1 Overview of Comparative Economics Chapter III The Theory and History of Marxism and Socialism.

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Overview of Comparative Economics

Chapter III

The Theory and History of Marxism and Socialism

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Command Socialism

Form of Ownership → Most of the time the state owns the land and produced means of production (capital stock)

Role of Planning → Economy is planned centrally and the planners’ preferences dominate allocative decision-making

Incentive Structure → Moral Incentives-trying to motivate workers by appealing to some higher collective goal

Income Redistribution → The governments control the distribution of income by setting wages and forbidding capital or land income

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Command Socialism

Role of politics and ideology → Are command socialist economies usually linked with authoritarian regimes? Authoritarian political regimes also pursue market

capitalism Command socialism can also support democracy

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Socialism

An economic system characterized by state or collective ownership of the means of product, land and capital

Not actually exists as a system until the early 12th century

Its emergence based on criticism of feudal and capitalist systems that existed prior to its modern appearance

Criticism originated from religious sources favoring egalitarian income distributions and collective sharing

Became a secular theory of history and society in the writings of Karl Marx

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Is Socialism still popular?

With the collapse of Soviet Union and end of communism, nowadays many countries that have identified themselves socialist are attempting to move toward market capitalism

Why examine the socialist economic system? Many are still socialist in actual practice Frustration with efforts to move toward some form of

capitalism have led to a revival of socialist ideology in some of the countries

Difficulties experienced in the market capitalist world have stimulated reconsideration of limited elements of socialist model as reformist devices

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Development of Socialist Ideology:Religious and Philosophical Precursors It is originated in religious and philosophical criticism

of inequalities in existing societies and the formulation of ideal alternatives in which collective sharing and equality reign supreme

In ancient Greece → philosopher Plato described an ideal society of in his Republic

Christianity provided opportunity for socialism expecting the second coming of Christ → when all would be judged and there would be heaven on earth for the saved (millennium)

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Development of Socialist Ideology Thomas More “Utopia” described an island

where everyone shared and was equal Enlightenment of 1700 Secularized version of egalitarianism in

French philosophy by Jean-Jacques Rousseau led to French Revolution in 1789 The revolution was against feudal aristocracy and

inequality

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Development of Socialist Ideology In 1796 Francois Gracchus Babeuf is often

identified as the founder of modern Communism “Conspiracy of Equals” → abolition of private

property and the holding in common land Communism → local units of government in

France are called communes The term socialism originated in the early

1830s with the British utopian socialist Robert Owen

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Development of Socialist Ideology: Utopian Socialism Utopian socialism is the first movement to

label itself socialist Founders:

Saint-Simon → father of command central planning

Chares Fourier Robert Owen

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Utopian Socialism: Saint Simon The father of “fatal conceit”

→ constructivism The idea that a rational order of society can be

planed and constructed from the top down Background in science and engineering Supported social engineering → a rational

central plan ordering society for the benefit of those least well off

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Utopian Socialism: Charles Fourier Criticized industrialization and urbanization

and called for the creation of small communities (1.600 people) in rural areas called phalansteries

Everyone should share all things and would do many different kinds of work Brook farm in Massachusetts Amana Farms of Iowa

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Utopian Socialism:Robert Owen Coming from a working-class background Became a successful capitalist at an early age in

Scotland Owned and managed a successful textile company

between 1820-1824 Introduced numerous reforms in his company

Higher wages Restriction on child labor Education for the workers

Attempted to start a utopian community in Indiana but failed

Became the leader of the first national labor union in Britain

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The Marxian Worldview

Marxian → refers to the writings and views of Marx himself Marxist → refers to any view or idea strongly influenced by Marx

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The Marxian Worldview

Karl Marx (1818-1883) was born in Trier in the German Rhineland

Studied philosophy in Berlin Became a radical journalist Participated the uprising of Rhineland Spent most of his life in exile in London Supported financially by his collaborator, Friedrich

Engels, who owned a textile mill Together Marx and Engels developed Marxian worldview in

writings which influenced socialist thought

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The Marxian Worldview

Marx’s worldview constitutes a holistic system by seeking to explain virtually everything in a unified whole

His holistic theory is his integration of three major strands of 19th century European thought: German political philosophy French political sociology British political economy

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The Marxian Worldview: The Hegelian DialecticGerman Political Philosophy Hegel developed the idea of dialectic

All phenomena reflect a conflict between pairs of unified opposites whose joint opposition evolves over time to critical breakpoints where reality qualitatively changes

These opposites are labeled as thesis and antithesis

At the critical breakpoint their opposition generates something brand new, the synthesis

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The Marxian Worldview: The Hegelian Dialectic The ultimate Hegelian thesis is the Universal

Idea → God The antithesis is the individual person The synthesis is the state

The idea of emergent powerful and nationalist German state

These ideas influenced the movement for German unification that accelerated toward its culmination under Bismarck in 1871 and influenced the ultranationalist Nazi movement in the 20th century

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The Marxian Worldview: Historical Materialism Marx “materialized” Hegel’s dialectic by using the

idea of French Revolution The key to historical materialism → the idea that the

driving force of history is the dialectic between conflicting socioeconomic classes

The class conflict of the emerging industrial society between the bourgeoisie (capitalists) and the proletariat (worker)

The Communist Manifesto starts as “The history of all existing societies has been the

history of class struggles”

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The Marxian Worldview: Historical Materialism The struggle concerns

ownership controls of means of production

One class owns and controls the means of production and exploits the other class, which does not own and control the means of production

The technology of society → forces of production Combines with the structure of classes → relations of

production To determine the mode of production → the substructure or

base of the society that determines everything else, the superstructure, that is religion, politics, culture and so forth

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The Marxian Worldview: Historical Materialism The mode of production of ancient Greece and

Rome was slavery, characterized by the struggle between master and slave

The fall of the Roman Empire was a result of this contradiction → resulting in the mode production transforming from slavery to feudalism

In turn, feudalism was driven by the struggle between lord and serf and was transformed into capitalism

In capitalism, the struggle is between the capitalist who owns the means of production and the workers who does not

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The Marxian Worldview: Historical Materialism As this struggle reaches its peak in the most

advanced capitalist countries such as England and Germany, there would be a revolutionary transformation into socialism with state ownership of the means of production direction of a production by a common plan,

income inequalities and wage payments control by a dictatorship of the proletariat

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The Marxian Worldview: Historical Materialism Marx claims

Once socialism is accomplished, communism would eventually develop

All classes and property ownership would disappear

The state would wither away

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The Marxian Worldview: The Labor Theory of Value and the Breakdown of Capitalism Ricardo’s labor theory of value

The value of a commodity is determined by the amount of socially necessary labor time it takes to produce it

Contradicts the neoclassical economic theory that value is determined by supply and demand, with capital contributing to the supply side

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The Marxian Worldview: The Labor Theory of Value and the Breakdown of Capitalism Land and capital as productive but not as

contributing to value Capital goods as being the product of past labor,

indirect labor

Core of Marxian doctrine The true reality of capital was not the capital

good itself but the social relation of exploitation between the capitalist and the worker

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The Marxian Worldview: The Labor Theory of Value and the Breakdown of Capitalism The value of commodity (W) = c+v+s

Constant capital (c) fixed capital stock as measured in the labor time required to produce it

Variable capital (v) the value of labor power used in production that is the amount of socially necessary labor time it takes to reproduce labor, equal to subsistence wage

Surplus value (s) value created by the worker but taken by the capitalist, leading to exploitation “Marx’s modification of the labor theory” Marx concentrated on the “surplus value”- profit

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The Marxian Worldview: The Labor Theory of Value and the Breakdown of Capitalism Capitalist → capital investment → raising the organic

composition of capital c rises while s and v are constant → the rate of profit

declines The fundamental tendency of capitalism

Increase the rate of exploitation → by lowering wages or by working longer

The class struggle and the commercial crisis Concentration of capital in fewer hands and proletariat

becomes more miserable Eventually the contradiction between the forces of

production and the relations of production becomes so intense that the system is overthrown by the revolutionary working class

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Controversies in Socialism:Revisionism Difficulties arose for the Marxists of the

German Socialist Democratic Party in 1895 Capitalism did not collapse Real wages rose The expectation of arrival of revolution

undermined Eduard Bernstein first pointed this out

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Controversies in Socialism: Revisionism- Modern European Social Democracy Eduard Bernstein argued that since the

conditions were improving, a reformist and gradualist approach through parliamentary democracy should be used to achieve gains for the working class This eventually became the policy of the German

Social Democratic Party, which still exists

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Controversies in Socialism: Theory of Imperialism Capitalism had succeeded in transforming itself into

imperialism, expanding overseas into colonies to exploit their raw materials, cheap labor and new markets

The domestic market could not absorb what the capitalists produced, so they found overseas markets

With the enormous profits capitalist made from their colonies, they started paying off their working class → this changed this class into reformists rather than revolutionaries

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Controversies in Socialism: Marxism-Leninism Vladimir Illich Ulyanov known as Lenin developed

the Imperialism thesis Lenin noted that imperialism was expanding

unevenly The revolution would come in capitalism’s weakest

link, Russia Industrialized too late to participate in the conquest of

Africa Dominated by foreign investment from the leading capitalist

powers like Great Britain, France and Germany

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Controversies in Socialism: Marxism-Leninism Refocusing revolutionary expectations on

less developed countries became Marxism-Leninism, the official Soviet doctrine after 1917

It also became the guiding light of Marxist revolution in the 20th century in less developed countries from China to Cuba and to Vietnam

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Controversies in Socialism: Anarchism and Syndicalism They both support the abolishment of the

state Anarchism

Founded by British William Godwin in 1793 Without government people will peacefully

organize themselves into harmonious and non-oppressive order

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Controversies in Socialism: Anarchism and Syndicalism French Pierre - Joseph Proudhon in 1840

linked anarchism with communism and the revolutionary working class movement

Syndicalism In 1890s, proanarchist trade unions in Spain, Italy,

Switzerland and France After the abolition of the state, society should be

run by the trade unions themselves Production being directly controlled by the

workers at the production site

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Some Divisions of Socialism since 1917 Trotskyism Titoism Maoism

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Some Divisions of Socialism since 1917: Trotskyism Leon Trotsky, founder of the Red Army in the

Soviet Union, was Stalin’s chief rival for power after Lenin’s death in 1924

He was exiled in 1927 and founded the Fourth International, which fragmented into factions after his assassination in Mexico in 1940

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Some Divisions of Socialism since 1917: Trotskyism Trotsky and Stalin agreed about the need for

rapid industrialization, but they disagreed whether this should be done in isolation or in an international context

Trotsky supported the idea of an international permanent revolution, believing that true socialism could not be achieved in the Soviet Union without an international revolution

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Some Divisions of Socialism since 1917:Titoism Marshall Tito led Communist partisans in

throwing the Nazis out of Yugoslavia during the Second World War, with little assistance from Soviet Red Army

A strong Stalinist Tito broke with Stalin in 1948 and declared political independence of Yugoslavia from Soviet influence

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Some Divisions of Socialism since 1917: Titoism Tito developed a distinctive economic system

for Yugoslavia → worker-managed market socialism

State-owned enterprises in a one-party state operating with little central planning and with managements appointed by worker selected boards

After Tito’s death in 1981, the economic system in Yugoslavia deteriorated and eventually collapsed

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Some Divisions of Socialism since 1917: Maoism In 1949 a Communist insurgency led by Mao

Zedong took power in mainland China Rural guerilla movement that encouraged

egalitarian economic development in zones of revolutionary control

Imitated the centrally planned command industrialization model of Stalin

More emphasis upon rural agricultural development, egalitarianism, the use of moral incentives

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Some Divisions of Socialism since 1917: Maoism In the Great Proletarian Cultural

Revolution (1966-1969), Mao emphasized industrial decentralization complete communalization of agriculture total egalitarianism moral incentives

After Mao’s death in 1976, a decline of support in his ideas

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The Theory of Economic Socialism The Socialist Planning Controversy The Theory of Command Socialist Central

Planning The Participatory or Cooperative Alternative

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Theory of Economic Socialism:Socialist Planning Controversy 1908 Enrico Barone’s system with no

money Pareto’s efficiency analysis and the Walrasian

general equilibrium model The state determining equivalences (relative

prices) between goods and distributing them through stores in exchange for goods brought by people

An efficient competitive equilibrium in that the cost of production would be minimized and the price would equal to the cost of production

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Theory of Economic Socialism:Socialist Planning Controversy 1920 Ludwig von Mises’ proposal

Money is necessary to calculate prices The artificial market of socialist central planner

can not generate rational prices because of insufficient incentives

Fundamental driving force in Austrian School → the profit motive based on the private ownership of capital

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Theory of Economic Socialism:Socialist Planning Controversy In 1936 Oskar Lange defended market socialism

Central planning board that sets producer good prices and the level of overall investment and distributes the social dividend

Consumer good prices are set by free-market forces, with supply coming from state-owned firms that set the price equal to marginal cost (as in perfectly competitive markets)

Market failures (due to monopoly power, externalities, income inequality and macroeconomic fluctuations) resolved leading to equitable and macro-economically stable outcome

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Theory of Economic Socialism:Socialist Planning Controversy Friedrich Hayek, von Misses’s follower,

counterattacked in 1940 Lange failed to answer von Mises’s argument

regarding motivation Without private ownership and the profit motive,

firm managers will lack the incentive to search out minimum cost or fulfill consumer demand

Also difficulty in gathering information to carry out calculations

The decentralized capitalist market is the best information transmission system

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Theory of Economic Socialism:Socialist Planning Controversy Socialist Market Economy of China

Rapidly expanding town and village enterprises Operate in free markets with hard budget

constraints but are owned by local units of government

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Theory of Economic Socialism:Theory of Command Socialist Central Planning Central planning first appeared in Soviet

Russia with the 1920 electrification plan Indicative planning instituted for heavy

industrial sectors under state ownership such as electricity, steel and cement

Long-term planning was on a five-year time horizon

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Theory of Economic Socialism:Theory of Command Socialist Central Planning Five year plans were broken down into one-year

plans from which monthly quotas for individual firms were derived

Each firm had a technical-production-financial plan that specified output quantities and prices input quantities and prices including wages levels and kinds of capital investment

One year’s overall general plan generally involved minor modifications of the previous year’s plan based in the outcome of that plan

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Theory of Economic Socialism:Theory of Command Socialist Central Planning For the first five-year plan, the material balances

were based on the inherited structure of production Figure out

how much of which final goods were to be produced the amounts of all the inputs required to produce those

outputs the inputs to produce those inputs

If a commodity was in “deficit” then either one of the three previous mechanisms would be drawn on or greater efficiency in its production would be induced or demand for it had been cut back

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Theory of Economic Socialism:Theory of Command Socialist Central Planning In the 1930s mathematical approaches to

implementing planning began Input-output analysis

Designed by Leontief Depicts the production structure of an economy

using a rectangular input-output matrix, whose rows represents inputs and whose columns represent outputs

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Theory of Economic Socialism:Participatory or Cooperative Alternative Also known as the labor-managed

economy-Yugoslavia is the example Market Socialist System → state owns the

means of production Characterized by workers’ ownership or

workers’ management Combination of capitalism and socialism,

constituting a Third Way

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Theory of Economic Socialism:Participatory or Cooperative Alternative Workers will manage the firms There will be income sharing Productive resources are not owned by the

workers → workers enjoy usufruct rights to the fruits of the operation

Market economy → Any kind of planning is indicative planning rather than of the command sort

Workers can freely choose where to work

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Theory of Economic Socialism:Participatory or Cooperative AlternativeAdvantages While market efficiency exist, it eliminates

class struggle and worker alienation It may eliminate struggle between labor and

management It increases workers’ motivation and

productivity It increases fair distribution of income

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Theory of Economic Socialism:Participatory or Cooperative AlternativeCriticisms Tendency for less labor to be hired in order to

maximize net income Worker-managed firms may tend toward

monopolization → may disregard externalities such as pollution

May underinvest in capital in the long run since workers will drain firms of extra income in the short run

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Transition from Socialism to Capitalism Most Marxist-inspired socialist states have

moved away from it since 1989 toward some form of capitalism Some of them slowed down Some of them such as Uzbekistan reversed

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Transition from Socialism to Capitalism In 1989 when the Berlin Wall fell, many

Eastern and Central European countries that pursued command socialist economies (with some market socialism) achieved political independence from Soviet Union

Transition from one-party systems to multi-party systems took place

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Transition from Socialism to Capitalism Transition from command socialism to market

capitalism requires replacement of command economy with market

mechanisms in decision-making privatization of state-owned enterprises to move

from socialism to capitalism liberalization of the political system

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Transition from Socialism to Capitalism In adopting markets rather than command

Freeing prices from central control was the easiest thing Macroeconomic stabilization was more difficult to achieve

as sudden freeing of prices led to inflationary outburst Total output declined sharply with unemployment rising Establishment of the institutional framework that allows for

the open and stable functioning of markets is difficult Developing banking, financial and accounting systems A proper competition policy Laws of corporate governance and bankruptcy Opening to trade and investment Foreign currency convertibility

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Transition from Socialism to Capitalism Problems of privatization

Restructuring of enterprise management is more important than privatization

Countries that privatized quickly ran into serious problems (Russia and Czech Republic) compared to those that privatized more gradually (Poland and Slovenia)

Privatized firms in transition countries exhibit greater productivity that state-owned ones

The emergence of social problems as countries fell into deep recessions with high inflation and institutional instability