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

The instability of the business cycle makes the financial sector the most essential to control

You might want to read:

(Part I)

(Part II)

The instability of the business cycle

During the 1800s the monetary economy expanded to include every aspect of life. The non-monetary economy shrank in importance. Autonomous farms, creating all they needed via internal craft production, became less common, whereas it became more common for farms to sell their produce for cash and use the cash to buy whatever the farm needed.

A large percentage of the population moved to the cities and became dependent on the business cycle. A recession now meant unemployment and misery for a significant share of the nation, leading to social unrest. There was talk of revolution. The problem would clearly get worse and worse, as more and more people left the farms and were drawn into the monetary economy. Something had to be done to smooth out the business cycle.

Russia and the USA acted almost simultaneously, but they pursued radically different tactics. Russia had a revolution that brought to power new political actors who wanted to use the power of the state to mange the flow of money in a complete and total manner. The USA wanted to proceed in a manner that would give the government some control over the flow of money, but without interfering with the liberal spirit of the American economy.

In 1913, the USA established a central bank.

In 1917, Russia moved to abolish the use of debt to manage promises of future flows of resources. (Arguably, the Soviet Union still allowed the existence of debts, but such promises of future resource flows were more like political promises than monetary promises.)

For it's first 60 years, the Soviet Union was careful to control the printing of money, and therefore it avoided inflation. It only got into trouble in the 1980s, and the inflation was a sign of its overall political collapse. We've already covered that episode in detail, reviewing Chris Miller's great book:

The effects of inflation were not only economic. Just as inflation was caused by political gridlock - a disagreement about who should bear the costs of budgetary adjustment - it also had serious political consequences. Though Gorbachev was beginning to move the Soviet Union toward a market-based system, the country’s economy was still largely based on command methods. Commands from the top were followed because failure to do so resulted in punishment. Inflation changed this calculus because it laid bare the political chaos at the center of the Soviet state. It sent a message to mid-level Soviet officials that rules no longer mattered. Carefully controlled prices previously had been a central tool of the Communist Party’s authority over society and economy; changes in relative prices were how the state mediated between different interest groups and redistributed resources. But where prices previously represented the state’s power, by 1988 they provided further proof of an increasingly desperate struggle between Gorbachev and his opponents in Moscow. No one was in charge.

My point is, civilized nations followed a lot of different strategies in their efforts to control monetary fluctuations, but they all reached a point where further development wasn't possible till there was some answer for those fluctuations, which had become too damaging to be ignored.

How to control monetary fluctuations when the government owns everything?

If we're imagining a society where the government owns everything some might assume it would be easy to control monetary fluctuations, but in Part I we looked at building a highly competitive economy that recreated most of the features of a liberal economy, and so the right answer for Communism is, again, to further imitate the answers followed by the liberal economies.

Problem solved.

But I think there might be one more problem. When I think of how we could imitate a liberal system inside of a Communist system it all seems to work, except in the financial sector, which raises some special problems.

Old firms die, so where do new firms come from?

Some firms die because they are ambushed by circumstances, other firms die because the CEO is incompetent. But what is certain is that firms will constantly die, so we need to think about how new firms are created.

In the USA today there are two main sources of new businesses:

1.) an individual entrepreneur uses personal savings to establish a business

2.) venture capital invests in an entrepreneur

But we want to build a society where there is no private property or there is a limit on private property, such as a cap at $10 million. In the latter case, an entrepreneur can start a business and grow it to a certain size, but after that they hit a wall so, for the most part, the individual entrepreneur will no longer play the same role as before — we cannot get large firms to grow from small firms started by individual entrepreneurs.

So what is the Communist equivalent of venture capital?

Addressing this question, we can start the way we started with grocery stores, back in Part I, and simply assume that the government has set up 20,000 bank companies, and given the 20,000 CEOs proper incentives to compete against one another. And these banks can cover all normal banking functions, and the government can establish a central bank to moderate a central interest rate and thus influence the speed at which the banks produce new money. In other words, up to a point, everything can work the way things work in the USA today.

But banks are not the same as Venture Capital. Banks are best at supporting the growth of small businesses that are started by individual entrepreneurs, and that is exactly what we plan to forbid in our Communist society. If the government starts a bunch of businesses, then the banks can help nurture those businesses and help them grow, but how does the government actually start those businesses?

There are many answers that would work, but the simplest is to allow each bank to also run a Venture Capital firm, with some regulations in place to make sure the banks don't take on a level of risk that would endanger the entire banking system.

Most Western countries currently enforce a hard boundary between normal banking and the riskier forms of investing. This is so the collapse of a speculative bubble won't collapse the banking sector. After the 1930s the USA put good protections in place, which lasted until the 1990s. These protections were know as the Glass-Steagall legislation. The repeal of which opened the door to the kind of speculation that brought about the global financial crisis of 2008.

Since 2008, regulations were tweaked to keep financial institutions from taking too many risks. Is enough being done to protect us from a repeat of 2008? Who knows! Only time will tell.

How to keep the financial sector competitive

Assume that the government sets up 20,000 companies in the banking sector, so the banking sector is full of competition, and each of these banks are allowed to put some of their deposits towards high-risk, high-reward investments, and the CEOs are properly incentivized in all the ways we discussed back in Part I, and the VC money takes big bets on new ideas -- then we should see plenty of new firms created.

I can imagine all of the ways that the bankers running the Venture Capital firms can be incentivized. They can be offered a bonus based on the long-run success of the investments they make. But that goes back to the question of how to incentivize workers, and it is a complex problem that, for the most part, is outside the scope of this essay. Suffice it to say, there is a lot of good research about the best way to do this.

So, everything is awesome, we've got a banking system that has incentives to create new firms. But there is still a problem: no CEO of a banking firm would ever authorize the creation of a new banking firm. Every CEO craves consolidation in whatever field they happen to be in. A bank CEO, if they saw a profitable opportunity, would go after that opportunity with the firm they already control, they would not create a new banking firm to go after the opportunity.

So I think we need one additional piece for this economy.

Of course, this problem applies in the USA in 2022: there has been too much consolidation in the banking sector, and there are no incentives for anyone to create a new banking firm.

There is an existing solution, even if it is rarely used nowadays: aggressive anti-monopoly enforcement, breaking up large firms into smaller firms. And, in theory, in a world where everything is owned by the government, then anti-monopoly efforts become easier, as there are no complex layers of ownership that need to be figured out, and no battles to be fought in the courts, year after year. The only complication is the workers who were promised a percentage of future profits. Presumably there needs to be a formula that gives them a share in all the daughter firms split from the firm they were in previously.

But given that the tendency, in most markets at most times, is toward consolidation, we should think about a cure that might feel a little bit more automatic and organic, putting an institution in place that constantly creates new financial firms, rather than stepping in and forcefully breaking up a firm (though that remains an option).

(As an aside, we can assume that all the normal tactics of current Western governments will continue in a Communist context: "industrial policy" and "infant industry protection" are things that even conservative governments do, so we can assume all of that will continue. The USA has agencies such as DARPA that offer grants to researchers to create new technologies, and sometimes DARPA helps engineer funding to create a business around a breakthrough new technology. I assume all of that will continue, but I assume it won't be enough. We need more sources of funding for new firms.)

An agency to regulate the flow of funds to high-risk, high-reward investments

Assume this agency takes on no debt, but pays for everything from tax money. Assume this agency has the power to implement any tax it deems necessary. Possibly it keeps its taxes steady in both recession and boom, but only varies its spending, saving money during the boom and then spending it during recessions. Like the central bank, it could be given a mandate to try to balance inflation and employment, while also trying to drive innovation in the economy.

The goal of the agency is to set up new venture capital funds. As elsewhere, the people running the funds would be properly incentivized, with bonuses paid as a percentage of the profits from the companies that the fund invests in. We already covered that.

Who would be hired? Would the process be political? Is meritocracy a reasonable policy for hiring? In Part I we talked about using independent agencies to enable non-political decision making. But as to who should be hired, I’m assuming the theory of who should be hired would change from decade, driven by the culture and the political process, just like happens in every non-totalitarian nation.

Most of the developed countries took small steps towards setting up such an agency as this, during the post war years, as part of their efforts towards "industrial policy", before the neoliberalism of the late 20th Century made such ideas unpopular. But the benefits to society seem obvious. It's another way to ensure a robust rate of new firm creation.

The details are a distraction, the important point is that this is possible

At the risk of boring you, I went rather far into the details of our hypothetical system. But let's not get lost in the details. What seems clear is, once you start looking for ways to engineer a successful Communist system, it is easy to imagine a system that would work.

So why isn't Communism more common in human history? Why isn't it the default economic organization? For thousands of years the most common economic arrangement has involved an older male, surrounded by an army of women and younger men, using his existing wealth to acquire even more wealth. But why has this patriarchal system been the default for most of human history? The answer is complex but part of the answer is because the people who are most likely to challenge this system have also wanted a long list of other changes. They rebel against the authority of the patriarch, and they tend to rebel against all other forms of authority. They've been wary of creating new sources of authority which, they worry, might be as unjust as the system they want to get away from.

A valid concern. But it makes it difficult to establish a new system as the default. The perfect can be the enemy of the good. Reaching for a utopian Communism means that Communism fails. Meanwhile, aiming for a pragmatic Communist system is possible, but it would not solve every injustice in the world.

What is clear is this: if we wanted to abolish oligarchs, we could. If we want to abolish Elon Musk and Bill Gates and Warren Buffet and Mark Zuckerberg and Adam Neumann then we can. We can clearly run a society that has no private property, or which has some moderate limit, such as $10 million as a cap on wealth. If we take a pragmatic attitude, then it is easy to think of how to build a Communist system that works intelligently and efficiently. It's simple actually: recreate most of the features of a liberal system, inside of a Communist system. There are only a few difficulties that come up, and those are easily fixed.

Will we ever see a system like the one that I've here sketched? Probably not in the details, but at some point over the next 1,000 years, we will probably see a society where nearly all economic activity involves the government. If you're curious about why, see Is Communism Inevitable?

Maybe ideas such as this can influence what kind of system eventually evolves.

(If you enjoyed reading this essay, you might also enjoy reading my book, How To Destroy A Tech Startup In Three Easy Steps.)