Notes on Solutions to the "Economic Problem"

by Jim Devine

In an e-mail discussion, I had written: "Part of the ecological and human crisis is people's free-market responses to poverty." This refers to the way in which the commercialization of agriculture drives the land-less peasants in poor countries to seek ways to survive that involve deforestation and farming on steep hills, encouraging erosion, floods, etc. I see this as intensifying floods in Mozambique and Venezuela, while making ecological problems in the Amazon basin worse. 

One discussant writes: >Are we left with no solutions _but_ free market responses to poverty and ecological crisis? If not, which is what I get from your post, what can be the alternative solutions accessible?<

Economists list three ways of dealing with "the economic problem" (scarcity). I would redefine the "problem" as being a matter of how people as a group try to attain collective goals while dealing with free-riders under conditions of scarcity. In addition, I would add two more.

Start with the official three:

1. The Market. Since the market doesn't deal with external costs and benefits well at all, other solutions are needed. Further, free market competition encourages -- and in some cases, imposes -- an opportunistic free-riding attitude (eschewing what Kenneth Arrow termed "social values") that pushes capitalists and the desperate poor to actively seek was to dump internal costs on others and the natural environment. The market is part of the problem, not the solution. 

(Some other time, I'll discuss proposals such as the selling of licenses to pollute (market "solutions" to external costs).)

2. Central Command: this is the government and state imposing solutions on people, such as what the Environmental Protection Agency or the Bureau of Land Management. While this kind of thing should play a role in any effort to deal with environmental problems, excessive reliance on this technique is elitist and alienates the people at the grass-roots. Worse, organizations of this sort can be captured by the bureaucrats running the organization and/or the most powerful of the people being regulated. (The classic case is that of  the US Interstate Commerce Commission (created about 100 years ago) was taken over by the railroad companies it was supposed to regulate, so that it ended up acting like a train cartel until the truckers took it over.) Usually, the bureaucrats are in cahoots with 
the most powerful of the regulated, as with the US Fed or the IMF, which represent coalitions of central bureaucracies with bankers. I would bet real money that the US Bureau of Land Management is in league with the biggest farmers, as is the Brazilian equivalent. (Unfortunately, I don't have information available here.)

3. Tradition (paging the fiddler on the roof!): many peoples -- like the American Indians -- developed ways to survive that do not end up fouling their own nest. These ways were enshrined in unwritten traditions. (For example, the anthropologist Marvin Harris argues that the Jewish and Moslem taboo on eating pork had a positive ecological effect.) But not only are many traditions disgusting, but capitalism tends to destroy or pervert the good ones. The ecological problem is a dynamic one, whereas tradition is backward-looking and static. Tradition can't handle global warming, for example.

Here's where the economist's official list stops and I add two. The first one is familiar (at least to students of Douglass North or Oliver Williamson), but the last one is only rarely mentioned. Even a liberal like Robert Heilbroner leaves it off his list of solutions to the "economic problem."

4. Decentralized Command or Hierarchy: this includes those embodied in slavery, serfdom, mafias, political machines, or corporations. In modern capitalism, only the last is really relevant. As North and Lance Davis argue, such hierarchies actively seek to "internalize the external benefits," trying to capture as many profitable activities as possible. (Thus the town square is replaced by the commercial shopping mall.) They somehow ignore the fact that by exactly the same logic, such corporate hierarchies actively seek to turn internal costs (those that they have to pay for) into external costs (those that others have to pay  for). Combining these hierarchies with markets produces the aggressive competition that Marx points to. This simply reinforces this point: cost-dumping on others is part of capitalist competition (one that is unfortunately ignored in arguments about the falling rate of profit theory). These organizations are not the solution to ecological problems.

On the other hand, organizations of serfdom, mafias, and political machines might deal with local ecological problems (though not global ones). But capitalist corporations are mobile in their operations and thus care little about local problems (except to the extent they are tied down by the use of  fixed capital). Simultaneously, they want to capture regulatory agencies to make sure that all regulations are profit-promoting.

5. Decentralized Democracy: I'm always surprised that economists so often ignore this one.[*] I don't expect neoclassical economists -- who are very individualistic and market-oriented and therefore anti-democratic (except on the most abstract level) -- to pay attention to grass-roots democracy. But I'm always surprised that they generally ignore industry self-regulation, a less grass-roots form of decentralized democracy. (I care about such things because my late father was in an industry self-regulating company, the Audit Bureau of Circulations for newspapers.) Industry self-regulation helps prevent many of the worst abuses that are encouraged by the aggressive competition of corporations. (These abuses -- such as blatant fraud -- not only represent a PR problem vis-a-vis the public at large, but hurt members of the industry.) In fact, due to the power of corporations to capture government regulatory agencies, most of 
the latter end up acting like industry self-regulation.

Turn now to grass-roots democratic decision-making: "tradition" is really nothing but the result of a long process of formal and informal 
decentralized democratic decision-making. Strictly speaking, tradition and this kind of decentralized decision-making are very hard to separate, since democracy builds on existing tradition.

Many socialists have emphasized the importance of increasing the role of decentralized democracy, as with Marx's writings on the Russian mir (as a way to further socialism there). This includes the cooperative movement, Guild socialism, the workers' control movement, and the like. One of the disasters of the recent marketization process in China, I am told, is the abolition or weakening of cooperatives that dealt with issues like irrigation and erosion.

(Of course, I always feel inadequate in talking about China, so I would appreciate any input on this issue. Also, I would guess that the democracy of such coops was limited by the need to preserve the power of the CP. So these cooperatives acted like political machines.)

While I think that grass-roots democracy is important, and in fact absolutely necessary to the socialist project,  it has the problem of being parochial, ignoring the negative effects on other communities and globally. (Usually, however, communities aren't aggressive in their competition the  way capitalist corporations are.) So not only are grass-roots federations of communities needed, but some sort of centralized state (centralized command) is needed. However, to avoid the elitism and alienation referred to above, it is absolutely necessary for the federations of community democratic organizations to control the state. That means that the decentralized hierarchies and markets need to be either abolished or subjected to grass-roots democratic control. That's socialism. 

[*] Here I'm referring to their presentations to the public, i.e., textbooks and op-ed screeds, not in scholarly work. I bet that there is an 
obscure literature somewhere on industry self-regulation and even on grass-roots democracy. Some can even be seen in Mishkin's money & banking textbook, encouraged by his emphasis on moral hazard and adverse selection. But by and large, bringing in industry self-regulation sheds doubt on the virtue of the market, an organization that economists generally worship and idealize. The existence of industry self-regulation suggests that markets aren't perfect.

James Devine jdevine@lmu.edu & http://liberalarts.lmu.edu/~JDevine