The defining characteristic of a socialist system is the public ownership of the means of production. Karl Marx observed that the historical-cultural pattern of the ownership of the means of production (OMP) gave rise to the social phenomenon of class and the politics of class struggle. Membership in either class, bourgeoisie of proletariat, is defined by the individual’s relationship to the means of production. When workers, through their pension funds, participate indirectly in OMP as shareholders, they become members of the petite bourgeoisie. Self-employed professionals are also members of the petite bourgeoisie, even as they are increasingly corporatized. For a market system to remain balanced, the public sector needs to be dominant.
Hyman Minsky pointed out in his 1996 paper: Uncertainty and the Institutional Structure of Capitalist Economies that capitalism is an ever-evolving construct that recently entered a new stage: money manager capitalism. In this form of capitalism, nearly all businesses are organized as corporations; pension and mutual funds are the predominant owners of financial assets; and managers of these funds are judged solely on the total return on fund assets (dividends and interest plus appreciation in share value). One consequence of the money manager structure is predominance of short-run considerations in decision making. A robust public sector is needed to rebalance excessive uncertainty in the private sector.
Two important points need to be borne in mind in understanding the concept of Ownership of the means of production (OMP). The first point is that private ownership of the means of production is more than owning physical and intellectual property, or owning the financial capital behind it. The second point is that private ownership of the means of production in a capitalist system refers to a socio-cultural practice in which a small number of individuals within a larger corporation, namely shareholders represented by the board of directors, operating under the capitalist law of private property rights and the sanctity of contracts as if the corporation were one single individual, can control and decide what is done with all the profit created by the entire corporation composing also largely of workers who are legally disfranchised of their economic rights merely because they do not own the means of production. As represented by management under the supervision of the board of directors, these absentee owners of the means of production do not have anything to do with the operation of the corporation besides ownership of its capital. When corporations make good profits, only their management and shareholders benefit. Workers are paid a fixed wage and generally do not receive bonuses based on profit earned by the corporation that employ them. This may be legal and appear fair under the doctrine of private ownership rights, but it is the fundamental injustice of capitalism.
While shareowners of a corporation, members of the bourgeoisie class by definition, contribute only financial capital that enhances the productivity of workers, and workers, members of the proletariat class, produce the profit, shareholders command complete legal control over that profit and how it is used and distributed. The owning bourgeoisie have complete legal control over both how much the working proletariat are paid in wages and complete legal control over how the profit from worker productivity is used, thus giving rise to a class division. In Chinese political nomenclature, the term bourgeoisie stands for the “propertied class” and the term proletariat stands for the “property-less class”. The politics of class struggle is a battle between uneven power commanded by capital and labor. Under a central banking regime in a market economy, non-inflationary monetary policy requires the maintenance of “structural unemployment”, thus systemically weakening the bargaining power of labor against capital, unionism or no unionism.
Charles Dickens wrote on the inhumanity of capitalism as a natural outcome of the industrial revolution to promote reform. But Marx and Engels wrote on the structural contradiction of capitalism to show that even if workers were treated more humanely by capital as an enlightened utilitarian necessity, capitalism will still not escape collapse from its internal contradiction. The introduction of meta-wage benefits via pension funds turns classical capitalism into mass capitalism, making workers simultaneously into their own oppressors through a system that allows capital in the form of labor’s own retirement savings to continue to oppress labor. The search for high return on workers pension funds is pushing wages down everywhere in the globalized economy and relocating jobs from high-wage economies to low wage economies. The neoliberal name for capitalism is market economy. The concept of a labor market is merely a modern version of slavery.
Capitalist bias not withstanding, labor is not a factor of production. It is the core component in the economy around which factors of production, such as capital, land, technology, organization, etc., are applied to increase labor productivity. Marx considered it a reification to treat labor as just another factor of production. Workers are people who should not be used as things, with profit they create extracted to benefit solely others who own things that workers use to be more productive. Return on capital should not be achieved through robbing labor of its fair share of the fruits of workers’ labor.
Profit should only be realizable pari passu with wage increases. As corporate revenue rises, wages must rise with it to prevent obscene profits. Rather, corporate profit should be shared with labor in the form of wage bonuses along with dividend to shareholders.
Privatization of the public sector is an abdication of government responsibility to the governed. It is economically unsound, financially inefficient and socially unjust when national public infrastructure, either physical or social, are privatized. The public sector is not merely another component of the national economy. It is the critical component that defines the limits of the globalized market in a functioning sovereign state. Economist Hyman Minsky pointed out that a sizable and strong government sector is indispensable for a capitalist market economy to maintain macroeconomic stability and avoid recurring deep recessions. In a globalized economy, national public sectors are necessary to maintain global macroeconomic stability.
Privatization of the public sector exposes the capitalist market economy to cyclical disasters that require nationalization measures to bail out, as the recent collapse of the finance sector of the US economy aptly illustrates. Even in the boom phase of the business cycle, privatization of the pubic sector drives socio-economic resources and development to where there is highest profit rather than where the nation’s most critical needs are located. The nature of private finance is such that privatized public enterprises are forced by market pressure to focus on the short term, often leading them toward long-term problems and even insolvency.
Privatization of the public sector provides needed public services only to those who can afford them rather than to all who need them as a matter of rights of citizenship. The dilemma over universal health care and insurance in the US is an obvious example. The market by its very nature rewards the financially strong and punishes the financially weak, in opposition to the function of government to protect the weak from the strong. The market is the venue of choice for owners of capital, notwithstanding that the market value of capital is basically defined by state actions, such as monetary policy, interstate trade and antitrust regulations, tax policies, and above all by the productivity of labor.
Fundamentally, capital is merely idle asset when deprived of the opportunity to invest in enhancing the productivity of labor. Capital is merely an auxiliary factor of production. Without capital, labor can still produce, albeit at a lower productivity rate, but without labor, capital cannot exits. This is why capital, when allowed to move freely, tends to go to where workers are and where worker productivity is underdeveloped. This fundamental truth is often distorted by the supporters of capitalism who promote the flawed concept that capital is the driving force in a capitalist economy and therefore must be given preferred advantage or it will move to another economy that does.
Dollar hegemony operating on a globalized trade regime pushes capital to where wages are lowest without any intention of developing global parity in worker productivity. The sole aim is to maximize return on capital with lowest wages. For centuries, capitalism prospered because it enhanced labor productivity that yielded rising wages. For the last two decades, free market capitalism has worked to drive wage down throughout the global economy, a trend that will spell self destruction.
Further, just as the rich can enjoy a life of riches only if they control money, but not when money controls them, an economy can prosper only when its workers control the capital needed to enhance their productivity. It is a very American idea that workers should be able to become rich by their labor, an idea deeply rooted in the founding of the new nation. The founding fathers of the United States considered the concept of financial capital unnatural and an unholy obstacle to the inalienable right of the pursuit of happiness.
In a February 12, 2005 article in AToL: The Privatization Wave, I wrote:
Transnational investment banks and private equity firms such as Goldman Sachs, Blackstone, the Carlyle Group, Merrill Lynch, Morgan Stanley, etc., are eager to pounce on juicy privatized public assets such as infrastructure projects worldwide. But privatization of the public sector (the sale or lease of public assets) means governments will be relinquishing control over and responsibility for key infrastructure for the common good for the term of the sales. It usually also means higher fees for users, since private borrowing tends to be more costly than sovereign credit, and investors always insist on taking their profits off the top from gross revenue, thus increasing user fees and reducing the cost-competitiveness of those users depending on such infrastructure for efficient operation. And rising user fees seldom translate into improved service. To the contrary, surveys have shown that in-house operation of publicly-provided services is generally more efficient than contracting them out to private operators, while privatizing public infrastructure for private profit has typically led to increased inefficiency and corruption. State-owned-projects can keep user fees to a minimum and recoup public investment from increased tax receipts generated by economic growth. Many counterproductive cases are cited in a large body of work on privatization, including my article: The Privatization Wave. Much of the blame for the current housing credit crisis can be laid at the footstep of the privatization of government sponsored agencies, namely Fannie Mae and Freddie Mac.
Privatization of the public sector in China is not simply the benign transfer of ownership from the state, as a political institution representing all the people, to corporatized entities controlled by private financial institutions and private individual shareowners. Rather, it is the very process by which the system of private property is reintroduced into the public sector a socialist society in the process of transitioning to a socialist market economy. This involves fundamental questions about social justice in ownership distribution, valuation of assets being privatized, and the fairness of the privatization sale process of state-owned assets.
Privatization for transitional economies requires not only the restructuring of the economy but also the creation or redefinition of private property rights and market institutions and mechanism while ensuring maximum economic growth with minimum socio-economic and political disruption. Above all the issue of social justice needs to be a controlling consideration.
Ronald Coase, 1991 Nobel Laureate in economics, developed the Coase theorem in his 1937 paper describing the economic efficiency of financial allocation in the presence of externalities. Externality in economics involves impacts on parties not directly engaged in economic decisions or actions, or in plain language: the spillover effect. Externality in finance occurs when others besides the actors must pay for the cost or share the benefits of a decision, action or transaction. The theorem, clarified in his 1960 article: The Problem of Social Cost, states that when trade in an externality is possible with no transaction costs; bargaining will naturally lead to an efficient outcome regardless of the initial allocation of property rights. By extention, given well-defined property rights, low bargaining costs, perfect competition, perfect information and the absence of wealth and income effects, resources will be used efficiently and identically regardless of who owns them.
The Coase theorem has been cited as a basis for most modern economic analyses of government regulation. According to Coase, disputes over resources stem mostly from a situation where no one owns them, as in the case of nature, or everyone owns them, as in the case of public property. However, these disputes could be resolved automatically if
the unclaimed resources were divided up as private property, even if the division contain inherent unfairness.
This is the basic argument used by those promoting privatization of the public sector. They view the problem of air pollution as no one owning the air, or everyone owns it. The same argument applies to water. If these natural resources were privatized, economic efficient over their use and preservation would improve, these privatizers argue. But the nature of the economic man is such that whoever is assigned to own the air would rather charge others for permission to pollute it than to pay everyone else to stop polluting it. Privatization of air would then end up promoting air pollution for profit.
Another obstacle to applying the Coase theorem is the wealth and income effects. This is defined as the change of wealth or income that occurs when public property or property rights are awarded unevenly to private parties. Coase made his “invariance claim” that outcomes will be similar of not identical regardless who the favored owners are. But effects of wealth and income disparity on equality and social stability are ubiquitously obvious enough to invalidate the Coase theorem. Coasians argue that the social results may be different, but they will be equally efficient economically. The problem with this argument is that changes in supply and demand caused by different ownership patterns have rippling effects throughout the entire economy that affect efficiency. And even if efficiency is unaffected, social stability will certainly be affected that will in turn affect economic efficiency.
History has shown that no national resurgent strategy can succeed without a clear understanding of the importance of a viable monetary strategy for successful independent national development. Chinese monetary strategy in recent decades has been reactive, lacking political will to take the initiative and playing a game in ways that show her policymakers as not having full understanding or the necessary skills to control the outcome, despite the fact that China has become the world’s biggest creditor nation and the top manufacturer. China cannot continue to allow her currency to be a derivative of the dollar; nor can she rely on foreign trade surplus denominated in dollars to finance much needed domestic development. China must stop further privatization of her public sector, stop exposing her strategic sectors to international market forces and take steps to reverse the disparity of wealth and income and free up sovereign credit to develop much need physical and socio-economic infrastructure at a much faster pace. After three decades of reform and open-up to the outside world, Chinese policymakers should realize its time to review and redirect toward new approaches of national revival not merely to catch up with a decadent West, but to restore Chinese civilization as the guiding light towards a world free of exploitation and oppression.
September 15, 2008