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All who are not lunatics are agreed about certain things. That it is better to be alive than dead, better to be adequately fed than starved, better to be free than a slave. Many people desire those things only for themselves and their friends; they are quite content that their enemies should suffer. These people can be refuted by science: Humankind has become so much one family that we cannot insure our own prosperity except by insuring that of everyone else. If you wish to be happy yourself, you must resign yourself to seeing others also happy.
[Capitalism] is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuousand it doesnt deliver the goods. In short, we dislike it, and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed.
John Maynard Keynes
Four economic institutions are commonplace in currently favored economic systems: private ownership of the means of production, hierarchical corporate divisions of labor, central planning, and markets. It makes sense to assess each in their own right. Having done so, evaluating types of economies will be easy.
Private ownership of the means of production exists when private individuals own the buildings, equipment, tools, technologies, land, and/or resources with which we produce goods and services. Private ownership is relevant to how we evaluate an economy in three senses. By virtue of owning particular items owners decide how they are used, largely rule over their disposition, and accrue income from putting those items to work and claiming all revenues above and beyond costs.
The implications of employing private property for remuneration and decision-making are therefore pretty straightforward. Private property imposes what we earlier called norm one (rewarding property) as a dominant component of income distribution. Like- wise, private property affords owners disproportionate say over decisions that involve the disposition of their property even if other people are greatly affected. Thus, when a capitalist employing many people decides to move a firm to a new locale, the impact can devastate the employees fired or the town left behind, yet neither the discarded employees nor the gutted town have significant say in the decision. Likewise, in having dominant say over how a workplace is organized and utilized the owner has vastly dis- proportionate influence over decisions affecting how workers spend their days.
The implications of private ownership for solidarity are largely derivative. By separating those who own means of production from those who dont, private property generates opposition. The owner tries to extract maximum labor from the workforce as cheaply as possible to generate as much saleable product at as little cost as possible, thereby maximizing profits while also working to maintain the conditions that allow owners to appropriate profits. The non-owner (worker) tries to increase her wage as much as possible and to have as desirable a work day as possible, while increasing her power to demand more and better her economic life. The worker therefore prefers to work less than the owner desires, under better conditions, and with more pay. The opposed motivations of workers and owners create conflict that obstruct solidarity.
Diversity is modestly affected by private ownership. By dividing people into owners and workers, private ownership creates a great difference between the two classes but also creates homogenizing pressure inside those classes.
Corporate Divisions of Labor
Producing any particular product or service requires various tasks. A hierarchical division of labor is one that apportions these various tasks into separate jobs graded hierarchically relative to one another. Some sets of tasks combine into jobs that have more quality of life and/or empowerment effects. Other sets of tasks combine together into jobs that have less of those same attributes. The jobs therefore form a hierarchy with respect to quality of life effects and the power that jobs accord to workers, as well as associated remuneration and status. This hierarchy marks the difference between being an all-purpose gopher, a custodian, an assembler, a foreman, a manager, an engineer, a vice president, or a CEO.
In any workplace, we can examine the pleasure or pain a job entails, the tensions it imposes, its sociality or isolation, its danger or sense of accomplishment, the pay it warrants, and the implications it has for empowering people vis-à-vis their own situations or the situations of others. If we find that some jobs have many more of the preferred features and some many fewer, then the workplace has what we call a corporate division of labor. On the other hand, if we cant line up an economys jobs in a pyramid of their desirability or empowerment implications, then the workplace doesnt have a corporate division of labor.
So how do we judge the corporate division of labor as a means to getting economic functions accomplished? As with all institutions, we must examine the implications of this choice for solidarity, diversity, equity, and self-management.
We will start with the most obvious aspect: if you have a corporate division of labor in which a few workers have excellent conditions and empowering circumstances, many fall well below that, and most workers have essentially no power at all, you will obviously not see all actors influencing decisions in proportion to the degree they are affected by them. For one thing, a corporate division of labor nearly always entails that actors have differential voting say over outcomes. Those at the top generally have more votes than those at the bottom (in fact, those at the top most often have all the formal voting rights with none for those at the bottom). But even if everyone has one vote in every major decision regardless of their job, nonetheless, with a corporate division of labor, each persons specific circumstances will empower her or him differently. This will in turn ensure that despite everyone having equal formal say, for want of information, time, skills, and disposition, those with less empowering work will be less able to arrive at or manifest their views and those enjoying jobs that convey more information, confidence, and decision-making skills will dominate debate and choice. Formal democracy doesnt guarantee real democracy. The wills of empowered workers trump the wills of disempowered workers because the empowered workers set agendas and easily override uninformed preferences, and most likely monopolize votes as well. The wills of disempowered workers are unlikely even to be heard, much less implemented.
To see how this follows from dividing labor as indicated, imagine that overnight it is decided to hold formally democratic votes on various policies in a typical corporate workplace. The jobs in that workplace, however, are to remain as we currently know them. The managers, CEOs, engineers, custodians, shipping clerks, and assembly workers are all going to vote on large policies that provide the overarching norms for their daily activitiesbut in their daily activity they are going to do just as they have done before, with the same autonomy or lack of it, the same empowering work or lack of it, and so on. Despite the one-person-one-vote majority rules approach to the biggest decisions, we can predict that in the process of developing options to vote on and then arguing on their behalf, only the views of the employees with access to knowledge of the workplace and with relevant decision-making skills will come to the fore. They will set agendas. They will pontificate ponderously or compellingly, alone. Their desires will overwhelmingly dominate proposals, discussion, debate, and choice. The hierarchical distribution of empowering circumstances conferring to only a few actors informed opinions and decision-making information, skills, and confidence, will obstruct participation of all actors in voting. Corporate divisions of labor will ensure that a few would give orders and most obey, and these are not conditions conducive to all participating equally. With corporate organization, that is, formal democracy becomes not just a facade on top of unequal conception and debate, but an annoyance that wastes time and energy. If you are low in the hierarchy, why should you attend meetings and vote when your attendance and vote have little to no impact since real decisions are largely made before you ever arrive on the scene? Why should those who do impact outcomes put up with the participation of the uninformed and risk having to waste time trying to convince them which options to pursue? Hierarchical work organization empowers a few and gives those few every incentive to replace formally democratic rules with their own explicit domination of every facet of decision-making. Corporate divisions of labor do not advance and in fact overwhelmingly obstruct self-management.
What implications do corporate divisions of labor have for solidarity? The differential division of circumstances and power between you and me is obviously not conducive to empathy between us. If we make these differences systematic, with, say, 20 percent monopolizing the best and most empowering conditions of work, and 80 percent largely or exclusively doing what they are told solidarity between those who rule and those who are ruled dies a quick but painful death. Worse, suppose, as is generally the case, that once there is a corporate division of labor it is elaborated into a broad and pervasive class division. Those above a certain cut-off in the empowerment hierarchy are in one class, which largely defines and controls its own circumstances and the circumstances of others below, and those who are below that cut-off are in another class, which obeys orders and gets what its members can eke out. The manners, lifestyles, dress, habits, and even language of the two classes come into opposition. The one class monopolizes infor- mation, training, knowledge, and the associated status and perquisites of expression and performance, plus all the income it can grab for itself via its inflated bargaining power. The other class, excluded from training and saddled with deadening activity, drags along behind with marginal bargaining power and income, either bent in submission, or, if aroused to its plight, angry and rebellious. The coordinator class looks down on workers as instruments with which to get jobs done. It engages workers paternally, seeing them as needing guidance and oversight and as lacking the finer human qualities that justify both autonomous input and also the higher incomes needed to support more expensive tastes. Workers in reply look up at coordinators as well-educated and knowledgeable which in fact they generally arebut also as arrogant, elitist snobs lacking human sentiment and solidarity. Workers may wrongly accept that the empowerment and capacity differentials between themselves and coordinators are due to innate differences, and may thus bemoan their own sadthough seemingly inevitablelot, while hating, but succumbing to, the coordinators arrogance. Or they may realize that the differentials in talents, knowledge, and confidence derive mostly from widely different circumstances in home life and schooling and of course in the division of labor that literally imposes hierarchical outcomes regardless of peoples actual potentials and capacities. In any event, as they may realize, such differences in no way justify differentials in income and power. But in either case, or in any more conflicted and ambivalent mix of perceptions, solidarity is impeded by such a class division, and hostility and supervision grow in its place.
What about equity? If we have a hierarchy of empowerment, we can confidently predict that those above will use their differential power to skew income to their own material advantage. Why? Imagine that some folks have better conditions and more control because of a hierarchical division of labor. Will those folks then decide that they deserve more income for being more trained, more informed, and for having more responsibility, as well as to feed their more refined tastes and desires? Or will they decide that the exhausted and less educated workers enduring worse conditions deserve more income for their greater sacrifice?
The reason hierarchical divisions of labor obstruct material equity is that the only way for those who are higher to see that those who are lower in the hierarchy deserve more pay would be to feel that those lower are sacrificing greatly due to their worse conditions and lesser empowerment. But if I am on top and actively agree that those below are suffering, then to retain self-respect I will have to wonder if I am unfair for being on top. The way for me to instead feel good about being above others is to tell myself that I belong above them and that they belong below. I arrive at the conclusion that those who are disempowered are suited only to obey. They are comfortable and properly utilized when they are being obedient. They would be fish out of water and make a mess of economic outcomes if they were forced to bear more responsibility. We who are on top are comfortable and properly utilized in our higher station despite our having to shoulder tremendous responsibilities. We belong here and society needs us here, and both to be com- fortable and to be able to act on all this responsibility as well as so we can better enjoy the finer things in life that our refined tastes desire, we need extra income. The others wont miss it, so lets give it to ourselves, of course. Thats the logic that translates predictably persisting differentials in power into parallel differentials in income.
What about diversity? On the one hand, by forcing people into classes and pressuring conformity within and confrontation between classes, hierarchical divisions of labor reduce diversity within classes and impose harmful differences between them, neither of which is a positive attribute. But if we go further and look at jobs themselves, the case is starker. If jobs are created by combining a set of tasks that are internally similar to one another in their quality of life and empowerment effects, we can reasonably predict that most jobs will be less diverse in their attributes than if jobs are created by combining a set of diverse (but compatible) tasks so that the overall quality of life and empowerment impact of the package is average. It therefore doesnt take extensive analysis to figure out whether a hierarchical division of labor will yield greater workday diversity than a non-hierarchical one. For about 80 percent of the workforce, the difference is between having a job that has only rote tasks and having a job with some rote but some conceptual tasks, or between having a job that has only tedious tasks and having one that has some tedious but also some engaging tasks.
Can we summarize this brief survey? Are hierarchical production relations consistent with the goals of a participatory, equitable, economy? Clearly they are not, for reasons obvious to most workers but nonetheless obscure to many economists. If someone’s work is mechanical and mindless it will diminish her or his self-esteem, confidence, and self-management skills. On the other hand, if someone’s work is exciting and challenging, it will enhance her or his ability to analyze and evaluate economic alternatives. Hierarchical work leaves different imprints on personalities. For those at the top, it yields an inquisitive, expansive outlook. For those at the bottom, it leaves an aggrieved and self-deprecating outlook, or induces anger. People’s confidence or self-doubts and their intelligence or ignorance all derive, in part, from the kind of economic activities they daily undertake. Under hierarchical arrangements, many capable citizens enter industry only to exert little influence and do exclusively boring work. Those few who advance to more fulfilling and commanding jobs generally have freer workdays and greater “thinking” time than those who remain at the bottom. Each promotion increases immediate power and also the beneficiary’s skill and information advantages to bring to future competitions. Not only will this lead to disparate opportunities for participation, but corporate production relations will generate remuneration as well. People who occupy favored positions in production hierarchies will appropriate more pleasant work conditions and greater consumption opportunities than those afforded their subordinates. And this will be the case whether the hierarchy is based on differential ownership or on differential access to information and decision-making opportunities, or on both.
Central planning is a conceptually simple solution to the problem of economic allocation. Within this system, a group of planners accumulates massive information in various ways, massages it, imposes some broad values on it, and emerges with a list of instructions for producers and prices for consumers. They then send this out to the rest of society to implement.
In short, the planning system gathers data and sets economic priorities that planners then use to determine how best to achieve societys goals with societys limited productive resources. The system consists of a relatively small group of planners in a central planning apparatus communicating with managers in enterprises. The planners decide what to produce, where workers should work, what income levels consumers will have, and by determining prices also what they can consume. The information goes from planners to managers and on to workers. This can all occur with less or more input allowed to the broad public, and while central planning is a non-market system, highly truncated markets can certainly be used to distribute goods to consumers once they are produced, to gather data, or even to assign particular workers to particular enterprises. But the broader decisions of how much of each product to produce, how many workers of different skills should work where, and how much they should be paid, are all determined overwhelmingly by the central plan, even when limited markets exist to assist lesser determinations.
Many advocates of centrally planned public-enterprise economies such as the old Soviet Union viewed their goal as a classless economy and saw central planning as an approach to allocation consistent with eliminating classes. Everyone in such a system will be workers and consumers, they argued. All workers and consumers will be on an equal footing because none will own the means of production. The nightmare of private appropriation of scarce social resources along with the inequity, alienation, and inefficiency fostered by the accumulation of profits by narrow elites is replaced, their prognosis continues, by a rational use of productive resources to best achieve societys economic goals. In this view, central planners and managers knowledgeably translate workers and consumers desires about consumption and about work into the most efficient possible assignment of productive assets. In reality, of course, this is not what occurred in the Soviet Union, Eastern Europe, China, Cuba, or anywhere else that the system has been deployed, nor is it what we would predict from modeling the systems institutions. Instead, in history and in our predictions, classes emerge even in the least corrupt and least authoritarian centrally planned economies. Moreover, this is not due solely to non-democratic political influences nor to betrayals by corrupt leaders, but is instead an intrinsic outcome of central planning.
That is, instead of having a capitalist ruling class, in centrally planned economies we see a coordinator class of planners and managers inexorably becoming the ruling class. The idea that the coordinators who monopolize positions of decision-making influence are simply there to carry out the will of workers and consumers is a doublespeak myth, of course. Instead it is workers who labor at the behest of the coordinator class of planners, managers, and other empowered economic actors. The coordinators consume more than ordinary workers, work under more pleasant conditions, and make all the important economic decisionswhether at the broad plan- ning level or as managers in separate firms. Ordinary workers are alienated from decision-making and have inferior work conditions and consumption opportunities. This is not to say that all workers are equally exploited or alienated in all centrally planned systems, or that all workers are more exploited in any centrally planned economy, however enlightened, than in any capitalist system, however barbaric. But even at its best, central planning is plagued by class division, exploitation, oppression, and alienation.
How well does central planning do its allocative job? Do its operations result in undue waste, miscommunication, gluts, short- ages, and so on? The answer is well known and a bit different than publicly assumed. Central planning cannot be efficient unless central planners know the quantities of available resources and equipment, know the ratios in which production units can combine inputs to yield desired outputs, are informed of the relative social worth of final goods, have sufficient computing facilities to carry out quantitative manipulations, and can impose incentives that will induce managers and workers to carry out their assigned tasks.
But, if we generously grant these assumptionswhich is no less reasonable than granting the assumptions economists typically make about marketsthen we must agree that central planners could, in fact, calculate an efficient production plan and then choose intelligently from a variety of options to decide how to assign workers to jobs and how to distribute goods to consumers. In such circumstances, that is, central planners can successfully solve a giant, economy-wide problem of how to maximize the social value of final output by calculating how much of each product to produce via each technique that can be used to make the product. The planners choose from among all the production plans that satisfy the various constraints operating in their economy the one plan that yields the greatest value of final output as judged by the planners valuations of the worth of products. The assumptions above guarantee that the planners will calculate an optimal plan and will be able to get the optimal plan they calculate carried out.
But even if central planning can theoretically function this smoothly and effectively, will it facilitate each actor having appropriate proportionate decision-making influence, or will it place excessive power in a few hands and diminished power in everyone elses? In all versions of central planning:
1 The famous down/up down/up process is down-go- questions, up-come-answers; down-go-orders, up-comes- obedience.
2 Qualitative information that is essential to evaluating human outcomes is never generated, much less dis- seminated.
3 Elite conceptual workersthe central planners and plant managers who we call coordinatorsmonopolize the technical information required for decision-making.
4 The only management left to individual production units is to manage to fulfill the central planners targets using inputs allotted them by the central planners.
In other words, central planners gather information, calculate a plan, and issue marching orders to production units. The relationship between the central planning agency and the production units is authoritative rather than democratic, and exclusive rather than participatory. Moreover, since each unit is subordinate to the planning board and any superior agent will always seek effective means for holding subordinates accountable, methods of surveillance and verification will be employed to minimize malfeasant lying and shirking. To these ends, central planners appoint and then reward and punish managers according to the performance of their units rather than establishing procedures that give power to rambunctious workers councils. Since it is senseless to punish managers for the behavior of workers over whom they have no control, central planners grant managers dictatorial powers over their workers. What begins as a totalitarian relationship between the central planning agency and production units ends up extending to managers a dictatorial say over workers. Not only do workers have no say over what they produce and what inputs they work with because central planners make allocative decisions outside the workplace, workers have little say over how they use inputs to meet their output quotas because plant managers make these decisions unilaterally. Real world central planning therefore prevents workers from deciding how to use their laboring capacities because its logic requires pervasive hierarchy.
Even if we assume the planners have all the information they need; that the social values of final goods are determined by a completely democratic voting procedure among consumers; that the planners forswear all opportunity to bias the social values guiding planning in favor of their own interests; that the planners accurately calculate the optimal plan; and that workers carry out the plan to the letter of their instructions (a very long and utterly implausible list of ifs)nonetheless, even in this highly unreal, best-case scenario, central planning would still fail to deliver self-management for three reasons:
1) Since the central planners monopolize all the quantitative information generated in the planning process, workers and consumers lack access to quantitative information about the relationship between different primary resources and final goods in the economy. And since very little qualitative information is generated in central planning about the human aspects of different work and consumption processes, workers and consumers lack information about the situations of other workers and consumers. But this means workers and consumers in centrally planned economies do not have the information required to engage in intelligent and responsible self-management. How can people sensibly decide what to produce and consume without knowing how their choice will affect otherseven if they were allowed to do so?
2) Regarding valuation of outputs, central planning could let every consumer vote say 10,000 points, indicating his or her relative preferences for different final goods and services. But even this fair and democratic consumer voting procedure would deny self-management for workers. Once votes were tallied and used to formulate the planers objective function, even the best central planning would translate those preferences into specific work plans for each and every production unit. But that means every consumer/worker would have had the exact same decision-making input (10,000 votes) as every other consumer/worker over every facet of what to produce and how to produce it in every single workplace. Even assuming this structure could ever be harnessed to yield workable and sensible outcomes, which it could not, it would fail to provide self-management for workers because it would not give workers input into production decisions according to how much they are affected by them. Your opinion about what to produce and how to produce it should count more towards what goes on in your own workplace than the opinion of someone who is less affected by what happens in your workplacejust as their opinion should count more than yours about their workplace. But the best that central planning can conceivably do (a goal that it never remotely attains due to devolution into class division) is to give everyone equal input in all economic decisions via a democratic determination of the plans objective function. Central planning is therefore ill-suited to providing actors influence in accord with the differential impacts that different decisions have on different workers and consumers.
3) Finally, as we have discussed at greater length in other contexts, in any economy individuals rationally orient their preferences toward opportunities that will be relatively plentiful and away from those that will be relatively scarce. We know that orienting ourselves to want what we cannot have or cannot afford yields little satisfaction, while orienting ourselves to want what we can have and can afford can yield more. Thus our preferences are not fixed and we influence them by our actions and choices. If a bias arises in the expected future supply of particular roles or goods so that some are under-priced and others are overpriced, people will orient their development accordingly. If I can get commodity X at a price below what it ought to sell at, and can get commodity Y only at an inflated price above what it ought to sell at, I am going to feel a real incentive to change my preferences from Y toward X to benefit from this mispricing. On average, over a whole population, tastes will drift as a result. In the case of central planning, the bias against providing self-managed work opportunities keeps people from developing (systematically) desires and capacities for self- management, and instead promotes steadily greater apathy among the workforce. That is, the apathy of its workers often noted by those who studied the Soviet and Eastern European centrally planned economies was not genetic, of course, but a logical result of the bias against self-managed work opportunities in those societies, as well as a result of political alienation. But this apathy would develop even in the best case of central planning, much less in real world versions. Why should a worker in a centrally planned economy develop a keen interest in what she will produce or how she will produce it, or develop a powerful desire to influence such decisions? It is better not to care. (The parallel to the disinterest in participating in political democracy by those without means to influence agendas is obvious.)
Now what about solidarity, equity, and diversity? We need not spend excessive time on these. With a class division between workers and coordinators (including central planners, local managers, and other actors who share their relative monopoly on decision-making options and access to information), solidarity is clearly less than it would be with classlessness. With planners and managers in position to reward themselves excessively and possessing a world view that sees themselves as conceptual and in charge and that sees societys workers as needing to be cared for, we can predict with great confidence a growing gap in income, perks, and conditions. So there is no equity.
Diversity is subtler, and can increase or decrease in this model depending on many variables, though, in practice (as all the jokes about communist robotic regimentation convey), our expectation is not positive. All in all, not surprisingly central planning is an allocation system that obstructs the values we favor including equity of circumstance and income, solidarity, self-management, and diversity.
Markets is a term denoting allocation via competitive buying and selling at prices determined by the competitive offerings of the buyers and sellers. A market is therefore not merely the food store or the mall, but the entire entwined allocation system of buyers and sellers each acting to further their own interests by selling dear and buying cheap.
Markets undeniably often permit buyers and sellers to interact conveniently for mutual benefit. In fact, taking into account only their own immediate circumstances, market exchanges nearly always benefit both buyer and seller. But unfortunately, immediate convenience and relative short-run benefit for both buyer and seller do not imply immediate equity or efficiency, much less a positive social interaction over extended periods. In these wider dimensions market exchange aggravates inequities, generates grossly under- estimated inefficiencies, and disastrously distorts human relations. To judge markets regarding equity we need some shared framework of beliefs about how markets affect peoples attributes and peoples attributes in turn affect the operations of markets. We propose the following:
Proposition 1: People have different abilities to benefit others and different abilities to secure a favorable share of the benefits from exchange. We are not all alike in these (or any) respects.
Proposition 2: Very few, if any, of the many abilities people may have to benefit others or to secure benefits for themselves bestow a rightful moral claim to benefit more or exercise more decision-making authority than those of lesser ability.
Proposition 3: Market exchanges permit those with greater abilities to benefit more and exercise greater economic power than do those with lesser abilities. These inequities occur even with fully informed exchanges in perfectly competitive markets, much less in markets as we know them in real economies with advertising, unequal bar- gaining power, etc.
If these propositions are true, then clearly markets cannot provide a morally justified allocation of income and will therefore fail to uphold the values we arrived at in the last chapter. But are the propositions trueand moreover, are they true not merely in existing historical circumstances for existing and arguably contingent market arrangements, but true intrinsically and unavoidably for all market economies due to the very nature of market exchange?
The first part of p one is that people have different abilities to benefit others. This is self-evident. Mozart obviously had greater ability to please music lovers than his rival Salieri. Michael Jordan had greater ability to please basketball fans than other NBA players. A skilled brain surgeon has greater ability to benefit her patients than a garbage collector to benefit his clients (except when New York City is in day twenty of a sanitation workers strike). In short, people are born with unequal talents for benefiting others, and differences in education and training or even just location can instill in people different abilities to benefit others even even when they do not have significant genetic differences.
We should note, however, that as evident as proposition one is, there are nonetheless people who reject it, at least emotionally. They presumably feel that once one admits such differences one is on an inexorable slide toward justifying economic inequality. Their opposition to economic inequality is so great it causes them to deny that genetic and training differences exist in a prophylactic move to prevent what they deem inevitably correlated inequality before the fact. They think that to assert that people have differential talents and abilities is elitist.
However, two problems with this attitude arise: (1) To deny the existence of different abilities is obviously out of touch with reality. Imagine a society that refused to give glasses to people with poor eyesight or gave lower incomes to people with poor eyesight. Some might respond to this obvious injustice by denying that peoples genetically determined attributes were different. But this would be silly. Wishing it so doesnt make it so, and anyway, theres no reason why social or economic inequality is a necessary consequence of inequality in peoples eyesight. What needs to be challenged is not the fact that people differ in their eyesight, but the social practice that rewards people differently based on their eyesight.
But (2), imagine that there were no differences in talents, abilities, etc.what a boring world it would be if each and every person had the same talents, no one was exceptional in any respect, and each was able to develop capabilities only just like those that everyone else had already developed. Sometimes aspirations for equality lead justice-advocates down strange intellectual paths. In any event, other than for well-motivated people who worry about its implications and who will in any event be freed from these feelings by the rest of our arguments, the first part of proposition one is not controversial, so we move on.
The second part of proposition one is that when operating in the context of markets, people will have different abilities to secure a favorable share of the benefits of exchanges. This is equally self-evident, but less often noted.
Different abilities to secure a greater share of benefits from competitive exchange can result, for example, from differences in peoples abilities to withstand failure to reach an agreement. A single mother with a sick child and no other means of securing health insurance is at a disadvantage negotiating with a large corporate employer compared to someone with many options who can hold out for better terms, even if the two have identical skills. A peasant with no savings is at a disadvantage negotiating a loan for seed and food with a rural moneylender compared to a corporation able to withstand delays.
Different abilities to benefit from competitive exchange can also result from more accurate predictions about uncertain con- sequences or from differential knowledge of the terms of exchange (which in turn could stem from genetic differences in this particular talent or differences in training or, more often, from different access to relevant information).
Or differences could stem from personality traits that make some more willing or able to drive a hard bargain than others, or to abide the pains risked or, more often, the pains imposed on others. The truism that in our society nice guys finish last attests to this last point. If you cannot abide hurting others or at least ignoring the hurt endured by others, in a competitive context you are at a severe disadvantage when it comes to your own self-advancement. Differences in social values could (and do) prevent some people from seeking maximum advantage at the expense of others, even as they encourage others to do so. Different opportunities and/or willing- ness to disobey the golden rule to do unto others as you would have them do unto you and to instead obey the rule of the marketplace, to do others in before they do you in, make for different abilities to garner benefits in the context of competition.
And unfortunately, competitionthe famous harmonizer of the private and public interestby systematically weeding out the less devious and aggressive actors, enforces lowest common denominator consciousness regarding willingness to invert the golden rule. So, in the ways listed above and others that could be enunciated as well, the second half of proposition one also proves true. And once it is clearly stated, about this there is virtually no dissent. After all, a large part of contemporary economic activity involves precisely trying to get ahead by utilizing such differences.
As compared to proposition one, the issue addressed in proposition two is more philosophical and complex, but luckily already navigated in the last chapter. What reasons for differential compensation are morally compelling and what reasons carry no moral weight? Our earlier discussion of values established that only acts under our control and not owing to luck and circumstance provide moral justification for income differentials, which makes proposition two true, with associated controversies having been dealt with in the last chapter.
You do this and I do that so that the total of what we both do is greater than if, instead, we reversed it and I did that and you did this. Who gets the gain? Proposition three points out that those with greater abilities to capture the benefits of market exchange will obviously capture a greater share of the efficiency gains from a division of labor in a market economy. And any student of the laws of supply and demand knows that the greater the benefit a commodity affords a buyer, the higher the price a seller will receive, other things being equal. So those with greater ability to benefit others will also benefit to a greater extent than those less able to benefit others.
Two actors or agents meet in a market exchange. This occurs over and over, with partners changing, rotating, and otherwise varying in an unpredictable pattern. Those who can benefit others better can demand more in return; those who can accrue more of the benefits that exchanges make available can accrue more in return. Since both these differentials among those playing the roles of buyer and seller exist, differential outcomes arise. Since having greater wealth confers further advantage, the differentials steadily enlarge. In time, therefore, there emerge people who make substantially more and people who make substantially less. More formally put, taken together propositions one, two, and three spell out the case that market economies will subvert equity whether combined with private or public enterprise:
1 People have different abilities to benefit others and to capture the efficiency gains from market exchanges.
2 As established last chapter, neither greater innate nor learned ability either to benefit others or to capture benefit for oneself earns the more able any moral right to a greater share of the benefits of economic cooperation. Only greater effort or sacrifice merits greater reward. But in fact
3 Markets will permit those with greater abilities of either kind to reap greater economic rewards than those of lesser abilities will receive, even when those with greater abilities exert less effort and sacrifice. (And any effort to offset this with tax policies will subvert the proclaimed efficiency of markets.)
More simply put, in a market economy the big strong cane cutter gets more income than the small weak one regardless of how long and how hard they work. The doctor working in a plush setting with comfortable and fulfilling circumstances earns more than the assembly worker working in a horrible din, risking life and limb, and enduring boredom and denigration, regardless of how long and how hard each works. To earn more due to generating more valuable output despite contributing less effort and enduring less sacrifice goes against the values that we settled on last chapter but is a defining feature of market remuneration. Is this there is for our critique, or are there additional equity problems?
First, it is instructive to note that even if rewarding according to the social value of contribution were regarded as fair, which our values deny, market valuations of workers contributions system- atically diverge from an accurate measure of their true social contribution for two reasons:
1 In market systems we vote with our wallets. The market weighs peoples desires in accord with the income they muster behind their preferences. Therefore the value of contributions in the marketplace is determined not only by peoples relative needs and desires but by the distribution of income enabling actors to manifest those needs and desires. Thus, as measured in the marketplace the contribution of a plastic surgeon reconstructing noses in Hollywood will be greater than the value of the contribution of a family practitioner saving lives in a poor, rural county in Oklahoma even though the family practitioners work is of much greater social benefit by any reasonable measure. The starlets have more money to express their desires for better looks than the farmers have to keep alive. If you pay more, it will cause what you pay for to be valued more highly. An inequitable distribution of income therefore will cause market valuations of producers outputs to diverge from accurate measures of those outputs implications for social well-being. Plastic surgery trumps saving malnourished children not because reversing malnourishment is less valuable then cosmetic surgery, but because Hollywood stars have more cash to express their preferences than do those who suffer starvation. It follows, then, that even those who urge remunerating according to output shouldnt be market advocates, because markets dont measure the value of outputs in tune with the outputs true social benefits.
2 Moreover, markets only incorporate in their valuations the wills of immediate buyers and sellers. The preferences of the auto consumer and the auto dealer are well accounted for (assuming we ignore income differentials distorting the weights they are accorded) when the former buys a car from the latter, but others in society who are neither buying nor selling the car but who breathe the auto pollution the car generates, have no say at all in the transaction. The price of a car negotiated by buyer and seller doesnt reflect the impact of the cars pollution on the broader populace since the broader populace isnt involved in the direct transaction and their views on the matter are never polled. Sometimes such broader impact is positivea person becomes enlightened by buying a book and in turn benefits others. The positive benefits to others did not affect the initial purchase price. Sometimes broader impacts are negative: a person drinks excessively and eventually spouses and friends and the broader society suffer lost productivity, increased costs of health care, and the horrors of abuse and drunken driving. The negative by-products did not impact the initial purchase. The point of this is that the market over-values some goods by not accounting for their negative external effects beyond direct buyers and sellers, and undervalues others by not accounting for their positive external effects beyond direct buyers and sellers. This mis-valuation of transactions that have implications beyond immediate buyers and sellers implies in turn that those who produce goods or services with negative unaccounted effects will have the value of their contributions over-valued in market economies, while others who produce goods or services with positive unaccounted effects will have the value of their contributions undervalued. So again, even those who believe in remuneration according to output (rather than according to effort and sacrifice, as we favor) ought to disavow markets, since even the freest markets dont properly measure social costs and benefits. They remunerate according to contribution, but they mis- measure contribution in systematic and socially harmful ways.
Using markets to reward contribution to output is more or less as if we believed that people ought to be paid for how much they weigh, and we then adopted an elaborate system to find this out, but the system that we chose for the task involved a scale with additional bags of sand added to one side or the other, thus increasing the weight of some and not others. Obviously the whole weight norm in the first place is immoral, as we believe remunerating for output is. But, in addition, if one does advocate the weight norm, it would make no sense for anyone to also advocate a set of institutions that in fact systematically misrepresent itunless, of course, there were other things about that system one greatly liked and the rhetoric about the weight norm was mere window dressing that one didnt take seriously.
To return to our own standards, it is very important to note that the problem of some people receiving higher wages and salaries than others who make greater personal sacrifices cannot be corrected in market economies without creating a great deal of inefficiency. The issue is both intrinsic to markets and also intractable under their sway. Even at their very best, in market transactions, labor is paid what is called its marginal revenue productthe valuation of its contribution to outputwhich, as we have seen, can differ significantly from a true valuation of output, much less from effort expended. But suppose we realize the injustice of this basis for remuneration and decide to correct it by keeping markets otherwise unchanged while legislatively substituting effort wages (i.e. just wages) for marginal revenue product (unjust) wages. Cant that ameliorate this particular problem? We keep markets, generally, but we correct market wages. What is there to dislike? To a degree this would ameliorate one problem, yes, but it would also lead to inefficient uses of scarce labor resources, thereby offsetting any gains made.
The point is this: while our morals lead us to want to remunerate labor according to effort and sacrifice and not the true value of labors output, on the other side of the allocative coin, we want to use the true value of output in deciding how much labor should be apportioned to different tasks. For example, you do not want to value something more and thus put more resources into it merely because it takes more effort to produce. Instead, you only want to produce more of something if the products worth to people actually warrants it. So suppose we pay labor according to effort and sacrifice in an otherwise market driven economy. As a result the markets will operate as though the value of the product of work is measured in large part by the effort and sacrifice that was expended in its production, but this in turn reduces attention to the impact of the product on recipients. In other words, while we do not want to pay the surgeon according to the value of the surgery to society for moral reasons having to do with what we believe people should earn, we also do not want to say that the value of the surgery should be determined solely by effort and sacrifice involved in it. Instead, the value of the surgery depends largely on the benefits it bestows. A good allocation system has to remunerate in accordance with our preferred values of effort and sacrifice, of course, but it also has to allocate in light of full true social costs and benefits. Since in a market system labor costs form a substantial portion of total production costs of most goods and services, if wages are forcibly made just, with markets this would distort the valuation of the products of that labor, in turn causing the entire cost structure and price system of the economy to deviate substantially from reflecting true costs and benefits.
The adapted system would then have products valued according to what was being paid to labor for its effort and sacrifice but not according to the amount that the products are desired by their consumers. To use the terminology of economists: in a market system with effort-governed wages, goods made directly or indirectly by labor whose effort wages were higher than their marginal revenue product would sell at prices higher than their real costs, while goods made directly or indirectly by labor whose effort wages were lower than their marginal revenue product would sell at prices lower than their real costs. Since prices in a market economy help to determine not only what laborers get paid but also how much of what items are produced, any attempt to make wages more equitable while retaining market exchange must cause a systematic misuse of scarce productive resources.
More of some items and less of others will be produced than proper valuations of their social benefits and costs would dictate. In other words, if left to their own devices, market economies distribute the burdens and benefits of social labor unfairly because workers are rewarded according to the market value of their contributions rather than according to their effort or personal sacrifice. But if we correct this problem by enforcing wages that are better correlated to actual effort and sacrifice, then the adapted market economy will misvalue products and misallocate productive resources even more than otherwise.
In addition, why would the economically advantaged in any market economy not translate their advantages in resources and leisure into disproportionate political power with which to defend market wage rates against critics? Why would they not use their disproportionate political power to obstruct attempts to correct wage and salary inequities? Of course, the answer is the advantaged would take both these paths, and very effectively, as we have seen throughout history.
Moreover, people naturally tend to rationalize their behavior so as to function effectively and respect themselves in the process. The logic of the labor market is: he or she who contributes more gets more. When people participate in the labor market, in order to get ahead they must defend their right to a wage on the basis of their output. The logic of redistributing income to attain more equitable wages, however, runs counter to rewarding output. So participation in markets (with or without private ownership) not only does not lead people to see the moral logic of redistribution, it inclines them to favor the argument that everyone gets what they contributed, so redistribution is unfair. Participation in markets empowers those who oppose redistributive schemes and intellectually and psychologically impedes those who would benefit from them.
In conclusion, while of course the degree of inequity is far greater in private enterprise economies wherein people can accumulate ownership of means of production and a flow of profits from that property, income inequalities due to unequal human talents and abilities, though smaller, are inequitable for the same reason. When payment is based on the value of contribution to output, unavoidable unequal distribution of human or non-human talents, abilities, and tools will lead to morally unjustifiable differences in economic benefits. Moreover, whereas it is theoretically possible to equalize ownership of non-human assets (like training or tools) through their redistribution, it is not possible to do so in the case of unequal human assets (innate talents, size, etc.). The only conceivable way to eliminate doctor versus garbage collector inequities of the sort discussed last chapter is to base benefits on something other than contribution to output and this is not possible in any kind of market economy.
Disgust with the commercialization of human relationships is as old as commerce itself. The spread of markets in eighteenth century England led the Irish-born British political philosopher Edmund Burke to reflect:
The age of chivalry is gone. The age of sophists, economists, and calculators is upon us; and the glory of Europe is extinguished forever.
Likewise, the British historian Thomas Carlyle warned in 1847:
Never on this Earth, was the relation of man to man long carried on by cash-payment alone. If, at any time, a philosophy of laissez-faire, competition and supply-and-demand start up as the exponent of human relations, expect that it will end soon.
And of course through all his critiques of capitalism, Karl Marx complained that markets gradually turn everything into a commodity corroding social values and undermining community:
[With the spread of markets] there came a time when everything that people had considered as inalienable became an object of exchange, of traffic, and could be alienated. This is the time when the very things which till then had been communicated, but never exchanged, given, but never sold, acquired, but never boughtvirtue, love, conviction, knowledge, conscience, etc. when everything, in short passed into commerce. It is the time of general corruption, of universal venality [....] It has left remaining no other nexus between man and man other than naked self-interest and callous cash payment.
Like all social institutions, markets provide incentives that promote some kinds of behavior and discourage others. Markets minimize the transaction costs of some forms of economic interaction, especially those that are personal and involve private agents, thereby facilitating them, but markets do nothing to reduce the transaction costs and thereby facilitate other forms of interaction, especially those that are public and involve collective implications.
Even beyond simple inefficiencies, if the forms of interaction that are encouraged are mean-spirited and hostile and the forms of interaction that are discouraged are respectful and empathetic, the negative effects on human relations will be profound.
In effect, advocates of markets say to us: “You cannot cooperatively and self-consciously coordinate your economic activities sensibly, so dont even try. You cannot orchestrate a group of inter-related tasks efficiently in light of peoples shared human needs, so dont even try. You cannot come to equitable agreements among yourselves, so dont even try. Just thank your lucky stars that even such a socially challenged species as yourselves can still benefit from a division of labor thanks to the miracle of the market system wherein you can function as greedy, non-cooperating, competitive, isolated atoms, but still get social results. Markets are a no-confidence vote on the social capacities of the human species.
But if that daily message were not sufficient discouragement, markets mobilize our creative capacities and energies largely by arranging for other people to threaten our livelihoods and by bribing us with the lure of luxury beyond what others can have and beyond what we know we deserve. They feed the worst forms of individualism and egoism. And to top off their anti-social agenda, markets munificently reward those who are the most cut-throat and adept at taking advantage of their fellow citizens, and penalize those who insist on pursuing the golden rule. Of course, we are told we can personally benefit in a market system by providing service to others. But we also know that we can generally benefit a lot more easily by tricking others. Mutual concern, empathy, and solidarity have little or no usefulness in market economies, so they atrophy.
Why do markets impede solidarity? For workers to compre- hensively evaluate their work they would have to know the human and social as well as the material factors that go into the inputs they use plus the human and social consequences their outputs make possible. But the only information markets provide, with or without private property, are the prices of the commodities people exchange. Even if these prices accurately reflected all the human and social factors lurking behind economic transactions, which they most certainly dont, producers and consumers would still not be able to adjust their activities in light of a self-conscious understanding of their relations with other producers or consumers because they would lack the qualitative data to do so, and they would still have to compete. It follows that markets do not provide the qualitative data necessary for producers to judge how their activities affect consumers, or vice versa. The absence of information about the concrete effects of my activities on others leaves me little choice but to consult my own situation exclusively. The fact that marks pit buyers against sellersthe one trying to buy cheap and the other to sell dearmeans the absence of information causes no aggravation. Rather, all economic actors are forced to be anti-social and lack the means to do otherwise, in any event.
That is, the lack of concrete qualitative information and the obscuring of social ties and connections in market economies make cooperation difficult, while competitive pressures make cooperation irrational. Neither buyers nor sellers can afford to respect the situation of the other. Not only is relevant information unavailable, solidarity is self-defeating. Polluters must try to hide their transgressions, since paying a pollution tax or modernizing their equipment would lower their profits. Even if one producer in an industry does not behave egocentrically, others will. If altruists persist in socially responsible behavior they will ultimately be driven out of business for their trouble, with egoists rising to prominent positions. Market competition squashes solidarity regardless of encompassing ownership relations.
But rather than further pursue our rejection of markets on grounds of their implications for human relations, it may be more compelling to hear the US-based economist Sam Bowles, a left advocate of market allocation, eloquently explain this failure of markets:
Markets not only allocate resources and distribute income; they also shape our culture, foster or thwart desirable forms of human development, and support a well-defined structure of power. Markets are as much political and cultural institutions as they are economic. For this reason, the standard efficiency analysis is insufficient to tell us when and where markets should allocate goods and services and where other institutions should be used. Even if market allocations did yield [economically efficient] results, and even if the resulting income distribution was thought to be fair (two very big ifs), the market would still fail if it supported an undemocratic structure of power or if it rewarded greed, opportunism, political passivity, and indifference toward others. The central idea here is that our evaluation of markets and with it the concept of market failure-must be expanded to include the effects of markets on both the structure of power and the process of human development ....
As anthropologists have long stressed, how we regulate our exchanges and coordinate our disparate economic activities influences what kind of people we become. Markets may be considered to be social settings that foster specific types of personal development and penalize others. The beauty of the market, some would say, is precisely this: It works well even if people are indifferent toward one another. And it does not require complex communication or even trust among its participants. But that is also the problem. The economyits markets, workplaces and other sitesis a gigantic school. Its rewards encourage the development of particular skills and attitudes while other potentials lay fallow or atrophy. We learn to function in these environments, and in so doing become someone we might not have become in a different setting. By economizing on valuable traitsfeelings of solidarity with others, the ability to empathize, the capacity for complex communication and collective decision-making, for examplemarkets are said to cope with the scarcity of these worthy traits. But in the long run markets contribute to their erosion and even disappearance. What looks like a hardheaded adaptation to the infirmity of human nature may in fact be part of the problem.
In short, markets pit buyers against sellers creating an environment that is almost precisely the opposite of what any reasonable person would associate with solidarity. In each market transaction one party gains more only if the other party gains less. What ought to be the caseeconomic actors sharing in benefits and costs and moving forward or back in unison with the interest of each actor furthering the enhancement of other actorsis turned topsy-turvy, to the point where each actors interest is opposed to that of all others. As Bowles explains, even against our better natures, this literally instructs us, molds us, and cajoles us into being unsympathetic egoists of the worst sort.
Confusing the cause of free markets with that of democracy is typical of modern commentary, but astounding given the overwhelming evidence that market systems have disenfranchised larger and larger segments of the worlds body politic. First, markets undermine rather than promote the kinds of human traits critical to the democratic process. As Bowles, who is, remember, an advocate of markets, explains:
If democratic governance is a value, it seems reasonable to favor institutions that foster the development of people likely to support democratic institutions and able to function effectively in a democratic environment. Among the traits most students of the subject consider essential are the ability to process and communicate complex information, to make collective decisions, and the capacity to feel empathy and solidarity with others. As we have seen, markets may provide a hostile environment for the cultivation of these traits. Feelings of solidarity are more likely to flourish where economic relationships are ongoing and personal, rather than fleeting and anonymous; and where a concern for the needs of others is an integral part of the institutions governing economic life. The complex decision-making and information processing skills required of the modern democratic citizen are not likely to be fostered in either markets or in workplaces that run from the top down.
Second, markets empower those with greater ability to extract rewards at the expense of those less able to do so. By concentrating economic and therefore political power in the hands of a few, markets work to the comparative advantage of the more able, and therefore, of those who are likely to be more powerful in the first place. If the more powerful party succeeds in appropriating more than 50 percent of the benefits of an exchange, as will generally occur, the exchange further disempowers the less powerful party and further empowers the more powerful party. In the next round of exchange, the deck is stacked a little more, and so on, ultimately leading to wide disparities.
Those who deceive themselves (and others) that markets nurture democracy ignore the simple truth that markets tend to aggravate disparities in economic power. Advocates focus on the fact that the spread of markets can undermine traditional elites. This is certainly true, but it does not prove that power will be more evenly spread and democracy enhanced. If new and more powerful obstacles replace old obstacles to economic democracy and participation, we are not moving forward, or at most are barely doing so. If the boards of directors of multinational corporations and banks, the free market policemen at the World Bank and the IMF, and the adjudication commissions for international treaties like NAFTA and MAI are more effectively insulated from popular pressure than their predecessors were, the cause of democracy is obviously not served, even though some old obstacles have been pushed aside.
But there is more to be said. Markets have class implications just as central planning does. Consider a workplace in a market economy: even without private ownership and profit-seeking for owners, the firm must compete for market share and reduce costs and raise revenues in pursuit of surpluses to invest. If it fails in the competition for surpluses relative to other firms in its industry, it will lack funds to invest and will steadily decline in assets and eventually go out of business. Therefore survival in a market system, even in the absence of private ownership, requires pursuit of surplus. A key component of pursuing profit or surplus is reducing labor costs and extracting more work from those employed. But this is not uncontested. Workers, of course, all other things being equal, prefer the opposite goal: higher wages and better conditions.
So imagine a workplace in a market economy. Typically, there is a broad corporate division of labor between conceptual workers making decisions and overseeing and disciplining the workforce, and rote workers carrying out orders given to them by their superiors. Given the remuneration scheme of markets, the employees with empowering work and decision-making prerog- atives will earn more and enjoy better conditions than those who merely carry out orders. More, because of this disparity, the empowered group will be in position to largely implement its own schemes and defend its position to do so, also seeing themselves as worthy to do so. These people do not opt to reduce their own incomes or worsen their own work conditions (though in an economy with capitalists, the capitalists may try to do this to them) in order to reduce workplace costs. Instead, they force the rote workers to accept lower wages and worse conditions.
Now imagine that this same workplace has removed such divisions of labor. By whatever means, all workers earn according to effort and sacrifice and enjoy equally empowering and fulfilling work conditions. By the rules of the workplace they may share equally in sensible, informed decision-making. However, their workplace exists in a market, and as a result they must compete with other firms or go bankrupt.
In this context, assuming that they reject bankruptcy, they have two broad choices: they can opt to reduce their own wages, worsen their own work conditions, and speed up their own levels of work, which is a very alienating approach that they are not very emotionally or psychologically equipped to undertake. Or, they can hire managers to carry out these cost-cutting and output enlarging policies while insulating the managers from feeling the policies adverse effects by giving the managers better conditions, higher wages, etc. In practice, very predictably, the latter is what occurs. Even ignoring their remunerative implications, markets therefore have a built-in pressure to organize a work force into two groups: a large majority that obeys and a small minority that makes decisions, with the latter enjoying greater income, power, and protection from the adverse effects of the cost-cutting decisions they will impose on others.
In other words, the information, incentive, and role characteristics of market systems subvert the rationale for workers to take initiative in workplace decisions even if they have the legal right to do so. For example, workers councils in the old Yugoslavia had the right to meet and make decisions over all aspects of their economic activities, but why should they? Market competition created an environment in which decision-makers had no choice but to maximize the bottom line. Any human effects that did not bear on costs and revenues had to be ignored or else risk competitive failure. Workers councils motivated by qualitative human considerations would ultimately fail, thus putting out of work the very people the councils were intended to empower. Since competitive pressures have adverse effects on workplace satisfaction, it is perfectly sensible for workers councils in market environments to hire others to make the decisions for them. The pattern is simple: first, worker attention to and desire for self-management erodes. Next, workers hire managers who in turn hire engineers and administrators to transform job roles according to the dictates of market competition. Even in the absence of private ownership, a process that begins with workers choosing to delegate technical and alienating decisions to experts who are insulated from the negative effects of those decisions, ends up by increasing the fragmentation of work, bloating managerial prerogatives, and substituting managers goalsor, perhaps more accurately, market goalsfor those of workers. It is not long before a burgeoning managerial class of coordinators begins to increase the proportion of the surplus earmarked for themselves and to search for ways to preserve their own power.
Even beyond generating income inequalities, which would be more than bad enough, by creating a class division and elevating the conceptual workers whom we call coordinators to positions dominating workers who do the more rote and obedient tasks, markets empower some folks disproportionately at the expense of others, and create conditions that permit these coordinators to parlay their power into grabbing still more income for themselves. Obviously all this creates opposed interests and destroys solidarity.
Increasing the value of goods and services produced and decreasing the unpleasantness of what we have to do to get them are two ways producers can increase profits in a market economy. Competitive pressures drive producers to do both, a situation which is sometimes desirable, as, for example, when it leads to innovations in methods of production. But generally undesirable is the maneuvering to appropriate a greater share of the goods and services produced by externalizing costs such as pollution, and competitive market pressures drive producers to pursue this route to greater profitability just as assiduously as any other. The problem is that, while the first kind of behavior often serves the social interest as well as the private interests of producers, the second kind of behavior does not. When buyers or sellers promote their private interests by avoiding responsibility for costs of their actions and pushing them onto those who are not party to the market exchange, as with generating pollution and not cleaning it up, their behavior introduces a misallocation of productive resources and a consequent decrease in the overall value of goods and services produced.
The positive side of market incentives has received great attention and admiration, starting with Adam Smith who used the term invisible hand to characterize it. He meant, of course, that competitive pressures to profit induce many efficiency increasing choices, such as employing more productive technologies and guiding actors to seek more productive and less expensive options. The darker side of market incentives has been neglected and underestimated. Two modern exceptions are Ralph dArge and E.K. Hunt, who coined the less famous but equally appropriate concept, invisible foot to describe the socially counter-productive behavior of foisting costs onto others that markets also promote.
Market advocates seldom ask: Where are firms most likely to find the easiest opportunities to expand their profits? How easy is it to increase the size or quality of the economic pie and thereby accrue more? How easy is it to reduce the time or discomfort that it takes to bake the pie, thereby accruing more? Alternatively, how easy is it to enlarge ones slice of the pie by externalizing a cost or by appropriating a benefit without payment, even if the overall size or quality of the pie declines as a result? Why should we assume that it is infinitely easier to expand ones own profits through socially productive behavior that increases the size of the pie than through socially unproductive or even counter-productive behavior that actually reduces the size of the pie? Yet this implicit assumption lies behind the view that markets are efficiency machines.
Market advocates fail to notice that the same feature of market exchanges primarily responsible for making business easy to undertakethe exclusion of all affected parties but two from a transactionis also a major source of potential gain for the buyer and seller. When the buyer and seller of an automobile strike their mutually convenient deal, the size of the benefit they have to divide between them is greatly enlarged by externalizing the costs onto others of the acid rain produced by car production, as well as the costs of urban smog, noise pollution, traffic congestion, and greenhouse gas emissions caused by car consumption. Those who pay these costs and thereby enlarge car-maker profits and car-consumer benefits are easy marks for car sellers and buyers because they are geographically and chronologically dispersed and because the magnitude of the effect of each specific transaction on each of them is small and varies widely from person to person. Individually the mass of folks who are separately affected each have little incentive to insist on being party to the transaction. Collectively they face formidable obstacles to forming a voluntary coalition to effectively represent a large number of people, each of whom have little and different amounts at stake. Nor is the problem solved by awarding victims of external effects a property right not to be victimized without their consent. Moreover, making markets perfectly competitive or making the cost of entering a market zero (even if either were realistically possible) would not eliminate the opportunity for this kind of rent-seeking behavior.
That is, even if there were countless perfectly informed sellers and buyers in every market, even if the appearance of the slightest differences in average profit rates in different industries induced instantaneous self-correcting entries and exits of firms, and even if every economic participant were equally powerful and therefore equally powerlessthat is, even if we fully embraced the utterly unreal fantasies of market enthusiastsas long as there were numerous external parties with small but unequal interests in market transactions, those external parties would face much greater obstacles to a full and effective representation of their collective interest than the obstacles faced by the buyer and seller in the exchange. And it is this unavoidable inequality in their ability to represent their own interests that makes external parties easy prey to rent-seeking behavior on the part of buyers and sellers.
Moreover, even if we could organize a market economy wherein every participant were as powerful as every other and no one ever faced a less powerful opponent in a market exchangeanother ridiculous fictionthis would still not change the fact that each of us has small interests at stake in many transactions in which we are neither buyer or seller. Yet the sum total interest of all these external parties can be considerable compared to the interests of the two who are presumably the most affectedthe buyer and seller. It is the difficulty of representing the collective interests of those with lesser individual interests that creates an unavoidable inequality in power, which, in turn, gives rise to the opportunity for individually profitable but socially counter-productive rent-seeking on the part of buyers and sellers.
But of course the real world bears little resemblance to a hypothetical game where it is impossible to increase ones market power so that there is no reason to try. Instead, in the real world it is just as rational to pursue ways to increase ones power vis-à-vis other buyers or sellers as it is to search for ways to increase the size or quality of the economic pie or reduce the time or discomfort necessary to bake it. In the real world there are consumers with little information, time, or means to defend their interests. There are small innovative firms for giants like IBM and Microsoft to buy up instead of tackling the hard work of innovation themselves. There are common property resources whose productivity can be appropriated at little or no cost to the beneficiary as they are over-exploited at the expense of future generations. And there is a government run by politicians whose careers rely mainly on their ability to raise campaign money, begging to be plied for corporate welfare programs financed at taxpayer expense.
In short, in a realistic world of unequal economic power the most effective profit maximizing strategy is often to maneuver at the expense of those with less economic power so as to re-slice the pie (even while shrinking it) rather than to work to expand the pie. And of course, the same prevails internationally as US-based economist Robert Lekachman points out with eloquent restraint:
Children and economists may think that the men at the head of our great corporations spend their time thinking about new ways to please the customers or improve the efficiency of their factories and offices. What they actually concentrate on is enlisting their government to protect their foreign and domestic interests.
In any case, leftist advocates of markets concede that externalities lead to inefficient allocations and that non-competitive market structures and disequilibrating forces add additional sources of inefficiencies. And they also concede that efficiency requires policies designed to internalize external effects, curb monopolistic practices, and ameliorate market disequilibria. But there are also many significant failings of markets that market admirers do not concede, and their sum total importance is undeniable.
1 External effects are the rule rather than the exception.
As E. K. Hunt explained:
The Achilles heel of welfare economics is its treatment of externalities ....When reference is made to externalities, one usually takes as a typical example an upwind factory that emits large quantities of sulfur oxides and particulate matter inducing rising probabilities of emphysema, lung cancer, and other respiratory diseases to residents downwind, or a strip-mining operation that leaves an irreparable aesthetic scar on the countryside. The fact is, however, that most of the millions of acts of production and consumption in which we daily engage involve externalities. In a market economy any action of one individual or enterprise which induces pleasure or pain to any other individual or enterprise constitutes an externality. Since the vast majority of productive and consumptive acts are social, i.e., to some degree they involve more than one person, it follows that they will involve externalities. Our table manners in a restaurant, the general appearance of our house, our yard or our person, our personal hygiene, the route we pick for a joy ride, the time of day we mow our lawn, or nearly any one of the thousands of ordinary daily acts, all affect, to some degree, the pleasures or happiness of others. The fact is externalities are totally pervasive.
2 There are no convenient or reliable procedures in market economies for estimating the magnitude of external effects.
This means that accurate correctives, or what economists call Pigouvian taxes, after the British economist Arthur Pigou (1877-1959), are hard to calculate even in an isolated market. Any hope of accurately estimating external effects in market economies lies with actors willingness to accept damage surveys which have well-known biases and discrepancies that can be exploited by special interests. And the fact that estimates derived from willingness to accept damage surveys are commonly four times as high as estimates derived from willingness to pay surveys is hardly comforting, when, in theory, they should be roughly equal. Suffice to say, this problem is another thorn in the side of markets.
3 Because they are unevenly dispersed throughout the industrial matrix, the task of correcting for external effects is even more daunting.
In the real world, where private interests and power take pre- cedence over economic efficiency, the would-be beneficiaries of accurate corrective taxes are usually dispersed and powerless compared to those who would have to pay such taxes. This makes it unlikely that full correctives would be enactedeven if they could be accurately calculated.
4 Because consumer preferences are at least partially affected by the economythe technical term for which is that they are endogenousthe degree of misallocation that results from predictable under-correction for external effects will increase, or snowball over time.
As noted earlier, people are affected by their economic conditions and activities and they will learn to adjust their preferences to the biases created by external effects in the market price system. Consumers will increase their preference and demand for goods whose production and/or consumption entails negative external effects but whose market prices fail to reflect these costs and are therefore too low; and will decrease their preference and demand for goods whose production and/or consumption entails positive external effects but whose market prices fail to reflect these benefits and are therefore too high. In short, we adjust ourselves to benefit from what we see to be systematic bargains and to avoid what we see to be systematic scams. While this adjustment is individually rational to take advantage of market biases, it is socially irrational and inefficient since it leads to greater demand for the goods that the market already wrongly overproduces, and lowers demand for the goods the market already under produces. Morever, because the effects of this phenomenon are cumulative and self-enforcing, over time the degree of inefficiency in the economy will grow.
The upshot of these points is that the invisible foot operates on a par with the invisible hand. The degree of allocative inefficiency due to external effects is significant. Hope for Pigouvian correctives is a pipe dream. Relative prices predictably diverge ever more widely from accurate measures of full social costs and benefits as consumers adjust their endogenous preferences to individually benefit from inevitable market biases. In sum, convenient deals with mutual benefits for buyer and seller should not be confused with economic efficiency. When some kinds of preferences are consistently under-represented because of transaction cost and free rider problems (wherein folks get the benefit of public goods without paying for them), when some resources are consistently over- exploited because they are common rather than private property, when consumers adjust their preferences to biases in the price system, and when profits or surpluses come as often from greater power as greater contribution, theory predicts free market exchange will result in a misallocation of resources. And when markets are less than perfect (which they always are), and fail to reach equilibrium instantaneously (which they always do), the results will be that much worse.
While markets are currently widely praised, perhaps before moving on we should point out that we are not markets only detractors. Consider the US Nobel Prize-winning economist Robert Solows observations that:
Few markets can ever have been as competitive as those that flourished in Britain in the first half of the nineteenth century, when infants became deformed as they toiled their way to an early death in the pits and mills of the Black Country. And there is no lack of examples today to confirm the fact also that well-functioning markets have no innate tendency to promote excellence in any form. They offer no resistance to forces making for a descent into cultural barbarity or moral depravity.
Or US Nobel Prize economist James Tobins observation that:
The only sure result [of free market Reaganomics] are redistribution of income, wealth, and powerfrom government to private enterprises, from workers to capitalists, and from poor to rich.
Or US novelist Edward Bellamys (1850-1898) observation that:
According to our ideas, buying and selling is essentially anti-social in all its tendencies. It is an education in self-seeking at the expense of others, and no society whose citizens are trained in such a school can possibly rise above a very low grade of civilization.
Or, arch marketeer US Nobel Prize-winning economist Milton Friedmans recent observation that:
The greatest problem facing our country is the breaking down into two classes, those who have and those who have not. The growing differences between the incomes of the skilled and the less skilled, the educated and the uneducated, pose a very real danger. If that widening rift continues, were going to be in terrible trouble. The idea of having a class of people who never communicate with their neighborsthose very neighbors who assume the responsibility for providing their basic needsis extremely unpleasant and discouraging. And it cannot last. Well have a civil war. We really cannot remain a democratic, open society that is divided into two classes. In the long run, thats the greatest single danger.
A summary of our findings regarding market inefficiencies is that the cybernetic, incentive, and allocative properties of markets involve a pervasive bias against discovering, expressing, and developing needs that require social rather than individual activity for fulfillment. Markets do not provide concrete information about how peoples decisions affect the life prospects of others or vice versa. They do not even provide accurate summaries of the social benefits and costs associated with what people decide to do since markets mis-evaluate external effectsand external effects are the rule rather than the exception. Actual market allocations under supply social goods and activities and over supply individual goods and activities. They establish incentives for individuals to wean themselves of needs that require socially coordinated intercourse and accentuate needs that can be met individually. Moreover, markets reward competitive behavior and penalize cooperative behavior.
In sum, markets not only erode solidarity, they also systemat- ically mis-charge purchasers so that over time, preferences that are individually rational for people to develop combine with biases inherent in market allocations to yield outcomes increasingly further from those that would have maximized human fulfillment. And to top it off, markets generate gross economic inequality, severely distorted decision-making influence, and class division and rule. In the end, the fears of utopian critics who decry the socially alienating effects of markets prove more to the point than the assurances of so-called scientific economists that markets are ideal allocation institutions. Regarding markets, abolitionism is an appropriate attitude.
Capitalism employs private ownership and markets. It remunerates property, power, and output, and, as a result, has produced some of the widest disparities of income and wealth found in human history. The division of labor within capitalism is hierarchical. Capitalists rule workers while coordinators occupy the terrain between labor and capital, partly administering on behalf of capitalists and partly trying to enlarge their own interests at the expense of both capitalists above and workers below.
Within this broad rubric there is certainly variation. Workers may or may not have unions and other forms of organization to aid in manifesting their preferences—and the same can be true for the coordinator class that may have amassed greater or lesser means of accruing wealth and power unto itself at the expense of either capitalists or workers. At its most oppressive, there is the cut-throat capitalism of robber barons with gigantic, unrestrained corporate power dominating all social choices and options. At its least oppressive, there is an ameliorated system of capitalism called social democracy in which laborers and consumers have considerable local and state power and use it to ward off the worst outcomes of markets and private ownership.
In any case, the basic model called capitalism because of its intrinsic tendencies of private ownership of means of production, hierarchical corporate divisions of labor, and competitive markets, not only doesnt facilitate solidarity, diversity, equity, and participatory self-management, it violates each of these values producing virtually the exact opposite. As the tremendously influential British Nobel economist John Maynard Keynes (1883-1946) put it:
[Capitalism] is not a success. It is not intelligent, it is not beau- tiful, it is not just, it is not virtuousand it doesnt deliver the goods. In short, we dislike it, and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed.
Reducing that perplexity occupies much of this book.
Market socialism is the widely used name for a system that utilizes markets, a hierarchical or corporate division of labor, remuneration according to output, and either social, public, or state ownership of means of production.
Market socialism, in our view, improves on capitalism by eliminating private ownership and thus the capitalist class. But in market socialism we see, instead, that the coordinator class rises in stature and power, utilizing its relative monopoly on intellectual labor and on decision-making bearing on their own work and the work of their subordinates to attain a ruling position. Capitalists are gone and thus the most significant factor leading to income differential is gone, but there is still class division and class rule. There is still the alienation, misallocation, and immoral bases for remuneration intrinsic to markets, and there is still a division of labor that relegates most actors to greater tedium than warranted, reserving for a relative few greater power and reward.
One can imagine a range of variations in such economies, of course. The balance of power between coordinators and workers could shift. If workers accrued more power, they could enact structural reforms to ameliorate the ills of markets, reallocate wealth, etc. If coordinators accrued more power, they could enact the reverse. The systems internal market dynamics promote the latter. Courageous struggle promotes the former.
Clearly, however, whatever gains over capitalism have been achieved in attaining market socialism, market socialism still is not an economy that by its intrinsic operations promotes solidarity, equity, diversity, and participatory self-management while also accomplishing economic functions efficiently. Instead, all the intrinsic ills of marketsparticularly, hierarchical workplace divisions, remuneration according to output and bargaining power, distortion of personality and motives, and mispricing of goods and services, etc.persist, while only the aggravating presence of private capital is transcended.
Is this economic system aptly called socialism? If we call it socialism, then the word cant simultaneously mean rule by workers over their own labors, because that is certainly absent in this system. If we do not call this system socialism, then we fly in the face of popular labels and of the name for their aim chosen by the advocates of the system. The deciding factor in this tension for me, after some years of ambivalence, is that too many perfectly reasonable people associate the label socialism with this model and with associated centrally planned models to make trying to disentangle the label from the systems worthwhile. It seems to be more instructive and productive
1 to make clear that these systems are class-divided and coordinator-ruled,
2 to make clear how a preferred system differs from them, and
3 to leave behind the label socialism as a positive descriptor of what we desire so as to avoid guilt by association and related confusions.
And thats why the economy featured in this book is called participatory economics.
Centrally Planned Socialism
Centrally planned socialism replaces the market allocation of market socialism with central planning. Having discussed this allocation institution we know that the result will be quite mixed. Depending on how the central planning apparatus arrives at data, and the harshness of its regime, we will have more or less authoritarianism and more or less means for planners and other intellectual workers in the coordinator class to propel their own interests over and above the interests of workers.
But however the chips fall regarding the exact balance of power and the institutional forms of a centrally planned economy, the continuation of hierarchical divisions of labor and remuneration according to power, and the imposition of even more starkly authoritarian command and associated personality structures guarantee that such a system will not deliver solidarity, diversity, equity, and participatory self-management. It will be socialist only by self-designation and popular usage. Nonetheless, the system will deny those doing the labor and consuming the outputs proper say in the decisions that affect their lives and proper remuneration for their efforts and sacrifices.
Green bioregionalism is a system whose characteristics are quite vague. Many green activists quite reasonably reject capitalism, markets, and authoritarianismmuch as we do in this book and for rather similar reasons. Somehow, however, their additional perfectly reasonable and essential idea that an economy and society should attain ecological sustainability leads some of themand this is where a strange jump occursto a notion that local material self-sufficiency is a primary virtue.
Sustainability is certainly unobjectionable. What is the alter- native, after all? Is there anyone who would argue that we should organize ourselves to promote dissolution of our societies due to depletion of their means of existence? Surely everyone of all persuasions has to agree that ecological sustainability is desirable, the alternative being suicide. But then what does self-sufficiency mean? Or bioregionalism?
For some of its advocates bioregionalism seems to mean that in any sensibly demarcated region, economic and social activities should respect the biological and ecological character of the region, consistent with creating a sustainable and fulfilling existence. That seems fair enough and is obviously desirable. But for other advocates bioregionalism seems to mean that each bioregion should only undertake activities that are made possible by the resources and ecological attributes it contains. Its economy must use what resources are directly available in the region, and not depend on inputs from other regions. This seems, in contrast to the earlier sensible formulation, quite misguided.
First, what is ecological about separating each region from all others? The core concept of ecology is arguably interconnection and mutual dependence. For this reason, it is hard to understand why some greens, otherwise so attuned to ecological logic and values, think there is a virtuemuch less an ecological imperativein creating self-sufficient rather than mutually dependent relations among regions. Second, some regions naturally have more plentiful resources and desirable ecologies for humans than others, and no single region can offer all the benefits that can be generated by sensible attention to balanced utilization and sharing of resources from all regions. So why should we eliminate the benefits of sharing ecological bounty across all borders? We cannot find any reason to forego such benefits unless one argues that mutual interaction intrinsically breeds ecological devastation. But why should that be if we use means of mutual interaction that are ecologically sensitive (and rule out markets)?
What has all this got to do with green bioregionalism? Well, for us it is hard to evaluate it as an economic system without raising these points because to evaluate it as an economy we have to specify its component economic institutions. Some greens advocate a localized community economy, with small work units and no major allocation institutions other than direct interpersonal barter. They often seem to favor equitable roles and incomes, including no hierarchies in decision-making influence or job quality. However, they provide no explanation of how to accomplish these desirable aims. Instead, there is an implicit presumption that such admirable results would flow inexorably from the logic of small size and self-sufficiency. Yet this belief has neither historical nor logical basis. Indeed, in contrast, the only thing that necessarily flows from bioregionalist self-sufficient aspirations and small size is a needless dissolution of social ties, a harsh inequality of resources, and a self-negating rejection of economies of scale.
When green bioregionalists react to such criticisms, they say: Oh sure, of course, we dont mean that people in the desert have to suffer compared to people in areas with great climates and plentiful resources. Who would favor such unfairness in life? But then when asked how the bounty of the latter finds its way, in part, into the hands of the former, they have no answer and in our view the green bioregionalist now confronts an economic decision. Do I want markets, or do I want central planning, or do I want some other allocation mechanism to mediate this transfer? It is our view that if they opt for either of the first two allocative means they will wind up with either market or centrally planned socialism/coordinatorism. Their vision will incorporate class division and class rule and will lose the qualities they aspired to, including proper attention to the ecology in relation to human well-being and the capacity to sensibly relate to broader ecological dictates having to do with the rights of other speciesas well as rejection of hierarchy in work conditions, assertion of mutual empowerment, and attainment of equitable distribution of circumstances and incomes. On the other hand, if Bioregionalists wish to retain all these values and to also facilitate the diverse ecological realities of countless regions, then they will have to adopt a suitable economic vision for those goalswhich is not accomplished by favoring an a priori dissolution of inter- connectedness or prioritization of self-sufficiency.
The final point we would like to make about bioregionalism is the even more extreme one that ubiquitous smallness and self- sufficiency are not only not in every case necessary or sufficient for a good economy, but that taken by themselves they are not even always ecological values or values of any desirable sort at all.
To say that an economy should prioritize small structures, or assemble itself into regions subsisting without benefit of interaction, opts for such choices even when they are contrary to worthy values and themselves convey nothing positive. It would be sensible for greens to demand that a good economy should take proper account of the full ecological implications of economic choices, and should help people make choices in light of these implications. It would make sense to demand that an economy permit sensible choices of scale in light of ecological and social implications, not prejudging one way or the other. When dealing with workplaces, living units, industries, and pretty much every type of institution and social structure, sometimes larger is better, sometimes smaller, whether ecologically, or to achieve face to face relations, or for many other reasons. Similarly, it would make sense to demand that an economy not dissolve relations of mutual benefit and support among regions or exaggerate their potentials either, but, instead, allow ecologically proper and materially just and beneficial flows from region to region. Sometimes it makes sense for resources, goods, and services to flow freely even over large distances, sometimes not. The point is that an economy should not make such choices a priori, but provide workers and consumers the needed information and appropriate decision-making influence to collectively arrive at desirable choices, as conditions and opportunities arise.
We have come to the end of this chapter and to the end of part one of this book and have arrived at the positive questions that motivate the rest of our exploration. Can we specify a new type of economy that facilitates solidarity, diversity, equity, and self-management, and that gets desirable economic functions done without imposing costs that offset its benefits in ways that we find too onerous?
If yes, then we have a new economic vision we can truly celebrate. If no, then we either keep trying or we will have to choose from among the horribly flawed models we have already discussed forcing ourselves to settle for the one we find least evil.
Having shown that existing economic options impede the values we hold dear, we desire a new and better vision. Espousing good values, as in earlier chapters, is a part of going forward. But a serious alternative vision must delineate new institutions with different properties than those we now endure. These new institutions should accomplish production, allocation, and consumption at least as well as institutions found in capitalism, market socialism, centrally planned socialism, and bioregionalism. But the new institutions should not induce class divisions nor produce the rule of one class by another. And they should enhance rather than obstruct equity, diversity, solidarity, and self-management. To accomplish these ends we are going to propose a system called participatory economics.
A New Vision
Participatory economics, or parecon for short, has as its central institutional and organizational components:
- social rather than private ownership
- nested worker and consumer councils and balanced job complexes rather than corporate workplace organization
- remuneration for effort and sacrifice rather than for property, power, or output
- participatory planning rather than markets or central planning
- and participatory self-management rather than class rule.
Taken together the above structures define participatory economics as a separate and new economic modelone that we believe meets our norms for a good economy.
From our earlier discussion of economics, various economic institutions, and various economic systems, we already know that in a desirable economy each worker and consumer should have equal access to information regarding the full social effects of proposed actions on themselves and throughout the economy. They should influence decisions in proportion as the decisions affect them. They should share one anothers successes and suffer one anothers hardships so that the daily functions of economic life enhance rather than destroy solidarity. A good economys incentives, information, and circumstances should foster empathy and mutual concern. A good economys economic activity should diversify opportunities and paths people can choose, rather than homogenizing them. A good economys workers should be justly remunerated for their labors in accord with the actual effort and sacrifice they expend on behalf of the social product, or, if they cannot work, in accord with social averages and special needs. A good economys division of labor should respect and advance peoples diverse preferences at the same time that it promotes solidarity and facilitates self-management. Class divisions should not be produced, either by ownership or different circumstances of production or consumption. All in all, a good economy should accomplish central economic functions and meet peoples needs and develop their potentials in accord with our highlighted values and without ill effects on other values we also hold dear.
In Part II, therefore, we will describe participatory economics, focusing on its defining institutions and their implications for workers and consumers. In the concluding parts three and four of the book we will explore daily life circumstances in parecon and address criticisms of parecon.
Describing an entire economic system one step at a time is a bit problematic: half a suspension bridge is worthless; the same holds for half an economic system. The new meaning and viability of each part of a good economy can only be fully evident when we take into account its interactions with the new economys other parts. So as you read the rest of this book, please keep in mind that we will occasionally, and of necessity, allude to features that will not be fully described until later. Each chapter in the coming section will only partly explain the full meaning and implications of what is introduced. Full clarity comes only when we can situate each new structure in proper relation with all other new features. Please finish all the chapters and see the mutually dependent implications of all component parts before you fully judge any one of them.