The People's Republic of Walmart

by Leigh Phillips

  We have to admit that Hayek was right in rejecting mainstream fantasies. In fact, it was Lange who had underestimated the problems he inherited from the economics of his time. Here, he differed from Marx. While Marx undertook a thoroughgoing critique of the classical school, which dominated when he was writing, Lange primarily tried to replace “capitalist” variables in the equations of dominant neoclassical economics with “socialist” ones. In doing so, he took on all the flawed assumptions of the mainstream model. These included everything from an impossibly rational Homo economicus to eventual general equilibrium to the “completeness” of markets—meaning a market for every possible thing, at every possible time present and future. (In practice, completeness would mean that you could agree to buy—today, for a firm price—a unit of Amazon stock, a haircut or even a block of aged cheddar to be delivered at any precise point in the future, whether two weeks and three hours from now—or even in fifty years!) These assumptions are not only patently false under even the most extreme variants of capitalism; they would soon be challenged—slowly and cautiously—even by neoclassical economists.

  Without this baggage, Hayek took a different tack from the silent but grudging acceptance of the mainstream. He rejected Lange’s case outright. Hayek argued that markets—incomplete, permanently off tilt, full of fallible humans—do not just aggregate and calculate information. Markets are producers of information and knowledge. Even if Lange’s market socialism allowed planners to calculate better and faster than did free markets, planning would ultimately still be impossible because planners would not have the information created by market interactions to use in their calculations. Buying and selling may not generate technical and scientific knowledge, but it still creates all that knowledge of “time and place” that is instrumental to making efficient production and distribution decisions. Hayek argued that the problem for planners was not in the “how”—the equations to use—but in the “what”—the data that goes into the equations. The copious information planners need is unavailable before markets work their magic. Decentralization creates coordination: only the market can bring together the information that is normally isolated in the heads of different individuals.

  Hayek, however, was writing before the advent of “big data,” which is testing the limits of just how much granular information can be collected. It seems that he also wrote in blissful ignorance of Coase, who had shown just how flimsy the veneer of decentralized decision making really is, even under capitalist markets.

  If Hayek sounds like a radical democrat, the affinity is purely superficial. What he is after is not so much freedom for people, but rather freedom for information and money—those two central lubricants of market activity. Human beings, after all, are not capable of democratically coordinating complex systems, so they must therefore submit themselves to the dictates of the market, onboarding its anonymous decisions no matter how profound the social costs it creates. The argument against planning clearly hinges on Hayek’s ideological commitments

  Oddly enough, despite challenging the market socialists head on, Hayek’s ideas were initially ignored, perhaps because they were critical not only of left-wing, but also mainstream economic opinion. At a time when even Richard Nixon was pronouncing that “we are all Keynesians now,” how could their maximalist rhetoric be anything but out of step? The debate on the calculation problem continued to unfold in the pages of obscure economic journals. The world, however, had moved on.

  But shortly after Nixon’s startling declaration of allegiance, the existing economic orthodoxies on both sides of the Berlin Wall were violently thrown into question. By the 1970s, “really existing socialism” was mired in economic crisis, its cracks beginning to show. The “free world” was troubled, too, experiencing its most severe economic crisis of the postwar period. Political and economic elites saw in the crisis an opening to unwind their postwar compromise with labor, a compact borne not of love, but out of their fear of revolution. It was in this context that the new heterodoxy championed by Hayek became efficacious outside the walls of the academy at last.

  We’ve All Been Misinformed

  Something incredible happened to the discipline of economics in the 1970s: the professors suddenly discovered human beings were not the equivalent of walking calculators. Alongside this revelation, many others among the most cherished beliefs of economics had been cast into potential doubt. Much of the entire mainstream economics project since the late nineteenth century had been built on the foundation of perfectly rational humans. Models of markets working together in seamless harmony, as well as arguments about the market system producing the best outcomes, relied on the pretty fantastical assumption that each of us have any and all information permanently at our fingertips.

  As some economists began to question the notion of hyperrational humans, they found Coase’s notion of transaction costs to be a useful concept that could help save the rest of the discipline. The new field of transaction cost economics turned Coase’s insights about planning within capitalism into a story about flawed humanity. If our world diverged from one populated by perfectly rational beings, then some nonmarket transactions could be grudgingly admitted into the market system—as long as our imperfections were more costly than the benefits we could get from markets. Even our imperfections could be co-opted into the same story about capitalism as the best of all possible worlds!

  However, once the Pandora’s box of flawed humanity is opened, it is hard to close. Joseph Stiglitz, another winner of the Swedish National Bank’s Prize in Economic Sciences in Memory of Alfred Nobel whom the Left sometimes uses to lend credibility to anti-austerity politics, first made his name by furthering the critique of the assumption of human rationality while still making a case for markets. Distinct from the earlier mythology of a perfectly rational Homo economicus—nowhere to be found in reality, but for so long beloved by economists—the economics of information that Stiglitz helped launch started from the seemingly obvious idea that getting our hands on, and using, information is usually costly, and sometimes impossible.

  An example economists love to use is the market for private health insurance. There is only so much an insurer can do to see if a person buying insurance is relatively healthy. Developing a better and better picture costs more and more. At some point, the costs prevent further information acquisition from making sense. In the same way, hiring a mechanic to take apart and inspect the engine of a used car to find out if it is a “lemon” can cost more than the car itself. Markets can fail: some people will end up overpaying for health insurance, while others will be uninsured. Your local sketchy used car dealership isn’t likely to be the first place you’d think of as a well-functioning market.

  Beyond individual markets, Stiglitz and others were asking a bigger question: What if the entire economy was something of a used car dealership? Once enough examples of failing markets accumulate, the entire system’s efficiency and justice can be called into doubt. In short, the economics of information ultimately challenges the argument that capitalism, despite its flaws, is the best of all possible worlds. However, rather than seeing information problems as a reason to explore collective, democratic decision-making alternatives that could bring people and information together, economists went to work making market theory work in spite of humanity’s imperfections. Since the ’70s, the economics of information has generated ever more ingenious ideas for incentivizing people or organizations to do things—all, of course, within the bounds of capitalist markets.

  Mechanism design is one such idea. In this obscure corner of economics, economists drum up—elegant, but often mathematically complex—means to compel people or companies to reveal information that they would otherwise keep secret. A new auction format created by economists in the early 1990s to help the US government sell off cell phone frequencies to telecommunications firms is an exemplary case. The auction had rules designed to force companies to reveal how much the rights to frequencies were really worth to th
em—lying would see them lose the rights to competitors. The design netted the government hundreds of millions of dollars more than expected and is now commonplace around the world.

  Mechanism design is a kind of planning, although a very indirect one. Economic decision making of any kind—whether outright planning or a “designed” market—needs to gather the bits and pieces of information spread between people. But information problems don’t preclude other ways of doing things. Rather than creating a complex process that ultimately benefits a few big players, governments today could choose to run a public cell phone utility, which would constitute one more step on the way to greater socialization. As things stand, however, governments make some money on the auction, but give up control over a valuable resource. This also leaves behind a market dominated by a few big players who can charge famously high prices backed by shoddy customer service.

  Other mechanisms “align incentives”—for example, trying to ensure that workers internalize and act in accord with the goals of managers or ensure that managers internalize and act in accord with the goals of stock owners. Mechanism design is just one more example showing that the free market also has to be planned. Real-world markets must be consciously made and remade.

  Speaking of Making People Do Things …

  What makes Coase’s theory and the economics of information so important is that they show us why the capitalist planning that takes place all around us is such a blind spot, not just in economics, but in our everyday perception of the world.

  Mainstream economics ignores the disciplinary nature of business. It has a lot to say about competition between firms, but it overlooks questions of power within them. The intricate explanations for bringing workers together in firms skirt around a fundamental issue: there is a gulf that separates workers’ formal freedom to quit their job, if they don’t like it, from the fact that we have to work to survive, and thus do not really have that freedom at all. Workers are brought together under the quite literally despotic rule of managers within businesses (a business is not a democracy) because, fundamentally, we have no other choice. Even in those workplaces where management has offered workers a modicum of control over decision making, outside of strong union representation, this gift of freedom and democracy is offered (and withdrawn) at the pleasure of management. This is the definition of authoritarian, that is, nondemocratic, rule—Chomsky’s “islands of tyranny.” Too often we confuse the violence of despots with what makes despotism wrong. But much of this violence is a grotesque tool to enforce submission. It is this unfreedom—unchallengeable control of a human by another—that is the worst crime.

  Under capitalism, businesses buy the time and the energy of workers, and during that time, they can dispose of workers as they wish (within the bounds of the laws of physics and legal or union constraints imposed as the result of class struggle). One of the few economists before Coase to look inside the black box of business was, as it happens, Karl Marx. Marx saw the firm as an instrument for extracting profit off the backs of workers. He alighted upon a simple fact: workers are paid a wage for their time, not for what they produce. Profit comes from the difference between what a business can pay its workers (plus the cost of materials, themselves made or extracted from the earth by other workers) and the value of what these same workers are able to produce.

  Coase thought that firms planned simply to save costs. For Marx, what happens inside firms is much more important: it determines how everything we produce is divided up between us. How we produce goods and services is closely related to how much of what we produce goes to whom. Under capitalism, the class of owners (businesspeople or shareholders) receive much more relative to the class of producers (workers).

  The manager’s exercise of central planning over his small province of tyranny is therefore not simply a better means to an end, as Coase thought, but a reflection of how the economy actually works. The adversarial relationship between bosses and workers that capitalism creates is no accident of markets merely introducing transaction costs that are best avoided through planning. Yet for mainstream economists, the confrontation between workers and managers only comes up in the context of “shirking.” The GPS device in the UPS driver’s truck, the call center badge that monitors washroom breaks or the white-collar worker’s app that tracks web browsing history are the sticks requiring one does as one is told; the bonuses are the carrots.

  Shirking, however, is a very rational response for someone who has little or no say over their work, often has no deeper sense of collective responsibility and knows that the profit from what they do ends up in someone else’s pocket. Shirking is not an innate tendency toward laziness, but rather the way people are under capitalism. Any complex society will have people with different, sometimes-conflicting interests who need to cooperate toward common goals. Humans have embarked upon and accomplished projects in common, from the mundane to the spectacularly ambitious, long before the advent of capitalism and its subtly coercive labor market—indeed, often involving much more explicit coercion. Across history, however, people have also found ways to plan and act together without bosses to tell them what to do.

  In response to any mention of durable human cooperation that is not mediated by markets, in particular by the undisguised incentives provided by the labor market—at their most basic, work or starve—defenders of the market system often bring up the notion of the “tragedy of the commons.” The phrase, coined by ecologist Garrett Hardin in a 1968 article in the journal Science, refers to a shared resource inevitably depleted through overuse by individuals acting in their self-interest. The prototypical commons employed to illustrate this tragedy is a plot of open, shared pastureland in a village. If farmers only look out for the cows that are theirs, rather than the entire pasture, each will allow their cows to overgraze, and the land shared in common will quickly turn to dust.

  Over the course of her long career, Elinor Ostrom, the only woman to win the “not really a Nobel” prize in economics in its fifty-year existence, did much to debunk this crude story. She compiled evidence of groups stewarding common resources and found that in many cases, the commons not only survived but thrived. Rather than being overrun by unthinking self-interest, shared resources were in reality often governed by complex sets of social rules established over time. Ostrom studied actual shared pasture land in Swiss alpine villages and found it had been preserved for common use for over 500 years. Based on this and other case studies, Ostrom went on to identify conditions that helped protect common resources—among them, participation in decision making by users of the resources, the capacity for monitoring usage, meaningful social sanctions and conflict-resolution mechanisms.

  Findings that question the tragedy of the commons, just like the idea of planning itself, can be initially jarring. It is an implicit belief of our age that the only real incentives are pecuniary ones—that despotism is a necessary part of work, and that it is largely out of fear of losing their incomes that people work toward common goals. However, this is not human reality but capitalist reality. While there will always be work that needs doing, there are many ways to organize that work—to plan it and to ensure that it is done. In practice, the commons need not be tragic.

  Even within capitalism, studies have shown that a flatter hierarchy makes for better teamwork and greater productivity. Similarly, even just handing all day-to-day operational decision making to the workers doing the work, while leaving only strategic decision making to managers, can boost productivity. Remarkable what giving people more direct decision making over the work processes does! A socialized and truly democratized economy—whether via worker representatives, community councils or more direct forms of democracy—would offer meaningful self-management with no need for illegitimate power of one human over others. In the meantime, simply expanding trade union membership pushes back against the islands of tyranny, giving workers at least some minimal levels of input into working conditions today and laying the foundation for a more th
oroughgoing democracy in the future.

  Get the Machine before It Gets You

  Today, after decades of Hayek-inspired reforms in parliaments and numerous campaigns of outright intimidation in workplaces, union membership is stagnant or in decline, while democracy in the workplace remains a more distant dream than ever. We are told to celebrate more “flexible” work, to revel in the new freedom to change jobs frequently. Yet despite the transformations wrought by outsourcing and the breakdown of supply chains into smaller pieces, most people remain in stable but crappy jobs in which they have little say over how they work. Despite all the enthusiasm about markets and choice, planning remains the modus operandi of business.

  What has changed is that the advent of the information technology age has permitted the capture of vast stores of information. What do Facebook and Google do? They prod us, gently and with our own collusion, to reveal information about ourselves. Their business model is the economics of information, come to life. For now, they use the accumulated data to sell ad space—who knew the epitome of high technology would be getting the right people to see ads for novelty “I have a Polish husband and I know how to use him” T-shirts?—but the possibilities are much broader.

  Uber and other media darlings of the “sharing economy” combine sussing out information with finding new ways to lower transaction costs. Good capitalists that they are, they’re doing it at the expense of workers and democracy (and other capitalists, namely the venture financiers who continue to pump money into a business like Uber even though it has so far failed to turn a profit). Uber’s rapid expansion stems in large part from its army of well-paid lobbyists, who in turn cajole and threaten city governments behind closed doors into cutting regulations around taxi monopolies.