Economic Democracy

A text from a talk at the Center for Ethics and Public Affairs at the Murphy Institute at Tulane University in New Orleans Louisiana, April 2022.

What is economic democracy? How might economic democracy be achieved? To pretend I could lay matters to rest regarding the answer to either question would be ridiculous, not merely presumptuous. In this essay what I will try to do instead is explore (1) a few of the intellectual dilemmas that arise when trying to answer the first question; and (2) some of the practical problems that arise when trying to devise institutions and decision making procedures to achieve what I believe is the most compelling answer to the first question – people should have decision-making input, or power in proportion to the degree they are affected by an economic decision. My treatment of neither question is exhaustive, but instead highly selective — focusing on a few issues where I believe I might be able to advance the quality of debate.

Defining Economic Democracy

I believe how we conceptualize, or define economic democracy is crucial. I also believe common conceptions used are not appropriate, and responsible for creating a great deal of confusion when thinking about how to design procedures which will deliver economic democracy.

The centerpiece of the ideological defense of capitalism is the concept economic freedom. While many victims have been lulled to sleep when the cheerleaders for capitalism equate economic justice with “to each according to the value of the contribution of her labor and productive property,” even more have been hoodwinked when capitalist ideologues equate economic democracy with economic freedom, and pretend that all economic freedoms are treated equally in capitalism. Substituting the concept of economic freedom for a more meaningful definition of economic democracy plays on the obvious truth that it is good when we are free to do what we want. But what are we to do when the freedom of one person to do what she wants infringes on the freedom of others to do as they wish? Uncovering the sleight of hand at play when economic freedom is cleverly substituted for the principle that people should control their own economic destinies is crucial to dispelling capitalist enabling myths.

However, there is another reason to dig more deeply into what economic democracy means and requires. Confusion about economic democracy has led many progressives astray as well. For example, substituting majority rule for economic freedom, which supporters of centrally planned economies were prone to do, is also not an adequate solution to the problem of economic democracy.

Conservative Abuses

Milton Friedman argues in Capitalism and Freedom that the greatest virtue of capitalism is that it provides people with “economic freedom.” Friedman even stipulates that should capitalism, to his surprise, prove less fair or efficient than some other economy, he would still favor capitalism because in his view it is uniquely capable of delivering economic freedom. While Friedman never defines economic freedom, his discussion and examples in Capitalism and Freedom make clear that by economic freedom he means the freedom to do whatever one wishes with one’s person and property — including the right to contract with others over their use of one’s person or property.

The first problem with Friedman’s concept of economic freedom is that there are important situations where the economic freedom of one person conflicts with the economic freedom of another person. If polluters are free to pollute, then victims of pollution are not free to live in pollution free environments. If employers are free to use their productive property as they see fit, then their employees are not free to use their laboring capacities as they see fit. If the wealthy are free to leave their children large bequests, then new generations will not be free to enjoy equal economic opportunities. If those who own banks are free from a government imposed minimum reserve requirement, ordinary depositors are not free to save safely. So it is not enough simply to shout “let economic freedom ring” — as appealing as that may sound. 

The appeal of the concept of economic freedom largely rests on a presumption that when one person exercises her economic freedom she does not infringe on the economic freedom of others. It has often been remarked that John Locke envisioned a society of independent farmers and artisans, where each possessed his necessary means of production. Ignoring the presence of indigenous inhabitants, Locke reasoned that with an open frontier farmers could each have all the land they wanted without limiting the ability of other farmers to do likewise. Artisans were presumed to possess the necessary tools of their trade enabling them to produce anything in their individual “production possibility set” without relying on anyone else. In other words, in Locke’s world everyone had sufficient wherewithal to produce whatever she wanted, and nobody’s choices limited the choices open to anyone else. In this context the goal of increasing everyone’s decision-making discretion over more elements in her individual choice set was both non-contradictory and attractive. But it was only John Locke’s imagination and the assumptions of classical liberalism that armed everyone with sufficient wherewithal to pursue their goals, and assured us that none could make choices that limited the choices open to others. Whether people were ever so armed and immune to the choices made by others is highly questionable. Certainly in today’s world where the natural environment is no longer bounteous relative to the human population, and where large corporations not only own the preponderance of the means of production but have patented the most productive technologies as well, it is painfully obvious that the options for most of us are largely determined by choices made by others.

When there are conflicts between people’s economic freedoms in capitalism, whose economic freedom takes priority over whose is settled by the property rights system. Once we realize economic freedom is meaningless without a specification of property rights — that it is the property rights system in capitalism that dictates who gets to decide what when conflicts inevitably arise — the focus of attention shifts to where it should have been in the first place: How does a property rights system distribute decision making authority? Does a property rights system distribute control over economic decisions in a way we would consider democratic? Or, by distributing property unequally, and by giving priority to some categories of property rights over others, does a particular property rights system leave most people little control over their economic destinies and award a few control over the economic fates of the many? In other words, Freidman’s way of conceptualizing the notion that people should control their own economic lives merely begs the question, and defers all problems to an unspecified property rights system. 

The second problem is that while Friedman waxes poetic on the subject of economic freedom, he has remarkably little to say about what is a better or worse property rights system. Most of what little he says reduces to two observations: (1) However property rights are distributed, it is crucial that property rights be clear cut and complete, since otherwise there will be inefficiency due to “property right ambiguity.” (2) Since — in Friedman’s opinion — it is difficult to argue that any distribution of property rights is preferable to any other on moral or theoretical grounds, there is no reason — again, in his opinion — to change the distribution of property rights history bequeathed us. If one can prove that property was acquired in clear violation of the law Friedman and his followers are willing to consider redress. But they refuse to even consider the possibility of “legal theft” – that is a distribution of property rights that effectively and unfairly disenfranchises whole categories of economic actors. In sum, Friedman makes no objection when his fellow conservatives defend the property rights status quo, and considers only clarification of ambiguities a legitimate area for public policy. What is entirely lacking is any attempt to develop criteria for better and worse distributions of property rights. The silence from conservative theoreticians is deafening on this point, and those favored by existing property rights regimes can hardly be expected to object to the oversight.

Liberal Misuses

Over the past three decades Amartya Sen has arguably done more to challenge the dogma that there is no remedy for poverty than any other living economist. However, his work illustrates a dangers liberals court when they embrace the economic freedom metaphor. In Development as Freedom (Sen 1999) he goes beyond his earlier interpretation of economic development as the expansion of people’s “capabilities” and argues that development can be defined as the expansion of freedom. Sen explains that all the capabilities people may acquire are to be understood as exemplifying freedom. In his desire to describe all the “good” things that come with “development” as expansions of “freedom” Sen, for example, talks about mortality as a denial of “the freedom to survive.” Paul Seabright took exception to reducing development to the expansion of freedoms in his review of Development as Freedom (Seabright 2001): “Well yes, one can call death denial of the freedom to survive. But is it really illuminating to suggest that what matters about being dead is the lack of freedom that goes with it? Being dead is also bad for the health and has a significant statistical association with dropping out of college, but personally I think it’s the deadness that would bother me…. We can always say that the society we like best is the one that most advances freedom, but a claim of that kind sounds remarkably like the claim in Moliere that opium sends people to sleep because if its dormitive faculty.” I have the greatest respect and admiration for Sen, and wrote a chapter in a book praising his numerous contributions (Hahnel 2002). But I agree with Seabright that redefining everything that is good for someone to have as an increase in their freedom to have it, may be good salesmanship in the era of the free market jubilee, but it is not good methodology.

First, by conflating all “goods” into one — freedom — we not only reduce the power of language, we risk deceiving ourselves that something is more simple than it really is — a mistake Sen himself has correctly warned others against time and time again in other contexts. Economic development is not simply the expansion of freedoms. More generally, we have multiple economic goals — economic democracy, economic justice, environmental sustainability, and economic efficiency to name four — that we should not attempt to reduce to a single goal — economic freedom. Second, as argued above, all too often when one person’s freedom expands it does so at the expense of someone else’s freedom that contracts. It is no less ambiguous and problematic when Amartya Sen says the goal of economic development is to maximize people’s freedom than when Milton Friedman says the most important economic goal is to maximize economic freedom. What are we to do when people’s freedoms conflict? Friedman’s conservative disciples are happy to leave the answer to problems of conflicting personal freedoms to the reigning property rights system. Anyone who is familiar with Sen’s work knows he is not willing to let the reigning system of property rights be the arbiter of some freedoms over others, and the freedoms of some people over the freedoms of other people. Sen has devoted his entire career to searching for answers to the paramount question of our time: What is the cause of so much poverty in the midst of so much wealth and prosperity? But if existing property rights regimes disenfranchise the have-nots, then what property rights deliver economic democracy? How does one argue for the superiority of one property rights regime over another?

Just as conservatives side step this question by favoring existing property rights regimes, Sen side steps the basic philosophical question by simply favoring an expansion of property rights for the poor. In a world where property rights govern decision making power and life prospects, favoring an expansion of property rights for those with little or none is good politics. But it is not an attempt to justify a particular pattern of property rights as a means to achieve economic democracy. Neither conservatives nor Sen make a compelling philosophical case for the property rights they favor. In effect they assume their conclusion. These are among the difficulties that motivate the alternative conception of economic democracy I find more useful discussed below. 

Finally, by embracing the metaphor of economic freedom Sen unintentionally encourages the dominant rationalization for exploitation of our times. It is often asked: If people freely choose to enter into an arrangement, and are fully aware of the consequences, how can the outcome be considered unjust? This is a common rebuttal to legitimate complaints that wages are exploitative, that giant corporations price gouge, that the international credit system is usurious, and that free trade is a system of unequal exchange. I am not suggesting that Sen himself falls victim to this sophistry — far from it. Sen has contributed greatly to the critique of neoliberal arguments for capital and trade liberalization, “flexible” labor markets, and the expansion of corporate rule in general. My point is simply that the freedom-encompasses-all metaphor Sen championed unfortunately lends itself to this kind of abuse.

Majority Rule

If economic freedom is an inadequate and misleading conception of economic democracy what are the alternatives? The other dominant conception of economic democracy is majority rule. This concept was borrowed from political science where the notion that no citizen should have more say over political matters than any other was enshrined in the doctrine of one person one vote. The problem with majority rule is this: When a decision has a greater effect on some people than others, by giving each person an equal vote, those more affected by a decision can find themselves overruled by those who are less affected. Even in the political sphere of social life, where there are many decisions that do affect all citizens more or less equally, there are some political decisions that clearly affect the lives of some citizens more than the lives of others, and some choices individuals should be allowed to make regardless of how much others may disagree and claim to be affected. In these circumstances political scientists sensibly amend the principle of majority rule with other concepts like a bill of rights, civil liberties, and supermajority voting rules. But in the case of economic decisions the probability of unequal effects is much greater than in the case of political decisions — it is the rule rather than the exception.

While there are some economic decisions that affect only a single person, and there are some economic decisions that affect us all roughly to the same extent, most economic decisions affect more than one person, but affect some people more than others. And therein lies the rub! While the concept of economic freedom works well for economic decisions that only affect one person, and the concept of majority rule works well for economic decisions that affect us all equally, neither conception of economic democracy works well for the overwhelming majority of economic decisions that affect some of us more than others.

Little Help From the Economics Profession

One would think the economics profession would have a great deal to say about economic democracy. But like economic justice, economic democracy is not a favorite subject of mainstream economists who prefer to dwell on efficiency issues. What little economists have to say on the subject comes under esoteric labels like “consumer and producer sovereignty,” while the intellectually difficult issues are buried under the unlikely heading of “externalities.”

When mainstream economists think about economic democracy they do not begin from scratch. Instead they begin their thinking in the framework of a private enterprise market economy where there are already employers, employees, and consumers. In such an economy the employers — not the consumers of goods and services — are the ones who get to decide what goods will be available to consume. And the employers — not the employees who do the work — are the ones who get to decide how the work will be done. While this seems to obviously disenfranchise both consumers and workers from decisions that affect them greatly, mainstream economists caution us not to rush to verdict. They argue that while it is true that the employers do get to decide what to produce, consumers’ preferences will guide owners of productive facilities to produce what consumers want — as long as there are many producers competing against one another to sell their goods in competitive goods markets. Mainstream economists also argue that while it is true that the employers do get to tell their employees how to go about their work, employers will seek to please workers’ preferences about how they work — as long as there are many employers competing against one another to hire employees in competitive labor markets. 

There is no doubt that the more competitive goods markets are, the more consumer preferences will influence what they get to consume, and the more competitive labor markets are, the more workers’ preferences about how they go about their work will be taken into account by their employers. But even when goods and labor markets are competitive, the degree of influence consumers and employees exert over the decisions that affect them in capitalist economies falls far short of anything deserving the title “consumer and producer (i.e. worker) sovereignty.” A heterodox economic theory called “the conflict theory of the firm” demonstrates that even when labor markets are competitive, employers have incentives to organize work in ways that disempower employees — hardly something employees would choose if they were truly “sovereign.” And even competitive goods markets bias the choices consumers face for different kinds of goods, and distribute “votes” in a way that can hardly be considered democratic. 

But most importantly, by labeling the effects on an individual of choices made by others in market economies “externalities,” and by treating externalities as exceptions to the rule, mainstream economic theory (1) effectively relegates the difficult issues of economic democracy in market economies to an underdeveloped backwater of mainstream economic theory, and (2) neatly classifies all situations where people who are “external parties,” are disenfranchised in market economies as exceptions to the norm. The mainstream economic paradigm effectively mirrors the classical liberal paradigm of John Locke, substituting mathematically sophisticated non-intersecting individual production and consumption possibility sets for Locke’s references to independent yeomen farmers and artisans.

Unfortunately, those outside the mainstream of the profession have not been much more helpful than mainstream economists in clarifying how we should think about economic democracy. Progressive economists outside the mainstream invariably call for economic democracy, but just as invariably fail to specify what they mean precisely. To a great extent, “economic democracy” has been reduced to a feel-good phrase, which like “sustainable development” often obscures more than it clarifies. Heterodox economists who are openly critical of capitalism do make clear they do not believe employees in capitalist firms enjoy economic democracy or that producer and consumer sovereignty add up to meaningful economic democracy. And Marxists criticize capitalism because it “alienates” workers from their labor and its products and from their “species being.” But besides sweeping generalizations to the effect that economic democracy will be achieved when economic decisions are finally made by “the associated producers,” there has regrettably been little concrete help from outside the mainstream of the economics profession toward defining our elusive goal.

Economic Self-Management

There is a straightforward, alternative conception of economic democracy that takes into account the fact that most economic decisions affect more than one person, but not everyone equally: Economic democracy means having decision making input, or power, in proportion to the extent that you are affected by a choice or decision. If you are affected more than someone else by a particular economic decision, then you would have more say than they do. If you are affected less, you would have less input than they do. Then we can say that if everyone has decision making input in proportion to the degree they are affected, for every economic decision, the economy is characterized by, or has achieved economic democracy.

However, the phrase “economic democracy” is already used to mean different things by different people, and practically never used in the way suggested here. So it seems helpful to give this new way of thinking about economic democracy a name of its own: We define economic self-management as decision making input in proportion to the degree one is affected by different economic choices, and suggest that thinking about how to achieve economic self-management for everyone is the best way to think about achieving economic democracy.

Shortly I will turn to the far more difficult matter of how we might achieve economic democracy as economic self-management by designing decision making procedures in particular ways. But of course it will never be possible to arrange for decisions to be made in ways that every person enjoys perfect economic self-management, any more than it will never be possible to achieve perfect economic justice no matter how well an economy is designed to do so. However, at least the goal of maximizing economic self-management as we define it is always meaningful, whereas the goal of maximizing people’s economic freedom over the choice sets that affect them is only meaningful in a context where those choice sets do not intersect, which they often do. Because when choice sets do intersect, increasing the economic freedom of one person over her choice set necessarily diminishes the economic freedom of someone else over their choice set. In other words, when two people’s choice sets intersect it is impossible to simultaneously maximize the economic freedom of both, in which case you must choose some set of rules that prioritize the economic freedom of one over the economic freedom of the other, you cannot maximize economic freedom in general.

On the other hand, regardless of how intertwined the choice sets that affect people may be, no matter how often an economic decision affects more than one person, no matter how uneven the pattern of effects of economic decisions on multiple parties; it is still always possible to move from a decision making procedure that less perfectly apportions decision making input in accord with the extent to which people are affected to a decision making procedure that more perfectly apportions decision making power according to how much people are affected. In other words, when we think of economic democracy as collective economic self-management we have a well-defined goal that offers a clear objective that is achievable in theory, even if only imperfectly in practice under the most democratic decision making procedures conceivable.

Of course agreeing on a definition and a goal is not the same as achieving the goal. Just because we have a rigorous definition of economic self-management, and just because this gives us a coherent goal to shoot for and measure different decision making procedures against, this does not mean we know what procedures will best achieve economic self-management. Nor does it help us decide how we can best determine the degree to which different people are affected by different economic decisions. Nor does it help us identify and deal with situations where it is pointless to deny that people do feel affected by the behavior of others, but we may not think it is right to give them input in any case. In other words, having a clear idea of what we mean by economic democracy does not solve any of the hard problems of achieving it. Nonetheless, getting clear about the goal is a first step in the right direction. As long as the phrase “economic democracy” remains vague, and is used to mean different things by different people, it is difficult to make progress toward achieving economic democracy. And as long as people labor under a misconception about what economic democracy means, we will continue to search in the wrong directions. Thinking of economic democracy as individual economic freedom can lead us to embrace anti-democratic economic institutions like private enterprise and markets. While thinking of economic democracy as majority rule can blind us to the fact that even the most democratic version of central planning conceivable would still deny people economic democracy by failing to let those who are more affected by a decision have more say over that choice.

Achieving Collective Economic Self-Management

We believe our greatest intellectual contribution to organizing economic activities to achieve collective economic self-management – giving everyone decision making power or input in proportion to the extent that different decisions affect them – lie in our proposals for how to conduct annual planning, investment planning, and different kinds of long-term development planning. However, our proposals for how to promote self-management inside worker councils, and how to give consumers meaningful self-management as well are easier to understand. So we begin there.

Self-management Inside Worker Councils

We propose that every worker, regardless of seniority, have one vote in his or her worker council, which is the ultimate decision making authority for the workplace. However we have also proposed two other measures, one of which has proven to be very controversial.

For small worker councils there is no need for different sub-units since it is practical for all to participate actively in meetings of the entire worker council which can be held weekly or whenever there is need. For example, at South End Press in Boston and several worker councils in the A-Zone in Winnipeg where participatory economy self-management “principles” were self-consciously practiced for decades, the number of workers was never large enough to require sub-units. But presumably there will be worker councils producing steel for example, where true economies of scale lead to worker councils with many hundreds or even thousands of members. And in large production units like these, it seems apparent that creating sub-units which are semi-autonomous makes sense. For example, open hearth workers, blast furnace workers, rolling mill workers, and warehouse workers might have their own councils to discuss issues among themselves that have mostly to do with their own work. It would be up to the worker council for the entire steel mill to sanction creation of any sub-units, and monitor how autonomous any sub-units would be. While the proposal for semi-autonomous councils for sub-units has gone unchallenged, our second proposal to foster meaningful self-management within workplaces — balancing jobs for empowerment — has proven to be the single most controversial of all our proposals.

Every economy organizes work into jobs that define what tasks a single individual will perform. In both capitalist and centrally planned economies most jobs contain a number of similar, relatively undesirable, and relatively un-empowering tasks, while a few jobs contain a number of relatively desirable and empowering tasks. But why should work empower only a few? If we want everyone to have an equal opportunity to participate in economic decision making, and if we want to ensure that a formal right to participate equally in worker councils translates into an effective right to participate equally, doesn’t this require balancing work for empowerment? We expect the education system in a desirable society to prepare everyone to take part in social decision making effectively, and we expect a democratic political system to accustom people to participate effectively as well.  But if some sweep floors all week, year in and year out, while others evaluate new technological options and attend planning meetings all week, year in and year out, is it realistic to believe they have an equal opportunity to affect workplace decisions simply because they each have one vote in the worker council? Doesn’t taking participation seriously require balancing jobs for empowerment? Proponents of participatory economics believe it does.

In a participatory economy worker councils are advised to create job balancing committees to distribute and combine tasks in ways that make jobs more “balanced” with regard to empowerment. Over the past three decades the reaction against balancing jobs for empowerment from not only mainstream but many progressive economists and activists as well has been fierce. What objections have been raised, and how do we respond?

For example:

Apart from their inhibition of personal freedom, balanced job complexes designed to avoid specialization seem likely to deprive society of the benefits of activities performed well only by people who have devoted a disproportionate amount of time and effort to them.

— Thomas Weisskopf

Personal endowments as well as preferences differ greatly. Up to a point, specialization provides important efficiency gains. A certain level of specialization and hierarchy seems necessary and functional to me.

— Nancy Folbre

Balanced jobs are designed to avoid disparate empowerment and thereby protect the freedom of those who otherwise would not have equal opportunity to participate in economic decision making. Balanced jobs are designed to prevent class divisions, for example between those who do mental and manual labor. But balanced jobs do not eliminate specialization. The proposal is not that everyone spend some time working at every task in her workplace — which is ridiculous, and impossible in any case. Each person will still perform a small number of tasks in her particular balanced job. For example, some will still specialize in brain surgery, others in electrical engineering, others in high voltage welding, etc. But if the specialized tasks in a job are more empowering than tasks are on average in a workplace, those who perform them will perform some less empowering tasks as well. And if the specialized tasks in a job are more desirable than tasks are on average, those who perform them will also perform some less desirable tasks. 

Moreover, the tasks each person performs only need to be balanced over a reasonable period of time. Jobs do not have to be balanced every hour, or every day, or every week, or even every month. The balancing is also done in the context of what is practical in particular work situations. Technologies and worker capabilities and preferences must all be taken into account when balancing jobs in any worker council. Finally, the balancing is done by committees composed of workers in each work place, and done as they see fit. We do not propose that jobs be balanced by an external bureaucracy and imposed on workplaces. Instead, proponents of a participatory economy believe there is every reason to expect that job balancing committees composed of workers in a workplace will take ample leeway in organizing work to accommodate technological, skill, and psychological considerations while eliminating the kind of large, persistent differences in empowerment that characterize work life today. Nonetheless, critics have repeatedly raised two objections that deserve consideration:

1. Talent is scarce and training is socially costly, therefore it is inefficient for talented people, or people with a great deal of training, to do “menial” tasks.

The “scarce talent” argument against balancing jobs makes a valid point. However, proponents of a participatory economy believe the objection is often overstated. It is true not everyone has the talent to become a brain surgeon, and it is true there are social costs to training brain surgeons. Therefore, there is an efficiency loss whenever a skilled brain surgeon does something other than perform brain surgery. Roughly speaking, if brain surgeons spend X% of their time doing something other than brain surgery, there is an additional social cost of training X% more brain surgeons. And it is even possible that the average native talent of a pool of brain surgeons which is X% larger will be slightly less than it would have been had the pool been smaller.

However, virtually every study confirms that participation not only increases worker satisfaction, it increases worker productivity as well. So if balanced jobs enhance effective participation, as they are intended to, the efficiency loss because they fail to economize fully on “scarce talent,” must be weighed against the productivity gain they bring from greater participation of all workers. Then, if there is still a net efficiency loss, this would have to be weighed against the importance of balancing jobs for empowerment in giving people equal opportunities to exercise self-management in work.

2. For everyone to participate equally in economic decisions ignores the importance of expertise.

This “expertise” argument against balancing jobs for empowerment fails to distinguish between a legitimate role of expertise and an unwarranted usurpation of decision making power by experts. In circumstances where the consequences of decisions are complicated and not readily apparent, there is an obvious need for experts. But economic choice entails both determining and evaluating consequences. Presumably those with expertise in a complicated matter can predict the consequences of a decision more accurately than non-experts. But those affected by a choice know best whether they prefer one outcome to another. So, while efficiency requires an important role for experts in predicting consequences of choices in complicated situations, efficiency also requires that those who will be affected determine which consequences they prefer. This means that just as it is inefficient to prevent experts from explaining consequences of complicated choices to those who will be affected, it is also inefficient to keep those affected by decisions from making them after considering expert opinion. Self-management, defined as decision making input in proportion to the degree one is affected by the outcome, does not mean there is no role for experts. Instead it means confining experts to their proper role, and preventing them from usurping a role that it is neither fair, democratic, nor efficient for them to play.

In sum, proponents of participatory economics believe there is ample leeway in organizing work to accommodate practical considerations while eliminating persistent differences in empowerment and uncompensated differences in desirability.

Self-management for Consumers

While not all of us are workers, we are all consumers, and not just consumers of personal items like shirts, video games, and vacations at the beach. We are also consumers of neighborhood public goods like sidewalks and playground equipment in our neighborhood park, city-wide public goods like libraries and mass transit, and state, regional, and national public goods like port facilities, bridges, national and state parks and forests, an interstate highway system, and national defense. While market economies allow consumers to choose as they wish among a plethora of private consumption goods, they make it far more difficult for consumers to express preferences for a variety of public goods. One of the liabilities of market economies is that while they reduce the transaction costs people have to overcome for individual consumption, they do nothing to lower the transaction costs of expressing one’s preferences with regard to collective consumption, which generates an unfortunate bias against collective consumption in favor of private consumption. We have tried to eliminate this “bias” in a participatory economy as follows.

Every household in a neighborhood is a member of the neighborhood consumer council where every household submits its personal, household consumption request for approval, As long as the household’s income is sufficient to cover the social cost of its personal consumption request, it is automatically accepted and becomes part of the neighborhood council proposal during annual planning as explained below. All members of households also participate directly in discussions about what neighborhood public goods to ask for, and all members vote for recallable delegates to higher level federations of consumer councils at the ward, city, county, state, regional, and national levels.

The purpose of these federations is to allow people to express demands for public goods, i.e. goods which people consume jointly. Delegates to federations discuss and vote on what public goods their constituents want to ask for. While a neighborhood council might request new swing sets for its neighborhood park, it would be up to the city federation to request an extension to the city’s mass transit system, up to the state federation to request new campsites at state parks, and up to the national federation to request upgrades for the national railway system and new weapon systems for national defense.

While participation is via direct democracy in neighborhood councils, participation is necessarily via representational democracy in federations. Neighborhood councils must send delegates to deliberate in federations on behalf of those they represent. There is much that will have to be determined regarding how delegates represent their constituencies. How will delegates be selected? What will be their terms of service? What, if any procedures will there be to recall delegates? Will delegates be free to vote as they see fit, or be required to remand decisions to binding referenda by those they represent? And finally, will the answers to these and other questions be left up to each council represented by a delegate in a federation to decide regarding its own delegates, or will federations establish rules which apply to all delegates? We leave all that to be determined by the constituents of different federations when the time comes. However, while deliberation in worker and neighborhood consumer councils can and should be conducted through direct democracy, unfortunately the deliberative work, although not necessarily the final decisions of federations, must be done through representative democracy.

Self-management and Annual Planning

Our participatory annual planning procedure is unique in the democratic planning literature as explained below. And in my opinion it is the most important intellectual contribution we have made regarding how democratic planning can be reconciled with an appropriate degree of autonomy for worker and consumer councils.

The participants in the planning procedure are worker councils (WCs) and federations, consumer councils (CCs) and federations, communities of affected parties (CAPs), and an Iteration Facilitation Board (IFB) which plays a perfunctory role. Conceptually, annual participatory planning is quite simple: The social, iterative, planning procedure works as follows:

(1) At the beginning of each round of planning the IFB announces current estimates of the opportunity costs of using all natural resources, all categories of labor, and all capital goods available for use, as well as current estimates of the social cost of producing different capital goods, intermediate goods, and consumption goods and services, as well as the current estimates of damage caused by release of different pollutants. These estimates can be thought of as “indicative prices” since they provide useful “indications” of what it costs society when we use different primary inputs, and what it costs society to produce different goods and services. In other words, the phrase “indicative prices” refers to estimates of opportunity and social costs.

(2) CCs and consumer federations respond by making consumption proposals. That is, they propose what goods and services, both private and public, consumers want to consume. WCs respond by making production proposals. That is, they propose what “outputs,” including pollutants, they want to produce and what “inputs”they want permission to use to accomplish this—including not only intermediate goods they need from other worker councils and capital goods they want to use, but any natural resources  and different kinds of labor they would need as well. CAPs respond by proposing how much of a pollutant they want to allow to be emitted in light of how much their members will be compensated for being exposed to it.

(3) The IFB adds up all the demands for and supplies of each final good, intermediate good, capital good, natural resource, category of labor and pollutant, and adjusts its estimate of the opportunity or social cost of the good (or bad) — that is its “indicative price” — up or down in proportion to the degree of its excess demand or supply.

These three steps are repeated in subsequent rounds, or “iterations,” until there is no longer any excess demand for any final or intermediate good, capital stock, natural resource, category of labor, or pollutant.

We have proved that under assumptions about technologies and preferences which are standard in the literature each round in this social, iterative procedure will begin with new, more accurate estimates of opportunity and social costs, the procedure will eventually lead to a feasible plan where everything someone is counting on will actually be available, and this feasible plan will be a Pareto optimum, or what economists call an efficient outcome. 

Consumption council proposals are evaluated by multiplying the quantity of every good or service requested by the estimated social cost of producing a unit of the good or service, to be compared to the average effort rating plus allowances of the households in the consumption council requesting the goods and services. If, for example, the average effort rating plus allowances for members of a neighborhood consumption council is equal to the social average, this should entitle them to consume goods and services whose production costs society an amount equal to the average cost of providing a neighborhood consumption request. A neighborhood council whose members have higher than average effort ratings plus allowances is entitled to a neighborhood consumption bundle which cost society more than the average; a neighborhood council whose members have lower than average effort ratings plus allowances should only be entitled to a consumption bundle which costs less than the average. 

The important point is that the estimates of opportunity and social costs generated during the planning procedure make it easy to calculate the social cost of consumption requests. This is important information for councils making consumption requests since otherwise they have no way of knowing the extent to which they are asking others to bear burdens on their behalf. It is also important for councils which must vote to approve or disapprove consumption requests of others, since otherwise they have no way of knowing if a request is fair — consistent with sacrifices those making the request have made — or unfair — in excess of sacrifices made.

Production proposals from worker councils are evaluated by comparing the estimated social benefits of outputs to the estimated social cost of inputs. In any round of the planning procedure the social benefits of a production proposal are calculated simply by multiplying quantities of proposed outputs by their “indicative” prices and summing, and social costs of a production proposal are calculated by multiplying quantities of inputs requested by their “indicative” prices, and summing. If the social benefits exceed the social costs—that is, if the social benefit to cost ratio of a production proposal exceeds one, SB/SC > 1, everyone else in the economy is presumably made better off by allowing the worker council to do what they have proposed. On the other hand, if the social benefit to cost ratio is less than one, SB/SC < 1, the rest of society would presumably be worse off if the workers went ahead to do what they have proposed, unless there is something “the numbers” fail to capture. Again, the “indicative” prices make it easy to calculate the social benefit to cost ratio for any production proposal, allowing worker councils making proposals to determine if their own proposals are socially responsible, and giving all councils who must vote to approve or disapprove production proposals of others an easy way to assess whether those proposals are socially responsible as well.

This procedure “whittles down” overly ambitious proposals submitted by worker and consumer councils about what they would like to do to a “feasible” plan where everything someone is expecting to be able to use will actually be available. Consumer councils requesting more than their effort ratings and allowances warrant are forced to either reduce the amounts they request, or shift their requests to less socially costly items if they expect to win the approval of other councils who have no reason to approve consumption requests whose social costs are not justified by the sacrifices of those making them. Similarly, worker councils are forced to either increase their efforts, shift toward producing a more desirable mix of outputs, or shift to a less socially costly mix of inputs to win approval for their proposals from other councils who have no reason to approve production proposals whose social costs exceed their social benefits.

Efficiency is promoted as consumers and workers attempt to shift their proposals in response to updated information about opportunity and social costs in order to avoid reductions in consumption or increases in work effort. Equity is promoted when further shifting is insufficient to win approval from fellow consumers and workers which can only be achieved through consumption reduction or greater work effort. As iterations proceed, consumption and production proposals move closer to mutual feasibility, and estimates more closely approximate true opportunity and social costs as the procedure generates equity and efficiency simultaneously. There is more to say about various issues, but this is what it boils down to:

When worker councils make proposals they are asking permission to use particular parts of the productive resources that belong to everyone. In effect their proposals say: “If the rest of you, with whom we are engaged in a cooperative division of labor, agree to allow us to use these productive resources belonging to all of us as inputs, then we promise to deliver the following goods and services as outputs for others to use.” When consumer councils make proposals they are asking permission to consume goods and services whose production entails social costs. In effect their proposals say: “We believe the ratings we received from our coworkers, together with allowances members of households have been granted, indicate that we deserve the right to consume goods and services whose production entails an equivalent level of social costs.” 

The planning procedure is designed to make it clear when a worker council production proposal is inefficient and when a consumption council proposal is unfair, and allows other worker and consumer councils to easily deny approval for proposals when they seem to be inefficient or unfair. However, initial self-activity proposals, and all revisions of proposals, are entirely up to each worker and consumer council itself. In other words, if a worker council production proposal or neighborhood council consumption proposal is not approved, the council which made the proposal and nobody else can revise its proposal for resubmission in the next round of the planning procedure. As far as we know this aspect of the participatory planning procedure distinguishes it from all other planning models, which we believe is crucial if workers and consumers are to enjoy meaningful self-management.

Others have suggested giving “outside stake holders” seats on enterprise councils because people who do not work at an enterprise are often affected by enterprise decisions. It is certainly the case that what a worker council does will affect constituencies other than council members. Moreover, since winning outside stake holders a seat at the table in corporate boardrooms today is a reform often worth fighting for, many progressive activists assume it is how the issue of enterprise effects on the broader “community” should be addressed in a desirable, post-capitalist economy as well. Why have we rejected this suggestion? There are two disadvantages to addressing the problem of community effects in this way:

1. How does one decide which other constituencies are affected, and how many seats to give them? It seems naïve to assume there would be no differences of opinion on these matters, and in absence of any objective criteria, decisions would be arbitrary even if not contentious.

2. If outsiders have seats, workers in an enterprise have no place where they can discuss what they want to do free from outside interference. Giving stake holders seats on the enterprise council requires workers to hear from, and convince outsiders before they can even formulate a proposal about what they want to do. In order to motivate workers to embrace their own self-management we want their worker council to be a “space” for them and them alone.

If the only way to enfranchise outsiders who are affected were to give them seats on enterprise councils, it might be necessary to achieve self-management as we understand it. But we believe the participatory planning procedure provides others who are affected an appropriate degree of influence over enterprise decisions without infringing on the autonomy of workers in the enterprise. In particular, by including CAPs as active participants in annual planning we are able to estimate the magnitude of external effects which either go ignored in market economies, or whose magnitudes must be estimated by various kinds of “studies” which are both unreliable and contestable.  Our planning procedure also empowers others to reject any proposal a group of workers makes that fails to benefit those outside the worker council at least as much as it costs them, and does so without arbitrarily deciding which outsiders are affected and to what degree. Limiting representation in worker councils only to workers in an enterprise does not mean they get to do whatever they want irrespective of its effects on others. If a worker council votes to use productive resources belonging to everyone inefficiently, their proposal will not be approved during the participatory planning procedure. In other words, proponents of participatory economics believe the legitimate interests of others outside a workplace can be better protected through the participatory planning procedure than by giving outsiders seats on enterprise councils, which denies workers the opportunity to function in a council where only they have voice and vote. To summarize: This is how we propose to achieve the goal of collective economic self-management:

1. Every worker has one vote in his or her worker council. And in workplaces with large numbers of workers and many sub-units, the worker council can choose to make sub-units semi-autonomous if it wishes.

2. Consumers are free to consume whatever kinds and amounts of goods and services they prefer as long as their rating from work and/or allowance is sufficient to cover the overall cost to society of producing the goods and services they request.
3. Consumers each have one vote in their neighborhood consumption council regarding the level and composition of neighborhood public good consumption, as well as one vote in choosing delegates to represent them in federations of consumer councils requesting higher level public goods.

4. “External parties” who are disenfranchised in market economies are given voice through CAPs which are among the participants during annual planning.

5. Most importantly, in the participatory planning procedure worker and consumer councils not only propose what they, themselves, will do in the initial round of the participatory planning procedure, they alone make all revisions regarding their own activity during subsequent rounds of the planning procedure.

Does all this guarantee that if a particular decision affects me 1.13 times as much as it affects someone else, I will have exactly 1.13 more say than they do? Of course not. But I will get to decide what kinds of private goods I consume. My neighbors and I will get to decide what local public goods we consume. Along with my fellow citizens I will get to decide what regional and national public goods we consume. And my coworkers and I will get to decide what we produce and how we produce it — as long as we propose to use society’s scarce productive resources efficiently.

Self-management and Planning Over Time

Only recently have we proposed how a participatory economy might go about investment planning, and long-run education planning, environmental planning, infrastructure planning, and strategic international economic planning. There are two significant problems which arise when planning over time which we do not have to contend with during annual participatory planning.

• Future generations who will be affected by investment and development plans cannot be present when those plans are created to represent themselves and their interests.

• Calculating efficient plans over time requires knowing how much, and in what ways technologies and preferences will change in the future, which nobody can know for sure.

Our proposal to enfranchise future generations is what we call a generational equity constraint. We propose to require the present generation to choose a limit, β, on what percent aggregate consumption can differ between any two adjacent years before investment and development plans are created. To protect itself against the possibility that technical progress will be brisk, and therefore an efficient investment plan will call for high levels of investment to the detriment of present consumption, the present generation would be wise to vote to for a β that is not too high. However, by doing so the present generation will also have protected future generations against the possibility that technical change might prove to be lackluster, or environmental degradation might be significant, in which case an efficient investment plan will call for low levels of investment to the detriment of future generations. 

What calculating any efficient plan over time requires is estimating the magnitudes of different categories of future benefits and costs from investment, to be weighed against the benefit of more consumption now. Taking access to information and motivation into account, we discuss who might best be tasked with making these various estimates for investments in physical capital, human capital, and natural capital. But perhaps more importantly, since whoever is charged with making various estimates will inevitably make mistakes, we explain (1) how mistakes can be identified from results of subsequent annual plans, and (2) how welfare losses can be then be mitigated by revising investment and development plans.

For each kind of planning over time we have proposed that consumer federations and different worker federations as well as different ministries participate in formulating the plan in various capacities. However, once a plan has been created, and once it has been checked to be sure it does not violate the generational equity constraint, and modified if necessary; since investment and development plans affect everyone, we propose they be debated thoroughly, and either approved by the national legislature or put to a national referendum.

A Cautionary Note: In all the various kinds of development planning we found that various federations and ministries must be heavily involved in providing estimates of effects which are critical to determining (a) how much it is efficient to invest in education, (b) how much it is efficient to invest in protecting the environment, (c) how much is efficient to invest in infrastructure, and (d) which industries should be favored by tariffs or subsidies, for how long — before an agency uses those estimates to calculate an efficient education, environmental, infrastructure, or  international economic development plan. Which means that those participating in generating crucial estimates and using them to calculate development plans are delegates to federations, officials in ministries, and staffs of different development planning agencies – which, to be frank, worries us!

Of course these delegates and officials represent ordinary workers, consumers, and citizens. Of course the selection process, terms of office, conditions for recall, and whether delegates receive instructions from those they represent about how to cast important votes, are all important considerations affecting how much voice and control those who they represent will have. Of course the staff of development planning agencies merely turn the data given them into efficient development plans. And of course, once plans have been drawn up they should be subjected to debate and approval by the national legislature and/or popular referenda. Nonetheless, we worry that especially for those who are long accustomed to being denied access to decision making power, and are understandably suspicious that their participation will continue to be meaningless, the absence of more direct participation by ordinary people in the formulation of various development plans is problematic. We offer three thoughts on this subject:

(1) We have not discussed the role for political movements, campaigns, and parties. Socialist visionaries sometimes give the impression that none of these social, advocacy or political groups will be necessary in a truly desirable society – like old war horses, they are no longer needed when peace breaks out. We believe quite the opposite. We believe the assumption that political advocacy organizations will no longer be necessary in socialism is naïve and utopian in the worst sense of the word. We believe that in a society where the majority have more time and far greater opportunity to become involved in decision making of all kinds, that both traditional and new kinds of political advocacy groups will become even larger and stronger, and that passions will continue to run deep about issues they address. So we think it is important to imagine the development planning procedures we have described – and the delegates and officials who participate in them — as being subjected to intense scrutiny and agitation of all kinds by various advocacy groups of interested citizens.

(2) Nonetheless, we believe that because delegates do play important roles in estimating effects necessary to determine efficient development plans, because staffs in ministries use those estimates to calculate efficient long-term plans, and because popular participation is largely limited to selecting and monitoring representatives and voting in referenda on different overall long-term plans, it is all the more important that ordinary workers and consumers participate directly and actively in annual planning by proposing and revising self-activity proposals for their workplaces and neighborhoods — as we have now explained is perfectly possible. 

(3) Finally, we are open to any suggestions for how to increase popular participation in education, environmental, infrastructure, and international economic planning. While we had that goal very much in mind when designing our proposals, we may have ignored opportunities to increase more direct participation by workers, consumers, and citizens. We believe we have broken new ground in demonstrating how workers and consumers can participate directly in planning their own activities, and coordinate them with others efficiently and fairly during annual planning. Any similar path breaking ideas about how to involve workers and consumers more directly in the formulation of long-term development plans are welcome!

References

Friedman, M. 1964. Capitalism and Freedom, Chicago IL: University of Chicago Press.

Hahnel, R. 2002. “Amartya Sen: The Late Twentieth Century’s Greatest Political Economist?” in Understanding Capitalism: Critical Analysis from Karl Marx to Amartya Sen, Doug Dowd editor, London UK: Pluto Press.

Hahnel, R. 2021. Democratic Economic Planning, New York NY: Routledge.

Seabright, P. March 29, 2001. “The Road Upward: Review of Development as Freedom.” The New York Review of Books.

Sen, A. 1999. Development as Freedom, Oxford UK: Oxford University Press.