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Market socialism is a type of economic system where the means of production are either publicly owned or socially owned as cooperatives and operated in a market economy. This differs from non-market socialism in that a market exists for allocating capital goods and the means of production. There are many models of market socialism. Depending on the specific model, profits generated by socially-owned firms could be used to directly remunerate employees, accrue to society at large by becoming the source of public finance, or could be distributed amongst the population in a social dividend. The term "market socialism" only became widespread during the Socialist calculation debate beginning in the 1920s and 1930s.
Market socialism is distinguished from models of mixed economies, because unlike the mixed economy, models of market socialism are complete and self-regulating systems. Market socialism is also contrasted with social democratic policies implemented within capitalist market economies: while social democracy aims to achieve greater economic stability and equality through policy measures such as taxes, subsidies and social welfare programs, market socialism aims to achieve similar goals through changing patterns of enterprise ownership and management.
Early models of market socialism have their roots in the works of Adam Smith and the theories of classical economics, consisting of proposals for cooperative enterprises operating in a free-market economy, with the aim of eliminating exploitation, allowing individuals to receive the full product of their labor, and to remove the market-distorting effects of concentrating ownership and wealth in private owners. Among early advocates of market socialism were Ricardian socialist economists and mutualism.
Beginning in the early twentieth century, neoclassical economic theory provided the theoretical basis for more comprehensive models of market socialism. Early neoclassical models of socialism included a role for a central planning board (CPB) in setting prices to equal marginal cost to achieve Pareto efficiency. Alternative models of market socialism outlined models where socially owned enterprises or producer co-operatives operated within free markets under the criterion of profitability. In recent models proposed by neoclassical economists such as John Roemer and James Yunker, public ownership of the means of production is achieved through public ownership of equity and social control of investment.
Market socialism has also been used to refer to reformed economic systems in Marxist-Leninist states, most notably in reference to the contemporary economy of the People's Republic of China. In this system, a free price system is used for the allocation of capital goods within the state and private sectors, and the state utilizes indirect macroeconomic market mechanisms (i.e.: fiscal, monetary and Industrial policies) to influence the economy in the same manner governments affect the economy in capitalist economies. However, Chinese political and economic proponents of the "socialist market economy" do not consider it to be a form of market socialism in the neoclassical sense, and many Western economists and political scientists question the degree to which this model constitutes a form of market socialism.
- 1 Theoretical history
- 2 Theoretical basis
- 3 Implementation
- 4 Other uses of the term
- 5 See also
- 6 References
- 7 Further reading
Proponents of early market socialism include the Ricardian socialist economists, the classical liberal philosopher John Stuart Mill, and the anarchist philosopher Pierre-Joseph Proudhon. These models of socialism entailed "perfecting" or improving the market-mechanism and free-price system by removing distortions caused by exploitation, private property, and alienated labor.
Mutualism and US individualist anarchism
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. 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 which argue that free markets help workers and weaken capitalists. He is the first person to call himself an "anarchist", and considered among its most influential theorists. He is considered by many to be the "father of anarchism". He became a member of the French Parliament after the revolution of 1848, whereon he referred to himself as a "federalist". His best-known assertion is that Property is Theft!, contained in his first major work, What is Property? Or, an Inquiry into the Principle of Right and Government (Qu'est-ce que la propriété? Recherche sur le principe du droit et du gouvernement), published in 1840. The book's publication attracted the attention of the French authorities. It also attracted the scrutiny of Karl Marx, who started a correspondence with its author. The two influenced each other: they met in Paris while Marx was exiled there. Their friendship finally ended when Marx responded to Proudhon's The System of Economic Contradictions, or The Philosophy of Poverty with the provocatively titled The Poverty of Philosophy. The dispute became one of the sources of the split between the anarchist and Marxian wings of the International Working Men's Association.
For American anarchist historian Eunice Minette Schuster "It is apparent ... that Proudhonian Anarchism was to be found in the United States at least as early as 1848 and that it was not conscious of its affinity to the Individualist Anarchism of Josiah Warren and Stephen Pearl Andrews ... William B. Greene presented this Proudhonian Mutualism in its purest and most systematic form.". Josiah Warren is widely regarded as the first American anarchist, and the four-page weekly paper he edited during 1833, The Peaceful Revolutionist, was the first anarchist periodical published, an enterprise for which he built his own printing press, cast his own type, and made his own printing plates. Warren was a follower of Robert Owen and joined Owen's community at New Harmony, Indiana. Josiah Warren termed the phrase "Cost the limit of price," with "cost" here referring not to monetary price paid but the labor one exerted to produce an item. Therefore, "[h]e proposed a system to pay people with certificates indicating how many hours of work they did. They could exchange the notes at local time stores for goods that took the same amount of time to produce.". He put his theories to the test by establishing an experimental "labor for labor store" called the Cincinnati Time Store where trade was facilitated by notes backed by a promise to perform labor. The store proved successful and operated for three years after which it was closed so that Warren could pursue establishing colonies based on mutualism. These included "Utopia" and "Modern Times." Warren said that Stephen Pearl Andrews' The Science of Society, published in 1852, was the most lucid and complete exposition of Warren's own theories. Later Benjamin Tucker fused the economics of Warren and Proudhon and published these ideas in Liberty calling them "Anarchistic-Socialism". Tucker said, "the fact that one class of men are dependent for their living upon the sale of their labour, while another class of men are relieved of the necessity of labour by being legally privileged to sell something that is not labour. . . . And to such a state of things I am as much opposed as any one. But the minute you remove privilege. . . every man will be a labourer exchanging with fellow-labourers . . . What Anarchistic-Socialism aims to abolish is usury . . . it wants to deprive capital of its reward.".
The earliest models of neoclassical market socialism were developed by Leon Walras, Enrico Barone (1908) and Oskar R. Lange (c. 1936). Lange and Fred M. Taylor (1929)  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. 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.
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.
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.
Economists active in the former Yugoslavia, Czech-born Jaroslav Vanek and Croat-born Branko Horvat, promoted a model of market socialism dubbed the Illyrian model, where firms were socially owned by their employees and structured on workers' self-management, and competed with each other in open and free markets.
Another form of market socialism was promoted by critics of central planning and neoclassical general equilibrium theory, the most notable economists being Alec Nove and Janos Kornai. In particular, Alec Nove proposed what he called feasible socialism, a mixed economy consisting of state-run enterprises, autonomous publicly owned firms, cooperatives, and small-scale private enterprise operating in an economy consisting of both markets and indirect macroeconomic planning.
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 and anarchist economists, who advocated a free-market combined with state ownership (or worker-ownership in the case of anarchists) 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.
The economy of the former Socialist Federal Republic of Yugoslavia is widely considered to be a model of market-based socialism.
The Mondragon Cooperative Corporation in the Basque Country is widely cited as a highly successful co-operative enterprise based on worker-ownership and democratic management.
Peter Drucker described the U.S. system of regulated pension funds providing capital to financial markets as "pension fund socialism". William H. Simon characterized pension fund socialism as "a form of market socialism", concluding that it was promising but perhaps with prospects more limited than those envisioned by its enthusiasts.
Similar policies to the market socialist proposal of a social dividend and basic income scheme have been implemented on the basis of public ownership of natural resources in Alaska (Alaska Permanent Fund) and in Norway (The Government Pension Fund of Norway).
Other uses of the term
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Although they sound similar in name, market socialism markedly differs from the socialist market economy and Socialist-oriented market economy models that are practiced in the People's Republic of China and Socialist Republic of Vietnam, respectively.
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. The Economy of Belarus has been described as a "market socialist" system. 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 state 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.
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. 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. By 2008, these state-owned corporations have became increasingly dynamic and generated lots of revenue for the state, with the state-sector leading the recovery of economic growth in 2009 in the wake of the financial crises.
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. 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.
- Criticisms of Capitalism
- Economic calculation debate
- Goulash Communism
- Lange Model
- Market economy
- Neoclassical economics
- New Economic Policy
- New Economic Mechanism
- Ricardian socialism
- Self-managed economy
- Socialist economics
- Socialist market economy
- Socialist-oriented market economy
- Social capitalism
- State capitalism
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