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Science & Society, Vol. 56, No. 1, Spring 1992, 9-38
Economic Democracy:
A Worthy Socialism
That Would Really Work



ARXISTS ARE SKEPTICAL OF BLUEPRINTS, al­ways have been. We all remember Marx's polemic against Proudhon, the Manifesto's critique of "historical action [yielding] to personal inventive action, historically created conditions of emancipation to fantastic ones, and the gradual spontaneous class organizations of the proletariat to an organiza­tion of society specially contrived by these inventors" (Marx and Engels, 1986, 64), and the numerous other occasions when the fathers of "scientific socialism" went after the "utopians." In general this Marxian aversion to drawing up blueprints has been healthy, fueled at least in part by a respect for the concrete specific­ity of the revolutionary situation and for the agents engaged in revolutionary activity: it is not the business of Marxist intellectuals to tell the agents of revolution how they are to construct their post­revolutionary economy.

Yet the historical dialectic is a funny thing: virtues sometimes turn into vices, and vice versa. At this particular historical mo­ment, the skeptical aversion to blueprints is out of place. Such is my contention. At this present historical conjuncture, we need a "blueprint" — a theoretical model of a viable, desirable socialism. It is no secret that the long-standing argument that socialism cannot work has been given a powerful boost by the recent and still unfolding events in Eastern Europe and the Soviet Union. Indeed, the breadth and depth of the anti-socialist, pro-capitalist feelings among those who have lived or are still living under "actually existing socialism" cannot but be disturbing, even to those of us who have long been critical of that brand of socialism. It seems


clear that the left needs more than slogans about democratic plan­ning and/or worker control if we are to contest with any degree of effectiveness the now deepening hegemony of capitalist ideology.

The historical dialectic is a funny thing. At precisely the moment when capitalist hegemony seems most secure, and the left seems most in need of an alternative vision, the materials for constructing and defending such a vision have become available. There has been a burgeoning of theoretical and empirical research during the last two decades concerning alternative economic ar­rangements — alternative schemas for organizing the workplace, alternative mechanisms for planning, alternative ways of integrat­ing planning with the market — much of it (though by no means all) driven by the intensified competition among capitalist na­tions. I believe the left is now in position, as we have never been before, to argue with scientific and moral confidence that there is a desirable form of socialism that will work. This paper takes a step in that direction.

Before proceeding, I want to emphasize that I do not think that the project of constructing and defending models of a viable, desirable socialism is the only worthy project for socialist activists or intellectuals at this time; nor do I think that having a viable model solves the problem "what is to be done." Far from it. The "transition problem" remains enormous. At the same time, I think it important that we have some sense of what it is we hope to be in transition toward — even while recognizing that the exigencies of concrete struggle will doubtless require various modifications of whatever "blueprint" is proposed. Indeed, the "blueprint" to be set out here should not be thought of as a fixed form, optimal in every real-world situation. It is better regarded as primarily an intellectual weapon against the apologists for capitalism, who forever gloat that no matter how bad things are with capitalism, there are no viable alternatives.

Setting the Stage

In 1920 Ludwig von Mises fired the opening salvo in what was to become a several-decade academic skirmish. Socialism, von Mises declared, is impossible: without private ownership of the means of production, there cannot be a competitive market for production goods; without a market for production goods, it is

impossible to determine their values; without these values, eco­nomic rationality is impossible.

Hence in a socialist state wherein the pursuit of economic calculation is impossible, there can be — in our sense of the term — no economy whatsoever. In trivial and secondary matters rational conduct might still be possible, but in general it would be impossible to speak of rational production anymore. (Mises, 1935, 92.)

The current crises of the Soviet and Eastern European econo­mies might seem to be von Mises' definitive vindication. It is certainly fashionable these days to read the collapse of European Communism in this vein. But let us proceed a bit more cautiously.

It has long been recognized that von Mises' argument is logically defective. Even without a market in production goods, their monetary values can be determined. In response to von Mises a number of economists pointed out that Pareto's disciple, Enrico Barone, had already, 13 years earlier, demonstrated the theoretical possibility of a "market-simulated" socialism.1

Of course, the "market-simulated" model of Barone and others is very different from the Soviet "command economy" model, which does not permit a free market in either production or con­sumption goods, and does not even try to mimic market behavior. Has not von Mises been proven correct at least with respect to this form of socialism?

I think we should be fair here. Even command economies, which have recently come to such grief, have not been without substantial accomplishments. By the mid-1970s the Soviet Union had established itself as the world's second largest economic power. In the space of a generation China has succeeded in remov­ing its now one billion people from the long list of countries still plagued by hunger. Since its inception in 1959 Cuban socialism has provided its citizens with a level of economic well-being tragi­cally rare in Latin America beyond the upper classes. As for East­ern Europe, we might attend to the West German poet/essayist Hans-Magnus Enzenberger (1989, 114, 116), reflecting in 1985 on his recent visit to Hungary:

1 A translation of Barone's article appears in Hayek (1935, 245-90). The principle attack on von Mises was made by Fred Taylor and Oscar Lange, whose important essays on the subject are collected in Lippincott (1938).


Hardly anyone remembered that before the Second World War there had been millions of agrarian proletarians in Hungary living below subsis­tence level, without land or rights. Many emigrated to find salvation; hundreds of thousands wound up as beggars. . . . After bitter conflicts and endless argument, the Kadar regime has definitively closed the gap between town and country and made possible an agricultural specializa­tion that achieves large surpluses. The silence of the villages conceals the fact that here, behind the drowsy fences, where only a dog sometimes disturbs the noonday peace, Hungarian socialism has put an end to misery and servitude and achieved its most revolutionary successes.

To acknowledge that a market-simulated socialism is theoreti­cally possible and that command economies are not without sig­nificant accomplishments is not to advocate either of these forms of socialism, but such an acknowledgment should make one pause before embracing the simplistic proposition that socialism is im­possible. Economic crises do not salvage logically defective argu­ments, nor do they negate historical accomplishments. Socialism can "work." The important question is, how well? Specifically, can socialism work better than capitalism?

I contend that the answer to this latter question is, "it all depends." It depends on the kind of socialism. I further contend that there is at least one form of socialism which, if implemented, would be superior to capitalism on almost all counts: it would be more efficient, more rational in its growth, more egalitarian, more democratic. It is this form of socialism that I wish to elaborate in the following pages.

Three Cases

The model to be set out here does not spring whole from political or economic theory, nor is it a stylized economic structure of some particular country or region. The model is a synthesis of theory and practice — a "dialectical synthesis," I like to think. To be more specific, what I will call "Economic Democracy" is a model whose form has been shaped by the theoretical debates on alternative economic organizations that have proliferated over the past 20 years, by the empirical evidence on modes of workplace organization and by the historical record of various post-World War II large-scale "experiments." From these "experiments" there are negative lessons

to be learned, notably from the failure of central planning in the Soviet Union and Eastern Europe, but there are positive lessons also, deriving especially from three central cases.

Let us begin with a socialist "failure." In the early 1950s a small Eastern European country with "two alphabets, three reli­gions, four languages, five nations, six federal states called repub­lics, seven neighbors and eight national banks" (Horvat, 1976, 3), embarked on a remarkable course. In 1948 Stalin accused Yugosla­via of antisovietism. By 1949 all trade between Yugoslavia and other Communist countries had been halted, and an economic boycott imposed. Pressed by events, Yugoslavia began a highly original construction — a decentralized socialist economy featur­ing worker self-management of factories. Milovan Djilas (1969, 220-221) recounts the decision:

Soon after the outbreak of the quarrel with Stalin, in 1949, as far as I remember, I began to reread Marx's Capital, this time with much greater care, to see if I could find the answer to the riddle of why, to put it in simplistic terms, Stalinism was bad and Yugoslavia was good. I discov­ered many new ideas and, most interesting of all, ideas about a future society in which the immediate producers, through free association, would themselves make the decisions regarding production and distribu­tion — would in effect, run their own lives and their own future. . . . It occurred to me that we Yugoslav Communists were now in a position to start creating Marx's free association of producers. The factories should be left in their hands, with the sole proviso that they should pay a tax for military and other state needs.

Kardelj and Djilas pressed Tito, who was initially skeptical.

The most important part of our case was that this would be the beginning of democracy, something that socialism had not yet achieved; further, it could be plainly seen by the world and the international workers' move­ment as a radical departure from Stalinism. Tito paced up and down, as though completely wrapped in his own thoughts. Suddenly he stopped and exclaimed: "Factories belonging to the workers — something that has never yet been achieved!" (Djilas, 1969, 222-223.)

The system thus born (imposed top-down, it should be noted, and without the benefit of any economic theory) underwent many


modifications during the succeeding decades, but the basic struc­ture of worker self-management persisted and was combined with ever greater reliance on the market. For a long while the results were impressive. Between 1952 and 1960 Yugoslavia recorded the highest growth rate of any country in the world. From 1960 to 1980 Yugoslavia, among the low and middle income nations, ranked third in growth per capita (cf. Horvat, 1976, 12; Sen, 1984, 490).

These statistics reflect a real transformation in the quality of life for millions. In 1950 Yugoslavia was, as it had been since its creation in 1918, a poor, underdeveloped country, three-quarters of the population rural peasants. By 1975 rural peasantry comprised only 30 percent of the population, and Yugoslavia had achieved a standard of living, in Slovenia equal to that of Austria, in the country as a whole about two-thirds that of Italy. Even Harold Lydall, a major critic of the Yugoslav experiment, concedes that "it is clear that Yugoslavia, under its system of 'socialist self-management,' has achieved a high rate of economic growth of both output and consumption. The average standard of living has changed all out of recognition in the past thirty-five years" (Lydall, 1984, 183). And though the pendulum swung back and forth between liberalization and repression, Yugoslavia was with­out doubt the freest of any Communist state, freer also than most non-Communist low- and middle-income countries. To cite but one indicator: since 1967 Yugoslavs have enjoyed almost complete freedom to travel outside the country's borders, a freedom widely used.

During the 1980s the Yugoslav economy collapsed. "The real social product . . . has fallen by 6 percent from 1979 to 1985 and even further since then. . . . Labor productivity in the social sector fell in the same period by about 20%, and the real personal incomes of social sector workers by about 25 percent. The standard of education, health and housing services has also fallen. . . . Despite a vast amount of overmanning, both in industry and government . . . there are more than a million persons registered as seeking work, four-fifths of whom are young people" (Lydall, 1989, 4-5). In addition, ethnic antagonisms, long in abeyance, have revived with intensity. As of this writing, the country appears to be com­ing unstuck.

What happened? Why has the Yugoslav economy fallen apart? What lessons are to be learned? Should we conclude, with Oxford's
Lydall, that the Yugoslav experiment was fatally flawed from the beginning, or with Cornell's Jaroslav Vanek (1990, 182), that any country which tries the Yugoslav path while avoiding the now-evident design flaws "has the best chance to move forward out of the universal crisis of the late twentieth century?"2 Let us set these questions aside for now, and move from socialist "failure" to capitalist "success."

In 1945 General Douglas MacArthur looked out over a devas­tated Japan, and instituted five basic reforms: female suffrage, the right of labor to organize, liberal education, abolition of autocratic government, and democratization of the economy. Elements of the last reform included a breakup of the zaibatsu (huge capitalist conglomerates), the imposition of a stiff wealth tax, and major land reform. The goal was to create a competitive capitalist coun­try that might be relatively poor, but democratic and egalitarian.

But with the Chinese Communists victorious in 1948 and the outbreak of the Korean War in 1950, this goal changed dramati­cally. According to Michio Morishima (1982, 161-162),

Abandoning the original policy aim of building a democratic country based on the free enterprise system, whose actions would be restrained and peaceloving, there was a shift to measures such as would rebuild Japan into a powerful country equipped with the military and economic strength appropriate to an advance base of the "free" (anti-communist) camp. As a result of this shift Japanese capitalism re-emerged like a phoenix in a form almost identical to that of the prewar period.

It is often forgotten that the Japanese "miracle" did not begin after World War II. Following the Meiji Revolution (1867-68), Japan set out consciously to build a modern industrial economy. In 1905 Japan's victory in the Russo-Japanese War stunned West­ern consciousness: for the first time since the onset of Western imperialism, non-white had triumphed over white. The Japanese economy surged ahead. By the end of the First World War Japan had become one of the world's five great powers and, although hit hard by the Great Depression, Japan's economy, fuelled by mili 

2 For a concise analysis of the deviations of the Yugoslav system from the necessary conditions for optimality, see Vanek, 1990, 180-182.


tary expenditures, recovered more quickly than those of the West. (In 1937 the phrase "Japanese miracle" was used to describe the 81.5% increase in industrial output from 1931 to 1934 [Johnson, 1982, 6].) It is this economy which, in Morishima's words, "re­emerged like a phoenix" in the 1950s, its structure almost identical to its prewar form.

The structural features of the Japanese economy contrast sharply with Western capitalism, even more sharply with the laissez-faire theoretical ideal. Its central features include: 1) large scale state intervention, particularly regarding investment decisions; 2) a dual economy, one half dominated by a handful of competing con­glomerates (keiretsusuccessors to the prewar zaibatsu), the other half consisting of thousands of smaller firms, often linked hierarchi­cally via subcontracting arrangements to one another and to a keiretsu; and 3) workplace relations (in the keiretsu sector) charac­terized by lifetime employment guarantees, wages tied tightly to seniority, substantial bonuses linked to company earnings, and con­siderable worker participation in decision making.

It hardly needs to be said that in material terms the Japanese economy has been enormously successful. Between 1946 and 1976 Japan's economy increased 55-fold. A country the size of Califor­nia, devoid of significant natural resources, now accounts for 10% of the world's economic production (the United States accounts for 20%). A price has been paid for these accomplishments: very little class or. occupational mobility, a system that gives a young person but one chance of making it into the ranks of a good company, an educational system compelling Japanese teenagers to study 13-15 hours a day. This last feature has resulted in a highly productive and disciplined labor force, but, says Morishima (1982, 183), "it must not be forgotten that it has also resulted in the annihilation of their own selves." There would seem to be lessons to be learned here. But what lessons?

Let us consider a third case, this one in my judgment an unambiguous success (no scare quotes needed). At about the same time that the Yugoslav nation was beginning its novel restructur­ing and the Japanese economy was coming up to speed under the stimulus of Korean War procurements, another experiment, far humbler in scope, was getting under way in a small, depressed town in the Basque region of Spain. In 1943 a school for working-class boys was established in Mondragon, at the instigation of Don José Maria Arizmendi, a local priest who had barely escaped execu­tion by Franco forces during the Civil War. The "Red priest," as he was called in conservative circles, was a man with a large vision.3 Believing that God gives almost all people equal intellectual po­tential, potential blocked by conditions of unequal power, and dismayed that not a single working-class youth from Mondragon had ever attended a university, Fr. Arizmendi structured his school to promote technical but also "social and spiritual" education. Eleven members of the first class (of 20) went on to become profes­sional engineers. In 1956 five of these and 18 other workers set up, at the priest's urging, a cooperative factory to make small cookers and stoves. In 1958 a second cooperative was formed, to make machine tools. In 1959, again at Fr. Arizmendi's instigation, a cooperative bank was established.

The movement took off. Thirty-four industrial cooperatives were added to the group during the 1960s. Expansion was even more rapid in the 1970s. By the late 1980s the Mondragon Group comprised nearly 20,000 workers in more than 180 cooperatives. In addition to industrial cooperatives making stoves, refrigerators, automatic washing machines, machine tools, electrical equip­ment, petrochemicals, and much more, there are agricultural cooperatives, construction cooperatives, education cooperatives, a consumer cooperative, a women's cooperative, a social security cooperative, and a research and development cooperative. The cooperative bank has expanded to nearly a hundred branches throughout the Basque region, and is now the 14th largest bank in Spain.4

By all accounts, the experiment has been astonishingly suc­cessful. The productivity of Mondragon firms has been found to

3 Arizmendi's vision is often said to have derived from Catholic Social Doctrine in opposition to Marxism, but this interpretation has been called into question by recent scholarship. Certain Left Catholic thinkers were important to Arizmendi (Maritain and Mounier), but so was Marx. So also was an example set earlier in Mondragon. In 1920, as a result of a long strike, workers pooled their resources (supplemented by union funds) and set up their own factory (producing firearms) that survived until the Civil War. Cf. Whyte and Whyte (1988, 19-20 and Ch. 18).

4 As of 1987 the Mondragon Cooperative Group consisted of 94 industrial coops, 26

agricultural coops, 44 educational coops, 17 housing coops, 7 service coops, and a

consumer coop. (Figures from Caja Laboral Popular, cited by Meek and Woodworth,

1990, 518.)


exceed that of comparable capitalist firms (Thomas and Logan, 1982). The failure rate of new Mondragon cooperatives is nearly zero. The group's success in confronting economic hard times has been exceptional. The Basque region was hit hard by the recession of the late 1970s and early 1980s; between 1975 and 1983 the Basque economy lost twenty percent of its jobs; during that same period, the Mondragon group — though undergoing some painful re­adjustments — suffered virtually no unemployment (Bradley and Gelb, 1987, 87).

The outstanding structural feature of a Mondragon firm is its democratic nature. Workers meet at least once a year in a General Assembly. They elect, one-person/one-vote, a Supervisory Council that appoints the firm's management; they also elect a Social Council that has jurisdiction over matters directly affecting workers' well being, and a Watchdog Council to monitor, collect, and verify information for the General Assembly.

The outstanding structural innovation of the Mondragon Group is its creation of a network of support institutions — above all, the Caja Laboral Popular, the "working people's bank," which interacts with the productive enterprises in various ways: providing capital for expansion, providing technical and financial advice, assisting in the transfer of workers from one enterprise to another, assisting in the creation of new firms. The Caja also looks to the long-range interests of the region, plans development, and works to harmonize conflicting interests.

Economic Democracy

The socialist model to be outlined below has features in com­mon with Yugoslav socialism, with Japanese capitalism and with Mondragon cooperativism, but it is not a stylized version of any of these. Our model differs from each of these experiments in various crucial respects, but these experiments, their successes as well as failures, constitute empirical evidence highly relevant to the claims I shall make on behalf of this model.

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