The Economic Case for Socialism

0:00I'm gonna present a paper here giving you an economic case for socialism. After hearing Lucas's talk though, I'm not sure I have a case. So, thanks for the opportunity. Anyway, what I'm gonna do here is talk about this paper that I first thought I would call an Austro-Marxist view of economic development, but I thought that might provoke someone, so I'm calling it the economic case for socialism instead. What I'm gonna do is really throw out a bunch of ideas and then tie them at the end together in a market process kind of economic development view, if you like. So we're gonna go through, but very, very quickly, very briefly, growth, development, equilibrium, connect those to Marx's process in economic development, and Economic Development, his stages through economic history, if you like.

0:58Then talk about what the market looks like, research heterogeneity, calculation and so forth, what I call the specialization deadlock, and connect those to the entrepreneur and the firm, and then talk about capitalism versus socialism. So as you can see, there are a few ideas that I'm just gonna throw out there. So, first of all, the market. Now, neoclassical economics, we know what that is. A lot of weird assumptions. We can't really get anywhere at all. We prefer the market process. So, we have a process towards something, right? But to where does this process lead us? Now, we could imagine the final state of rest, but that doesn't really tell us what is going What is going on in the here and the now, in the real world, it gives us something that we're aiming for, but how is this process going on, and I found these quotes here that show what is going on in the market every day.

2:08So the first quote, the further an exchange economy develops, the further advanced will be the specialization process. That shows pretty clearly what is going on in the market, we get more and more specialized, more and more division of labor, and we get more efficient. And the other quote is the same, basically, how far the productive forces of a nation are developed is shown most manifestly by the degree to which the division of labor has been carried. The question then is, who said what? Did anyone give a guess? Sound pretty good, right? Well, it's Murray Rothbard and Karl Marx. So obviously they have something in common, right? Probably not all that much, but something. I mean, they view the market in a process way.

2:56They see division of labor at the core and so forth. So I thought, why not give it a shot and try to see if I can put these two guys together, hand in hand. That's not what I'm gonna do completely, but I'm gonna give you an idea of how this might actually work and how we can use Marx to interpret the market. And I apologize, I have a pretty bad cold. I guess that's God's punishment for doing a paper like this. So, economic development. This is, there are the stages of development in the division of labor are just so many different forms of ownership. This is what Marx says. He focuses on what is the kind of type of ownership throughout these stages.

3:44But what he's talking about is really the division of labor is different, depending on these ownership structures in the market. And he has these, I didn't include the first steps, because they're not really interesting here. But we are now at capitalism, obviously, where we have private property. We're going to go through the dictatorship of the proletariat to Communism where there's common ownership of all the means of production and what does that mean? Well it means we have a market or an economy that looks like this, we have rational planning first of all which is kind of necessary the way Marx sees the economy, have coordinated investment to meet people's needs, I mean we all know that, that everything is to satisfy to satisfy people's needs in a communist market, or communist economy, whatever you want to call it.

4:40Now, what I learned also is that this is a post-commodity economy, because you produce for direct use, right? You produce something using the commonly owned means of production to produce something that satisfies your needs immediately, right away. Of course, there's a little problem there, who maintains the capital structure and so forth, but just like Lucas, I can just assume that that's there. Also, we have this production for use immediately, not for profit, so it's not this, what a Marxist would say, that you produce to exchange goods for profit, which then might satisfy a need somewhere, so it's not this roundabout kind of process.

5:29Now I found this quote which kind of, it's very interesting in describing what socialism is about. It says, planning is not equivalent to perfect allocation of resources nor scientific allocations, nor even more humane allocation. It simply means direct allocation, ex ante. As such, it is the opposite of market allocation which is exposed. And this might actually be a good description of neoclassical economics, right? Because you have this exposed, this seems to imply that what is going on is that you have all these capitalists producing goods, then afterwards you just try to allocate them through the price mechanism.

6:15There's no entrepreneur, right? There's no one trying to foresee what are the needs So people in this 39.7 quintillion years future, right? So the entrepreneur is not here. This is just a static kind of description of the market. It doesn't go anywhere, which is kind of strange since this is how Marxists who actually see a division of labor in the process describe capitalism as a non-process. and there seems to be a contradiction here. But let's move on to what is this market where the entrepreneur acts?

7:00What does it look like? What kind of opportunities does he see and why? And what are the limitations? So we'll look at heterogeneity and specialization primarily here. The heterogeneity, I'm using Lachmann, It implies complementarity in use, which simply means that you have a sink with a pipe and a drain, and those fit together, right? You can't use three pipes instead, or three sinks. It doesn't make any sense. So you use them together, and you have to use them together, and you can't use another pipe with a different dimension or something. They're pretty specific. And it suggests less substitutability, because you have more different kinds of goods so the substitutability in the market is limited.

7:54Now specialization, I see that as kind of claiming a specific niche in the capital structure. So you specialize, you start producing this specific pipe of a certain length and a certain diameter or whatever and then you claim this specific little good that is complementary to other goods, hopefully. And of course, specialization also means the division of labor and capital, and that's how you get a more efficient production and so forth. You can more efficiently satisfy people's needs and hopefully make a profit. So what does this mean then on a more macro level?

8:40Well, if we have this higher complementarity, it does mean that we have some kind of interdependence between the sink and the pipe and the drain. Those are interdependent. And this creates some kind of deadlock in the market, too, because you can't just suddenly start producing something that no one has produced before, because you have to use what is already there. You have to innovate the whole process. If you have a production process with three tasks that you do after each other, and you want to break one task into three different ones, you have to do all three tasks, right? You can't just do one of them.

9:27You have to find three people doing those tasks or do them after each other, right? So this would be a problem. So in any kind of progress in this market, you would have to take a leap forward, right? If you divide one task into three, you have to find someone to specialize in each of these tasks at the same time, because otherwise it doesn't make any sense at all. You can't get anywhere. You would mean bankruptcy, right? So what I propose, and it's another paper and last year's presentation, is that entrepreneurs can create these islands of specialization in a firm. You integrate this and you integrate all those three tasks into a firm and you coordinate them in this island of specialization and then you can provide this whole solution to the market.

10:21Now, what is the firm? Well, the firm is subject to the calculation problem if it has more than one stage, right? So, or you can read this quote yourselves, it's kind of long, but what it really says is that there is a calculation problem because there are several, If there are several stages inside the firm, you don't have market prices for the intermediate stage, right, or the product of the first stage. And this also means that in the firm, in the first stage, you actually produce for use, right, for direct use, just like Marx said that the communist economy would have worked. So you would use it yourself. Of course, ownership might not be communal in a firm, but that's another matter.

11:06And this is Murray Rothbard who talks about the firm. He seems to accept the Kocian view of the firm. And he actually has a footnote saying that too, so I'm not making it up. Now the firm then, if we see it like this, well we can, this is another quote from another guy. You can probably guess who then. Now here it says the division of labor in a manufacturer, which is a factory or a firm, demands that a division of labor in society at large should previously have attained and a certain degree of development. Inversely, the former division reacts upon and develops and multiplies the latter, which kind of says what I said before about the firm, right? It's an island of specialization, right? And you start with what the market's specialization as it is, and you integrate, and on that island, you can specialize even further.

12:02You can divide the tasks into more. And the meaning of division of labor in society, the market, and the firm are not only different in degree, but also in kind, that's what Karl Marx says. So he was really the inventor of My Theory of the Firm, I feel like. That's my Swedish heritage. So, in the firm then, what we have is that you take these leaps forward, they require mutual specialization like we talked about before, the sink, the pipe, and the drain, you develop all of them together. You can't go to the market and procure one of them because there's no market yet, right? And since there's no market yet, you can't really contract someone to do it either.

12:49Because you have to coordinate and you have to probably educate the guy you're contracting with. So there seems to be a problem here. You have to create the whole process first before you can actually procure these things for your process. It seems to be a paradox. So, that's what I say, basically. That entrepreneurs challenge the market structure as it is. If we see it as a specialization deadlock, what the firm does is really break through this and create a new kind of, more intense specialization. And this is how we might get through, one minute. Alright then. So if we do this in one firm, that creates this new production process or divides tasks into more smaller, more narrowly defined tasks, and it's profitable, well obviously we would see other entrepreneurs do the same thing, right, try to imitate what they're doing, and then we would get a market, right, market prices between these two firms integrating these multiple steps, right?

14:06So suddenly there we have this, they have the price mechanism between the firms, two or three or four and even more as time passes, and we solve the calculation problem because suddenly we have market prices for the intermediate stages within those integrated units, right? Those islands of socialism, if you like. So the calculation problem is solved and suddenly you can outsource parts of your business because there's a market suddenly. So, the macro level then, what does this mean? Well, it seems to me that we have some kind of Schumpeterian market structure, creative destruction process, right? We have a specialization deadlock that is completely destroyed through innovation and a new equilibrium kind of emerges.

14:55I see this probably as a process for many parallel processes at the same time. So it would be hard to find this deadlock or this equilibrium. But there is probably is, it's a spasmodic progress kind of process. So what we have is that markets really replace these islands of socialism, right? Which is exactly the opposite of what Marx said, isn't it? Because what he said was that we had capitalism and markets that are replaced by socialism. But it's really the opposite. So we kind of confirm what Marx is talking about in his stages of development. But what we really have here is that socialism really leads into capitalism.

15:41You need that barbaric planning kind of island before you can have a beautiful market. And that's my case for socialism, that in order to have markets and capitalism and beauty you have to have something ugly first.