Social Ownership in a Market Economy

The first section of this chapter concerned the ‘market’ part of market social­ism; the present section is about the ‘socialism’ part. It begins with a discus­sion of ownership of the means of production in a free enterprise system.

Private ownership, or full liberal ownership, is actually a complex of rights, terms and conditions. These “incidents of ownership” as A. M. Honore calls them in his classic study, “Ownership” are

1. the right to possess, that is, the right to exclusive physical control

2. the right to use, that is, the right to personal use and enjoyment of the thing owned, as distinct from incidents 3 and 4

3.

4. the right to the income from the thing

5. the right to the capital, which consists of the power to alienate and the freedom to consume, waste, modify, or destroy all or part of the thing

6. the right to security, that is, immunity from expropriation by others

7. transmissibility, that is, the power to bequeath

8. absence of term, that is, the fact that the other incidents are held indef­initely

9. prohibition of harmful use, which is usually defined in terms of the non­violation of the rights of others

10. liability to execution, that is, liability to judgment debt, insolvency, or taxation

11. residuary character, that is, rules governing the disposition of the thing when the other rights lapse. (1961, 112-28)

Any system of ownership is going to have to specify these rights, terms, and conditions. What is distinctive about private ownership is that all of these can be held by one individual, or they can be distributed among any number of individuals in whatever constellation they find mutually agreeable.¹² Clearly, the most important of these for economic purposes are incidents 3-5. (Incidents 1 and 6 are tacitly assumed to be assigned to whomever has 3 and 4.) It is primarily through these incidents of ownership that private individuals control the means of production to further their private interests. And it is the concentration of these rights in private hands that defenders of a free enterprise celebrate and their socialist opponents abhor.

By definition, a socialist economic system prohibits widespread private ownership of the means of production, which means that in most cases it pro­hibits persons from individually holding the rights identified in incidents 3-5. The definition of a socialist economic system also requires the socializa­tion or social ownership of the means of production. How is this to be under­stood? As was suggested in chapter 1, there are fundamentally two positive conceptions of what socialization of the means of production amounts to that are compatible with a fully functioning market economy.¹³ One conception holds that the means of production should be owned by society (or possibly the working class) as a whole.

Although societies in which the state owns the means of production his­torically have had centrally planned economies, this form of ownership is in principle compatible with a market economy.¹⁵ In such a system, state-owned enterprises would be ultimately controlled by political authorities, who may or may not be democratically elected. These firms would buy inputs from each other and sell outputs to each other and to consumers. To approximate the efficiency of capitalist firms, managers appointed by the state would seek to maximize profits, possibly subject to various side constraints; these profits would be plowed back into the firm or go to the national treasury, or both.

However, many, if not most, contemporary proponents of market social­ism do not favor full state ownership as the primary way to socialize the means of production. Historical experience with nationalized firms in both state socialist and capitalist economies has given little cause for optimism about state ownership of the means of production. The underlying reason for this aversion to nationalization seems to be that both the state and the nation­alized firms that the state controls have, or come to develop, their own sepa­rate interests—interests that do not necessarily coincide with the interests of those who work in the firm or of society at large.¹⁶ More exactly, the interests of the politicians and the ministers who are supposed to oversee the nation­alized industries and the interests of the managerial elites who actually con­trol these firms very often do not coincide with the public interest or the interests of the workers.

In addition, the widespread nationalization of the means of production does not sit easily with another characteristic feature of a socialist economic system: the abolition of wage labor. One of the defining features of a free enterprise system is that people are free to sell their labor (labor power) to those who control the means of production. This sale implies a separation of the worker from control of the means of production. The problem with nationalization as a mode of social ownership is that it certainly seems that employees of nationalized firms are selling their labor to the state in exchange for a wage. The only difference between this system and a free enterprise system in this respect is who is doing the buying—in this case, the state. It might be argued that workers in nationalized firms are, qua citizens, part owners of these firms, so they cannot really be wage laborers. But this conclusion does not follow and seems specious on its face. Workers in a cap­italist system can be part owners of their firms (through, e.g., the holdings of their pension funds) without thereby ceasing to be wage laborers.

More important, a market socialist economic system in which the state fully owns the means of production may well suffer many of the problems attributed to a capitalist (free enterprise) system in general and wage labor in particular. The crucial difference between this type of system and capital­ism is that the former precludes private ownership of the means of produc­tion. However, this difference may not come to very much beyond the elim­ination of interest income to nonworkers in an economic system in which most enterprises have been nationalized.

In addition, in a society in which most of the means of production have been nationalized, the workers would likely be forced to deal with the bureau­crat-managers just as they are forced to deal with capitalists under capitalism. This, coupled with management’s directive to maximize profits, creates the structural conditions for the exploitation of the workers by bureaucratic elites, and it bodes ill for ameliorating alienation.

These observations are not meant to be decisive objections to complete ownership of the means of production by the state, since it may be possible to fashion institutional devices to preempt these potential problems. And these considerations are certainly not telling against all forms of state own­ership. However, they do constitute a prima facie case against full state own­ership that many thoughtful socialists have found, or should find, persuasive, especially in light of the historical record of socialism (as well as state owner­ship under capitalism) as it has been realized in the twentieth century. Though most people—and virtually all socialists—believe that the govern­ment should have a significant role in the economy, few believe anymore that it would be a good idea to turn over complete ownership of most of society’s means of production to the state.

The second way of socializing the means of production (currently the pre­ferred mode of socialization for most proponents of market socialism) is through the establishment of worker cooperatives (Vanek 1970, 1977a; Selucky 1979; Schweickart 1980; Horvat 1982; Cohen and Rogers, 1983; Dahl 1985; Bowles and Gintis, 1986; J. Cohen 1989; Estrin 1989; Miller 1989a).¹⁷ This means, first and foremost, that enterprises are self-managed. All and only workers in the cooperative collectively decide (1) how work relations are to be structured, (2) what pay differentials should be for different jobs, (3) what working conditions should be (e.g.

In this type of system, firms buy their nonlabor inputs and sell their out­put in the market—a market in which prices are free to seek their own level. Workers’ income is determined by the total income of the firm, net of nonla­bor expenses. Because of the way their income is determined, the workers are said to be the residual claimants. Do workers have full liberal ownership rights in the firm? The answer to this question must be no for two reasons: (1) if they had full liberal ownership rights, they could sell their management and income rights to non-members, which would violate the general prohi­bition on private ownership; and (2) if the workers were to have the kind of income rights in their cooperatives that owners of capitalist firms have, they would receive all of the returns on the cooperative’s capital. The reason this is problematic from a socialist perspective is that for technical reasons, capi- tal-to-labor ratios vary enormously from one firm to another. Workers in highly capital-intensive firms, such as petrochemical refineries, would real­ize a much greater per capita share of society’s total return on its capital investment than those who happen to work in less capital-intensive firms, such as truck farming operations. This would result in income inequalities too large for any socialist to accept.

The first problem can be precluded by prohibiting workers from selling their management rights in their firms to anyone who is not a member of the firm, or indeed possibly to anyone at all. The second problem could be solved by socializing the returns to capital. The simplest and most obvious way to do this is to require cooperatives to pay a capital usage fee to the state.¹⁸ The returns to capital must be taken into account in some manner for the simple reason that capital is scarce, so that decision makers must economize on its use. Payment of a capital usage fee forces a recognition of this fact.

The rationale for paying this fee to the state is that it is the most natural way of giving expression to the idea that society as a whole should have an ownership stake in its means of production. Of course, under this system the state does not have complete ownership of those resources, since the work­ers have the corresponding management rights. However, by receiving the returns to capital, society as a whole, as represented by the state, retains a real ownership stake in its productive apparatus. This ownership stake is fur­ther enhanced by requiring the cooperatives to maintain properly the means of production they are entrusted with and to maintain a capital reserve fund (sometimes called a “depreciation fund”) to replace capital goods when they are used up or wear out (Vanek 1977a, 171-85; Horvat 1982, 237; Schweick- art 1980, 50). As Schweickart says, “Societal ownership manifests itself in an insistence (backed by law) that the capital stock of a firm be kept intact. Depreciation reserves must be maintained; workers are not permitted to allow the assets in their trust to deteriorate in value or to sell them off for per­sonal gain” (1980, 50).

In this way, firms can be thought of as renting all of their capital (except perhaps that which is formed from internally financed new investment) from society at large. If a firm in a capitalist system rents a capital good such as a compressor or a backhoe, it must maintain the good in proper working order, and it must pay a rental fee. Part of that rental fee goes to replace the piece of equipment when its useful life has expired and part of that fee is the owner’s return on his investment. In like manner, the cooperative must prop­erly maintain all of its assets; it must pay a rental fee, part of which goes into a capital reserve fund to replace “their” capital goods as they are used up and part of which goes to the owner of these assets—society at large—in the form of a capital usage fee. The capital usage fee can also be conceived of as com­parable to interest paid to a lender of financial capital (e.g., a bondholder) in a free enterprise system. The state, like a bondholder, would have no man­agement rights or residual income rights in the firm, but the firm would be contractually obligated to pay a certain rate of return to the lender. In this scenario, the workers’ income rights in the firm, as distinct from the capital that it uses, would represent a claim on the returns to labor plus any residu­als (roughly, the returns to entrepreneurship).

The conception of the state as a stand-in or representative of society as whole is, of course, potentially problematic. Following Marx’s lead,¹⁹ most socialist theoreticians are aware of the fact that states can develop an unhealthy autonomy from society, which is why many contemporary social­ists do not favor concentrating all economic power in the hands of the state and why nearly all of them strongly favor a highly democratic, participatory state, which thereby has a legitimate claim to reflect the public interest (e.g., Selucky 1979, chap. 6; Schweickart 1980, 138-40, 150-58; Horvat 1982, chap. 11; Nove 1983, 197-98, 208; Cohen and Rogers 1983, chap. 6; Dahl 1985; Miller 1989a, chap. 12).

Another advantage of this arrangement is that it facilitates one of the goals of social ownership in market economy favored by most socialists: it subjects the rate and direction of economic growth and development to collective choice. Nearly all market socialists include a substantial role for the state in directing the economy, primarily through the control of new investment (Vanek 1977b, 183; Selucky 1979, 179; Schweickart 1980, 49-53; Cohen and Rogers 1983, 161-62; Nove 1983, 207-8; Horvat 1982, 230; Levine 1984, 9-10). These theorists usually envision firms financing some expansion or even some new projects from undistributed earnings, but they also believe that the state should control most new investment.²⁰ This could be done in any number of ways. For example, the proceeds from the capital usage fee could be funneled through state-owned banks, which would be given a list of investment priorities (so much for biotechnology projects, so much for tourism, etc.). It would then be up to the banks to choose which new invest­ment projects to fund, so long as they stay within the guidelines for new investment determined through the political process.

Just as in free enterprise systems, new investment would be largely financed by the returns to capital if the capital usage fee were used to fund new investment. However, unlike in a free enterprise system, both the level of that fee (i.e., the rate of return on society’s investment) and the direction of economic development would be a matter of social choice. In other words, the overall rate and direction of economic growth would be a matter of col­lective social choice that a society makes and not something that just happens, as is the case in a free enterprise system.²¹ In the latter, the economy is char­acterized by a swarm of individuals and groups pursuing their own private interests. There is no economic institution concerned with new investment that represents the interests of society as a whole. The same would be true of a market socialist system, if the state did not have the kind of presence in the economy just described.

To summarize, in a system of worker cooperatives, the levying of a capi­tal usage fee, payable to the state and used to finance most new investment, is a natural and obvious way to give expression to the socialist principle that society as a whole should retain some form of ownership in its productive apparatus and that society itself is ultimately responsible for its own economic destiny. This account of social ownership is not fully determinate. Some of the rights, terms, and conditions have been only incompletely specified. For example, the institutional mechanisms by which the state controls new investment have not been specified. The account of the rights of self-man­agement does not require or prohibit a one person-one vote rule. Usually that is implied, but it might be reasonable to advocate something different in some circumstances. Other rights, such as (personal) use rights, have been left entirely unspecified. Nevertheless, the core of this type of market social­ist economic system consists of the following four elements:

1. It is a market economy, which means that most production is coordi­nated by market pricing.

2. The predominant type of enterprise is the self-managed cooperative. All and only workers have management rights in the firm.

3. Workers’ income is the total income of the firm, net of nonlabor expenses; the latter includes a capital usage fee paid to the state. The workers’ income rights make them the firm’s residual claimants, and only they have this status.

4. Most new investment is financed by the capital usage fee, which is con­trolled by the state. There is an important sense in which the state owns the firm’s capital, namely, the workers effectively lease the capital they use from the state; this means that in addition to paying a capital usage fee, they must maintain it properly and put enough aside to replace the capital goods they control as those goods are used up.

Element 1 constitutes the ‘market’ part of this form of market socialism. Ele­ments 2-4 define social ownership of the means of production and thus con­stitute the ‘socialism’ part of this system. Finally, as noted in chapter 1, a mar­ket socialist economic system can allow for some private ownership and some state ownership of the means of production, provided that these forms of ownership do not individually or collectively dominate the economy.

This is the type of market socialist economic system to be discussed in most of the rest of this book.²² Or perhaps it would be more illuminating to refer to it as a family of types, since there are different ways to fill in some of the rights mentioned. Its specification is relatively abstract in that many dif­ferent systems could instantiate this general type. This makes for logically stronger conclusions in the end. It also tries to capture many of the common elements in contemporary market socialist thought. But most importantly, it is a well-motivated type of economic system. The motivation for element 1, the market, was discussed in detail in the first section of this chapter. The task of the next section is to motivate elements 2-4. This involves explaining why it might be thought that an economic system that has these general features would avoid the social vices that socialists have attributed to free enterprise systems and why, by implication, it would realize some of the social virtues that constitute a widely shared socialist vision of the good society.

50

The Philosophy and Economics of Market Socialism