John Quiggin criticizes socializing finance

John Quiggin of Crooked Timber fame has a post on the Jacobin website today critiquing a recent article on socializing finance by Seth Ackerman. After Ackerman’s piece was published, I wrote two sympathetic posts (I, II) about the idea of socializing finance. Quiggin is skeptical.

In his response, Quiggin does not appear to take exception to the idea of socializing finance, just with the specifics of Ackerman’s proposal. He makes three objections. First, socializing finance is politically unfeasible because many individuals have retirement savings in financial assets, and they will not support being forced to sell them to the government. Second, owner-managed businesses would cause practical difficulties for the plan because capital and labor income in such businesses are blurred. It is not clear what exactly you would seize from them and whether that would be a good idea. Third, the public managers of the new socialized equity could behave just as badly as the private mangers do.

Quiggin goes on to offer somewhat related proposals that he thinks are better, but here I want to address his specific objections. And it can be done quickly: use a different socializing scheme. I don’t know how important the specifics of Ackerman’s socializing scheme are to Ackerman, but there are very easy ways to use a different socializing scheme that can escape these problems.

For instance, consider a socializing scheme where the federal government levied steep inheritance taxes and used the proceeds to buy up financial assets from voluntary actors. This is a popular proposal among the people who write about socializing finance. It effectively converts the assets of dead people into public assets. There are strong fairness arguments in support of this idea. Inheritance is unearned and tends to entrench wealth and privilege across generations. Why not use it for the benefit of all, instead of the benefit of birth lottery winners, as is often the case?

The philosophical justification aside, this sort of socializing scheme would easily avoid objections one and two of Quiggin’s proposal. First, nobody would be forced to sell any assets. Unlike Ackerman’s proposal, it would not be mandatory. The government will use the revenues it generates from the inheritance tax to buy up assets just like any other market actor and only from willing participants. The retirees and those not looking to sell have nothing to worry about. Second, the owner-manager problem disappears at least for some time. Under this scheme, the government would buy up equity gradually each year, starting first with equity stakes that are already on the market. It would take some time before it hit a wall and the only remaining equity out there was being held by owner-managers. And even then, there would be no mandatory selling under this scheme.

This proposal does not solve the last problem of corrupt public administration, but I am not sure anything will except perhaps strong oversight. We know that the public already manages huge funds and seems to do so reasonably well. I have not seen too many really damning stories about CalPERS or the Alaska Permanent Fund for instance. There are some, but not many. In any case, it is not clear why public administration would be any more corrupt and harmful than private administration, especially given what we have seen recently. Saying that the problem might persist is not a reason against making the change. It would wash out of the comparison if both types of administration have the defect.

So, in short, there are ways to socialize finance that don’t run into the problems Quiggin raises. I tend to like socializing finance through voluntary purchases funded by inheritance taxes. Since that scheme — and others not mentioned here — escape Quiggin’s proposed problems, we should just socialize finance that way.

Socialize finance!

Seth Ackerman has a fantastic piece (a primer if you will) in the latest Jacobin. At the heart of the piece is an explanation of the economic calculation problem, and the challenge it poses to the realization of socialism. For those interested in this sort of thing, the discussion is pretty standard, but still worth reading and passing along to others.

The short is that without free-floating market prices, it is arguably impossible to make the economic calculations necessary to allocate productive resources well. Every bit of production trades off with an infinite variety of other kinds of production: the labor and material used in the production could be re-purposed towards other ends. A critical function of any economic system is determining how best to manage those trade-offs to produce what we most want.

In the status quo, the buying and selling of things at free-floating prices functions as a decentralized economic calculator. This calculator generates signals that are then used to align production. The chief task for socialist technicians is to figure out how to achieve their socialist goals without losing the ability to carry out the economic calculation necessary for production. The easiest way to do this is by preserving the market price mechanism, and socializing around it in various ways. This is called market socialism.

In his piece, Ackerman’s proposal for socializing around the market is to socialize finance. Those familiar with Gar Alperovitz will quickly recognize the proposal. In essence, the state would set up a sovereign wealth fund that purchases shares in existing companies. Such funds would quite literally socialize the means of production by transferring ownership of business equity from private individuals to the public state. Funds similar to this already exist in some limited ways, e.g. the Alaska Permanent Fund and public pension funds like CalPERS.

This idea is very commendable in many ways. Using a public wealth fund to buy equity in private businesses preserves the economic calculation function of the market, but redirects profits, dividends, and capital gains to the state. This would allow the state to capture the passive returns that wealthy private investors currently capture. The state could then distribute that extra revenue to the public through cash transfers (as they do in Alaska) or use it to finance valuable public investment.

I like this idea so much that I wrote a post a short time ago arguing that the federal government should exploit the super-low interest rates on treasuries to start building a sovereign wealth fund right now. Just as super-low interest rates make debt-financed public investment a no-brainer right now, it also makes debt-financed private investment a no-brainer as well.

With that said, it is important to highlight the limitations of this form of socialization. All this socialization does is wrestle away profits, dividends, and other forms of capital income away from private — and generally very wealthy — hands. While this is technically a socializing move, it does not necessarily have a significantly egalitarian or democratizing effect. Swapping out private owners for government owners does not necessarily empower workers in their own firms or ensure that low-income workers get a raise. To the extent that worker democracy and egalitarianism are critical goals of the socialist agenda, financial socialization will not, by itself, be sufficient.

To be fair, advocates of it have never claimed that it will be sufficient. The goal of socialized finance is very narrow: capture financial rents for the public. That’s a very worthwhile goal, and one that seems to be in reach. To increase income equality and worker strength, however, other programs and strategies are much more critical.

The explosive LIBOR scandal

Of all the bank malfeasance that surfaced in the last decade, the LIBOR scandal developing in the UK right now dwarfs them all. In essence, a number of banks conspired to manipulate interest rates in order to make certain financial positions pay off. I worry that the level of abstraction involved here is so great that the scandal will not capture the popular imagination. Nonetheless, there is no way to exaggerate just how massive this scandal is. And it’s only just begun unfolding.

Some selected coverage: