Capitalist markets block social foresight

In his book Revolution Betrayed, evidently thinking through lessons from “war communism” in 1918-21, Trotsky argued that a workers’ government (and not just in poverty-blighted Russia) would for a long time use goods and services markets to signal costs, but would push aside financial markets.

“The budget and credit mechanism is wholly adequate for a planned distribution of the national income. And as to prices, they will serve the cause of socialism better, the more honestly they being to express the real economic relations of the present day”.

Even in bourgeois economic writing, the theories ( Arrow-Debreu, etc.) about the efficiency of markets are mostly limited to exchanges at a given time. (Arrow himself was a socialist). Much of economic life, though, is about activity which cannot be assessed immediately by those markets — large-scale, long-term projects, public works.

Marx was one of the first economists to show that capitalism depends on large-scale credit and financial markets.

According to the standard story, these work to scoop up small savings into sizeable stashes which can then be invested efficiently, through transactions which exchange not money for goods, but immediate cash for titles to future cash (dividends on shares, bond interest payments).

In fact those financial markets — where bourgeois theories about optimality, though they exist ( Malinvaud, Bliss), are thinner — operate as gambling dens where the wealthy vie to redistribute surplus value among themselves.

They are endemically short-termist. Capitalist bosses have to gear to paying dividends, sustaining share prices, or repaying “venture capital” funds, within a few years. Governments have to sustain the market price of their bonds (IOUs). The British government now, for example, pays out about £100 billion a year in interest on its bonds, and worry every month about what price it can get for new bonds.

Long-term public provision, or ecological sustainability, are constantly pushed aside. Ecological sustainability doubly so, because that depends on world aggregates. Each capitalist firm or government has an incentive to cash in for themselves, short-term, even if they know that the total of such short-term choices will be destructive world-scale and longer-term.

A workers’ government will suppress financial markets, and direct investment according to transparent, far-sighted, and common-good criteria, decided democratically.