Here is a short piece on my primary area of interest. I think readers unfamiliar with the terminology should still get the general drift.

 

The economics of collective ownership

 

Generally any discussion of the economics of collective ownership is short and sweet. We are told that such a system is plainly and obviously irrational and the experience of places like the Soviet Union confirms this.

 

Making some inroads into that sort of stuff is a priority job as far as I am concerned. Number one on my list is taking aim at the idea that a system that eliminates market relations between economic enterprises is not able to carry out rational economic calculation. We are told that it  would be unable to use a properly functioning price system to efficiently allocate resources and would have to rely on centralized coordination which is totally impractical.

 

Cockshott and Cottrell address this by accepting the former claim while putting up a case for an effective system of centralized coordination.  It looks plausible. However, I have big doubts.

 

They argue that the problem of solving systems of millions of simultaneous equations is now feasible using a short cut algorithm that gives very quick results that closely approximate the true values. (In minutes or hours rather than years or centuries) The number of equations equals the number of separate products or activities in the economy defined very specifically. Cockshott and Cottrell refer to a figure of 24 million for the Soviet Union. For far more advance economies the figure would be a lot higher.

 

(The equations require a simultaneous solution because one variable (e.g., output for particular good) cannot be determined until another one is determined, however, this other variable cannot be determined until the first variable is determined.)

 

My suspicion is that the level of detail would make this impractical for day by day decision-making.  As far as I can tell you would need, for example, to specify not just the number of screws but the number for each specific type of screw. Although the system would allow some consultation between supplier and user industries to sort out specifics.

 

Furthermore, they do not spell out how the input-output coefficients are determined. Perhaps the costs of current and alternative production methods are continually being recalculated on the basis of changes in direct labor requirements and the cost of inputs. If an alternative production method becomes cheaper, coefficients are changed accordingly. However, this would not be a simultaneous adjustments process. When one production unit changes its coefficients it will throw out the calculations of other units requiring further adjustment.  I don't know what a more accurate and elegant ex ante simultaneous procedure would look like or how complex it would be. Hopefully the decentralized ex post adjustment process would gives results that do not diverge too far from the optimal.

 

And regardless of how the coefficients are determined they are going to vary with the level of output,  which throws the whole idea of using input-output analysis into doubt given that you would be using it to determine the level of output.

 

Input-output analysis is more plausible for longer term investment planning. Here you would not be trying to centrally coordinate current production but trying to determine how much each industry should grow relative to others.  Input-output analysis would simply be a tool used in allocating the economy's investment budget.

 

It is going to take a while for me to get my head round this stuff. Anyone interested in following up what Cockshott and Cottrell are saying should look at their material here. http://ricardo.ecn.wfu.edu/~cottrell/socialism_book/

 

In the case of their 1993 book, look in particular at Chapters 3, 6 and 8. Also see 'Calculation, Complexity and Planning: The Socialist Calculation Debate Once Again' (Review of Political Economy, July 1993): calculation_debate.pdf.

 

While doubtful about a system based on complete central coordination, I am far more confident about refuting the claim that a collectively owned economy could not use a proper price system.  I touch on this in Bright Future and also argue that a collective economy would actually make better use of a price system than capitalism. In other words it is not a case of mimicking or simulating the results of a market economy but developing a system where economic calculation based on decentralized price adjustment is freed of its capitalist fetters.

 

I think the main point to make is that inter-enterprise transactions would not be market exchanges. The output of an enterprise is collective property and does not belong to it and likewise no one has a personal claim on any of the revenue received for the output. At the same time the inputs assigned the enterprise such as raw materials and machinery "belong" to the enterprise only in the sense that it has been provided with an exclusive entitlement to use them (usufruct right) on the basis that it would put them to the best use from society's point view.

 

Output is driven ultimately by the demand for final goods, i.e., individual consumption, public goods and net investment. The wages of workers paid in labor tokens equal the total value of the economy's output (except possibly for a small rate of return on investment which I won't go into now). They then pay a poll tax and a rent on residential land to cover spending on pubic goods and net investment.

 

Producers of final goods would rely on a range of measures to determine the demand for their products based on consumer surveys, information from government agencies on investment and other government spending plans. This gives them the information they need to make bids for inputs. This determines the demand for their input providers whose demand in turn determines the demand for their inputs and so it goes down the line. (Economists call all this 'derived demand'.) The fact that interdependent decisions are not made in a simultaneous fashion means that errors (excess supply or demand) will occur. However, given the better flow of information in the absence of commercial secrecy and dissembling, the extent of the errors would be less than those under capitalism.

 

This use of prices would need to be clearly distinguished from what is oddly called "market socialism". All "market socialism" schemes involve enterprise output belonging to owners who are not society as a whole. Any net revenue from the sale of output belongs to them. Various ownership systems have been proposed and include: worker cooperatives; a system where every adult has an equal share of stock which can be bought with and sold for other stock but never cashed in ("coupon socialism"); and stock ownership by state banks.  By "market" they explicitly, and quite correctly, mean the profit motive.

 

Theses are the primary tasks as I see them:

 

1. Reach some clearer conclusions about the Cockshott and Cottrell model;
2. Spell out the workings of the collectivist price system in more detail;
3. Look at how capitalism fails to make the most effective use of the price system;
4. Argue that it is both plausible and ultimately better to do without the profit motive; and
5. Spell out transitional arrangements.
   

It would be good to be at least a blip on the radar when "the market" is discussed, with supporters of the profit motive giving us at least a dismissive glance. The latter includes broth full-throated libertarians and mealy-mouthed pseudo lefts with their market socialism or mixed economy.

 

There is also a public discussion around intellectual property rights and the pricing of public goods such as computer software, music and movies that is relevant here. While joining in the chorus of opposition to the present arrangements, we need to develop a coherent view on how a collectivized economy would do better.  The failure of capitalism to provide every child in developed countries with a cheap laptop (let alone every child on the planet!) is another topical issue which could be used to make similar points.

Hi Dave,

Glad you are working on this! Agree on the importance and general approach ie:

...the main point to make is that inter-enterprise transactions would not be market exchanges. The output of an enterprise is collective property and does not belong to it and likewise no one has a personal claim on any of the revenue received for the output. At the same time the inputs assigned the enterprise such as raw materials and machinery "belong" to the enterprise only in the sense that it has been provided with an exclusive entitlement to use them (usufruct right) on the basis that it would put them to the best use from society's point view.

That is essentially the difference between an "enterprise" (with its own "bottom line") and an establishment. Already the economy is dominated by gigantic transnational enterprises that operate enormous numbers of establishments in multiple economic sectors as well as locations. Even where there is formal separation into multiple corporate entities (including state economic institutions) the interlocking common ownership (including subordination to state budgets) implies the same issue of allocation rather than purchase and sale. The transfer prices and principal-agent issues involved are notoriously dysfunctional, especially with so much effort devoted to both indirect controls through regulation and taxation and the avoidance of these.

So the key issues are how workers taking control of enterprises and establishments are to take (both centralized and decentralized) decisions that "put them to the best use from society's point of view". Giant transnationals attempt to get decentralized lower levels of management to act in the interests of the enterprise as a whole and run straight into conflict with their own systems of rewarding them which perversely encourage them to scew each other as well as the rest of the economy.

Closely related issue is how workers do that in the "finance" sector that replaces capital markets in deciding allocation of funds for new activities and establishments. That too should be decentralized as well as centralized. Lots of different bodies able to fund projects, with more people involved in decisions about that than the small minority of "investors" currently doing it (or having it done on their behalf by financial analysts etc).

I haven't read the Cockshott and Cottrell stuff. From quick glance I recall reading similar a long time ago. Your summary suggests they are not addressing the real issues.

You mentioned residential land rent. That alone implies an additional number of prices to be "calculated" equal to the total number of residences since each is in a different location and different state of repair. There is quite obviously no meaningful basis on which input coefficients could be assigned and such calculations made in a communist economy, just as there isn't in a capitalist economy.

Likewise you mentioned "public goods" such as computer software, music and films. This extends more broadly to embrace R&D and culture generally, and include non-pure public goods aspects of infrastructure and plant investments generally. Most economic decisions are not about matters that could be meaningfully expressed in terms of input output coefficients.

We would expect to be massively increasing the rate of investment in R&D since that is so productive and capitalism is such an obvious fetter limited by the unprofitability of investments that undermine existing capital values. The impression I have (perhaps unfairly) is that C&C somehow imagine a more static economy with fixed coefficients.

Another aspect is that much of what is produced is a "joint product". Again there is no input output technique for assigning prices to the multiple outputs.

This quote from Marx they mention is worth elaborating on:

The use of machinery for the exclusive purpose of cheapening the product is limited by the requirement that less labour must be expended in producing the machinery than is displaced by the employment of that machinery. For the capitalist, however, there is a further limit on its use. Instead of paying for the labour, he pays only the value of the labour-power employed; the limit to his using a machine is therefore fixed by the difference between the value of the machine and the value of the labour-power replaced by it.

Pushing down the rate of return on funds invested to just the "virtual depreciation" corresponding to increasing productivity and pushing up labor values to absorb the whole social product (from which social investments as well as collective consumption etc are deducted directly) implies that economic calculations will result in choice of far less labor intensive techniques than under capitalism where labor is cheap and likewise result in decisions to invest in developing new even less labor intensive technology more rapidly.

I would suggest focus on the actual mechanics of transition. Assume revolutionary government faces the problem of transforming the existing enterprises with their existing market relations in a direction that rapidly and steadily moves towards communism (including shifting the rate of return down and wages up and investment financing from wages instead of from profits). What concretely starts happening in both economic and state institutions?

PS I just skimmed (very rapidly and superficially) the July 2004 preface  (in  English) to  Czech edition of their book.  Didn't notice any attempt to think like this.

Arthur,

Thanks for your comments. I'll just take up three points and come back to other stuff  later.

1. I'm not sure what point you are making on I-O and public goods. Their production would be considered final output and their output coefficients would be a row of zeros. While Pirates of the Caribbean is an input into a number of industries including cinemas and DVDs it does not require extra "units" because of the non-rivalrous nature of public goods. (Consumption of the movie by one person or business does not reduce its availability to others). However, a lot of industries would have being supplying goods and services in the production of the film so its input coefficients would include some non-zeroes.

Certainly every film will have its own coefficients because each varies in its requirements. Also because a movie is made over time the coefficients would vary from week to week or however often the calculations were made. So it would be rather detailed and complex. However, this could also be said about one off private/rivalrous goods including investment projects.

2. C&C have a section on joint products. I haven’t read it myself yet so I can’t say how they deal with them.

3. By coincidence, C&C also mention land rent as a source of government revenue (and imagine a range of ownership/ tenure arrangements for the residence itself). The rent would be used to ration scarce things like ocean views and proximity to facilities and would be determined by supply and demand. It would not be determined by the I-O process and would have not impact on it

I can't remember if they mention it, but there would need to be rent on land occupied by businesses for comparable reasons. The benefits of having lots of room and being close to suppliers and customers will have to be weighed against higher rents. This will affect production methods – more compact equipment, lower inventories, greater use of transport – and hence the coefficients. Businesses would look at the costs saving from being in a good location and bid accordingly. Properties would go the highest bidder. (Bids would not be an actual payment and like much in a collective economy would rely on honest reporting.) 

So I don't see any problem with land rent and I-O.

On all 3 the point I was making was calculations based on input output coefficients are not central to the (still necessary) economic decision making.

Forecasting production costs of a film is not  qualitatively more difficult than other such estimates.  These  forecast  costs are more or less completely rivalrous with other opportunities for using the same  resources  (including other possible  film proposals).

But it is only an  artefact of capitalist market  relations  and  (already controversial)  "intellectual  property" laws which are blatantly a fetter on production  that these costs  are in any sense  an input  to other  industries such as theatres and  DVDs.

So assume the only costs for theatres are the actual physical ones and likewise for  DVDs and  broadcasts, with no "royalties" and therefore no royalty based mechanism for repaying the production costs of the film.

On what basis does one take the economic decision to provide funds to this collective wishing to produce this film rather than that collective wishing to produce that film? who takes the decision and how?

With joint products and land rents there is a demand  function that has to  ration the fixed supply or fixed proportions of joint supply among different uses by a price mechanism unrelated to input output coefficients.


It is the total outputs of joint product industries and public goods industries and other industries across which labor has to be allocated and supplies and demands balanced. Dividing it up into a price per unit is a secondary aspect of "marketing" (much of which is devoted, under capitalism, to attempting to create artificially separate markets for different portions depending on the price elasticicities of different classes of consumer so as to extract the maximum consumer surplus from each).

Arthur

 

I am not sure what you are saying about public goods. It is true that I-O does not help much with determining final  demand. All it can do is help determine whether a particular final demand is plausible given the need for intermediate goods. This is true for both public goods such as movies and private goods such as toothpaste. I can understand how I-O is less important for public goods in production. With standard production capacity you need to know how much capacity is needed to meet expected final demand and intermediate requirements in production. That is not a consideration in the case of public goods. The investment required is the same regardless of the level of output that it contributes to. Research and development is the primary example. Another example would be a plant built to meet demand five years down the track. This gives you a quasi public good in the short term as you have plenty of slack to play with.

 

I still think we have a fair way to go to refute C&C. My hunch is that the real problem with relying on I-O and centralized coordination lies somewhere in the way production is something carried out over time. As well as pointing to its failings we would also need to show that these make it inferior to a system that relies on decentralized, non-simultaneous decisions.

 

C&C seem to be saying something similar to you about the rate of return on investment

 

A zero discount rate could be argued against on both subjective and objective grounds. On the principle that jam today is better than the promise of jam tomorrow, it may be better to save effort this year even if that entails more work in the future. A subjectively determined discount rate could conceivably be set politically (with people being allowed to vote every few years on whether they wanted the discount rate raised, lowered or left the same). But a more objective approach is possible: one could use the average growth rate of productivity as the discount rate. The rationale for this is that if labour productivity doubled every decade then one hour of labour now would be equivalent to half an hour^’s work by the end of the 1990s. Since we can never accurately know the future, it would be necessary to estimate future productivity growth on the basis of recent history. {page 74 of 208}

 

You say:

 

Lots of different bodies able to fund projects, with more people involved in decisions about that than the small minority of "investors" currently doing it (or having it done on their behalf by financial analysts etc).

 

There would need to be agencies or branches of agencies that specialize in assessing different type of projects. I think I remember reading an article years ago which looked at the probability of getting correct decisions and the number of funding sources. It may have been in the context of research funding. All sort of errors and biases can be cancelled out perhaps. You would also have the opportunity to compare performance and learn why some agencies were better than others at selecting good projects.

 

Funding needs to range from small short term grants for feasibility studies to full blown construction projects spread over a number of years. Organizations might specialize along this funding spectrum.

 

There would need to be a more centralized body deciding on how total investments funds were distributed.  That needs a bit of thought. Maybe past performance would be one factor.

 

In my scenario there would also be funds much like circulating capital sloshing around. The revenue and outgoings of establishments will not be in sync so some of the time they will have bank account surpluses and at other times overdrafts.

1. Yes, the non-zero discount rate is saying much the same as me. I regard the "objective" rate based on expected productivity growth as simply replacement of "virtual depreciation" (to maintain same labor intensity/organic composition of capital) in the same way that other depreciation has to be included in costs to replace the stock of means of production that are used up over a longer period rather than consumed directly. So including that is essential for a labor theory of value.

Note that that the only connection between depreciation funds (whether physical or virtual) and investment is the implication that all such funds will in fact be used to renew the existing stock (false only when choosing to run it down). This is not investment but maintenance.

The existence of virtual depreciation and hence a positive discount rate implies that there is additional investment occurring which increases productivity by lowering the labor intensity of production by accumulating an increased stock to use with more productive and less labor intensive techniques (and/or by investing in R&D which produces new technologies).

Under capitalism the source of investment funds for expanded reproduction is the accumulation by individual capitalists from their incomes based on profit, rent and interest extracted as surplus value by paying workers less than the value of their labour power (with another part of their incomes maintaining and enhancing their "lifestyles").

The transition would be to investment funds allocated directly, under the political control of the workers, from the value added as labor costs. So labor costs are much higher (including the entire investment funds) and the rate of discount is much lower (excluding them). Hence economic calculations would result in choices of much less labor intensive technology as workers would be recognized as being the source of ALL value added rather than ANY of it being attributed to the mysterious "productivity of capital". The (much smaller) discount rate is simply recognizing the  time dependent  nature of the  value added by labor.

2. The expected net rate of return (including the discount rate as part of costs) for any economic activity would be zero.  Activities would be expanded or reduced to ensure they can break even. This  is the  opposite of  (and requires an entirely different management mentality)  from  maintaining  surplus  capacity so  as to  keep  prices up and maximize profits. Instead of funding all and only those projects that show a positive rate of return with the complicated effect of demand elasticities being taken into effect to keep prices up you would have simpler calculations in which prices falling as output expands is a better outcome while making more profit than "breaking even" is a worse outcome.

3.

In my scenario there would also be funds much like circulating capital sloshing around. The revenue and outgoings of establishments will not be in sync so some of the time they will have bank account surpluses and at other times overdrafts.

That is also true of individual lifecycles with accumulation and spending of savings. There would be no connection between the inclusion of the standard small rate of discount in that and the funding of investment for productivity growth.

4. My point is that this "funds much like circulating capital sloshing around" isn't a central issue. Under capitalism it is handled routinely by banks with not much economic decision making involved. The main complication is the risk assessments due to general dishonesty, raising investment funds as circulating capital etc etc. This sort of stuff is what the input output coefficients deal with successfully and it just isn't worth remarking on.

5. The real issues are economic decisions about whether to initiate an enterprise (or even an establishment) or expand or contract it, try to develop a new technology etc. The investment decisions must be taken based on future expectations rather than known coefficients. They do not result in cash flows that are merely out of sync transiently but final consumption decisions to spend on producing something that will be of benefit but will not flow back as a future cash flow like circulating capital. The decision to produce a film or develp a technology is similar to the decision to consume a a bowl of fruit. We do it for the benefit obtained rather than the discounted cash flow expectation. Making economic calculations about that is necessary for large scale projects in a way that it isn't for personal consumption decisions. Simply classifying both as "final consumption" does not address the issue.

6. Capitalist investors (or their flunkeys) make these decisions based on maximizing the rate of return on their capital based on their expectations about the future. If that remains the criteria then the economy remains capitalist  (state capitalist). The issue is what criteria would we transition to in making economic decisions when such decisions have become part of "final consumption" rather than "investment of capital".

7. In particular with (pure) public goods, capitalists can only directly invest  via state enforced monopolies that enable maintaining a price well above the (zero) marginal cost of further use of the public good. This price level is set to exclude at least some people from using the public good or it has not been set high enough to maximize profits. So it is inherently a fetter on production. We unfetter production by making such public goods free. But we also have to determine how the decisions are to be made in the absence of such calculations about what price can extract maximum consumer surplus from consumers.

8. Capitalists can also indirectly invest via interest on state debt, relying on the state being able to  collect future  tax revenue  from the results of productive investments in public goods such as infrastructure.  Presumably corresponding mechanisms would be more widely applicable without having to fund parasites from state debt. But the limititations of state bureaucracies evaluating productive investment projects (and collecting tax revenues) are notorious.

9. For example a film studio wil invest hundreds of millions of dollars in a film proposal based on the (statistical) expectation that it will be among the films that don't flop and return more than enough from ticket sales, DVD sales broadcast royalties etc etc to cover both its own costs and the flops. Without the actual sales (including broadcast audience surveys by which advertisers pay broadcasters to pay publishers) there would be no criteria for the film studio to make the decision.

10. I would assume the criteria for evaluating whether a decision had been successful for films would be primarily based on audience surveys (omitting the superflous advertisers) and without any connection with the costs of broadcasting or receiving broadcasts.

11. So once a film has been produced it would be available to anyone who wants to watch it for the cost of reproduction. This implies that the there is no return to the film studio for its hundreds of millions of dollars investment. Absolutely zero. It is certainly true that this means the investment in the film is part of final consumption. But that does not answer how decisions about that final consumption are to be made. Details need to be worked out!

12. This is essentially marginal cost based pricing ie labor theory of value. As you mention there is quasi public goods situation in almost any capacity installation decision. Capacity has to be installed in lumps to meet projected future demand. Only during a bottleneck due to planning mistakes would the plant capacity actually in use not have some slack and therefore become a component of cost calculations. In the normal situation the decision to install the capacity was a "final consumption" decision that results in a reduction of marginal costs with corresponding reduction in prices and no recovery of the average costs. The result is that most industry is in a similar situation as pure public goods industries like films. Their marginal costs, on which rational pricing should be based are well below the average costs that would enable them to break even.

13. I maintain that industry should transition, as rapidly as possible, to such marginal cost pricing. The implication is that "final consumption" from workers value added includes not only their personal consumption, but that of all "pure" public goods and the vast majority of investment decisions in large scale industry. They are all "final consumption" paid for directly out of value added by workers rather than indirectly by transforming that value added into profit, rent and interest belonging to capitalists and persuading those capitalists to reinvest part of it as long as even more surplus value comes back to the capitalists later as a result of doing so.

14.  Both the input output coefficients of C&C and more decentralized arrangements for calculating marginal cost prices only cover the circulating capital sloshing around. That stuff is routine. The problem is how to take these "final consumption" decisions which are also the important investment decisions (also including the reinvestment of depreciation and virtual depreciation).

15.

There would need to be a more centralized body deciding on how total investments funds were distributed.  That needs a bit of thought. Maybe past performance would be one factor.

Both failing to achieve "break even" and exceeding it would equally reflect poor past performance so far as the circulating marginal cost priced stuff is concerned.

But as far as average costs are concerned, the results of every hundred million dollar film budget would be a "past performance" of a hundred million dollar loss. Likewise for billions on plant capacities. We need to be able to specify economic criteria for such "final consumption" decisions that can be applied in advance and evaluated for future improvements in retrospect.

 

 

Re-reading my last post I notice it is pretty unclear.

I may have given the impression of treating ALL investment in "fixed capital" such as plant capacity as though it was a sunk cost. That isn't what I actually mean to say. Often average costs are recoverable as depreciation etc.

I'm not going to attempt to formulate a more precisely worded position now but intention was merely to stress that WHEN there are sunk costs, attempts to "recover" them are merely a fetter.

Better avoid that issue of slack capacity and "quasi public goods" for now and focus on "pure" public goods to clarify the issue.

Here's the issue more concretely.

According to the film industry we require such phenomena as "Digital Rights Management" hardware costs and punitive enforcement of copyright to prevent people from viewing films without helping to pay for them. Otherwise it will be uneconomic to produce (big budget) films.

According to a significant and growing section of the population it is perfectly reasonable to copy and share films and people should not be prevented from viewing them once they have been produced without having to help pay for them.

That second view should be supported and used to highlight capitalist property relations being a fetter.

But in doing so we have to spell out what alternative to capitalist property relations would be used to pay for producing such films WITHOUT the absurdity of hindering people from watching them once produced.

1. Yes even with slack capacity you could still have full cost recovery through charges for  wear and tear. In fact if a production line depreciates through wear and tear rather than aging or obsolescence you really can't talk about under use because using it less now simply means that you can use it more later on. Depreciation through aging or obsolescence are where we find public good issues. In these cases there is no rivalry between use now and use later and they are not part of marginal cost.

So, when you add these to R&D, the learning curve and public consumer goods, public good provision looms very large. That means a big focus on how we evaluate and rank them for funding purposes.

While marginal cost pricing can be superior to average cost pricing, it can also be inferior if the system of public good provision is dodgy. It's not much consolation only having to pay marginal cost, if you can't get the goods you would prefer.

2. What you (and C&C) are saying about  the discount rate seems quite plausible. Although I will need to get a better handle on it. It would be good to be able to clearly and concisely demolish the  bourgeois view on this subject seeing it plays a central role in their apologetics.

3. I'm not sure if this helps - Irrespective of whether central coordination or a decentralized price system is the appropriate method for immediate production, longer term planning (i.e., all the big investment and R&D) would look pretty much the same in both cases.

4. I mentioned "funds much like circulating capital sloshing around" as a mealy mouthed way of raising the fact that tokens will  be circulating a bit like money.  They are not just like theatre tickets or vouchers that get torn up or cancelled by the recipient. This could be seen as a tad unorthodox.

5. More later.

Sorry Travelling so not much time. Off the top of my head the technological change variable might be the biggest influence in the way we plan. The rate of automation and redundancy. If you look at depreciation then "later on" may have a cost as things have moved so fast the machinery may well be redundant. I would hope change would be rapid and we would have to just ditch things. Will try to get time to make more sense of this.

Tom

It is certainly possible to envisage all plant and equipment, and consumer goods having short lives because of obsolescence.  However, keep in mind that a technology or product does not become a candidate for the junk pile the moment something better comes along.

In the case of plant and equipment, the new one would have to have an average cost which is less than the marginal cost of the old one. The existing plant and equipment is a free gift from the past (a sunk cost) and does not come into present cost considerations. However, the new one would have to be built.

There is something comparable in the case of consumer goods. You already have a perfectly good computer which will keep working for quite a while. You are not going to ditch it unless you value the improved features in the new computer sufficiently to pay for the new computer. You are paying for the added benefits of the computer and not the total benefits.

David I think TomB is pointing out that the rapidity of technological change already under and capitalism and its expected acceleration as we move beyond capitalism has qualitative effects on the way we do economic calculations.

With Science and R&D as the most important productive force and virtual depreciation (obsolescence)  dominating other costs of production you get a different way of looking at things.

BTW I've now read some chapters of the C&C book on socialism. Although I don't like it much generally, I was struck by the very clear explanation of capitalists squandering labour on labor intensive technology around p49:

Capitalism was a clear advance on slavery. The capitalist buys his labour
by the hour and is reluctant to waste it. He employs time and motion study to
check that he is making good use of what he has bought. But still, he buys his
labour cheap—if he did not, there would be no profit in it. Here is the paradox:
what is bought cheap is never truly valued. The lower are wages, the greater
the profit; but when wages are low employers can afford to squander labour.
The capitalist is one step above the slaveholder in rationality, but that step can
be a small one.

Re your point 2:

2. What you (and C&C) are saying about  the discount rate seems quite plausible. Although I will need to get a better handle on it. It would be good to be able to clearly and concisely demolish the  bourgeois view on this subject seeing it plays a central role in their apologetics.

I do think its worth really getting a handle on it as a clear and concise demolition of bourgeois apologetics. Basically their con trick is that capital "produces" profit which belongs to capitalists who "invest" it. (Making heroic sacrifices to restrain themselves from consuming it all instead, accepting frightful risks that their portfolios will disobey the law of averages and so forth).

It elaborates the well known theme that profits come entirely from surplus value added by workers so therefore the transition would be to workers (collectively) deciding on their investment policies, because the resources/funds are drawn entirely from labor/wages rather than capitalists individually deciding on the their investment policies because they don't have resources from profits to invest when the net rate return is zero corresponding to wages being the entire value added.

This ties the broad critique to a direct challenge to the very thing that bourgeois apologists claim as their greatest strength - greater efficiency and dynamism of market pricing. Shows that their price system is broken, precisely because it has to obscure the real origin of surplus value and investment and ours would therefore more rationally encourage less labor intensive techniques and unleash dynamism.

Also ties in to critique of "conservationism". Unlike capitalists endlessly trying to "conserve" their capital and expand it, we would be quite cheerful about writing off stuff as obsolete and taking the likelihood of doing so into account in advance as part of its cost of production.

BTW I certainly agree that quasi public goods would be very central. But that has implications for circulation of money as opposed to redemption of "tickets".

For example if plant capacity is installed on the basis that construction costs for installing it would break even with rental stream from allocating it to relieve congestion of capacity for productive use that appears to take the same form as capitalists building and leasing plant. But if obsolescence or other changes drives down the appropriate congestion rental unexpectedly this doesn't conflict with establishments continuing to use the available capacity at lower rental costs (with corresponding lower output prices and general benefit).

It simply cancels the "tickets" that were issued. Its just an old calculation error being corrected rather than a devaluation of some property owner's capital with financial implications sloshing around the circulation of working capital across the board and the sort of "crises" that capital has to go through to bring prices back into balance.

A crisp way of expressing the absurdity of capitalist pricing is that the goal of profit maximizing requires complex calculations as to how much to constraining supply given the extent to which demand will fall given increased price (and corresponding calculations on cost side).

You stop raising the price when the lost revenue from decline in sales exceeds increased profit margin on each sale.

This is inherently anti-social, compelling some potential consumers to do without when production capacity exists to supply them. The sole beneficiaries of the anti-social behaviour are the capitalists making profits.

Transition would be to much simpler price  calculations that simply raise  congestion/capacity  prices/rentals to level where  slack  capacity exists/congestion disappears  and no  further  despite the additional profit that could be made by raising further by wasting some production capacity in order to keep the profit margins higher.

Essentially this describes the underlying mechanisms of the economy as a whole, not just microeconomics. ie unemployment has to be maintained at a "sufficient" level to keep wages down and profits up and capitalism, hence the "business cycle" - whereas transition would be to full employment with wages as clearing prices and poll taxes financing investment.

The funding of big budget movies is one issue where we could connect with the here and now.

Arthur said

According to the film industry we require such phenomena as "Digital Rights Management" hardware costs and punitive enforcement of copyright to prevent people from viewing films without helping to pay for them. Otherwise it will be uneconomic to produce (big budget) films.

According to a significant and growing section of the population it is perfectly reasonable to copy and share films and people should not be prevented from viewing them once they have been produced without having to help pay for them.

That second view should be supported and used to highlight capitalist property relations being a fetter.

But in doing so we have to spell out what alternative to capitalist property relations would be used to pay for producing such films WITHOUT the absurdity of hindering people from watching them once produced.

We have to figure out both how the total budget is determined and how it is allocated. I don't think I will have much to say until I have revisited the literature on public good provision. Although two points presently come to mind:

1. Ultimately we will get the best outcome if there are lot of  film makers who want to produce films that are both popular and uplifting. They see that as the purpose of their filmmaking.  This is the best guarantee against films mainly catering to a cultural elite or being mindless pap for the masses.
2. The movie industry at the moment is no doubt subject to Hotelling's law with different studios or fund providers trying to capture the same middle ground. This leaves consumers confronted with a one size fits all, the lowest common denominator.  Where funding is more coordinated it can be distributed to ensure that people's diverse tastes are catered for.

I think the cost of producing movies is exteremely exaggerated.  Plenty of successful low budget movies. (that are still overpriced) Hope we aren't going to pay tom cruise 100 milion for a movie.

Anyone who wants to make a movie should be able to do so. This is almost possible now. With utube internet etc  anyone can get started and schools teach this stuff. If the product is successful then funding should be provided. Anyone who wants to sing or act should also be able to do so and people will listen to whoever they like. We have heaps of amatuer theatre where no one gets paid. Bob dylan busked.

We should provide material for the "arts" and usage according to how succueesful the producers are. The question of course, how much do we allocate to the "arts"? How many hospitals libraries, schools, politicians, etc.  Assume an average wage at least and then some value to the service provided, but will have to spend some time on this later.

Sorry if a bit vague will try to clearit up, still travelling

I want to suggest two mechanisms that would lead capitalism to be tardy in introducing new technology.

1. Capitalists will only undertake the necessary investment required to adopt an innovation if they expect to get an exorbitant rate of return.

(a) New production method

A new cheaper production method should kick in if its average cost is lower than the marginal cost of the old incumbent method.*  However, under capitalism the average cost includes an exorbitant rate of return. So a new technology has to pass an excessively severe test before it is accepted.

(b) New improved product

Where there is a new improved product requiring new plant, equipment, skills etc, it should be introduced if consumers value the improvement enough to justify the cost. However, once again cost includes an exorbitant rate of return.

2. Where incumbent firms have the ability to prevent or deter entry by others, the rate of return is not the only problem. They impose an even more severe test on the innovation

(a) New production method

Certainly adopting a new better technology will give the firm a new lower marginal cost. The new lower, profit maximizing price will bring in more revenue net of margincal costs.** However, weighed against this increase in net revenue is the additional fixed costs from the new technology. It is not hard to imagine these additional costs frequently outweighing any additional revenue. Where this is the case, the monopolist won't be interested in making the change.

(b) New improved product

In the case of a new improved product, the incumbent firm would have the benefit of a demand curve further to the right of that of the old product (the new product is more highly valued) which would mean a profit maximizing price which brings in more revenue net of marginal cost. However, for the firm to be enticed by that it would have to exceed the additional fixed costs required for the new investment.

* As I mentioned in an earlier posting: "In the case of plant and equipment, the new one would have to have an average cost which is less than the marginal cost of the old one. The existing plant and equipment is a free gift from the past (a sunk cost) and does not come into present cost considerations. However, the new one would have to be built."

**  The profit maximizing price is set where  marginal revene equals marginal cost. Or as Arthur put it using plain English: "You stop raising the price when the lost revenue from decline in sales exceeds increased profit margin on each sale." (Arthur 7 June 2007)  I'm not sure of the maths (or a verbal equivalent) but I think I'm right in saying that as marginal cost falls net revenue will increase. It certainly looks like it when I draw a demand curve, marginal revenue curve and move the marginal cost curve up and down. Nutting this out is a little project for me.

Here is a piece to keep this topic ticking over. I've got a lot of work to do on this stuff so I think my future contributions on other issues will be pretty limited.

 

Collective ownership and the price system

 

 

There is a common belief that an economy based on collective ownership could not decentralize resource allocation through the use of a price system. This is based on the misconception that such a system of allocation would necessarily entail a market exchange between suppliers and users of production inputs.

 

Under collective ownership the relations between enterprises or establishments are not market ones. When for example a flour mill or distributor supplies flour to a bakery there is no exchange of ownership. Both before and after the physical transfer the flour is the property of society.

 

Does this prevent decentralized resource allocation based on a price system? No. However, transactions will be very different in a number of ways from market exchanges. Two stand out.  First, no individual or individuals have a claim on any net revenue nor a liability for any loss. The only source of income is wages. Second, the aim is to maximize economic welfare rather than profit. If a consumer or input user is willing to pay the cost of production they are entitled to the product. There is no attempt to make a profit at the expense of the customer by creating an artificial shortage by either restricting the use of existing capacity or under-investing in new capacity. The result will be what under capitalism would require the unachievable conditions of perfect competition.

 

Under such a system all demand is directly or indirectly derived from wages – the expenditure of take home wages and revenue from tax deductions (preferably a poll tax). The former is spent on consumer goods and services and the latter is spent on investment, public goods such as research and development, and the cost of government. Revenue or expected future revenue from these forms of final demand provide producers with the means to acquire inputs from suppliers. This in turn provides these supplier with the revenue to obtain the inputs they require and so on down the line.

 

Production establishments place a limit on what they are willing to pay for inputs on the basis of known or expected demand for their products. This includes new investment and the funds required for it. At the same time they set prices for their own output which aim to equate supply and demand. If deemed appropriate these decisions may be coordinated or decided at an industry, regional or even higher level.

 

Producers will endeavor to minimize costs. In the short term, they will do this by choosing the cheapest variable inputs and economizing on their use; and in the long term by replacing old technology by cheaper new technology. 

 

Cooperation will be the predominant feature of relations between establishments – for example, no commercial secrecy or intellectual property rights. However, there will still be forms of competition which could undermine this and will need to be kept under close scrutiny. These rhetorical questions should make the point. Who wants to be involved in putting in a losing bid to design or build some facility, or to obtain some earmarked R&D funds? Who wants to be involved in developing a technology which is pipped at the post by another team? Who wants to be working in a production facility which becomes marginal because of the superior performance of other facilities producing the same output?

 

There will still be markets for consumer goods and for labor power, with workers providing the latter to society in exchange for the former. However, these will be different kinds of markets from what we are used to under capitalism. In the case of consumer goods, suppliers will be there to benefit consumers and not shareholders and extravagantly overpaid executives. In the labor market workers will receive the full value of their output, the total final product of society. While one's current job will not be guaranteed (and is very likely to be temporary in a dynamic economy), work (and a wage) can be guaranteed because unemployment is no longer used to keep down wages, and the elimination of the capitalist financial system and the necessity to make a profit removes the possibility of recessions and depressions.

 

Initially there will be a need for significant wage differentials to encourage better performance, training and the taking on of responsibility. Incentives are required both as an inducement to the less well motivated and to avoid resentment by those who feel that they are doing their best but others are not.  The need for this should diminish as work, work relations and people change for the better. Wages will also be affected by temporary excess demand or supply of particular types of labor. These will be kept within limits by retraining for the jobs in short supply or by increased automation if the work is relatively unattractive.

 

Businesses and households will pay a rent on land. For the former the rent is traded off against the lower costs of a better location and more space. Households will pay higher rent for a more congenial location in high demand. The rent revenue will be another source of government funds along with the poll tax.

 

Business premises are collectively owned and a hire fee is incurred if they have an alternative use. Individual residential housing will be owned or hired. Private owners will want the right to build and renovate and hire out their houses or to take in borders. Most of the housing stock available for hire will be collectively owned and managed by agencies set up for the purpose. The hire fee will need to cover depreciation and maintenance and residential prices the cost of replacement. Like other prices these will be tossed about in the short term by excess supply and demand.

 

Establishments will be scrapped or restructured if they cease to be economically viable. Vertical and hierarchical coordination between establishments could be quite fluid. They will be loosened or strengthened to meet changing circumstances.

 

A banking system will be required for two reasons. Firstly, production establishments will have a mismatch between revenue and outgoings leading to surpluses and overdrafts. Secondly, individuals can either deposit funds for later use or borrow these funds to bring forward spending.

 

Retirement insurance would make sense. Given that you do not know how long you are going to live, you can't simply save for old age. With insurance, everyone saves on the assumption that they will have the expected average lifespan. The surplus left by those who live less than the average then funds those who live longer. Whether current premiums are more or less than outgoings will depend on the age structure of the population. The government would have to cover any deficit and invest any surplus.

 

If it is deemed appropriate to subsidize childrearing activities such as education and care, this could be done through a system of vouchers that would cover some or all of the cost. Providers would set themselves up in much the same as those in other industries. If new investment is required they would need to  convince a funding agency to provide the funds. A bank would also need to be convinced to provide overdraft facilities. A provider that failed to attract sufficient clients would soon find themselves out of business.

 

There will need to be numerous agencies responsible for providing funds for investment and R&D to existing enterprises and new start ups. Agencies and individuals will specialize in funding particular industries based on expertise in the area. Also those seeking funds will have a number of alternative agencies that they can apply to. Those agencies that make more than the normal number of poor investment decisions will be disbanded, subject to reorganization or entrusted with less tax funds. These decisions will be made by a monitoring body. Furthermore, good decisions are a matter of chance as well as competence, so I think having a larger "sample" of decision makers in itself improves the average outcome.  (My limited grasp of statistics and probability theory fails me here.)

 

The available investment funds will be rationed to their most valued use through a rate of return. Although, neither the rate of return nor the principal should become a cost which limits the full use of in-place capacity.

 

There seems to be a good case for setting  the supply of  investment funds at a level that will ensure that the rate of return is equal to the rate of productivity increase. (This is way below the rate of return imposed under capitalism which can be viewed as a tax on the use of the means of production leading to excessively labor-intensive technologies.)

 

My far from adequate understanding of this point rests mainly on the so-called declining marginal utility of consumption. When we are poorer a given increase in consumption is more important than when we are richer. So an investment of labor now has to provide a future increase in consumption that is larger than the present loss of consumption incurred by the investment. And when equating present with future consumption you discount the latter by the extent that we will be richer, i.e., the rate of productivity increase.

 

This is not the silly myopic time preference of economics text books which says that we prefer consumption now to consumption later. At the same time it does not mean we are indifferent about when consumption takes place. We shouldn't cut consumption to the bone in the next 10 years just to increase the total sum of consumption for the next 20 years as whole. The total consumption is increased but the time profile is wrong so people's welfare is reduced. 

 

The establishment of collective ownership will undoubtedly take place amidst intense class struggle. Among other things, we will have to deal with:

 

·      Shirking and lack of initiative by some elements.

·      The diversion of resources to personal uses or to the black market, and the corrupt allocation of funds.

·      Attempts to prevent the elimination of wage differentials and the old division of labor in order to entrench a new privileged stratum.

·      All sorts of  pseudo left sabotage. This would include demanding that steps be taken prematurely, sabotaging efforts to unite the many to defeat the few and focusing on a secondary enemy so as to take the flack off the primary enemy.

·      And most importantly, a new bourgeoisie in high places going to great lengths to prove that we can't do without the profit motive.

 

I’m currently wading through some "Austrian" economics. This is the school of economics associated with the Austrians Ludwig von Mises and Frederick Hayek and their present-day disciples. Apparently a high proportion of libertarians or anarcho-capitalists identify with it.

They like to brag about having made a special contribution to the case against collective ownership by “winning”  the “socialist calculation debate”.

They certainly played a significant part in discrediting the idea that an economy can be centrally coordinated – a view that used to be common on the left – and in showing that a price system is the only way to go.  However, their attempt to show that an effective price system is not feasible where the means of production are collectively owned is rather flaky. Most of their effort goes into refuting a straw man.