The last years of the 1980s saw the collapse of Soviet ...



20 The Possibilities of a Third Way

MARKET SOCIALISM AND SOCIAL MARKETS

market socialism.

social market economy

MARKET SOCIALISM

The Function of the Capital Market

The basic service the capital market supplies is the evaluation of each traded firm’s net worth. This signals to its management and its owners how the market judges its future prospects. If this value declines relative to that of similar firms, this may be taken as an indication that the market considers the firm’s policies inferior to those of its competitors. In severe situations, this may convey a recommendation to change the top management team of the firm, possibly through a takeover by an alternative team. In extreme cases, when the market believes that the expected present value of the firm’s cash flow is negative or significantly below the breakup value of the firm, the capital market may apply direct sanctions by bankrupting the firm.[1]

Making Capital Decisions under Socialism

Politicians

Investment Boards

Ludwig von Mises, the promarket Austrian economist, argued trenchantly that a socialist state would be unable to handle the question of a railway investment very well:

Suppose, for instance, that the socialist commonwealth was contemplating a new railway line. Would a new railway line be a good thing? If so, which of many possible routes should it cover? Under a system of private ownership we could use money calculations to decide these questions. The new line would cheapen the transportation of certain articles, and, on this basis, we could estimate whether the reduction in transport charges would be great enough to counterweigh the expenditure which the building and running of the line would involve. Such a calculation could be made only in money. We could not do it by comparing various classes of expenditure and savings in kind. If it is out of the question to reduce to a common unit the quantities of various kinds of skilled and unskilled labor, iron, coal, building materials of different kinds, machinery, and the other things which the building and upkeep of railways necessitate, then it is impossible to make them the subject of economic calculation. We can make systematic economic plans only when all the commodities which we have to take into account can be assimilated to money. True, money calculations are incomplete. True, they have profound deficiencies. But we have nothing better to put in their place. And, under sound monetary conditions, they suffice for practical purposes. If we abandon them, economic calculation becomes absolutely impossible.[2]

The Soft Budget Constraint

The Impact of Soft Budget Constraints on the Conduct of the Enterprise

The most important issue is dynamic adjustment. If the budget constraint is hard, the firm has no other option but to adjust to unfavorable circumstances by improving quality, cutting costs, introducing new products or processes, i.e. it must behave in an entrepreneurial manner. If, however, the budget constraint is soft, such productive efforts are no longer imperative. Instead, the firm is likely to seek external assistance, asking for compensation for unfavorable external circumstances. The State is acting like an overall insurance company taking over all the moral hazards with the usual well-known consequences; the insured will be less careful in protecting his wealth. [Joseph] Schumpeter [the Austrian economist] emphasized the significance of “creative destruction”: the elimination of old products, technologies, organizations which were surpassed by the more efficient new ones. The soft budget constraint protects the old production line, the inefficient firm against constructive destruction and thus impedes innovation and development.[3]

The Possibility of Market Socialism

THE SOCIAL MARKET ECONOMY

The European Model

.

The Stakeholder and the Stockholder

A stakeholder is defined as someone who, while not a titular owner of a business, has legitimate interest in its performance and success. The stakeholders of a corporation may include not only the shareholders but also labor, management, customers, suppliers, lenders, and the community in which the corporation is located. Consequently, if stakeholders have any legitimacy, they have a voice that influences the performance of the corporation.

TABLE 20.1

Banks’ Share of Voting Rights at AGMs of Large German Companies, 1992

Shares Owned By:

Subsidiary Total

Investment Bank

Company Banks Funds Proxy Votes Votes

Siemens — 9.87 85.61 95.48

Volkswagen — 8.89 35.16 44.05

Hoechst — 10.74 87.72 98.46

BASF 0.09 13.61 81.01 94.71

Bayer — 11.23 80.09 91.32

Thyssen 6.77 3.62 34.98 45.37

VEBA — 12.62 78.23 90.85

Mannesmann — 7.76 90.35 98.11

Deutsche Bank — 12.41 82.32 94.73

MAN 8.67 12.69 26.84 48.2

SOURCE: The Economist, 3 June 1995, 66.

Stakeholders as Shareholders

TABLE 20.2

The 10 Largest Firms in the United States with Employee Holdings above 50 Percent of Total Equity, 2002

|Company |Plan |Business |Number of Employees|

|United Parcel Service |401k |Package Delivery |344,000 |

|Publix Supermarkets |ESOP,stock purchase |Supermarkets |111,000 |

|United Airlines |ESOP |Airline |98,400 |

|Hy-Vee |ESOP |Supermarkets |46,000 |

|ScienceApplications Intl. |multiple |R&D/Computer Systems |41,000 |

|Lifetouch |ESOP |Photography Studios |25,890 |

|Dyncorp |ESOP |IT/Technical Services |23,000 |

|Tharaldson Motels |ESOP |Motel Management |18,980 |

|Amsted Industries |ESOP |Industrial Production |12,500 |

|CH2M Hill, Inc. |stock purchase |Engineering& Construction |12,000 |

SOURCE: National Center for Employee Ownership: The Employee Ownership 100,

Cooperative Organization

. The Statement on Cooperative Identity defines four fundamental principles to define coperatives:

1. Cooperatives are member-owned and -controlled businesses, in which all members have an equal say in the governance of the business: one member, one vote. Co-ops stand in contrast to proprietary ownership, in which one person holds all of the authority, and "traditional" corporate ownership, in which bases control on the size of one's investment.

2. Second, cooperatives serve their members, and not the interests of speculative capital. By establishing limits on the return of investment and on share holdings, cooperatives discourage profit-seeking investments. Instead co-ops encourage local control and investments by the people who use the business.

3. Third, cooperatives help the members actively govern their organization through education and help other cooperatives to better serve their members. This is done through buying goods from other cooperatives and providing development assistance to organizing groups.

4. Finally, cooperatives exist not just for the benefit of the members but to serve, strengthen, and sustain local communities. They are community organizations.

The Future of Stakeholding

employee stock ownership plans (ESOPs).

retail cooperatives,

mutual thrift institutions

mutual insurance societies.

demutualisation.

The economic rationale behind it assumes that mutuals—which are comprehensive stakeholder organizations where customers (both depositors and borrowers in the case of thrift associations) and potential future customers have an interest—are less efficient organizations than conventionally organized corporations. Mutuals not only lack the ability to offer stock option remuneration schemes, but also they cannot raise capital on the stock market, relying instead on debt finance. These factors, it was argued, lead to inefficiency relative to joint stock companies and unless action was taken they would lose out in the market place. However, an alternative explanation is that the building societies have been systematically pillaged by management and “carpetbaggers” to the detriment of other present and future stakeholders. Explanations focusing on efficiency do not answer the question of why the mutual thrifts were so successful for such a long time and grew to have such power.[4] In the retail sector, the cooperative societies that were founded in the 19th century to give customer/stakeholders a share in the management and profit of retailing have fallen of late on hard times. Again, this is frequently attributed to the absence of incentives for management because of an inability to use stock option schemes.

corporate social responsibility

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[1] Michael Keren, “On the (Im)Possibility of Market Socialism,” in The Road to Capitalism, ed. Kennett and Lieberman, 45–52

[2] Ludwig von Mises, “Economic Calculation in Socialism,” in The Road to Capitalism, ed. David Kennett and Marc Lieberman (Fort Worth, Tex.: Harcourt Brace, 1993), 38–39.

[3] Kornai, “The Soft Budget Constraint,” 10–11.

[4] In July 1999 the British Treasury issued a report on Demutualisation, Ninth Report of the Select Committee of the Treasury, HMSO (22 July 1999). It examined the case for and against mutual societies, but in general saw no reason to oppose demutualisation.

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Box

The Third Way

There is popular appeal in the current drive to find “Third Way” in politics, an appeal that has been effectively harnessed by Tony Blair’s New Labour in Britain and by Gerhard Schroeder’s “New Centre” in Germany. Both speak of a need to extend democracy, broaden property ownership and take up the challenge of rapid change. Both have been apparently inspired by the book “The Third Way: The Renewal of Social Democracy,” written by Anthony Giddens, a sociologist and the Director of the London School of Economics. However, some critics find the rhetoric rather empty. Ralf Dahrendorf, another sociologist, who preceded Giddings as Director of the LSE described the “Third Way” as “as a politics that speaks of the need for hard choices but then avoids them by trying to please everybody.” Among those who is apparently pleased is Senator Hillary Clinton who speaks of the “Third Way” as “unified theory of life which will marry conservatism and liberalism, capitalism and statism, and tie together practically everything: the way we are, the way we were, the faults of man and the word of God, the end of communism and the beginning of the third millennium." It has at least the universalism that characterized the failed “isms” of the 20th century but in its present form it has great appeal but few teeth.

References:

Giddens, Anthony The Third Way: The Renewal of Social Democracy. London: Polity Press, 2000

DeGroot, Gerard “The Third Way,” Christian Science Monitor, June 14, 2000, page 9. Accessible at .

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