Movement for a Democratic Mixed Economy

Marxism without Revolution: Class

2011-07-20T02:51:00.000-07:00

above: another recent picture of John Quiggin

The following is a recent post by leading Australian economist, John Quiggin, on what can be salavaged from Marxism in terms of class analysis. It is one of several posts by Quiggin on Marxism - and more is coming! Again debate is welcome!

For a further debate on Marx, neo-liberalism, Hayekian economics etc the following is also interesting: http://hayekversusmarx.blogspot.com/

And finally PLS feel welcome to join the Movement for a Democratic Mixed Economy group at Facebook! See: http://www.facebook.com/profile.php?id=624565190#!/groups/152326549326

Originally posted by John Quiggin June 19th 2011

I’ve mentioned Erik Olin Wright’s Envisaging Real Utopias a couple of times, and I’ve also been reading David Harvey’s Enigma of Capital and Jerry Cohen’s if You’re an Egalitarian How Come you’re so Rich. In different ways, all these books raise the question: what becomes of Marxism if you abandon belief in the likelihood or desirability of revolution[1]? To give the shorter JQ upfront, there are lots of valuable insights, but there’s a high risk of political paralysis.

I plan alliteratively, to organise my points under three headings: Class, Capital and Crisis, and in this post I’ll talk about class

The analysis of economics and history in terms of class struggle is the central distinguishing feature of Marxism, and remains essential to any proper understanding. That said, the specifically Marxist class analysis in which the industrial working class, brought together in large factories, and increasingly homogenized and immiserised, serves as the inevitable agent of revolution, clearly hasn’t worked and isn’t going to. In the standard path of capitalist development, the stage when industrial workers (defined broadly to include all kinds of non-agricultural manual workers) constitute even a plurality of the workforce turns out to be quite short-lived. In today’s developed economies, such workers are a small minority of the population, even if you throw in the 100 million or so in China. And the working class considered more generally, as people who earn their living from labour is too heterogeneous to form a self-conscious class-for-itself. In one way or another, Wright, Harvey and Cohen all make or at least acknowledge this point.

As Cohen puts it, the revolutionary working class postulated by Marx had to satisfy four conditions:

1) They constitute the majority of society;
2) they produce the wealth of society;
3) they are the exploited people in society;
4) they are the needy people in society.
To quote this summary from the Directionless Bones blog, 1. and 2. give the proletariat the capacity to revolutionise society, and 3. and 4. give them the reason to do so.

It seems clear, as Cohen says, that no sensible definition of the working class is going to satisfy all four conditions.

On the other hand, there clearly is a self-conscious and generally dominant class, centred on control of capital, but including plenty of people whose source of power and wealth is derived from their job rather than from capital income. On a narrow definition, it includes the top 1 per cent of US households which now receive 25 per cent of all income and hold around 35 per cent of all wealth. More broadly, the top 20 per cent of the population has, in broad terms, increased or maintained its share of national income as the top 1 per cent have become richer. This broader group controls more than half of all income and wealth.

Most of the political elite in developed countries, but particularly in the US, consists of members of the top 1 per cent, or aspirants to rise to this group from the top 20 per cent. Moreover as well as controlling much of the political process through direct participation or political donations, this class exercises power directly through ownership of capital and particularly through control of the financial system. Anyone who attempts to understand policy and politics without taking account of the central role of this class is doomed to failure.

Coming back to Cohen’s conditions, the case to be made against the top 1 per cent is that:

1) They constitute a tiny minority of society
2) they consume far more of the wealth of society than they actually contribute
3) they exploit their control over capital for their own benefit
4) they are the primary obstacle to meeting a wide range of social needs

In a Marxist analysis, it would be natural at this point to use the term “ruling class”, and to stress, even more than I have done, the point that much of what passes for political debate consists of little more than rearrangements of an executive committee derived from, and largely driven by this class. There is a lot to be said for this analysis, but in the absence of any prospect of revolutionary overthrow of the ruling class, it doesn’t seem to lead anywhere, except perhaps to defeatism.

And, in some parts of the academic left, defeatism seems to be seen as positively desirable. Once a critical analysis has been performed, demonstrating the hopelessness of any particular attempt to change existing structures without a revolution, the necessary work has been done, and it’s time for a well-earned cafe latte.

More commonly, perhaps, leftists continue to work on projects of reform and resistance with an implicit assumption that no fundamental change is going to take place, while maintaining a non-operational faith in the ultimate possibility or even inevitability of revolution.

If defeatism were obviously justified, this would just be a regrettable fact about the world. In reality, however, the dominant class suffered a series of historic defeats over the century or so between Marx’s own writing and the resurgence of market liberalism in the 1970s. The creation of a democratic welfare state, funded primarily by progressive taxation, produced societies with a more equal distribution of economic and political power than any seen since the emergence of agriculture, and with better standards of living for virtually everyone in the developed world.

And even after decades in which the upper 1 per cent has steadily gained ground, they remain far from omnipotent. Despite continuous attack, the basic structures of the welfare state remain intact, and there have even been some important extensions[2].

The existence of those structures mean that a relatively simple set of feasible political demands, primarily involving reversal of the losses of the past few decades, could form a basis for political opposition to the rule of the top 1 per cent. The key elements are fairly obvious, and include
* reimposition of control over the financial system
* restoration of a progressive tax structure, combined with a more vigorous assault on international tax evasion/avoidance
* shifting the burden of ‘austerity’ back to those responsible for the crisis, and rejection of cuts to the welfare state
* repeal of anti-union laws and measures to make union organization easier

Of course, setting out a policy program is one thing – the political movement needed to bring it into being is another. And for now, the ruling 1 per cent has managed to turn the anger generated by their failures to their own political advantage. But, far more than in the 1980s and 1990s, or even the first decade of the 2000s, the opening is there for a radical alternative. Even within the dominant class, faith in the beneficience of markets in general and financial markets in particular, has largely dissipated. What remains is a grimly determined class view that “what we have we hold”.

An effective political movement would mobilise the direct interests of the 80 per cent or so of the population who are losing ground in relative terms (and in the US in absolute terms) combined with the broader interest of those in the top 20 per cent of the population in a juster and more stable social order – unlike the top 1 per cent, this group can’t easily insulate themselves from society as a whole or count on passing on their own social position to their children.

There is no obvious political vehicle for such a movement. The social democratic parties (not to mention the US Democratic Party) seem either hopelessly compromised or ineffective, while the Greens seem to be stuck as a permanent minority. But there have been plenty of radical realignments of political party structures in the past, and they often happen just when they seem least likely.

That’s more than enough for a blog post. As always, I’m putting my thoughts out for discussion rather than claiming any finality for them.

fn1. I argued my position on this here. If people want to dispute this, please don’t derail discussion on this thread. Just write something to indicate you’d like it, and I’ll open a separate thread for this topic.

fn2. Most notable are the Bush prescription drug benefit and Obama’s health plan. Although these measures were riddled with gifts to powerful interest, they nevertheless represent a very significant extension of the role and responsibility of the state to protect its citizens against the risks associated with ill-health..

The Mixed Economy is Back - and it's Here to Stay - an essay by John Quiggin

2010-01-25T16:08:00.000-08:00

above: Respected Australian economist John Quiggin

In this our first entry for the 'Movement for a Democratic Mixed Economy' website, economist John Quiggin argues the case for a mixed economy. In the face of the Global Financial Crisis the time to dissent against neo-liberal misassumptions and ideology is now...

For much of the 20th century, the general movement of economic policy in capitalist societies was towards an expanded role for the state, including an expansion of the scope and extent of public ownership of industry. The term ‘mixed economy’ was popularized by British economist Andrew Shonfield to describe the economic system of the postwar era.

This system was not a compromise between comprehensive state socialism and free market capitalism, as is often supposed. Rather, in seeking a market system actively managed by governments the mixed economy transcended this dichotomy. It was, and remains, unlike the vaporous offerings of Tony Blair and Bill Clinton in the 1990s, a genuine ‘Third Way’.

At its best, the mixed economy was a substantially more democratic mode of organization than the system of globalised laissez-faire it replaced, and that has been resurgent in recent decades. Under laissez-faire, the property rights of capital owners override the democratic presumption that people should have a say in the major decisions that affect their lives. In a mixed economy, major providers of infrastructure are, or at least should be, responsive to public concerns about, for example, the environment or equity in employment.

This potential was not always realised. Some public enterprises were unaccountable fiefdoms run by their managers or by narrowly-based unions. Overall, though, public enterprises of the mixed economy era displayed a concern with the public good that has been lost in the subsequent era of corporatisation and privatisation.

From the 1980s onwards, the mixed economy came under sustained attack from advocates of privatisation. By the 1990s, books like The End of History and The Lexus and the Olive Tree proclaimed the final and irrevocable victory of market liberalism. But after many failed privatizations, and the failure of global financial markets, necessitating a massive government bailout, it is time to reassess the issues.

The long-run case for privatization is based on the idea that the allocation of investment will be better undertaken by private firms than by government business enterprises. This claim in turn relies on the assumption that the evaluation of risk and returns undertaken by investment banks, with the assistance of ratings agencies, and the availability of sophisticated markets for financial derivatives will be far superior than anything that could be obtained by, for example, using engineering calculations of the need for investment in various kinds of infrastructure, and seeking to implement the resulting investment plans on a co-ordinated basis. The global financial crisis has shown that, for most of the past decade, market estimates of the relative riskiness and return of alternative investments have been entirely unrelated to reality.

The crucial claim is that privatization always yields net social benefits and therefore that, other things equal the price for which a public asset can be sold will exceed its value in continued public ownership. This claim has never had much empirical support. Rather it has been taken on faith as a consequence of the efficient financial markets hypothesis.

For many privatisations, the sale price is less than a reasonable estimate of the present value of future earnings under continued public ownership, discounted at the real government bond rate. That’s because of the ‘equity premium’ demanded by private investors to bear the systematic risk in returns. The equity premium is the difference between the average rate of return to equity (share capital) and the rate of interest on government bonds. Since equity is riskier than bonds, economic theory predicts that it should attract a higher return on average, so the existence of an equity premium is unsurprising. But the equity premium is much larger than it should be under standard assumptions about risk (in the economics literature, this is called the ‘equity premium puzzle’).

According to the efficient financial markets hypothesis this is a non-problem. If private capital markets are efficient, the private sector cost of capital and not the government bond rate is the appropriate rate for evaluating the returns to public assets and. Provided the private sector is at least as efficient in operational terms, the efficient financial markets hypothesis yields a general presumption of superiority for private ownership.

The global financial crisis has shown that private financial markets are far from efficient. It is reasonable to conclude that the public sector really does face a lower cost of capital, so privatisation has to be assessed on the case by case basis of whether private owners can make sufficient operational improvements to offset their higher cost of capital.

The failure of the case for comprehensive privatization does not imply acceptance of the opposite extreme position in favor of comprehensive public ownership, or that privatization is never justified. There are large areas of the economy, such as agriculture and retail trade, where public enterprises have rarely operated at a profit. No fiscal benefit can arise from public ownership of a loss-making enterprise. Relatively modest reductions in profitability arising from the constraints associated with public ownership are sufficient to offset the benefits of a lower cost of capital.

In particular, arguments about the cost of equity capital are irrelevant for small unincorporated businesses, where there is no reliance on outside shareholders to provide external equity. Such small businesses typically face a high cost of external capital, relying primarily on bank loans. However, the higher cost of capital for small businesses, relative to both government enterprises and large private corporations, is offset by the efficiency advantages of combining ownership and control.

The idea that we must choose between pure laissez-faire capitalism and comprehensive socialization is part of what might be called the Great Forgetting of the lessons of the mixed economy. The mixed economy was not, and is not, a simple compromise between incompatible extremes. Rather it has given rise to an effective, and productive interaction between the private and public sectors. The balance of that interaction will change over time, sometimes requiring privatization of public enterprises and sometimes extension of the public sector through nationalization or the creation of new government business enterprises.

The existing theory of natural monopoly and market failure provides an indication of the areas where public ownership is likely to prove beneficial, as does the observation that, across many different countries, the areas of the economy that have been allocated to the private and public sectors have been broadly similar. The boundaries have shifted from time to time, but, broadly speaking, public provision has been most common in capital-intensive natural monopoly industries, and in the provision of human services such as health and education.

The case for public ownership is strongest in where market failure problems are likely to be severe. In the case of infrastructure industries, several market failures are important. First, because of the equity premium and the associated problem of short-termism, private providers of infrastructure may not invest enough, or in a way that maximizes long-run benefits. Second, infrastructure facilities often generate positive externalities that are not reflected in the returns to the owners of those facilities. For example, good quality transport facilities will raise the value of land in the areas it serves. Finally, there are problems associated with the natural monopoly characteristics of many infrastructure services.

As regards human services such as health and education, there is a large gap between the reality of providing these services and the theoretical requirements for market optimality is so great that economists have struggled to apply economic analysis to these activities. Among a wide range of difficulties, the biggest problems relate to information, uncertainty and financing. The value of health and education services is derived, in large measure from the knowledge of the providers (doctors, nurses, teachers and others) and their skill in applying that knowledge to benefit patients and students. By contrast, the standard economic analysis of markets begins with the presumption that both parties are equally well informed about the nature of the good or service involved. The asymmetry of information is intimately linked to the fact that the benefits of health and education services are hard to predict in advance, or even to verify in retrospect. This in turn creates severe problems financing through market mechanisms such as health insurance and student loans. One way or another, substantial government involvement in the financing of health and education is unavoidable. Once governments are paying some or all of the bill, the most cost-effective solution is often direct public provision.

Conversely, the case for private provision is strongest where the efficient scale of operations is small enough to allow a number of firms to compete and where markets function well, rewarding firms that innovate to anticipate and meet consumer demand, and eliminating those that produce inefficiently or provide poor service. In particular, in sectors of the economy dominated by small and medium enterprises, where large corporations cannot compete successfully, it is unlikely that government business enterprises will do much better. My home state of Queensland provides historical support for this claim, having experimented, unsuccessfully, with state-owned butcher shops, hotels and cattle stations early in the 20th century.

There will always be a range of intermediate cases where no solution is obviously superior. Depending on historical contingencies or particular circumstances, different societies may choose between public provision (typically by a commercialized government business enterprise), private provision subject to regulation, or perhaps some intermediate between the two, such as a public-private partnership.

Unlike most of the ideas discussed, the failure of the ideology of privatization has already been reflected in ‘facts on the ground’. Most of the emergency nationalizations undertaken during the crisis will ultimately be reversed. But the idea that public ownership is always a policy option, and sometimes a necessary choice, cannot easily be banished from public debate. The mixed economy is back, and it’s here to stay.

Welcome Message

2009-12-31T17:28:00.000-08:00

Welcome to the 'Movement for a Democratic Mixed Economy' website. This website has only just been created - so there's no material yet. But please visit again. We hope to receive some high quality contributions in the new year. Please read our mission statement for more information on what we stand for.