Capitalism, Socialism and Property Rights: Why market socialism cannot substitute the market

By Mateusz Machaj

The comparative analysis of socialist and capitalist economic systems has given rise to a voluminous literature in the history of economic thought, yet detailed analysis of the “market socialism” model, which seeks to imitate the functional efficiency of capitalism by simulating a competitive economy, has been relatively neglected. In this work, Mateusz Machaj seeks to redress this imbalance by providing an in-depth examination of one of the defining issues that separates capitalism from socialism – the system of ownership, or property rights – which, when explored, highlight fundamental problems in the market socialism model.

Taking a broadly Austrian perspective, he shows that the mechanism of efficiency in market socialism is unable to play the part ascribed to it by its theoreticians, because it disregards the fact that property rights are fundamental to the shaping of prices and thus the abolition of ownership in market socialism makes its mechanism of efficiency a fiction. Indeed, the author argues, the economic terms used in the model of market capitalism only mirror the names of the real economic variables that cause capitalism to be efficient, not their functions.

The books offers new and original insights into the theory of competition, theories of pricing, property laws, the relation between law and economics, as well as the economics of the market socialism model. It will be of interest to a wide range of heterodox economists.

• Language: English
• Publisher: Agenda Publishing
• Release date: Mar 31, 2018
• ISBN: 9781788211307

Mateusz Machaj

Mateusz Machaj is Assistant Professor of Economics at the University of Wroclaw, Poland.

Book preview

Austrian Economics

Series Editor: Per Bylund

The Austrian school of economics offers a powerful framework for understanding major economic events such as the fall of socialist economies in the early 1990s and the financial crisis of 2007–08 and thanks to this promise, and to the limitations of mainstream economics, the Austrian tradition has attracted increasing interest from a new generation of economists and social scientists. This series seeks to capture this renewed interest by publishing original research within the modern Austrian tradition.

Published

Capitalism, Socialism and Property Rights

Mateusz Machaj

© Mateusz Machaj 2018

This book is copyright under the Berne Convention.

No reproduction without permission.

All rights reserved.

First published in 2018 by Agenda Publishing

Agenda Publishing Limited

The Core

Science Central

Bath Lane

Newcastle upon Tyne

NE4 5TF

www.agendapub.com

ISBN 978-1-78821-035-5

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

Typeset by JS Typesetting Ltd, Porthcawl, Mid Glamorgan

Printed and bound in the UK by TJ International

To my parents and Paulina

CONTENTS

Acknowledgements

Introduction

Chapter 1 Legal fundamentals of economic systems

1.1 Economic analysis and the concept of property

1.2 The problem of the economic analysis of law and relations between law and economics

1.3 Natural law and positive law

Chapter 2 Evolution of the socialist calculation challenge

2.1 Mises and the (un)resolvable puzzle

2.2 Taylor’s project

2.3 Hayek’s attempted solution

Chapter 3 Neoclassical cruising around the Misesian challenge

3.1 A proposed mathematical solution

3.2 Lange’s competitive model

3.3 Schumpeter’s mechanistic approach

3.4 Walter Eucken: the debate’s most underestimated contributor

Chapter 4 Property and the market process

4.1 Ownership and the foundations of society and the economy

4.2 Ownership and the development of money

4.3 Ownership and the pricing of heterogeneous resources

4.4 Consumer sovereignty and the distribution of income

4.5 Theories of valuation: ownership and mathematics

Chapter 5 Property in the dynamics of the market process

5.1 Calculation, intellectual division of labour and dispersion of knowledge

5.2 Ownership-based analysis of profits and losses

5.3 Ownership of factors of production and consumer sovereignty

5.4 The entrepreneurial division of labour versus division of labour

5.5 The stock exchange and corporate governance

5.6 Why doesn’t one giant company form in the free market?

Chapter 6 On the path to socialism: imperialism, bureaucracy and monopolization

6.1 Bureaucratization and the market

6.2 Remarks on imperialism and class struggle

6.3 Monopoly and competition

Chapter 7 The nature of socialism

Conclusion

Notes

Bibliography

ACKNOWLEDGEMENTS

This book was written with the invaluable help and care of Witold Kwaśnicki, who has my greatest thanks. I would also like to thank professors Robert Ciborowski and Bogusław Fiedor for their valuable comments. I am grateful to Jan Lewiński, Witold Falkowski, Ryszard Jacek Kubisz and Przemysław Leszek for giving this book their attention and for voicing constructive criticism.

I sincerely thank my parents and my loving wife Paulina for their moral support while I was preparing this work. I also thank my dear brother, Łukasz, for igniting my passion for social sciences.

INTRODUCTION

The book you hold in your hands was inspired by an article on Oskar Lange’s proposition of a market socialism that I began writing in 2005, and later published in the Quarterly Journal of Austrian Economics. Lange argued that socialist planners could use a central calculation of profits and losses that would make economic projects as efficient as in the market framework. I aimed to show that such calculations were, in fact, economically meaningless, because the planners were to make them. By setting prices for the means of production, and subsequently by adjusting them, they decide, in effect, what should be produced, what should not, based on their own judgement. Prices do not affect their actions as they would an entrepreneur in a market. Such a simple observation led me to further reflect on the nature of monetary calculation, which eventually gave me a new perspective on the debate on whether socialist economies can function or not. Although a few thinkers have raised this argument, their voices have never gained serious influence on the debate about socialism.

The problems set forth in this book regard property laws in an economic context – a comparison between capitalism and socialism. Therefore I shall not discuss legal history, case studies or legal details arising in the relevant economic systems. The notion of property laws interests me as a theoretical category in light of economics, not law, anthropology, or history. Similarly, I talk about socialism and capitalism in the abstract. Capitalism is defined as a system built on the free exchange of property deeds, which is not present in socialism. These two categories do have their concrete and pure historic occurrences, but I shall regard them as purely theoretical. The same is true for the idea of ownership, which is an owner’s capability to control, use and dispose of various real-world entities. Real ownership is therefore not necessarily equal to how legislators define ownership in legal systems.

Because the debate on the comparison between socialism and capitalism is already a part of the history of economic thought, this book builds on the conclusions drawn from that debate, on economic calculation in socialism and the impossibility (or possibility, according to others) of its application.

The system of ownership is a basic trait distinguishing capitalism and socialism. In capitalism property is dispersed among competing controllers, independent in their decisions. Various forms of socialism propose to abolish this competitive distribution by dispossessing all private owners at once, and setting up a single owner, who would organize production (directly or indirectly). And so property laws are the heart of and starting point for the comparative analysis of capitalism and socialism; it is the only way to properly grasp their differences (this was not sufficiently emphasized in the historical debate).¹

Although property laws found their way into the economic literature thanks to the institutional revolution of the 1960s, in terms of our inquiry this was not a significant change and did not seriously influence comparative macroanalysis. Firstly, the focus was placed only on certain aspects of granting deeds of ownership by government in situations of conflict between already existing owners, as well as on the forms of contracts between parties in a market. Secondly, entire systems and general economic efficiency were not discussed.² The purpose of this book is to fill this gap in the debate on whether rational economic calculation is possible in socialism.

During the debate on the functionality of socialism the two (or perhaps even more) sides differed in their views on competition, the mechanism of calculation, prices, salaries, and other economic variables existing in the respective systems. Anglo-Saxon contributions gave us the model of market socialism, which was meant to imitate the functional efficiency of capitalism by simulating a competitive economy. This model was the single strongest argument put forward by the proponents of socialism.

This book aims to show that the mechanism of efficiency in market socialism is unable to play the part ascribed to it by its theoreticians, chiefly because it disregards the fact that property rights are fundamental to the shaping of prices and to calculations. I shall show that the abolition of ownership in market socialism makes its mechanism of efficiency a fiction, unable to imitate capitalism. While praising the advantages of the socialist mechanism of trial and error, its Western proponents used much the same words as are used to describe capitalism: price, pay, profit, interest rate, etc. I show, however, that this is nothing but definitional confusion because prices, pay, and profits mean something entirely different in capitalism than in socialism. Both sides in the debate were arguing past each other because they used the same terms to describe different phenomena.

Following from this I further aim to show that the model of market socialism is virtually the same as a classic economic dictatorship proposed by naïve utopian movements and criticized by Ludwig von Mises in his first publication. I aim to demonstrate that this dictatorship hides behind a veil of economic terms that do not change its essence. Economic terms used in the model of market capitalism copy only the names of real economic variables that cause capitalism to be efficient, they do not follow their vital functions. This statement, which I shall corroborate, will support my view that the last word has yet to be said on the topic, and that its further discussion is warranted. As I shall show, Mises and Hayek, the two greatest critics of the competitive solution to socialism, have not been conclusive in their arguments. I hope that my critique will bring new insights to the debate, and ultimately to other theoretical aspects of economic comparison.

CHAPTER 1

LEGAL FUNDAMENTALS OF ECONOMIC SYSTEMS

1.1 ECONOMIC ANALYSIS AND THE CONCEPT OF PROPERTY

Economic analysis illustrates the influence of prices on allocation of various resources used in production. Before we show how the economic system shapes social existence, we should first examine the primary assignments of resources, prior to any exchanges made. Modern analysis of economic policy often ignores this necessity, focusing instead on equilibrium, pre-determined competitive costs and prices, or economic policies that are best for society.¹

One of the first theorems economic students learn states that human needs are unlimited, whereas the resources that can satisfy those needs are not. Scarcity of means of production forces people to choose one course of action and to judge it as more important than the alternatives (Robbins 1937: 12 ff.). The theory relates to knowledge of the context in which market participants choose between scarce resources. The context which decides who controls a given good according to the law. Without it allocation of resources would not be possible.

The 1870s marginal revolution is considered to be among the most important events in the history of economic thought (Landreth & Colander 1998: 320). The revolutionaries were three great economists, who made consumer choices one of the main pillars of economics.² Classical economics studied production, exchange and distribution, but it placed little emphasis on the consumer and the way the economy allocates resources on a microeconomic level. In other words, it did not dwell in detail upon which needs are satisfied and how they are satisfied according to a given theory of production.

Carl Menger gave four prerequisites for anything to be a good: that there is a human need to be satisfied; the thing has qualities that allow for the need to be satisfied; people have knowledge about these qualities; people are able to control the thing so that it can satisfy the need (Menger 1994: 52).

It is interesting to note that economics has concentrated chiefly on the first three prerequisites. Human needs are given a lot of attention; refined theories of utility are constructed to describe them (for example Samuelson 1956), and economics of information and knowledge in management is increasing in importance (since at least Akerlof 1970). The last element, control over a resource, did not interest economists as much.

For Menger, control over anything was a natural prerequisite for it to be a good. It is, after all, one of the basic consequences of scarcity. Scarcity means a good appears in a quantity allowing for satisfaction of only a limited amount of needs. Air, from the point of view of economics, is not a scarce good. It is available in very large amounts, so we do not have to ponder its allocation for various uses. It constitutes one of the basic conditions of human life. The problem of scarcity appears when there is not enough resource to satisfy all intended needs. Only then do we have to choose, to decide between alternative uses (Menger 1994: 94–101). The choice implies control over a resource. If human control would not exist (as in the case of the sun), there could be no allocation, because the use would not depend on human action and choice.

Necessity for control over a resource to define a good is an important conclusion, though often omitted for purposes of scientific analysis. The omission is justified when analyzing actions of an isolated person, an economics of Robinson Crusoe, when a theoretician considers only singular actions, ignoring social context. But when we begin to analyze interpersonal relations and the fact that people cooperate, the subject of investigation changes considerably. It ceases to be only isolated action, and becomes cooperation instead.

In the light of this inference Menger’s fourth prerequisite for a good, control, takes on a new meaning. Control now means not only the possibility to allocate units of a good into various uses, but also a related ability to exclude people from using them. When we talk about a one-person economy model, Robinson Crusoe chooses to eat food, store it, or not to acquire it at all. If other people come to the island, various other scenarios have to be considered, which include other people having food. The fourth prerequisite, control over a resource, indicates we should know who the owner is.

Scarcity means that a good has to be economized, i.e. a decision must be made about which of its uses has the most value. In a model of many people scarcity implies that conflicts between the people may arise. If a resource were not scarce, it would not have to be economized, because there would always be enough to satisfy all needs. The problem of economization would not occur. Legally the issue looks the same: if a good were not scarce, its use by a person would not exclude anyone else from the use, because another unit of the resource would always be available. As Hans Hermann Hoppe writes:

The recognition of scarcity is not only the starting point for political economy; it is the starting point of political philosophy as well. Obviously, if there were a superabundance of goods, no economic problem whatsoever would exist. With a superabundance of goods such that my present use of them would neither reduce my own future supply nor the present or future supply of them for any other person, ethical problems of right or wrong, just or unjust would not emerge either since no conflict over the use of such goods could possibly arise.

(Hoppe 2006: 333)

Air, which is not economically scarce, is a good example. People do not have to allocate it, because there is always enough of it to satisfy needs. Therefore there are no conflicts between people about air (the problem of clean air, which can be a scarce resource, is omitted for convenience). If anyone breathes air, he does not exclude others from its use, because air is not scarce relative to our needs; there is always another portion to take.

And so a good’s scarcity gives rise to the question of economizing, but also legalizing. As some resources come in limited quantities, we cannot use them to satisfy all needs and anyone possessing a given resource is forced to exclude others from using it. Scarcity gives rise to conflicts about who should administer available supply. Scarcity, however, is not enough to create a legal system, because under scarcity conflicts can be resolved by force. In that case the stronger becomes the final keeper of a good.

Scarcity can lead to conflicts not only among humans, but also between animals. Yet no one would call relations between animals a legal system, as we do regarding humans. The existence of a legal system arises from a crucial difference between humans and animals: people are rational beings, using reason, and are not completely led by stimuli and instinct like animals. And reason can be communicated to others (Schnädelbach 2001: 3–4). This is related to Habermas’s rationality of communication (Habermas 1999). Because people use reason, the societies they create are based on norms formulated, collected, and defended by reason. Therefore legal systems exist not only because of the possibility of conflicts, but also because there is more than one rational party, and each is capable of argumentation (Herbut 1997: 117–20).³

Whenever an economist analyses scarcity of goods, he is typically interested in their management. He does not care how a person came into possession of a consumer or production good, or whether it happened according to positive or natural law. Economic analysis, as stated in Menger’s fourth prerequisite, takes into account all control, regardless of whether it is just or not.

Legal analysis sees things differently. It is concerned precisely with discerning just and unjust ownership, and with describing them. The law of marginal utility of apples affects the apples’ holder in the same way irrespectively of whether he stole the basket of fruit or not. Then a lawyer concludes that a person has justifiable exclusivity of control over a given resource, the person can be said to have ownership, which is implicitly just. If a resource was not acquired in a just manner, but was taken by force from someone else, it is called expropriation or theft (Rothbard 2002: 45–50).

And so the prevalent view is that economics tells us about the implications of control over resources and its statements are therefore strictly descriptive. Whereas ethics and law are disciplines concerned with just or unjust control over resources. Economics speaks objectively about how the world functions. Ethics and law give a normative description of how the world should function.

This book does not aim to completely separate the positive science of economics and the normative discipline of ethics, because I plan to use positive science to describe normative projects. This, however, does not mean that I reject David Hume’s famous dictum. To the contrary, I presuppose that there is a definite difference between statements of what is and statements of what should be (Hume 1952: 183). I do not make arguments for or against various solutions or actions. Rather, I aim to distinguish property developed by the market process from property that is not, and the consequences of both.⁴

It is possible to defend a thesis that all kinds of social conflicts are ultimately resolved by communication and property rights. Even the apparently ideological problem of freedom of speech can be resolved with praxeology of property rights. And so the fundamental task before the social sciences is to analyse various systems of property and law, and their inevitable social consequences.⁵

The way conflicts are resolved in a society is defined by how individuals possess various resources. A coherent and consistent legal system will decide the ownership of all resources, including the inalienable (the human body), the stationary but negotiable (land), and the fully mobile (cars, oil, etc.) and the purpose of a legal system is to justly assign ownership of all scarce resources (Simpson 1980: 499).⁶

A just legal system provides rules for who, from a normative standpoint, should possess given resources, in effect who should be considered their legal owner. After resources are justly distributed, the owners can, as the spirit of Roman law implies, control the resources they possess. This includes possessing, using, disposing, reaping benefits, and also destroying or not using the resource at all (Kolańczyk 2000: 292–3). The most important point in our inquiries is the following: property laws essentially define relations between the owner and other people, not relations between people and things.⁷

Ownership applies in social circumstances, and defines relations between people (Robinson Crusoe would find the concept of ownership superfluous).⁸ To state that a person is an owner of a stone does not mean that he is currently holding it. Ownership means that the person ultimately decides about allocations for the stone, can dictate what other people are allowed do with it and on what conditions.⁹

Whenever we speak of ownership of a given resource, we are not speaking of current control, but rather a legal ability to exclude other people from the use of the resource. It is quite clear in the extreme case of ownership of people’s bodies. Body ownership is not just current control, but a justified ability to exclude others from the use of one’s body supported by the legal system. A person has the right to prohibit the touching of his/her body in any way, which in itself forms an expression of a specific property right. In essence ownership as a relation between people means excluding other people from using a resource. The case with bodies is quite clear in illustrating such sovereignty and the necessity for consent in order to create peaceful social relations.

The situation is similar with resources unrelated to our bodies, such as land or capital goods. Although they differ from less traversable goods (the human body is an extreme example), the essence of their legal ownership is the same. If there is an owner, there is also a silent implication, that all others are excluded from using the goods, unless he or she gives consent. Further chapters of this book will explain the influence and economic consequences of such property exclusions. All actions in an economy take place in the context of ownership constraints, which I shall discuss later.¹⁰

Exclusion is not irrevocable and can be ended by an exercise of property rights. Whenever an owner wishes to make anything he owns available for someone else, he can do so by the statement of will (Radwański 1977: 37 ff.). It means giving consent for others to use an owned thing. Consent is a fundamental notion for the concept of property rights, because it means an ability to fully utilize given rights. Under social rules use or co-use of a good without the owner’s consent is impossible. When two people arrange an expedition together, it presents a mutual consent. When one of them coerces the other with a threat of force, it is kidnapping. Similarly: forced labour is slavery, and coerced sex is rape.

Numerous economists have dealt with comparative analysis of market versus state intervention (Hülsmann 2004: 57). Market is a crucial word, which ought to represent ownership relations between concerned parties (although the literature does not always reflect this). In a market context everyone can control their properties provided they do not attack the properties of others. The exclusivity does not mean autarky, however, because people are not self-sufficient. They have to use the resources of others. Property rights stand in the way of simply claiming them, and owner’s consent must be obtained. Moreover, the owner while consenting can request meeting certain conditions, often an exchange. Thus emerges an agreement between parties,¹¹ implicit in the concept of property.

In other words, each owner can, in accordance with property rights, exclude others from using any of their goods, while he or she is excluded from the use of goods which belong to other people. One can nevertheless gain access to the goods, but only via an agreement, which in turn is an act of will. This seemingly obvious fact is crucial to our analysis. Any time a person wishes to gain access to a resource, a person must seek permission from the owner to gain consent for his actions. The person must defer to the owner’s judgement and agree to his terms (Hoppe 1989: 11).

A state works differently. A lawyer may define a state as a legal monopoly operating in an area, which has an exclusive right to collect relevant monetary payments (Weber 2002: 40). This means that a state is an institution built on positive law, which does not rely on property rights, but rather on unilateral relations of power. In a market rights apply equally – both parties of a contract must state their will. In the case of state operations the legal relation is not equal. Only one party (a government institution) makes a decision, for example to establish a tax. Whereas the opposite party of such a legal relation does not express a wish to be taxed. To the contrary: part of the income is confiscated for public purposes. Government actions are therefore diametrically opposite to relations based on property rights. Government does not seek permission to take people’s property (it does not ask for an owner’s consent), but takes it against their will.¹² A person acting on behalf of a government institution does not defer to the will of others, and takes various contributions regardless (Rothbard 2002: 162–3).

These two modes of operation employ different methods. Economics widely takes it into account, even if it does not explicitly articulate it. A sufficient example would be the basic Keynesian model, where the I investment factor is categorically distinct from the G factor. As is widely known, the first factor represents unstable private investments, while the second factor represents the stabilizing influence of the public sector (e.g. Hall & Taylor 1997: 175–83). The distinction is directly based on the previous conclusion. Operating in a market, where everyone is dependent on the judgement of other owners, is very different from actions of government, which depend on contradicting the will of owners. A theoretician using the Keynesian model must accept the distinction, as otherwise he would not be able to see the difference between I and G, which is to say that he could not really make sense of the model (even if the model and its assumptions are incorrect). After all, both variables represent monetary streams spent by persons. Why are they categorized as radically different? The answer is: if G means spending public money, then the money was acquired in a different way than it would be in a market. This and only this makes the money different.¹³

The following is another example of the role property rights theory has in economics. It is slightly different and taken from a typical microeconomics course. The class usually starts with explaining the market mechanism at the base of the economy, which is the law of supply and demand. The coexistence of supply and demand forms the price equilibrium. The next theory presented deals with price controls. Setting the maximum price below equilibrium price causes shortages; setting the minimum price above equilibrium price causes surpluses (e.g. Begg, Fischer & Dornbusch 1996: 77–81, 88–95). The government affects prices differently than the market, because it uses force. It can be said that a minimum or maximum price is forced on the owner, which means he is prohibited from selling a commodity above (or below) a certain price. The government works radically differently than the market, because, as stated earlier, government does not care for an owner’s consent. Microeconomics is less concerned with a situation where the owner himself lowers a price too much, because she will consume her capital (intentionally or otherwise). She will either change her decision or continue to subsidize an unprofitable business (consume capital).

As we can see, distinguishing government and market, based on a criterion of property rights, has its place in economic theory, although it is often included unwittingly. I would like to emphasize that the distinction is based on property analysis. The market is a product of voluntary relations, built on property rights. Governmental order, on the other hand, requires that taxpayers be forced to make certain decisions about their property (verbal deeds of ownership are produced, which are not based on agreement: Hoppe 1989: 12–13).¹⁴ It should be quite obvious now that all this is possible only after instituting a fundamental inequality between the two groups; if anyone could freely declare himself the owner of resources contrary to the will of the current possessors, utter chaos would ensue.¹⁵

What differentiates capitalism from socialism is law. Capitalism is widely said to be a system founded on private property, where all resources belong to independent owners, and socioeconomic order flows from relations between them. But that is not a precise description. A lot of property owned by capitalists does not come from free contracts, but may have been inherited feudally; as was the case in western countries transitioning to early capitalism. It can come from unjust acquisition; as was the case at the dawning of the Third Polish Republic, when the assets left by the late People’s Republic of Poland were not distributed among society at large, but to a particular group of people. We should also note that in the so-called mixed economies capitalists are often given public money (state or local subsidies). Some American capitalists have succeeded thanks to their state’s military expansion, as the United States engaged in wars and led an offensive foreign policy (see for example Stromberg 2001).

Businessmen and capitalists can obtain public funding, e.g. through public auctions, market regulations, or direct subsidies from state treasuries. This is often a mix of voluntary and forced relations, so it would be justified to substitute a different term for capitalism in this work, regardless of how the term has been traditionally used. Theory paints capitalism as a system of private ownership. But when we look at historical analysis, the term mutates into political capitalism, or neomercantilism, and describes a collusion between government and big business to establish monopolies.¹⁶ Therefore it makes sense to leave aside the controversial word capitalism (once a pejorative), and talk about a system based on ownership relations instead. Often it will be appropriate to write of a free market. The adjective free is used here to denote that all socioeconomic relations flow from the independence of owners, and that the owners’ decisions are inviolable. Such notion also means that owners can resign from using a supplier’s services and find another, although not if it would mean breaking a contract. The supplier is free in the same sense as well.

It seems that the term capitalism is currently used too widely. A capitalist possesses certain means and funds, which he seeks to allocate effectively in various sectors of the economy. Theoretical models of capitalism often leave out how these were obtained and what their effective allocation looks like. If the capitalist acquires state-imposed monopoly in an area, exclusion of competition, it will essentially abolish the free market. Capitalism then becomes a mercantilist state capitalism.¹⁷

My analysis is designed to exclude such vague terms, which can confound the thought process. I shall instead focus on comparing two completely opposite systems.¹⁸ The first is based on an unconditional respect for property. The second institutionally attacks property rights and is based on an imposition of a single owner by enforcing the will of a central planner. These two radically distinct economic systems, polar opposites in terms of acquiring goods, are our starting point for the analysis of socialism.

We can find many different kinds of