On the (Im)possibility of Market Socialism

This paper explores the question of whether socialism and inflexibility are interlinked and hence, whether a Market Socialism is at all feasible. The linchpin in this thesis is the capital market, coupled with what Kornai has termed the "soft budget constraint." The commitment to social ownership of capital is a commitment to an exclusion of the private sector from the ownership of productive resources. It puts the firm under the control of a public hierarchy, and the key question is whether this hierarchy can simulate the capital market. It is argued that this cannot be done. This impossibility leads to the soft budget constraint. The firm is then freed from the need to fight for its continued existence through the unceasing search for profits. As a result, it becomes less sensitive to market signals, its supply response to price changes and to changes in demand is less elastic and, as a result, the hierarchy finds it necessary to balance the market.Socialism