Market socialism

Market socialism

Market socialism refers to various economic systems where the means of production are either publicly owned or cooperatively owned and operated for a profit in a market economy. The profit generated by the firms system would be used to directly remunerate employees or would be the source of public finance.[1][2] Theoretically, the fundamental difference between market socialism and a traditional socialist economy is the existence of a market for the means of production and capital goods.

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

Early forms of market socialism consisted of proposals for cooperative enterprises operating in a free-market economy, so that exploitation would be eliminated and individuals would receive the full product of their labor. Early market socialism was expressed by Ricardian socialists, mutualists, individualist anarchists and syndicalists.

The maturing of neoclassical economic theory led to various new proposals of market socialism in the early twentieth century. The traditional neoclassical market socialist proposals consisted of state-owned industries and a central planning board (CPB) that sets prices to equal marginal cost, thereby achieving pareto efficiency.

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


Theoretical history

The earliest models of this form of market socialism were developed by Enrico Barone (1908)[3][4] and Oskar R. Lange (c. 1936).[5] Lange and Fred M. Taylor[6] proposed that central planning boards set prices through "trial and error," making adjustments as shortages and surpluses occurred rather than relying on a free price mechanism. If there were shortages, prices would be raised; if there were surpluses, prices would be lowered.[7] Raising the prices would encourage businesses to increase production, driven by their desire to increase their profits, and in doing so eliminate the shortage. Lowering the prices would encourage businesses to curtail production to prevent losses, which would eliminate the surplus. Therefore, it would be a simulation of the market mechanism, which Lange thought would be capable of effectively managing supply and demand[8] but could not work as efficiently or as effectively as the true thing. Time delays due to bureaucracy, distortions due to politics, and the lack of an entrepreneurial process that would come up with newer, better and cheaper products would seriously hamper the results of this approach vis-a-vis the real thing, which would also avoid the financial cost of paying for inessential government administrative staff.

A second form of market socialism has been termed "free market socialism" because it does not involve planners.[9][10] Pierre-Joseph Proudhon developed a theoretical system called mutualism, which attacks the legitimacy of existing property rights, subsidies, corporations, banking, and rent. Proudhon envisioned a decentralized market where people would enter the market with equal power, negating wage slavery.[11] Proponents believe that cooperatives, credit unions, and other forms of worker ownership would become viable without being subject to the state. Market socialism has also been used to describe some individualist anarchist works[12] which argue that free markets help workers and weaken capitalists.

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

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

Although the name is similar, it markedly differs from the socialist market economy and Socialist-oriented market economy, which is practiced within the People's Republic of China and Socialist Republic of Vietnam, respectively.

Advocates of market socialism argue that it combines the advantages of a market economy with those of socialist economics. Proposed models include 'Coupon Socialism' (by the economist John Roemer) and ´Economic Democracy´ (by the philosopher David Schweickart).

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

Theoretical basis

The key theoretical basis for market socialism is the negation of the underlying expropriation of surplus value present in other, exploitative, modes of production. Socialist theories that favored the market date back to the Ricardian socialists, who advocated a free-market combined with state ownership of the means of production.

An important base for the first definition of market socialism in economic theory is the Lange Model, which states that an economy in which all production is performed by the state, but in which there is a functioning price mechanism, has similar properties to a market economy under perfect competition, in that it achieves Pareto efficiency.


Peter Drucker described the U.S. system of regulated pension funds providing capital to financial markets as "pension fund socialism".[13] William H. Simon characterized pension fund socialism as "a form of market socialism", concluding that it was promising but perhaps with prospects more limited that those envisioned by its enthusiasts.[14]

Other uses of the term

Market socialism has also been used as a name for any attempt by a Soviet-style economy to introduce market elements into its economic system. In this sense, "market socialism" was first attempted during the 1920s in the Soviet Union as the New Economic Policy (NEP), but soon abandoned. Later, elements of "market socialism" were introduced in Hungary (where it was nicknamed "goulash communism"), Czechoslovakia and Yugoslavia (see Titoism) in the 1970s and 1980s. Modern Vietnam and Laos also describe themselves as market socialist systems. The Soviet Union attempted to introduce a market socialist system with its perestroika reforms under Mikhail Gorbachev. During the later stages there was talk within top circles that the government should create the Socialist Market Economy; however, they never reached an agreement of how much socialism and market was to be featured.

Historically, these kinds of "market socialist" systems attempt to retain government ownership of the commanding heights of the economy, such as heavy industry, energy, and infrastructure, while introducing decentralised decision making and giving local managers more freedom to make decisions and respond to market demands. Market socialist systems also allow private ownership and entrepreneurship in the service and other secondary economic sectors. The market is allowed to determine prices for consumer goods and agricultural products, and farmers are allowed to sell all or some of their products on the open market and keep some or all of the profit as an incentive to increase and improve production.

Socialist market economy

The Chinese experience with socialism with Chinese characteristics is frequently referred to as a 'socialist market economy' in which the 'commanding heights' remain in state ownership, but a substantial portion of both the state and private sectors of economy are governed by free market practices, including a stock exchange for trading equity. The free-market is the arbitrator for most economic activity, with economic planning being relegated to macro-economic government indicative planning that does not encompass the microeconomic decision-making that is left to the individual organizations and state-owned enterprises. This model includes a significant amount of privately owned firms that operate as a business for profit, but only for consumer goods and services.[15]

Directive centralized planning composed of mandatory output requirements and production quotas have been displaced by the free-market mechanism (for most of the economy) and directive planning in larger state industries.[16] One of the major changes between the old planned economy and the socialist market model is the corporatization state institutions, with 150 of them reporting directly to the central government.[17] By 2008, these state-owned corporations have became increasingly dynamic and generated lots of revenue for the state,[18][19] with the state-sector leading the recovery of economic growth in 2009 in the wake of the financial crises.[20]

The Socialist Republic of Vietnam pursued market-oriented reforms in 1986, resulting in what is officially called a 'Socialist-oriented market economy', a system that utilizes market forces to distribute consumer goods produced by state-run, collectively owned and privately owned enterprises.

Proponents of socialist market economic systems argue from a Marxist perspective, stating that a planned socialist economy can only be brought about by first establishing a comprehensive commodity market economy and letting it fully develop until it exhausts its historical stage and gradually transforms itself into a planned economy.[21] They argue that the economic system of the USSR and its satellite states attempted to go from a natural economy to a planned economy by decree, without passing through the necessary market economy phase of development. Proponents of socialist-directed market economies distinguish themselves from market socialists, and state that market socialists believe that only through utilizing the market mechanism can socialism be achieved, and that planned economies are ineffective or undesirable.[22]

See also


  1. ^ Buchanan, Alan E. Ethics, Efficiency and the Market. Oxford University Press US. 1985. ISBN 978-0-8476-7396-4, pp. 104-105
  2. ^ Comparing Economic Systems in the Twenty-First Century, 2003, by Gregory and Stuart. ISBN 0-618-26181-8. (P.142): "It is an economic system that combines social ownership of capital with market allocation of capital...The state owns the means of production, and returns accrue to society at large."
  3. ^ F. Caffé (1987), "Barone, Enrico," The New Palgrave: A Dictionary of Economics, ISBN 978-1-56159-197-8, v. 1, p. 195.
  4. ^ Enrico Barone, "Il Ministro della Produzione nello Stato Collettivista", Giornale degli Economisti, 2, pp. 267-293, trans. as "The Ministry of Production in the Collectivist State," in F. A. Hayek, ed. (1935), Collectivist Economic Planning, ISBN 978-0-7100-1506-8 pp. 245-90.
  5. ^ Robin Hahnel (2005), Economic Justice and Democracy, Routlege, ISBN 978-0-415-93344-5, p. 170
  6. ^ Fred M. Taylor (1929). "The Guidance of Production in a Socialist State," American Economic Review, 19(1), pp. 1-8.
  7. ^ Mark Skousen (2001), Making Modern Economics, M.E. Sharpe, ISBN 978-0-7656-0479-8,pp. 414-415.
  8. ^ János Kornai (1992),The Socialist System: the political economy of communism, Oxford University Press, ISBN 978-0-19-828776-6, p. 476.
  9. ^ Property and Prophets: the evolution of economic institutions and ideologies, E. K. Hunt, published by M.E. Sharpe, ISBN 978-0-7656-0609-9, p.72
  10. ^ Mutualist Blog: Free Market Anti-Capitalism: "J.S. Mill, Market Socialist"
  11. ^ Mutualist Blog: Free Market Anti-Capitalism: Eugene Plawiuk on Anarchist Socialism
  12. ^ Murray Bookchin, Ghost of Anarcho-Syndicalism; Robert Graham, The General Idea of Proudhon's Revolution.
  13. ^ The unseen revolution: how pension fund socialism came to America, Peter Ferdinand Drucker, Harper Collins, 1976, ISBN 978-0-06-011097-0
  14. ^ William H. Simon, "Prospects for Pension Fund Socialism", Corporate control and accountability: changing structures and the dynamics J McCahery, et al., Oxford University Press, 1995, ISBN p.167
  15. ^ "The Role of Planning in China's Market Economy", presented before the "International Conference on China's Planning System Reform," March 24 and 25, 2004 in Beijing, by Prof. Gregory C. Chow, Princeton University.
  16. ^ "The Role of Planning in China's Market Economy", presented before the "International Conference on China's Planning System Reform," March 24 and 25, 2004 in Beijing, by Prof. Gregory C. Chow, Princeton University.
  17. ^ "Reassessing China's State-Owned Enterprises". Forbes. July 8, 2008. 
  18. ^
  19. ^ David A. Ralston, Jane Terpstra-Tong, Robert H. Terpstra, Xueli Wang, "Today's State-Owned Enterprises of China: Are They Dying Dinosaurs or Dynamic Dynamos?"
  20. ^ "China grows faster amid worries". BBC News. July 16, 2009. Retrieved May 12, 2010. 
  21. ^ Market Economy and Socialist Road, Duan Zhongqiao
  22. ^ Market Economy and Socialist Road, Duan Zhongqiao

Further reading

  • Bertell Ollman ed. (1998). Market Socialism: the Debate Among Socialists, with other contributions by James Lawler, Hillel Ticktin and David Schewikart. Preview.
  • Steven O'Donnell (2003). Introducing Entrepreneurial Activity Into Market Socialist Models, University Press, Auckland
  • John E. Roemer et al. (E. O. Wright, ed.) (1996). Equal Shares: Making Market Socialism Work, Verso.
  • Alec Nove (1983). The Economics of Feasible Socialism, HarperCollins.
  • David Miller (1989). Market, State, and Community: Theoretical Foundations of Market Socialism, Clarendon Press, Oxford.
  • David Schweickart (2002). After Capitalism, Rowman & Littlefield, Lanham, Maryland.
  • Johanna Bockman (2011). Markets in the Name of Socialism: The Left-Wing Origins of Neoliberalism, Stanford University Press, Stanford. Preview.

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