Plan, Market, and Wal-Market

Men plan, and God laughs.” – Yiddish proverb, origin unknown

More and more people are talking about socialism, but nobody’s doing anything about it. If we’re talking about “nationalizing the means of production,” Bernie Sanders’ avowedly democratic socialist political revolution falls well short. Old notions of the state owning the “commanding heights” of industry and employing central planning to guide the economy fit a classic concept of socialism. Old-fashioned lefties are given to gripe that Bernie’s vision extends little beyond a beefed-up New Deal.

An extension of the space that Sanders has cleared is the new book by Leigh Phillips and Michael Rozworski, “People’s Republic of Walmart: How the World’s Biggest Corporations Are Laying the Foundation for Socialism.” Their elevator pitch could be, our largest, successful corporations are founded on extensive planning systems, and the success of these firms, such as Walmart and Amazon, demonstrates the growing feasibility of socialist planning.

Central planning means the government owns and directs the operations of the bulk of land, plant, and equipment – capital — used to produce most of the economy’s goods and services. It is distinct from the expanded public sector promised by Sanders that would provide more benefits, facilities, and services where the private sector is most delinquent. Health insurance is currently the most cited example.

In efforts to render ‘socialism’ more wholesome, some voices urge us to regard the humblest public facilities as examples. Your beloved library is Socialism! But this will not do. If we’re talking about planning, we are really referring to the next level of public provision of goods and services that are usually produced by business firms.

In centrally-planned economies, instead of business firms we have enterprises. These enterprises are given instructions from a central authority on what to produce, how to produce it, and what to sell it for. Capital investment is decided by the government, which owns all the capital goods. For an enterprise to expand, or to switch to some different production method, agreement must be secured from higher authorities. Moreover, ‘lower authorities’ – the enterprises – have to obey instructions finally arrived at.

An alternative to central planning is the market socialist model. In that system, individual enterprises are controlled by their own workers. They produce for profit and compete with other enterprises for market share. The authors are non-committal as to their preference for either model, though libertarian-socialist sympathies for market socialism are detectable in their account.

Central planning was taken up by the communist governments of Eastern Europe and the Soviet Union, and in recent decades, abandoned by them. State-owned enterprises were sold to private parties. Usually the beneficiaries of these transfers, at fire sale prices, were former communist bureaucrats. Meet the new boss, literally the same as the old boss. Exhibit A is the fabulously wealthy president of the Russian state, whose business experience was acquired in the KGB.

Market socialism never got much further than Yugoslavia and has also left the scene. Even so, the libertarian socialist vision scratches the right itches – decentralization, democracy, communal ownership, equality. Feasibility remains a question.

State-owned enterprises and state-run economies were famously unproductive, among other deficiencies. When it came to provide a competitive supply of consumer goods, central planning failed. Competitive in this context means that these planning systems could produce, but they could not produce enough at acceptable quality to discourage their citizens from envying capitalist alternatives in the west.

Yugoslavia’s story was different. The authors might have devoted more attention to its devolution, since it goes to the heart of their appeals. At any rate, there is little question that today, labor-managed firms, cooperatives, and non-profit organizations are ubiquitous in capitalist economies and have proven capabilities of producing marketable, profitable goods and services.

The burden of analysis from Phillips and Rozworski (P&R) is that communist planning systems, aside from their multiple affronts to human freedom, failed at logistics, and were further handicapped by the limited computing power available in their heydays. Now we have giant corporations that rely on planning, and they are doing just fine.

The authors are keen to emphasize that the prosperity of these firms does not hinge on market efficiency, since the internals of these firms are not organized along market lines. They are right to cite the economist Ronald Coase of the University of Chicago, who pointed this out in the 1930s, though they might have also given attention to John Kenneth Galbraith, who cultivated this field in more recent decades.

Under the hallowed theory of supply and demand, we get an efficient market when many well-informed buyers and sellers come together, prices are thrown back and forth, and equilibrium is reached.

The departures of really-existing markets from this best of all possible worlds were always obvious. Coase’s insight was that internally, business firms’ operations do not rely on market forces at all. The custodian summoned to fix the furnace does not begin dickering with the supervisor over his fee. There is no bidding war for who will sweep the floor. Workers on an assembly line do not auction off their services for each task performed.

Internally, business firms have always run as little command economies, or “islands of power.” What’s remarkable about Amazon or Walmart is not only the fact of this planning, but the scale at which it operates successfully.

The analogy of Walmart’s internal operations to central planning is tantalizing but limited. Our largest corporations’ outputs exceed the Gross Domestic Product of entire countries. Has planning become feasible for an entire nation? The differences between Walmart and an entire economy elaborated by the authors present a set of challenges for the advance of planning.

One reason that planning appears to function is due to what economists call survivorship bias. Walmart is successful, but what about firms with internal planning that are no longer with us, or that were never able to scale up in the first place? The authors offer one counterfactual bit of evidence – the failure of Sears, in which a scheme to organize competition among different subdivisions of the firm ended in fiasco.

Second, one feature of Walmart’s operations vociferously rejected by P&R – the cramdown of labor costs and the suppression of workers’ voices at work – could be reasons for its success. The authors are right to suggest that ‘flatter’ organizational pyramids with bottom-up participation can function effectively, but one must ask, if such alternatives are more profitable, why don’t more firms resort to them?

Third, another egregious practice that comes with the market power of Walmart and Amazon and helps them to succeed, planning aside, is a feature of their scale and dominance of their markets: the ability to grind down the prices paid to their suppliers. Moreover, not a small share of these suppliers operates in nations that suppress labor costs in ways that the worst American robber baron might envy. Neither state-owned nor worker-managed enterprises would necessarily be immune to such temptations.

Fourth, Walmart and Amazon are in large part intermediaries – they don’t manufacture the products they sell. As large as they are, so too are the worlds of their suppliers and customers. The planning problem is largely solved for them. They can obtain information on costs of production and consumers’ willingness to pay for this and that by surveying markets external to them. They are similarly informed on whether to contract out some component of their production, such as custodial services. They know the prices offered by outside vendors. This information would be lacking under central planning, if not under market socialism.

Fifth, one feature of corporations is that decisions are made in a hierarchy. The results may be unlovely from a social standpoint, but they are arrived at more quickly. A drawback to the authoritarianism of extinct communist governments, was the tendency for the information flow to be stifled. The authors urge the replacement of hierarchy by democratic procedure: “Democracy is the beating heart of socialism.”

But democratic rule by councils of interested, not always unbiased or informed parties, brings its own costs, particularly in time. A decision arrived at by a central authority that must be run back and forth through subordinate councils, or councils of councils, takes longer to be resolved. By the time it is resolved, it could be rendered obsolete by subsequent events.

Great advances in computing power combined with big data certainly enlarge the ability to plan. The extent to which such capacity is adequate to the problem of determining production and consumption decisions in an economy is still an open question. Alongside the greater scope for calculation, moreover, comes the greater threat to individual privacy.

Socialism in the U.S. is back, at least as something to talk about, so chances are we are not done talking about planning either. A myriad of social problems cries out for the intervention of a higher, regulating authority to restrict or transform the way business firms operate. These interventions imply planning, though not necessarily of the sort hoped for in this book.

We need better planning for cities and regions. We need a plan to reduce carbon emissions through the reorganization of transportation and electricity generation and distribution. We need a plan to reverse the trend of residential segregation by race.

We need to ask which problems we hope for central planning to solve. Some of the most popular causes nowadays do not require planning. The lowest priority for planning may be the basic production decisions of corporations.

The government could require Walmart to phase into renewable energy. It could devise trade agreements that inhibit the super-exploitation of labor in nations that export to the U.S. It could put floors on the wages Walmart can pay its employees and indirectly, its vendors, and mandate equal pay by race and gender. It could tax the incomes and inheritances of Walmart’s chief shareholders and executives at progressive rates. It could purchase shares and expand public ownership stakes in corporations. None of these measures require central planning, but with their proliferation, the U.S. would be a different country. You might even call it “democratic socialism.”

Read this post and others like it on the author’s “desperate blog for desperate times, MaxSpeak; You Listen.