The Online Library of Liberty

A project of Liberty Fund, Inc.

• Introduction
• Part One: the Needless State (chapters 2, 3, 4 Are Not Available Online For Copyright Reasons)
• 1: Who Gave Us Order? On Exclusion, Enforcement, and Its Wherewithal *
• 5: Empirical Evidence *
• Part Two: Redistribution (chapter 7 Is Not Available Online For Copyright Reasons)
• 6: A Stocktaking of Perversities *
• 8: Disjunction, Conjunction *
• Part Three: Justice (chapters 10, 11 Are Not Available Online For Copyright Reasons)
• 9: Justice As Something Else *
• 12: Slicing the Cake Nobody Baked *
• Part Four: Socialism
• 13: Ownership, Agency, Socialism *
• 14: Market Socialism: “this Square Circle” *
• Part Five: Freedom
• 15: Right, Wrong, and Economics *
• 16: The Paretian Liberal, His Liberties and His Contracts *
• 17: The Bitter Medicine of Freedom *
• Works Cited

Part Four

Socialism

13

Ownership, Agency, Socialism*

The failure of the socialist command economy directs attention to purported alternative mechanisms of resource allocation that would be self-enforcing, simulate certain capitalist processes and outcomes, yet would preserve some socialist values. Tracing the effect of alternative types of ownership, severalty and commonalty, upon systemic behavior, the present paper argues that the principal-agent problem obstructs any self-enforcing efficient solution unless severalty becomes the dominant form of holding property. The latter, however, is inconsistent with other essential socialist goals.

The economies of the greater part of the Eurasian land mass have lost steerage way, and seem to have great difficulty in getting up steam again and setting a course. At the same time socialism as a doctrine of government has exhausted its intellectual credit and, to survive in some version, must seek new theoretical foundations—an endeavor that has not been crowned with much success so far. These two quandaries are of course closely related. Both have their origin in a fudged image of economic and social institutions as they really work, leading to a boundless overestimate of their mutual compatibility and the results they can be asked to deliver. The present paper is aimed at the center of the fudge, the dependence of a particular mechanism of resource allocation on a particular type of property right. It seeks to help clarify the question: are markets intrinsically capitalistic?—or, to put it the other way round, is “market socialism” a contradiction in terms?

1.

Enforcement

Socialism in its undiluted, genuine version implies a command economy. There is nothing pejorative in this term: it is factually descriptive. It means that all significant production and distribution decisions are taken by “social choice” and backed by the sovereign power vested in it.1 They are broken down by central planning into detailed instructions concerning factor inputs, product outputs, incomes, and prices. The instructions are meant to be coherent and capable of being executed by agents of “society” from managers down to workers. Coherence ex ante, if it is achieved, does not secure coherence ex post, because the system is necessarily rigid yet exposed to random shocks, shortfalls, and stoppages. Any variable not subject to a specific instruction or target backed by adequate sanctions, has a natural propensity to follow the line of least resistance and take on the “wrong” value; inputs, prices, wages, and investment expenditures will be too high for given outputs, outputs will be too low for given inputs, labor productivity too low for a given equipment, quality too low for a given price, and so on. This tendency necessitates an ever finer breakdown of targets and constraints, and runs counter to attempts at simplifying and decentralizing the system by one ingenious reform after another. The agents of the political authority owe it obedience, but the more exacting are their orders and the greater is their complexity, the stronger will be the likelihood of laxism in execution and dissimulation of failures. For these and other reasons, the nature of the genuinely socialist economic mechanism demands severe enforcement in order to perform anywhere near as intended—yet severe enforcement is costly. However, the innocent belief that the corresponding “Stalinist” features of socialist systems are merely residual effects of the personal proclivities of the individual of the same name, seems nevertheless ineradicable from much public discourse.

The typical by-products of the genuinely socialist economic steering mechanism are twofold. First, despite the humanitarian strands of the creed, the need for severe enforcement brings into being an authoritarian political system that must make heavy exertions to legitimate itself and leaves little room for democratic trappings. Political relaxation is quickly translated into a worsening economic performance that may degenerate into uncontrolled rout. Second, even under fairly rigorous authoritarian rule, the mechanism lends itself poorly to its intended purpose. The “social choices” it is supposed to put into effect prove in general to be partly or wholly unenforceable.

2.

Efficiency

Unenforceability of its “socially chosen” instructions and targets, and the high moral and material cost of attempted enforcement, are primary weaknesses of genuine socialism. Its secondary weakness—secondary only in the sense that the empirical evidence for it is indirect and not wholly conclusive—is that even if its instructions were wholly coherent and fully enforceable, they would still be inefficient, wasteful by failing to hit upon the factor combinations, techniques, product mixes, and foreign trade patterns that would jointly place the economy on the “socially preferred” (i.e., politically chosen) point on the production possibility function. Even if the steelworks gets built and functions exactly as planned, it would have been more economic to build tourist hotels instead, and import the steel. The reason is presumably that prices in genuine socialism serve essentially recording purposes, but do not generally clear markets, do not reflect relative scarcities, and are not “truthful” signals calling for any particular resource allocation, let alone the “optimal” one. Prices are not formed in a progress of discovering opportunities for profitable exchanges, and once formed do not convey the sort of information that, if acted upon by buyers and sellers, would bring about the best available outcome.

3.

Self-Enforcement

Having made a diagnosis along these lines, socialists who for one reason or another put a high value on economic efficiency or political democracy, and of course those who think the two are Siamese twins and come and go together, are intellectually ripe for abandoning direction by command; they typically suggest recourse to the market as the remedy. (Whether buying efficiency and democracy at this price would really be in socialism’s best interests, is a moot point that we will leave on one side.) Reliance on the disciplines of the market makes input-output instructions redundant; at the most, limited intervention should suffice to make production and distribution respond to “needs” as well as to demand, when the two are deemed to diverge too blatantly. If there are few or no instructions to obey, there is little or no need for their enforcement. The market is a mechanism with a built-in allocation of rewards and punishments that generally make it preferable for all participants to act as they should if it was to fulfil its purpose. Briefly, it is self-enforcing.

Where there is no enforcement in the above sense, there can be democratic decision-rules; where there is a quasi-automatic feedback mechanism for sorting out waste and seeking out the most economical solutions, there can be a reasonable approximation to efficiency. For all this, there must be no capitalism. These three conditions form the hopeful crux of “market socialism.”

4.

Equality at the “Starting Gate”

There must be no capitalism because, in the first place, socialism seeks its own renewal and would rather not make away with itself. In the second place, it derives such legitimacy as is left to it, from a conspicuous commitment to equality and what it is pleased to call “distributive justice.” It is part of its creed that capitalism is actively destroying these pre- and post-capitalist values. Therefore the cohabitation of inconsistent systems must not be tried; capitalism must be abolished, not mitigated. The social democratic or “American liberal” compromise, whereby capitalism is allowed to produce wealth, whose spontaneous distribution is then forcibly rearranged by the institutions of the welfare state, is not ambitious enough for the emerging “market socialist” program. For under the welfare state compromise, capitalism keeps creating unacceptable inequality and injustice which “social choice” must keep correcting and redressing. The desired end-result must be continuously enforced, and as one unjust head is chopped off, two grow in its stead. Under market socialism, on the contrary, the basic institutions themselves must be such that no unjust end-results are created in the first place, the very system being self-enforcing with regard to both of its intended outcomes, economic efficiency and social justice.

While the former is to be achieved by “reliance on the market,” the latter is to come about as the spontaneous product of “equality at the starting gate.” Private property of productive assets, even if equally distributed in some imaginary initial position, tends over time to cluster unevenly as a combined result of random chances and systematic processes, with winners winning even more and losers eventually losing all. Hence people’s capitalism is an illusion; at best, it is transitory. Productive property under market socialism must therefore be “socially owned,” both to preserve “starting-gate equality” from the accumulation of private property, and for numerous other reasons that seem to me secondary to the program’s main objective.

5.

Severalty

“Social ownership” is market socialism’s secret weapon, in that its exact nature is kept behind a veil of verbiage, leaving it to the imagination of each to discern through its opacity particular charms, a particular potency. Trying to identify it by working back from other market socialist theses (employee ownership is not socialism but workers’ capitalism; decentralized ownership creates conflicts of interest among particular sets of owners, and between each such set and society or the superset), one would have to conclude that “social ownership” is merely a coy euphemism for state property. However, most market socialists vigorously deny this without saying plainly what is meant by it. They variously allude to distinctions between private and public, individual and collective, exclusive and inclusive, selfish and unselfish, conflictual and cooperative, as elements of the definition of “social ownership.” Manifestly, however, these allusions only help to make the notion woollier still. Since “social ownership” must mean something if it is to be discussed at all, some minimal definition of it should be agreed. Here, we will proceed by first identifying its polar opposite, severalty.

When property is held in severalty, each individual member in an owner-set has rights to a quantified part of the whole by virtue of original occupation (“finding”), contract or bequest. In the absence of specific contractual provision or custom resting on good reason to the contrary, each individual owner can exercise the rights pertaining to his part of the property at his discretion. In the limiting case, the owner-set is simply one natural person, the sole owner, whose discretion to exercise his rights is complete. In the general case, the owner set can of course have any real positive number of individual members, from one to many. A good reason for limited discretion in the exercise of property rights by members of a multi-person set of owners is that the property is indivisible or would lose value in division. It is not feasible to cut a ship in two so that its two owners may each sail away with half the hull. Less obviously, it is not always feasible or at least not convenient to let one part-holder of an usufruct to exercise it one way, the other another way. Thus corporations distribute the same dividend to each share of a given class of stock even if one shareholder prefers high dividends, the other a high ploughback. However, under severalty the limited discretion in the exercise of property rights, due to physical indivisibility or high cost of division, is to a substantial extent overcome by potential value-divisibility. The owner of half a ship cannot cut off his half nor use it in ways the owner of the other half objects to, but he can claim half the income it yields and half the residual value when it is sold. He can, in turn, alienate a part or the whole of these claims,2 a right that renders income and capital both divisible and convertible into one another. Likewise, the shareholder who disagrees with a corporation’s profit reinvestment policy can supplement his low dividend by selling each year such fraction of his shareholding as will keep his investment constant while that of the corporation as a whole increases; in fact, subject only to tax considerations, he can decide his saving or dissaving at his discretion in complete independence from his fellow owners in the corporation.

The principle of severalty, greatly aided by value-divisibility, does not eliminate every possible externality arising from multi-person ownership of undivided chunks of property, but in its purely economic effects comes close enough to sole ownership; in the limit, it is sole ownership. It is quintessentially capitalist in that each benefits from his ownership in proportion to his equity in the property, rather than in proportion to the work he contributed, or his deserts, his needs, his age, or some other criterion. It is the form of property right where, despite indivisibilities and potential externalities, costs and yields are internalized to the greatest practicable extent.

6.

Commonalty

Commonalty is almost the obverse of severalty. Under commonalty, a property has a single owner who, however, is always an abstract holistic entity whose individual members, unlike members of partnerships, joint stock companies, or other owners in severalty, have no definite shares in the property by virtue of contract or bequest. Such rights as they have individually are derived from their “belonging” by virtue of residence, place of work, admission, or citizenship—a quality that may be acquired at little or no cost by simple entry and lost by exit, and that is in many cases as loosely defined as the benefits to which it entitles the member.

There is little doubt that commonalty is a very old form of property right, probably older than severalty in general though not older than the special limiting case of severalty, i.e., single individual (or family) ownership. Historically, commonalty declined pari passu with the economic role played by the tribe and the clan. An instance of commonalty that has survived is the village owning the “common.” While all have certain access rights, no individual villager owns a definite fraction of it, or of any right pertaining to it. There may be a presumption that everybody has the same right to it as everybody else, but this is not translated into quantitative limitations of use or equity; what it really means is that the members’ property rights are quantitatively indeterminate. Any villager can free-ride on his fellow villagers by overgrazing. Costs and yields are to a large extent externalities. Hence, contrary to severalty, economically optimal solutions (e.g., as to the number of cattle to be grazed) are not self-enforcing (in technical language, “coordination games” involve conflicts), and the avoidance of waste may need specific enforcement if it can be done at all. Physical indivisibility and its attendant inconvenience and cost cannot be evaded by recourse to value-divisibility. Hence an individual seeking, for instance, a change of use or a change in the time-profile of the income stream, can only obtain it if the owner entity as a whole has the corresponding right and decides to exercise it—a requirement that, failing unanimity, raises all the problems of collective choice, notably the choice of a choice rule, cyclical preferences, the status of minority rights, dictatorship, and so forth.

As the villager is to the common, so is the club member to the golf course, the syndicalist to the worker-owned “self-managed” enterprise, and the citizen to state property. The latter is in practice the overwhelmingly most important form of commonalty. We do not know which of these property forms socialists really have in mind when they call for “social ownership.” They do not seem to have thought out their own position on the question. The mainstream view used to be, and perhaps in a latent fashion still is, that the state must own all productive property over a certain size. Other proposals would allow workers’ collectives and non-profit institutions to own restricted rights in them, the rights of alienation and change of use being reserved for the state. All “market socialists” would, however, exclude any right that gave individuals a precisely quantified negotiable equity in a property, permitting the “exploitation” of labor and “unearned income.” Their rejection of capitalist property rights implies, however, that whichever abstract entity is the rightful “social owner,” it holds its property in commonalty, with consequences for the resulting economic system that may not be immediately obvious.

7.

Simulation

How would market socialism “rely on the market” under commonalty? How, for that matter, does it know that there would be a market to rely on, and that if some kind of market did emerge, it would be efficient in some sense and hence worth relying on?

Since exchange needs at least two contract parties and a market a plurality of them, there can of course be no market in producers’ goods if they are all owned by the same “social owner,” the state. A market is difficult to conceive of even if there are many “social owners” of use rights, but these rights are not value-divisible and negotiable. The state may put shadow prices on capital goods and may set interest rates in order to calculate the “costs” of consumer goods, but these would not be market prices and rates in the proper sense, and would not benefit from the presumption of truthfulness about relative scarcity. However, if there is no true market in producers’ goods, there cannot be one in the consumer goods they serve to produce, nor of course (for these and other reasons) true factor markets. The more intelligent kind of market socialists have been aware of this at least since the start of the “socialist calculation debate,”3 and have proposed a series of alternative solutions involving some method of simulation of the process by which prices, corresponding to efficient resource allocation, are determined in a competitive market.

The oldest is the computing solution, first envisaged and rejected by Pareto (Pareto, 1909, 233–34) because it would require solving an astronomical number of simultaneous equations incorporating an astronomical quantity of information, much of it difficult to extract. Three generations after Pareto, this objection looks less decisive, for data storage, retrieval, and processing are well on the way to tackling problems of astronomical complexity. The true obstacle to the mathematical solution is not the technical one of gathering and manipulating too much information, which an imminent science-fiction civilization might presumably overcome. It is the more fundamental fact, rightly stressed by Hayek and Kirzner, that some market participants do not act on pre-existing information, but discover it, so to speak, for the first time; it is their search for innovative, “economic” solutions to problems posed by competition that generates the knowledge in the first place about prices, costs, techniques, etc., and it is this information that is needed for efficient resource allocation.

Many half-way solutions between command and market socialism have been proposed, and some have been tested by the many abortive “market-oriented” reforms of the late planned economies, especially in Hungary, Poland, and the Soviet Union. Common to each were the ambitions to decentralize, to direct the economy by setting broad parameters rather than giving detailed instructions, to allow a measure of price flexibility and accounting and managerial autonomy in state enterprises. Probably the strongest single reason for their failure was that they tried artificially to transplant and insert into the “socially owned” economy a number of features that characterize market economies and that grow out of decentralized capitalist property rights. In the absence of the reward-and-penalty structures that arise out of ownership in severalty, they are like plants with their roots up in thin air. A “socially owned” enterprise is autonomous and independent in the sense that a weightlessly levitating object is autonomous and independent. There is no reason why it should “economize” and tend to move in any particular direction, let alone as it ought to in order for competitive markets to come into being and perform their optimizing function.

To overcome levitation and indeterminacy in enterprise behavior, theoretical models of market socialism postulate various types of conduct to be mimicked. In one version, the enterprise is instructed to adjust output and price until, by trial and error, it just clears its market. However, the enterprise can clear its own market with a suboptimal output at a price above marginal cost, and may well prefer to do so. In a tighter version, it may be instructed to expand output until price equals short- or long-period marginal cost, i.e., to simulate some ideal type of profit-maximization. Once again, it has no evident interest to do so, may prefer to maximize peace and quiet, or conversely size and influence, or perhaps the managers’ popularity among the employees. The instruction to maximize profit would in any event have to be enforced—the simulated market mechanism would not be self-enforcing—but enforcement might well prove to be impossible because the enterprise could, within reason, simulate to have whatever level of marginal cost suited its own purposes. It might choose to innovate and “economize” in a wide sense, but more probably it would not, and there is nothing much anyone from the outside could do to make it.

If ownerless enterprises, held “in commonalty,” cannot with any certitude be made to simulate some acceptably profit-maximizing behavior, they have to be given incentives to make it worth their while. The corresponding version of market socialism might be called “motivated simulation.” It is of course not the enterprise as a legal person, but the natural persons influencing its conduct who need to be motivated. They can be promised bonuses depending on their own performance, or that of their department, line, or function according to orthodox business school teachings, with the top man’s or men’s bonus directly tied to some measure of total profit. Provided it is a linear function of the latter, the bonus of the ultimate decision-taker is then the tail that should wag the dog, i.e., make the enterprise adopt the profit-maximizing output and price.

8.

When Agents Have No Principals

Can the “socially owned” enterprise’s top manager be made to act like a capitalist without first becoming a capitalist? The problem is the notoriously intractable one of agency. The last-resort impossibility of simulating an efficient market under socialism resides in the peculiar nature of the principal-agent conflict when property is held in commonalty. In general, the agent responsible for the management of property reports to another agent, responsible to its owner or to yet another agent who, in turn, is responsible to the owner; no matter how indirect the responsibility and how long the chain of agency, it must end somewhere.

Under capitalism, the end of the chain is held by a natural person aiming to maximize the value of his equity, or an aggregate of such persons. Profits and losses are their profits and losses: they are principals. How the principal obtains that the agent should put his interests first, or (less naively) how a mutually acceptable solution is found to the obvious, albeit partial, conflict of interest between them, is a long story that continues to be told, mostly on the financial pages of newspapers. In the modern large corporation with a multitude of owners, many of whom hold their stakes through institutional intermediaries, the solution, such as it is, is provided by the latent possibility of the takeover bid that threatens the tenure of the managing agents who, whatever their excuses, fail to maximize the owners’ equity as valued in the market. The solution is a self-enforcing market sanction, blunted as it may be by legislation that can be turned to entrench the sitting management. It may not be a perfect solution—no agency problem can have one4 —but at least it has a logical structure.

Under “social ownership,” however, property is ultimately held by an abstract entity which cannot but be represented by an agent, an agent’s agent, or an agent of the agent’s agent. There is no principal at the end of the chain, for whom the discounted value of all future income from his equity in the property would be a sensible, rational maximand. At best, an individual “owner” in commonalty, if the term “owner” can be employed at all, would seek to maximize the value of the rights he held or that benefited him personally. The villager, subject to how he expected his fellow villagers to act or react, would put as many cows on the common pasture and cut as much timber from the common wood as he could. The member of a worker collective would lobby for the greatest possible capital-intensity (machines per worker) in his enterprise, and for having as few fellow-workers as possible provided his cousins and nephews were co-opted into the happy few. The ordinary citizen, holder in commonalty of all state property, would probably be just indifferent to the fact and not bother about who maximizes what.

When there are no principals, the question of solving agency problems through overt or latent bargains between principals and agents cannot even arise. Property may still be managed, but it will be managed as if it belonged to nobody.

9.

When Simulated Capitalism Becomes Real

Now a principal-less agent will have no constraint, except perhaps public opinion, to stop him from maximizing the variable, or bundle of variables, that he prefers. He might put various values on various combinations of the income, non-pecuniary agreement, and safety of his managerial tenure. Having said this, we have said next to nothing, for almost any managerial behavior can be alleged to be consistent with such vague unquantified objectives. In other words, the principal-less agent is largely unpredictable. There are nevertheless a few things we can safely say he will not do if he is rational, i.e., fits means to ends. He will not maximize profit if only part of his income from his post is a bonus geared directly to profit while the rest depends on other variables that are not co-variant with profit. He will not maximize profit if his evaluation of risk is different from what it would be if it was his own equity that profited or lost from unpredictable outcomes. (Not risking his own money may, of course, as easily lead to undue aggressiveness as to timid passivity.) Finally, he will not maximize profit if his own tenure is finite for any reason: because he is mortal, must retire, cannot bequeath or sell his job, or may lose it upon a turn of the political wheel. With finite non-negotiable tenure, his rational maximand is not the market value of his equity, but only the discounted value of profit over some limited, perhaps brief, period—a very different objective dictating a different policy for investment in facilities, research, quality, reputation, and goodwill.

Once the conditions are stated under which the heads of “socially owned” enterprises, if they are rationally pursuing what is best for them, will not manage their business in such a way that outputs and prices should fairly closely simulate those that capitalist enterprises would adopt in a competitive market, a simple conclusion becomes blindingly obvious. Before there is any hope for “market socialism” to perform as expected, these conditions must be removed though their removal, while necessary, may not be sufficient. Removal of the anti-efficiency conditions, however, would effectively transform the agent-manager into a principal, a capitalist with a negotiable and heritable part-ownership in the enterprise. Of all the market-socialist versions of simulation—by giant computer, by instruction to clear the market, to equate marginal cost to price, and by “motivated simulation”—this is the only one that is not logically condemned to fail, basically because this is the only one that does not simulate capitalism, but admits it and resigns itself to its domination.

Though this conclusion will not seem original to the common-sense reader who “knew” all along that socialism “cannot work,” it is perhaps a comfort to his worldly wisdom to find that one can also be guided to the same result by the disciplines of deductive reasoning.

Under this version, where socialist simulation flips over into real capitalism, the head of each enterprise and perhaps his close subordinates, would be owning a perhaps minor stake in its equity in severalty, the “social owner”—the state, the municipality, the “work collective”—the remaining stake in commonalty. The capitalist tail would well and truly be wagging the socialist dog. In important respects, the effect would be much the same as if the managers had taken over the economy in a gigantic avalanche of leveraged buy-outs, leaving the “social owner” with an ill-defined interest that is, rather like “junk” bonds, neither really a prior charge nor really equity; it is neither the wellspring of incentives nor a basis for influence. The individual “social owners,” if they can be said to exist as such, would in such a situation be very much at the mercy of the owner-managers, for even if they could muster the collective will to do so, they could neither remove nor buy out the latter without defeating the object of the exercise. “Social ownership” could not regain the upper hand without actually liquidating market socialism and going back to the genuine command version of socialism. Once more, this is perhaps unsurprising once it is argued and stated, but seems worth stating all the same.

10.

When the Starting Gate Is at the Finishing Post

Can anything at all be saved from the socialist program, or must the establishment of a self-enforcing and efficient market mechanism crowd out the socialist norms of equality and “distributive justice”—unless they are squeezed back in by the system-alien compromises of a hybrid “social democracy”?

Market socialists would hardly admit to this stark alternative. The belief that in fashioning society one can have it both ways, is fundamental to their intellectual constitution. If some system of social organization does not achieve all they hold dear, there must be another that does, and all they need is to design it by informed thought. A secondary reason for their confidence is that to my knowledge no market socialist is on record as realizing that property in commonalty is inconsistent with the efficiency they think their system must have in order to be accepted. They have never come to terms with the thesis that, as was shown in Sections 6–9, “social ownership” must be superseded by capitalist ownership for their program to succeed. Should they, however, come round to this recognition, they might still not give up hope and renounce certain normative demands. They might fall back on the prima facie plausible case that the ethical features they want society to have, ought to and can be secured by a form of equality of opportunity. If that is achieved, any type of property rights, even capitalist ones, and even the market processes such rights generate, can be consistent with social justice. “Equality at the starting gate” would, according to this fallback position, mean that even unequal results at the finishing post would be ethically acceptable; for acceptance of the outcome of just initial conditions and of due process is, after all, the essence of the American liberal idea of “procedural justice.”

Equality at the starting gate needs careful definition before it has any meaning worth serious discussion. Here, let us merely note that since the “race” (the market economy) is a continuous process without a beginning where all start to run and an end where all stop, any arbitrarily chosen “finishing post” where we assess results to date, doubles as the “starting gate” for the rest of the race that is still ahead. Unless the runners have all passed the finishing post marking the end of any given lap in a dead heat, they have ceased to be (if they ever were) in a position of “starting-gate equality” for the next lap. The market solution implies that some of the “runners” gain advantages as they run, and get to keep them, for if they did not, they would not race but only simulate. One can have a real race, or “fix” the result, but not both. This is by no means a compelling argument for having real races which upset equality, rather than phoney ones whose results are “fixed” in advance to uphold equality. It is merely a statement of the mutually exclusive alternatives that each kind of race implies.

Refusing to choose between “market” and “equality,” proclaiming that one need only ask to have the best of both worlds, is self-delusion or self-contradiction; it is nonetheless the position market socialism is now adopting. On the long retreat from the original doctrine, past one humiliating accommodation after another, it can no doubt accommodate itself to that, too.

14

Market Socialism: “This Square Circle”*

Never kick a doctrine when it is down; the present is hardly the time to rub in the humiliations of socialism, in disarray as a political and economic theory and failed as a practice of government. This is not a rubbing-in essay. On the other hand, now is very much the season for attempts to reformulate, or as we have learnt to say, to “restructure” socialism, openly defaulting on its heaviest liabilities, and taking it out of bankruptcy under some less tarnished identity. If only to protect the public, these attempts should be submitted to fairly beady-eyed scrutiny. The present, beady-eyed essay looks at the favorite candidate for such a new, post-bankruptcy identity.

In Market Socialism,1 a team of Fabian social science teachers presents a collection of papers avowedly designed to rebuild an intellectually tenable position for the Left. The authors proceed partly by jettisoning some of the doctrinal baggage socialism has found too heavy to carry, partly by cross-breeding “socialism” with “market” to demonstrate that the union is both possible and desirable, and would have as its progeny a richer mix of efficiency and justice than any type of organization that has yet been tried.

I

There is a minor and a major move in this exit from bankruptcy’s Chapter 11.2 The minor move, which may serve as a hedge against the major move not succeeding, consists in denying that the realization of socialism entails recourse to any particular set of means (Estrin and Le Grand, 2). This must mean, conversely, that the employment of a particular set of means need not signify that it is socialism or anything like it that is being built; the means does not identify the end pursued. Hence if nationalization, planning, regulation, price or rent control, queuing, sharply progressive taxation, or a certain type of public education prove to be counterproductive in practice and untenable in theory, it should be easy for socialists to repudiate them without in any way abjuring socialism, for the former are merely contingent features of a possible socialist system; some other socialist system could do without them; and their presence neither qualifies a state of affairs or the thrust of policy as socialist, nor discredits socialism if they are condemned. This a more refined echo of the perennial and unbeatable defense which makes all tangible evidence irrelevant by declaring about Soviet Russian experience that it did not discredit socialism because it was not socialist, but Stalinist and bureaucratic.

The authors of Market Socialism, quite astutely, generalize this defense: no objectionable feature of an existing system that calls itself socialist counts as evidence one way or the other. No empirically observable detail of its policies can serve as an argument that socialism is not a worthwhile goal. Thanks to this defense, socialism becomes a highly mobile and elusive target. Its definition is purged of falsifiable propositions. Such alternatives as “the means of production are/are not privately owned,” “workers hire/are hired by capital,” or “access to food and shelter is/is not regulated by purchasing power” no longer necessarily distinguish a capitalist from a socialist society. It is only clear what socialism is not—no existing arrangement is—while what it is will be revealed only by the future, and then only if we have the good taste and judgement to embrace market socialism.

ARE MARKETS COMPATIBLE WITH SOCIALIST ETHICS?

The question whether reliance on markets is compatible with the ethics of socialist man “cannot be fully resolved until we have a working model” of market socialism (Miller, 48)—a test which does not threaten by its imminence. The internal contradictions of the Yugoslav system of worker ownership are no arguments against it, since “as our understanding of co-operatives increases, we are [sic] able to devise alternative arrangements which preserve both enterprise-level democracy and economy-wide efficiency” (Estrin, 184)—though the profane reader wonders why, in that case, forty years of experience did not enable the hapless Yugoslavs to have either democracy or efficiency, let alone both at the same time.

Dissociation of socialism from empirically falsifiable descriptive statements (e.g., “in socialism, workers hire managers,” or “unearned income is taxed more heavily than earned,” etc.) and indeed from all empirical precedents (e.g., “Sweden” or “Yugoslavia”), should protect it from positivist attacks, and ease the major move, the projection of a new identity. Its new name attractively couples the currently fashionable (“market”) with the nostalgically retro (“socialism”). For this union really to work, however, it is necessary to dissolve another, that is, to “decouple capitalism and markets” (Estrin and Le Grand, 2), for the two are wrongly yet strongly linked in the public mind.

There are, in fact, two links, one philosophical, the other historical. The philosophical link was first asserted by Mises3 in 1920, for whom the information embodied in prices, necessary for efficiency in resource allocation, could be generated only by a competitive market. His argument was completed by Hayek4 who added the essential element of a discovery process, developing and spreading otherwise unavailable, latent information, that is part of price formation by a multitude of economic agents.

The socialist counter-argument, that no logical links existed between capitalism and efficient pricing, set out in the 1930s by Lerner and Lange,5 centered around the theoretical possibility of finding market-clearing prices by simulating the responses capitalist producers would make to perceptible shortages and surpluses of exchangeable goods. This controversy, which went down in the history of economics as the “Calculation Debate,” in my view cannot be usefully pursued on a purely formal logical level.

On the substantive level, the key question to be settled is the reason adduced for expecting participants in a market to behave in a manner that will make the market an efficient instrument of resource allocation. In the context of the “socialist market,” this calls above all for settling the principal-agent problem. While it is present in both a real and a simulated market, there is good reason to hold that it works one way where property rights are private (i.e., attach to individuals), another way where they are collective (i.e., attach to holistic entities like the workforce, the commune, the state). The difference is fundamental, and suggests that managers of collectively owned, non-capitalist enterprises neither would nor could successfully simulate capitalist responses and reproduce the market processes and the resource transfers they induce. This argument is strongly supported both by the micro-economic theory of property rights and agency, and by the depressingly monotonous failure of repeated “market-oriented” reforms in socialist economies—reforms that have always fought shy of reassigning ultimate, properly sub-divided, and clearly defined property rights to persons.

Even if these arguments were not conclusive and the issue were open, the onus would still be on socialists to show that, contrary to the record and to the state of the Calculation Debate, anything a capitalist market can do, the socialist one could do as well. No trace of meeting this obviously central requirement appears in Market Socialism, except for a bland and platitudinous reference to the calculation problem (Miller, 30–31) as a reason for recourse to markets, rather than as a reason for questioning whether socialist markets, too, can “calculate.” Why markets under socialism should be expected to achieve efficient allocation, or indeed to exist at all except as fakes—which is the sole really contentious issue in the Calculation Debate—is passed over in complete silence and incomprehension. Instead, we are airily told not to fret, because for reasons that are not revealed, “in a socialist market economy . . . the makers of cheese will adjust their supply week by week to match the demand” (Miller, 38), and that is all there is to it. But it is not at all clear why they would adjust week by week, or ever, especially as doing so is neither always simple, nor convenient, nor costless. Simply to suppose that they would is begging a fairly basic question the authors may or may not have grasped, but have certainly not answered.

THE MARKET: A TOOL OF CAPITALISM OR SOCIALISM

The historical link between capitalism and market, in turn, is not (pace Marx) a matter of historical necessity—the capitalist “mode” entailing “production for exchange,” other “modes” entailing “production for needs.” It is merely a matter of historical coincidence that the abstract institution of the market, which is of course more than just the heir to the medieval fair, happened to evolve at the same time as, and in the frame of, the capitalist “relations of production,” though no doubt it could have evolved in other “frames” as well. Apologists for capitalism usurp the market, appropriating it as if the market—an efficient institution—depended for its functioning on capitalism—a repugnant and alienating system. However, the suggestion that market and capitalism go together is but “a sleight of hand” (Miller, 25). Traditional socialists fall for this trick, and think they dislike and mistrust markets when in fact it is capitalism they reject. This is a confusion (Miller, 29), a failure to see that the market can be trained to serve socialist goals just as it now serves capitalist ones. Indeed, though the authors do not say so, they tacitly treat the market as a neutral tool in the hands of its political master who can use it in fashioning the kind of society he wants. Gone, then, is the characterization of capitalism as a design for the pursuit of profit, socialism as one for the satisfaction of “needs”—as is the clear distinction between obedience to impersonal market forces under capitalism, to conscious social choice under socialism. We can, in sum, have the best of both at one and the same time.

For market socialism is nothing if not pragmatic. Markets appear to be good for some purposes in some areas, planning is good for other purposes in other areas, and there is no apprehension that the two may not mix admirably well. Worker co-operatives “may not be optimal for all industries at all times” (Miller, 36), but then they surely must be for some industries at certain times. “[I]t is not clear that one would want to rule out capitalist acts between consenting adults altogether” (Estrin and Le Grand, 15; Winter, 154). “[G]overnment could seek to make the market responsive to social goals such as greater social justice, equality and full employment” (Plant, 52). “[C]entral planning of an entire economy is unfeasible” (Estrin and Le Grand, 11), but one must choose the right balance between market and planning, and indicative planning is valuable, notably as a “guide to medium-term economic development in the medium term [sic]” (ibid.). Above all, market socialists can safely count on the market for delivering material welfare, yet need not condone the unjust, “morally arbitrary” way it distributes it. Only social democracy, untroubled by principles and systemic clashes, is as confident of having its cake and eating it as market socialism.

IS MARKET SOCIALISM MERELY SOCIAL DEMOCRACY DRESSED UP?

Does this self-assured eclecticism in fact mean that market socialism is nothing else but re-packaged social democracy, with at its base an economy capitalist enough to work, and capable of holding up a strongly interventionist and redistributive super-structure, pushing union power, regulation, egalitarianism, and welfarism, but only to the point beyond which adverse economic and social trade-offs become unaffordable, and never quite going over the brink? The answer appears to be “no,” for reasons that are not wholly clear and turn out to be surprising when they are elucidated. The main point seems to be that, unlike social democracy, market socialism will do more than merely redress capitalist outcomes; it will do away with the institutions chiefly responsible for these outcomes—and first of all with the main culprit, the limited liability company (Winter, 140). The latter is noxious because it facilitates private concentrations of power outside government control (a tendency which, if true, would surely be a contribution to the preservation of individual freedom by virtue of the counterweights it provided against the omnipotence of the state), but also because it separates ownership and control, and therefore—whatever the modern theory of the firm may say—it cannot be “relied upon to produce efficient results”; on the other hand,

It is hard to take this sort of statement seriously but one must try. Market socialists ought to be especially aware of what markets are suited to do. The separation of management control from ownership, while admittedly a possible source of inefficiency, is broadly taken care of by the market for corporate control or, in plainer English, by the threat of the take-over bid. The more open and free is that particular market, the less the likelihood of inefficiency due to the principal-agent problem. The owner-manager, who has total security of managerial tenure, is potentially more inefficient than the professionally run corporation, since he is much freer not to “maximize,” and can indulge his fancies—as the history of so many family-owned firms and of capricious robber barons demonstrates. Unfortunately for the market socialist thesis, however, worker co-operatives are a priori worse than either, their weird and hybrid incentive structure pushing them to choose “socially” wrong, inefficient factor proportions and a sub-optimal scale. The authors of Market Socialism appear to be aware of this (Abell, 98; Estrin, 175–76, 183), yet they let stand the bizarre juxtaposition of capitalist inefficiency/co-operative efficiency. For the structural deformities of the latter, they propose truly lame remedies that might or might not work if they were tried but, perhaps fortunately for the market socialist argument, have not been, and the fact that they have not been is surely significant.

WHAT IS MARKET SOCIALISM?

If one is to believe the disclaimer that market socialism is not social democracy (Estrin and Le Grand, 13), nor the putting into practice of any particular set of reputedly socialist policies (Estrin and Le Grand, 2), what exactly is it? The answers, such as they are, have to be found by exegesis, for the authors do not tempt Nemesis by setting them out in the shape of a clearly visible target. We do know, however, that it is a system where, contrary to socialism proper, decisions to allocate resources are taken in response to price signals emitted by market mechanisms. But why are these signals heeded? Innocently, the book takes it for granted that, quite simply, they are, “[s]ince market producers are generally motivated by profit” (Estrin and Le Grand, 3). However, it is clear on reflection (and the hurt surprise of socialist countries that tried to abandon the command economy without also re-defining and de-centralizing property rights and found themselves with an economy that heeded no signals of any sort, shows it conclusively), that this is by no means “generally” the case. It will be the case only if property rights are private in the sense that whoever is entitled to allocate certain resources is also entitled fully to profit from good allocations and is made to suffer from bad ones—either directly if he is the owner, or through some control mechanism if he is a manager. In the latter case tricky problems may start to arise, which, however, are as nothing to the problem to be faced when the manager is not the agent of the owner, but the simulated agent of a holistic pseudo-owner.

So far, however, market socialism looks not too unlike a kind of capitalism in discreet incognito. Yet as one looks closer, troubles of identity emerge. Consumer goods are permitted to be privately owned by firms (which, in turn, may or may not be privately owned) and by individuals but only within the limits imposed on the wealth and income of the latter by the requirements of equality. Subject to these limits, they can be bought and sold; at least one necessary condition of a market for consumer goods is thus fulfilled. Ownership of producer goods, and of their assemblies, however, is subject to more stringent restraints, which react back on consumer goods and negate other necessary conditions of a market for the latter.

“Provided that the capitalist acquired the productive assets legitimately, and here I would rule out inheritance” (Winter, 154, my italics), puts narrow bounds on the permissible size of asset holdings, for since the market must not permanently reward one participant more than another, and incomes after tax are to be broadly equal, the capitalist, barred from inheriting, cannot accumulate from his profits either. The size of a privately owned firm, moreover, is to be decided at the discretion of its employees:

What is more devastating, and indeed startling in the context of a proposal to rely on markets, is that “private ownership is tolerated so long as the owners do not wish to sell their assets” (Winter, 162). The ban on negotiability, reinforced by the ban on joint-stock limited liability, would put paid, in the name of market socialism, to any chance of having a market for producer goods, and assets as claims on producer goods or on income streams. The question then arises as to how a market for consumer goods alone can function efficiently or at all, if there can be, for practical purposes, no market in the resources that it takes to make consumer goods.

“A BRICK WALL OF SELF-CONTRADICTION”

It really seems that market socialism has, at this point if not before, run into a brick wall of total self-contradiction. Does it have some clever way around it, by inventing a species of property rights which permits exchanges on all markets, and permits market disequilibria to result in profits for those who best read market signals and thus do most to eliminate the disequilibria? Can it, in other words, devise a hitherto untried type of ownership that would be private in its effect on people’s motivations, yet non-private in that it would not reproduce capitalist domination, capitalist inequality, capitalist “moral arbitrariness”? Miller declares, as if this were obvious once you thought of it, that “[i]t is quite possible to be for markets and against capitalism” (Miller, 25). Yet the possibility is remote, and certainly not evident. It depends on the discovery of this new institution of “both-private-and-not-private” ownership—an attempt whose success has yet to be demonstrated.

As we shall see, if the theoretical attempt can be made, let alone made successfully, it calls for mental contortions of greater improbability than market socialists seem to realize. They appear to think—and if they do not, they unwittingly convey—that property rights which have both these attributes at the same time, are inherent and can be discovered in what they choose to call “social ownership.” Once again, the meaning of the term is hidden in verbiage, and is rendered positively enigmatic by assertions that it does not mean what the lay reader would think it meant. It is not state ownership: if it were, nationalization would be an identifying characteristic of the building of market socialism, and we have been explicitly told that it is not. The authors of Market Socialism profess to think little of it as a policy. Is, then, “social ownership” ownership by the workers? Again the answer is “no.” Communal ownership is potentially market-socialist if it concerns a mere island “in a hostile capitalist environment” (Estrin, 185) but becomes “workers’ capitalism, not socialism” (ibid.) if it is the prevalent form of ownership, since each commune would be motivated to act selfishly with respect to society as a whole. The plot thickens; the puzzle gets ever more insoluble. Market socialist property rights “preclude any direct ownership or control by workers. . . . Ownership of co-operatives . . . must therefore be social” (ibid., my italics). Under social ownership, “the capital stock is owned collectively by society, and is merely administered by particular groups of workers” (Estrin, 173).

Who, however, is society? Is it not the entity represented by the supreme proxyholder, the state? How can ownership be vested in “society” without the ownership rights being exercised by the state? If the owner is not any of its subsets (a municipality, a co-operative, a commune of kindred spirits, or whatever), but really society “as a whole,” social ownership is ipso facto state ownership, social owner decisions are government decisions (however unsatisfactory a proxy the government may be for society, there is no other above it), and no linguistic figleaves will alter these identities by one iota. The state, then, owns the capital stock, and “democratically run” groups of workers “administer” but do not “control” it. The reader who thought that elsewhere in this “reconstruction of the intellectual base of the Left” he saw market socialism held up as a superior alternative to nationalization, must be rubbing his eyes.

“SOCIAL OWNERSHIP” EQUALS STATE OWNERSHIP

“Social ownership,” if it means anything at all beyond chatter, is clearly state ownership, for only the latter satisfies the apparent requirements of neutralizing the owner’s selfishness vis-à-vis society; it is only society as such that has no “particular will” in conflict with the “general will.” Yet it is not certain that market socialists realize that it is state ownership they are calling for. Only sundry obiter dicta suggest that in a vague way they do. One of them describes the passage to market socialism thus:

But does market socialism leave it any other choice? It must not hand back the equity in the “national portfolio” to the citizenry at large, for that would in no time recreate capitalist institutions and capitalist outcomes; then market socialism would have to be introduced all over again. Nor must it hand it over to firms, letting them be not only “self-managed” but also “self-owned,” for this would be taking a wrong turning, leading to workers’ capitalism. The state, in sum, not only “might choose” to be the universal owner, but must do so unless market socialism is to degenerate into mere social democracy. A good deal of perhaps unconscious camouflage, in the shape of state holding companies acting as competing venture capitalists, and so forth, is going on in the book to avoid having to face state ownership openly. The words “social ownership” are the recurrent motif in this camouflage. It is no more a genuinely new type of ownership, holding out the stimuli of private rights without their propensity to reproduce capitalism, than market socialism is a genuine doctrine.

If taking capital into state ownership is mandatory—for any alternative would negate essential market socialist postulates—market socialism is no longer a moving target. We find that, perhaps unbeknown to its inventors, it has been nailed down, committed to at least one “particular means,” nationalization, if it really seeks to realize its avowed ends. Can market socialists live with this? Perhaps understandably in view of the dilemma, they choose not to say.

An ironic consequence of their implicit commitment is that, even if other self-imposed constraints did not confine the “market” of market socialism to consumer goods alone, “social ownership” of productive assets would. Genuine market exchanges presuppose among other things a plurality of principals owning goods to be exchanged, and having dissimilar preferences or expectations. When the state is the sole owner of the assets to be exchanged, it can at best organize exchanges between its right hand and its left hand, getting up a “simulated market” generating simulated asset prices, a simulated “going” interest rate, simulated gains and losses of simulated efficiency, and, at the end of the road, simulated shops pretending to sell simulated goods.

“THE STATE-OWNED MARKET”?

Undaunted, market socialists will have both state ownership and market, and introduce a near-perfect oxymoron, the state-owned market:

What these words can possibly mean, and how such a market could be “created,” are details that remain unrevealed due perhaps to modesty, perhaps to the author’s belief that a “state-owned capital market” is self-explanatory in the same way as “state-owned steelworks” or (in what is probably the crowning example of self-explanation) Engels’s “state-owned brothels.”

Other contributors commit themselves even less in the matter of how real markets in non-capitalist property rights are to arise. In characteristically pragmatic spirit, it is suggested that all manner of arrangements could be envisaged, ranging from various types of cooperatives to “labor-capital partnerships” (Abell, 95, 98), excluding only the joint-stock company. Labor-capital partnerships differ both from capitalist enterprises and from pure co-operatives; in fact, they appear to embody the vices and virtues of both in a diluted form. They look like the corporatist fudge, much tried by British governments of both parties since the Second World War, that may be the least unacceptable short-run modus vivendi for producer interests, but regularly ends up in the worst of both worlds for producers and consumers alike.

Fudged or clear-cut, non-private ownership is a core requirement of market socialism, and genuine markets must somehow prove to be compatible with it. It is the pivotal place of this condition that really differentiates market socialism from the bankrupt doctrine of orthodox and, as I would insist, genuine socialism, as well as from the ad hoc compromises of social democracy. Market socialism, in order to rid itself of the crushing liabilities of genuine socialism while still making good its claim to being more than just the boring old welfare state, must invent something desperately original by way of what property rights should entail and in whom they should be vested. It is dismaying to find, then, that the particular author whose lot it was to go beyond airy anti-private generalities and to spell out these matters, is not familiar with the meaning of ownership and has not mastered the distinction between creditor and owner, debt and equity, interest and profit. In the same breath he (probably rightly) condemns workers’ capitalism and communal ownership, prescribes the vesting of productive capital in “society as a whole,” yet assigns to the labor force of each enterprise “one element of the entrepreneurial function: the right to the residual surpluses (profit from trading after all inputs have been paid for)” (Estrin, 186), the right in question being none other than equity ownership.

Manifestly, then, it is not “productive capital” as such, but only some kind of gigantic prior charge on it, that is to be “socially owned” by the state. The equity of each enterprise is to belong to workers’ collectives (always provided that they do not buy or sell it or parts in it—a condition that is sure to give rise to lively and efficient asset markets). Back we go, then, to “each of these groups of workers acting selfishly with respect to the broader society” (Estrin, 185), which was the reason for prescribing state, instead of group, ownership in the first place. At this point, one abandons vain exegesis; the more one looks to see how the circle could be squared, the rounder it stays.

II

Market socialists are on intellectually less unfamiliar ground when, instead of dealing with such contrivances as equity, debt, market, and profit, they turn to the final values—equality, freedom, distributive justice, the satisfaction of needs—that they expect the market as an instrument, allied to some ingenious if not wholly comprehensible reform of property rights, to procure. Arguing for these values and about ways to reach them has always been congenial to socialist thought (though more to its Proudhonian than its Marxist strain), in contrast to the value-neutral tendencies of liberalism. In addition, Plant and Abell, the authors whose contributions particularly address these issues, happen to reason better and less glibly than the others, and deserve more serious attention.

For genuine socialists, the notion of freedom conveys above all mankind winning mastery over matter, liberating itself from the tyranny of things, the blind caprice of “reified relations.” It is a notion that alludes to scientific progress and political revolution, and whose subject is a collective, holistic one. Its bearing on individual choice is at best derivative and contingent; at worst, it dismisses choice as a selfish indulgence. Market socialists, by contrast, associate freedom primarily with individual choice in the classical liberal manner, and are pleased to note that the market is the economic institution par excellence that responds to preferences, just as democracy is the political institution par excellence that does so, though each weighs the preferences of different individuals in a particular manner. The democratic weighting—one man, one vote—is always egalitarian, the market weighting may be grossly inegalitarian if one man can back his preference with more money than another. It is for socialist policies to see to it that grossly unequal weights disappear. Various means can be employed to this end. Whatever they are, they are prefaced by a blanket dismissal of the costs and pains of applying them, and of the feedbacks leading back to the market economy:

Perhaps there isn’t, but how do they know?—and how do we? Gratuitous assertions such as this one, only just acceptable in a party policy statement but not in an argument addressed to intellectuals, are not helpful for the declared aim of rebuilding “the lost intellectual base” of the Left and “its philosophical and economic foundations” (Preface, v).

HOW MUCH “ACTIVE ENFORCEMENT”?

A good deal of “active enforcement” would be required to establish “market democracy,” and more than we should at first think to secure freedom of choice, for the latter is not simply what it says. It is more than the non-imposition of any particular alternative out of a given set of them—what has unfortunately come to be called “negative freedom.” It is also their availability, according to Miller, as “real” rather than merely “formal” options. On inspection, a formal option is one that is not one, while a choice is said to need resources before it can be acted upon. It would be better English not to call them “options” when they are unreal, nor “choices” when they cannot be acted upon, but the inept language about unreal options and impossible choices helps to slip in the similarly muddled notion of “positive freedom.” As Miller clumsily puts it,

More lucidly, and without talking of choices when he means desires, to shape one’s life means “to have abilities, resources and opportunities—that is to say, some command over resources,” and cannot be separated from “the capacity for agency and its associated resources” (Plant, 65). In the terminology of economics, negative freedom is the unobstructed faculty to take any option that falls within the individual’s given budget of time, money, and knowledge, while positive freedom has to do with widening the budget constraint. Having more positive freedom is a code word for having more wealth, more leisure, more knowledge—in sum, a richer life. But then why not say so?—why have recourse to the special code? For are not wealth, knowledge, or leisure less emotion-laden words, and have they not a more settled and precise meaning, than freedom? Or is that precisely why market socialists, and others, draw them under the umbrella term of “freedom” instead? They plead that “it would be perverse” to regard “a wealthy genius and a poor illiterate, both living under the rule of the same liberal law, as equally free” (Abell, 84). Users of the “negative” freedom concept would have no inhibitions so to regard them; they could increase the information content of the comparison by adding that while both were “equally” free, one was richer and cleverer than the other. This would tell us substantially more than the cryptic socialist statement that one had more “positive” freedom than the other.

One suspects, however, that the call to give “equal freedom” to all gets a wider and more favorable hearing than the seemingly far stronger demand to equalize everybody’s wealth, leisure, and knowledge. Hence packaging the latter demand under the bland name of “positive freedom” masks the sting of a very demanding egalitarian norm. Indeed, when postulating that equality is a value in its own right, it is explicitly the equality of “positive and negative freedoms” that is being stipulated (Abell, 80), for defined as they are, their equality will ipso facto give socialists all the equality of wealth, income, education, and status that they are likely to want.

They want a good deal, but it is never finally clear just how much, for despite a few defiant assurances that we can safely afford social justice, since the market will go on delivering much the same riches regardless of how “society” decides to distribute them, several contributors to the volume have some gut awareness that redistribution of the rewards market participants hand to each other must have some effect on the performance of the market economy; the goose will hardly remain forever indifferent to what happens to her golden eggs. Plant warns, pertinently, that “[i]f people know in advance that there will be equality of result however they act in the market, this will be a recipe for inefficiency” (p. 72)—to put it no higher. Since they could not be fooled for long, and would know in advance if there were to be equality of result, presumably there must not be equality of result—or so one would surmise, although as we shall see presently, one would be wrong.

STARTING-GATES AND END-STATES

Unease about the goose may have a small part in shaping the sort of equality market socialists are calling for, philosophical differences with genuine socialists a greater one. In the trendy words that have come to pollute the stagnant pool of political philosophy, they do not wish distribution to be governed solely or even mainly by “patterned” or “end-state” principles, but want distributive justice to emerge from just “process”—their great remaining difference with liberals being that, for market socialists, just process yields acceptable end-state outcomes only if it begins at a specially designed “starting-gate” of equal opportunity. Provided, however, that in socialism starting-gates themselves are “patterned” as they should be, the outcomes of market processes will call for relatively little further state intervention to make the right, egalitarian end-state principle prevail—for it will then to a large extent prevail, as it were, of its own accord, assisted by the invisible hand.

This, then, is the great promise of equality of opportunity, the species of equality that offends least and is easiest to get past a somnolent moral consensus; for while there is no single end-state principle of equality that would not offend some strong moral intuition, some material interest, or both, equality of opportunity is at first sight soothing and almost wholly unexceptionable. Its appeal to our sense of justice (or, more insidiously, to our sense of “fairness”) is as broad as it is weak, while any vague threat it may represent to our vested interests looks tolerably easy to live with.

Proponents of the idea convey this impression (and, I dare say, convince themselves of it, too) by employing a particular paradigmatic imagery. Participation in the market economy is a trip, or a race. It has an “entry point” or “starting-gate,” and a finishing line where prizes await the runners who win them in order of arrival. The winners get larger prizes than the others, but this inequality is a legitimate outcome of the process of matching the runners on a level track, provided the winners had no “unfair” advantage, nor the losers a handicap, “at the starting-gate.” Calling advantages that have helped winners to win “unfair,” and that we only recognize as such because their possessors have won, is of course vacuous in itself unless it gets content from a prior delineation between fair and unfair advantages. All market socialists would put greater wealth, a better education, a more extensive and highly placed network of friends and protectors on the wrong side of the dividing line. Many would hesitate about more brains, rare gifts, better looks, greater sex appeal. Most of them would not (though those who took the “moral arbitrariness” of natural endowments seriously would clearly have to) classify greater industry, hard work, relentless application as unfair advantages, because they are owed to character, innate guts, and strength of will that are, in turn, unearned. Great perplexity would surround the fairness or otherwise of sheer luck, which is the residual cause of differential performance after all other, specially identified advantages have been accounted for.

Evidently, if all differential performance on a level track is attributable to some advantage, whether innate or acquired, and if all advantages at the starting-gate are unfair, the only fair outcome of the race is all-round dead-heat—that is, “equality of outcome.” Dead-heat is engineered by stripping the contestants at the starting-gate of their alienable advantages, such as wealth, or redistributing them until all possess them in equal measure, while compensating for inalienable advantages by a system of head starts and handicaps (positive and negative discriminations). However, racing history suggests that perfect handicapping is probably impossible, for residual advantages always manage to subsist. Nor would market socialists really want it, most being content to allow desert in some sense to earn differential rewards (Miller, 44), and believing that they can tell rewards due to some kind of desert from rewards due to unfair advantages.

EQUAL OPPORTUNITY: “FAIR” AND “UNFAIR” ADVANTAGES

In sum, under equal opportunity people retain some “fair” advantages at the starting-gate to make the race interesting, but the rest of their advantages, inherited or acquired, are unfair and must be evened out one way or another. Lest we should think that, once that is done, the rest is really up to the individual contestants, it turns out that the end-state resulting at the finishing line, albeit a product of pure procedural justice, will still require adjustment guided by “a theory of distributive justice, equality and community” (Plant, 76), which cannot “be achieved without a powerful state” (ibid., 77). Nevertheless, “starting-gate redistribution” will have done much that would otherwise fall to “end-state redistribution” to achieve, and this will bring to life a remarkable hybrid, “market-oriented” in that it permits random outcomes, and socialist in that it does not.

The prize formulation of this clever synthesis is once again contributed by Miller:

Now winning on the lottery is a permanent advantage, unless there is a specific, built-in provision to undo it, ensuring by some means that the winner loses it again without undue delay. For instance, a combination of poor odds and an obligation to go on playing as long as he is ahead, would suffice to make him rapidly lose again the advantages he has won. Failing such a combination of adverse odds and obligation to play on, he could either take the money home, or profitably use it to buy more tickets for the next round of the lottery, since a sufficient proportion of tickets would be winning ones. At the odds offered by the “lottery” of a market economy—that is, where the return on the average investment is better than zero—an initial advantage has a better than even chance of becoming cumulative, as each round is more likely to add to than subtract from the player’s winnings.

But market socialism works by a different logic. It insists that the market shall be a “genuine lottery,” not a game of “cumulative advantage” (Miller, 45, my italics).

THE CONFUSION OF LOTTERIES

The confusion about lotteries is not a pardonable slip of language or logic, for it leads to a gross confusion of the whole issue of equal opportunity in a market economy. A lottery is genuine if the distribution of all (positive and negative) prizes among the tickets is random. Miller appears to believe, however, that it is genuine only if the sum of the prizes is zero—a very different condition. This is nonsense, for the concept of lottery implies no particular sum, positive or negative. A more insidious fallacy is then committed in applying the false concept of lottery as a possible norm for the market. It is possible to hold that the distribution of prizes in the market is random. To stipulate that they have a zero sum is, on the contrary, to require an absurdity which contradicts the essential, wealth-creating nature of the market without which it would lose its whole point and would not exist. Gains and losses cannot possibly cancel out either interpersonally or intertemporally, but must be greater than zero both over all the players and over time as long as prizes breed more prizes—that is, in an economy where the productivity of capital (or, less metaphysically, the interest rate) is positive.

There seems to be a more than somewhat Freudian reason why a market socialist equates a properly ordered socialist market economy to a non-positive-sum game: for only in a world where no gain is permanent, let alone cumulative, can equal opportunity make sense as an identifiable end capable of being told apart from equality of results or “end-states.” The slip of logic about lotteries reveals the self-destructive nature of the starting-gate “paradigm.”

Suppose, first, that on the advent of market socialism an equal-opportunity placing of the contestants at the “entry point” has been accomplished by appropriate juggling with endowments, advantages, handicaps, discriminations, and head starts. The starting-gate is thus properly “patterned” and they now run the race. Anything they win is an advantage in the next race. However, since it is, by special stipulation, a “genuine lottery” excluding permanent and, a fortiori, cumulative advantage, either no one wins, or all win the same prize, or if one wins a bigger prize, he hastens to play double or quits and quickly loses it. Thus when they are past the finishing line, no one has an advantage, let alone a permanent and still less a cumulative one. Happily, therefore, the finishing line of the first race proves to be the right, correctly “patterned” starting-gate for the second race. The contestants again run it from an equal-opportunity position, presumably with the same result as the first race. So they can go on for any number of races. The equal-opportunity entry point, where each contestant is let loose on an even track, ensures that each finishing line is also a new entry-point of the same kind as the old. Each end-state faithfully reproduces the initial equal-opportunity position, and the just procedure duly generates a just outcome.

A POSITIVE-SUM GAME

Suppose next that the market economy is a positive-sum game. Gains and losses of a given participant do not tend to cancel out over time and, by the nature of market exchanges and the law of compound interest, the prizes of various kinds—differential earnings, profits, acquired skills, knowledge, goodwill—help win additional prizes. The contestants are again lined up at the “entry point” so as to enjoy equal opportunity. Now, however, any advantage is retained and becomes the source of further advantage. Whoever discovers marketable knowledge can accumulate capital, whoever gets hold of capital finds it easier to acquire knowledge, and so on in a cumulative process of “positive-sum” exchanges. Under such conditions, the “finishing line” of any one race will no longer serve as an equal-opportunity starting-gate for the following race. For each race, contest, or round, an equal-opportunity starting-gate has to be deliberately constructed all over again by stripping people of their acquired advantages, evening out differentials, arranging handicaps, awarding head starts, and so forth. Unhappily, and in contrast to the first scenario, this means that at each finishing line at the latest, distributive justice has to be administered to the participants before they are off again to the next round, according to “patterned” principles, to preserve a particular end-state of no net advantages at the new starting-gate. Aiming at equal opportunity means aiming at an end-state of which it happens to be a characteristic feature, that is, where no one is ahead.

If such is the case, however, one might as well not bother about equality of opportunity, for it turns out to be both analytically and operationally indistinguishable from equality of outcomes, and collapses into the latter.

The truth of the matter, of course, is that Ronald Dworkin’s catchy, media-friendly metaphor of the “starting-gate” trips him up, and with him many of the lesser lights of the soft Left. If the world began at some starting-gate where the representative economic agent got going and ended some distance away at a finishing line where he had to stop, equal opportunity at the starting-gate might be a meaningful condition, independent of outcomes. It would be consistent with unequal outcomes at the finishing line, and would be operationally different from equality of end-states, for starting-gate and finishing line would be in two different places. But if the world continued beyond the putative finishing line, and the race went on or a new one began, the absurd zero-sum “genuine lottery” requirement would have to be satisfied for starting-gate equal opportunity to be preserved.

However, since there is no Day One and each starting-gate is the finishing line of the preceding round, while each finishing line is the starting-gate of the next one, we are dealing with an infinite regress of “races” or “lotteries.” At the finish of each race, the participants are further removed from equal opportunity than at its start. People have parents who have transmitted advantages to them; they pursue careers, save money, win friends, and in turn transmit some of these advantages to their children. How often during a race, or after how many races, is equal opportunity to be restored by equalizing end-states? Can we leave it to a revolution or a lost war every thirty years or so? The sole logical market socialist answer, of course, is that to secure equal opportunity, we have to keep removing advantages all the time as they accrue, while confidently expecting that people will keep on accumulating them. We are invited to believe that they will not get wise to the fact that a “patterned” end-state principle is being busily applied to their income, wealth, education, or anything else that helps them win “races” or “lotteries,” and makes for a competitive economy.

If we abandon the fiction of discrete rounds of finite length, and are facing a continuum of competitive economic activity instead, the distinction between equal opportunities and equal outcomes loses all meaning. Goodbye, then, to equal opportunity as an intelligible and at least metaphorically plausible policy goal; welcome to equal opportunity as an inoffensive and reassuring form of words that market socialists (and others) can use when they mean equal end-states or plain equality. Vain as it may be, one can nonetheless express the wish that people in general, would-be political philosophers in particular, would learn to say what they mean.

III

By protesting too much, and promising too much, blueprints of social organization have tended to discredit themselves and their draughtsmen. Genuine socialism used to promise material progress, equality, and freedom conceived as the end of alienation and subjection to blind economic mechanisms. It is of course true that it never fulfilled any of these promises, let alone all three, and that it could never have done so even if its earthly incarnations had not all been dogged by bad luck in the geographical and historical “parameters” that fell to their lot. I would nevertheless argue that had it offered a trade-off of more of two desirable ends in exchange for less of a third, it might have earned a degree of recognition for honesty. At least its ultimate loss of credibility might have been less total. Striving for material progress, expecting ever greater hordes of machines served by “work collectives” of progressively more mismotivated men to generate abundance from misdirected resources, was a forlorn hope. Without the fatal ambition to grow as rich and have as clever gadgets as capitalism, the socialist state might have come a little closer to redeeming its promises of equality and liberation, for at least at first sight these two are not mutually exclusive objectives in a simple, quasi-pastoral economy stretched by no exacting demands.

Alternatively, the blueprint might have offered to the socialist élite a strictly non-market, state capitalist system with an avowedly inegalitarian command economy running on quasi-slave labor; such a version of socialism might make material progress of sorts, while also living up to some albeit contorted ideal of liberation from the alienating relations of “production for exchange.” It would of course have to shut out, together with equality, all temptation of self-determination and all basis for personal autonomy, and firmly refuse to seek popularity by compromise; with these provisos, however, it could prove to be as credible an undertaking as it was unlovely. The triple promise of welfare, liberty, and equality, however, is too much and has so far always proved to be so, condemning all three to shameful defaults.

One could no doubt find a priori reasons why this could not have turned out otherwise, but in the face of the empirical evidence, that effort is hardly worth the trouble. Whether a less foolhardy or less insincere blueprint, promising a measure of equality and relative freedom from the compulsions of the market in a slack economic backwater, would have called forth more trust and tolerance, can of course only be guessed at, but the intellectual and moral fiasco would have been less humiliating.

“BUILDING SOCIALISM” VIA MARKETS?

Market socialism, for all its contrary protestations, shows every sign of setting out to march in genuine socialism’s footsteps. Despite an occasional doubt, an ad hoc disclaimer, a shrewd, albeit momentary, awareness that one cannot always have it both ways:

the main drift of the market socialist project is that everything men of good will would like to do to society is feasible and painless; that “building socialism” does not commit us to the application of any particular and possibly objectionable tool of policy; that various market socialist objectives do not clash; that anything desirable that some existing type of modern social organization—capitalism, genuine socialism, social democracy—has accomplished, market socialism can accomplish at least as well, while managing to spare us the particular nastiness proper to each; in short, it too is undertaking so much that it would almost certainly fail in all.

It, too, makes a triple promise. First, under market socialism there would be substantial equality of material conditions among men, and it would be achieved not against the grain through the crude levelling of outcomes, but procedurally and with the grain through abolishing capitalist property rights, equalizing opportunity and positive freedom. Second, unlike in genuine socialism, individual choice would be given pride of place both in politics, by entrenching electoral democracy, and in economics, by conceding consumer sovereignty within a merely indicative framework of planning. Third, semi-automatic resource allocation by reliance on the market would ensure the material ease that can give us both the rising private consumption prized in capitalism, and the wherewithal for copious public provision of welfare.

“A DULL MUMBO-JUMBO”

Genuine socialism comes reciting a dull mumbo-jumbo, it is often hard work to decipher its propositions and proposals, and it carries the staggering handicap of having been tried in many places. For all the discredit practical failure has heaped upon it, however, it has the modest merit that each of its promises can be given a meaning, and that two out of the three may be mutually consistent. Market socialism has no such intellectual saving grace. The volume of essays that provoked the present paper is on the whole poorly and in places appallingly reasoned. It is astonishing to see on it the Clarendon Press imprint, reserved for works of original research and scholarship, and implying that it must have got past the Delegates. Yet the average market socialist tract is not much better argued, though perhaps less incongruous as to pretensions and performance. Plainly, advocates of a new kind of socialism have an implausible case to plead, and their chief fault is to imagine that it is a natural winner.

Genuine socialism shelters its reasoning within a private language where definitions and meanings adjust to the needs of the good cause. Social democracy carries little ballast by way of doctrine and is not in the habit of worrying about intellectual consistency. In the discourse of market socialism, however, favorite and pivotal concepts, “social ownership,” “equality of opportunity,” and “equal positive freedom” among them, prove under scrutiny to mean either nothing or something else altogether, often something that is in the same breath expressly disavowed.

The new type of “genuine-lottery” market, socialism’s untried secret weapon, the guarantee of capitalist efficiency in an environment of “distributive justice” and “producer democracy,” fares worst of all. It must get producers to compete in order to set roughly right prices and quantities, but must not be allowed to reward or punish them for it, for doing so is society’s political prerogative. Reduced to a pretense without consequences, it is supposed to generate prices and shift resources, and “efficiently” at that, despite important kinds of exchanges being banned and others transformed into a charade for lack of real-life owners having real stakes to exchange.

Never did a political theory, in its eagerness to escape the liabilities of its predecessor, put forward so superficial an analysis and so many self-contradictions, as market socialism. Nor does any single market socialist promise, let alone two, never mind all three—an efficient market economy without capitalist ownership, equality through equal opportunity without imposing equal outcomes, and free choice without freedom of contract—look capable of being fulfilled, each being an open contradiction in terms, much like hot snow, wanton virgin, fat skeleton, round square.

[* ]Reprinted with permission from Government: Servant or Master?, edited by Gerald Radnitzky and Hardy Bouillon (Amsterdam; Atlanta: Rodopi, 1993), 125–37.

[1. ]I use “social choice” in the ethically neutral legal-positivist sense, to mean any decision reached in conformity with the “constitution,” rules, and procedures, whose observance entails that the decision will be enforced by the power of the state. “Social choice” corresponds to a broad class of decisions, including not only laws passed by elected legislatures and decrees issued under such enabling laws, but also the commands of a dictator or of a totalitarian party exercising effective sovereignty. “Social choice” does not imply that it has been arrived at by following any particular decision rule. “Democracy is a form of government, and in all governments acts of state are determined by an exertion of will. But in what sense can a multitude exercise volition?” (Maine 1885, 104). The only answer that does not sanctify social choice by imparting ethical value to it is a legal-positivist one.

[2. ]The latter right presupposes freedom of contract and bequest—freedoms which the present writer would consider as being entailed by ownership. Many others, however, view ownership as a loose bundle having “variable geometry,” that may contain some property rights but not necessarily all, e.g., the right to rent out residential property to any tenant at any rent he will pay is not considered by everyone nor by every jurisdiction as an integral part of the ownership “bundle.” In this view, ownership consists in distinct rights which are detachable from each other. The question is a vast one and cannot be gone into here.

[3. ]The basic literature is in Hayek (1935), Lange (1936), Lange (1937), Bergson (1948), and Bergson (1967). For a survey, see the “Introduction” by Vaughn (1949).

[4. ]A perfect solution of an agency problem is one whose result is the same as the result that would be obtained if the principal acted directly rather than through an agent, but this trivializes the premiss that there is an agent.

[* ]Reprinted with permission from Market Socialism: A Scrutiny “This Square Circle,” Occasional Paper 84 (London: Institute for Economic Affairs, 1990).

[1. ]Julian Le Grand and Saul Estrin (eds.), Market Socialism, Oxford: The Clarendon Press, 1989. Subsequent references to authors’ papers in this collection are cited in brackets in my text, with page references where appropriate.

[2. ]Chapter 11 is a U.S. form of corporate re-organization which falls short of liquidation.

[3. ]Ludwig von Mises, “Die Wirtschaftsrechnung im sozialistischen Gemeinwesen,” Archiv fuer Sozialwissenschaften, 1920, trans. as “Economic Calculation in the Socialist Commonwealth,” in F. A. Hayek (ed.), Collectivist Economic Planning, London: Routledge, 1935.

[4. ]F. A. Hayek in Hayek (ed.), ibid.

[5. ]A. P. Lerner, “Economic Theory and Socialist Economy,” Review of Economic Studies, 1934–35; Oskar Lange, “On the Economic Theory of Socialism, I-II,” Review of Economic Studies, October 1936 and February 1937.