Markets

Aren’t markets a problem for a worker-ownership model of socialism? Won’t free markets inevitably lead to wealth inequality even if all the firms in an economy are worker-owned?

Most credible models of a cooperative economy could be described as some form of market socialism: worker-owned firms would be internally cooperative, but would compete with each other on open markets to buy resources and sell products. Markets would be used to set prices and determine production levels, and to encourage innovation and efficiency in worker-owned firms, much like markets currently function in our capitalist economy. Indeed, this combination of internal cooperation and external competition is how worker-owned firms operate now, and advocates of worker-ownership usually assume that a cooperative economy will evolve out of the capitalist economy over time as worker-owned firms grow to be an ever more dominant sector of the economy as a whole. Eventually, the rules of the market may have to be adjusted to better fit the aims of a cooperative economy, but the basic function of the market would remain unchanged: setting prices and rewarding efficiency.

But when socialists critique capitalism as a system, they often include ‘the free market’ as part of the problem. Using markets to coordinate a cooperative economy raises a number of fair questions: Isn’t free-market capitalism the antithesis of a fair and democratic economy? How can a socialist or cooperative economy that is built around markets ever promote social justice? Shouldn’t we be working for a society that doesn’t require us to sell our time and our productivity on the open market? Shouldn’t we be building a society that isn’t founded on market relations at all? Isn’t cooperation and building a world beyond market competition the whole point? And further, won’t ‘free-market socialism’ just devolve back into winner-take-all capitalism in the end anyway? Isn’t including free markets in the design of a cooperative economy fundamentally a contradiction and counterproductive?

To answer these questions it is important to establish, first of all, that the idea of a free market is a myth; it is a very pervasive myth but a myth nonetheless. There is no such thing as a truly free market. Markets aren’t products of nature but human organizations with human-made rules (for an interesting discussion of this idea, see Ahrne, Aspers and Brunsson 2014). All markets are governed by rules. Depending on the society, those rules may be more or less complex, and may come in the form of relatively explicit laws enforced by governments or more implicit social norms enforced by informal social sanctions (or typically a combination of both kinds of rules), but those rules are made by humans and they can be changed by humans.

So a market is human-made institution — it’s not natural and it’s not rule-free. In truth, the only truly free market is a mugging. If you are mugged, you hope to make an exchange: you hope to exchange your money for your life, but after you hand over your wallet, there is no rule guaranteeing that the mugger will abide by the terms of the exchange and not just kill you anyway to spite your cooperation. That is a truly free market. In all other cases, exchange in markets is governed by human-made rules, laws and social norms.

In spite of the fact that all markets have rules, the notion that free markets exist and are an ideal way to organize human behavior has become part of the taken-for-granted ideology of our time. The neoliberal belief that ‘free’ markets are the most natural and most efficient way to organize society is frequently called market fundamentalism. Market fundamentalist ideas are currently dominant among the elites that govern the world economy and these ideas drive public policy-making at all levels in almost all modern states. Market fundamentalist ideology also often includes the belief that markets are essentially connected to the capitalist system, that markets and capitalism ‘naturally’ go together.

While markets are often associated with capitalism, actually markets don’t belong to any one economic system. Markets are simply a tool. We can write the rules of market exchange to work in service of a cooperative economy just as well as we can write the rules of market exchange to work in service of a capitalist economy. In either case, the market would function to a set of human-made rules, and no set of rules is necessarily more natural than any other.

Interestingly, much of classic socialist thought also shares this second belief with market fundamentalism: the notion that markets and capitalism essentially go together. Much of classic socialist theory rests on the belief that markets inevitably alienate workers from the products of their labor, that markets unavoidably concentrate wealth in the hands of the few, and that markets naturally lead to a capitalist society, but there is actually no historical reason to believe any of this. Markets are simply a set of established social rules for exchanging goods, and markets can be found in every society from tribal, to feudal, to modern capitalist.

The Czech economist, Radoslav Selucky (1975), argues that when it comes to designing an economic system, the choice is between markets on the one hand or a command economy on the other; there really is no third option. In a market-based cooperative economy, the workers in independent, worker-owned firms would have the freedom to make their own decisions about how their firms were run: what to produce, how much, and when. Without the market as a tool to set prices and production levels, the only other option available is to set prices and determine production centrally, with each firm following orders from the authorities in a top-down and planned economy. According to Selucky, a socialist economy can either be market-based and democratic, or planned and authoritarian; there is no other economic mechanism available to organize production between firms.

Understood as a tool, markets are simply the most efficient way to set prices, reward efficiency in the economy, and motivate innovation in firms. In a capitalist economy, profits are retained by owners as returns on their investments, but in a cooperative economy, profits would be retained by the workers themselves, either as higher wages, as capital to be reinvested into the cooperative, or both. It is the capitalist system itself that concentrates wealth in the hands of the few, not markets per se. Of course, if wage differences within firms or between firms ever rose to levels where some individual worker-owners could accumulate so much private wealth that they could start lending capital at interest like capitalists, then that would be a real problem for a cooperative economy, but a problem that could be solved in a number of ways, perhaps with tax policy, or through the rules of incorporation of the worker-owned collectives themselves. It would be a technical problem and potentially a serious problem, but not an unsolvable problem. It all depends on how the rules of the market are written.

And all things being equal, markets are more than just an effective way to set prices and reward efficiency. All things being equal, markets are also a form of pure democracy; we vote for the goods and services we want with our dollars (pounds, euros, yen, etc). Of course, all things are not equal. Some of us have much more money than others, and thereby, more votes, but the problem again is with income inequality, not the market per se. In a cooperative society where income inequality is kept within reasonable limits, markets are a very efficient way to poll society on what goods and services people want. State communism was an economic failure because the planned economy inefficiently produced generally shoddy goods in the wrong amounts and at the wrong time. A cooperative economy organized around markets would give worker-owned firms accurate information about what goods to produce in the proper amounts and at the proper prices. Worker-owned firms that inefficiently produced shoddy goods would be forced to innovate and improve or face a reduction in wages as profits dropped.

In theory, inefficient worker-owned firms in a market-based economy could even fire staff or go out of business altogether, but in practice, this seems to be rare. In studies of worker-owned firms in times of economic downturn, economists have found that worker-owners tend to favor reducing wages rather than firing fellow workers or moving shop. The solidarity of worker-owned firms means that these firms prefer to keep on all staff at reduced wages until the economy improves and profits rise again. While in theory a market-based cooperative economy might produce cycles of business failure and unemployment, in practice, it appears that worker-owned firms tend to be more flexible and resilient than capitalist firms in this respect, and reserve layoffs (redundancies) as a last resort. (Dow 2003, 62, 244—5)

Indeed, it is important that in a cooperative economy, worker-owned firms are still allowed to fail. Failure is valuable information for a firm. If a product doesn’t sell, and the firm is forced to cut wages as a result of dropping profits, the worker-owners have a strong motivation to figure out why. Was the product over-priced? Distributed poorly? Shoddy? Or poorly matched to demand? The information that failure provides delivers a social good for the cooperative society as a whole: better goods that people want and at a price they will pay. If the cooperation in the economy starts to extend beyond the firms themselves, if firms in the same sector start to form up into syndicates and cartels to fix prices, then the cooperative economy will start to suffer from the same inefficiencies that hobble monopoly capitalist economies.

There is a strong temptation in the worker-ownership movement to understand ‘cooperation’ as extending beyond firms, particularly as present-day worker-owned firms have to compete with larger capitalist firms that often benefit from vertical production monopolies and greater buying power for inputs. Right now, it may be strategically justifiable for worker-owned firms to form up into syndicates to better compete with international corporations; right now, it simply isn’t a fair fight between the little worker-owned firms and the giant multinationals, but in the long run, when worker-ownership develops into an economy-wide system, such external cooperation would be very damaging and would need to be discouraged.

Markets are not a threat to a cooperative economy; they are, in fact, a necessary tool. Like any tool, used in the wrong way, markets can indeed cause harm, but used correctly, there is no better way to organize production in a complex, modern economy. The question is not whether to use markets or not, but how to structure markets so that they serve a cooperative economy rather than undermine it. This is a technical question, but not an unprecedented question. We write rules to structure how markets work all the time, even in our ‘free-market’ economy. If we can move the debate past the myth of the free market, and if we can break the ideological connection between markets and capitalism, we can find ways to use markets to coordinate a flexible, innovative and democratic economic system that serves the public good.

Ahrne, Göran, Aspers, Patrik and Brunsson, Nils. 2014 “The Organization of Markets.” Organization Studies 36(1), 7–27.

Dow, Gregory K. 2003. Governing the Firm:  Workers’ Control in Theory and Practice. University of Cambridge Press: Cambridge.

Selucky, R. 1975. ‘Marxism and Self-Management.’ In Jaroslav Vanek (Ed.) Self-Management: Economic Liberation of Man, Middlesex: Penguin, 47–61.