Monday, April 8, 2019

Socialist Monetary Policy

Consider a command economy that doesn't fully dispense with money but rather pays wages to the workers in all of the nationalized industries and charges them prices for the consumer goods they buy in the various government owned and operated shops and stores.   In other words, they are not quite ready to have people show up for work according to their perceived abilities and take away consumer goods and services as they need them.   Those who fail to show up to work don't get paid, and those who don't get paid cannot buy consumer goods and services in the shops.

In capitalist economies, monetary policy is typically managed by adjusting policy interest rates.  For there to be interest rates there must be lenders and borrowers.   The lenders earn interest income from the money they have accumulated and lent.   They are earning income from property and not labor.   This is exploitation and inconsistent with socialist principles.

However, in a socialist economy money can simply be printed up and paid out as wages and then retired when it is spent on consumer goods and services.  If money is credited and debited to deposit accounts of workers as they are paid and spend their incomes, then the creation and destruction of money would be literal.   If wages are paid in currency and then paid over to government shops, it would be silly to shred currency when received and print it anew.   Currency would need to be collected from the retailers and then distributed to the various agencies and departments employing workers.    Worn bills would be shredded and new currency printed as needed.

Would this system result in inflation?   It would only create inflation if the government chose to raise the prices it sets for consumer goods and services in its shops.   Inflation would be a choice by the government.

What could happen is shortages of consumer goods and services at the prices set by the government.  This depends on how many consumer goods and services are produced but also by the workers as they choose what and how much they buy.

It would be possible to correct a shortage by raising prices resulting in inflation.   However, those shortages could also be corrected by reducing the wages workers are paid.   And finally, it would be possible to expand the production of consumer goods and services, perhaps by shifting resources from the production of additional capital goods, consumer services provided without charge like medical care or education or still other goods like domestic security or military preparedness. 

A socialist system would have no role for a "monetary policy" based upon the manipulation of interest rates.   And while there is a quantity of money outstanding at any time and a demand to hold it by workers, it is doubtful that the quantity theory really applies.   There is noting like gold mining or even trade surpluses resulting in additions to a stock of gold.   Further, the usual vision of "velocity" of money being spent, received, and then spent again would play little role in a system where for the most part money is created to pay workers' wages and then received by government shops and extinguished.

Now, the socialist system described above does allow workers to save.   They can simply accumulate currency or else balances in deposit accounts.   To the degree there is saving, the money created by the payment of wages will exceed the money absorbed by the sale of consumer goods and services.   Saving would involve lower demand for consumer good and services than if there were no saving.  That would allow resources to be devoted to the production of capital goods, expansion of products distributed at no charge like healthcare or education, or the military or security services.

If deposit balances are used, it would be possible to pay interest on those balances.   This would mean, of course, that workers who saved would earn income on their property, which is contrary to socialist principles.   Leaving that aside, such interest might encourage saving and so free up resources from the production of consumer goods and services to allow the production of additional capital goods or perhaps expand "free" social services or even military or policing.    Interestingly, if additional capital goods are produced, this could allow for an increase in the production of consumer goods in the future, providing additional goods and services for the workers who saved and earned interest to buy. 

Further, if a shortage of consumer goods and services were to develop, paying higher interest on deposits would encourage saving and correct the shortage without the need to raise prices or lower wages.    Inflation would be controlled by higher interest rates to the degree it encourages saving.

Collecting taxes on wages, of course, is just another way of describing a decrease in wages.   Collecting some kind of sales tax on purchases is simply another way of increasing prices.  In fact, aren't the prices paid for consumer goods and services really just a tax for taking the various consumer goods and services?

Perhaps these principles can be applied to understanding the monetary system of a capitalist system?   Or, more to the point, the transition of a capitalist system to the new socialist order! 

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