How to build a pragmatic Communism that works intelligently and efficiently, part 1 of 3

Too many people favor a utopian vision of Communism, rather that simply focusing on what works

As a thought experiment, let us consider a different kind of economy:

Grocery store companies

Let's talk about grocery stores (broadly defined because I don't want to waste time defining cross-cultural comparisons). If you traveled around Europe much, before the pandemic, you might have noticed that food prices were higher in France than in Germany. I asked a French friend, who worked in the government and seemed to know things, why that was. He said it was all about competition: Germany had 20,000 grocery chains, France only has 3,000, so in France there are more places where grocery stores face limited competition, and therefore enjoy at least a small amount of monopoly pricing power.

The greater competition in Germany ensures better quality at lower prices. This seems like something essential that we'd want to have in any Communist society. So let's assume that the government (for a country the size of Germany) sets up 20,000 grocery store companies, to compete with each other.

But how can we make the competition meaningful? What are the incentives? The obvious answer is to offer a percentage of the profits to the CEO.

I should stop right here and mention that "What is the correct way to pay CEOs" is a vast subject and a lot has been written about this. I can't review the whole subject here, I'm just going to assume you already know something about this subject. Suffice it to say, this was the conventional wisdom 30 years ago:

The critics have it wrong. There are serious problems with CEO compensation, but “excessive” pay is not the biggest issue. The relentless focus on how much CEOs are paid diverts public attention from the real problem—how CEOs are paid. In most publicly held companies, the compensation of top executives is virtually independent of performance. On average, corporate America pays its most important leaders like bureaucrats. Is it any wonder then that so many CEOs act like bureaucrats rather than the value-maximizing entrepreneurs companies need to enhance their standing in world markets?

And this is the conventional wisdom now:

For chief executives and other senior leaders, it is not unusual for 60-80% of their pay to be tied to performance – whether performance is measured by quarterly earnings, stock prices, or something else. And yet from a review of the research on incentives and motivation, it is wholly unclear why such a large proportion of these executives’ compensation packages would need to be variable. First, the nature of their work is unsuited to performance-based pay. As the incoming Chief Executive of Deutsche Bank, John Cryan, recently said in an interview: “I have no idea why I was offered a contract with a bonus in it because I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less.”

And who knows what the conventional wisdom will be in 30 years?

Let's go with the condensed version of the current conventional wisdom: CEOs should be paid a good base salary, plus a bonus, but the bonus does not need to be a large variable of their base rate. We simply want to offer them an incentive to think about the long-term health of the company.

So let us assume we want to pay the CEOs something like $1 million a year, plus a percentage of profits. Or if we want them to emphasize growth rather than profits, we can also offer them a percentage of gross revenue. (We cannot offer them stock options since there is no stock, since everything is owned by the government, but there are many other incentives that we can offer.) A reasonable package might offer the CEO 1% of net and 1% of gross.

Of course, there is the risk that a CEO will take over a grocery chain and, knowing they will only be CEO for 5 or 6 years, they might stop all investments so as to boost maximum profits, so as to maximize their pay. To keep a CEO from doing this, the bonus can be offset by a year or two. Let's say a CEO gets no bonus during their first 2 years, but they get a bonus for 2 years after they step down. That would give them the incentive to make some long-term investments that will pay off after they have stepped down.

What about the CFO, the CMO, the CTO? No doubt we can offer bonuses to all of them, similar to the ones offered to the CEO. As a general rule, when the question is "What should a person be paid?" to a rough first degree the answer should be "Whatever the market pays."

Again, "What incentives to offer top leadership?"" is an enormously complex topic, and we cannot review all of it here. If the subject interests you, start with the Harvard Business Review articles I already linked to, and research the subject from there.

Competition offers high quality at low prices

We end up with 20,000 grocery companies competing with each other, and each CEO is trying to maximize profits because they get a percentage of the profits. So we end up with plenty of competition, which should ensure high quality and low prices.

The great libertarian Friedrich Hayek often said the problem with government programs is that they were run from the center and therefore they lacked local knowledge. Whereas a family grocery store would know about the unique likes and dislikes of the people in one particular town, the bureaucrats who run a centralized grocery store chain program would never know such things, and customers would suffer because of the lack of local knowledge. If the government set up a monopoly grocery store and ran it from the center then presumably this vast grocery chain would do stupid things, such as offer pork products in a neighborhood that is entirely Jewish, or offer a variety of pungent soft cheeses in a neighborhood that is entirely Chinese. But we've overcome that problem, by ensuring a high number of grocery store chains, which would have CEOs whose whole job is to gather up such local knowledge about their customers.

There are many problems with this simple model

Up to this point, everything seems simple. We have decreed a fixed number of grocery stores, and we've given incentives to the CEOs to ensure competition leads to high quality and low prices. But in fact, this little scenario is a bit of an illusion. After all, where did we get the number 20,000? We got it from Germany, and we assumed it was the correct number, because it seems to work well for Germany. But how did Germany get this number? Ah, that was from a very dynamic social, cultural, economic, and political system which came together to ensure that Germany has more competition among grocery stores than France. But was 20,000 the correct number 50 years ago? Will it be the correct number 50 years in the future? Our model of Communism is, right now, too simple. It is fragile: like a bad software demo, we've hardcoded all the numbers, and so, sadly, we can be certain this little demo won't survive real-world conditions.

Let's look at some of the obvious problems that will come up:

Arbitrage.

A CEO is running a grocery store chain. She wants to maximize her income by maximizing profits so she can get a big bonus. However, she is facing too much competition in every area. Too much competition is lowering profits and therefore lowering her bonus. But she notices, there is a shortage of food warehouses: when she complains to her suppliers about late shipments, the CEO running the warehouse company says "Hey, I've only got one warehouse in your region, and it is overwhelmed." So she sees a chance for arbitrage. She converts most of her grocery stores from grocery stores into warehouses and distribution centers. In other words, she moves from an industry that has too much competition, to an industry that has too little competition.

This is great for her and it is great for society, in so far as her independent initiative helps to keep the economy dynamic and ever-changing. But if the government was trying to ensure a certain amount of competition among grocery stores, to ensure high quality and low prices for consumers, then she has just made life more difficult for the government bureaucrats who have the task of ensuring the grocery store competition. She has reduced competition among the grocery store chains: there were supposed to be 20,000 competing grocery store chains, but now there are only 19,999.

Likewise, a woman, working as a CEO of a different grocery store chain, may find herself late for a meeting because the best hair salons are in another city, and thereby she realizes there is a need for more hair salons, so perhaps she converts some of her grocery stores to hair salons. And so on. Now there are only 19,998 competing firms.

In such a system, the government may try to achieve a high level of competition in a given industry, but the CEOs, trying to maximize their own income, will quickly move their businesses to other industries, where the competition is less. And of course, society benefits from this flexibility. 20,000 CEOs will see opportunities for arbitrage faster than any central authority. I'm sure the central authority would eventually figure out the need to shift resources, but not as fast as 20,000 CEOs who spend every day focused on the immediate wants and failings of their industry and, necessarily, the industries of the suppliers, as well as the needs of their customers.

Can the government simply aim to maintain high levels of competition in every industry? That is certainly a good aspirational ideal. Again, comparing European nations, it is clear that some nations do a better job encouraging competition that others. The German economy, in most industries, has more competition than you would find in Poland or Greece or Spain.

Having said that, capital is a finite resource, so the government cannot blindly spray capital at every industry. Indeed, on this weblog we covered the collapse of the Soviet Union in exhausting detail, and let's remember, one of the many reforms Gorvachev attempted to push through, he wanted to see Soviet agricultural stop wasting so many resources.

So we can start by saying "If the government launches enough grocery chains, and correctly incentivizes the leadership, ensuring enough competition, then the consumers will enjoy high quality and low prices" but then the next question would be how, exactly, the system would maintain discipline in the use of capital.

So how to maintain discipline regarding capital? We will come back to the question in Part 2 and Part 3 of this essay.

(

By the way, someone will ask, "Your scheme only works if the CEOs have true independence, but since these CEOs are government employees, how can you protect them from political pressures?" How to achieve independence is a question we've considered in several other essays and I cannot rehearse all the old arguments again. If you're interested, see:

"In our highly specialized and complex world, all real political power needs to move to specialized committees"

or:

"How do we get great leadership?""

)

A totalitarian nightmare?

Let's deal with another problem associated with Communism: all attempts to set up such a society have so far turned into illiberal, authoritarian regimes. So we need to ask, is it possible to build a liberal Communism?

I'll start by pointing out that Western Civilization, over the last 2,500 years, has proven itself talented at liberalizing things. Plato watched as democratic Athens convened a democratic trial for Socrates at which point the good people of Athens democratically agreed to execute him because his ideas made them uncomfortable, and after his teacher was murdered, Plato wrote at length about how democracy is fundamentally illiberal. It took 2,200 years to come up with a fix, but eventually, during the Enlightenment, the West did a find a way to reconcile democracy to liberalism.

There were other successes. Religion is fundamentally illiberal, yet the West has found a way to reconcile it to liberalism. The military is fundamentally illiberal, yet the West has a found a way to reconcile it to liberalism. Gender is fundamentally illiberal, yet the West has found a way to reconcile it to liberalism. Indeed, much of human life is illiberal, but given time, the West finds a way to reconcile all of it to liberalism. Given enough time, the West liberalizes everything.

So I'm sure the West will find a way to reconcile Communism to liberalism. It might take 10 years, or perhaps 1,000 years, but it will be done.

Is it possible to have a vibrant civil society in a Communist society?

Let's here sketch a few ideas for what that might look like.

First of all, what aspect of liberalism is Communism most likely to destroy? Surely it is an active civil society. And what exactly does that look like? The best short book on the subject is The Moral Basis of a Backward Society, written in 1958 by Edward C. Banfield, examining poverty in an Italian village and comparing it to the vibrancy of a small American town. The American town is not wealthy, but it has a fantastically active civil society. This is a very beautiful and insightful description of what makes a society vibrant, even when it is not wealthy. Here I quote Banfield at length:

Page 7-10

Introduction

In democratic countries the science of association is the mother of science; the progress of all the rest depends upon the progress it has made.

--Tocqueville

Most of the people of the world live and die without ever achieving membership in a community larger than the family or tribe. Except in Europe and America, the concerting of behavior in political associations and corporate organization is a rare and recent thing.

Lack of such association is a very important limiting factor in the way of economic development in most of the world. Except as people can create and maintain corporate organization, they cannot have a modern economy. To put the matter positively: the higher the level of living to be attained, the greater the need for organization. Inability to maintain organization is also a barrier to political progress. Successful self-government depends, among other things, upon the possibility of concerting the behavior of large numbers of people in matters of public concern. The same factors that stand in the way of effective association for economic ends stand in the way of association for political ones too. “The most democratic country on the face of the earth,” Tocqueville observed, “is that in which men have, in our time, carried to the highest perfection the art of pursuing in common the object of their common desires and have applied this new science to the greatest number of purposes.”

Page 17-20

Impressions and Questions

Americans are used to a buzz of activity having as its purpose, at least in part, the advancement of community welfare. For example, a single issue of the weekly newspaper published in St. George, Utah (population 4,562), reports a variety of public-spirited undertakings. The Red Cross is conducting a membership drive. The Business and Professional Women’s Club is raising funds to build an additional dormitory for the local junior college by putting on a circus in which the members will be both clowns and “animals.” The Future Farmers of America (whose purpose is “to develop agricultural leadership, cooperation, and citizenship through individual and group leadership”) are holding a father-son banquet. A local business firm has given an encyclopedia to the school district. The Chamber of Commerce is discussing the feasibility of building an all-weather road between two nearby towns. “Skywatch” volunteers are being signed up. A local church has collected $1,393.11 in pennies for a children’s hospital 350 miles away. The County Farm Bureau is flying one of its members to Washington, 2,000 miles away, to participate in discussions of farm policy. Meetings of the Parent Teachers Associations are being held in the schools. “As a responsible citizen of our community,” the notice says, “you belong in the PTA.”

Montegrano, a commune of 3,400 persons, most of them poor farmers and laborers, in the province of Potenza in southern Italy, presents a striking contrast. The commune consists of a town, lying like a white beehive against the top of a mountain, and twenty-seven square miles of surrounding fields and forests. One-third of the Montegranesi live on scattered farms at the base of the mountain and in the valley around it. The others live in the town, but since they are mostly farmers and laborers, their waking hours are spent in the fields below the town or on the footpaths that wind between town and country.

No newspaper is published in Montegrano or in any of the thirteen other towns lying within view on nearby hilltops. Occasional announcements of public interest - “there are fish for sale in the piazza at 100 lire per chilo” - are carried by a town crier wearing an official cap, who toots a brass horn to attract attention. Official notices are posted in the salt and tobacco store, a government monopoly, and on a bulletin board in the town hall. Several copies of three or four newspapers published in Rome, Naples, and Potenza come into town by bus every day or two, but these of course do not deal much with local affairs and they are read by very few.

Twenty-five upper class men constitute a “circle” and maintain a clubroom where members play cards and chat. Theirs is the only association. None of the members has ever suggested that it concern itself with community affairs or that it undertake a “project.”

The merchants of Montegrano are well aware of the importance to them of good roads. They would not, however, expect to be listened to by the authorities who decide which roads are to be improved. A Montegrano man might write a letter to the provincial authorities in Potenza or to the newspaper there, but it is unlikely that his doing so would make any difference. In fact, the officials would be likely to resent what they would consider interference in their affairs.

There are no organized voluntary charities in Montegrano. An order of nuns struggles to maintain an orphanage for little girls in the remains of an ancient monastery, but this is not a local undertaking. The people of Montegrano contribute nothing to the support of it, although the children come from local families. The monastery is crumbling, but none of the many half-employed stone masons has even given a day’s work to its repair. There is not enough food for the children, but no peasant or landed proprietor has ever given a young pig to the orphanage.

...When a gentleman of Montegrano buys a melon or a basket of tomatoes in the public square, he hands it wordlessly to the nearest peasant boy, woman, or man, who carries it to his home as a matter of course. He hands his burden to any peasant with whom he is acquainted, and there is no thought on either side of payment for the specific service. The peasant wants to be polite and amiable (civile) and he knows that a time will come when the gentleman can give or withhold a favor or an injury. (Even those peasants who are not anti-clerical will not lift a finger to assist a nun carrying a heavy burden to the orphanage at the top of the mountain. The nuns are upper class women, but they have no capacity to do the peasant a favor or an injury. Priests, or course, can do favors and injuries, and their bundles are carried for them.)

Twenty years ago a gentleman did not hesitate to ask a peasant to chop his winter’s wood supply without payment. Even today a gentleman who needs a donkey expects a peasant “friend” to supply one without charge; ordinarily a peasant himself goes with the donkey or sends one of his family, for if the handling of the donkey is left to the gentleman’s servant and the animal is injured, there will be no recompense.

When the tax collector wants his grapes harvested, he tells two or three peasants to harvest them. For their day’s work, he gives them two or three pounds of grapes each. They do not think that their taxes would be higher if they refused, but they have a feeling that somehow it is best to stay on the collector’s good side.

There are a few things here, which we don't have time or space to discuss, but which we will make mention of:

1. class mobility in the American town versus its lack in the Italian town

2. the rule of law in America, as in general rules that apply to everyone equally, versus the need for personal favors from specific members of the upper class in Italy

3. true civil peace in the American town versus the hint or implication that a member of the Italian upper class can engage in violence against peasants without facing any consequences

4. the inertia of culture. In America, an overall culture of helping others, a culture that existed before the current generation was born and will continue after the current generation is dead, versus a different culture in Italy which also existed before the current generation was born, and will continue to exist after the current generation is dead

Is it possible to have a vibrant civil society in a Communist society?

So let's re-phrase the question. Is it possible to have a vibrant civil society, full of organizations engaged diverse efforts towards improving society in various ways, while also having a society where the nearly all of the productive forces of society are controlled by the government?

There are some difficulties to consider:

1. who or what funds this civil society?

2. does government charity (social safety nets) get in the way of this civil society?

3. is the rule of law assured?

All of the above possible problems have an easy solution in the independence of various government actors. In other essays we've talked about the independence of the courts and the independence of the central banks and how those two institutions offer examples of the kind of independence we should want to foster for all aspects of the different functions of the government:

1. is the tax collection agency being used to punish political dissidents? The answer is greater independence for the tax collection agency.

2. is the justice department being used to punish political dissidents? The answer is greater independence for the justice department.

3. is the census bureau being used to punish specific races or religions? The answer is greater independence for the census bureau.

4. is gerrymandering being used to punish specific geographic regions? The answer is greater independence for the agency that draws the voting maps.

5. is infrastructure investment being targeted to specific politically favored regions? The answer is greater independence for the agency that decides where to invest infrastructure investment.

What does “greater independence” really mean? We discussed this in “How to save American democracy: end the Imperial Presidency.”

Democracies must breakup their governments into a series of independent functions

I've written before that Western democracies face an inflection point in their evolution: either they will become increasingly authoritarian, like Hungary, or they will break through to a new level of independence for their various functions. (Since I write software, I often think of this in terms of software. As a software architect I would say the functions of government must become more modular, more autonomous, more like microservices or SOA.)

When I first wrote of this need for more independence for more functions someone responded online with the comment "You make this sound too easy. It took many centuries for the Western nations to agree that the courts should be independent. These things take time." I agree with that, these types of evolution can take decades or centuries, but we are lucky that we now have working examples of what independence looks like (the courts, the central banks) so it gets easier to imagine what it would mean if the justice department was also independent, or if the census bureau was also independent. We can begin to abstract the concept of independence, once exclusive to the courts, and we can begin to apply the concept to more and more parts of the government, and so we can de-politicize much of the government.

And the process propels further evolution: the more that people see true independence, the more they are willing to see the government expand, and manage aspects of life that used to be free of the government. For instance, Americans are often astonished how many European countries continue to use tax payer money to support an official church. But even secular Europeans are comfortable with this, where they have seen true independence of the church from the government and the government from the church. In Sweden, even secular people check the box on the tax forms that gives some of their tax money to the official church, which they view more as a cultural institution than a supernatural spiritual organization.

In short, we can imagine a Communist society in which the businesses are independent, the political groups are independent, the media is independent, the courts are independent, the justice system is independent, the churches are independent, the financial system is independent. Everything is independent and therefore non-political. Given enough independence we could completely recreate the whole of civil society in a country in which everything is owned by the government.

Put differently, we can build an intelligent, pragmatic, efficient Communism by borrowing as many ideas as possible from existing liberal systems.

Obviously this raises many difficult issues of accountability, and this short essay cannot address every one of those issues. Instead, please see what we wrote in “Liberal democracy (not capitalism) is the only way to corral money to its best social purposes.” That essay offers a sketch of the kind of political system that offers sufficient levels of accountability.

But why do any of this? You might reasonably ask why should we want to pursue any of the ideas in this essay? Why should we want to go to such extreme efforts merely to re-create what we already have? There are two reasons:

1. Eliminate all taxes. Milton Friedman, the great libertarian, once remarked, “The strongest argument for socialism, though no one makes this argument, is that it lowers taxes.” Indeed, in a world where the government owns thousands of profitable businesses, then there is no need for any other tax. The profits from the businesses can pay for all of government. We can abolish the income tax and we can abolish the sales tax and we can abolish the real estate tax. And in the long-run, this might be why government ownership of businesses becomes common: it is a practical way to lower taxes. As Achen and Bartles point out in their book “Democracy For Realists” the American public constantly demands more government services than they are willing to pay for. (We quote one example in our review of Democracy For Realists.) If the government owned profitable businesses, it would have the money to give the public the level of government services that the public demands, without having to impose taxes on the public. And more so, direct ownership makes it easier for governments to profit from the overseas operations of multinational corporations. In the old days, the government had the power to impose taxes on multinationals, but we’ve made it easier and easier for corporations to shift capital and profits overseas, and so it has become more difficult for the government to impose taxes on these corporations. But direct ownership solves that problem: if a company makes $20 billion in profits from operations in Africa or South America, every penny of that $20 billion goes directly to the government.

2. Eliminate vast concentrations of wealth in private hands. There would be no more oligarchs, no more Bill Gates or Steve Jobs or Elon Musk or Jeff Bezos, no individual who concentrates in their hands enormous amounts of private property. I know some people believe in a utopian kind of Communism, in which Communism solves every injustice in the world. This is foolish. The world is full of injustice, it always has been and it always will be, and there is no political or economic arrangement that can change that fact. But there is one specific form of injustice that Communism could address, and that is the concentration of vast wealth in the hands of a single individual. We’ve written before that a democratic society will tend to be a middle-class society, because the middle-class lacks the power to defy the law whereas oligarchs can often use their vast wealth to cheat the intent of the law — therefore limiting great concentrations of wealth is an important step towards building a truly democratic society. This is too large a topic to fully cover here, but please see what we wrote in “Liberal democracy (not capitalism) is the only way to corral money to its best social purposes.”

For these reasons, government ownership of businesses will likely increase over the next 100 years.

(An aside about the Social Democratic reforms of the 20th Century. History is complex and cannot be summarized in short essays, but we need to simplify somehow, so let us agree for now that the 20th Century saw the Western nations build social safety nets, motivated in part by compassion and in part by the need for social stability in the face of recessions and other economic disasters. Some libertarians and religious traditionalists have argued that the modern welfare state gets in the way of older forms of charity. For now I'll simply say maybe or maybe not, but either way, let us treat the Social Democratic experiment as something separate from Communism. There is no need to assume that a Communist society would aim to have the same level of social welfare spending as what the Western democracies were aiming for in the mid to late 20th Century. Maybe they do, or maybe they don't, I'm simply saying, for now, let's consider that a completely separate issue. In other words, if there was hard evidence that government charity got in the way of individual charity, and therefore civil society, then we could suspend government charity in the interest of building a pragmatic Communism. I'm saying this as a person who works as a software architect: there might be two technologies that we want to use together, and which in the past we've always used together, but let’s remember that they remain two separate things, and in the future we may not use them together.)

There are many more problems that need to be addressed before we can establish a truly pragmatic Communism. All such issues I will address this weekend, in part 2 and part 3 of this essay.

(Update: some people on Twitter read this and complained that I’m not actually talking about Communism. Other’s suggested that I ditch the label “Communism” because it comes with too much historical baggage. I’d be happy to instead go with the label “demoagora” with “demo” suggesting some of the people and “agora” suggesting a market place. Therefore, demoagora refers to a democratically run market.)