Keith Rankin: Capitalist Pragmatism Or Socialism?

Thursday, 4 October 2001, 7:42 am
Column: Keith Rankin

In the first seven decades of the 20th century, there was one major force pushing for public ownership and control of the industries that dominate national economies. That force was socialism.

The world was a very different place in 1970 compared to 1900, however, so the rationale for socialism had to change if the momentum of socialism was to continue. In particular, taxation had replaced nationalisation as a means of capturing surplus value. Socialism had to develop theories of taxation and public property rights. If didn't. It died.

Interestingly, the last nationalisation that I can think of to take place before economic fashion turned in favour of denationalisation, took place in that well known bastion of socialism, the United States. The firm was Amtrak, and it still exists in its nationalised form, despite the privatisation of railways in much of the rest of the world. Further, the public shareholders of Amtrak must be doing very well just now. Train travel has not for many years looked so attractive to Americans.

Socialism evolved in the 19th century, ironically, as a corollary to the writings of David Ricardo, the founding prince of economic rationalism. Ricardo, a London stockbroker of Portuguese descent, invented the labour theory of value.

Before Karl Marx got hold of the theory, a whole group of people - the Ricardian socialists - had already asked the key question. If the value of goods and services is determined by the amount of labour used in their production, then it should be the workers - or the social class from which workers are drawn - who should receive the profits that arise from the sale of goods and services. If workers create "surplus value" then surplus value must be workers' property. They had used Ricardo's "what is" answer to formulate a "what should be" question?

There were three broad mechanisms by which the masses could appropriate the surplus value that, in the 19th century, went not to workers nor to the general public, but to capitalists and landlords.

One was through the unionisation of the labour force. This was an important mechanism of income equalisation from the 1870s to the 1970s. But it created an alternative private interest group. Not only were the unemployed (and the never employed - eg most women) excluded from the union- negotiated wages, but the workers that made the biggest gains were those least in need - the so-called "aristocracies" of labour. (Indeed, in the last 10 years many of the most protracted labour disputes worldwide have involved airline workers, possibly the only surviving remnants of the labour aristocracies of the last 150 years. Pilot strikes have done nothing for the labouring class.)

Further, since the 1870s - at least within the neoclassical (non- socialist) branch of Ricardian economics - the labour theory of value had been discredited. In the new theory, value was derived from subjective "utility". The problem of the distribution of surplus value (ie collective profit) did not go away with the advent of neoclassical economics. But the special claims of the labouring class to surplus value had been severely undermined.

The second mechanism of socialism was the public ownership of the means of production. Note the shift in emphasis from "workers" to "public". Of course there is a large overlap between these two concepts of "the masses". So what was good for the public would also be good for the workers.

This mechanism of nationalisation - "publicisation" would have been a better word given that privatisation is the antonym - was a necessary complement to unionisation as a means of creating a more correct distribution of income; especially as taxation, the third mechanism of facilitating the distribution of surplus value, represented, in the late 19th century, too small a slice to the economic cake to make a difference.

While the nationalisations that did proceed in the economically developed west failed to achieve their distributional goals, they significantly reduced the gross inequities of previous centuries.

There were two problems with the socialism that motivated 20th century nationalisation: (i) socialists always tended to be puritans cum control freaks, and (ii) the socialist concept of "the means of production" hadn't evolved from its Ricardian roots. [Point (ii) lies beyond the scope of this brief article, but will, I am sure, point the way to a new kind of socialism; a libertarian socialism.]

Puritan socialists (as distinct from libertarian socialists) could never trust the masses to spend their private incomes wisely. Instead of allowing the public profits arising from nationalisation to be distributed as a cash "public dividend", they opted for a "social wage" made up entirely of collective goods such as education and health care. Now, while these "social wage goods" were valuable and worthy, they seemed detached from the nationalised industries whose profits helped to fund them. Because there was no visible link from public property to public dividends, we paid too little attention to how profitable our public enterprises were.

In the meantime, taxation proved to be the major new "income stream" of the 20th century. Its expansion had more to do with two world wars and paying for social security in the 1930s' depression than it had to do with socialist theory. But taxation - and not the profits of publicly owned enterprises - became increasingly necessary as the principal means of funding social wage goods. In the process, the argument for public ownership of the means of production had become undermined. The public could now obtain its rightful share of the profits of private (and privatised) firms by taxing the ostensibly private wages and dividends generated through private capitalism.

By the 1970s income taxation - not unionisation or nationalisation - had become the most important means of reversing the injustices of feudalism and laissez-faire capitalism. Nationalisation, in the few cases where it still happened (eg Amtrak) was a last resort means of reviving an industry that could not make a profit but whose retention had benefits for society as a whole. Interestingly, now that Amtrak has monopoly control, in the US, of an industry that could be highly profitable, there are sound arguments for its privatisation. The initial investment by the US public will be repaid as a substantial capital gain.

The airline industry is now entering an era much like that faced by long- distance passenger rail in the 1950s and 1960s. In part due to heightened fears of flying, the demand for air passenger transport has fallen. In addition, the rise of substitutes - in particular teleconferencing but also the internet - has dampened the demand for air travel.

So nationalisation is now appropriate because, although the airline industry is not profitable, there are widespread public benefits in retaining global passenger transport networks that are not priced outside of the reach of our nations' populations. Air New Zealand (and many other of the world's airlines) will only survive through a nationalisation (ie publicisation) process. For Air New Zealand, the key decisions have been made, literally, today. It won't be a 100% nationalisation. (80% is the very strong rumour.). And it probably will not be a "permanent" nationalisation, just as Amtrak will not permanently operate American long-distance passenger rail. Air New Zealand is not being nationalised, as a 'cash cow', in order to capture surplus value on behalf of the masses. The effective nationalisation of Air New Zealand is not socialism.

While the market value of Air New Zealand is so little, it's excellent capitalism to acquire such a company at so little cost. If well managed - ie through cost savings (but without cost-cutting) - it will reap a capital gain for future generations of New Zealanders. The new Air New Zealand is well- placed to incur cost savings (it is in a buyers market for aeroplanes and staff) and pass them onto its customers, New Zealanders will reap dividends even if Air New Zealand does not pay dividends.

In economists' language - "aggregate supply" is considerably greater if we have an efficient nationalised airline than if we have an expensive privatised monopoly airline (as Qantas threatens to become in Australia) or if we have no airline. More aggregate supply means more national income which means more income tax. Thus, our dividend from the public re-acquisition of Air New Zealand will be the extra income tax raised not from airline profits but from general business expansion.

Further, a nationalised airline operating to and from New Zealand (with the interest of the whole NZ economy as its bottom line) keeps its private and foreign owned competitors honest. One reason for nationalising firms (but not whole industries) is to keep the competition honest. So I'll finish by noting a different (but topical) example of how a single publicly owned firm can modify (for the better) the behaviour of its private and/or foreign owned competitors.

The soon-to-open Jims' Bank - or New Zealand Post Bank as it will probably be called - might never make a profit in its own right. But if it reduces the costs of banking services in general, then there will be a dividend to the New Zealand people, both directly through cheaper bank fees and indirectly through higher levels of national income. More income means more income tax.

In 2001, the rationale for nationalisation is different to that embraced by the socialist manifestos of 1891. But both reasons are valid in their contexts. Further past contexts return. Indeed, since the 1980s, despite reduced aggregate profits from publicly owned enterprises, there has been a trend to reduce rates of income tax. If this trend persists, the Dickensian inequities of 150 years ago will return. If so, we will soon need to nationalise as a means to socialise profits, and not simply as a means of saving essential but unprofitable capitalist industries.

© Scoop Media

Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

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