[OPE-L] Venezuela and Socialist Economic Policy

From: Paul Cockshott (wpc@DCS.GLA.AC.UK)
Date: Mon Jul 02 2007 - 17:48:31 EDT

In 1989   Allin Cottrell and I wrote a book on socialism which was published three years later in English as Towards a New Socialism. This book was addressed at an audience in the USSR and East European countries because it dealt with the problems that socialism was then facing in these countries. It had been the intention to have it translated and published in Russian. The book presented a model of how to run a socialist economy based on clear economic and moral principles and re-asserted the basic values of socialism against the pro-capitalist measures being introduced under Gorbachov.  Events moved to fast to allow the to come out in Russian before the USSR fell, but since then what it says has been recognised to be sufficiently important that publishers in Sweden, Germany, Czechoslovakia and Venezuela have published translations under a variety of national titles.

In June 2007 at a workshop in Venezuela to launch the Spanish translation entitled Hacia el socialismo del siglo XXI, I was asked how the principles in the book could be applied to the process of establishing socialism in that country.  

Clearly an economic model designed to answer the problems of a mature socialist industrial economy like the USSR can not be applied immediately to Venezuela. What it can do, is give people some idea where the process of socialist transformation may end up. It can warn them about avoiding some economic mistakes that were made in the USSR and Eastern Europe: for those who do not learn from history are doomed to repeat it.

When a society undergoes a transition to socialism there are decisions that have to be made, forks in the road that have to be chosen. If the wrong set of turnings are chosen, you can end up going in a circle. Starting off going towards socialism, you can end up on a path that eventually leads back to capitalism. We all know that this happened in several 20th century attempts to go towards socialism. The worst thing is that the implications of decisions are not immediately obvious at the time they are made. This means that, almost up until the last moment, people can think that they are still on the right course.

This is not the place to repeat what was said in the book Towards a New Socialism, but let us summarise the 3 key features of the mature socialism that it describes:

1.The economy is based on the deliberate and concious application of  the labour theory of value as developed by Adam Smith and Karl Marx. It is a model in which consumer goods are priced in terms of the hours and minutes of labour it took to make them, and in which each worker is paid labour credits for each hour worked. The consistent application of this principle eliminates economic exploitation.

2.Industry is publicly owned, run according to a plan and not for profit. Stage retail enterprises for example, work on a break even rather than profit making basis.

3.Decisions are taken democratically, both at a local and a national basis. This applies in particular to decisions about the level of taxation and state expenditure. Such democratic decision making is vital to prevent the replacement of private exploitation with exploitation by the state.

When we compare this with Venezuela today, we see that all three key features still need to be built. On some features the progress towards socialism has not yet started, on others it has started but the country has only taken a few steps along the path.

Let us look at these points one at a time.

Still a money economy
The Venezuelan economy is still based on money. In his great book Capital, Karl Marx showed how money was at the root of the evils of capitalism. The essence of capitalism is to start out with a sum of money at the beginning of the year and end up with a larger sum at the end. Marx denoted this by M>M',  where M might be $1,000,000 for example and M' might be $2,000,000. 
Because capitalists have more money than working people, they can use this money to hire workers to work for wages.  These wages are much much less than the value which workers create during the working week. Since the capitalist can sell the product for more value than they paid out in wages, the capitalists become richer and richer whilst workers stay as poor as ever.
This process is still going on in Venezuela. It is the root cause of the difference between rich and poor, between the oligarchy and the masses.
On top of this there is a secondary form of exploitation that allows capitalists to increase their money: lending money at interest. This process allows the money-lender to get richer year by year by doing absolutely nothing. This again, still occurs in Venezuela.
Still an unplanned economy
In Venezuela, unlike for example the USSR, the supply of most goods and services is regulated by the market. Whilst this is not entirely a bad thing, since it does, to a limited extent allow supply to be adjusted to peoples wants, the drawback is  that the provision of goods and services is systematically biased towards the wishes and desires of the rich. Venezuela currently lacks the mechanisms by which the structure of the economy as a whole can regulated by a concious social plan both to achieve development and to equitably meet the needs of all citizens.

Towards a New Socialism, assumed public ownership of the economy. Most of the economy in Venezuela, is still privately owned, although this may be changing now.
Democratic revolution not yet complete
Whilst Venezuela has made great strides towards local participative democracy, it has yet to introduce participative democracy on key questions of national economic control. Issues relating to the raising of state revenue and the allocation of this revenue between major budget headings : defence, social care, infrastructure investment etc, are taken centrally rather than allowing the people as a whole to vote on them. If this is not addressed, it will in the long run, as the state comes to dominate more and more of the economy, be a serious danger. You could end up with a situation as occurred in the USSR where the state, and the bureaucracy of the state could be seen as being  rather like a new exploiting class. 

When we think of what happened in the USSR just before it collapsed, the desire of state bureaucrats to go from being like an exploiting class, to become outright capitalists like today's Russian oligarchs, must be counted as a key factor in the collapse.

How to effect the transformation

The great economist Keynes remarked that practical political men, whether they be cautious or bold, fond themselves unconsciously repeating the ideas of long dead economists. Politicians who advance neo-liberalism, whether they know it or not, are repeating the ideas of the reactionary Austrian economists Ludwig von Mises and von Hayek. The policies that we suggest below counter those ideas by drawing on the insights of others particularly the Scottish philosopher Adam Smith, the German economist Karl Marx, the Polish socialist economist Oscar Lange and the Englishman Maynard Keynes.
As economists and social scientists we can only sketch out possible courses of action and some of their likely consequences of these actions. Decisions on what course to take are essentially political and political community, the leaders and the citizens of the country concerned are responsible for their own destiny. What intellectuals can to is to suggest possibilities which influence the terms of debate.
In the last section we looked at key objectives in the socialist transformation of an economy and the extent to which they have been met in Venezuelan experience. We will now shift the focus to specific policy measures, which we will present one by one and whilst explaining how each of these  helps to achieve the broader objectives we have described.
Currency stabilisation
There is, by world standards, a considerable degree of inflation in the Venezuelan economy. This is masked by administrative measures to stabilise prices of certain essentials of life but it is nonetheless real. Of itself, inflation is not necessarily against the interests of the poor and working classes, provided that wages keep up with prices. The people who are hit hardest by inflation are the rentier class whose holdings of money and interest bearing assets depreciate. Since these people are opponents of socialism anyway, a socialist government need not worry about any financial loss they suffer were it not for the other social effects of inflation.
Uncertainty about future prices can lead to a social psychology of instability leading to a loss of confidence in the government. We explain in an annexe how this sort of inflation played a role in the collapse of the USSR. For this reason alone, it will eventually be necessary for the Venezuelan government to take measures to regulate inflation.
However, if ones objectives are to establish a socialist economy based on the equivalent payment of labour, then currency reform can be a step towards this goal.  What we suggest is that, following the introduction of the new strong Bolivar, the state place a legal obligation on the central bank to maintain a stable value of the currency in terms of labour1.  A prototype for this could be the successful monetary policy of the British Labour Government after 1996. At that time the government placed monetary policy under a committee of expert economists ( The Monetary Policy Committee) rather than politicians and gave them a clear legal obligation to achieve a particular target rate of inflation. One might have expected this policy to be severely deflationary, but it has actually been very successful, because committee are legally obliged to avoid both deflation and inflation in their policy.
Where our proposal differs from British policy is in the goal it sets  we advocate fixing the value of the Bolivar in terms of labour not in terms of the cost of living index. The reasons for this goal are twofold:
1.As labour productivity rises, a Bolivar fixed in terms of hours of labour, will be able to buy more each year, cheapening the cost of living.
2.Once the value of the Bolivar has been stabilised in terms of labour, then the labour value of Bolivar notes should be printed on them in hours and minutes. This step would be an act of revolutionary pedagogy. It would reveal clearly to the oppressed just how the existing system cheats them. Suppose a worker puts in a working week of 45hours and gets back Bolivars and sees that the hours printed on them amount to only 15 hours, then she will become aware that she is being cheated out of 30 hours each week. This will act to raise the socialist consciousness of the people, and create favourable public opinion for other socialist measures.
Instead of just having a committee of economists charged with regulating the value of the Bolivar, the principle of participative democracy implies that the Value Policy Committee should be made up both of economists and delegates from the trades unions and consumers associations. The Value Policy Committee would have to commission surveys of how much work was being done in different industries, and how much monetary value added there was in these industries, in order to guide its stabilisation policy.
Reform of accounting and pressure for fair prices
All firms have currently to prepare money accounts, The government should make it a condition of their accounts being approved for auditing, that they also produce labour time accounts. and that they mark on all products that they sell their labour content. 
Initially firms need not be legally obligated to sell their commodities at their true values. They could attempt to sell them for a price that is higher or lower than the true value. But since the consumer can now see when they are being overcharged, consumers will tend to avoid companies that sell goods at above their true value. This will put psychological and consumer pressure on companies that are overcharging. This too will be an act of socialist mass pedagogy to raise consciousness.
In the first few months, before all goods have their labour values printed on their price tags, firms will have to impute labour values to the goods they purchase using the  printed exchange rate between Bolivars and labour hours. The will add to the labour value of their inputs, the number of hours of work that are performed by their employees to get a labour value for the final product.
We mentioned earlier the need to establish labour accounting in industry for pedagogic purposes. The  government should also move towards having a dual system of national accounts, labour accounts alongside money accounts because, at the level of national economic policy, there are many issues on which labour accounts would be more informative than money accounts. Money accounts hide the fact that what government economic policy really does is re-allocate society's labour. Money is the veil behind which real labour allocation occurs.
Enshrine the rights of labour in law
Scientific evidence shows that in the capitalist world the money value of goods is overwhelmingly determined by their labour contents. Studies find that for most economies the correlation between labour values and prices are 95% or above. So Adam Smiths scientific hypothesis that labour was the source of value has now been statistically verified.
This scientific fact should be incorporated in law. 
The law should recognise that labour is the sole source of value and that in consequence, workers, or their Unions will have a claim in law against their employers if they are paid less than the full value of their labour.
If we consider the previous measures and the revolutionary pedagogy that would follow from them, it should be relatively easy to pass a referendum on such a law.
Following such a law being passed, there would be a huge wave of worker activism as workers and their unions sought to end the cheating and deceit to which they and their ancestors had been subjected. It would also bring about a very large increase in real wages, cementing support for the socialist government.
The employing class, on the other hand would see sharp fall in their unearned incomes. Employers who were active factory managers would of course still be legally entitled to be paid for the hours that they put in managing the firm, just like any other employee.
The cumulative effect of the three measures outlined so far would be to substantially abolish capitalist exploitation in the workplace  at least in the short term. There will be long term difficulties if other measures are not taken, and we shall examine these later.
Eliminating other forms of exploitation
In addition to the exploitation of employees by employers, there are other forms of unearned incomes, the most economically important of which are interest and rent.
Interest, the getting of money from money itself, was regarded for thousands of years as being sinful. Philosophers like Aristotle condemned it. Papal encyclicals banned it. Islamic law still forbids it in Muslim countries. But in capitalist countries, such was the social power of the banks and other money lenders that this moral objections came to be forgotten.
In capitalist countries which were undergoing very rapid industrialisation, for instance, Japan in the 1950s or 1960s, lending money at interest did serve a necessary economic purpose, since it allowed peoples savings to be channelled, via the banks, to fund industrialisation. But once a country has industrialised, firms finance most of their investment from internal profits. Indeed they normally have more profit than they know how to invest. Instead of borrowing from the banks, industrial firms run a financial surplus, and they themselves lend to the banks. The banks now channel  the  financial surplus of firms into loans to the third world, or to Northern governments and consumers. Lending at interest looses the  temporary progressive function that it had during industrialisation and reverts to being what morality and religion originally condemned : usury.
Socialism abolishes interest as a form of income. It has no class of rentiers  people who do no work but just live off the interest on their money. So it is clear that at some point, that a government seriously intent upon socialism has to pass a legislation banning the lending of money at interest. It could specify, for instance, that interest on debt could not be enforced in the civil courts. It could impose severe criminal penalties on those who used threats of harm to extort interest.
Before moving to a step such as this, a socialist government needs to put in place replacements for the economic functions still served by lending, and charging interest.
It will still be necessary to fund new investments. This could be done by interst free loans from the state bank. But if this is not done with care, the resulting expansion of the money stock will lead to the type of suppressed inflation which occurred in the USSR. 
Investment on credit is based on the illusion that you can push the cost of investment into the future. Whilst this can be true for an individual borrower, for society as a whole,  today's investment has to be made using today's labour. We can not get future generations to travel back in time in order to do work for us. Socialist economies should thus rely mainly on tax revenue to fund investment.
Regulating price levels
Capitalist central banks try to control inflation by adjusting the interest rate. If inflation is too high, they raise interest rates. The effect is to choke off investment, reduce demand, and so reduce inflationary pressures. If interest is banned, how is the price level to be regulated ?  or, in the light of what we said earlier  how would the Venezuelan Value Policy Committee ensure that the value of the Bolivar in terms of labour was held steady?
An alternative control mechanism would be to adjust the term on which loans are made. The state bank could set maximum durations for loans. For example, if the Value Policy Committee thought the value of the currency was in danger of falling it could shorten the period for which loans could be had. If loan periods were reduced from 10 year to 5 years, then monthly repayments rise, just as happens with interest rate rises today.
Another means of regulating prices is tax policy. Paper money, like the Bolivar, is inherently worthless  just printed paper. It has value imputed to it, from the fact that the government will accept its own currency for tax debts. The fact that people need money to pay their taxes, forces them to value it. If governments tax less than they spend, the money stock will rise leading to inflation. The second way to regulate prices is thus to fine tune tax levels.
Rent is another type of exploitation. Socialists regard it as immoral since the owner of land enriches himself, not by his own labour, but by the labour of others combined with the bounty of nature. Rent is however an inevitable phenomenon in a commodity producing society. If there is some product, be it crude oil, or corn, the efficiency whose production depends on the land being used, then rent incomes will arise.
Suppose the price of a ton of corn is $200, then any land on which the corn's cost of production is less than $200 will be worth cultivating. By the cost of production we mean the ultimate labour cost translated into money  including the cost of fertilizers. If land will yield corn at a cost of production of only $50  say because of its great fertility  then its owner can rent it out to farmers for $150 and they can still break even selling corn at $200. The same applies to oil production. If on the marginal oil field  say the tar sands of Athabasca in Canada, oil can be produced for $50 a barrel, then a productive oilfield like the  Venezuelan where costs are much lower, say $15, will yield its owner (the state in this case) a rent of $35 a barrel.
In a socialist economy all  rent income should accrue to the state and be used for the good of the community in general. Socialist states have usually nationalised land, but have not always charged   a rent for using the land. In the case of mineral extraction this made no difference, since this was done by state enterprises and rent would just have been a fictitious transfer between sections of the state. Failure to charge agricultural rents to collective farms will, however, accentuate differences in income between fertile and less fertile agricultural regions. 
In the immediate situation in Venezuela, the nationalisation of land may not initially be politically opportune since it could drive the small farmers into alliance with large landowners. An alternative, which over the long term would produce a similar effect, would be to introduce a land tax on the rentable value of land. The threshold for the tax could be set high enough to ensure that small farmers paid nothing or only a token amount, but for larger more fertile estates it could be set at a level that would confiscate the  greater part of  rent revenue. The effect on the landowners would be similar to that which would be achieved by nationalisation  depriving them of their unearned income and making it available for communal uses  but it is ideologically harder for them to mount a  campaign to justify tax evasion than it is to mount one to justify resistance to expropriation.
State finance and foreign currency
This brings us onto the general topic of state finance.
Socialist economies typically have a higher level of state expenditure than capitalist ones at a comparable level of economic development. It is essential that the state has an efficient revenue raising mechanism, with taxes that are easy to collect and difficult to avoid. Venezuela is unusual in having large oil exports, which helps somewhat, but the principle still remains.
Social democratic states like Sweden relied mainly on income taxes along with an efficient civil service. East European socialist states like the USSR relied upon turnover taxes on industry and on profits earned by state firms. Because of the importance of oil revenue to the Venezuelan state, it currently leans more towards the Soviet model.
Which of these models of tax revenue should be used is one of the major strategic issues that has to be faced by Venezuela  as it moves towards a socialist economy.
In their book Towards a New Socialism, Cottrell and Cockshott argue that the Soviet model of taxation had several drawbacks, which, in the long run, contributed the final collapse of the Soviet socialist economy. 
1.The use of indirect taxation, such as turnover or value added taxes2, and a-fortiori a reliance on profit income, puts the state in the position of being a collective capitalist vis a vis the workers.
2.The use of indirect taxation, has also traditionally been opposed by socialists as these  are regressive rather than progressive forms of taxation3.
3.It resulted in a distorted price structure that systematically undervalued labour to the detriment of economic efficiency.
4.Reliance on the profit of state industry is a hidden form of revenue, which is not easily amenable to democratic control.
In the case of Venezuela there is the additional complicating factor that profits from oil revenue are dependent on the very volatile world market price of oil. This can cause unexpected fluctuations in state revenue. The recent sharp rise in oil prices has been very beneficial to the government, but it must be remembered that prices can go down as well as up.
It is said Venezuelan government has plenty of money thanks to oil, but it is  important to understand in what sense it has plenty of money. What it has is plenty of dollars. These are fine  if the government wants to directly purchases manufactured commodities made in other countries. Dollars are also fine for giving aid to other countries. But dollars are no use for paying the wages of government employees or when the government wants to buy domestically produced goods, for these the government needs Bolivars not dollars.
The government can get Bolivars in several ways:
1.It can raise them from taxes.
2.It can issue bonds denoted in Bolivars and sell these on the money markets.
3.It could purchase Bolivars on the open market using it's dollar reserves.
4.It can get the state bank to extend it credit.
The fact that the black market rate for the dollar is well above the official rate, and that there is significant inflation indicates that the state has been relying excessively on the last of these  methods of finance.

It must be realised that dollars can not be used to meet  a shortfall of tax revenue in Bolivars so long as foreign exchange controls are retained. Dollar revenue can only be freely converted to revenue in Bolivars by the state buying Bolivars on the open market. This in turn implies that Venezuelan citizens would have to be free to sell dollars in the open market.
It is understandable that the government maintains exchange controls to prevent the upper classes expatriating their Bolivar assets, and in the process using up the government's foreign exchange reserves, so there is obviously a dilemma here. This dilemma indicates that the government has not yet felt itself to be strong enough to face down the economic power of the oligarchy. We could suggest two possible policies under these circumstances:
1.Increases in higher rate income taxes and abolition of tax exemptions sufficient to fund government domestic expenditure from domestic tax revenues.
2.More radically, a sharp reduction in the amount of privately held Bolivars could be brought in along with the projected currency reform. If there was a limit to the amount that any one person could change from old Bolivars to new Bolivars  for instance this might be set at a certain number of months of average wages  then the money capital of the rich would no longer be sufficient for them to threaten the states foreign exchange reserves following the removal of exchange controls. It would also incidentally greatly reduce the social power of the capitalist class.
Each of these policies has obvious political risks involved, which have to weighed against the futur benefits of a more stable system of public finance.
Foreseeable consequences
The policies described above would go a long way to transforming the economy into a new socialist one. However, since they undermine what are important functional components of capitalism there would be consequences if alternative mechanisms were not put into place.
Ending the production of surplus value by paying workers the full value they create would make employment unprofitable. There is a danger under these circumstances that capitalists would find it more profitable to leave their money in the bank and earn interest on it than use it to employ workers. 
It would thus be important that the payment of interest was abolished prior to introducing the right to the full value of labour. 
It would might well also be necessary to introduce the right for employees to be able to vote for their firm to be co-managed with a co-management committee having a clear majority of employees on it, in order to prevent owners asset stripping and closing the now unprofitable firm.

Paul Cockshott


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