of sewage without harm to anything. This is shown in the figures below by the vertical line labelled supply. Suppose people are free to just go ahead and dump sewage whenever they liked. With no price to pay for dumping, they might dump 2 million tons per year. But if they were to be charged Rs. 2, 000 per ton of dumping, then they might dump nothing at all. Now suppose, a hundred years hence, due to population growth and industrialization, people might dump 4 million tons into the river when they are free to do so whereas if they were to be charged Rs. 4, 000 per ton, they would not dump at all. With zero price, suppose people dump 6 million tons which is more than the absorptive capacity of the river. At that point, ‘no swimming’ signs would go up, fish would die and drinking water would be hard to find. According to the advocates of this system, the government would solve this problem by establishing property rights. The government might simply print up each year 4 million certificates, each of them giving its holder the right to dump 1 ton of sewage into the river during that year. And government might announce that henceforth the river’s waste absorption capacity was private property, belonging to the holders of these certificates. Under these circumstances, a market for dumping rights would spring up at once among those who did dumping and those who did not want to do any dumping. Before long, competition among demanders or suppliers of these rights would push their price to the equilibrium level of Rs. 2, 000 per right. This process would exclude many would-be dumpers from the scence. Many individuals, firms and local governments, who would have dumped sewage into the river at a zero price, would then think twice about their behaviour. They would suddenly and painfully confronted with the consequences of their action in terms of the price to pay. The equilibrium price is a message to the dumpers: if you were willing to pay Rs. 2,000 per ton, you could dump all the sewage into the river you liked. Yet, as the sloping demand line indicates, some would find it cheaper to change their behaviour as by treating their sewage instead. Thus, harm to the environment could be prevented because the overall amount of dumping would be restricted to the limited amount the river could absorb.

Conclusion Market capitalism as a pure model is the best of all worlds possible in terms of selfinterest producing socially beneficial results.

Lecture Notes 9
US Capitalist System/American Capitalism as Case Study of Market Capitalism: Features and Performance
Features Imperfect competition Like in the pure model of market capitalism, most resources in the US economy are privately owned, and the separate decisions made by numerous individuals and firms are spontaneously coordinated through markets. However, contrary to the pure model, resources are not evenly distributed over the whole population and most markets are imperfectly competitive. Imperfect competition means the following: (a) The number of buyers or sellers is small, or, when that is not the case, large numbers collude rather than compete. As a result, market participants are not price takers as the pure model points out, but can exercise a lot of power over price. (b) Differentiated rather than homogeneous products are traded in many markets. (c) Knowledge about market conditions is anything but perfect. (d) Entry into and exit from markets is frequently restricted rather than free. Imperfect competiton on these lines characterises not only goods markets but also resource markets in the US economy. The monopoly game In the US economy, many people play a ‘monopoly game’. This means that they try to gain control over the prices at which they sell or buy in order to raise their own income at the expense of other people’s income. The most successful players of the monopoly game achieve a pure or genuine monopoly which originates from a number of technological and legal reasons, including

increasing returns to scale, exclusive ownership of key resources, patents and copyrights, and exclusive franchises. Whatever their origin, these monopolies attempt to create for themselves a situation of permanent profit. There are private cartels seeking permanent profit. A cartel comes into existence when there is an agreement among all the existing sellers to charge an identical and higher price and to restrict supply until it equals market demand at the cartel price. There are also numerous successful examples of government sponsored cartels. Typically, they involve legislating, separately or in combination, the setting of a higher price, a cutback in supply, or even an increase in demand. Sellers who fail to achieve monopoly or successful cartels often find themselves in market situations lying in between the extremes of monopoly/cartel on the one hand and perfect competition on the other. Examples include (a) oligopoly, in which the entry of new firms is difficult and relatively few sellers compete with one another, offering either homogenous or differentiated products, and (b) monopolistic competition, in which the entry of new firms is easy and large numbers of sellers compete with one another, offering differentiated products. An example of imperfect competiton in resource markets is the monopoly power on the selling side of a labour market frequently exercised by workers who have formed a cartel for the joint sale of their labour, that is, a labour union. Unions, in typcial cartellike fashion, have tried to raise wages by reducing supply. They have tried to keep competing workers out by restricting union membership (charging high initiation fees, administering impossible entrance tests, or simply denying access to blacks, females, Jews, or any other easily identifiable group). They have warded off the threat of nonunion competition by forcing employers to establish closed shops (in which only union members are hired) or union shops (in which all employees, soon after hiring, have to pay union dues as a condition of continued employment). Sometimes buyers of resource services restrict competition. For example, there exists only a single buyer—a situation of monopsony—in the labour market. Monopsony can also arise when numerous employers agree to act jointly in the hiring of labour and not to compete with each other for workers. The role of government Government in the US hardly conforms to the role envisioned in the pure model of market capitalism. Although there are attempts to promote a competitive environment for business (e.g. antitrust laws or free trade legislation), such policies often pale in significance when compared with those designed to aid would-be monopolists. Many observers explain this schizophrenic behaviour of government by the ‘capture’ of legislators and regulators by special interests. Within the nation, there are many individuals whose interests conflict with those of other individuals. For each of these individuals, income can be gained more easily by taking it away from other people—given the overall degree of scarcity prevailing—than by making genuine contributions toward reducing the realm of scarcity by working harder, saving more, or making cost-reducing innovations. It is not surprising that some of these individuals want the government to intercede for their special interest (which is to gain power to raise the prices of whatever they sell in order to raise their income in the

easiest way). To the extent that government responds to such requests, it does not govern in the national interest; it promotes a coalition of special interests. Sellers use many devices to get government to promote their special interest in above-equilibrium minimum prices, reduced supply, or increased demand for whatever they have to sell. The ‘capture of legislators’ involves sellers inducing legislators at all levels of government to rig markets directly—or set up appropriate agencies to do the rigging—by channeling a number of rewards for them. Perhaps the most important reward is election campaign contributions. The ‘capture of regulators’ means that the officials of the regulatory bodies set up by the legislative branch of government are systematically influenced by those they are supposed to ‘regulate’. They, too, receive rewards for being compliant when approached by the special interests. Performance Assessment Full employment Like in pure model of market capitalism, the definition of full employment in the US is left to each private resource owner. But unlike in the pure model, resource prices are not always free to adjust, or to adjust quickly enough, to their equilibrium levels. For example, when labour unions inisist on, or governments prescribe, minimum wages above equilibrium, a surplus of labour develops. As a result, all kinds of people who would like to work at the going wage find themselvs involuntarily unemployed. Since a decline in the wage is impossible, their unemployment persists. This situation can be overcome, however, even if downward wage flexibility cannot be restored, by an increase in the demand for labour. Recognition of this fact lies at the heart of the Keynesian macroeconomic theory—born in the Great Depression of the 1930s. Keynes had noted that an increase in overall spending on newly produced goods in an economy would increase the demand for labour and, thus, reduce involuntary unemployment. This basic insight was incorporated into the official policies of the US government for quite some time. Efficient employment: Technical efficiency and Allocative efficiency There is allocative inefficiency although the extent of the resultant welfare loss is difficult to estimate. Estimates of technical inefficiency in the US are highly controversial even as some economists have come to view technical inefficiency as all pervasive and much more significant in scope than allocative inefficiency. Firms with monopoly power, i.e. the power to raise the selling price above the perfectly competitive level, not only incur considerable expenses in obtaining, strengthening, and defending that power, but they are generally lax on cost control because they do not face intense competitive pressure. Before long, such extravagances as lavish offices, high entertainment budgest, and long coffee breaks push costs to unnecessary levels. This type of conclusion has been confirmed by a number of investigations in the US.

Economic growth, extensive and intensive In the view of most observers, the US economy has exhibited a remarkable rate of economic growth in the long run. Voluntary private saving and investing by individuals and corporations have been a major source of this economic growth. A significant part of the real economic growth has resulted from improvements in the general levels of education, health, and training as well as from a rapid pace of technical advance. The latter has become increasingly important over time. Economic equity Distribution of income is highly unequal in the US. The reasons for this inequality can be understood by examining the determinants of income earned by households in the US. The money income earned by any one household and the share of output it can claim in the US depends on three things: (a) on the size and quality of the stocks of resources owned; (b) on the rate at which these stocks are placed in the process of production; and (c) on the prices that are established in the resource markets for the use of the resources involved. The US government has failed to disperse the private ownership of resources as widely and as equally as is called for by the pure model of market capitalism which calls for commutative justice. As a result, the private ownership of natural and capital resources tends to be highly concentrated in the hands of a few. Household incomes differ also because not only do some household members stay out of the labour force entirely, but even those who do work do so for varying numbers of hours per year, simply because they differ from other people when it come to choosing between leisure and the goods its sacrifice can bring. Similar differences in voluntary choice occur with respect to nonhuman resources. The third reason for income differences is that households receive differential rates of pay for the resource services they do offer, and this is true both in perfectly and imperfectly competitive markets. However, one should also note that the government in the US has been increasingly involved in the redistribution of income, through taxes and subsidies, toward the poor. Alienation from self, others and nature Although alienation from self is inevitably there due to division of labour and specialisation, many surveys in the US have indicated that people are satisfied not only with their jobs but also that their behaviour is satisfactory. Certainly the relationships of most people with most other people are indirect, impersonal, businesslike, and cold, rather than direct, personal, intimate and warm. But still people in the US are considered better off in terms of consumer, worker and citizen sovereignties. As regards nature, the US government has failed to assign property rights in such scarce things as the air, rivers,
lakes, or oceans and consequently, a host of unbearable pollution problems have cropped up.

Lecture Notes 10
Mixed Economic Systems: Variation in Government Intervention
Common Feature Many capitalist countries throughout the world have one thing in common: a significant degree of government intervention in the economy. Inspired by socialist thought, this government action is often designed to achieve greater equality in wealth, income, and economic power. Yet, unlike in the erstwhile Eastern Europe, the poltical parties that articulate such demands in countries such as France, Great Britain, Sweden, West Germany, or Japan are committed to the maintenance of political democracy. Given the stress on democracy, it is not surprising that there exists a great diversity in the approaches different governments take when they intervene in the economy. In the post Second World War period up until the 1980s, continental European countries such as France, Sweden, or West Germany often referred to themselves as social democracies, which the British Labour Party preferred to call democratic socialism. Even the communist parties in Western Europe, often referred to as ‘Eurocommunists’ condemned the Soviet-style or Stalinist dictatorship and the associated repression of civil liberties. The stress on democracy has two consequences: first, there exists a great variation in the approaches different governments take with regard to the nature of government planning and with regard to governmental policies; and second, there are frequent changes in governmental philosophy so that for example when a labour or socialist party is thrown out of office and a conservative party is elected, we should not be surprised if the entire thrust of governmental intervention in the economy is halted or even reversed. Differences 1. The nature of governmental planning Unlike the Soviet-style central plans the fulfilment of which is commanded by the government, French plans have been of an entirely different nature. They have not carried the force of law; the French ‘toothless’ plans have in fact been elaborate forecasts indicating to all concerned what the government expected to happen during the plan period, given its own actions and those likely to be taken by private parties. That is why Soviet planning has been called imperative planning, while French planning, in contrast, has been termed indicative planning. The purpose of plans that the government cannot enforce has been to eliminate the boom and bust of the business cycle by making the future path of the economy ‘transparent’ to all, by reducing uncertainty and, thus, the errors potentially associated with it. Some have described the French plan as a

generalized piece of market research simultaneously made available to all suppliers and customers. All of them are free to make their own decisions, but they can do so with a knowledge of the intentions of the rest of the economy. Thus, a steel industry executive can compare the company’s production and investment plans with the authoritative government forecast of national steel demand and can foresee a potential slippage in the company’s market share. This ability to foresee the future, it has been argued, promotes private actions that help achieve the national growth target. We cannot say that the government is completely powerless to promote its plan. The government clearly has direct control over the public enterprise sector and is free to carry out the portion of the national investment plan affecting that sector. It can, in addition, affect the volume and composition of private investment by selectively imposing credit controls, providing tax breaks, withholding factory building permits, and more. And French governments have ‘persuaded’ private businesses in purely verbal ways as well to conform to its plan. These ways have included threats of nationalization and many informal governmentbusiness get-togethers. In Great Britain, the British Labour Party has consistently denounced the ‘blind forces of the market’ and argued in favour of a ‘collective organisation of the economy by enlightened people’ who would seek to attain a ‘social purpose’. Yet, compared to France, the machinery of governmental planning in Great Britain has been rather primitive. In Sweden, the Social Democratic Party has stressed group action over individual action, and has attempted to instill in people the highest regard for the expert, technician, and bureaucrat who might guide such group action. Planning here has been less specific than the French, though. In West Germany, the government has been concerned with the establishment of a socially responsible market economy. While at the micro level, competitive markets have been promoted, the self-regulation of the economy on the micro level has always been supplemented by governmental steering on the macro level through Keynesian stabilization policies. In Japan, the Ministry of International Trade and Industry has been particularly important in drawing up indicative central plans similar to those of the French and in devising numerous strategies to ensure their fulfilment. The government has continually deferred to the wishes of a potent lobby of some 700 large corporations that make up the Federation of Economic Organisations and whose chairman is referred to as the Prime Minister of Japanese Industry.

2. Governmental policies Governmental policies have varies with respect to the nationalisation of resources, the welfare state and the role of labour. (a) Nationalisation of resources The French have a long history of nationalizing privately owned resources. The reasons for this were as follows. First, it was argued that the private ownership of non-human resources had been too concentrated and that this unequal distribution of wealth had to be corrected. Secondly, it was argued that nationalization would help correct an all-toounequal distribution of income in that it would remove interest, rent and profit income from the affected wealth holders. Thirdly, it was argued that nationalisation would more widely distribute the power of decision making. Indeed, public enterprises were to be run by tripartite boards composed of workers, consumers and government officials. Fourthly, nationalisation has been viewed as an ideal means to promote the goals set in the national plan. Similarly, nationalization has been viewed as a means to promoting extensive and intensive economic growth. Thus, tax receipts have been used directly for investments in public enterprises. And the nationalised banks and insurance companies, many of which hold equity positions in private firms, have been used to approve or deny credit selectively, depending on whether private firms intended to carry out the types of technology-advancing projects encouraged by the national economic plan. In Great Britain, nationalizations with compensation have been carried out, typically for the same reasons as in France. In Sweden, the social democrats, like their French and British counterparts, have presided over a limited degree of nationalization as well. In addition, the Swedes have stressed the establishment of consumer cooperatives, usually retail stores owned and run by their customers. In West Germany, the prevalence of government enterprise was somewhat less than in the countries discussed so far. In Japan too, some government enterprises came into existence but their importance like in West Germany remained low. (b) The Welfare State Over many decades, many political parties in capitalist countries have striven to create a more equal distribution of income by means of a more direct route than the nationalization of nonhuman resources. They have endeavoured to guarantee a certain minimum income to every citizen, regardless of that citizen’s personal contribution to current production. For this purpose, they have pursued policies of providing governmentally financed general education, vocational training, and health care (to disperse income-earning opportunities widely) and they have created elaborate systems of direct income payments (for children or young mothers, for the disabled, sick or unemployed, for the poor, the retired, and more). In the process, they have created the modern welfare state—a capitalist society in which government pledges to protect people not only from the rigours of the marketplace but, quite literally, from all types of misfortunes that might befall them on their lifelong travel from the cradle to the grave. In Great Britain, the Labour Party had long pushed for an expansion of social programmes

designed to create a ‘minimum practicable inequality of income’. Sweden is usually cited as the most advanced example of the welfare state. (c) The Role of Labour In most capitalist countries, governments had taken steps to strengthen the hands of workers vis-à-vis business, usually by protecting labour unions as well as by a variety of laws reducing the rights of business. France is known for its industrial democracy movement. In Great Britain, the Labour governments had encouraged aggressive unionism to get the ‘unearned income’ (interest, rent, profit) of the capitalists and to gain control nont only over wages but also over wage differentials among workers, over hours worked, hirings, promotions, layoffs, and firings, the organization of work, and more. In Sweden, collective bargaining was institutionalized to be carried on the national level between an Employers’ Confederation and a Trade Union Confederation. Moreover, in each plant, workers elect a work council that has the legal right to be informed and consulted on company affairs and working conditions. In West Germany, codetermination laws were created in order to bring about work councils like in Sweden and also to put workers representatives in the corporate boardroom. Japan was unique in terms of paternalistic management-labour relations based on employment security, seniority based compensation systems and promotion based on experience and skills accumulation. Reversals From the 1980s onwards, some capitalist countries have experienced reversals in the post Second World War trends described as above. Privatization, shrinking the welfare state and putting a leash on labour have been undertaken rapidly in the era of globalisation over the last two decades. The rise of neoliberalism By the mid-80s, the term ‘neoliberalism’ gained widespread currency as a label to describe the predominantly laissez faire, market driven economic policies sweeping across the globe from advanced countries to the less developed countries and to the socalled ‘transitional economies’ emerging after the collapse of the Soviet Bloc in 1989. The pivotal point of neoliberalism is the essentially negative role of government. Their argument is that nations are poor because of too much government interference and hence the government should be downsized. Thus came into existence the new era of neoliberalism in terms of the LPG (liberalisation, privatization and globalisation) model over the last two decades almost all over the world.