Why left-wing ideas don't work
Critiquing Yanis Varoufakis
It’s a known problem of the left: their criticism of capitalism is usually spot-on, but since the collapse of Soviet Union it was difficult to formulate a workable alternative to capitalist economy.
One of the prominent figures of the left who actually did propose a number of steps was Yanis Varoufakis, an ex-finance minister of Greece. Let’s take a look.
Reform 1. Banning the stock market and implementing a ‘one worker - one vote’ rule at every firm.
Basically, capitalists lose their control of the enterprise, and instead every company is managed as a coop by its employees.
In other words, whatever the circumstances, the only thing you are entitled to in terms of ownership of means of production is the fixed share in the company you work for.
The critique. What is the key left-wing demand to capitalists? Stop exploiting labor by taking all the profits from labor’s work. It makes sense to assume that under Yanis’es proposal the situation with profits distribution is supposed to improve. Meaning that workers, who now control the enterprise, will be receiving dividends out of the firm’s profits together with their normal wage (or the wage simply goes up - same thing).
What happens to this dividend in the capitalist system? Some of it gets consumed, but a large part of it gets saved and reinvested. For instance, a shareholder gets a good dividend and decides to save it by investing in a different company - by buying Google stock.
Who owns accumulated surplus is the key economic question. Why? Because accumulated savings form the capital stock, which enables future development.
But what happens in Yanis’es reformed socialist economy? People receive the profit distribution, but they cannot in any way improve their capital position (each worker is strictly entitled to one vote in only one company). So the workers have zero incentive (and zero opportunity) to reinvest their savings.
What else is there to do with the money? Consume. This system, therefore, will be prone to overconsumption and underinvestment. Workers will be ‘eating their future’, and new adequate capital stock will not be formed. But capital is absolutely crucial to production. Labor without capital has very low productivity. So, ultimately everybody in the economy will impoverished, even if in the beginning it would seem that consumption went up.
Btw, this is almost exactly what happened to Soviet Union. People traveling to the country from the West in the 1950s and 60s were surprised how poor masses of people were in this supposed to be colossus.
One may argue - ok, don’t distribute the profits then - let them accumulate at the firm. This is doable, but you should ask yourself - what is the purpose of the reform if a worker is still entitled to the same salary?! And indeed, it’s another thing that happened in Soviet Union. Those in power recognized that they cannot distribute profits to people, that the economy needs the savings. And decided that the government will manage this resource. So what was the result? Workers in the Soviet Union started being exploited exactly the same way by the government as they used to be - by former capitalists.
Reform 2. Establishing digital wallets and letting people keep their savings at the Central Bank.
Yanis recognizes that such a move will cause significant contraction of money supply. So in order to counter that he proposes printing a lot of money in compensation and distributing it to people’s wallets helicopter-style. This way he hopes to combat poverty.
Such a dramatic move may actually help many people get out of the debt trap, for sure, but ultimately it will result in the same problematic situation: the funds that are currently available for productive investments via the private banking system will be consumed (eaten) instead, which will deny this economy its future.
As a matter of fact, it’s very simple: the money held at the Central Bank are considered non-existent, destroyed. Why? Because the Central Bank does not directly credit the economy. But the credit is clearly needed. So, in order to remedy the situation you would have to re-institute means of pulling the money out of digital wallets into productive use. This, by the way, does not mean that the banking system cannot be reformed (and must be reformed) - but I seriously doubt the reform should go according to Yanis’es idea.
Just to recap, accumulated capital stock is absolutely crucial. And under capitalism, those who invest their savings directly benefit from those investments. This makes this system an efficient provider of capital for suture projects. If you break this link, you will very soon see that your economy operates in the regime of chronic deficit - exactly how it happened in the Soviet Union, where the economy did not have capital resources to produce goods which would cover even the basic needs of the population.
And one more point - since both of Yanis’es ideas heavily favor current consumption over investment, it makes sense that the first addressees they should be sent to are the countries with an overly large share of investment in GDP. Specifically China - with its 42% of investment in GDP as opposed to the US with their 21%. The ‘developed’ world already consumes more than enough.
Source: The proposals of Yanis Varoufakis are outlined in his book ‘Another Now’