State and Market - a Democratic Socialist Approach

above: 'people power' - time to build a democratic economy

In this new essay  Shayn McCallum explores the possibilities for a genuine democratic mixed economy; one profoundly more radical that the social market approach.  Debate welcome!

nb:  Readers can join our Facebook group too!!  at:  http://www.facebook.com/groups/152326549326/

Current debates within the European socialist movement on the way forward for the Centre-Left, often seem to be centred on the unnecessarily narrow field of “state versus market”.  Much of the debate revolves around questions of the “correct ratio” of state-to-market in the provision of public goods and services, with scant attention given to the political nature of either.  Where an economic vision is articulated we see labels such as “decent capitalism” or the highly traditional “social-market economy” employed.  Both of these terms however, borrow heavily from a terminology, and therefore a mind-set, which is not of the Left and which unnecessarily limits and restricts the thinking of social-democratic strategists and activists.

The work of George Lakoff and Drew Westen[1] into the neuro-linguistic dimension of politics reveals a great deal that is useful in considering the current weakness of the Centre-Left and its apparent loss of creativity and direction.  In accepting the essence of the liberal world-view and limiting its criticisms of the liberal project to the details rather than the over-arching vision, social-democrats have been reduced to becoming the “annoying flea” of politics, creating little more than an irritation for the continuing (neo-) liberal agenda.  It has proven relatively easy for conservatives and liberals in Europe and elsewhere to dismiss social-democratic complaints about the ruthlessness of capitalism as mere faint-heartedness or an unrealistic inability to face up to “what must be done”.  What is worse, the social-democratic discourse reveals that they may suspect that their neo-liberal opponents might be right after all; thus, the unsure, excessively tentative, somewhat vacuous nature of much social-democratic discourse.

By adopting terms such as “good capitalism” to combat the “bad capitalism” of the neo-liberals, social-democrats are exposing themselves to the obvious response, common to both far Left and Centre-Right, that really “there is just capitalism” and adjectives such as “good” and “bad” are irrelevant or misplaced.  For the hard-core economists of the Right, as much as the more economistic voices on the hard Left, speaking of “good” and “bad” capitalism makes as much sense as speaking of “good” or “bad” gravity or “good” or “bad” oxygen.  The term is weak, ineffective and unambitious and fails to offer more than a limp moral critique of the system as it is.  In fact, the charming vision of a virtuous, industrious society re-enshrined in the virtuous “real economy” of manufacturing and productive industry is not only a fantasy, it is, in many ways, a reactionary one at that.  When ecological collapse is looming right behind the collapse of the unbalanced and excessive, increasingly-consumption driven, global economic system, producing yet more “stuff” is probably not the optimum way forward from where we are now.  Short-sighted, populist attempts to revive the industrial revolution in the wealthy nations makes as much sense as trying to stop the Titanic from sinking by making the orchestra play more slowly.  The era of unsustainable industrial growth, at least in the first-wave of industrialised nations, belongs to the past not to the future and this is, perhaps, one thing the “neo-social democrats” have got right.

The state we are in demands a much bolder response than a nostalgic appeal to the good old days of industrial growth.   Terms such as “decent capitalism” or even the “social-market economy” are flawed, in that they create a conceptual framework that is inseparable from, and therefore unable to move beyond the basic framework of the existing system. In contrast, by adopting terms such as “economic democracy” or even “a democratic mixed economy” socialists would have the means to open up this currently truncated and inhibited conceptual framework and, potentially, take back control of the dominant discourse.  Where capitalism, whether “good” or “bad”, is defined by certain structures and institutions that cannot, even must not be transcended or interfered with for fear of undermining the system itself (once the central goal of socialists not so very long ago) terms such as a “democratic mixed economy” at least open the door to the possibility of transcending  the flawed logic of capitalism and “the market economy” altogether.

Not only “capitalism”, which, it should be pointed out, is a term originally coined by critics of the system and which has only recently been embraced by its aficionados[2], but also the term “market economy” (whether social or not) is a conceptual prison.  The Delors-era social-democratic slogan of “we want a market economy, not a market society” is reminiscent of a caricature of a man being devoured by a tiger and, whilst half-engulfed in the tiger’s maw, pleads with the creature to eat only his lower half and no more.  A market economy, in the sense implied by liberal theory, cannot but lead to a market society[3].  A “mixed” economy however, at least conceptually, has the potential of being a society “with markets” without necessarily being dominated by them.

Just to frame this concept so it can emerge from the level of rhetoric to the level of a concrete example, economic  history reveals a  myriad of examples of economic systems which employed markets without being dominated by them and without exchange and commerce occupying the central place in economic life.  Indeed, for much of human history, commerce has existed as one among many forms of economic activity and it is only in the modern age that it has acquired such a uniquely pervasive influence.  Feudal economies, for example, were essentially war-driven economies based on the control of land and commerce remained a highly secondary pursuit.  Merchants were tolerated and or encouraged as a means to an end and it wasn’t until the vast influx of wealth from the new world, from the 1500’s on, began to undermine the feudal power structure and grant the rising merchant class a significant degree of political influence that the road to modern capitalism was opened[4].  Likewise, in the Islamic Middle-East, trade was an important pursuit and markets held an important place in the life of the cities yet, even here, the dominant economic engine was the demands of a militarised state.  There was no market economy to be found in the Middle-East, although very sophisticated markets played an important role in the urban economic order.  No matter how important markets may have been to pre-modern economies, these were always merely one part, mostly a subordinate part, of the broader economic and political context.

As Polanyi points out[5], economic relations are always embedded in (and have been historically subject to) broader social and political contexts.  Capitalism therefore, may be perceived as an attempt to dis-embed the economy and grant it a central, autonomous and superior role in the construction and maintenance of society.  This is, however (according to Polanyi at least, and history is yet to prove him wrong) an unworkable fantasy.  The idea of the self-regulating market is just as mythical and untenable as the idea of a fully-planned, efficient communist paradise.   In reality, all economies embody a variety of co-existing production and distribution systems and most have varied property forms.  Even the most “capitalistic” economies, such as the U.S., clearly demonstrate these variances.  The state and large corporations are intertwined in ways that make a mockery of Smith’s “invisible hand”.  Capitalism, in short, means “the rule of capital” and markets are merely a vehicle to be used when profitable and to be ignored whenever a liability[6].

This definition of capitalism permits the, otherwise absurd, position of advocating free markets against capitalism.  This highly optimistic approach can be found in the works of David Korten[7] and the theory of mutualism associated with Pierre-Joseph Proudhon, together with various theories of “market socialism”.   Indeed, there are a number of political approaches which separate the market as a mechanism from the rule of capital.  Although this “socialist reading of Adam Smith” is perhaps naïve and overly rooted in a near extinct class of smallholder artisans, farmers and entrepreneurs, the idea of a separation of the market from the rule of capital, although problematic, is not totally unreasonable as the existence of socially-embedded market mechanisms long precede the emergence of the capitalist political economy.  As has been mentioned above, the self-regulating market is an ideological fantasy and does not approach the reality of capitalism which is increasingly exercised through highly-organised, bureaucratic trans-national corporations that employ markets as a tool.  The problem of “markets against capitalism” however, is that the competition inherent to a market system inevitably creates winners and losers and leads to an evolutionary dynamic that, in a very short period of time, undermines the basis of the market itself (which is the essence of Polanyi’s critique of free-market ideology).  A market-centred economy, regardless of its ideological foundations, appears inevitably to tend to support the emergence of capitalism at some point (a process somewhat demonstrated by real-world attempts to implement “market socialism”[8]).

Capitalism therefore, defined as the “rule of capital”, is, in every sense, at odds with popular sovereignty.  If social-democrats accept “decent capitalism” as a goal, they are essentially pleading for capital to be decent as they are not capable of advancing any meaningful counter-power, such as powerful, well-organised trade-unions or citizens’ alliances to ensure this.  In fact, the “decent capitalism” of the post-war Keynesian era, that forms the basis for this vision, was “decent” precisely because capitalism was compromised and partly balanced by a rising wave of democratisation.  This democratic revolution was, unfortunately, undermined by circumstances and partially abandoned in the late 1970’s, at which point the neo-liberal counter-revolution seized the initiative.   After WWII, capitalism was forced into an open-ended compromise with democracy, from the 1980’s onwards it has been busy undoing the bonds imposed by that era.

Just as it is impossible to serve two masters, it is also impossible to simultaneously uphold the power of capital and the sovereignty of the people.  The unsatisfactory compromise offered by liberalism is to separate the political from the economic, leaving the economy to the abstraction known as the market (in truth, organised corporate interests) whilst parliaments elected by the people handle what remains of the political.  In short, according to the theory, the “market” will see to employment, prices, wages and the distribution of essential and non-essential goods and services, whilst “democracy” need content itself with rulings on issues such as the permissibility of gay marriage, the criminalisation of flag-burning, gun ownership, abortion or other details of the social, cultural and political milieu.  In such an environment, politics becomes a matter of flavour and preference with cultural issues substituting for questions of class power, redistribution or the provision of social goods and services[9].  That social-democrats have allowed themselves to be led down this path is a sad indictment of the robustness of socialist thought and strategy in the current era.

As Thomas Meyer points out[10], economic issues, issues of public welfare and economic justice give democracy its substance.  If the liberal celebration of “negative freedom” (i.e. “freedom from” as opposed to “positive freedom” being the “freedom to” act or access something[11]) leads to little more than the “freedom” to be unemployed, homeless, ignorant or uninsured, there is good reason for adopting a more balanced and sober attitude.  There is no point speaking of “freedom” unless people have the basis on which to enjoy that freedom and this can only be assured politically, by means of an active, participatory democracy that embraces all areas of public life.

Thomas Meyer roots his approach to social-democracy in the U.N. Universal Declaration of Human Rights and there is some merit in referring to this document.  The Declaration attempts not to align itself overtly with any particular political or economic theory or ideology although it is quite explicit in its advocacy of a political and social democracy entailing a raft of full social and political rights.  Indeed, the resulting document proves, in its fundamentals, incompatible with either capitalism or communism (as practised in the Soviet Bloc or China) but highly compatible with either democratic socialism or social-liberalism and, indeed, it was on this terrain that the post-war Western European political order was established.  The emergent order was a compromise between socialism and capitalism which, although capitalism was always the dominant force, arguably also contained the (historically unrealised) potential also to evolve in a more socialist direction.

It is worthwhile remembering that liberals such as Keynes, although by no means socialists, were also very much disenchanted with capitalism, although they grudgingly tolerated its continuation as the least-bad of the available alternatives.  The aim of Keynesian demand-management was the general welfare and it saw capitalism as a tool, a means rather than an end.  Keynes’ economics were, therefore open-ended and evolutionary and, arguably, contained the seeds equally of what could become either a democratic socialist or a social-liberal approach.  

Although the benign capitalism of the “social market economy” may have resembled, in practice, the social-democratic ideal of a “democratic mixed economy” in truth the intentions were, and are, different.  The social market may be “social” but the market is the indispensable, central mechanism of the economy, albeit modified where necessary by the need for a degree of social justice (again, to the degree that it does not “distort” the market mechanism).  The “democratic mixed economy” however is an open-ended evolutionary project which stresses democracy as its primary feature.  Its goal is not mere benevolent capitalism but a terrain on which new, emancipatory forms of property and production are able to evolve and emerge.  It does not seek to overthrow capitalism in a frontal assault, nor necessarily to entirely eliminate market mechanisms from the economy, but rather to tame them, then subordinate them to the general good where possible.  The difference, in brief, is that the “social market” is conceptually rooted in the market and therefore limited by the demands of the market whereas a “democratic mixed economy” is conceptually rooted in, and limited by, the demands of democracy and social justice.   In the former, the limits of the social are determined by the market whereas, in the latter, the limits of the market are determined by the social.

Of course, in the real world, assuming the basis for a new compromise could be created, there would be a competition in politics between the visions of the “democratic economy” and the “social-market” which was, indeed, the ideological cleavage separating the Centre-Right and Centre-Left in the post-war Western European political economy.   The democratic Left begins from the assumption that its own vision must be fought for amidst a plurality of competing visions and approaches.  Any democratic political project must be open-ended and subject to both advances and reversals.  It is a pity that the large sections of the Centre-Left abandoned its own vision before it had even achieved the bulk of its goals, although there is still a chance it will find its way back home. 

At this point, it is perhaps appropriate to remember the approach of Eduard Bernstein for whom the “movement (was) everything, the end nothing”.  The end, for modern socialists, is perhaps not “nothing”, in that it helps to have a landmark in the distance by which we can measure our progress, although, the nature of social-evolution is such that there usually is no identifiable end that can be discerned as one victory endlessly opens the path to new struggles.  The goal of the Centre-Left therefore ought to be to ensure that the direction of evolution be towards greater freedom, equality and solidarity.  Getting trapped in the historical cul-de-sacs of specific systems or institutional frameworks, whether it be “state-socialism” or “decent capitalism”, is the passport to extinction.  Socialists need to imitate life itself and embrace constant evolution, but they must never forget the direction they wish to evolve in if they are to avoid the fate of the dinosaurs and dodos of the past.  In time, terms such as “democratic mixed economy” are bound to pass their use-by date and develop into hidebound clichés as reality continues to extend its limits and social-democrats, if they are even continuing to call themselves by that name by then, will once again need to adapt or die, but always, hopefully, on the path to ever more democracy, ever more equality, liberty and fraternity.

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[1] Lakoff and Westen’s work strongly parallel and even largely duplicate each other.  The most comprehensive exposition of their approach can be found in:

Lakoff, George (2008): The Political Mind: why you can’t understand 21^st-century politics with an 18^th-century brain, Penguin, NY

Westen, Drew (2007): The Political Brain: the role of emotion in understanding the fate of the nation Public Affairs, NY

[2] Professor Fred Block points this out frequently in his work on capitalism and social-democracy and particularly compellingly in a Miwon lecture he delivered to Kyung-Hee University, Korea on September 26 2011, entitled; The Origins of the Current Crisis of Global Modernity

[3] Articulated most clearly by Karl Polanyi, especially in his magnum opus The Great Transformation.  See

Polanyi Karl (2001 (1944) The Great Transformation, The Political and Economic Origins of Our Time, Boston,

                                                 Beacon Press

[4] These ideas are explored widely in Polanyi’s writings on economic history and can also be found in Eric Hobsbawm’s writing on the era as well as in a number of other sources.  There is a wide range of literature dealing with the Islamic Middle-East however, among the best is probably the 3-volume investigation on the political-economy of the Ottoman Empire by Halil İnalcık and Donald Quataert., see

İnalcık H & Quataert D (1994) An Economic and Social History of the Ottoman Empire, CUP, Cambridge

[5] Polanyi Karl (1944) op.cit.

[6] This is also mentioned by Polanyi but also widely commented on by a very wide range of other sources positioned on all points of the political spectrum.  It was even acknowledged by former U.S. president Dwight D. Eisenhower in his musings on the “military-industrial complex”.

[7] David Korten is a leading proponent of a non-capitalist market economy.  Most of his work embraces the central contention that capitalism is actually not a market system and that a “true” market economy is the solution.  In many respects, his work is reminiscent of classical Proudhonian mutualism.

[8] Examples of this may be cited as the collapse of Yugoslav market socialism as well as the rather makeshift “goulash socialism” of communist Hungary but also the feeble market reforms of perestroika or state-capitalism of China and Vietnam.  It remains to be seen how the emerging reforms in Cuba are likely to take shape.

[9] For an enthusiastic embrace of this process, see Thomas Friedman’s The World is Flat

Friedman Thomas (2005) The World Is Flat: a brief history of the twenty-first century FSG NY

[10] Meyer, Thomas & Hinchman, Lewis (2005 (2007)  The Theory Of Social Democracy Cambridge, Polity Press

[11] The distinction between “positive” and “negative” freedoms here are based on the categories introduced by Sir Isaiah Berlin in his famous essay Two Concepts of Liberty.

Marxism without Revolution: Class

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..



Readers of John Quiggin may be interested in the following essay on 'The Democratic Mixed Economy' by Dr Tristan Ewins as well ;  Discussion Welcome

see here:  https://democraticmixedeconomy.blogspot.com.au/2013/10/what-is-democratic-mixed-economy.html

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

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.

Readers of John Quiggin may be interested in the following essay on 'The Democratic Mixed Economy' by Dr Tristan Ewins as well ;  Discussion Welcome

see here:  https://democraticmixedeconomy.blogspot.com.au/2013/10/what-is-democratic-mixed-economy.html

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