[Note for bibliographic reference: Melberg, Hans O. (1997), Non-utopian Utopians?
John Roemer's coupon system http://www.oocities.org/hmelberg/papers/970220.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
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. The
proposed method to achieve this is primarily nationalisation and redistribution of
ownership of firms. 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 would then own the firm collectively and receive dividends from the coupons in the
same way that owners of stocks receive dividends. A second proposal put forth by Roemer,
is to increase government control over the investment process, mainly by creating a system
of differentiated interest rates for different sectors. Combined Roemer believes this
would significantly improve - the income of the poor would increase by about 20% - the
overall level of welfare in society. 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?
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 and liberal 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 minor
flaws and interesting insights.
Efficiency
I have two 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.
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 engage in activities to have their rates decreased. Roemer recognises 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 real 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. Moreover, 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 this
is the case.
How does the concentration and nature of ownership affect the efficiency of firms?
Roemer believes that it is the competition in the market 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 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 the 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 the 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 mechanism that could be
used. Roemer's list include constitutional provisions prohibiting state interference with
the banks, reliance on the importance of a reputation for independence, careful design of
the salary structures of managers, international competition, well publicised
precommitments and monitoring by pension funds. These mechanisms, he argues, goes some way
toward solving 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 publicised 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. By
promising the managers of banks and firms good positions the state may manage to influence
managers. Similarly, firms may influence banks by making promises to their monitors. As
long as a large portion of 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 in this case
is not very powerful counter-deterrent since you have a good retirement position.
Moreover, laws against being influenced in this way is difficult to legislate away.
Lastly, one might believe that even honest and diligent monitors make worse decisions when
a large portion of their wealth is not at stake.
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 is 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 resources to do so. In country B people are prohibited from
travelling 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.
Against the above justification 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, I think, is the point
Berlin was making. It was certainly a point Hayek made as Roemer notes but does not
discuss closely. Maybe there is no valid conceptual distinction between positive and
negative liberty, but it is true that 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 the fact that Roemer gives the state the power to make a number of
decisions while at the same time it takes away the power of 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
nationalised, 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. 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 above. 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 makes me reluctant of 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 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 his plan does not rest on changes in human nature i.e. he assumes rational and
selfish individuals. These facts induces me to make 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 not possible (inconsistent) or that it is not stable
(psychologically instable 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 coupon ownership. Maybe it 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 me jump. 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) for the reason
stated above - 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 us believe
that any alternative was connected to 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 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.
Major insights
After trying to criticise Roemer's arguments, I should give credit to some of his major
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. 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 to solve the same problems in 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 organising 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) (see his Making Sense of Marx). 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 large inheritance taxes
or, in the case of Roemer - 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 transferral 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 can only recommend this book. It challenges some of our implicit beliefs,
it is concise, well argued and the topic is important. One might also hope that Roemer
finds time to write a more sustained defence of his proposal against some of weak points
such as Hayek warning that this kind of state intervention leads to totalitarianism, the
challenge that rent-seeking is 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 the book under review. Nevertheless, A Future for Socialism
is stimulating reading and as such it is recommended.
[Note for bibliographic reference: Melberg, Hans O. (1997), Non-utopian Utopians?
John Roemer's coupon system http://www.oocities.org/hmelberg/papers/970220.htm]