The “third way”-market socialism, social market economy, or neither?
By Chaopeng Huang
Prior to the formal discussion of this issue, it would be helpful to first present the concepts of market socialism and social market economy.
Market socialism, as suggested by the term, is a hybrid of market and state ownership. Under the regime of market socialism, the system combines social ownership of capital with market allocation. Social market economy, on the other hand, is the combination of free market forces with significant state intervention to achieve desired social goals. Social market economy is a stretch of capitalism, while market socialism is a stretch of socialism.
Both systems are appealing, at least in theory, because they capture the market’s advantages in allocative efficiency and marry it to the distributional equity of socialism. These systems remind me the issue in strategic management. When a firm is to implement cost leadership strategy and product differentiation strategy, will or will not this firm end up being stuck in the middle. Same type of logic could be applied to the concept of market socialism and social market economy, will these two systems end up providing a mediocre result. I will discuss these two systems separately in the rest part of my statements, with an emphasis on market socialism.
It is argued by many economists that any attempt to maintain a competitive system of prices in the goods and labor markets alone will fail because it divorces the functioning of those markets from the market for capital, to which they are inescapably related. In a market socialism regime, the investment becomes a public good, which means it largely or completely relies on government to direct. Therefore, in the absence of an objective capital market, the ability of government to efficiently direct capital flows is essential. It is argued that markets might be short-sighted in their evaluation of prospects, and deny capital to enterprises that, though worthy, will be slow to pay back principal. |
Governments might be more capable of taking a longer view. Therefore, with investment decisions being made by government, it is plausible that the economy will be more likely to avoid some cyclicality and prosper in the long run. However, long run decisions inevitably are more subject to political stability, where the failure of Yugoslavia is the best demonstration. Moreover, as suggested before, if a competitive system of prices in the goods and labor markets are inescapably related to market for capital, the possibility of goods and labor markets being competitive under market socialism system is a large question mark.
Another problem with market socialism is the issue of soft-budget constraint, which enables the firm to continue to exist although its long-term obligations are not met. The existence of soft-budget constraint provides the enterprises the incentives to operate in a manner that lowers the efficiency of the economy. My last concern is specifically on the cooperative variants of market socialism, where I think labor productivity might be compromised. If the goal of each cooperative is to maximize income per labor, then each cooperative is subject to free ride resulted from social loafing. When the income pie is shared equally by each workers, then will every worker put his/her weight to production knowing the outcome of his/her effort will be shared by others.
In terms of social market economy, my concern is whether to incorporate a wide range of interests into decision making process will compromise economic performance. The concept of stakeholder economy developed in German model is subject to many criticisms. It is possible that the efficiency of an enterprise will be damaged when it includes the labor’s interest into consideration. First, decision making process becomes longer when interests from an additional party are considered. Second, when stakeholders’ preferences are considered and those preferences are against profit maximization, then stakeholder cooperation might experience difficulty because it will underperform its “profit-oriented” competitors, and thus are vulnerable to and ultimately eliminated by market forces.
The search of a third way is indeed intriguing. I am personally in favor of social market economy to market socialism. However, the current demonstration of social market economy is far from satisfying, where future modifications and completion are necessary. |
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