Roemer Future for Socialism

A Future for Socialism, by John E. Roemer, Harvard University Press, 1994

Review by Cosma Shalizi

The Red Monday Efficient Allocation Blues

What to do the week after the Revolution has always been a poser for socialists

Every sect of socialists gives its own answer, and these vary greatly in specificity and plausibility.

For quite some time many socialists regarded Soviet-style central planning as a specific and plausible solution to Red Monday.
Today, of course, one would have to search pretty hard to find someone who finds it at all satisfactory, even among those who hope Red Monday will dawn.

This is not just retrospective wisdom; there were socialists and even some Marxists (the inimitable Otto Neurath, for instance) who realized that the three Rs would not be enough, and worked on the problem of how to allocate well. This was a point particularly stressed by Austrian critics of socialism, such as Ludwig von Mises, who pointed to the way self-regulating markets, setting their own prices, force people to use resources efficiently, and presented a dilemma

The most interesting reply was formulated by Oskar Lange in 1936, and was to splashily impale socialism on one of the horns of the dilemma by embracing markets. He proposed to turn all allocation of consumer goods over to markets, with a Central Planning Board setting prices of producers' goods (raw materials?) through a trial-and-error process.

This is the tradition of the present book and its author, who is a member of a species which is not supposed to exist, a socialist economist who is not only fully conversant with the tools of mainstream economics but uses them extensively

since the late '70s Roemer has been using neo-classical tools to do highly interesting socialist economics, starting with A General Theory of Exploitation and Class

where, having formalized and made precise some essential parts of Marxian economics, he proceeded to show that the labor theory of value and the notions of exploitation and class raised upon it self-destruct

and to propose a new notion of exploitation based on game-theory and inequality in property relations. This in turn led to egalitarian political philosophy, and to the theory of mechanism design.

It was the combination of his studies of mechanism design with the vogue for writing socialism's obituaries in the early 1990s which prompted Roemer to write this book:

Firms, in other words, are run by hired agents of their owners, and this suggests that hired agents could as well run firms in a socialist economy, one in which profits would be distributed even more diffusely than they have under capitalism. Indeed, the mechanisms that have evolved (or been designed) under capitalism that enable owners to control management can be transported to a socialist framework

There is no central planning board, like the Soviet Gosplan, commanding factories to produce so many million tons of steel and size 12 leather boots. Instead, all goods, including labor (land, oddly, is not mentioned) are allocated by markets; there are many banks, making loans at interest to competing firms, who pay dividends to those who own stock in them, and are, quite cold-heartedly, allowed to go bankrupt when bad luck or stupidity force them to it

Where, then, do we find the socialist better half of the union? Not in the welfare-state provisions (though there is a full set of them, like china), but in the stock market. Stock prices are quoted not in currency but in coupons, issued to citizens on attaining their majority, not convertible to cash, and reverting to the treasury at death. The price of a firm's stock in coupons will, presumably, reflect both the current value of its dividends and expectations about its future performance. Citizens can buy and sell shares in firms directly, or, more plausibly, invest in mutual funds. (if you can buy/sell coupons, then how are they not convertible to cash?)

Since firms cannot raise fresh capital on the stock market for investment (and there is no bond market; at least, he mentions none), they must go to the banks. Each bank has a circle of associated firms, on the model of the Japanese keiretsu, which it supervises.

The banks themselves are partially owned by institutional investors (pension funds, insurance companies, etc.), and partially by the government; their boards of directors are, at least in part, democratically elected

Five questions present themselves.

1. Could it work? I suspect it could; certainly Roemer's case that it could is very strong. Advanced capitalist economies are dominated by large firms, which, in practice, solve very complicated problems of mechanism design

An obvious argument against the practicality of market socialism is: "The Yugoslavs tried it, and look where it got them." Few would attribute the continuing horror there to the preceding thirty-odd years of worker-management and markets (though some writers for Z magazine seem to come close to this). Still, by the 1980s the Yugoslavian economy was in quite bad shape, and if this was due to the attempt to wed markets and socialism, that's bad news for their mutual friends. Roemer's section 10, therefore, examines "the Yugoslav experiment" and concludes that one of the supposed parties to the marriage was, in fact, an impostor:
[F]irms were not run on a competitive, profit-maximizing basis but were intensively interfered with by political authorities. Not only was competition between firms actively prevented [along with trade between the federated republics!], but the soft-budget-constraint syndrome was ubiquitous

2. Would it be at all superior to capitalism? For an egalitarian liberal, like Roemer or myself, sure.

A related benefit, which Roemer goes into at some length, is reducing the level of profitable public bads. Many public bads, like pollution, go with increased profits, so, all else being equal, the more money you get from profits, the more of those public bads you will be willing to tolerate. If profits are highly concentrated (as today they are; in the United States, 10 percent of all households hold 83 percent of all stocks), there will be a small group of people who want much more of those public bads than the rest of the population, and, being powerful and rich, they are likely to get their way. Distributing profits widely eliminates this problem

One of the great triumphs of neo-classical economics (already mentioned in passing) is the proof that, subject to certain conditions, markets allocate efficiently. Unfortunately, those conditions are not, and almost certainly cannot be, fulfilled in this world, and so real markets mis-use resources, to a greater or lesser degree, which is known (there is a hint of betrayal in the name) as market failure. One of those conditions is the existence of a "complete set of futures markets"; roughly, one should be able to buy insurance for any contingency

it's not the sort of thing which private insurers can offer, and consequently firms are liable to invest too little. Such insurance could, however, be organized by governments

3. Can it be reached from actually existing capitalism?

I will simply say that I will be greatly surprised if market socialism becomes a live option in the developed countries any time soon. At the moment, it's all we can do to preserve some fragments of the welfare state; here in the United States, we are lucky when economic policy maintains a connection to orthodox economics. But suppose we get over this, and leftists (or progressives, or what-have-you) return to strength; the key tasks would then be getting them to embrace markets, and getting the rich to give up their wealth. Roemer spends seven pages confuting "criticisms of market socialism from the left," and while nothing in them is wrong, nothing in them is very likely to change anyone's mind, either, especially not the minds of those who gravitated to left precisely because (if I may put it this way) they did not value markets at their true worth

I will be flabbergasted if market socialism takes root outside the developed countries

4. Is it socialist? Unlike Roemer, I don't find this a particularly interesting question to ask... little seems to hinge on the answer.

5. How likely is Roemer's book to persuade anyone? Alas, not very. Roemer clearly wants to reach non-economists who know little math, but he has so completely assimilated the neo-classical way of thinking that the effort fails dismally

The reader who struggles past this to the core of the book will be treated to the detailed, careful, entirely verbal presentation of several different mathematical model economies, all of them highly abstract

Theorems about these models are enunciated, again with some care, but (naturally enough, lacking algebra) not proved. The only people likely to find this persuasive will positively crave the missing formalism; I certainly did

Some of my socialist friends regard this sort of thing as the inevitable consequence of indulging in mathematical economics

First, Roemer is no worse than most of Marx, to say nothing of the suppurations of carriers of the French Disease. Second, there are mathematical economists who do write decently and persuasively --- though precious few of them.

In addition to speaking Rigorese, Roemer neglects the kinds of argument which might persuade non-initiates

His political arguments, in any idiom (egalitarian-liberal, Marxist, etc.), are few and anemic. The contrast with earlier market socialist works --- Alec Nove's The Economics of Feasible Socialism (London: George Allen & Unwin, 1983) springs to mind --- is striking and saddening.

In summary: This book makes a good case for a species of market socialism, and (here I risk prophecy) will have no influence at all.