Funding new industries in socialism/communism

agreed, this isn't something dismissed so easily

In fact, I'll post all of Kotz's essay here
years which seek to combine three principles: economic planning rather than market forces guides economic activity, democracy characterizes political and economic institutions, and wide participation in decision-making is fostered. Such models of what can be called democratic planned participatory socialism (DPPS) have been developed by Devine (1988), Albert and Hahnel (1991), and Cockshott and Cottrell (1993).
comparison to other systems. Section 2 presents a framework for analyzing the innovation process in general. Section 3 briefly comments on the innovation performance of contemporary capitalism. Section 4 considers the innovation experience under state socialism, specifically for the Soviet case. Section 5 takes up directly the expected innovation performance of a system of DPPS. Devine’s (1988) version will be used as the template for discussing innovation under DPPS, although the analysis should be applicable, to a greater or lesser extent, to other models of DPPS as well.
(cont)

(I give up on formatting it for greentext)
2. The Innovation Process

In the literature on innovation, 3 two types are usually distinguished, process innovation
and product innovation. The innovation process can be broken down into four stages: invention,
development, production, and diffusion. 4 Invention here means originating the idea for a new
product or process and working it out in rudimentary form. Development involves turning the
rudimentary form into an economically viable product or process, capable of being
produced/introduced within the existing economic system. Production is the step of actually first
producing the new product or introducing the new production process. Diffusion is the spread of
the new product to other producers or the new process to other users. 5

Invention, as defined above, is a very risky endeavor, since most new ideas do not pan
out. However, invention is not necessarily very costly. Development, while also risky, is much
less so than invention. However, the difficulty of converting a rudimentary form into an
economically viable product or process makes this stage typically time-consuming and costly.

First production/introduction is less risky still, and the cost varies considerably depending on the case. In the final stage of innovation – diffusion – the only remaining risks are commercial, not
technical.

The above stages schema is helpful for analyzing how hospitable a particular institutional
framework is to innovation. A system must be favorable for all stages of the innovation process
if it is to exhibit good performance. To approach this analysis, we can ask three questions about a
system:

1. Does the system provide strong incentives for innovation?
2. Does the system provide substantial means to carry out innovation?
3. Does the system generate innovative effort that contributes effectively to the
improvement of human welfare?

The above three questions can be applied to an analysis of innovation under
contemporary capitalism, under the now defunct system of state socialism, and in a future system
of DPPS.

3. Capitalist Innovation
Mainstream Western economics gives capitalism high marks for innovation. The pursuit
of profit is supposed to assure a strong incentive to engage in the invention, development, and
production stages of innovation, while also inducing investors to provide potential innovators
with the necessary financial means. Free entry into markets compels rapid diffusion of
innovations. An optimal contribution to human welfare is assured, given the assumption that
profitability reflects the ultimate value to society of any economic activity.

While capitalism does promote a certain kind of rapid technological change, the above
account has serious flaws. The pursuit of profit does not play such a big role at the important
invention stage of innovation. Studies show that a large majority of economically important
inventions come from university scientists, government researchers, and independent inventors,
for whom pecuniary considerations are not typically dominant. 6 At the development stage, the still-high risks, plus the sometimes substantial external (and hence uncapturable) benefits from
innovation, lead to (successful) demands for government subsidization. 7

The profit incentive for innovation is profoundly contradictory. For the profit incentive to
operate, innovators must be able to gain monopoly control over the innovation and bar
competitors, or else the first innovator’s profit will be small and fleeting. However, the legal and
extra-legal means that capitalist innovators use to gain such monopoly power (patents and
predatory tactics) prevent the rapid diffusion of new products and processes.

The greatest flaw in the capitalist innovation process has to do with the third question,
that of the contribution of innovative activity to human welfare. As capitalist innovators follow
the guide of profits, the following problems arise: 1) innovations are disproportionally directed at
upper income consumers; 8 2) public goods are largely ignored in the innovation process; 3)
external benefits and costs of innovation, which may loom very large, are not taken into account
in innovation decisions; 4) the monopoly power required to stimulate innovation leads to high
monopoly prices for the resulting product, limiting the use of the new innovation and hence
reducing the benefit from it; 9 5) much innovation activity is pure waste, as firms devote
innovation resources toward the end of defeating rivals rather than benefitting consumers. 10

While capitalism does promote the development of the forces of production, it does so in
a manner that is severely flawed. Capitalism can promote innovation only if the state and other
non-capitalist institutions play an active role in organizing and financing the innovation process,
particularly the invention stage. It can do so only with significant monopoly power and barriers
to entry that simultaneously promote and hinder technical progress. And it produces a severely
distorted innovation process that, after a certain stage of development, may subtract as much
from human welfare as it contributes, or even more.

4. Innovation Under Soviet State Socialism
The Soviet system was, at best, a highly flawed and distorted version of socialism.
However, it was the first large-scale effort to build a modern economy based on public
ownership of productive property and coordination of the economy by economic planning. For
this reason, the experience of the Soviet economy in the area of innovation is relevant to our
concerns here.

Spokespeople for the Soviet system claimed that, as a socialist system, it would, and did,
outperform capitalism in promoting technical progress. The key advantages cited were the
absence of commercial secrecy, the avoidance of the wasteful duplication of R&D effort of
capitalism, and the ability to directly incorporate technological advances into the central plan
rather than having to rely on the indirect incentive of profitability. However, the Soviet
leadership soon discovered that innovation was not as straightforward a process as had been
assumed. In the postwar decades the system was frequently adjusted and reformed to improve
innovation performance.

The mature Soviet system had various institutional components to its innovation system,
including the incorporation of major planned new technologies into the central plan by Gosplan
each year. However, two institutions were most important in Soviet innovation performance: 1) a system of R&D Institutes, which had innovation as their sole mission; and 2) the individual
enterprises, which typically had a design department for new product development and, at larger
enterprises, a research laboratory.
(cont)

The Soviet system did have significant strengths in innovation performance. 11 Soviet
R&D Institutes were staffed with well-trained and dedicated researchers and were reasonably
well funded, and they and the enterprises did produce many important innovations. The success
was best known in military and space technology, but it extended to some civilian industrial
technologies. 12 Output per labor hour in the Soviet economy grew rapidly until 1975, much faster
than in the U.S. during that period (Kotz and Weir, 1997, p. 46). However, Soviet innovation
performance never lived up to expectations. Understanding the problems encountered in the
Soviet innovation process – and the institutional sources of those problems – is relevant to
evaluating the potential innovation performance of a DPPS system, including potential problems
that it might encounter.

There was a serious incentive problem in the Soviet innovation process. The incentive
problem was not located at the R&D Institutes but rather at the enterprises. Soviet enterprises
were relatively good at minor innovations. The incentive problem involved larger changes in the
production process and the development of new products that differed substantially from what
had been produced before. The Soviet enterprise director faced a context of relatively low
rewards (in the director’s bonus) for successful innovations while the risks attendant upon major
innovations were quite high. This tended to make Soviet enterprise directors conservative about
innovation, with reluctance to develop new products or processes or to introduce those that
emerged from the R&D Institutes.

The risk of innovation was not just the result of the inevitable delays and unforseen costs
that arise when trying something new. The key factor was the difficult supply relations in the
Soviet planning system. Enterprises always worried about whether sufficient supplies would be
delivered on time to enable the enterprise to meet its goals. This was a result of the policy of
“taut planning,” aimed at achieving the maximum possible output from available inputs.
Innovation necessitates unforeseen changes in required inputs, and the taut planning system
made it difficult to change the input mix in mid-plan. The hierarchical relations of Soviet
planning meant that enterprises did not have close relations with their suppliers, which
compounded the problem. These conditions made innovation very risky, with a likelihood of
interruption of the enterprise’s regular production, resulting in financial punishment for the
director.
Another incentive problem was an absence of penalties for failure to introduce available
new technologies. A laggard enterprise with outmoded technology might find its costs rising
above the industry average, but the ministry tended to protect its enterprises and made subsidies
available.
(cont)

There were also problems of the means available for innovation. Innovations that involve
radically new products typically entail either the entry by an existing enterprise into a new line of
production or the creation of new enterprises. The Soviet planning system had relatively rigid
boundaries between industries, and entry into a different line by an existing enterprise was
discouraged, as poaching on the territory of others. 13 While new enterprises were created from
time to time, this was limited and usually faced opposition from existing enterprises.
Individual inventors were greatly underutilized in the Soviet system. Most enterprises had
an official policy of making small-scale facilities available to aspiring inventors. However, this
program was not very effective at drawing out creative individual inventors, perhaps because the
passivity bred into individuals by the repressive, centralized, hierarchical Soviet system
discouraged individual inventive activity.

In the matter of the effectiveness of innovative activity at advancing human welfare, the
Soviet system did avoid some of the problems of capitalist innovation. There was no bias against
innovation in public goods. There was no problem of monopoly pricing of new products and
processes, with the attendant limitation of their use.

However, the Soviet system had significant weaknesses in the effectiveness of innovative
activity. We will cite three problems in this area. First, while irrational profit criteria largely
guide the allocation of innovative effort in a capitalist system, in the Soviet system the “planners’
preference” guided this allocation. The top leadership favored certain sectors, particularly the
military, space exploration, and certain industrial sectors, while consumer goods occupied a
lowly place in their priorities.

Second, there was a problem stemming from the poor relations between the two key
institutions involved in innovation, the R&D Institutes and the enterprises. The R&D Institutes
had the best researchers and facilities, and they produced a large volume of plans for new
products and processes. However, the enterprises, which had to produce the new product or
introduce the new process, complained that plans arrived that were incomplete, unrealistic, or
unworkable. R&D Institutes complained that enterprises were uninterested in their proposals.
The result was that much innovative effort failed to bear fruit. This seemed to be a result of the
hierarchical character of the system, in which relations between institutions at the same level of
the hierarchy were very poorly structured. 14

Third, and perhaps most serious, innovation in the Soviet system generated major
external costs, particularly for workplace and environmental health. The reason for this in the
Soviet case was not the pursuit of profit but the single-minded emphasis on growth in output and
the undemocratic and repressive character of the system which prevented the affected parties
from defending their health interests.

5. Innovation in a Democratic Planned Participatory Socialist System
What kind of innovation performance would be expected under a DPPS system, by
comparison to that of capitalism and state socialism? Three features of DPPS, as laid out in
Devine (1988), are relevant to innovation performance. First, the main features of the overall
economic plan would be determined by a democratic process (Devine, 1988, p. 190).

Second, the planning and coordination of the economy would take place, not through
market forces or top-down central planning, but through a process of “negotiated coordination”
(Devine, 1988, ch. 8-10). This means that resource allocation decisions would be made by boards
– industry boards and local and regional negotiated coordination bodies – that have
representation of all affected constituencies, including workers, consumers, suppliers, the local
community, and even “cause” groups such as environmentalists, job safety activists, feminists,
etc. These bodies would arrive at decisions through compromise among the interests represented
on them. In addition, the basic units of social production, or enterprises, are considered social
property and have governing boards that include representatives of all groups affected by the
activity of the enterprise, including workers, consumers, suppliers, and the local community.

Third, each individual would be expected to spend part of her/his work life in each of the
main types of labor, which Devine defines as planning and managing labor, creative labor,
nurturing labor, skilled labor, and unskilled/repetitive labor (Devine, 1988, 171). This would
eliminate the social division of labor, while preserving the technical division of labor with its
efficiency advantages.

In the absence of competitive pursuit of profits, or a Politburo demanding innovation,
what would be the source of innovation under DPPS? First, the democratic, participatory
institutions of that system would empower the population to demand innovations aimed at its
own benefit. Under such a system, people would stand to benefit from innovation, in the three
roles that people occupy – that of consumer, worker, and community member. Consumers can
benefit from new, better, and cheaper products. Workers can benefit from less arduous toil and a
more satisfying experience at work. Members of the community can benefit from products and
work processes that improve, rather than harm, community life.

DPPS, like every economic system, can also tap a second potential source of innovation.
That is the species trait of human beings of having a propensity to look for ways to change and
improve their methods of doing things, entirely apart from any desire for more goods or less
labor. This drive, present in most people, although not in equal measure in all, represents an
important source of innovative behavior at the stage of invention, if the economic system allows
it to operate freely

How would a DPPS economy translate the potential benefits of innovation into actual
effective innovative activity? How would it encourage, within the economy, the expression of
human beings’ natural tendency to create new things?

If the populace wants innovation, they would have to build into the system significant
incentives for those who are in a position to carry it out. Enterprise managers, along with
everyone else who participates in any of the stages of innovation, should be eligible for rewards
for successful innovation. It is not sufficient to assume that decision-makers will automatically
innovate – it must be communicated to them, via a reward system, that society values
innovation. Such rewards would be needed regardless of the mix of material versus moral
incentives. Pay incentives need not be huge to elicit innovative behavior, as long they are large
enough to bring a noticeable consumption benefit to the innovator.

As the Soviet experience indicates, a planned economy can increase the risk associated
with innovation, deterring innovative activity. However, DPPS should not suffer from the
problems of uncertain supplies and inflexibility that characterized Soviet planning. With
representatives on one another’s decision-making boards and with opportunities to communicate
on negotiated coordination bodies, there should be reliable and flexible relations between
suppliers and customers. It would be necessary to eschew the Soviet policy of taut planning and
operate the economy with sufficient excess productive capacity to accommodate the unforeseen
changes in inputs that innovation requires.
(cont)

Part 5 (Continued)
Without the spur of competition to compel laggard enterprises to adopt the best
technology in the industry, could an enterprise management, perhaps backed up by a workforce
unenthusiastic about change, simply refuse to make improvements? As was noted above, an
enterprise under DPPS is not the sole property of its workers but is social property, upon which
constituencies outside the enterprise have a legitimate claim. Industry boards would have to keep
track of laggard enterprises, and consumer representatives on both industry and enterprise boards
would have to be powerful enough to exert pressure to make appropriate changes, imposing
financial penalties where necessary.

In order for this system to work effectively, it would be desirable to have more than one
enterprise in each industry, except in cases of natural monopoly. 15 The purpose is not to impose a
market form of competition in which the cheapest producer drives out the rest, a process which
often yields socially irrational outcomes. Rather, the purpose is to permit the gathering of
comparative information about enterprise performance, from market exchange as well as other
sources, so as to make informed decisions about what changes enterprises should be asked to
make. It would not always turn out that the higher-cost producer is the one asked to change; the
lower-cost producer might be found to have achieved low costs by anti-social practices rather
than superior technology.

Long ago Adam Smith complained that the detailed division of labor tends to make
workers stupid. The DPPS practice of assuring everyone participation in the highest types of
labor should have the opposite effect. This practice, along with the widespread participation in
decision-making fostered by a DPPS society, should encourage the creative, innovative behavior
that is natural to our species. DPPS should create conditions for a substantial outpouring of
creativity from the population, some of which would take the form of innovation in the economic
sphere.

In the matter of assuring adequate means for innovation, DPPS would face a serious
problem. The basic institutions of DPPS would not necessarily provide sufficient opportunities
for creative individuals to work out new economically relevant ideas. More generally, there
would be a danger that the decision-making boards of DPPS would tend to represent existing
ways of doing things and offer resistance to innovation.

The citizens of a DPPS society could solve this problem by establishing an Innovation
Facilitation Board (IFB), dedicated to the promotion of innovation throughout the economy. 16
The IFB would be given substantial financing from the central treasury. It would take
applications from enterprises, informal groups, or individuals that wanted to work on inventing a
new product or process or to engage in the development stage of an innovation. It would be able
to make grants covering a long enough time period to provide a chance of success.

Determining the membership of the IFB represents a serious problem for DPPS. If the
IFB included representatives of all the constituencies that are affected by innovation, this would
be likely to subvert its intended function. Major innovations typically have victims, and the
potential costs may be more apparent than the potential benefits when the innovation is still at an
early stage. 17 A simple application of the principle of wide representation might block the
development of new products and processes before their potential benefits became apparent.

In order to be capable of carrying out its mandate, the IFB would have to be constituted
as an independent board, perhaps made up of consumer representatives and experts of various
kinds. Such a departure from the usual practice would be consistent with the underlying principle
of DPPS, as long as the final decision to implement an innovation rested with a representative
board. The IFB would facilitate and encourage the invention and development stages for new
products and processes. It seems justified to protect the early stages of innovation from a final
social decision, until it has been developed to the point where a well-informed judgment can be
made about benefits and costs.

However, the decision to implement an innovation should have to pass the test of the
system’s core process of evaluation by, and compromise among, all affected constituencies. This
calls for a second institution, an Innovation Approval Board (IAB). It would be constituted in the
usual way, with representation of all relevant interests. Its role would be to determine whether a
proposed new product or process, which emerged from a grant from the IFB, should be given the
green light for production/introduction.
(cont)

While contemporary capitalism does place some after-the-fact restraints on socially
harmful innovation, through state regulation and individual or class-action lawsuits, DPPS would
place social interests at the heart of the innovation process. While the research and development
stages of a potentially harmful project could not be readily blocked by opponents, the project
could not be implemented, and the costs actually imposed, without social approval. Furthermore,
those engaging in invention or development on an IFB grant would know the criteria by which
the implementation of the innovation would eventually be judged by the IAB, which should have
a positive impact on the direction of invention and development.

A remaining problem is the possible need to allow an existing enterprise to enter a new
line of production, or to permit the founding of a new enterprise, in order to implement a major
innovation. This might encounter resistence from existing interests. To avoid this problem, once
the IAB has given its approval, the innovators should have the right to request permission to start
a new enterprise, or enlist an existing enterprise to move outside its previous line of work, in
order to implement the innovation. A decision to grant such a request might require a joint
meeting of the IFB and the IAB.

The social effectiveness of innovation under DPPS should be free of each of the five
problems of capitalist innovation cited above. Innovation would not be directed
disproportionately to satisfy the rich, since there would be no rich class, nor would profits from
sale guide innovation. The balance between innovation in public and private goods should reflect
the citizenry’s priorities, since representative bodies would allocate innovation resources
between the two types of goods, and the incentives for innovation should operate equally for the
two. External benefits and costs, including those affecting workers and the environment, should
be fully considered by the representative boards that make decisions about the introduction of
new technologies and products. Such decisions would not face the pressure to impose costs on
third parties that results from competitive profit-seeking. There would be no problem of
monopoly pricing restricting the application of innovations and no waste of innovative effort due
to oligopolistic competition.

The three problems that undermined the effectiveness of innovation under state socialist
planning should be absent from DPPS. No Politburo officials would dictate priorities for
innovation. Instead, democratic decision-making would determine the amount and allocation of
innovation. The waste-generating disconnection between R&D Institutes and enterprises should
not be present in DPPS, since horizontal relations among institutions would be strong. If R&D
Institutes were designed as part of the innovation system of DPPS, then cross representation
between them and the enterprises should permit an effective interface between the two types of
institutions. Last, the causes of the severe external costs of innovation under state socialism – a
single-minded focus on growth of output and a lack of democracy – should not characterize
DPPS.

Our conclusion is that the basic defining institutions of DPPS are generally favorable for
innovation, but these institutions alone would not be sufficient to guarantee successful
innovation performance. By adding the set of additional institutions and policies mentioned
above, DPPS should display an innovation performance far superior at meeting human needs to
that of either capitalism or state socialism. Of course, such a system would not guarantee that
every innovation would contribute to human welfare. It is not always possible to predict in
advance what the eventual consequences of a new product or process will be. However, such a
system would be far superior to earlier systems at making such decisions.
(cont)

It is uncertain whether human society will always engage in rapid innovation. If a future
advanced DPPS some day achieves a comfortable living standard, satisfying work of limited
duration, and the economic supports necessary for a fulfilling community life for all, then its
citizens might decide that they prefer a stable, sustainable economic level without continuing
change in economic life. At that point, the human creative impulse might turn entirely to non-
economic pursuits. However, such a choice would not be likely as long as pockets of poverty and
material deprivation persist, nor would it be feasible as long as DPPS is compelled to compete
with capitalism.

aaaaaaand done

I've actually been waiting years to post that pdf and the calculation in natura ones which I linked when I started the Soviet Cybernetics thread. I'm so glad that I've finally found a community where I can post this stuff and get replies on it!

No thoughts on Kotz's work?

Serious discussion takes a while m8. I promise I will have a response to this by tomorrow.

We should keep this thread bumped, since this is the first time I have seen it. Might get more responses that way.

Thanks lad.

I think the idea to abolish division of labour is really utopian and not really needed. Firstly, there are certain profession where you need a lot of training and practice (e.g. surgeons for difficult stuff), and the people in these professions should be doing this full-time. Secondly, I don't think most people would like this in the first place, there are people who don't want to do managing tasks, and others who don't want to do physical labour.

Thinking you can abolish division of labour and keep the productivity level is ridiculous and, given that the author himself argues that the new system will have to prove itself against capitalism, I don't think it really is viable.

The analysis of capitalism/real existing socialism seems to be alright. His proposal with the different innovation boards etc. seems to be prone to fall in a similar trap as the Soviet Union (bureaucratic overhead etc.). I, personally, think however that some kind of bureaucratic system isn't even that bad, since it can be done in an efficient and transparent way with modern technology. It's actually an argument that Soviet-style economic planning ceased to exist in 1990 exactly when it's time to shine was coming - digitalization potentially makes these large bureaucracies much more efficient and more transparent. Of course the lack of democratic structures in the SU would have been a problem - but I think we all (and the text as well) argue for democratically controlled economy anyway.

I find this section to be extremely idealistic for the following reasons.

– industry boards and local and regional negotiated coordination bodies – that have
representation of all affected constituencies, including workers, consumers, suppliers, the local
community, and even “cause” groups such as environmentalists, job safety activists, feminists,
etc. These bodies would arrive at decisions through compromise among the interests represented
on them. In addition, the basic units of social production, or enterprises, are considered social
property and have governing boards that include representatives of all groups affected by the
activity of the enterprise, including workers, consumers, suppliers, and the local community.
Third, each individual would be expected to spend part of her/his work life in each of the
main types of labor, which Devine defines as planning and managing labor, creative labor,
nurturing labor, skilled labor, and unskilled/repetitive labor (Devine, 1988, 171). This would
eliminate the social division of labor, while preserving the technical division of labor with its
efficiency advantages.
on them

First off, the only functional difference between this system and a capitalist society in which every distinct use value is monopolized by a single company is democracy. Kots inserts democracy as a way to ensure that the company produces for the people. Market economies by contrast are more akin to a patchwork of republics (or monarchies). One votes for representatives (with the wallet) who then take care of the business. One has little say in what goes on after the “election” is finished. The only right in such a system is the right to never do business with any particular entity ever again. The efficiency gains of republics are obvious; if everyone was busy pouring over legislation and constructing an informed opinion, nothing would get done. That is to say, the division of intellectual labor is a precondition for advanced society. It follows that your interest boards must adopt a republican model at the very minimum. However, if that is the case, then any functional difference between his model and actually existing capitalism evaporate. Even worse, we no longer even have the option to exit the board, but must fight to change it internally. Politics slows commerce down, extending politics to all of society thereby brings time to a stop.

The representative mechanism is flawed for several reasons. First, “interest” is not defined rigorously and probably never will. At the minimum, conflicts of interest will arise which must be solved by politics in this society. Second, the industry board will have to invest significant capital in ensuring “equal representation.” Failure to do so leads to regression to Darwinism, as the groups most able to pursue their interests outplay those who cannot. Third is that interests do not grow linearly with respect to population, but hyperbolically. If managing these “interests” can be thought of as a computation problem, then hyperbolic growth ensures that the problem quickly becomes unsolvable, no matter how much computing power you are given. In order to manage these complexities, the board will have to devote more of its time towards negotiating between the different factions instead of doing its job. Contrast this with an exit based system, where the individual does the negotiation with himself, allowing the various competing groups to focus on their product. Some form of regulation of course helps negate the other extreme case, in which companies focus on psy warfare instead of production. But the objective is not to recreate the current existing order, but to revolutionize it.

This actually a critique of the rest of the essay. Kots frequently claims that innovation and other factors will be “socially decided” by democracy. However, the inability of an individual to comprehend the complexity of society and the temporal limit placed on him means that individuals, in order to control society democratically, must delegate issues to experts. These experts are experts by virtue of possessing knowledge that the average person cannot acquire for some reason. This is the iron law of complexity. Social democratic control therefore rapidly returns to technocracy or some other undemocratic system, in which experts leverage their knowledge differential to claim power for themselves. Debating how the elites manage their rule is therefore pure window dressing, since the real question was always how to bring them under our control.

will respond to this when I get back later
age

nice quads