1 of 10: Going beyond social democratic capitalism

November 17, 2021

This is the first of ten extracts from the new book Democratic Economic Planning (2021, Routledge) by Robin Hahnel. This article is taken from chapter two on Social Democratic Capitalism. It argues that while social democratic capitalism is better than neoliberal capitalism, it is still not good enough, that markets are inefficient, labor markets are unfair, markets subvert democracy, and why any private or market based economies are therefore not desirable.

Better than neoliberal capitalism, but not good enough

Most who call themselves socialist today believe that in the most desirable econ- omy that is possible there is a useful role for markets – if properly “tamed” – and some private enterprises – along with worker-owned cooperatives and some state enterprises. In other words, most socialists today believe that what is often referred to as a “mixed” economy is the best economy possible, and that replacing private enterprise and markets altogether with social ownership and comprehensive planning is a “bridge too far.” Let me be clear: As stipulated in the introduction to Part I:

  1. Social democratic capitalism is an immense improvement over today’s neo- liberal capitalism, and market socialism in which private enterprise is elim- inated entirely would be an even greater improvement.
  2. Moreover, in all probability in many countries, both will play an important role in the transition to a truly desirable economy

Nonetheless, this chapter makes the case that neither social democratic capi- talism nor market socialism can ever fully achieve the goals just spelled out in Chapter 1. And that is why we should not “stop short” and “settle” for social democratic capitalism or market socialism but instead forge ahead to build the kind of economic system described in Parts III, IV, and V of this book.1

Why not private enterprise?

Private Enterprise Is Incompatible with Economic Self-Management: Anti-capitalists have long argued that production in privately owned enterprises dooms employees to the status of “alienated labor” and prevents workers from “self- managing” their own labor as they choose. For almost as long mainstream economists have rejected this criticism, arguing that as long as labor markets are competitive, workers have control over the work process and its products through their supply of labor functions, which will be different for activities whose “process” or “products” the workers evaluate differently.

Mainstream economists argue that if work is debilitating or boring, work- ers will insist on a sufficient wage premium to compensate for their greater displeasure. And if workers deem the work product unworthy in some way, presumably here as well, employees will demand “compensating wage differen- tials.” As a matter of fact, traditional theory contends that the influence permit- ted workers over the work process and product through their supply of labor functions backed by their freedom to “vote with their feet” is all the influence they should be permitted.

Mainstream economists also argue that even within the framework of work- ing for an employer, different kinds of jobs and occupational categories permit varying degrees of self-direction over one’s laboring efforts. Carpenters engage in more self-directed work than assembly-line workers, and if self-management is important to people, this should be reflected in compensating differentials between jobs that differ in this regard.

Finally, mainstream economists point out that contrary to what anti-capitalists would have people believe, the barrier between employer and employee in private enterprise economies is not impermeable.2 Presumably, if self-directed labor were sufficiently important to someone, he or she would become self- employed, as many do in all private enterprise economies, and if needs be, accept lower income to work for themselves. And if the desire to conceive and coordinate activities involving more than one’s own efforts is strong enough, as the story goes, perfectly competitive capital markets permit people to take out loans and start their own businesses hiring others who care less than they do about participating in management. In fact, in the traditional view, to allow any greater control over the work product by individual workers would rob consumers of their say over what they will consume – that is, if we “de-alienate” workers from their products, we necessarily “alienate” consumers from the objects of their consumption!

In sum, in the traditional view as long as labor markets are competitive, the worker has “practical” control in the same sense that the consumer has “practi- cal” control over what products private employers “choose” to produce as long as goods markets are competitive. In effect, as soon as one concludes that private employers’ freedom of maneuver is nil because they are completely hemmed in by competitive labor and product markets, the “problem” of worker “aliena- tion” vanishes. In the traditional view, producer and consumer “sovereignty” are the appropriate concepts concerning influence over decision-making, and the anti-capitalist concept of alienation is rejected as inappropriate for evaluat- ing effective influence over decision-making in modern economies. However, a careful reworking of what is known as the conflict theory of the firm casts doubt on these traditional conclusions and suggests instead that private enterprise economies do have a bias against worker self-management even when labor and goods markets are competitive.

Employers and their employees have an obvious conflict of interest over how high the wage rate will be and how hard workers will work for their wage. But unless labor turnover rates are 100% in every time period, they also have a conflict of interest over at least some of the human characteristic transforming effects of the production process. The conflict between employer and employee in pri- vate enterprise economies is a complicated battle waged over time. In any period what is at stake is not only the present outcome in terms of wage rates and effort extracted, but changes in employee characteristics that can change the terrain for future battles. While the conflict of interest is ultimately over extraction and divi- sion, there is also an all-important conflict of interest over the human characteristic transforming effects of laboring activity, since these will affect the advantages and disad- vantages of employees and employers in their future struggles over extraction and division. What human characteristics would be likely to reduce employee bargain- ing power, and what traits would be likely to increase employee bargaining power?

Regarding “group characteristics,” anything that reduces solidarity among employees would rebound to the benefit of employers during negotiation over wages and effort. So aggravating racial and gender antagonisms, for exam- ple, by engaging in discrimination in hiring, promotion, or pay, or choosing technologies that isolate employees from one another might be expected to increase profits. Even if society were devoid of racial, religious, and sexual divi- sions for employers to manipulate, creating entirely artificial hierarchies might also undermine employee solidarity. But what is germane to the issue at hand regarding individual human characteristics is that a careful remodeling of the conflict theory of the firm reveals that it would be rational for profit-maximizing employers to favor technologies and labor management practices that decrease their employees’ desire for, and capacity to engage in self-managed labor, and as a result, it is predictable that in capitalist economies over time workers’ capacity for economic self-management will decrease and atrophy.

While it is true that more competition in labor markets reduces employers’ room for maneuver, as do higher turnover rates, nonetheless there is good reason to believe that the institution of private enterprise is biased against providing as much self-management in work as is warranted by people’s preferences and known technologies, which in turn will cause people’s preferences for economic self-management to atrophy. Specifically, theorems 8.1 and 8.2 are proved in Hahnel and Albert 1990, leading to the aforementioned conclusions if self-managed work is employee empowering to some degree.

Theorem 8.1: Wage Bias: Under private enterprise production, unless there is 100% labor turnover each time period, even if labor markets are competitive any kind of laboring activity that generates employee- empowering traits will receive an actual market wage that is less than the socially optimal wage, and therefore be undersupplied. And any kind of labor activity that weakens employee-empowering traits will be paid more than the socially optimal wage and therefore be oversupplied.

Theorem 8.2: Snowballing Non-optimality: Not only will production under private enterprise fail to deliver optimal job mixes in some initial time period, oversupplying work conditions that empower employers vis-a-vis employees; there will be a cumulative divergence away from optimal allocations in future time periods as individuals “rationally” adjust their personal characteristics to diminish their desire for work opportunities that are underpaid and enhance their preference for work opportunities that are overpaid.

In sum, a careful modeling of the conflict theory of the firm rebuts the stand- ard mainstream argument that private enterprise contains no bias against self- management provided labor and goods markets are competitive, and instead confirms the criticism that private enterprise is fundamentally at odds with worker self-management.

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