Imagine a stock exchange market driven by socialism.

Witness Building Witness
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Consider this as a thought experiment, or a dream experiment as this one came in a dream.

Stock market is the cornerstone of capitalism. Right from the times when Europeans set sail to the foreign and utterly alien shores of India & America, the concept of joint-stock ownership made the venture of mass-exploitation possible. Today, stock market drives efficiency, rewards innovators and ensures that the companies are on a growth curve and are profitable. Organizations hire & fire people, they acquire companies or shed weight, go after newer horizons or focus on their core – they do everything as per the diktats of the market in their single-minded pursuit of increasing shareholder value.

After the cold war, Russian-branded socialism was no longer hip. Capitalism had once and for all trumped Russia’s ‘All men are equal, but some are more equal than the others’ funda. There were gross inefficiencies in the process, people starved and were indigent in general, and one look at the cultural & economic divide between East- & West-Germany told us quite emphatically which model worked better.

Socialists shirk away from stock markets, as they see it as a capitalist tool to deepen the gap between the rich and the poor. But what if they had their own market economics to improve efficiencies of their processes, a market system that eventually converted everything into commodities, made things more equal as per their viewpoint? What if they had a system that exactly matched their ethos?

So here goes.

It is somewhat similar to commodities market, but not quite. Consider a system that traded everything on the bourses – steel, apple, coffee beans, house, movie – everything! Each and every ingredient, raw material & finished good at an indexed price being sold on the market. And there is an avenue in which you can transform one thing into another.

Consider a simple example.

To make steel - you require iron ore, coke & limestone. Say all four of them traded just like in a commodities exchange. Say the price of 1 unit of iron ore was 30, of coke 5, limestone 5 & steel 50. For the sake of simplicity consider that to make 1 unit of steel, you require 1 unit of iron ore, limestone and coke each. Now comes the fun part – if I own 1 unit of iron ore, limestone & coke each, I can transform my shares in the raw material to finished goods. There is a magic convertor out there, which converts my raw material stocks into 1 unit of steel. Hence the arbitrage is of 50 – (30 + 5 + 5) = 10. I make a profit of 10, if I were to buy RM stocks, transform them into Finished goods, and sell the same.

Add a bit more complexity here. There are varieties of iron ores out there, and a lot many grades of steel that can be produced. Hence the difference in value may vary more or less. Instead of companies being listed on the stock market, in a socialist regime – the products themselves would be listed. Please note that the number of shares/units and the price would be linked to the actual goods or inventory. Hence the fluctuation in the price of units would depend not just on the supply/demand of those units, but also on the supply/demand of the actual goods. Also our magic convertor would have a basis in ground reality, so 1 unit each of iron ore, coke and limestone will not yield 1 unit of unicorn! It would only yield what is technically feasible, possible and what is actually done in the manufacturing units.

Why do this? What’s the purpose of trying to mirror manufacturing when you can actually manufacture? Where does the trading part come from?

The best way to trade is through Futures contract. It entails all the benefit of a commodity exchange: it is highly liquid, it has leveraged investments, and it increases the overall transparency. In socialism, one of the main issues is corruption – there is no free market, and hence very limited transparency as everything is state-driven. Vested powers can take ad-hoc decisions to line their pockets which leads to gross inefficiencies, behemoth PSUs that can’t take off the ground and are leaden with debt, and delivery of subpar goods and services. Furthermore, as this reduces information asymmetry – a trader would try to buy the cheapest raw material units and sell off the finished goods at the highest price. Plus as there is a time pressure in a futures’ contract, there would be added pressure to manufacture faster and reduce the lead times for delivery. It would ensure that the things don’t move at a meandering pace.

So a Commodities’ exchange kind of a market, with that magic convertor can improve the overall efficiencies of the underlying machinery. An impersonal state earns and loses the money in the market, there is no single individual entity or private company that is responsible to drive shareholder value – which in this case would be the state itself.

But such an exchange would kill brands. When the ethos of a community is group over an individual, when one must strive to be the part of a whole instead of being different – distinctive brands would not exist. Everything is treated as a commodity; nothing is unique or different. An example would serve our purpose, say we trade an iPhone on such an exchange. Initially, the arbitrage between the raw materials and the finished goods would be huge considering the price of an iPhone (1000 X) as compared to the raw materials used (100 X). Traders would rush in for buying the raw materials and trying to convert everything into an iPhone. This may artificially inflate the raw material prices for short-term. Suddenly, there would be a supply glut of iPhones. Lot many would get made. In the long term, this would drive down the prices of the finished product, killing all the brand power such a phone possessed. Brand would stop being a differential for price.

In absence of competition or driving force of greed to earn more, it would, in the end, kill innovation. New technologies would stop being developed. Such a society would perfect the art of making round wheels in the cheapest and fastest way possible, but they would never take off to the air.

India is a mixed economy. It still has areas and avenues where state has absolute control – can we introduce such a system to improve the efficiencies of the PSUs that we have, of the state-machinery itself? The auctions had already improved the buying process of the government resources, can we introduce a system as suggested above to not only improve the buying process but also improve the production efficiency and ensure faster response time?

A food for thought!

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I think, if it were to work, a socialist exchange would need to include services which benefit the common good. For example, infrastructure projects such as roads, communications, or power grids, and people would profit from the taxes or fees attached to each.

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That’s absolutely true - there needs to be a way in which service sector has to be brought into picture.

But here is where I stumble…till the time it was manufacturing industry, the traders would trade in raw materials.

In a service industry - it is the sweat and the toil of people? So would traders trade in the unit called “man-hours”, isn’t it another form of indentured slavery where we may try to improve the productivity of the “man-hours”.

The challenge is to reconcile human labor with the socialist stock exchange!

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You’re right. Some jobs would have be off the market. But, that said, a communal copyright which allows anyone funding a creative to receive a percentage, and allows others to alter or sample the work into something new, could be lucrative for investors. Some minor protections, credit where credit is due, to prevent outright theft, and you have a new source of national income which could be used to fund other projects.

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That can actually work.

Imagine a work of art: the raw ingredients are the canvas and paints. It costs hardly anything. But the painting (by a renowned artist) would itself fetch a lot. So if we use the same magic convertor, the profit of selling the painting would be much more than a commodity. We can easily include a commission for the artist. And it would yield a much greater return to the state.

Similarly, we can talk about music concerts.

We can also incentivize innovation in this manner (a doubt which I had in the main article). State would also welcome innovation because on the exchange, they would profit more - as this hasn’t yet become a commodity. They can always give the innovator a % of the profit.

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In my breakout group today we also discussed local sourcing money, such as a community backed currency to encourage people to shop local, and revising the barter system, where possible. If your vision for a new economy came into play, these would be nice, accoutrements to keep local communities interested without reverting to capitalism.

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I like where this is going. There have been plenty of attempts at market socialism, afaik: Vietnam is one, and the result is a much higher percentage of coops than in other economies plus government ownership. Basque also has an incredibly large coop going on.

However, those seem to rely on lots of ancillary policy (ie: Vietnamese coops have certain things eased on them compared to private corps), so calling in @alberto on this idea to see if we can massage it into shape. I can see, potentially, a more abstract use for futures contracts: pouring funds into externalities that short-term market transactions simply do not account for without regulation. Threads here I’m intrigued by.

“In absence of competition or driving force of greed to earn more, it would, in the end, kill innovation.” - not sure about this statement. An interesting point to ask is: innovating in what direction? For whom? Worth looking at: Innovation and competition: The role of the product market - ScienceDirect

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@Vismay, this seems to be a commodities exchange.

  • magic convertor. Given the usual (but that need close scrutiny!) assumptions of unhindered competition and reasonably available information, this is simply the the job of any commodity market. Market operators know what makes commodities useful, and have ideas as to how such usefulness will evolve in the future. driving demand. Market interaction aggregate all their ideas into an equilibrium price, that, in neoclassical economics, is equivalent to the marginal value of that commodity into the economy.
  • stocks. Stock exchanges exchange stocks. Human labor is not stockpilable as a raw material (it is when you incorporate it into an artifact: a craftsman puts a month of her time in building a grand piano). Nor is it transportable. Moving labor around en masse is what Polanyi called “dislocation”, and had Very Bad Effects in the late 19th-early 20th centuries. By the way, @jolwalton knows much about this stuff: check out this post. Anyway, it is very tricky to trade it through a stock exchange.
  • brand. That’s one of the cruces of the matter. In order to make intellectual sense, neoclassical economics assumes that preferences are exogenous. Demand for steel or iPhones is “out there”, and companies serve it. Once you introduce the ability for companies to create desires, they operate both on the demand and on the supply side of the market. Equilibria vanish, as both sides of the market push to sell more and more. Equilibrium price lose meaning.

Are you sure? It seems to me that humans have started innovating millennia before capitalism showed up, and never stopped developing new technologies. And it’s not just me. Mariana Mazzucato has written a definitive reality check on “private innovation”. It contains the famous slide of the iPhone, showing how everything that makes the iPhone smart was invented in public labs, by taxpayer-funded researchers. The Internet; the GPS; the touch screen; the world wide web, and so on. And Eric von Hippel has shown that the majority of product innovation is done by ordinary people, mostly non-professionals. An incredible 6-10% of the population of the six countries he surveyed engage in some kind of innovation!

Have you read it? I did not finish, but it reminds me of the stuff I dabbled in at UCL in 1994-1995. That was an intellectual dead end…

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Hi @alberto,

Thank you for your detailed response. But herein I diverge from the same:-

  • magic convertor: The concept is slightly different. I already mentioned that the raw materials and the finished products can be traded like in a commodities exchange, but that’s not I am after. I am after the value derived from the conversion. Let me give you an example: in US - both natural gas and electricity (in the form of “kilo-watt hours”) is traded. But please note that they are traded separately. What if one commodity can transmute into another? What’s the benefit of this? Unlike the futures contracts traders (who would be present in such a system), there would be traders in the process who would try to maximize the profit from the conversion: that of natural gas into electric power. If we have a cap on the price of power, in order to maximize profit - they would try to drive down the price of the natural gas. This puts the downward pressure on the price of natural gas and reigns in inflationary trend.

Not only we are using this platform to drive raw material prices - but to see which alternate emerges the best? Solar/hydro/nuclear would/can be cheaper than the gas guzzlers. If we transmute this form of energy into electricity “kilowatt hours”, then traders would realize more value from renewables than the gas guzzlers. This would incentivize green-tech at the foundation of this trade.

  • Human labor as stocks: @Bill & I were discussing on the same. One of the ways that we can put a price on human labor is by trading in indentured labor contracts, but that moves in the direction of slavery.

So certain human labor has to be out of the stock exchange. What we can trade in - this is where we want to bring the service industry into play, is “experiences”: movie-going experience, buying a piece of art. The state tends to earn more through services than through manufacturing, as the RMs and fixed costs are low. So a % of that can be given to the artist as an incentive.

  • Innovation: In the same manner, we can incentivize the innovators. By giving them a % for their intellectual labor.
    The innovative product would command a higher prices on the bourses than a commodity. Let me give you a crude example:

If abacuses trade on the bourses and someone invents a computer. The value of early computer would be say 100X an abacus. Hence, it would trade for more than an abacus. Of course, we have to streamline its costs but you get the gist. It is possible.

So @yudhanjaya & @alberto, is there a way in which we can incorporate the idea in the world that you are building? I would like to work on one of the cities with this idea as the core. If anyone would want to collaborate to write a short story on this - looking at you @Bill.

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Also @yudhanjaya,

You were mentioning about honor/prestige as currency —> Are we gamifying the human labour? If that is the case - then we can have a separate “honor market” which would be similar as the currency exchange market - as not all “honors” would be same, we would need to trade from one type of honor to another!

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Under the standard assumptions of the standard model, this is already embedded in the prices of the materials (and components), minus a “normal rate of profit” and premia for risks. This is what it means that markets are forward looking. If the African mobile phones shows signs of accelerated growth, the price of rare earths goes up.

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@alberto - I was interested in it because, even from the very narrow view that they take, they acknowledge that there are scenarios where a lessening of competition increases an industry’s pace of innovation and consumer surplus in the long run. So even with this very orthodox math we cannot claim that without competition, innovation will die.

@VismayHarani I’m interested, but I think we will need to dig deeper around this. As alberto pointed out, conversion already happens in pricing. In fact your computer abacus example is exactly what happens today: customers pay a premium for top-end products that demand and drive R&D.

Presently, this feels like capitalism with extra steps. I would be interested in seeing a market socialist model where welfare outcomes are tied to or privileged above trading performance.

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Yes… but it is the familiar argument of copyright proponents. Give me a monopoly on my innovation (= zero competition), it will be worth more to me. So, if you solve by backward induction, you find a keener competition to innovate, displacing that for serving the market for the innovation.

Which turns out to be bullshit, or at least incomplete – a mere artifact of model specification. Companies focus on strategies that are cheaper than innovation, like extending the duration and field of application of patents/copyright.

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I see. Very useful, thanks!

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