Review of Theodore Burczak

Review of Theodore Burczak,

Socialism After Hayek

University of Michigan Press (2006)

Herbert Gintis

Theodore Burczak is Professor of Economics at Denison University. He received his Ph.D. from the University of Massachusetts, where rigorous training in traditional economic theory and econometrics was linked to an equally rigorous training in "political economy," by which was meant the analysis of the politico-economic dynamics of social systems. I was privileged to teach in this department at the time Burczak was there, and indeed in the acknowledgements, Burczak says that I "showed how to transform traditional economics into political economy." So the reader is warned---I am not an unbiased reader of this book.

Many reasonable people believe that capitalism, for all its myriad of weaknesses, is the best possible economic system. This is a highly defensible position, given the abject failure of all attempts to create viable alternatives over the past two centuries, and especially after the spectacular collapse of the Soviet Union, the failure of European socialism, and the bitter extinction of Third World Socialism. Personally, I believe capitalism is the best system we know of, but it is very important to have some smart and committed people around who spend all their time and energy in devising workable alternatives. Burczak lies squarely in this tradition, and Socialism after Hayek is a very creative and thoughtful work that deserves to be widely read and evaluated.

The most salient fact about Burczak's defense of socialism is his wedding a model of market socialism with democratically run, worker-owned firms (Lange, Lerner, although Burczak uses arguments from the contemporary Austrian school, which fits well with Hayek) with a welfare analysis based on human flourishing (Aristotle, Sen), and perhaps most uniquely, a defense of markets inspired by the extremely right-wing, Nobel prize winning economist Friedrich Hayek. This potent mixture of ideas is a welcome alternative to the usual contemporary defense of socialism, which is based either on know-nothing populist sloganeering or reliance on the ancient German philosophers of socialism of the Nineteenth Century---especially Marx and his brainy intellectual followers, whose obvious Hegelianism reverberates nil with the modern mind (Marx said that he was "Hegel turned on his head." What he forgot was that an upside down Hegel is still Hegel, just upside-down, just as an upside-down chicken is just a chicken, upside down).

In Burczak's Lange-Sen-Hayek trinity, traditional economic theory is used to defend market socialism and democratic worker ownership (Samuel Bowles, John Roemer, Pranab Bardhan and I were working in this area when Burczak was working on his doctorate at the University of Massachusetts), to defend egalitarianism on the basis of Sen's notion that human welfare depends on developing capabilities, not on simply getting material things, and to defend a Postmodern philosophical position on the basis of Hayek's theory of knowledge.

Burczak's treatment is highly sophisticated, but I am afraid I am not persuaded. The absolutely central and bottom-line problem is that an economy consisting of worker-owned and democratically controlled firms would impose a significant static efficiency loss on the economy and would severely retard scientific and entrepreneurial innovate. I say this with pain and regret, because I and my colleagues work for almost ten year to devise a workable market socialism, but my final conclusion (I'll let the others speak for themselves) is that our models are more applicable to promoting self-employment of poor farmers in developing countries (see Pranab Bardhan, Samuel Bowles and Herbert Gintis, "Wealth Inequality, Credit Constraints, and Economic Performance", in Anthony Atkinson and Francois Bourguignon (Eds.) Handbook of Income Distribution (Dortrecht: North-Holland, 2000):541-603).

The main problem facing democratic worker control of firms is that the workers must be residual claimants on the profits and losses incurred by the firm, or the workers will have no reason to adopt efficient technology and work practices. Lenders will not willingly lend to worker-controlled firms because they cannot maintain sufficient influence over the firm's policies in this case (Herbert Gintis, "Financial Markets and the Political Structure of the Enterprise", Journal of Economic Behavior and Organization 1 (1989):311-322). John Roemer and Pranab Bardhan (Pranab Bardhan and John Roemer, "Market Socialism: A Case for Rejuvenation", Journal of Economic Perspectives 6,3 [Summer] (1992):101-116) worked out a sort-of "pari-mutual" betting plan that would direct public funds to the most promising firms, but it is implausible that such a plan, were it workable, would not succumb to political forces in a way to which private capital markets, based on the inviolability of private property, are virtually immune. Moreover, firms based completely on outside finance are extremely overleveraged and would inevitably collapse when even small threats to their viability arose.

The conclusion is that democratic firms must be almost wholly worker-owned, meaning that virtually all of the firm's capital stock is owned by the workers. However, there are severe problems with worker ownership. Most important, the capital per worker in the average firm is greater than the total wealth of the average worker in that firm. If the worker were given a share in the firm outright, he would prefer to sell it to diversify his asset holdings. Indeed, all the workers would prefer to sell out to a capitalist enterprise so they would become less vulnerable to the vicissitudes of the market. Indeed, there are several cases in which land redistribution to the peasants failed because the peasants sold the land right back to their previous landlords! Of course, this could be prevented by law, but the economic inefficiency of having a workforce of highly exposed individuals would be extreme. Moreover, if the workers own the firm, they will not want to expand employment in the firm, because the new workers would get a share of the value of the firm. Of course, new workers could be forced to buy a share in the firm, but few would willingly do so. Finally, the idea of worker ownership might be feasible for some highly stable and technologically developed sectors, but a vibrant economy is based on entrepreneurial innovation, and this is incompatible with workplace democracy.

If the contribution of workplace democracy to social welfare were sufficiently great, perhaps some of these severe problems could be overcome. But in fact, workplace democracy and popular ownership of capital are not fundamental values, but rather are instrumental values. Of course, in the minds of truly committed socialists they become ends in themselves, but I do not think such an idea can be sustained, even using Sen's notion of capacities. Socialists talk of "wage-slavery," but working for a boss is not slavery by a long shot. There are good and bad bosses, good and bad workplaces, but there are also good and bad teachers, and this does not imply that all authoritarianism should be abandoned in the educational process. Market socialists like to compare workplaces to communities, asking why we should have democratic communities but not democratic workplaces. This is a good question, but the fact is that our democratic communities work because we have a traditional market economy to draw upon. Moreover, while it is clear that a liberal democratic national constitution is a must, it is not clear that there would be something completely unacceptable about having corporations run communities, as they now run some schools and prisons.

I think the most creative insight in this book is the relationship between Hayek and Postmodernism. I love Hayek and I am deeply put off by Postmodernism, so I am certain that the melding of the two must be carefully executed to maintain continuity with Hayek's thought. But it is interesting food for thought--one of many Burczak offers us in Socialism After Hayek.