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Midterm 2 Notes Theory and Practice of Soviet Socialism Economic Problems Socialist State Must Resolve What to produce How to produce Who gets the production How to provide for the future Socialist controversy Marx dialectical materialism explains the pending triumph of socialism over capitalism Socialist victory inevitable Capitalism will be replaced by socialism because of its exploitation of workers amp contradictions Capitalism would replace feudalism because it would raise the productive cap of the economy only capitalists would benefit Socialism would inherit this capacity amp use it for the benefit of the working class Sociaism an intermediate transitory stage during which scarcity still exists and a strong state would be required Socialism will evolve in two stages first socialism then transition as the worker state increases its productive capacity the final stage of communism will be attained Communism the highest stage of social development is characterized by the absence of markets and money abundance and the withering away of the state The state will now be transformed and represent the interest of its workers Dictatorship of the Proetariat govern in the first stage of socialism and would directly represent the interests of the proetariatthe state would wither away The revolutionary dictatorship of the proletariat is as a rule won and maintained by the use of violence by the proletariat against the bourgeoisie a rule that is unrestricted by any laws Why do we need a dictatorship when we have a majority And Marx and Engels explain to break down the resistance of the bourgeoisie to inspire the reactionaries with fear to maintain the authority of the armed people against the bourgeoisie that the proletariat may forcibly hold down its adversaries FIGIJRIL 22 The Hiurarl1ial Cumnlaud Etzoxioulyz Prixuzipals and Agents Political Authority 1 p X Principals Planners A quot 395 Ministry A Ministry B Ministry C Ministry D Principals oi Firm I Firm II Firm Ill Agents of Lenin believed that a small revolutionary party was necessary He argued that the defeated capitalists would still have wealth money connections military experience and education so the dictatorship of the proletariat should use unrestrained violence against them His first act was to unleash the quotRed Terror of his secret police on political opponents and class enemies Joseph Stalin argued that the power of the socialist stage should increase because it represented the working classes anyone who questioned him were questioning the will of the people He concluded that the dictatorship must grow stronger and use even more draconian forms of terror Distribution of Income Socialism and Communism During the higher stage communism distribution would be according to need after the abundance stage has been attained people will work for the joy of labor there is more than enough to go around ike a material paradise on earth During the lower phase socialism the working class will be awarded according to productivity quothe who does not work does not eat Soviet Union wage income more unequal than US but about the same as Europe after redistribution Eastern Europe more equal than most European countries Problems with equal distribution of income Political rewards for loyalty In capitalism inequality derives from unequal distribution of land and capital resources How to plan ABC39s of Communism War Communism Soviet economic system existed from 19181921 all enterprises were nationalized private trade and money were outlawed and peasant crops were confiscated New Economic Policy replaced war communism from 19211928 restored private trade in agricultural goods and denationalized smaller enterprises but kept larger enterprise under state ownership and control The ABC ofcommunism written by Nikolai Bukharin described a planned and administered economy manage by newly trained speciaists not professional bureaucrats drawn from the ranks of the workers These worker administrators would return to their workplaces after their stint as administrators was completed They would work together with workers councils running factories and manage the economy All larger enterprises would be owned and administered by workeradministrators Private trade would be abolished distribution of goods would be in the hands of the state National Economic Plan directs resource allocation for all sectors of the economy o This begins with a survey of what is available plants enterprises raw materials Plan is approved by factory trade unions managers report to economic councils they report to administrative board And then they are approved by national economic council Soviet Planning in Practice Ludwig von Mises and Friedrich Hayek argued that a single planning organization cannot plan all economic activity from the center because the economy consists of too many enterprises and produces millions of products New Soviet Person a new breed of worker expert and manager who shares the idealistic goal of building socialism and will work unselfishly for that goal imperfect until communism is reached The founders of the Soviet system solved this problem by planning only a limited number of activities the most important It was rare for enterprises to be planned from the center defense plants or huge enterprises that affected national interest Other than that activities were planned by the ministries or by regional or local bodies o Sequence of Planning State Planning Commision Ministry of gt Ministry of Metallurgy Power Administration of lt gt Administration of Administration J L Administration of Ferrous Metals Non Ferrous of Coal Power Gas Power l Metals l l Enterprises Plants Plants Enterprises Material Balance System Output pan tells the producers what to produce and in what assortments Supply Pan tells the producers who to deliver their outputs to Planning from the achieved eve refers to the practice of planning based on last year39s targets plus marginal changes Funding commodities those whose limits were assigned to enterprises by the planning systems Fund holders the recipients of funded commodities Resource manager the actors that made the actual resource allocation decisions for the economy in the course of the plan implementation Planning from the Achieved level The practice of planning based on last years targets plus marginal changes Cannot be used for the United Stated because most of the products that make up GDP will not exist Ratchet effect if you produce more it puts you in danger Marx39s Labor Theory of value the value is determined by labor alone and therefore excludes interest and rent from allowable costs Industrial prices set to equal the average cost of the industrial branch plus a profit markup Different enterprises were producing at different costs so they had to average the costs to get the official price they used the labor theory to do this Average branch cost pricing profits cannot be used to gauge managerial performance Horizontal vs Vertical Transactions Vertical transaction an order from an administrative superior that is binding on the subordinate who is obligated to fulfill it Horizontal transaction subordinates at the same level of the administrative structure without the approval of administrative superiors In a planned socialist economy the goal of the dictator is to make sure that the planned economy is run according to vertical orders and not according to unplanned horizontal transactions If most transactions are horizontal it is unclear if the economy is planned How agents respond to vertical orders depends on their degree of vertical trust present when subordinates obey orders given to them by superiors Only those designated to receive X will get X Total Output Q Total Effort E Investment Maximization Model Definition of Stalinism State ownership Monopoly party directed by dictator Economic incentives Use of repression Extreme model of capital accumulation Banking and Ruble Control Enterprises had to pay their suppliers money in terms and workers had to be paid in cash All financial transactions were handles by one monopoly bank State Bank or Gosbank Each enterprise was required to hold an account with the state bank where all the transactions were recorded Ruble Control the monitoring of plan fulfillment by monitoring the financial transactions among enterprises o Basically if the enterpirise is supposed to make 10 tons of steel and sell it for 20 rubles per ton the banks should see 200 rubles in that enterprises account if not that means the physical plan is not being fulfilled In order for this to work the physical plans must be as detailed as the financial plans Financial Planning Macroeconomic baance occurs when the supply of consumer goods at established prices equaled desired consumer spending Savings overhang the accumulation of forced savings resulted from having nothing to buy at a good price There was a fear that this could destabilize consumer markets Financialbalance problem because the soviet economy grew so rapidly labor was paid high wages to encourage more effort and participation But the state wanted to produce producer goods not consumer goods the doing so they were subject to money iusion when economic agent base their decisions on nominal prices and wages rather than on relative prices and real wages Job Rights Granick You have a job for life unless you do something horrible From a socialist point of view it is not a good thing because workers can really act any kind of way Management Heirarchy principalagent problems and information Dictator s curse WintrobeREAD Truth tellers Gosplan Lack of formal rules Administrative enforcement Battle for the plan Plan is only the beginning Dictator s dilemma important vs the trivial ANGLOSAXON MODEL goes back to natural law when John Locke and Adam Smith argued for limited government or quotenglish common law AngloSaxon cluster US UK Switzerland New Zealand Japan Ireland Canada Australia Principle of judicial precedents court decisions should be consistent with past decisions Anglo Saxon model is best represented today by US New Zealand and Australia originated in England because of the Industrial Revolution Walt Rostow explained why this reolution happened in England It was because England had established preconditions for a takeoff of industrial growth 0 Preconditions included I Secular education I Transportation infrastructure I A middle class where entrepreneurs could be drawn I A stable banking system 0 One of the empirical signals of a takeoff would include doubling the investment rate English Agriculture Feudal agrz39culture based on large estates manors where peasants farmed strips of land in open fields and worked on the landlords land in retum 0 this was notably inefficient because of strip farming and lack of peasant effort on the landlord s land Tragedy of c0mm0ns the misuse of eventual destruction by individuals acting in their own interests of a commonly held asset o The common lands used for grazing were collectively overused Enclosure lands that had been tilled in open fields or used in common were assigned to speci c users such as the manor owner or more prosperous peasant families People placed in guildsbakers iron makers and merchants were basically the freemen of the cities that made them also responsible for the local govemment and welfare of the towns residents Limited Liability the shareholders of a joint stock company corporation were not responsible for the debts of the company if it went bankrupt the company had to have Limited somewhere in its name Legal Personhood the corporation can enter into contracts using its own name Creating Institutions of the US Economy America is considered the world s only superpower China is the only country that is close to joining soon It relies on market allocation with less government intervention and being the most technologically advanced US exceptionalism the notion that the United States is a unique social economic and political experiment made possible by the con uence of events in the late eighteenth century Federalist Papers the papers that explained the intent of the constitution so that states would ratify it Foundation of the constitution 0 written by Madison and Hamilton Madison was considered the father of the US constitution o the task of the constitution was to limit the power of the govemment and the best way to do this was separation of powers executive legislative and judicial o The 5th amendment is the most important be deprived of life liberty or property without due process of law nor shall private property be taken for public use without just compensation this was created to protect private businesses from govemment intervention the obligation of persons to pay taxes Us operates on common law if you have a legal case you go to court Precedents decide whether you win or lose meaning the judgments made must be consistent with past ruling Civil law written law that decides what is legalillegal enforced by professional judges amp rarely uses juries Hayek argued that the role of the judge is not to find economically efficient solutions but to find the ruling that conforms to previously established legal principles Common law does appear to produce logically economically ef cient results Private Sector the business sector in which private ownership prevails and govemment regulation or intervention is limited basically meaning they are free to make their own decisions Sole Proprietorship owned by one individual who makes all the business decisions and absorbs the profit or losses the business eams Partnership owned by two or more partners who make all the business decisions and share in the profits and losses Corporation owned by stockholders who have limited liability and can act as a legal person Board of Directors elected by the stockholders makes its majo decisions and appoints management to run the corporation Fiudiciary Responsibility a relationship in which one person has a full responsibility to care for the assets or rights of other persons Market Power present when the business can affect the price at which it buys or sells the less market power the more competitive Corporate governance decided in whose interests a corporation in which owners are not managers will be run Stakeholders those who participate in the operation of the corporation as managers employees workers suppliers or buyers but not as owners Shareholder value the value of the corporation in stock markets as measured by its market capitalization Market Capitalization the number of shares outstanding times the stock price in the stock market where it is listed New York Stock Exchange American Stock Exchange amp NASDAQ Market for Corporate Control exists when a rival management team has the opportunity to buy control of the corporation from its share owners Capital Market the market in which businesses raise investment nance through the issue of stocks and bonds and bank borrowing Primary market corporation sells new shares of stocks or bonds to buyers Underwriters organize the initial sale of shares sometimes buying stakes in the company themselves Full disclosure the corporation listing stock must be available to potential buyers all relevant info good and bad about the company Disadvantages of bank nancing Europen model and Asian model use banks get too closely linked with corporations to make impartial investment decisions Venture capital nancing through purchases of shares or loans to start up businesses Venture capital fund provides startup capital to new rms and takes a stake in them in retum European Model Mercantilism advocates a strong state to regulate and control the domestic and intemational transactions of a national economy in order to promote its political and economic strength they believed that in order to keep the economy from ruin they had to keep a strong state Marx C ommmunist Manifesto raised fears of a socialist revolution European welfare state replaces families Private savings and charity with state programs for economic security and welfare German civil law provides citizens with an accessible written collection of laws to govem their behavior as persons worker borrowers lenders lessors and businesspeople Corporate governance friction between stakeholders and shareholders Managerial capitalism a system of corporate governance that places the interests of stakeholders above those or equal to the shareholders workers are the most important the goal is to maximize stakeholder value stakeholders can even be regional banks crossholdings the ownership of blocks of shares of one company in other companies codetermination places worker representatives on the board of directors of corporations requires worker participation in decision making at the shop oor level