[Note for bibliographic reference: Melberg, Hans O. (1997), Non-utopian utopians?
John Roemer's Coupon System, http://www.oocities.org/hmelberg/papers/970408.htm]
Non-utopian utopians?
John Roemer's Coupon System
by Hans O. Melberg
John Roemer, A Future for Socialism, Harvard University Press, Cambridge,
Mass., 1994, ISBN: 0-674-33945-2, 178 pages
Introduction
The aim of John Roemer's book is to "sketch blueprints for a feasible socialism, to
provide a basis, once again, for daring to believe in the dream" (p. 124). Socialism
- the dream - is here defined in terms of equality of opportunities, not outcome. The
question is then how he wants to do this.
Roemer has two proposals. First, to change the structure of ownership in firms. Second,
to increase government control over the investment process. I shall discuss these in turn.
In Roemer's scheme large firms are first nationalized, and the ownership is then
redistributed to the people. All citizens above 21 are supposed to receive coupons which
they must invest in firms, but they are not free to sell or give the coupons to each
other. They are, however, free to withdraw their coupons from one firm and invest in
another whenever they want to (the price of a stock is given by the number of coupons you
have to give. This price is allowed to fluctuate freely). The coupon-holders would then
own the firm collectively and receive dividends from the coupons in the same way that
owners of stocks receive dividends i.e. according to the profitability of the firm. When a
person dies the coupons go back to the state for redistribution, for example to those who
have just turned 21. In short, the coupons become a kind of money which can be used to buy
stocks, the only difference being that you are not free to sell or give the coupons away.
The aim of this coupon-scheme is to increase equality of opportunities by making the
income from ownership more equal. Today 10% of the people in a country often owns 70-80%
of all corporate wealth. Under Roemer's scheme the distribution would be much more equal,
and more people would have the opportunity to live good lives.
The second proposal put forth by Roemer, is to increase government control over the
investment process. This is to be done, mainly, by creating a system of differentiated
interest rates for different sectors. He gives three reasons why state intervention is
desirable (p. 90-92). First, because of positive and negative externalities from
investment. For example, investment in research and education is under-provided by the
market, while investment in processes that pollute is over-provided. Second, to create
public goods such as highways and communication systems. This may not be too
controversial, but Roemer argues that the government should greatly increase this kind of
spending since - he believes - it pays a very high return. Third, to compensate for
incomplete markets. For example, there is no market for insurance against unlucky
investment decisions. This means that firms do not make enough risky investments -
investment which also have a very high potential return. In fact, there is something of a
prisoners' dilemma situation: Individually it is not optimal to take a high risk, but
socially it is optimal that some firms - more than now - make high-risk investments. These
three arguments complete Roemer's case for larger government control over the investment
process.
Combined Roemer believes that the two changes - the coupon system and increased
government intervention in the investment process - would significantly improve total
welfare in society. According to his estimates, based on US data for dividends from firms,
he believes the income of the poor would increase by about 20%. Moreover, it would move
the level and distribution of investment closer to its socially optimal level (reduce
pollution, avoid missing markets). Is this really possible? And, is it possible to know
whether it is possible?
Pros and Cons
First of all, Roemer's argument should not be dismissed as dogmatic socialist rambling.
The tone of his book is cautious and the arguments are couched in a language familiar to
most conservative economists. This, of course, does not mean that Roemer is always right.
First, I shall argue that concentrated ownership may be better than Roemer's equal
distribution of ownership in maintaining the efficiency of firms. Second, I believe the
book would have profited from a closer discussion of whether freedom and democracy is
reduced or increased in Roemer's socialist system. Third, I believe one might argue
against Roemer even if we agree that his proposal might work since the risk of trying a
new system may outweigh the potential benefits. Lastly, I shall comment on some
interesting insights and minor flaws.
Efficiency
I have three arguments against Roemer on this account. First, I believe his system may
increase rent-seeking i.e. that firms focus on changing the rules of the game to earn
profit instead of engaging in productive activities. Second, I believe - more weakly -
that concentration of ownership is important to maintain pressure on firms. In short,
having a few owners tends to make it more difficult for the managers to do what they want
than if the firm had a hundred thousand owners. Third, there is no guarantee that
government intervention does not produce an even worse result than the inefficiency
resulting from market failure.
In what way does Roemer's scheme increase the scope for rent-seeking? If the government
is supposed to determine different interest rates for different sectors of the economy,
firms will waste resources on activities to have their rates decreased. Roemer recognizes
this but states that "it is beyond the scope of this essay to engage this
challenge" (p. 106). This is unsatisfactory. The problem of rent-seeking is
well-known, and deserves more attention than Roemer gives it.
On the other hand, one must also admit that rent-seeking is a problem under the current
capitalist system. For example, in Norway the Association of Ship-Owners spends large sums
of money in order to change the tax system in their favor. Also, even if there is an
increase in rent seeking with Roemer's system, the benefits of planned investment may
outweigh the costs of the increase in rent-seeking. For example, Roemer argues that the
experience of planned investment in South Korea and Taiwan shows that there are great
benefits from government intervention in the investment decisions. My overall point,
however, is that Roemer does not engage in this discussion and he should do so in order to
convince me that his scheme will be better than the existing economic system.
How do the concentration and nature of ownership affect the efficiency of firms? Roemer
believes that it is competition that makes firm efficient, not private property and highly
concentrated ownership. Furthermore, he believes that the two can be divorced - that it is
possible to have competition without highly concentrated private ownership. The argument
is simple. Firms are seldom run on a day to day basis by their owners. Instead, the owners
hire managers who run their firms. The owners then make sure that the managers do what
they want by monitoring the performance of managers. If they do so unsuccessfully there is
always the threat of take-over so that the best owners will end up owning more firms.
Roemer proposes to replace monitoring by a few big owners with monitoring by banks,
pension funds and many small owners. The question is whether this system can achieve the
same degree of efficiency as stock-market capitalism.
I place little faith in monitoring by many small owners. The gain for a very small
owner - unlike the gain for a big owner - from monitoring his firm is too small compared
to the costs. As for monitoring by banks, I believe it is possible, but I am unsure
whether it would be as efficient as Roemer argues. His argument is that the history of
Japan and Germany show that monitoring by banks is an efficient mechanism for maintaining
the efficiency of firms. However, in Roemer's scheme banks are publicly owned unlike banks
in Japan and Germany. Privately owned banks have an obvious incentive to monitor firms
since they themselves are owned by a few large owners. Thus, under capitalism the problem
of "who is going to monitor the monitors" is solved by private ownership while
the socialist system has a problem both in terms of maintaining efficiency and avoiding
state/bank abuse of power. Roemer admits that "we do not have a definite solution to
this problem" (p. 76).
Although there is no definite solution, there are some possible mechanisms that could
be used. Roemer's list include constitutional provisions prohibiting state interference
with the banks, reliance on the importance (for a bank manager) of a reputation for
independence from firms and the state, careful design of the salary structures of
managers, international competition, well publicized precommitments and monitoring by
pension funds. These mechanisms, he argues, reduce the problem of making sure that
managers do what is economically efficient, that banks only give financially sound loans,
and that the state does not interfere to distort the decision process by making it
dependent on political and not economic criteria.
Some of these mechanisms may work - such as making the salary of managers dependent on
the performance of the firm/the bank. However, I have greater doubts about constitutional
provisions and the requirement to make highly publicized precommitments. I fear that the
power structures implied in this system will serve to subvert these requirements in the
same way that the constitution of the USSR was little more than a piece of paper. The
state may manage to influence managers by promising the managers of banks and firms good
positions in the state apparatus. Similarly, firms may influence managers in banks by
making individually profitable, but socially unprofitable, deals with the bank managers.
As long as your own wealth is not at risk you are more easily swayed by these promises.
The threat of not being re-elected to the board of the bank is not very powerful
counter-deterrent since they will have a good retirement position in a private firm.
Moreover, laws against being influenced in this way is difficult to implement since - as
with inside-trading - it is difficult for an outsider to distinguish between a honest, but
bad, decision and a corrupt decision. Lastly, one might believe that even honest and
diligent monitors make worse decisions when a large portion of their wealth is not at
stake. Altogether, Roemer has not convinced me that the coupons system will be as
efficient as current capitalism in monitoring firms.
The third factor creating inefficiency in Roemer's coupon system, can be labelled
government failure. (Thanks to Steven Jay Blatt for pointing this out to me). For example,
there is no law which makes sure that the government sets the most efficient rates of
interest for the various sectors of the economy. Nor is it guaranteed that the government
will invest in the most efficient infra-structure projects. In fact, there is reason to
believe that the government will fail to do what is most efficient. In a democracy the
voters have little incentive to gather information and to vote - the costs are high, the
signals confused, and the individuals benefits are low. Now, when we cannot monitor our
politicians in a good manner, we should not expect these politicians to behave in a manner
which is perfectly correlated with the public interest. On the contrary, they might accept
bribes for lowering interst-rates in one sector, and they might select pet project like
building a large bridge in their own home-county. Thus, giving the state larger power in
order to correct a market failure, may result in en aven worse situation as a result of
government failure.
Liberty
Although the state is given a prominent role in Roemer's system, liberty is not a prime
theme. This may be because Roemer believes it to be obvious that a society with more
equality is one with more liberty. Clearly, if we define liberty as the ability to do what
you want (and, more strongly, that what you want is not influenced by limited resources),
then the poor are severely constrained in the USA today. However, if we use I. Berlin's
famous distinction between positive and negative liberty the picture is more complicated.
Consider the following example. In country A people are formally free to travel abroad,
but very few have the financial resources to do so. In country B people are prohibited
from traveling abroad, but many have the resource to do so. In otherwise equal
circumstances, which of these countries have the highest level of freedom?
The issue is important because Roemer wants to prohibit certain acts in order to create
what he believes result in more "real" freedom for a greater number of people.
For example, the poor are prohibited from selling their coupons even if they want to. This
restriction may be justified by the externality involved in the selling and buying of
coupons. When one person sells a coupon this changes the distribution of power - making
the one who buys a coupon more powerful. Thus, it affects all the other members of the
community - not only the two who conduct the transfer. Moreover, the effect for the person
selling the coupon is so small that he ignores it i.e. it becomes an external effect. In
aggregate and over time, however, these effects are highly significant. For example, we
may end up in a situation in which 10% of the population own 83% of the corporate wealth
in a country, as is the case in the USA. This, in turn, means that they can use their
wealth to influence the decision of politicians - for example by allowing more public bads
(e.g. pollution) than the majority of the population wants. In this way one might try to
justify the prohibition of capitalist actions between consenting adults.
Does not the argument above ignore the fact that the person selling his coupon (if it
was allowed) would receive money for the coupon? Thus, the distribution of power is not
really changed since my power is the same whether I own $100 in cash or a coupon worth
$100. To defend himself against these claims, Roemer might say the poor are mypoic (have
high discount values) which means that they would sell their coupons at a price below its
"real value." Some might argue that there is no neutral way of finding the
"correct" discount rate or the "real value" of a coupon and hence
dismiss the above argument. However, an argument about justice cannot be dismissed simply
because it is not neutral. In fact, we should welcome normative arguments as both valid
and unavoidable in this field, as I shall argue below.
Political questions, such as the distribution of income, cannot be determined by
neutral criteria. A price which comes about as the result of great inequalities of power
can be considered wrong on normative grounds and this may justify regulation. Consider the
following example from a book by Bo Giertz (Steingrunnen): A poor farmer does not have
enough hay to feed his cow. He goes to his rich neighbour - the only one with spare hay in
the village - and asks if he could buy some hay. The rich farmer says no, knowing that the
poor farmer would then have to sell him the cow. Moreover, the poor farmer is forced to
sell the cow cheaply since the alternative option - not selling the cow - gives him very
little money (the price he can get from the butcher). Although there is no neutral
criteria which says that the price the poor farmer recieves for his cow is too low in this
situation, it is still possible to argue that the price is too low on normative grounds:
It is simply not just. In the same way one might justify regulations against poor people
selling their coupons - their cows. However, it is difficult to see why total prohibition
is the only possible regulation. What if the price was simply raised? Would the selling of
coupons then be acceptable?
For an argument against this option, I will refer the reader to an article by G. A.
Cohen, in which he argues that free trade have external implications for the distribution
of power between individuals (see Cohen's article in J. Arthur and G. Shaw's Justice
and Economic Distribution). It is almost impossible to solve these problems because it
requires different additions to the price depending on the existing wealth of the buyer.
When I pay a famous basketballplayer $10 in order to see him play, I increase his wealth
and power by a neglectible amount. Hence, I do not consider this change in power when I
decide whether to buy a ticket to see his team or not. However, in aggregate his wealth,
and hence power, is greatly increased when 10 000 people each pay him $10. Thus, we have
that voluntary capitalist acts between consenting adults involve externalities: it changes
the distribution of power and the agents who engage in this trade do not consider this
effect. In the same way that all the existence of externalities may be used to justify
intervention in other markets, this might be one way of justifying the prohibition of
vuluntary trade: to avoid large concentration of power in the hands of a few people.
Against the above justification for intervention, one might argue that the very act of
allowing the state to intervene in these areas leads to a slippery slope in which a more
and more powerful state makes more and more decisions concerning over lives. This was a
point made by Hayek a long time ago, as Roemer notes but does not discuss closely.
Different systems have different potentials for turning into dictatorships. This means
that we may design a system A which at one point in time has a higher level of freedom
than system B, but that over time system A has a higher probability of turning unfree - a
condition which has a tendency to be non-reversible. Now, arguing that this is a
possibility does not prove that it is the case with Roemer's plan.
One factor which leads one to suspect that Roemer's system is more prone to
dictatorship, is that Roemer gives the state the power to make a number of decisions,
while at the same time he reduces the number of seriously wealthy agents outside the
state. Some of the tasks of the state in Roemer's world include intervention in the
investment process, Scandinavian welfare state activities, remedy market failures, greatly
increase the resources dedicated to education, determine the maximum size of firms before
they are nationalized, make sure that firms do not become cash-cows, and to avoid
black-market trading in coupons. In addition, there are few individuals outside the state
with enough wealth to resist the state - the coupon system implies that no single
individual will own many firms. In this world I fear that a powerful clique might more
easily take even more control over society than the case is with the existing system. I
should add that my beliefs in these matters are not very strong as I believe it is
difficult to speculate about these issues.
Risk
We know what we have, but we do not know what we'll get if we try another system. This
simple truth implies that it is sometimes sensible to refuse to conduct an experiment even
if the expected level of utility in the new system is higher than the existing system. I
am partly convinced by many of Roemer's argument, although I have tried to make some
critical remarks. Yet, I am not certain enough to endorse a wholesale experiment of the
kind he envisages. The simple reason being that the doubts induced by the arguments above
make me reluctant to experimenting with social systems. Even if there is a small
probability of failure, the consequences may be so grave that I do not want to take the
risk.
Maybe it is possible to implement Roemer's plan on a small scale to reduce the
seriousness of its potential consequences. As far as I can see, it is possible to
implement the plan stepwise i.e. the success of the various parts are not mutually
dependent on each other. Moreover, it is possible to implement it locally i.e. its success
is not dependent on being implemented at the same time all over the world. Lastly, unlike
some other socialists utopias, his plan does not rest on changes in human nature i.e. he
assumes rational and selfish individuals. Faced with these facts, I have two comments.
First, Roemer's plan is less risky than many other plans, and in this sense I am more
willing to try the experiment. Second, if it is so easy, good and safe why has it not been
implemented in some country at some time?
There is always the possibility that a good idea has not been tried because of lack of
knowledge. Those who are more paranoid might also argue that powerful forces conspire
against the success and conduct of these experiments. Another reason might be that the
system is impossible to implement (internally inconsistent) or that it is not stable
(psychologically unstable or slippery slope argument). Certainly, some of the isolated
elements are possible - such as more investment planning and monitoring by banks - since
there are real life examples of this. But, as far as I know, there are no real-life
examples of large-scale coupon ownership. Maybe this is because it is impossible, maybe it
is because it has never been tried. In any case, there is a risk in being the first to try
to find out which of the two is true.
Minor flaws
I am always surprised to find how some socialists still maintain a certain nostalgia for
the former Soviet Union. Roemer is not a major example, but occasionally he makes some
comments which makes my head spin a little. Consider, for example, his argument that
"the world may be vastly better off for the fact that it [the socialist model in the
Soviet Union] existed" (p. 130) since it served as an inspiration for the belief that
capitalism and private property is not the only possible system and that equality is
possible. More that "its demise also marks a setback for socialism" (p. 124)
since the loss of a real alternative to capitalism weakens the beliefs that it is possible
to find a feasible alternative.
In short, I do not feel the collapse of what Roemer also admits was a tyrannical
regime, is a setback for socialism. Maybe it reinforced the belief in the feasibility of
alternative systems, but the net effect of its existence for the cause of socialism was
probably negative since it also made people believe that any alternative to capitalism was
connected to a lack of political freedom and human rights - not to mention the deaths of
millions of people in the experiment. It is my suspicion that we - both socialists and
conservatives - are vastly better off without socialism in the Soviet Union, and we would
be even better off if the experiment had not been conducted!
A related criticism of Roemer is his concern about whether his system really deserves
to be called socialism or not. I do not care about these labels. Neither do I care whether
a proposal is in agreement with what Marx wrote. Once again, Roemer is one of the few
socialists who are least prone to dogmatic Marxism, but he still feels that he has to
discuss whether his proposal constitutes what Marx meant with the phrase "public
ownership of the means of production." I also jump a bit when I read that
egalitarianism is "not simply a 'value judgement' ... rather ... a view that any
rational honest person had to accept" (p. 27). I cannot help but think of the ugly
history of "scientific socialism" and its believers who imposed sufferings on
millions of people because they were certain that had discovered the objective laws of
history. In contrast to this I believe the choice of how to organise society is more than
a question of scientific and rational investigation since we cannot assume that rational
people will converge on the same model for how society should be organized. If nothing
else, we have different risk-attitudes.
Some insights
After trying to criticize Roemer's arguments, I should give credit to some of his
insights. For example, the mentioned distinction between the effects of the market as
opposed to the effects of private ownership seems both valid and valuable. I also found
his discussion of the three principal-agent problems that must be solved both in
capitalism and socialism very illuminating. First, managers must make sure that the
workers do what the managers want. Second, some agency has to monitor the managers so they
act in the interest of the owners. Third, there is the problem of making sure that the
agency monitoring the managers do what the public wants. These principal-agent problems
are reduced by various mechanisms under capitalism (democracy, private ownership, salary
structure of managers). Roemer then suggests how socialists may use some of the same
methods invented by capitalism to solve the principal-agent problems facing a socialist
system, while at the same time avoiding the degree of inequality associated with
capitalism.
Roemer's book also contains several interesting suggestions which are worth closer
attention. One example is the concept of social-republican property which he borrows from
William Simon (p. 22). This concept fits into a general frame in which Roemer makes the
reader realize that there are more than two ways of organizing property rights. The
traditional alternatives have been almost unlimited individually controlled private
property vs. collectively owned and state controlled property. Social-republican property
is a third category in which property is individually owned but it constrained by
requiring active participation and the degree of inequality it creates.
Another example of an idea is what Roemer calls "psychologically stable"
system. In order to be stable a system has to conform to the moral intuitions of the
people. For example, people may believe that it is unfair to tax income too much. This
would mean that a system which tried to do so could not be maintained - it is not
psychologically stable. I have two further comments on this concept. First, our moral
intuitions may be endogenously created or even engineered by the system. For example, Jon
Elster has discussed the marginalist fallacy in which we are unconsciously fooled into
believing that it is fair if we are paid as if we were the last worker to be hired (i.e.
according to the marginal revenue). In a factory of ten workers they cannot all be the
last person to be hired, though they may all get the wage as if they were (see Elster's Making
Sense of Marx for more on this).
Second, one might wonder whether Roemer's own coupon system is psychologically stable.
I am reminded of the classical question asked to utilitarians: Would they save an
important bishop or their own grandmother if they could only save one of the two from a
burning house. The question is interesting because socialists often argue that what they
call morally irrelevant variables - such as place of birth and family name - should not be
allowed to influence the distribution of wealth. Hence, they often support heavy taxation
on inheritance or, in the case of Roemer - they want to abolish the right to transfer
ownership rights between family members. (In Roemer's scheme your coupons go back to the
state for redistribution to the new generation when the holder dies.) The question is then
whether this system of little ownership transferal between generations conform to our
moral intuitions. It may do so - remember that individuals are still allowed to transfer
income and some privately held property - but I am not sure.
Conclusion
In conclusion, I give this book a conditional recommendation. It challenges some of our
implicit beliefs, it is concise, well argued and the topic is important. However, Roemer
should have engaged in a closer discussion of the weaker points of his proposal. True,
given scarcity of time and space it is acceptable to simply present an idea, and to
pospone the discussion of its problems. However, in this case the idea of equality is
rather old and the weaknesses of state intervention are well known. Hence, I hope that
Roemer can find the time to write a more sustained defence of his proposal dealing with
Hayek's warning that this kind of state intervention leads to totalitarianism, the
challenge that rent-seeking a serious problem for his plan, the problem of monitoring the
monitors, and the issue of risk. One might also hope that this book becomes less a
collection of articles than A Future for Socialism.
[Note for bibliographic reference: Melberg, Hans O. (1997), Non-utopian utopians?
John Roemer's Coupon System, http://www.oocities.org/hmelberg/papers/970408.htm]