Colombo Telegraph

Social Market Economy Vs. Social Market Socialism

By Hema Senanayake

Hema Senanayake

Social Market Economy may be a familiar term or concept but the other concept might be new. As I perceive it, both concepts have very similar economic components but there is one significant difference. What is it?

Social Market Economy will continue to link the distribution of distributable output significantly to the ownership of means of production. On the contrary “Social Market Socialism” will separate the distribution of distributable output significantly from the ownership of means of production. This difference is not just theoretical; instead it has very far reaching practical impact. The impact is related to the efficiency of the economy. Let us discuss this matter further.

The UNFGG (United National Front for Good Governance) proposes an economic model which they define as “Social Market Economy.” If you are an interested reader of this subject, you may easily browse internet to read many scholarly articles written on the subject. Yet, my purpose here, in this article is to direct this discussion towards a possible application.

In regard to the concept of Social Market Economy, the word “Market” intimates in achieving economic efficiency through market mechanism and the word “Social” should stand for “public services and the state’s intervention in the economy.” In other words the efficiency of the economy would be primarily attained through “market mechanism” and the efficiency of fair distribution of distributable (or consumable) output would be attained through the intervention of the state or the government. Is this the economic model what UNFGG proposes? I guess it is. Then, what was the model existed under the previous regime? Priorities and components might vary, but previous regime too stood for Social Market Economy; no economist can deny it, even if so called corruption and nepotism existed under the previous regime. If this is the case, then this type of economic system must be properly defined not as “Social Market Economy” but as “Social Market Capitalism.”

Hence, my point is that Social Market Economy is only a useless label. In fact, it doesn’t explain any serious fundamental difference; capitalism is capitalism with two-tier production system in which almost all national proceeds are generated through “market-based-production” while society’s “common interests” such as general administration, law and order, health-care, education etc. are produced by the state using the money derived mainly from national proceeds. As a production system even socialism would retain this basic model of two-tier production. This means, in regard to economic production both systems would use same principles. Therefore I do not believe that envisioning a “Social Market Economy” has something new.

However, contemporary capitalism and true socialism are not the same. In money based economic system, the most fundamental and significant difference is that capitalism will continue to link the distribution of consumable output to the ownership of the means of production and on the contrary the scientific-socialist-system would de-link the distribution of distributable output from the ownership of means of production. This is the most significant difference between capitalism and true socialism. I am not sure whether JVP knows about this difference.

Both systems retain “market mechanism” to ensure the basic economic efficiency which efficiency we define as the efficient allocation of productive resources among numerous production processes. Perhaps, you may now wonder about the ownership of the means of production under the socialist system because, so far you had been indoctrinated that the main difference between capitalism and socialism is the ownership of means of production. It is not true.

Socialists talk about a phenomenon known as exploitation. The exploitation does not mean the expansion of productive capital and owned it by capitalist elite. Instead the exploitation is a question of the distribution of distributable income. In the final analysis exploitation means that you (the owner of businesses) allocate more consumable income for you or it is distributed as per your wish. In order to do it you must own the means of production or the government or both.

However, in money based well-functioning democracy the distribution of consumable output can be done fairly without any significant relation to the ownership of the means of production, such as factories, banks, etc. More intelligent capitalist elite know that this is technically and economically possible through maneuvering three economic variables, namely, wage structure, taxation and consumer credit. In regard to these variables “wage structure” relates to the entrepreneurial (or private) sector wages and the wages of government employees are included in the parameter of “taxation.” In regard to “consumer credit”, it relates to the employees in both sectors.

However, capitalists say that if you do de-link the distribution of distributable output from the ownership of means of production completely or to a greater degree, then you can’t ensure economic efficiency. Yet, the economic crisis erupted in the United States in 2008, clearly showed, that private ownership of means of production has nothing to do with ensuring economic efficiency. All major banks and businesses in the U.S. which are privately owned, such as Bank of America, Citibank, JP Morgan Chase, Wells Fargo, General Motors, Chrysler etc. should have bankrupted by now if not supported by the U.S. government. Hence, economic efficiency is not a thing directly related to private ownership.

In fact capitalism will continue to link the distribution of consumable income to the ownership of means of production through which exploitation become possible. The exploitation distort social production, waste resources, prevents socially necessary innovations and inventions.

On the contrary, a serious socialist might argue that if the distribution of distributable output is de-linked at least to a greater degree from the ownership of means of production, then, such an economic system would have more efficiency than contemporary capitalism in regard to the production, fair distribution of distributable output, full employment, protection of environment, direction of productive resources to make human friendly technological innovations and inventions, harnessing comparative advantages of global production etc. He or she will further argue that the separation of the distribution of distributable output from the ownership of means of production must be a goal of socialism, no matter whether factories, banks etc. are owned by private individuals or workers or corporations or unions or the government or workers’ cooperatives. For theoretical reasons I have to agree with this notion. In fact, this should be written in the election manifesto of JVP but I did not find it there.

This means the separation (or de-linking) of the distribution of distributable output from the ownership of means of production must be a goal in socialism. If the socialism can achieve this goal, then there is no need to bother about the question of ownership – because the so called exploitation does not mean the expansion of productive capital and owned it by capitalist elite, instead in the final analysis the exploitation means that you allocate more consumable output for yourself but you can’t do it now since the distribution or the allocation of consumable output has now been de-linked from the ownership of means of production. Can any economy do this? In regard to this question let me quote Noble Prize winning economist Professor Joseph Stieglitz. He is basically a capitalist economist.

Stieglitz says that, “… for total American consumption to be restored on a sustainable basis, there would have to be a large redistribution of income, from those at the top who can afford to save, to those who spend every penny they can get” (Free Fall, 2010). What does this mean? He says that redistribution of income must be separated from the owners of businesses. He further observes that, this would not only restore the consumption on a sustainable basis but also “help stabilize the economy.” In fact, Stieglitz was talking about the parameter of “taxation” which is one of the three parameters I mentioned above pointing out that those parameters or variables could be used to de-link the distribution of distributable income in a well-functioning democracy.

Therefore, the point I want to make here is that the said three variables namely, wage structure, taxation and consumer credit should be effectively used to the optimum separation of the distribution of distributable output. In such an economy entrepreneurs would be more enthusiastic than otherwise because when the consumption is restored on a sustainable basis, employers/entrepreneurs would get back what they expect from consumer spending. Is this what the UNFGG envisioning to do under whatever economic model? I do not know. But let us hope that they are going to do it.

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