Mises Daily Articles
A Move towards Market Socialism
The recent financial crisis has renewed interest in old issues. The Bush administration has announced plans to buy $85 billion in preferred stock in what are (for the time being) private financial institutions, like Bank of America, J.P. Morgan, Wells Fargo, and Morgan Stanley. The total commitment by the Treasury is set at $250 billion. While this move by the Treasury Department into the financial industry is unique in American history, it has precedents elsewhere, and has been debated many times.
Karl Marx proposed "centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly." Years later, so-called "market socialists" like Oscar Lange, Abba Lerner, and H.D. Dickinson proposed state control over credit and financial capital. While these market socialists accepted trade and the use of money with consumer goods, markets for capital goods would be simulated and markets for financial capital would be wholly replaced by central planning. Capital investment would therefore be determined by state officials, rather than by competition for funds in financial markets. Lange was particularly clear about how the state would determine the overall rate and pattern of capital investment. State officials would set the overall rate of capital accumulation, instead of interest rates. State officials would also determine the pattern of investment, instead of profit-seeking capitalists and entrepreneurs.
Ludwig von Mises and Friedrich Hayek defended capitalism from its Marxian and market-socialist enemies. Mises attributed special significance to financial markets and private financial institutions. After all, it is financial markets that determine the rate and pattern of future capital investment in capitalism. Since socialism is defined by communal control of capital, this system requires state control of investment and finance. Socialism therefore means replacing private dividends with social dividends and interest rates with edicts. All private speculation and credit must be prohibited if capital is truly to become communal property. Capitalism works because it eliminates inept managers of production automatically through bankruptcy, while extending greater industrial control to competent capitalists.
The elimination of markets for capital goods and financial capital introduces arbitrary and political forces into the determination of capital investment. In capitalism, money prices direct capital investment. Socialist officials necessarily lack money prices relating to capital goods because the markets that form these prices are incompatible with socialist aims and ideals. Socialist officials will not determine investment by rational calculations in terms of money, but will be guided by political expediency.
The collapse of the Soviet Union was seen by many people as a final verdict on socialism as an economic system. Whatever one might have thought about socialist ideals, the system was itself seen as unworkable. Yet, in only fifteen years, we have come to a point where a Lange-type system is close to being implemented. Of course, the federal government already holds strong regulatory powers over financial institutions. The regulation of American finance introduces an element of politics in financial markets. However, federal regulation of financial markets puts the voting public in the position of an active stakeholder in financial markets. With limited government and laissez faire, voters are passive stakeholders in financial markets. To put it simply, regulation changes the role but not the position of voters and interest groups in these markets.
The purchase of preferred stock by the federal government alters the position of the general citizenry regarding financial institutions. If implemented, this plan will move voting citizens from the position of active stakeholders to that of actual shareholders. It is not yet clear if the federal government will be an active or silent partner in the aforementioned financial institutions. But, given the historical record, it seems highly unlikely that the federal government would gain a $250 billion interest in these institutions without asserting some influence over their operations. It appears likely that the American public will become active shareholders in some of the largest and most important financial institutions.
The Bush buyout plan is being implemented "to restore confidence in the battered banking system." The Bush approach is not, however, the only way. The Bank of East Asia has also faced difficulties. When depositors began to withdraw money en masse, Hong Kong tycoon Li Ka-Shing began buying up shares. This move by Li Ka-Shing helped restore depositor confidence, and rightly so. The Bank of East Asia is well capitalized and has minimal stakes in Lehman and AIG. Of course, Li Ka-Shing made this move for personal profit, but this did help stabilize the financial situation in the Far East. The Hong Kong approach stands in stark contrast to the Bush administration's new policy. Hong Kong is standing by its capitalist institutions by allowing private investors to deal with the current crisis, as well they should. Free-market capitalism transformed Hong Kong from a poverty-stricken victim of the Second World War to its current prosperous condition.
The Bush administration is going beyond its well-established record of intervention by implementing partial socialization of numerous financial firms. It does seem that we are at the crossroads. Will we move in the direction of Lange's market socialism, or will we opt for greater freedom and prosperity?
The prospects for avoiding further losses of economic freedom seem poor. Presidential candidate Barack Obama has declared that the current financial crisis is the result of deregulation that has "shredded" necessary regulatory controls. While Obama's belief in recent deregulation of financial markets is factually incorrect, his call for greater regulation might actually be preferable to the Bush administration's plan for partial socialization of banking and finance.
The overall record of private capital markets is one of unprecedented economic success. Financial capitalism has raised living standards to previously unimagined heights. Government regulation of financial markets has caused problems and setbacks. In fact, our current crisis is due largely to the strictures of the Community Reinvestment Act and Federal Reserve interest-rate policy. But regulation has not reversed the general trend towards greater prosperity.
The track record of state-controlled capital investment through state-owned banking and financial institutions is equally clear, but opposite in its results. Socialized investment has failed so consistently that one must wonders why the Bush administration would claim that its buyout of banks will restore public confidence. Why would anyone have confidence in the federal government's ability to direct matters of finance and investment? One need only look at the federal deficit and the burden of unfunded entitlements like Social Security to gauge the ineptitude of federal financial management. We are at the crossroads, and, unfortunately, our future course is being charted by George W. Bush and Henry Paulson.
Dickinson, H.D. The Economics of Socialism (1939).
Hayek, F.A. Collectivist Economic Planning (1935).
Lange, O.R. On the Economic Theory of Socialism (1938).
Lerner, A.P. The Economics of Control (1944).
MacKenzie, D.W. "Social Dividends, Bureaucratic Rules, and Entrepreneurial Discretion." Under final revision for The Eastern Economic Journal.
Marx, Karl. The Communist Manifesto (1848).
Mises, Ludwig von. Socialism, an Economic and Sociological Analysis (1922).
—— Human Action (1949).
Solomon, et al., "US to Buy Stakes in Nation's Largest Banks," The Wall Street Journal A1 (October 14, 2008).