The Moorish Wanderer

A Socialist Economy For All

In Economic terms, Social Democracy has defined itself de facto. It has led, indirectly or not, to the financial meltdown the world is struggling with today. Democratic socialism, or even Communism are yet to redefine their terms, economic policies-wise.

Allow me to dismiss the old-fashioned economic stereotypes on Communists and Left-Wingers. The stereotypes that they are pro-Statu quo, still clinging on to an evaporated ideal of a centralized, planned economy. These days were over well before the Berlin Wall came down. If anything, New Communism, with its Alter-Globalization stance, embraces a different way of dealing with economics. Not as yet refined as Capitalist economics is in theoretical terms, but I am quite confident a generation of young economists can find a way through.

In any case, it is essential for the reader to bear in mind that the “mother source” of Communism, i.e. Karl Marx, never stated that communist economy should be planned, it was never mentioned how it should be organized, save perhaps for the motto “From each according to his ability, to each according to his needs“. In facts, most of Marx’s work was mainly a scientific attempt to produce a wholesome criticism of the capitalist production mode. Later in his life, he took interest in the mathematical aspect of economics, something that would have been of great use if his great mind was put to it. In any case, his criticism never got round the idea of “banning” markets, that’s for sure.

I promised my friend a post on how I can claim being a socialist, and still uphold the essential aspects of a capitalist economy. How I can find striking similarities in the theoretical groundwork of pure market and pure centralized economies. I shall give my best in this in two parts. First, the basic principles that are common to the two models, and then, a timid attempt to give a simple model of what I believe to be a socialist and democratic economy.

First, I have to say that the statement about Market vs Centralized economies is a bit over the top. When I first came across it, I did not believe it at first. Then, when the canvass of economic formulae was laid before my eyes, I hit upon it. In simple terms, the essential common points are as follow:
– The main economists that shaped the neo-classical models, those that are the core theory of market economics, where mainly (save perhaps for the Fascist Vilfredo Pareto, who, later in his life, accepted a Senator’s position in Mussolini’s Italy) of positivist stance.

And in the late 19th century, being positivist meant, in a way, being in favour of social harmony and progress. That was the case for Walras, but also for Jevons. These defined themselves as social-democrats, which, before 1904, meant they were much more left-wing than those today. The very idea of a Homo Economicus, an iron balance of pain and pleasure is the ideal of a Übermenschen, but in a “good way”. I put the brackets on advisedly, because I mean the Superhuman can be any body, and not an elite among the commons, all of which has a certain flavour of left-wing.

– The intrinsic determination of price market: Smith may have fathered to image of invisible hand, but Walras’ own image is more interesting: He talks of an “Auctioneer” (Commissaire Priseur). In his mind, there is an invisible actor that centralizes prices on both sides (Demand and Supply) then equates them all so that each one’s wealth is maximized. In addition to that, the Price of all prices, i.e. money, is defined as the last recipient of the remaining surplus (what is left of everyone’s maximized utility). I think I went a bit fast, so let me sum it up through mathematical formulae.
1. At the beginning, there is an assumption of universal initial endowment of goods.



Not just money, goods too. That means for households their labour force, and occasionally some money with unknown value. (Each agent in the market has m-1 goods and a sum of money as initial endowment) That also means for firms some capital or some money, equally of unknown value (value will be determined further on through price clearing mechanisms). The Auctioneer then centralizes all available data, including what everyone asks as a price (how these are determined is something economists did not fully answered until Arrow & Debreu came along, and even their explanation remains incomplete) The Auctioneer, through maximization under constraints of available resources, displays prices, market prices that is, for all individuals and firms to make their deals.

2. Centralized economies, in their theoretical models, differ very little from that scheme. The difference is that prices are not determined through each one’s utility, these are defined as a whole. Here, the Law of Large Numbers makes individual and collective wealth converge into one single item, all of which makes market and centralized economies look alike. The actual economies that we witnessed throughout history are, of course, quite different. Planned Economies failed not because of their own nature of Planning. They failed (and I must stress this is only my opinion) because they kept on producing non-productive goods and spoling the labour force. Non-productive goods means here Arms and Space industry. Capitalist economies, on the other hand, in order to kick out an possibility of communist subversion, managed, or made the impression to manage, an economy devoted to human capital, the so-called “Society of Mass Consumption“.

The Soviet Union, for instance, had experienced a brief period of that kind of economy, when Khrushchev came to power and tried to strengthen the Communist Party’s hold by producing more consumption goods. Same goes along for China after they abandoned Mao’s dogma. There are other factors of course, and my statement remains doubtful until some serious econometric study was carried out, but I am quite confident the theoretical parameter, i.e. the idea of planned economy, is of little consequence over the whole outcome.

The next bit is going to be a bit far-fetched, I am afraid I am going to stretch my knowledge of economic models to its limits. In a nutshell, my model allows for the following players to make their bidding in two times on the economy: The Firms (Banks and Goods-producing firms alike) that rally within employers’ union, and the Workforce that rallies behind trade-unions. These two groups of players are shadowed by the State and the Central Bank. Each player (including the authorities) have incentives and their own maximization program, which might come to the expense of others. Nonetheless, an optimum must be reached. I hold all players to be rational and all of them accept the idea of a cooperative set of games.

The workforce has the following system to solve:





Where W is the wage sought for a period t.

The wage W* is the equilibrium wage and is function of the equilibrium inflation rate π*.

Indeed, if the workforce asks for a large rise (meaning a large C) they would end up fuelling inflation, and thus effectively damaging their real income. Alternatively, they choose between a wage rise on their labour (with a fraction α), or they could cash in the dividends from the companies they own (with a fraction 1-α).

Here lies an idea I am very fond of: the extensive use of cooperatives as a form of socialist enterprise. All the aspects of a free market economy remain, save for the property regime, under which all workers have shares in their companies.

The dividends, on the other hands, do not have an impact on inflation, because of some further aspects that are to be discussed later on. Finally, I must admit there is at least something incongruous about the said model. Usually workers do not foresee inflation, but because these gather within trade-unions, the assumption holds, as the trade-union forecasts it for the benefit of its members. On the basis of these forecasts, the trade-unions claim a certain wage rise following constraints on output, inflation and interest rates.

The GDP is broken down as follows:


Where the Gross Domestic Product is the sum of each player’s contribution: Wages as marginal labour productivity, Profits as marginal output productivity, governement spendings (function of net wages and profits) and last, the sum of Liquidity Loss functions. These are the “lazy” way for the Central Bank to do its job by manufacturing inflation, instead of increasing interest rates. A job I referred to in a post earlier on.

In any case, my vision of a socialist economy remains, as someone puts it, very “moderate”: an open-Market economy where long-term stability on unemployment, inflation and growth is achieved through mass private ownership of one’s company, and the systematic involvement of unions (employees and employers alike) in defining the targets to meet.

Then there’s a bunch of other ideas, like free public transports to reduce the number of private cars (reducing thus effectively CO2 emissions) slimming down the civil service to an efficient corps of dedicated and professional civil servants (ideally, administrative costs relative to that of investment should be of 1 to 4 ratio), the abolition of VAT, and levy taxes on the large fortunes, while getting small amounts of taxes from a wider base.

There are other things I cannot afford to enumerate pêle-mêle, I need time and skill to study these policies a bit further. I know it is quite blur, but I am working on getting the necessary skills to describe it further.  In any case, the policies I support have one crucial criterion: the need to address any privilege, any inequality that is likely to degenerate into a rent.

I am well aware inequalities cannot be fully addressed, but there is a wide margin on narrowing these to a state such, as Tocqueville stated: “Among a democratic people, where there is no hereditary wealth, every man works to earn a living. Labour is held in honor; the prejudice is not against but in its favour“.