TRADITIONAL

ECONOMIES

Valuative Criteria

First, we accept the traditional view that a desirable economy should be equitable. However, we distinguish four mutually exclusive distributive maxims that different schools of thought have used to define the meaning of "equitable":

1. Payment according to personal contribution and the contribution of property owned.

2. Payment according to personal contribution.

3. Payment according to effort.

4. Payment according to need.

A variety of arguments indicate the desirability of attaining important goals that most traditional economists ignore. Besides equity, selfmanagement (decision making input in proportion to degree affected), solidarity (granting others equal consideration in their endeavors), and variety (attaining a diversity of outcomes) are desirable. For example, more self-management is desirable, ceteris paribus, because we humans have the capacity to analyze and evaluate the consequences of our actions and choose accordingly, and we garner considerable satisfaction from doing so. Greater solidarity is desirable, ceteris paribus, because social esteem is an important source of human fulfillment and achieving it through invidious comparison is a zero or negative sum game, while achieving it through solidarity is a positive sum game. Finally, a variety of life-styles promotes sound ecology, assists in maximizing human well-being under conditions of uncertainty, and increases opportunities for another important source of human satisfaction, vicarious enjoyment. To add self-management, solidarity, and variety to the traditional list of valuative norms does not require that we argue that these goals can be maximized simultaneously any more than traditional theory must argue that equity and efficiency can be maximized simultaneously to include both as valuative norms. The point is only that self-management, solidarity, and variety are all legitimate valuative criteria for judging economic institutions. In short, human development characterized by self-management, solidarity, and variety is preferable, ceteris paribus, just as efficient allocations and equitable distributions are preferable, ceteris paribus. Asking whether particular institutions help people attain self-management, variety, and solidarity is sensible.

We also accept the traditional view that a desirable economy should be efficient. As long as resources are scarce relative to human needs and socially useful labor has burdensome components, efficiency is preferable to wastefulness, ceteris paribus. Moreover, we accept the concept Pareto optimality as a useful definition of social efficiency for most purposes. But since people are conscious agents whose characteristics and therefore preferences develop over time, to assess long-term efficiency we must assess the impact of economic institutions on people's development. In this regard, a series of theorems we have proved elsewhere usefully highlights the importance of institutional biases without assuming one kind of preference is "better" than another. ¹

Welfare Theorems with Endogenous Preferences

1. The degree of nonoptimality will be greater than indicated by traditional welfare theory and the divergence from optimality will "snowball" over time.

2. Individuals' human development patterns will be "warped" and the warping will "snowball" over time.

3. The effects of the bias in the economy will be disguised to participants who adjust unconsciously or forget they have adjusted after the fact.

The logic behind these new welfare theorems is that to the extent people recognize the "preference development" as well as "preference fulfillment" effects of their economic choices, it is sensible for them to take both effects into account when making decisions. If an economic institution is biased against some activity-that is, if it systematically charges people more than the true social opportunity cost of making the activity available to them-then rational people will choose activities in part to develop a lower preference for that activity than if they were charged the true social opportunity cost. It follows that the demand for the activity will be less than had people not adjusted their preferences. But this implies even less resources will be allocated to produce the activity than had people not adjusted. The ensuing misallocation of resources will further warp human characteristics, leading to further misallocation.³

The theorems summarized above indicate that if an economic institution systematically biases the terms of availability of different economic options, the consequence will be a snowballing divergence from efficient allocations. This implies that a major factor in judging economic institutions should be determining whether they exert any systematic biases on individual choice.

In sum, to judge both traditional and new economic institutions, we will ask whether they subvert or promote:

1. Efficiency (where human characteristics and preferences can develop over time).

2. Equity (interpreted as payment according to effort).

3. Self-management (defined as decision making input in proportion to the degree one is affected).

4. Solidarity (defined as equal consideration for the well-being of others).

5. Variety (defined as a diversity of outcomes).

We will also ask if economic institutions impose any biases on individual choice that impede these five aims by charging people other than the true social opportunity costs for activities.

Allocation Institutions

Elsewhere we have examined markets and central planning in detail according to the above criteria.⁴ A summary of our findings regarding markets is that the cybernetic, incentive, and allocative properties of markets involve a pervasive bias against discovering, expressing, and developing needs that require social rather than individual activity for their fulfillment. Markets do not provide concrete information about how my decisions affect the life prospects of others. They do not even provide accurate summaries of the social benefits and costs associated with what I decide to do since they misevaluate external effects, and external effects are the rule rather than the exception. Actual market allocations undersupply social goods and activities and oversupply individual goods and activities, thereby establishing incentives for individuals to wean themselves of needs that require socially coordinated intercourse for their fulfillment and accentuate needs that can be met individually. Moreover, markets reward competitive behavior and penalize cooperative behavior. In sum, markets not only erode solidarity, but systematically mischarge purchasers, so that over time preferences that are "individually rational" for people to develop combine with biases inherent in market allocations to yield outcomes increasingly further from those that would have maximized human fulfillment. In the end, the fears of "romantic" critics who decry the "socially alienating" effects of markets prove more to the point than the assurances of "scientific" economists that markets are ideal allocative institutions.

However, studies (and history) have revealed that the best-known alternative to markets is flawed as well. A summary of our case against central planning is that it necessarily generates authoritarian dynamics, minimizes the information that producers receive about their relations with others, and generates a monopoly of technical knowledge in the Central Planning Bureau. Central planning's interunit roles are command relationships that promote compatible hierarchies within production units. No matter how democratic procedures for determining the social welfare function planners attempt to maximize may be, central planning is ill suited to providing workers greater say over their own activities than over the activities of others. While traditional critics of central planning focus on information and incentive problems, we argue that central planning's "tragic flaw" is its bias against self-management and the authoritarian dynamics this entails.

While it would take us too far afield to reproduce our full critique of markets and central planning, since our conclusions diverge dramatically from traditional conclusions we outline our logic here.

Markets

The traditional view celebrates markets as socially neutral efficiency machines. In contrast, we discover a fatal antisocial bias that generates gross inefficiency.

Commodity Fetishism

Markets coordinate economic activity by providing separate units the opportunity to offer their outputs in exchange for the outputs of others. In any economy, the activity of any group would be impossible without inputs from other groups and outputs from one group would have no purpose were they not destined to be inputs for some other group. We easily understand that workers at the beginning and end of a GM assembly line undertake the connected social activity of making automobiles, but we have difficulty understanding that workers at U.S. Steel and at GM are similarly related. This "comprehension differential" arises because within local units we see that activities of different individuals are consciously coordinated to achieve a goal, while between units markets obscure our ability to see activities as joint endeavors. Outside each firm, relations between people and things or things and things remain evident, but relations between people and people are obscured. This, of course, has been termed "commodity fetishism," and its corrosive ills are independent of ownership relations. For workers to comprehensively evaluate their work they would have to know the human and social as well as material factors that went into the inputs they use as well as the human and social consequences their outputs make possible. But the only information markets provide, with or without private property, are the prices of the commodities people exchange. Even if these prices accurately reflect all the human and social relationships lurking behind economic transactions, they will not allow producers and consumers to adjust their activities in light of a selfconscious understanding of their relations with other producers or consumers. It follows that markets do not provide qualitative data necessary for producers to judge how their activities affect consumers or vice versa. The absence of information about the concrete effects of my activities on others leaves me little choice but to consult my own situation exclusively. But the individualism this leads to will impede solidarity and efficiency.

Antagonistic Roles

Lack of concrete qualitative information in market economies makes cooperation difficult, but competitive pressures make it individually irrational. Neither buyers nor sellers can afford to consider the situation of the other. Not only is relevant information unavailable, solidarity would be self-defeating. Polluters must try to hide their transgressions since paying a pollution tax or modernizing their equipment would lower profits. Even if one producer in an industry does not behave egocentrically, others will, and if the altruists persist in their socially responsible behavior they will ultimately be driven out of business for their trouble. In general, market competition militates against solidarity, again, regardless of ownership relations.

Markets and Workplace Hierarchy

The information, incentive, and role characteristics of markets also subvert the rationale for workers to take initiative in workplace decisions even if they have the legal right to do so. Workers' councils in Yugoslavia have the right to meet and make decisions, but why should they? Market competition forces decision makers to maximize a bottom line. Any human effects unrepresented in costs and revenues are ignored on pain of competitive failure. Workers' councils motivated by qualitative, human considerations ultimately fail, eliminating even their own information-limited generosity.

Since competitive pressures militate against criteria such as workplace satisfaction, it is perfectly sensible for workers' councils in market environments to hire others to make their decisions for them. The pattern is simple. First, worker desire for self-management erodes. Next, workers hire managers who in turn hire engineers and administrators who transform job roles according to competitive dictates. Even in the absence of private ownership, a process that begins with workers choosing to delegate technical and alienated decisions to experts ends by increasing the fragmentation of work, bloating managerial prerogatives, and substituting managers' goals for those of workers. It is not too long before a burgeoning managerial class of "coordinators" begins to maximize the size of the surplus earmarked for themselves and to search for ways to preserve their own social power.

Antisocial Bias

The last problem with markets is that they are biased against provision of goods with greater than average positive external effects. The fact that markets systematically overcharge users of goods with positive external effects and undercharge users of goods with negative external effects is well known to traditional economists. But what is not readily admitted is that external effects are the rule, not the exception, because this implies that market prices generally misestimate social benefits and costs and markets generally misallocate resources. Coupling recognition of this bias with an understanding that consumers eventually bend their preferences toward relatively less expensive offerings and away from relatively more expensive offerings helps explain why markets inexorably produce egocentric behavior and antisocial outcomes. Ironically, it turns out that once we account for the endogeneity of preferences and recognize the pervasiveness of externalities, markets not only impede solidarity, self-management, and equity, but generate misleading price signals and inefficient allocations as well.

Markets and Coordinatorism

In sum, theoretical analysis based on realistic assumptions about external effects and endogenous preferences suggests that even if capitalist owners are replaced by democratic workers' councils, market allocations disempower executionary workers and empower conceptual workers. That this can lead to popular apathy, egocentric personalities, and a new ruling class of coordinators is clear. And nothing in the historical experience of Yugoslavia suggests otherwise. Markets predictably generate pressures for class differentiation and intrinsically subvert equality, participation, and collective selfmanagement.

Central Planning

It is well known that central planning cannot be efficient unless central planners:

1. Know the quantities of available resources and equipment.

2. Know the ratios in which production units can combine inputs to yield desired outputs.

3. Are informed of the relative social worths of final goods.

4. Have sufficient computing facilities to carry out elaborate quantitative manipulations.

5. Can impose incentives that will induce managers and workers to carry out their assigned tasks.

If we generously grant all these assumptions, central planners can calculate an efficient production plan and then choose from a variety of options for how to assign workers to jobs and distribute goods to consumers. But in all known versions of central planning:

1. The famous down/up down/up process is down-go-questions up-come-answers; down-go-orders up-comes-obedience.

2. Qualitative information essential to evaluating human outcomes is never generated, much less disseminated.

3. Elite "conceptual workers" monopolize what information is required for decision making.

4. The only management left to production units is to manage to fulfill centrally planned targets using allotted inputs.

Moreover, in real world central planning, planners can bias the "social welfare function" in favor of their interests. But even if we assume that planners forswear all opportunities to bias planning objectives, and even if goals are established by democratic voting procedures, two important defects remain.

1. Since most actors would still be denied access to quantitative information, and no one would have access to anything but the most cursory qualitative information, no citizen could intelligently determine her or his preferences in light of all social effects.

2. Since majority rule allocates the same influence over every decision to every voter, even "best case" central planning would fail to provide self-management since workers and consumers would not influence outcomes in proportion to the extent they are affected. That is, even though my opinion about my workplace should count more than someone else's opinion of my situation-just as their opinion should count more than mine about their workplace-everyone would have the same decision making input about production in every workplace if decisions are made by democratic voting for the social welfare function which planners translate into a production plan.

Finally, as we discussed previously, in all economic systems individuals naturally orient their preferences toward opportunities that will be relatively plentiful And away from those that will be relatively scarce. If a bias arises in expected future supply of particular roles or goods, people will contour their development accordingly. In the case of central planning, the bias against providing self-managed work opportunities militates against people developing greater desires and capacities for self-management and promotes ever greater apathy instead. We have explained these tendencies at great length elsewhere.⁵ But even the summary presented. here should suffice to explain why central planning is likely to promote coordinator rule and skew economic outcomes.

In sum, markets systematically destroy solidarity while central planning systematically thwarts self-management. Both contain fundamental biases that generate increasingly nonoptimal outcomes and social dynamics that promote coordinator class rule. It follows that economies cannot employ either markets or central planning and expect to achieve participatory, egalitarian outcomes. Instead, if these goals are to be achieved, a new allocative procedure will have to be found.

Production and Consumption

Even if a participatory economy cannot use traditional allocative procedures, must we search for new ways of organizing production and consumption as well?

Private Ownership

For some, "freedom of enterprise" is a fundamental right as well as the cornerstone of political liberty. In this view, if people are not free to hire any who are willing to work for them under conditions the employer specifies, people's fundamental economic freedoms are violated, and other freedoms are threatened as well. While we agree that economic freedom is a crucial valuative criterion and inextricably linked with political and cultural freedom, we do not accept the equation of economic freedom with freedom of enterprise, or the conclusion that private enterprise is compatible with economic freedom.

In our view, economic freedom is best defined as decision making input in proportion to the degree one is affected by the outcome of an economic choice, or as self-management. The problem with freedom of enterprise is that the "freedom" of employers inevitably conflicts with the "freedom" of employees. When stockholders exercise their freedom of enterprise to decide how their company will operate, they violate their employees' right to decide how their laboring capacities will be utilized. In other words, if production is organized under private ownership, the "property" rights of employers (freedom of enterprise) inevitably conflict with the "human" rights of employees (selfmanagement). One way of explaining our position is that we accord human rights priority over property rights. A more philosophically consistent way of putting it is that we grant all the right of selfmanagement, which is the only formulation of "economic freedom" that does not implicitly grant some people freedom at the expense of others.

The rebuttal of those who define economic freedom as freedom of enterprise is, of course, that employees are always free not to work for any particular employer, and free to become employers themselves if they wish. There are three problems with this response.

1. Unequal ownership of property is inconsistent with "equality of opportunity" to become an employer under the best of circumstances, and effectively limits the majority to choosing which employer will infringe upon their right of self-management in realistic settings.

2. Even if we started with equal ownership of property, maintaining equality of ownership entails redistributing people's property which supporters of freedom of enterprise oppose
as unjustifiable expropriation and a violation of people's right to dispose of their wherewithal without interference.

3. Even if equal opportunity to become an employer could be maintained, this merely grants all an equal chance to infringe on someone else's human right of self-management rather than have their own right of self-management violated. It is the logical equivalent of a fair lottery assigning people to be slave owners or slaves.

In any case, private ownership subverts self-management as we define it. It also subverts equity, defined as payment according to effort, since this maxim implies that income derived from ownership of property is unjustifiable, which we discuss at length in chapter 3. Finally, there is a more subtle argument against private enterprise. Unless there is 100 percent labor turnover each time period, profit maximization under competitive conditions implies that any kind of laboring activity that generates employee empowering traits will have an actual market wage less than its socially optimal wage and be undersupplied by private employers, while any kind of labor activity that weakens employee empowering traits will be paid more than its socially optimal wage and be oversupplied by private employers. ⁶ Various writers from a school of economic analysis known as "the conflict theory of the firm" have argued plausibly, in our opinion, that work conditions under participatory, cooperative, and fair conditions constitute laboring activities of the first kind-which will be undersupplied according to our theorem-whereas work under discriminatory conditions or in situations with artificial hierarchies constitute laboring activities of the second kind, and will, therefore, be oversupplied. So the common thread running through the conflict school is that socially counterproductive and inefficient practices such as wage and employment discrimination, exaggerating hierarchies, and de-skilling the work force are part and parcel of profit maximization. Or, put differently, profit maximization under private enterprise undermines rather than promotes selfmanagement and solidarity, and misallocates human productive potentials as well.

However, even if private enterprise is ruled out on efficiency and equity grounds, as well as because it is inconsistent with selfmanagement, it remains to assess traditional workplace structures that have existed in public as well as private enterprise environments and are generally considered an inevitable part of economic life.

Hierarchical Production

We leave to chapter 2 the question of whether production can be organized in ways that are nonhierarchical, and if so, whether this necessarily entails a loss of efficiency. Here we simply ask if hierarchical production relations are consistent with the goals of a participatory, equitable economy.

The answer is "no" for reasons that are obvious to most workers but apparently obscure to many economists. If someone's work is mechanical and mindless it will diminish her or his self-esteem, confidence, and self-management skills. On the other hand, if someone's work is exciting and challenging, it will enhance her or his ability to analyze and evaluate economic alternatives. Hierarchical work leaves a differential imprint on personalities. For those at the top it yields an inquisitive, expansionist outlook. For those at the bottom it leaves an aggrieved and self-deprecating view. People's confidence or self-doubts, intelligence or ignorance, wisdom or foolishness all derive, in part, from the kind of economic activities they engage in. If an economy segregates the work force so that most people do rote work while only a few people engage in conceptual tasks, these opposed classes will inevitably develop unequal capacities to participate in economic decision making. Conversely, if we want to increase economic participation, we must arrange job complexes to be equally empowering.

Under hierarchical arrangements, many capable citizens enter industry only to exert little influence and do boring work. Those few who advance to more fulfilling and commanding jobs have freer workdays and greater "thinking" time than those who remain at the bottom. Each promotion increases immediate power and also the beneficiary's skill and information advantages for future competitions. Not only will this lead to disparate opportunities for participation, but hierarchical production relations will generate inegalitarian outcomes as well. People who occupy favored positions in production hierarchies will appropriate more pleasant work conditions and greater consumption opportunities than those afforded their subordinates. And this will be the case whether the hierarchy is based on differential ownership or on differential access to information and decision making opportunities.

Consumption Institutions

Economists generally take consumption for granted and expend little energy evaluating consumption institutions. Since we recognize the social aspects of consumption activity obscured in the traditional economic paradigm and propose social institutions to coordinate "social" consumption, we must address the issue of the implications of hierarchical relations in consumption as well as production. Not surprisingly, we find that hierarchical consumption relations will create disproportionate input in decision making and inequality, so that if participatory equitable economies exist they must have nonhierarchical consumption relations.

Since the case that hierarchical relations of consumption subvert equal access to participation and equity is logically similar to the argument against hierarchical production relations, what remains to establish is the relevance of the problem in the case of consumption. Even in traditional economies that provide insufficient means for expressing and organizing social consumption, many consumption decisions are made by families and by various agencies of local, state, and federal government. In a traditional, patriarchal family there is a hierarchy of influence over consumption decisions in which the male head of household, wife, and children have degrees of authority that are not in proportion to the degree they are affected. Many traditional government procedures are far from democratic, and even when decisions are subject to one person one vote, to suggest that 79,000 Americans who earned the minimum wage in 1987 had the same influence over public consumption as Michael Milken, who "earned" as much as all of them combined, is highly disingenuous. So in traditional economies there is social consumption whose organization is hierarchical. And in participatory economies, where social consumption will receive greater attention, it will be even more important to ensure that consumption is not organized hierarchically. For hierarchy implies disparate influence that is uncorrelated with the degree people are affected, whether it be in context of production or consumption decision making.

The Logic of Power

While hierarchical production is logically conceivable alongside participatory and equitable consumption, and vice versa, there are good reasons to doubt that any real social formation could maintain such combinations. A hierarchy, anywhere, implies disparate influence over outcomes. Just as it is difficult to imagine that those with greater influence overproduction decisions would not eventually use their power to ensure themselves more pleasurable work situations, it is difficult to believe that those with greater power in one area of social life would not use their advantage to seek advantages elsewhere. Provided we remember that such efforts do not always succeed and that self-management can "spread" as well as disparate power can, we might refer to this logic as the "law" of institutional accommodation. Just as economic hierarchies in capitalist economies can subvert participatory politics, we should bear in mind that hierarchical relations in any part of the economy can subvert participatory, equitable, relations in the others. Not only must we rule out hierarchy in production, consumption, or allocation as subversive of participation and equity in other sectors of society, but as subversive of establishing and maintaining participation and equity in other aspects of the economy as well.

It follows that the arguments in this chapter, which we have presented elsewhere at great length, leave us no choice but to search for new institutions and procedures for organizing production, consumption, and allocation if we are to achieve efficiency, equity, self-management, solidarity, and variety. This we do throughout the rest of this book.

1. See chapter 6 in Hahnel and Albert, Quiet Revolution in Welfare Economics (Princeton, N.J.: Princeton University Press, 1990), hereafter cited as Welfare Economics.

2 See also our treatment in chapter 4 in Welfare Economics

4. See chapters 7 and 9 in Welfare Economics.

5. In chapter 10 of Welfare Economics we examined the theoretical properties of central planning, and in Albert and Hahnel, Socialism Today and Tomorrow (Boston: South End Press, 1981) we analyzed the historical experiences of the Soviet Union, China, and Cuba.

6. See theorem 8.1 in Welfare Economics.