Book Review: A Future For Socialism

A boot, stamping on a human face – forever!

No! Wait! Sorry! Wrong future for socialism! This is John Roemer’s A Future for Socialism, a book on how to build a kinder, gentler socialist economy. It argues for – and I believe proves – a bold thesis: a socialist economy is entirely compatible with prosperity, innovation, and consumer satisfaction – just as long as by “socialism”, you mean “capitalism”.

The book makes proposals, but you’re not exactly hearing the Internationale playing in the background as you read them. Prices are obviously the best form of allocating goods, so a socialist economy should keep them. Central planning could never work, so a socialist economy doesn’t need it. Bosses and managers seem to be doing a good job keeping their firms profitable, so they can all keep their jobs under socialism. Everyone has different skills, so clearly in a truly socialist system they deserve different wages, in fact whatever wage the market will bear.

So where’s the socialism? Well, socialism is a system where the people own the means of production. Right now corporations control the means of production, and you own corporations by holding stock in them. So if everybody owns stock in all corporations, then if you squint that’s kind of socialist.

Roemer proposes the following: first, you nationalize large industries – or, if you’re a post-Communist country (Roemer was writing in 1992) you start with your large industries already nationalized. Then you split them into stocks. Then you give everyone an equal amount of these stocks. When the corporations make money, they pay them out in the form of stock dividends, which go to the people/stockholders. So every year I get a check in the mail representing my one-three-hundred-millionth-part share of all the profits made by all the corporations in the United States.

Question: won’t poor people immediately sell their shares to rich people, resulting in the rich people becoming wealthy means-of-production-owning capitalists again? (compare question 4.1 here). Answer: yes, obviously. So Roemer proposes a law that stocks cannot be sold for money, only coupons and other stocks. Every citizen is given an equal number of coupons at birth, trades them for stocks later on, and then trades those stocks for other stocks. This allows smart citizens to invest wisely, and allows a sort of “stock market” that sends the correct signals (this business’s stock price is decreasing so maybe they’re doing something wrong) but doesn’t allow stock accumulation by wealthy capitalists.

In this system, businesses would raise funds not by selling stock but by seeking loans from banks. Apparently this is already how it works in Japan, where companies are arranged into “business groups” called keiretsu with each having a bank in charge of lending them money. Roemer hopes his model would work even better than the keiretsu, because the flow of stock coupons would give the banks market-driven information that help them make funding decisions.

So when I read about this I got really excited, because it sounded like a Basic Income Guarantee without the awkward questions about how to fund it. If everyone owns an equal number of shares in a diverse portfolio of the nation’s companies, then corporate profits go to everyone in the form of a check in the mail. Sounds like a good way to help the poor.

Unfortunately, Roemer calculates in the back of the book how much money he expects people to get from such a scheme. Using equations I can’t exactly follow, he finds that every citizen would get about $500, which is about 5% of the 1992 poverty rate. Using slightly different assumptions weighted in his favor, he is able to increase this to $1000 per person. It looks like we will not be solving poverty today.

On the other hand, I recently learned that corporate profits have been rising dramatically lately. If you do a calculation much simpler than Roemer’s – in fact, pure division of the $2 trillion in national profits by the 300 million Americans who could receive them – you get about $6,000 per person. That’s still not enough to reach the poverty line, but it’s something, especially if you’re willing to tax the wealthy’s share to funnel it to the poor.

(on the other hand, maybe fewer than all corporations will be nationalized? I dunno here.)

But Roemer doesn’t even mention this except as an aside, and doesn’t think it’s the most interesting thing about his system. What he’s really interested in is finding a way to control what by analogy to public goods he calls “public bads”. These are all the things that coordination problems form around, like pollution and global warming and selling weapons to dictatorial regimes and so on.

He makes the following fascinating claim: poor decision-making in the current system is driven by an imbalance of costs and benefits caused by the concentration of capital. For example, suppose that using lots of fossil fuel will produce $1 trillion in good economic activity, but also $10 trillion in costs due to climate change. The Koch brothers own lots of capital (in the form of stock, ownership rights of companies, et cetera) so much of that $1 trillion in economic benefits takes the form of increased corporate profits that go directly into their pockets. However, they only suffer the same share of global warming anyone else in the US suffers – presumably 1/300 millionth of the national cost. Therefore, since they get disproportionately large benefits but only proportionate costs, they have strong incentive to try to push fossil fuels. They are rich and powerful and usually get what they want, so probably fossil fuels will continue to be used.

But imagine that we socialized stock. Now everyone in the US gets 1/300 millionth of the national profits from good economic activity, and 1/300 millionth of the national costs of global warming. Since we already said the costs are greater than the benefits, every individual wants to fight global warming. People’s incentives finally match reality.

This is a really pretty idea, but it doesn’t seem quite right to me. By my understanding, very little lobbying is done by rich capitalists personally – and I think the Koch brothers are an exception because they genuinely hold conservative principles, not because they expect the calculus to come out in their favor. See Does Class Warfare Have A Free Rider Problem? Instead, lobbying is done by businesses directly, driven by the leadership of the businesses. Exxon Mobil hires oil lobbyists, Google hires intellectual property lobbyists, Monsanto hires agriculture lobbyists.

Would enraged Monsanto stockholder/citizens launch a corporate revolt demanding the company stop hiring lobbyists to work against the American people? I don’t think so. Corporate revolts are really really hard even nowadays when most stocks are held by a few attention-paying competent rich people. Give them to millions of not-attention-paying mostly-incompetent hoi polloi, and you think they’re going to be able to coordinate something? Besides, since stocks are tradeable, it might be only a few percent of the population who own Monsanto stock in particular; everyone else traded it away for more Google and Exxon Mobil stock. Those few percent of the population would get more money from Monsanto dividends than they would lose in the inevitable revolt of the Mutant Corn People, so their incentives would still be screwed.

So the Basic Income angle isn’t really enough to be exciting, and I don’t find the public goods/game theory angle too convincing either.

There’s also a big set of questions the book leaves unanswered – how do companies get nationalized? How are new companies formed? What happens to them?

Roemer does agree that it would be hard to nationalize all companies in a large advanced nation like the United States. In particular, taking rich people’s stock away from them without compensation would be naked theft, and the government probably couldn’t afford the compensation necessary. So he suggests that something like this be tried first in the post-communist countries or some other nation that already has nationalized industries and wants to know what to do with them.

Fine. That leaves the other big question. Suppose that the US somehow nationalizes all its industries in 1992, and a few years later Page and Brin want to start Google. What happens? Does the government say “Oh, no, sorry, we already have companies, we don’t need more of them”? Are they allowed to start it small, but the government immediately seizes it once it gets past a certain size? Are they just not allowed to sell it for stock and turn it into a corporation? Or if all of those things are okay and they can build Google as normal, what happens once most of the economy is made of these new post-1992 corporations and everything is capitalist again?

Overall there’s nothing terrible about the system in A Future For Socialism. It sure beats Stalin and even Castro. It just seems like a lot of work for not necessarily very much gain.

The last chapter is the only one in which Roemer permits himself to wax rhapsodic into the optimism I normally associate with the socialist cause. He says that he hopes market socialism is just the beginning, that this system of universal stock ownership will cause people to stop promoting public bads and care about the general welfare of the country, and this will take the form of more investment in education to train the next generation of workers, and once everyone has access to good education everyone will be just about equal and able to earn just about equal wages in the free market and then all this social class nonsense will disappear. Man, people who wrote politics before we fully understood how genetics worked were so cute!

But despite my panning the economic proposals, I learned a lot from this book and am grateful to have read it.

First, I was impressed by the assumptions. Roemer starts by explaining that yes, he knows why capitalism is a good thing, it’s reasons X Y and Z, and he’s not going to challenge or ignore that. When I hear someone making a controversial claim I disagree with, my immediate instinct is to assume that person is ignorant. Roemer proves he isn’t in precisely the right way. Before you advocate socialism, you prove that you’re not just totally ignorant of capitalism; that simplifies the process of sorting out the people you can learn from from the people you can’t.

He also makes it clear that he’s not out to change human nature. He hopes human nature will eventually change (see above about education) but he also recognizes that has to track changes in society, not be the cause of them. He writes:

[These proposals should take people as they actually are today, not as they might be after an egalitarian economic policy or cultural revolution has “remade” them. We must assume, as social scientists, that people are, in the short term at least, what they are: what can be changed – and slowly at that – are the institutions through which they interact.

Well put. Roemer establishes himself early on as someone who shares some of my basic assumptions (and can express them better than I can), which means even disagreement will be productive disagreement.

But second, and more important, this book is the first time I really had to think about joint-stock corporations. Like, I know what stock is in a “you buy it and then you get very excited or upset when it goes up or down” way, but I hadn’t thought of it as an important philosophical and political idea before, and Roemer really hammers home that it is.

The book identifies three big principal-agent problems in Soviet and other communist economic systems. First, managers employ workers to make their product, but workers want to slack off or line their own pockets. Second, central planners employ managers to run plants, but managers want to slack off or line their own pockets. Third, The People employ central planners to run the economy, but central planners want to slack off or line their own pockets. The Soviets solved these problems poorly. The central planners had no responsibility to anyone except other Party bureaucrats; the central planners could only punish managers who failed to meet their cooked-up metrics, leading to Goodhart’s Law gone berserk. And managers sometimes couldn’t promote workers in a meaningful way or fire them in a meaningful way, so workers had little incentive to do a good job.

The standard capitalist narrative is that principal-agent problems are very hard and maybe impossible on such a big scale, but this is okay, because in capitalism the people making the decisions are the ones profiting off them.

Roemer points out that’s nonsense. Most real-world capitalism isn’t the plucky entrepreneur founding a startup, it’s the giant corporation, in which a bunch of investors (who profit off of good decisions) hire a manager or CEO type person (who is supposed to make good decisions). Insofar as CEOs keep companies profitable – and it seems they do – the principal-agent problem is solved. If we want the company to be run by Stalin instead of by investors, all we need to do is use current corporate governance structure, but give Stalin the stock, and the company will be just as profitable as ever (as long as Stalin doesn’t try to interfere).

Roemer credits for this the hostile takeover method, where if a stock’s price falls too low, that means some other group can buy out all the stock and fire the manager. It’s a good point, but I can’t help wondering if another part of it is immediate, hard-to-deny feedback: that is, the existence of the stock price at all. First of all, the CEO can’t remain too deluded about her decisions; there has been many a politician who sends a country to its grave all the while hearing from a bunch of toadies that she’s making things better, but stock prices are hard to fudge. Second of all, the investors and the Board of Directors and so on have a mechanism by which they can agree upon whether the company is doing well or not, short-circuiting some of the politics that might cause them to split into factions for or against the current leadership (this is not to say there are no corporate politics, just that they are more resolvable than other kinds of politics).

The principal-agent problem is at the center of a lot of different things, so it’s really interesting to think of something as humble and unassuming as the joint-stock corporation as having in some sense solved it. I’m not sure what the wider implications of this are, but the idea of futarchy is looking better and better.

So in summary, this book’s ideas on stock distribution seem potentially okay but probably not worth nationalizing all industries over, but the real gem is the lucid explanation of the importance of corporate governance.

Link: A Future for Socialism

EDIT: Tumblr user fadingphilosophymiracle points out that if private companies were added to the redistribution scheme, it would be enough for ~$12000/person, which sounds more promising.