A Sketch of a Practicable Cooperative Socialist Economic System

1. Purpose

Socialists in the Marxist tradition have been suspicious of reflections on the nature of a socialist society as "blueprints," holding that the workers will find (or have already found) their own way to the forms of a socialist society. However, some anarchists and others have held that thinking about the nature of a future society can serve a useful purpose. These reflections are not at all meant to be a "blueprint." When free socialism is realized, it will most probably take a wide variety of forms. But reflections about the possible forms for a future cooperative socialist society can help us by challenging our understanding of our real ends and the means of obtaining them. It is my conviction also that the working class are more likely to find their own way to the appropriate forms after they have thought a great deal about what forms might be appropriate. To suppose otherwise seems to me to be too optimistic, too spontanist! Thus we ought to welcome a wide range of "blueprints" and utopian speculations, criticizing and discussing them, and treating them not as contradictions of our own ideas but as complements -- and where they contradict, confident that the discussion will be productive of a higher understanding all around.

This essay is meant to sketch one form that a minarchist socialist system might take. The society sketched will have much in common with existing society -- some will see it as insufficiently utopian! And they may well be right. But I believe it will be worthwhile to test the possibility that a society with truly minimal government and a free, democratic cooperative economic system might be created by incremental steps from the society we now have. If you don't agree, tell me where you feel my reasoning has gone wrong -- and then, at least, we will understand one another better.

2. Sectors

The economic system would consist of two major sectors, the corporate sector and the proprietary sector. Extrapolating from present conditions, we can anticipate that the corporate sector will employ most of the work force, but that the proprietary sector will consist of the larger number of enterprises, most of them quite tiny: family, individual, and even part-time enterprises. The dividing line should be size. For concreteness, we might say that any enterprise that deploys over 500 hours of labor per week (50 hours times 10 persons, for example) would be required to operate under charter as a corporation. Even in fairly large extended families, one would suppose that 500 hours per week would absorb the available family labor, and some hired labor might supplement family labor in some cases.

Corporations would be chartered by the central government, under strict rules. With one important exception, the corporations would be required to operate as cooperative corporations as the term has been used in these pages. That is, they would be democratic, with their officers and policies determined by majority voting on the part of the employee-members of the corporations. As corporations, they would raise capital by issuing shares, and the interests of the share-holders would be protected as these pages have proposed, i.e. by tying the dividends to the average pay of the employee-members. The exception would be start-up corporations. The owner of a proprietary firm would be able to apply once only for a temporary corporate charter, under which he could raise capital by share issues without regulated dividends but with a board of directors chosen by the vote of the shareholders. The temporary charter would allow the board of directors to be selected by the shareholders for a limited period (perhaps five years), and by codetermination with parity for a subsequent period (perhaps another five years). Thereafter, if not before, the corporation would have to be converted to a cooperative corporation, as I have described elsewhere. once the enterprise is established, the buy-out rules serve to assure that the innovator and risk-taking financiers of the enterprise will be able to get the market discounted present value of the future returns on the original investment.

This concession to the principle of industrial despotism is meant to encourage start-ups and innovation. In principle, cooperative corporations might be started directly, and once the cooperative corporation has become the accustomed norm, this will probably happen as a rule. However, the initiation of a cooperative enterprise is a multilateral deal. A start-up corporation under this proposal would be able to hire people by a series of one-to-one deals, putting together an enterprise of the necessary size and introducing innovative methods with most of the risk falling on those who put up the investment, as enterprises are started now.

Proprietary enterprises would be simply the property of the individual or family who initiate or buy them, very much as now. Such smaller enterprises will probably continue to play a role especially in agriculture and services.

3. Ownership

An essential point of socialism is that there should be no class that gains power or avoids the common necessity of work because of their ownership of property. Who, then, will own the shares in cooperative corporations?

What I propose is a form of the "social property" idea. The shares in cooperative corporations might be owned by two kinds of institutions, which are understood as representatives of "society." I shall call them "social funds." They are

pension funds
These funds would operate on actuarial principles to receive the savings of working people and pay life annuities for those working people when they are retired, and perhaps annuities for other purposes. The key point here is that there is no inheritable wealth in corporate shares -- working people would accumulate wealth for their old age, but whatever they pay into the system would eventually be paid out to that individual as a pension.
endowment funds
These could include the familiar endowment funds of educational and health institutions, museums and such, which provide, from the earnings of the funds, money to cover routine expenses of those nonprofit institutions. Ideally, however, this principle would be extended much further -- so that all production of the traditional government services (in the economist's jargon, public and quasipublic goods) would be paid for by endowment funds. There would then be no taxation for government revenue -- "every tub would sit on its own bottom," funded by its own endowment that it would control.

Of course, this simple ideal has to be qualified in a few ways in practice. First, it applies only to the corporate sector -- the proprietary sector would have to operate on different rules. On the one hand, family enterprises presumably would be heritable property -- those that survive long enough. (Today, most small enterprises are quite short-lived). Second, since tax freedom in the corporate sectors is a concomitant of social property, the proprietary sector will presumably continue to be taxed. Taxation is the correlate of private property in the means of production (though in practice, tax freedom is likely to be quite far away for everybody). Third, the special status of start-up corporations is inconsistent with 100% realization of social property. I have said that start-up founders would raise capital by issuing shares. From whom would they raise the capital? Presumably from the social funds. Thus, most of the shares of a successful start-up would be owned from start by the social funds, but since a start-up would begin as a proprietary enterprise in which the founder might have quite substantial ownership, a considerable part of the shares in a start-up corporation could still be in private ownership at the time of its conversion to a cooperative corporation (when its temporary charter expires). Such shares might be sold for spot cash, exchanged with pension funds for annuities, or used to contribute to the endowment fund of the founder's choice. In principle, there should be no private ownership of corporate shares.

I have said that, once the transition is complete, there would be no revenue taxation in the corporate sector of the society. The term "revenue taxation" is meant to set off one more exception. As a minarchist, I want to limit government to its minimal agenda; but the protection of the environment is very definitely on that minimal agenda. Penalty taxes can be a useful means of discouraging the wasting of environmental resources. Subsidies can also be useful as a means of encouraging pro-environment activities. It is likely that a system of environmental penalty taxes and subsidies could operate with a balanced budget -- no net revenues. Thus, no revenue taxes.

4. Formation and Allocation of "Capital"

Thus, ideally, the minimal functions of government would be paid for from the dividends paid by cooperative corporations to the endowment funds, and there would be no revenue taxation. This reflects some ideas from modern (post-Marxist) economics.

The labor theory of value, as David Ricardo developed it and Marx applied it in the first volume of Capital, is a very long-run theory. Ricardo, like Malthus, had thought in terms of a stationary state, in which investment funds would not be scarce. The idea was that all profitable opportunities for investment would be used up, and with no more profitable investment opportunities, the rate of profit would be zero. In such circumstances, there would be no need to conserve investment funds nor to allocate them efficiently.

However, we cannot anticipate that any real society will exist in such a stationary state. The emergence of new technologies creates new opportunities for investment that can increase labor productivity. Perhaps it is true, as some economists contend, that human impatience would keep investment funds scarce even if there were no new opportunities for investment. In any case, the stationary state seems quite far off, and that is no bad thing in itself. Since I do not want to postpone the free socialist society until the stationary state has arrived, I regard it as necessary that the free socialist society has institutions to conserve investment and encourage its allocation to the most productive uses.

As modern economics teaches, this function of conservation and allocation can in principle be accomplished by markets. If those who use the investment funds must pay in proportion to the funds they use, they have good reason to conserve and to choose the most productive uses. The proportion between the payment and the amount invested depends on the scarcity of funds: the more scarce, the higher the proportion. This proportion is the efficient "rate of return" on capital.

In a capitalist society this is accomplished because capitalist proprietors of investment funds are paid a market rate of return. But the logic of conservation does not require that the users of investment funds pay anyone in particular for their use -- only that the users pay in proportion to the funds they use. The logic of "social property" is that the payment for the use of investment funds go to support social purposes. In our proposal, those social purposes include the production of public and quasipublic goods, supported by the endowment funds.

Because there would be many retirement funds and endowment funds, a highly competitive market for investment funds would be feasible. Such a market is the most effective way to promote efficient conservation and allocation of capital. The alternative is to have the investment funds rationed by the government. This would hardly be acceptable even if it were efficient, because it concentrates power too much. But moreover, a good deal of historical experience indicates that such government allocation is highly inefficient -- because politics cannot be kept separate from economic allocation. However investment funds are allocated, the allocation must be kept at an arm's length from politics, and markets are the only way we have yet found to do this.

Every dollar used for investment might instead be used to buy food for the poorest person in society, or luxuries for the richest, or consumption goods for any other person. This is a good reason to consider the investment fund as a social fund; but it poses another sort of question: how much of society's product should be invested? A good rule of thumb is that the efficient rate of return should be reinvested.

That could be accomplished if there were no retirement funds, workers consume everything they earn in every period, and the dividends on corporate shares were always reinvested in the corporations. This would leave nothing for the endowment funds to spend. The world is not that simple, though. Once working people have escaped from the subsistence wage level, as they have in the developed countries, they want to have a reserve for retirement. This requires saving to fund the retirement annuity. The earlier people retire, and the longer they live, the more they need save while they work. Today, with a life expectancy of about 75 and retirement age of about 65, people expect to work for about 40 to 50 years and be retired for about 10. We may imagine a happy future age when that ratio could be reversed -- work for 10 years and retire for 40 (or, perhaps, 15 and 60, living to be 100). That would be a very frugal society.

Since working people save out of their production for retirement, it is not necessary that the entire efficient return to investment funds be reinvested. However, it may be appropriate to limit the spending by the endowment funds from their incomes, to require the endowment funds to contribute something to the total investment or "capital formation" in each period.

5. Transitional Taxation

The ideal of a corporate sector without taxation -- since all production of public goods is defrayed from the incomes of endowment funds -- is rather far off. Two points need to be made about the path from here to there.

First, the ideal presupposes a very much reduced scope of government expenditure. This is not visionary. The biggest components of government expenditure in present conditions are 1) income subsidies for people without jobs or whose jobs pay them too little to support their families, 2) retirement incomes and health and education services, 3) military defense. So long as we have those items on the bill we shall have taxes with us. However, the first and last would be eliminated by two changes in society that any socialist advocates. The first of these changes is genuine full employment. The second is peace and general disarmament. We shall not be so optimistic as to say that these conditions will automatically be achieved by a cooperative socialist society -- the point is that the failure to attain them will exact its costs of any kind of society, and the costs will be paid in taxes. As for the second group of expenses, we have envisioned a society in which retirement incomes are fully funded by savings, as they must eventually be. With real full employment, working people would have incomes from which to save for retirement. There may be good reasons why a decent society would wish to make education and health care available below cost, or even free. If funds from endowment funds should be insufficient, we might borrow the Guild Socialist idea of having the "civil guilds," corporations for education and health care supported from lump sum transfers from corporations in their communities that produce for the market; or the corporations that produce for the market might supply these services directly to their own employee-members. With war and unemployment "off the books" and health and education corporations independent of government, we might envision a government "lean" enough to live on an endowment.

Today, however, there are no government endowment funds. We are somewhat in the opposite situation, with government at most levels a net debtor.

W. Arthur Lewis pointed out that deficit finance is not a socialist policy. On the contrary, a socialist government would run a persistent surplus. This would, over time, pay off the national debt, and thereafter the government would acquire ownership shares in business corporations, gradually becoming the owner of the capital of the nation's businesses. This is another variant of "social property," with the government eventually becoming the titular proprietor of society's investment fund. As I recall, Lewis did not follow the logic out to have the government live on its income from investment.

Well, Alan Greenspan also seems to have come around to the view that government surpluses are a socialist, not a conservative policy.

The arithmetic is clear enough, though -- endowment funds can never exist without first having more added to their balances than is subtracted from it. There are, in principle, three ways in which the ownership structure we have proposed could come into existence.

  1. The capitalist class might voluntarily donate its property in investment funds to the endowment and retirement funds. I regard this as excessively idealistic, but it is a logical possibility and is mentioned as such.
  2. The wealth of the capitalist class might be confiscated suddenly at the climax of a great revolution. This would, in effect, be a 100% tax on capital wealth, and a brief period of "government surplus." But I have argued elsewhere in these pages that revolutions are inherently unpredictable, and thus it doesn't make much sense to plan on revolution.
  3. Finally, the capital wealth of the ruling class might be transferred gradually into the endowment funds by means of a uniform and well-regulated tax system.

This last seems the least evil and is our proposal. The transition to social ownership would take place by means of a wealth tax. The wealth tax would be at a rate high enough to transfer the whole of private wealth to social ownership within about thirty years. For example, assuming an average real rate of return of 3%, a wealth tax of 15% would leave only 2.5% of initial wealth in private hands after 30 years, while, with a real rate of return of 10%, a wealth tax of 22% would have the same effect. A limited amount of family property would be exempt from the tax -- a home and personal effects and business property up to some limit. The wealth tax should be strictly tied -- its proceeds to flow into the endowment funds and not to be diverted to any other purpose. In particular, the wealth tax should not be used to retire the existing public debt, since that would tempt the government to create new debt by borrowing, thus, in effect, eating up the wealth tax. This must not be permitted.

The wealth tax also answers a question we have left hanging above. What would become of the founder's interest in a start-up corporation? It would be subject to wealth tax and would thus be converted to social ownership within a generation.

6. How to Proceed?

If I have made my point, it is clear that we can do a great deal to move toward a free socialist society within the legal political structures that we now have in countries like the United States. Is it likely that a free society will be realized in this way? Of course it is not -- for very familiar reasons. But even if it is unlikely, it is possible, and possibility is important. The most common argument against non-government socialism is that it is impossible. Most working people believe that. Possibility is a message cooperative socialists need to get across.

The main objective for cooperative socialists today must be to change the consciousness of the working class by "the propaganda of the word." Without such a major change of consciousness the next revolution, when it comes, will be another disaster like the Soviet Revolution, if not worse. Cooperative socialists should not abstain from conventional politics, because doing so reinforces the lie that a free socialist society is impossible, and whatever "purity" we gain simply separates us from the working class. I do offer this sketch as a possible program for a Cooperative Socialist party of the future -- not because such a party will make us free, but because it might make us think, and thought is always the first step to freedom.