Economic Update: Capitalism vs Socialism is NOT Markets vs Planning

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This week on Economic Update, Prof. Wolff shows how the economics of existing capitalist and socialist economies make use of both markets and planning. The opposition of markets and planning is largely false and has worked to distract students and observers of economic systems from better differentiations such as how they differently organize their workplaces: hierarchical in the case of capitalist, democratic in the case of worker cooperatives. Some major implications of this critique of the "planning versus market" obsession are discussed in relation to the US, Soviet Union, and China.

Transcript has been edited for clarity

Welcome friends to another edition of Economic Update, a weekly program devoted to the economic dimensions of our lives and those of our children. I'm your host Richard Wolff. Today's program is a little bit different because I want to deal with one basic issue, the economics of which I think you will find interesting.

It's about planning versus the market, the so-called great either/or of the last century - either you organize your economy with private owners, private enterprises interacting in markets with one another and with the public or you have the government come in, plan what gets produced, plan who gets what of it shipped to them. In other words planning, which tends to be socialist or associated with the Soviet Union or with socialism on the one hand and the market, which tends to be associated with private enterprise, capitalism and all of that. And we're supposed to be living in the great world of conflict between planning and the market. I think that's a mistake. I don't think the differences between them are anywhere near as profound as an awful lot of folks have worked very hard to make them appear. In other words I think we ought to get beyond a false dichotomy between planning and markets. And I'm going to give you two basic reasons why.

The first one is a comparison. I'm going to give you another example, important today where either/or kind of thinking like this, like planning versus markets, has shown itself again to be a mistake, to be an old-fashioned, and therefore no longer appropriate, if it ever was, kind of difference. And then I'm going to show you how the planning and the market turn out not to be the either/or in our own lifetimes.

So first the example. It has to do with explaining inflations, those times like the one we're living in when prices go up. Probably the single most popular way to explain it has been to reason something like the following: money was increased. Usually the government creates the money. You'll all notice that the coins and bills we carry have been produced by the government. And it got from the government printing press or the stamping plant into our wallets. Governments produce money, so inflation is blamed on the government. And the logic goes like this: when the government pumps money into the economy like it's done for the last two or three years, well then, we get an inflation like we've had for the last year. It seems nice and neat, cause and effect. And there are some people who say "well, you know there's other things too, there's the supply chain disruptions we hear about." But those are kind of footnotes, add-ons. The basic argument is the money. And that's why an awful lot of people get angry at the Federal Reserve here in the United States, because it happens to be the agency in charge of deciding how much money to pump into the economy.

So let me explain to you why that's wrong. Here we go. Pumping money into the economy is one act, now there's more money. Whether or not there's an inflation requires another act. Pumping money in it does not by itself do anything to raise or lower prices. You know why? Because the Federal Reserve doesn't raise or lower prices. It's excluded from that activity. It can increase the quantity of money but it doesn't control prices, somebody else does. Who? The employers of America, the people who own and operate the stores and factories and offices that produce goods and services. One of the things employers do besides run their business, besides hire and fire the people who work there is they set the prices. So if there's an inflation there have to be at least two acts. One: more money pumped into the economy. That's done by the government, typically. Or at least in large part. And number two the decision to raise prices undertaken by a tiny minority of the people. Less than one percent of our people are employers, the other 99 percent are not. The other 99% are excluded from deciding prices.

So therefore to explain an inflation by only talking about the money is a none-too-subtle attempt not to pinpoint the attention of the people to the other part of the story that has to be there: the decision by employers to raise prices. If you don't have that decision you don't have an inflation. Can the government pump a lot of money in and there be no inflation because the businesses don't raise prices? Of course. From roughly 2000 to roughly 2020 we had the government pumping money into the economy to try to offset the effects of the crash of 2000, again to offset the effects of the crash of 2008 and 9. We have been increasing the money supply at a record pace for much of the last 20 years, but we had no inflation. You know why? Because the businesses didn't raise their prices, even though the money went up. You know where the money went? Into the stock market. It didn't go into the economy to bid up the price of food, clothing, shelter, automobiles and all the rest of it. All the things that are going up in price now didn't in the first 20 years of this century even though the money supply went up.

But the business community, the one percent, the employer class, they didn't mind. Because the money going into the stock market did bid up those pieces of paper, those shares of stock. And since the employers are the people who own most of the shares they were making out like bandits. They were happy that the money was pumped in. They were happy that it went to the stock market. They were happy that their wealth increased by record amounts. They didn't need to, and so they didn't, raise their prices. Then comes the crash of 2020 and the pandemic and what happened? Businesses saw that the stock market couldn't go up much further. The money kept coming in, so now the business community went to what you might call their plan B: jack up the prices for the goods and services.

Don't be fooled, being spoken to about how the government and the money supply is the bad guy in the inflation story is an attempt to distract you from the other bad guy: the business community, the employers who make the decisions to raise prices. The ideologues, the economists, the reporters who talk about money making the inflation are doing a very good service for the business community that don't want you to understand they make the decision to raise prices because that's their most profitable strategy at that time.

Now with that as an example I want to show you that the same story kind of applies to planning versus markets. So let's see, what does 'markets' mean? It means that we have private enterprises owned and operated by private individuals who hold no position in the government. They set up an enterprise, they buy and sell to other enterprises and to the public in the market, they negotiate a price and they bargain and all the rest. And that's how goods get produced and that's how goods get distributed. The alternative, we are told, is planning. That's when you don't buy and sell in a market, you actually make the decisions without markets and prices. You decide based on some study you've done, some measures you use that we're going to produce so many bushels of tomatoes and so many software programs. And as soon as they're produced 10% of them go over here and nine percent of them go over there. In other words the production and distribution is planned rather than going into the market to buy and sell.

There it is, we are told that the United States is the paragon example of a market economy, sometimes also called a free-market economy. Socialism, for example the Soviet Union, we are told is a case of planning, they plan everything, they don't use markets. That's the way the story is told. Well, I want to begin by telling you that this story is wrong, this story is false. There's loads of planning going on in the United States all the time, right now. And I'm also going to show you that in every year of the history of the Soviet Union from 1917 until 1989 when it disappeared they used markets all over the place.

So the notion that you're either a market or a 'planning' is silly. Every modern economy has been a mixture of both of them. So you kind of have to wonder, just like every inflation has to have more money and higher prices otherwise you don't get it, well, every capitalist economy we know of has had planning and markets. Let me begin, before we take our mid-program break by giving you some examples of planning in the United States.

Okay, first of all: the government. I'm going to start with the military. The government buys guns and ships and planes and tanks and uniforms and all the rest of it. It buys that from private enterprises. But how do those things get distributed? Does the Army buy things from the Navy? No. Does a division over here purchase the vehicles it needs over there from...? No. The different goods and services inside the military are planned. There are high levels of planning in the military that decide who gets these tanks on this occasion for this long time, fueled in this way by moving this over. In other words, government planning is all over the place.

The Federal Reserve decides whether or not to put money into the economy based on how they think it's going, what it needs, how they want to move it. They don't buy money, they don't sell money, they make a plan. The government/the President has a council of economic advisors. They do all kinds of studies and make all kinds of plans, some of which are put into effect, some of which are not. But those are small potatoes.

I want to give you the best example of planning in a capitalist economy like the United States. When huge corporations (IBM, General Motors, General Electric, General Dynamics - any of the Generals or any of the other big companies) decide that they don't want to use the market anymore, they don't want to buy an important input the way they used to - you know why? Because they don't like the fact that that depends on the producer they buy that stuff from doing a good job, having this stuff ready, and having it at an acceptable price at the right time. Whoa! That may not be forthcoming, these producers that they buy from may not be reliable. And you know what the big companies then do? They buy them, they bring them inside the corporation and then they plan how much that subsidiary is going to produce and what is going to be done with it. They end the market by buying it into themselves.

I'll continue in the second half. We've come to the end of the first part of today's show. Before we move on I want to remind everyone that Democracy at Work, that produces these shows, is celebrating 10 years of the work it has done to analyze society and to come up with a way of making it better. We also do things like podcasts. The one I'm thinking of: that by Dr Harriet Fraad called Capitalism Hits Home that explores the interaction between economics and our personal psychology. You can find her show and more at our website democracyatwork.info. There you can also follow us on social media to stay up to date with all we do. And be sure to sign up for our mailing list to support our work in a variety of ways. Stay right with us, I'm going to be right back to continue this analysis.

Welcome back friends to the second half of today's Economic Update, where we are trying to dismantle a false dichotomy between planning and the market.

I was, before the break, talking about how the biggest example of planning in the United States' system is what large corporations do. In fact, the leadership of all large corporations is continuously assessing the market versus planning, not as 'we're one not the other' but in a completely different way. How to make them both work for us in this corporation. So if they think it's more profitable to buy from another company and sell to another company and to move things around that way they do that. If they don't think that's the best, most profitable thing for them to do. They buy the company they sell to or they buy the company they buy from. It happens every day. Then they bring that company into the corporation. And you know what happens then? The output of what used to be an independent company is now inside. And it's planned how much we're going to produce, who's going to get it, what's going to be done with it. It's no longer a market transaction, no longer buying and selling, no longer competition. It's in-house.

Big corporations plan what they do. And the kinds of planning they do is very similar - here we go now - to what the Soviet Union did on a national level. It's very similar to what socialists have talked about when they've talked about planning for a century. You sit down and you try to figure out what's the most efficient, effective way to produce these things that we need and to move them from the producer to the consumer in a way that gets the job done. Planning is something corporations do. On the fourth of July the CEO gives a speech about the market, the market, the market. But before and after the speech he's in the boardroom of his company working out the plan for the next year's activities, which are all about producing these quantities and moving them where the people involved in producing and moving them are not buying and selling that material. They may decide to take something in-house and sell it off to make it an independent company. That happens, just like the reverse happens.

Well now, let me go from that combination (every corporation plays with markets and planning) and show you that the same thing happened in the Soviet Union and always happens in socialist countries. Do they plan a lot? Yep. Do they use markets also? Yeah, of course they do. The Soviet Union used markets all the time. Some markets were very close to what we call free markets. The producers were on their own, decided what to produce, how to produce, where to produce, when to produce. And when they were done they sold it on the market. The government didn't bother them, the government didn't care. Many foods in Russia during the time of the Soviet Union were handled in this way.

Then there were other things they did not allow to be handled in a market. They wanted to control things like grain, the basics of food. They wanted to control much of their industry. So they had that plan. But it was - yep - a mixture of planning and markets, not the either/or of the ideological battles, but the combination that made sense to those people. Now it is true that the United States tended to downplay and minimize the government planning things or that kind of activity. But that didn't prevent corporations from planning. And the government always had to do a good bit of planning also. And likewise in the Soviet Union they tilted towards a planned economy. But they also saw that they needed and could use the market in all kinds of ways.

And then we have the third example that I really want to drive home to you. A society that wasn't ideologically committed to the either/or (either you're for market or you're planning) - in other words, this is a society that saw through the false dichotomy. Just like at the beginning of today's program I tried to help you see through the dichotomy that either the inflation is caused by the government or it has to do with some other way that money gets pumped in, as if the evil money-doers are the problem, rather than the class of employers raising the price, which has to be there if there's ever an inflation.

Well, what am I talking about? Well, the answer is the most successful country, economically speaking, of the last 30 to 40 years. And that's unambiguously the People's Republic of China. Why? Because they have understood, without ideological blinders, the virtues of planning and markets and the shortcomings of planning and markets. Because both of them have strengths and weaknesses, like every other human institution. And so what the Chinese set themselves to do was get rid of the ideological blinders, get rid of the false dichotomy, get rid of the either/or. Let's figure out what combination of plan-the-economic-activity versus market-economic-activity we want to solve our problems. And who's the 'we'? Who's the one deciding there? Well, in China the way they do it is with a particular political party, the Communist Party of China, which sits as a supervisor over an economy that has an enormous amount of government-planned activity and an enormous amount of private market activity, with a regulatory superstructure, where the Communist Party is a little bit like the leadership of a capitalist corporation in America deciding when something is better handled using the market, then when it's better handled to take it out of the market and bring it into the realm of the government's planning apparatus. They're making those decisions exactly like corporate executives make comparable decisions. And it looks to be working real well. Because the transformation of the People's Republic of China - one of the poorest countries on Earth, happened also to be the largest one on Earth by population - has in the last 30 to 40 years achieved a level of economic power and wealth not just for an elite but for the mass of their people that nobody foresaw. Nobody expected this kind of performance. Which is why they have shaken the world and are shaking it as I speak.

Now, of course, and I shouldn't need to say this but I will, nothing that I have said indicates that there are terrible serious problems in China of all kinds. All societies have a mixture of achievements and failures, good points, bad points. China is not exempted from this, nor is the United States, nor was the Soviet Union, etc. That's a different conversation: what are their strengths and weaknesses. Here, though, I want to help you avoid getting stuck in a dead-end conversation that goes nowhere.

The problem of a person who tries to explain inflations by saying it's caused by there being too much money always gets stuck when someone points out to him or her "wait a minute, wait a minute, the only way you get an inflation is if the businesses raise their prices. You've told me there's more money, you've got to tell me the rest of the story." Well, I'm here too. You can't tell me the Soviet Union is a planned economy, because I can show you all the markets they used. And you can't tell me the United States is a market society, because I can show you all the planning done, led by the corporate sector, which you think of as the leadership, as it is in many ways, of American capitalism. Don't make use of a dichotomy that isn't there and never was. It was an ideological battle. The United States and the Soviet Union were at opposite ends of a political fight. And when that happens you tend to demonize the other side, to simplify and to forget that we all have strengths and weaknesses and then locate all the strengths on your side and all the weaknesses on the other. It may be understandable, but in an adult it's childish as well.

Well, then, where does that leave us with the dangling question? If planning versus markets isn't how you distinguish capitalism from socialism because they're both combinations in various proportions then let me offer you what is a much better alternative way of thinking about this. Because the differences get clear. In a capitalist society (and I owe this to Karl Marx, who's the first one I know who figured this out) a tiny group of people, the owner, the partners, the board of directors in the corporation make all the basic decisions: what to produce, how to produce, where to produce and what to do with the output or the revenue if you sell the output. They make all those decisions. The vast majority of people in any business are excluded from those decisions. They have to live with the results, but they don't participate. Just like they don't participate in setting the price of whatever it is they help to produce. They don't make the basic decisions, the rest of those decisions, either.

That's the uniqueness of capitalism. The alternative that socialists originally - like Marx - had in their mind was a radically different organization of the workplace; whether it's a factory, an office or a store, it's a democratic community - one person/one vote. All the basic decisions: what to produce, how to produce, where to produce and what to do with the revenue you get are decided democratically - one person/one vote, by majority vote. It is a radically different way of organizing an enterprise. It's the equivalent inside the enterprise of getting rid of the king to run the whole society. And instead saying everybody has a vote to decide on who the elected representatives will be. Whoa! That decision made about the larger society has now, the socialists tell us, to be made inside the workplace. Then you'll have a socialism and a capitalism that nobody will confuse: capitalist enterprises - hierarchies, power at the top, people who do what they're told everywhere else - versus a democratic community run in the ways we understand democratic communities (in this case a workplace community) would run.

And if you do that kind of analysis you would see something arresting to think about. That the United States is one kind of capitalism, the Soviet Union, which never departed from what I just described (small group of people at the top - except they were state officials - and a vast majority of people who were employees of those state officials) then the Soviet Union was a kind of capitalism, too. And the Chinese are a mixture of the two kinds of capitalism.

And what does that mean? It means that the socialist idea has to recognize we're still at the beginning of the process of recognizing that there's an old system passing away called capitalism desperately trying to give birth to a new way of doing business that is radically different. That's an understanding of capitalism versus socialism that has no need to get stuck in a dead end about the alternative of planning versus markets, when that alternative was never real in the first place.

Thank you very much for your attention. I hope this provides something to think usefully about and I look forward, as always, to speaking with you again next week.

Transcript by Brendan Tait

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Showing 1 comment

  • Kelena Kelena
    commented 2022-12-02 00:34:17 -0500
    As per my opinion Public or collective ownership of the means of production.https://www.mybkexperience.one Central planning of the economy. Emphasis on equality and economic security.

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