Section 1: Summary
Bardhan and Roemer (101) argue that socialism is not bankrupt or declining, but is a crucial entity, which mainly features competitive politics and resource allocation, as well as public ownership of the means of production. These authors hold that competitive markets are necessary for establishing a healthy economy and that public proprietorship is important to maintain profit distribution through a democratic process. Bardhan and Roemer (102) state that a majority of socialist nations view market socialism as a failure because political sides have failed to distinguish between private ownership and competitive markets. Further, these authors claim that people have a wrong perspective of market socialism because they are yet to integrate socialist market reform and institutional restructuring to address different incentive and agency issues. Therefore, Bardhan and Roemer (103) propose that market socialism is the most appropriate economic approach as it can create more egalitarian income distribution than capitalism, reduce public ills (pollution and noxious advertising, among others) and comes at the right time.
However, one major problem with public ownership in market socialism is that people fail to differentiate political criteria from the economic equivalent when focusing on the decision-making process within a firm (Bardhan and Roemer 102). Also, market socialism may fail to work if social democracy does not receive particular political settings, which unfortunately are unavailable in numerous nations due to given reasons such as the non-existence of robust labor institutions (Bardhan and Roemer 105). To solve these problems, Bardhan and Roemer (105) look at two issues (Soft Budget Constraint and Political Accountability) and propose some solutions to these problems.
According to Bardhan and Roemer (105), the Soft Budget Constraint (SBC) is a situation in which a company’s manager may lack the incentive to meet the Langean rules of the game. The SBC ends up being a thorny issue as it leads to two complications, the agency and political problems. The agency problem arises because managers may fail to maximize the share value of their organizations and only focus on fulfilling their interests. This agency issue is a substantial one as it can exist in both a socialist institution, where nobody takes accountability and a capitalist organization, where numerous investors exist, making it hard to ensure liability. Socialism can only solve this problem if the manager’s reputation and salary depend on the company’s performance (Bardhan and Roemer 106). Also, Bardhan and Roemer (107) assert that socialism can act as a solution if it has an institution like the stock market, which offers a continuous evaluation of managerial performance.
To solve the SBC problem, Bardhan and Roemer (108) create a model of Insider Monitoring (IM) which not only addresses this issue but also facilitates an egalitarian profit distribution within the economy. The IM approach elevates banks as the primary monitors of business institutions, maintains that the government will not directly own public companies and that these firms will be joint stock companies. Banks play a pivotal role as they can discipline the management, come up with financial rescue strategies, renegotiate the debt contract for corporations, manage the organization temporarily and so forth (Bardhan and Roemer 108). The monitoring, technical and financial ability of banks is essential to running these firms (Bardhan and Roemer 109). Nevertheless, this model only becomes active if a company goes public and the agency problem becomes critical. Also, this IM framework does not interfere with innovations of small businesses to avoid the collapse of these institutions (Bardhan and Roemer 108).
Bardhan and Roemer (110) state that in a situation where the stock market is the most active force, people can limit its influence by liquidating their portfolios to establish a “clamshell economy.” Such an economy will be vital as it provides crucial signals such as company performance to banks and prevents concentration of firm ownership to one small class. However, Bardhan and Roemer (111) note that their approach may result in a Pareto inefficiency, a condition that inhibits a fluctuating consumption from consumers. On the other hand, the SBC issue manifests itself as a political problem particularly in socialist nations since such countries feature minimal political pressures. Therefore, instances like bad projects, bankruptcies, layoffs and so forth become routine (Bardhan and Roemer 111). Nonetheless, Bardhan and Roemer (112) claim that their IM system may solve this problem as it creates a hard layer between public firms and the state treasury, which offers financial discipline for public companies, in addition to providing these companies some cushion from direct political responsibility, among other benefits.
I agree with Bardhan and Roemer (104) when they view that democracy helps shape public ownership. Citizens have significant control over the means of production, as well as the competitive equilibrium within the economy. Voters can influence the occurrence of public ills as they can decide upon what a company can produce. Additionally, Bardhan and Roemer (111) posit that the power of votes is valuable, because, without it, an inefficiency arises, which substantially inhibits market development. This standpoint is correct because according to Duncan (216), democratic socialism has risen to become an institutional form of nationalism, which helps the government plan and manage the economy via the popular will of the people. Furthermore, Duncan (216) asserts that public ownership emulates the essence of democracy, which consequently frees the management from any direct political involvement. Moreover, Freeman (285) notes that citizens have the duty of exercising their public ownership rights that come in the form of votes. People can use their votes to influence public business activities and as a result the livelihood of future generations (Freeman 285).
Secondly, by giving significant power to banks, Bardhan and Roemer (109) create an active model (the bank-centric financial system), which allows firms to play a bigger role and gain more access to crucial information than in a stock market-centric system. According to this model, businesses are in a better position to detect and address issues than depending on stakeholders. Furthermore, the bank-centric financial model allows companies to focus on long-term profitability rather than the short-term version, which may cause negative situations like contract withdrawals (Bardhan and Roemer 110). However, the concept of a bank-centric financial system may not be the best idea because it limits investors from enjoying some of the firm’s profits. The stock market-centric approach is better than the bank-centric option as it gives stakeholders a diversified investment portfolio. That is, all the profits that the shareholders get can outweigh any losses that they may suffer (Peirce 1). Ultimately, avoiding the bank-centric model will mean that capitalism replaces market socialism so as to bring investors and firms together.
Bardhan, Pranab and John E. Roemer. “Market Socialism: A Case for Rejuvenation.” The Journal of Economic Perspectives 6.3 (1992): 101-116. Web. Accessed 7 September 2016.
Duncan, Graeme. Democracy and the Capitalist State. Cambridge: Cambridge University Press, 1989. Web. Accessed 7 September 2016.
Freeman, John R. Democracy, and Markets: The Politics of Mixed Economies. New York: Cornell University Press, 1989. Web. Accessed 7 September 2016.
Peirce, Hester. We Must Resist Becoming ‘Bank-Centric’ In the U.S. 11 March 2015. Web. Accessed 7 September 2016.