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.