New Questions for Socialist Thinkers: A 1950s View of Socialism and Capitalism on the Modern US Economy

(This essay was originally presented Monthly Review for publication, but their review department is unresponsive.)

A review and modern interpretation of socialist works from the 1920s to 1950s.

Paul M. Sweezy, a founding editor of The Monthly Review, wrote The Present as History in 1953 to collect and analyze many angles of socialist thought. The book includes writing by several authors across the 1920s to 1950s. This essay reviews themes from this book and compares how they specifically apply to 2016 -- the year with the most populist, nationalist, and socialist discourse.

The Present as History compiles a good variety of essays to review economic ills of the United States and considers if a proletariat revolution (socialism) is inevitable or desirable. Conflicting views on the economy and how to improve it have been a major deciding factor in elections and regime change across the world for centuries. But in 2016 a United States socialist presidential candidate came further than any predecessor, Britain voted to leave the European Union, and nationalist / populist movements are affecting political discourse across the globe.

From the perspective of the 1920s to 1950s in the United States, it was unclear if the proletariat class would rise up and take control of countries across the developed world, and if so where they would start. An uprising was hopeful to bring prosperity for more people although it would require a period of readjustment. Such an uprising would happen one country at a time, and such several essays in the book made sure to discuss relations between capitalist and socialist countries.

Themes in this book help distinguish between capitalism and socialism. Perhaps the most valuable result of economic discourse is to compare societies and to understand their values. In this light, the book covers four distinct ways which capitalism and socialism can be told apart. Each predication is reviewed here and then extended to modern times. Then we are left with a whole new set of questions for the modern socialist thinker.

WHO CONTROLS PRODUCTIVE CAPACITY?

The Communist Manifesto After 100 Years by Paul M. Sweezy, considers "a promised land of peace and abundance if we could but control, instead of being dominated by, our vast powers of production [28]." Productive capacity is the lifeblood of an economy. In the 1950s, one popular way to distinguish capitalist and socialist economies was to consider whether capitalists or the government controlled the productive capacity. However, because of changes in monetary policy and commercial regulation, it is difficult to categorize the modern United States this way.

Inventive people will always dream up new things which can improve the lives of all citizens. Managers of factories and other productive capacity follow these dreams and produce ever better things to improve the property of citizens. Society is affected significantly by the choice of exactly how these factories are used.

In the 1950s, an economic system where capitalists chose how to manage factories and other productive capacity was called a capitalist system. Because of the incentives, capitalist systems were shown to promote creative destruction and declining employment [206]. Also, this system promotes competition and duplication of producers.

In contrast, a socialist economy uses government to control factories on behalf of the people. Because government can choose when to expand or contract factories, socialist thinkers stress that a planned economy can guarantee employment and meet targeted economic growth targets. However, in the modern economy, the concept of control has changed so much that we must rethink this distinction.

In addition to its control of business cycles, a socialist society can directly manage enterprise to ensure the public good is being served -- protecting natural resources and making safe and high quality goods. Because there is no competition, the entire wasteful and manipulative marketing industry is obviated. Several important differences between the 1950s and current times obsolete much of this distinction.

Throughout the second half of the 20th century, China implemented state control of a significant portion of its enterprises and successfully grew its economy from one-tenth the size of the United States to the world's largest in purchasing parity terms. China enacted its system of state owned enterprises to achieve tight control of monetary policy and all its major industries for the benefit of citizens. However, during the same time the United States has created a significant body of monetary and commercial regulations which achieves a similar purpose.

United States monetary policy in the 1900s saw the creation of the Federal Reserve, the adoption and abandonment of the Bretton Woods system, and countless other important changes. These changes have directly resulted in very noticeable economic conditions. For example, the price of gold rose 35-fold from 1950 to 2015, 30-year government interest rates ranged between 2.25%, and 15.21%, and banks' ability to create money ranged between 3.54 times deposits and infinity. Because the United States has remained the preeminent economy throughout this time, its monetary policies allow it to dictate economic growth and trade.

For commercial activities, the United States uses its authority to regulate interstate commerce to set standards in many industries. Food and drug regulation in the United States is unrivaled throughout the world. Other notable industries with strong central control include automotives and railroads, retail finance, and utilities. The amount of control that government exerts over each industry varies. Large banks are required to submit and keep current plans for their own dissolution, which can be executed at the government's convenience. To be sure, most other industries are regulated at the federal, state, or local level. In addition to regulation, federal, state, and local direct spending currently account for one third of gross domestic product. In times of crisis, the government also reserves the right to "bailout" and take direct control of private institutions at risk of losing the public faith.

To contrast China and the United States, both have achieved the socialist value of government control of productive capacity and growth planning, but have done so in entirely different ways. However, the United States' method of control leaves several important issues to consider. Managers can influence government and reduce the effectiveness of regulation. Socialists thinkers should particularly fear this situation and work to prevent it.

WHO OWNS PRODUCTIVE CAPACITY?

As technology advances, there comes a significant opportunity to improve and build new factories. The amount of capital and human resources employed in these consumer goods and industrial factories directly affects the economic growth of society.

Productive capacity is controlled by management to produce consumer goods and other industrial equipment. One classification of economic systems is whether this productive capacity is owned by capitalists ("capitalism") or by the the government in custody of the people ("socialism") [205]. This is distinct from control because initiators (or "investors" if you prefer) are the ones that create new productive capacity and set them into motion.

A major tenet of socialist thought is the contradiction of capitalism -- productive capacity is used primarily for the benefit the capitalist class. This is a self-reinforcing problem which prevents social mobility and restricts the prosperity of the majority of citizens. In contrast a socialist system has government purchase and hold productive capacity. A socialist system is created to benefit the citizens, therefore government should be trusted to initiate and own productive capacity which benefits the public good.

In 1950, a simple plan for switching to a socialist system may be to simply use government capital for all new productive assets. Then going forward it would only be necessary to register and collect existing productive assets from private owners. Over the next 65 years, this is the exact strategy which has been implemented in China. China controls primary capital through its Bank of China and secondary capital through its party-controlled provincial banking systems. To be sure, "black money," illegal lending and foreign investment do complicate matters. But for the most part the party does control the flow of capital to new productive capacity, and it does this in tight coordination with its five-year plans. Additionally, China has used a system of registrations, tariffs and legalized monopolies to reserve a large portion of its economy for state owned enterprises. The success of China and its use of this approach should bring validation to 1950s socialist thinkers. And this would embolden them in establishing similar policies in the United States. However, several important differences between the 1950s and the current United States obsolete much of this thinking.

First, ask to what end has China created its system of state owned enterprises? The United States has already achieved tight control of private industry through regulations. In addition, the US government has directly nationalized housing, automotive, and financial institutions when they were at risk of losing the public faith. For the remaining enterprises which are owned by private citizens, the vast majority are public companies. Public companies are registered with the state and follow specific rules which makes management answer to owners. However, nearly all citizens are now owners because of pension accounts and modernization of financial markets. Overall, productive capacity is used to benefit the citizens through these indirect means, which are all shepherded by the state. The remaining question is how to redistribute wealth so that the benefits are felt more equally by all citizens.

Second, the United States economy is much more advanced than China's. In 1950, The United States' goods and services output were near parity; currently, the services economy dwarfs goods. In 1950, median household income was $3,000 per year and a new wool men's suit cost one week's salary at retail prices. Median household income in 2014 was $54,000 and a week's salary is sufficient to purchase a new personal computer. In the current business environment many business functions and resources can be purchased incrementally over computer networks. Therefore, the most important productive capacity is directly available to nearly all citizens for minimal cost. New service-economy enterprises are commonly valued more than one million dollars per employee. Employees often share in ownership of these companies and such a valuation allows successful employees to enjoy large rewards. If the definition of a successful socialist economy is that all citizens may own world class productive assets then success has been mostly achieved. Socialist thinkers should consider how to bring the smaller heavy-industrial segment to the benefit of all citizens.

Ubiquitous and affordable technology now allows nearly all citizens to directly own productive assets. A further step in socialist thought may be to ask if direct and equal citizen ownership is better than government ownership on their behalf. It may be that economic thought is incapable of providing a satisfactory answer to this question.

WHO CAN GENERATE INCOME?

Professor Joseph Schumpeter presented an economic model named "circular flow" with no capitalists or entrepreneurs, no profits for enterprise, and no profits for capital. Instead, it only recognizes laborers which are paid based on their productivity and employers which may take on laborers. A lack of interest rates removes the incentive to accumulate capital. As a result consumption follows wages. Here, landowners are able to extract rent, however the market price for land is infinite because the present value of perpetual rent collection is not discounted by an interest rate [277].

A critique to the circular flow analysis has considered another possible interpretation: capitalists are a separate and exclusive club of individuals which are protected by institutional forces [274]. That analysis considers ownership of land and capital as necessary to join the employing class. Access to this exclusive club is an ends to itself and a strong motivation for accumulation comes about even without any time preference of money (i.e. "interest rate") [279]. This creates a capitalist class which then strongly reinforces itself.

In an advanced socialist economy, profits accrue from productive actives and are accumulated into the national surplus. However, this surplus is of no consequence and it is simply an accounting figure. The only meaningful income is earned by laborers which is then spent directly on consumption. In a capitalist system, capital generates income in the modified circular flow described above or in the more general sense that capitalists are the highest social class and they will use capital to exclude new entrants.

In 1950 it was clear that the United States was a capitalist economy. Several presuppositions of the circular flow were not supported. Specifically, interest rates were positive, land prices were stable, and entrepreneurialism was rife. This reinforced the incentive to accumulate capital and the ability of capital to earn interest. More importantly, the war economy required heavy industrial production which was supported by industrial capitalists. As a result capital was a significant ingredient for social success: it generated interest and income for capitalists, it defended the capitalist class from new entrants, and it secured advantage for capitalists over laborers.

A 1950s socialist planning group would have hoped to modify this situation in several ways. First, it would guarantee the ability of laborers to earn meaningful wages for its efforts. Next, it would ensure that capital financing for heavy industrial (and other) industries would be readily available from the public rather that requiring investment from a specific class of capitalists. And finally, it would reduce the incentives of capital accumulation by minimizing the benefits of capital ownership.

In many ways, present American society has successfully achieved these goals. It was perhaps inconceivable in 1950 that the United States would commit to a long-term strategy of zero interest rates, much less the current situation of negative interest rates in much of Europe. Furthermore, because of market liberalization American capitalists must now compete with surpluses in China to fund American businesses. This minimizes the ability of capital to earn profits. In 2016, the benefits of owning capital are minimized and mere investors face the threats of competition and technological advancement destroying any of their investments [59].

Socialist thinkers will do well to focus on the distribution of large corporation earnings between top managers and laborers, perhaps by promoting labor ownership of their employers. Additionally, American socialists and political leaders must understand the extent to which American businesses have increased the prosperity of foreign laborers at the expense of American laborers' wages.

WHO DOES ECONOMIC PLANNING?

In a socialist society, the government is responsible for economic planning. The basic tenet includes controlling the business cycle and allocating productive resources between consumption and industrialization [342]. An economic planning committee sets prices so that laborers may use their wages to purchase goods in such quantities as the committee is expecting. A more stringent definition of economic planning would include specific quotas for individual products and rationing for individuals -- however this is not necessary for our consideration here. The basic tenet of economic planning is sufficient to understand who is guiding the economy.

The benefits of centralized economic planning are demonstrated by Marx and have been reviewed thoroughly [348]. These benefits extend directly from government control of growth rates for consumption and industrialization. Certain, specific failures of an unplanned (capitalist) economy can be avoided, including boom/bust cycles, perpetually low employment, and deflation. In contrast, capitalist economies have incentives for creative destruction and leave laborers without gainful employment when the business cycle inevitably changes.

In 1950, state of the art for economic planning consisted of an esteemed economic planning committee which carefully considered the circumstances and set an annual production plan. Any failed predictions of the plan (e.g. too many raincoats in a dry year) could be resolved in the subsequent year by taking surpluses as inventory and reducing future production. However, in modern times much more is possible. Retail sales figures are now calculated daily (or continuously) rather than monthly; goods can be delivered directly from manufacturers to consumers, skipping months of inventory; and integrations can inform manufacturers of demand before customers even know they want a product! A 1950s economic planner may think that such information would allow annual plans to be completed much faster -- perhaps quarterly, monthly, or weekly. This blurs the lines between a planned and an unplanned economy.

A yearly economic plan has the goals of sustaining high employment and maximizing prosperity. More frequent economic plans are enabled by more information, however this additional information is only related to consumption. Prosperity is increased because production is more aligned with consumption and demand. A perfect economic planning commission would use all available information to make production decisions in real-time to react to the demands of citizens. In other words, the economy would be reactive and unplanned.

Because socialism and capitalism are both perfected when they quickly match production to citizen demand, economic planning is no longer a distinction between these two economic systems. Socialist thinkers need only be concerned with using production to manage employment levels.

CONCLUSION

In 1950 there was a thriving socialist discourse and an excited question: will the proletariat class rise up and take control of countries across the developed world, and if so where will they start? By many standards these socialists of yore would be pleased by the development of the United States in the ensuing years. Developments in the United States and the global economy provide new ways to interpret these standards and a whole new set of questions for socialist thinkers to worry about. In terms of improving the United States economy:

 * How to stop managers from influencing regulation?
 * How to increase labor's participation in large corporations' profit?
 * How to use production to manage employment levels?

and even more political questions remain that are perhaps unanswerable with socialist thought:

 * Is individual citizen ownership of production assets better than social ownership?
 * Is domestic enterprise more important or domestic employment levels?

The socialist thinker has much to be happy about, but there is still much more work to be done.


NOTES:

[28] P. M. Sweezy, L. Huberman, The Communist Manifesto after 100 Years. Monthly Review. August 1949.

[59] J. Burnham, The Industrial Revolution: What is Happening in the World. Science and Society. 1942.

[205] P. M. Sweezy, An Economic Program for America. Monthly Review. 1951.

[206] ibid

[274] J. Schumpeter, Professor Schumpeter's Theory of Innovation. The Review of Economic Statistics. 1943.

[277] ibid

[279] ibid

[342] P. M. Sweezy, A Crucial Difference Between Capitalism and Socialism. In The Present as History: Essays and Reviews on Capitalism and Socialism (pp. 341-351). (New York: Modern Reader, 1953), 342.

[348] ibid

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