In this article I explore the challenges of allocating and pricing access to existing capital goods in a Participatory Economy.
Capital goods are long-term physical assets that a workplace uses in their production process to make finished products and services. For example: buildings, machinery, equipment, vehicles, and tools. In a Participatory Economy, capital goods, like any productive resource, are socially owned under the productive commons and are priced and allocated to workplaces, who are given access rights to use them by the rest of society, during the annual participatory planning procedure.
However, the allocation and pricing of already produced and existing capital goods present a number of challenges in the context of the annual planning process. Below I discuss these challenges and point to possible ways to deal with them.
Capital goods in annual participatory planning
When the annual planning starts, the available supply of manufactured productive capital assets is known and fixed, and every worker council in the economy has access to an initial set of productive manufactured capital assets.
According to the model, every worker council identifies as part of its production proposal which parts of society’s total stock of capital goods it wants to get access to. They start from their initial set of capital assets and identify which categories of assets they want to add or reduce. In theory, in each new iteration, they can adjust their proposed access to capital assets in the light of price changes, i.e, changes in opportunity costs and other circumstances.
However, the pricing and allocation of society’s stock of existing capital goods does not necessarily always fit smoothly and neatly into the mechanisms of annual participatory planning as it has been presented so far.
Capital goods are often unique
To begin with, many available fixed capital assets will be unique items. For instance, a factory building or a customised installation, and since the supply is fixed to unique items it is unlikely that supply and demand will converge smoothly without actual face to face negotiations between potential “buyers” and “sellers” and there are no face-to-face negotiations taking place in the annual planning process.
For instance, in today’s economy a potential bid on a production facility is normally proceeded by a long and intense process of inquest, questions and answers and a close examination and screening of the included assets before a buyer feels confident enough to form an opinion about a price.
Capital goods are often tied to a fixed location
Since, in a participatory economy there will be no mobile external capital owners scanning for investment opportunities, there presumably won’t be very much demand in excess of the demand from the present users for most fixed assets, at least not demand expressed in a way that is useful in the participatory annual planning iterations.
This is because most productive fixed capital assets are tied to an individual worker council, and they are also often physically connected to the ground where they sit, which makes them immovable, e.g, buildings, facilities, fixtures, and installations. And most worker councils are tied to one workplace, and they will not be very interested in demanding fixed assets in other locations away from where their members live and work once they have been given the opportunity to bid on their initial set of capital assets, for instance fixed assets tied to a car manufacturing worker council or a steel mill worker council.
Capital goods define production capacity
Furthermore, in a participatory economy worker councils bid on assets by including them in their production proposals during annual planning. In their production proposals they identify both the resources they demand and the output they supply using the requested resources.
This means that, in an iteration, if there would be a demand for a production facility and its associated fixed assets over and above the demand emanating from the present user, the same physical fixed productive assets would generate an exaggerated demand for labour and intermediate resources, and a proposed production volume exceeding the feasible output many times since the same fixed assets would be included in several different production proposals. This would potentially cause big problems in the planning iterations, especially in industries with large and few production units.
Other capital assets may be more mobile, e.g, lighter machines and tools, and various types of vehicles, trucks, tractors, and wheel loaders, even though their primary purpose, once delivered, is to be used in production and not to be traded. These assets could possibly be better suited for the procedures in the annual planning process.
There are other important circumstances that makes it difficult for the annual planning procedure to generate prices that accurately reflect opportunity costs for existing capital goods:
1) Many capital goods are not replaced very frequently which makes it extra difficult to estimate current opportunity costs. Of course, this is true in all economies and in our present capitalist market economies most existing fixed and long-term productive capital assets have traditionally been valued at historic acquisition cost rather than at current market value since an estimated market value for a unique fixed asset or facility is very uncertain up until an actual sale takes place.
2) Since capital assets have long economic lives, it means that two capital assets produced in different years with the exact same functionality and capacity, i.e., with the same opportunity cost, will have cost society different amounts to produce if prices change between years. The social cost of producing a capital asset is not necessarily the same as its opportunity cost, unlike for a consumption good.
3) The opportunity cost of an active productive capital asset will change over its economic lifetime, for instance, as maintenance and repair costs increase because of wear and tear, or as newer and more productive technology is developed and becomes operational.
I see at least two important consequences from what has been pointed out in the discussion above:
1) The industry federations will often have to play an important and active role in allocating existing sets production facilities and their associated fixed capital assets between worker councils, which then use these assets as basis for their production plans in the annual planning. Industry federations will decide on new admissions, closures, increases and decreases in production capacity in existing facilities etc. This is especially true for heavy industries.
2) In practice, the user right fees charged to worker councils for access to fixed capital assets will often have to be derived and calculated outside of the annual planning iterations based on the price for the last produced unit in the relevant category of capital goods, or sometimes even the asset’s historic acquisition cost, and the estimated depreciation curves for the assets in question.
Anders, I think you have highlighted an important issue here about the unique characteristics of capital goods which poses challenges to treating the pricing and allocation of these assets which are already in use by worker councils, in the same way as we handle other types of inputs in the annual participatory planning procedure.
Is it correct that what you are saying is that because capital goods tend to be unique, tied to a fixed geographical location, and for other reasons you list in your article, they would need to be demanded as individual items, rather than as categories, as with other types of substitutable resources. Is that correct?
If so, thinking through a real-world example, if at my worker council we have a bicycle parts factory, it would be odd if the physical building and machines inside would be up for auction for others to ‘bid’ on in every year’s annual planning. Once our Worker Council has been granted the use of the factory and machines, I don’t think it would make sense for them to be available for others to demand access to and we should have the right to continue using them indefinitely - as long as we are consistently producing greater social benefits to costs (i.e using the resources efficiently), or unless we decided to close and make the physical assets available again for other groups to bid on to take over.
Is this how you see it? And with pricing do you see the usage fee of the factory being set to the annual depreciation? Do you see any possible drawbacks to this approach?
So, I don’t think that first access to a unique and fixed capital good, e.g a production facility, can or will be demanded in the same way as other goods in the annual planning. Instead, I believe that federations will have to play an active role in allocating the first access to many fixed capital goods to worker councils before the start of the annual planning. Once a worker council has been given access to a production facility, it can include it in the production proposal in the annual planning and it will be allowed to use it as long as the SB/SC ratio is positive, as you describe.
All this affects the pricing of individual, unique and fixed capital goods. Even in market economies, in which anything and everything is traded on a market and everything is supposed to have a market value, fixed capital goods have traditionally been valued at historic acquisition costs, not market values, because they are not traded in the same way as other goods. Any estimate of a market value of a fixed capital good would just be too uncertain and open up for manipulation, as well, if allowed.
Similarly, I assume that in a PE the user right fee for access to a fixed and unique capital good would have to be set to the annual depreciation cost based on the historic acquisition cost of the fixed good, or in some instances a replacement cost, i.e the cost for the last produced unit of the good.
Interesting, and thanks for clarifying.
Understood that you see that workplaces would be charged a user-right fee in the form of a fixed annual depreciation derived from the historic acquisition cost of the capital good. And how do you see the initial price (acquisition cost) for the capital good (e.g. a factory) being calculated?
At some point, every capital good including existing factory buildings was produced and delivered as part of an annual plan with its cost decided in and following from the annual planning. This is the historic acquisition cost. For more standardised fixed capital goods one could imagine using the cost for the latest produced unit of similar goods (the replacement cost) as the starting point for depreciation but for unique facilities, I think that one would have to settle with the historic cost. This is in analogy with how fixed assets are accounted for today.
Continue the discussion at forum.participatoryeconomy.org