Theory of Market Socialism
1
1.Definition
Market socialism is an ES that combines public/social ownership of
capital and market allocation.
•Public ownership of non-labor factors of production
•Decentralized decision making structure (firms & hhlds)
•Decentralized information structure
•Coordination by markets
•Both material and non-material rewards
2
The most famous theoretical model of mkt socialism is the trial and
error model proposed by the polish economist Oscar Lange
2. Theoretical Foundations—The Lange Model
•Combines public ownership and a trial & error approach to determine output and
equilibrium
•State owns non-labor factors of production and consumer goods are allocated by
market (state ownership and resource allocated by markets)
•A more centralized version of market socialism
•Three decision-making levels
-central planning board (CPB)
-industrial ministries
-enterprises
3
• CPB initially sets all prices arbitrarily
– enterprises face parametric prices just as perfectly competitive firms do
• Firms follow mkt type rules. Enterprises instructed to
– minimize costs
– produce output at which MC=P
• Result will either be a surplus or shortage
– if surplus, price adjusted downward
– if shortage, price adjusted upward
• The CBP sets the prices and would adjust prices to equilibrium until
supply=demand
• Households supply labor
• The CPB allocates social dividends (rents and profits):
– to finance investment to achieve growth goals (state control over investment& the rate
of econ growth)
– to achieve distributional goals (with state ownership, the rate & direction of econ
activity would be determined in large by state; distribution will be more even)
• State decisions on sectoral expansion
• Control of pricing can be used to correct externalities
– Because the state manipulates prices, it will account for externalities. Decisions made
at higher levels rather than lower levels will be better in terms of preventing
environmental effects
• State control over savings and investment would reduce cyclical instability
4
5
•
Critics of the Lange Model
–
–
–
•
Computationally inefficient
Unmanageable in practice—information needs too great; many tasks of the
CPB leads to large bureaucracy
what motivates managers to follow the rules?
• what motivates managers of perfectly competitive firms to follow the
P=MC rule? Or to use resources efficiently;
• How to make mrkts work when private individuals do not own capital.
• Lack of managerial incentives
The Lange’s model has sparkled great interest b/c most existing
socialist systems use a crude form of trial and error for the setting of
prices at least for the consumer.
6
3. The Cooperative Variant of Market Socialism
Market socialist system in which labor participates in decisions at
the enterprise level. The people should participate in making the
decisions that affect their well being.
a) Major features of participatory economy-Vanek describes the
major features:
–
–
enterprises managed by the workers
equitable income sharing
•
•
–
state owns non-labor factors of production
•
–
the workers must pay a fee, and the fee should not be minimal, but should reflect
the scarcity, or opportunity cost
market coordination
•
•
–
labor democratically decides how to distribute the enterprise’s income;
labor do not receive a fixed salary but the profit is divided equally
decentralized decision making, mkt prices are determined by ss&dd
Producers make their own decisions based on mkt rules (as opposed to Lange,
where CPB sets prices)
freedom in choice of employment
•
•
Where and what to work
The firm is free to hire or not to hire
7
• Closer to a true market system than the Lange version of market socialism
– prices set by markets, not by planners
– From these characteristics is clear that the objective of the labor-managed firm
will be different from a capitalist firm or centrally planned firm
• Under capitalism, profit-max; centrally planned-the objective derives from the
preferences of planners, communist party but not the workers.
• Still socialist because of state ownership of non-labor factors
b) Modeling of the Cooperative Market Socialism.
• Resources with exception of labor are owned by the state & the enterprise pay a fee
to the state. Ss& dd determine the prices of producer and consumer goods.
Enterprises will be managed by workers (or may hire a professional manager).
Given these conditions the cooperative firm behave:
• Objective to be maximized
– maximize per-worker (or average) dividend (= revenue minus cost, not including
labor cost)
– Let Q be the quantity of output
– L is the quantity of labor
– K is the quantity of capital
• If labor and capital are the only two inputs, the production function, which shows
the relationship between output and inputs, is: Q = f (L, K)
8
• In short-run case -variable supply of labor L and fixed capital K
– The enterprise pays the government a tax (T) for the capital it is using
– Since K is fixed in the short run, T is fixed
– If we let Y = total dividend and P = the mkt price of the output, then Y= PQ - T
– The firm will max per worker dividend Y/L = (PQ-T)/L
– Max solution is: P MPL = (PQ-T)/L
• Maximum net income per worker will be achieved when the amount of labor hired is such that
the value of the MP of the last worker hired is the same as the average net earnings per worker
– P MPL is the value of marginal product (VMP) of labor
Relationship Between VMP and Y/L
$
At L1,VMPL > Y/L adding an
additional unit of L will raise Y/L
Y/L
VMPL
9
0
L1
Le
L2
Labor
– Thus, to maximize per worker dividend, the firm must employ just that quantity
of labor such that the VMP of labor is equal to the per worker dividend Y/L.
• In long-run case-labor and capital are variable
– r=rental rate per unit of capital
– The firm will max Y/L = (PQ-rK)/L
– K-amount of capital; r-charge per unit of capital
– Max solution is: P MPK = r and P MPL = (PQ-rK)/L
• Where P MPK is the value of marginal product of capital
• If the VMPK is greater than r more capital should be hired to utilized until the return
and the cost are equal (perfectly competitive firm)
– Firm maximizes net revenues per worker
Households maximize utility to supply labor services.
10
Comparison with Capitalist Firm
• Assuming profit (Π) maximization Π = PQ - wL - T
– where w = wage
• At the profit maximizing employment of labor P MPL = w
• Value of labors’ marginal product equals wage
• The cooperative model has been analyzed by Jaroslav Vanek (defend) and Benjamin
Ward (criticized). Strong support for the cooperative features comes from Vanek
who argues that the participatory economy is element of social evolution
Positive Features of Cooperative Model
• Eliminates capitalist dichotomy between management and labor
– Enterprises are managed by the workers;
– Workers participate in decision making
• Greater social justice in distribution of income
– distribution according to decision of the workers involve
• Firms will be more socially responsible
– E.g. environment (pollution)
– The workers who control a participatory firm live locally, they are more likely to
“internalize” the externality of pollution and trade lower monetary awards for a better
environment.
11
Criticism of the Cooperative Model (Ward)
• theoretically rigorous , but its real world applications are limited
• cooperative monopolist, inefficiency
– If supplies big quantities of product and realize that, behaves as monopolist—
hires less labor, produces less output and charges a higher price.
• misallocation of labor
– Ward argues that if two cooperatives, producing identical product, use different
technologies there will be misallocation of labor that would not occur if the two
firms were capitalist.
– if VMPL = w and all firms face same wage, then all firms’ VMPL will be the
same
– no such mechanism to equate VMPs in market socialism
• if VMP1 > VMP2 then greater value can be produced by reallocating labor from
Enterprise 2 to Enterprise 1
• motivation of managers
– When the cooperative hires professional management how to motivate to follow
the rules
12
4. The Performance of Market Socialism: Hypotheses
a. Income Distribution
–State ownership, capital belongs to the state; worker-managed enterprises, the state must be
paid a fee for use of capital, and the state would presumably divide such income among the
population on a fairly equal basis.
–more nearly equally under mkt socialism than capitalism
b. Economic Growth
–Relatively high rates of growth since the earnings from capital will go back into economy, but
need to consider if there is pressure on the state to put “social dividends” into current
consumption and subsidy
–Not sure of high investment rates
–?
c. Efficiency
–Individual participation in decision making, lack of monopoly, attention to externalities;
therefore more efficient than capitalism
–However motivation problems
–?
d. Stability
–Greater econ stability since the state will have greater control over the investment rate
13
–But if it is difficult to adjust prices to equilibrium, macroecon instabilities associated with