Robin Hahnel Interview on Participatory Economics – Part 3 – Worker Councils, Efficiency, Labour Cost, Automation

Editor’s note: discussion topics include what production targets for individual production units benefit society as a whole the most in a Participatory Economy (parecon), how to calculate the cost of labour in parecon, how to determine pay for workers in parecon, the role of automation in parecon, unemployment in planned economies vs. market economies, and whether parecon is incentive compatible with efficient use of automation.

[After the Oligarchy] Hello everybody, this is After the Oligarchy. Today I’m speaking with Professor Robin Hahnel.

Robin Hahnel is a professor of economics in the United States, co-founder with Michael Albert of the post-capitalist model known as Participatory Economics (Parecon), and author of many books.

Today’s conversation is in association with meta: the Centre for Post-capitalist Civilization. This is the first in a series of interviews with Professor Hahnel about Participatory Economics, and in particular his latest book Democratic Economic Planning published in 2021. If you haven’t watched the first interview check out Part A and Part B here.

It’s an advanced discussion of the model proposed in that book so I recommend you familiarize yourself with participatory economics to understand what we’re talking about. You can do that by visiting participatoryeconomy.org. You can also read Of the People, By the People for a concise introduction to parecon.

The discussion will also continue on the forum of participatoryeconomy.org.

Robin Hahnel thank you very much for joining me.

[Robin Hahnel] Great to be with you. [Music]

[ATO] We were talking about worker self-management there at length, and there’s been a lot of talk of social cost and social benefit, and production proposals, and how the social interest is factored into the formulation and revision of production of proposals through this calculation of social benefit and social cost.

So, let’s dive into that with this question, and the question is: you made the point that if a workers council makes a proposal, as long as the social benefit that is produced by that proposal, and calculated, is at least equal to the social cost of that proposal – for the labour, the different resources, the capital goods, the pollution it generates, and so on – if those are at least equal, at parity, then at least people are no worse off because of it, right? And so the question is: are worker councils always aiming for social benefit divided by social costs is equal to one (SB/SC = 1)? Surely there is no progress unless the social benefit is greater than the social cost, in the long run, say. Would it not be desirable if the aim was for the social benefit to be much greater than the social cost? Representing getting much more out of much less. And if so, what will drive worker councils to achieve this? So it’s two questions there.

[RH] My answer is going to be very economics-y, okay?

[ATO] Sure.

[RH] And when you sent me these questions in advance, and when I looked at this series of questions, I realized ‘oh my god’.

When we teach economics classes and we teach ‘well, how would a profit-maximizing firm decide whether to use more of some input?’, what we say is, well, if when we use more of the input the increase in revenues is higher than the increase in costs, then the firm will keep doing it. And we come up with this rule which basically says a profit-maximizing firm is going to keep using every input right up to the point where the last unit that it used generated an increase in revenue that was exactly equal to the increase in cost.

And then the students will eventually ask me – some bright student in the class at some point will raise their hand and say – ‘well then why did the firm use that last unit?’. And my answer is we don’t really care if it used the last unit. It’s just a little thought experiment so that we can show that it wants to use every unit that generates a little more in revenues than it does in cost. It doesn’t want to use any units that would increase cost more than revenues.

And what you’re asking me is: that marginal unit should I use it or not? And what I’m saying is that’s not the point. So, part of my answer to your question is: when we say that we want workers councils to keep doing what they’re doing right up to the point where the social benefits equal to social costs, it is the same kind of reasoning. What if the social benefits were still greater than the social costs of doing something? Well then we should want that council to keep doing more of it. Whether it does the last little bit isn’t really the point.

Now here’s the second place where things are going to get a little economics-y. One of my criticisms of the usual teaching of microeconomic theory about capitalism is that that’s actually not what profit-maximizing firms do.

[ATO] Yes, yes, yes, yes.

[RH] And they don’t do that because if you keep buying units all the way up to the point where the increase in revenues that comes from it is no bigger than the increase in cost, you haven’t earned any profit on that last unit. And what profit-maximizing firms actually do is they basically have an expected rate of profit. So they’re not going to keep using inputs unless … They’re going to stop whenever the increase in revenues is not only as large as the increase in cost but it’s a little bit more. That gives them that standard rate of profit that they’re insisting on.

And this has been one of the things I’ve always loved about Sraffian economic theory compared to mainstream neoclassical economic theory. Sraffian economic theory basically says: look, in economies there’s a going rate of profit, and that’s rather arbitrary; when the workers’ bargaining power is high, the standard rate of profit will be low; when capitalist bargaining power is high, the standard rate of profit will be high; but there will be some standard rate of profit and firms take that into account.

And so, in a sense, you’re also asking me that. And the answer is again going to be a little economics-y and complicated.

[ATO] That’s okay, people can handle it.

[RH] Okay. The answer is a little different over time than it is at any point in time. If economic well-being is going to be rising over time, then you want to take that into account. And you’re going to need some sort of social rate of time discount. And a socialist society will want to take it into account as well, and we’re going to need to do that, and that’s one of the complicated things that I address when I when I talk about planning – whether it’s investment planning or development planning.

But in any given year, it’s efficient to have firms continue to do things right up to the point where the social benefits are no longer larger than the social costs. And that’s why that ratio for annual planning is a perfectly sensible ratio. Because if you stop short, it means that you could have had an increase in net social benefits this year, and having an increase in the social benefits in a year is obviously a good thing.

[ATO] Let me recapitulate that, because as you said it’s just a little bit technical, so it’s helpful to repeat things. What you’re saying is that if you imagine the situation where the social benefit is equal to the social cost, how you’ve arrived there is that before at that point your marginal benefit is equal to your marginal cost. Is that correct?

[RH] Yes.

[ATO] So, for that last unit produced –  let’s go back to our furniture factory – that last chair that was produced, the benefit to society of that chair is equal to the cost of that chair. And before then, for the last chair before that, the benefit was greater than the cost. And before that the benefit of that chair was greater than the cost. So the point is that for each chair up until the last chair, the net benefit to society is positive.

[RH] Yes.

[ATO] And once you reach that point where the net benefit is neutral …

[RH]… is zero, you want to stop.

[ATO] And that is the point in the planning procedure, and in the accounting of participatory economics, where the social benefit of that proposal will equal to the social cost.

[RH] Yes.

[ATO] (Editor’s note begins) Okay, hold on one minute.

I’m editing this and I realise the discussion here is slightly jumbled.

When marginal benefit equals marginal cost, the net total social benefit is greatest.

This is a completely different point than where the social benefit to social cost ratio is one. Or in other words, when total social benefit minus total social cost equals zero. Or in other words again, when net total social benefit equals zero.

Here Professor Hahnel and I are playing fast and loose with our terminology (e.g. sometimes saying ‘benefit’ when meaning ‘marginal benefit’). And I think I misconstrued what Hahnel was saying. Make sure to watch interview Part 5, coming out soon, in which we address this topic again and clarify some things. (Editor’s note ends)

Let us pursue this a little bit more. So, talking of social cost, the labour of workers is surely part of the social cost of production. How is the cost of this labour explicitly factored into the cost of production when a worker council makes a production proposal? Because I understand that the effort ratings that workers give themselves, which determine their income, that is actually separate to the social cost of labour which is factored into the production proposal. Is that correct?

[RH] Absolutely correct.

When any workplace uses labour, that means that labour could not be used by another workplace. So the labour has an opportunity cost, and you want to take that into account. Just the way that if a workplace uses an acre of land, then some other workplace couldn’t use it, and therefore it has an opportunity cost and you want to take that into account.

Labour is unique in that, unlike land, its opportunity cost includes an extra component. And that is most of the time when we work it’s somewhat disagreeable. I mean, economists call it disutility. So there are two costs to society when we use labour: one is the traditional opportunity cost, that it’s a productive resource, and it’s scarce, and if we use it here we can’t use it there; and the other is that, in the case of labour, whenever we labour most people would prefer leisure to labour, and so you want to take that into account. So, the opportunity cost of using labour is its disutility plus the traditional opportunity cost of using any scarce input in production. You want to take those into account when you’re figuring out: well, what is the social cost of society of a proposal? So that’s what you want to calculate, and that’s why you want to calculate that social opportunity cost of using labour when you’re comparing it to ‘what will be the social benefits that come from whatever it is we’re proposing to do?’.

So, what we’re proposing is that when we decide how to allocate labour between different workplaces, that that be the procedure that we use for its allocation. And we do that by: if you propose to use scarce labour and labour with a high disutility, well then we want to be sure we charge you for that and you therefore take it into account when you’re considering ‘are the benefits going to actually be worth it?’.

But our proposal is that that really should have nothing to do with how workers are paid. And that we can use a totally different procedure for deciding how workers are paid. Inside every workplace we can have an effort rating committee, and essentially what the effort rating committee is trying to decide is: when we all came to work, did some of us work harder? Did some of us in some way make a greater sacrifice than others? And, if that’s the case, we want to take it into account. And therefore amongst all of us, some of us should get paid somewhat more than others. I mean, there’s a lot of debate about what are the pros and cons and the dangers of having workers rate themselves in terms of efforts and sacrifices. But however many problems there would or wouldn’t be with that, our suggestion is, well, that’s what’s fair to take into account, and that’s the fair way to go about it. And whatever process seems to best get us the most reasonable results in that regard we should set up.

But that has really nothing to do with how much the firms are in the planning process being charged for using particular kinds of labour. Suppose we have some particular labour that’s in very, very, scarce supply. So chemical engineers were in very scarce supply in the Soviet Union in the 1930s. And it’s really important that they be allocated to the place where they are most valuable. So our procedure would essentially do that. But just because chemical engineering labour is incredibly valuable because it’s very scarce doesn’t mean that we have to pay the chemical engineer, you know, five times more than somebody who’s digging ashes out of the steam tunnel underneath a blast furnace. When you’re digging ashes out of a steam tunnel, that’s a lot of effort and sacrifice and it might be more effort and sacrifice than the person who’s the chemical engineer at the plant. And so we’re saying, well, the fairness of the distribution of the wages has to do with effort and sacrifice. But you want to be sure to allocate your labour according to the social opportunity costs of its being used.

[ATO] In terms of that allocation of different kinds of labour, how is that opportunity cost calculated? So, you have a firm, let’s say you have a pharmaceutical enterprise which wants to hire 20 chemical engineers. How will the social cost of the scarcity, or the relative scarcity, of those chemical engineers factor into the production proposals for that pharmaceutical enterprise?

[RH] So, you’ll have a number of pharmaceutical enterprises putting in proposals. And the sum total demand in their proposals to use chemical engineers is going to be greater than the supply. And what’s going to happen in the next round of the planning procedure … There’s going to be excess demand in the first round of the planning procedure, there’s going to be excess demand for chemical engineers. In the next round, the indicative price of using a chemical engineer in your worker council is going to be higher than it was before. So that’s how we’re going to find the social opportunity cost of using a chemical engineer. But it has nothing to do with what the chemical engineer gets paid once they show up to work.

[ATO] That is the opportunity cost of that category of labour, and so now let’s consider the disutility of labour. The broad idea here, if I’m correct, is that it is a cost to society if an enterprise is using labour which is unpleasant, or onerous, or dangerous, or tedious, and so that is a cost to society that needs to be factored in. So, when you talk about disutility of labour on the production side – in terms of making that proposal – that’s what you mean. Is that correct?

[RH] There are two different forms in which it is socially costly. The one that’s easiest to understand is that there’s disutility for the person performing it. And then the one that is what traditional economists understand about using any productive input is if it’s scarce then there’s an opportunity cost of using it because it’s scarce.

[ATO] Yes, and we’ve talked about that.

[RH] I mean the answer to how the disutility gets factored in is in the supply of labour of different kinds. So, for the kind of labour that is more pleasant, presumably more people will offer to supply that. And for the kind of labour that is less pleasant, presumably fewer people will offer to supply that. So, in that case the more unpleasant labour essentially has a smaller supply than more pleasant labour would have, and that will be the way in which that disutility gets factored in. Therefore anybody that wants to use that kind of labour, they’re imposing a higher social cost and we’re going to charge them a higher price for doing it.

[ATO] Ah, yes I see. So it’s really that the two costs – that disutility of labour and just the opportunity cost – they’re both calculated, really, in the same way. which is in how much of that labour appears in the in the planning proposal. And I suppose the idea is that in order for that to function effectively, people who are working, let’s say, less pleasant jobs, less safe jobs, and so forth, are working them by choice and not because they’re pressured into doing them as they are today due to circumstance.

[RH] Yeah, but two things will happen. One is that firms whose production proposals include using hours of labour that are, on average, considered to be more unpleasant are going to get charged more for using that kind of labour in their proposal. And you want to do that because that provides an incentive for them to look for ways not to use that kind of labour, and use some other kind of labour that’s more pleasant.

Once we get to the effort rating committee … I mean, this word ‘effort’, there’s an evolution over the past decades in terms of our thinking about this issue. And when we first started thinking about this, we used the word ‘effort’ and we said ‘look, some people put in more effort than others’. We basically assumed that effort was the only form of sacrifice that people make when they work. And so we were using the word in our own minds synonymous with if some people make greater sacrifices they deserve greater compensation. If I had it to do all over again, I think I might go back and try not to ever use the word ‘effort’.

[ATO] What do you think would be a better term?

[RH] Sacrifice. Effort is really only one form in which people sacrifice in work. What you’re imagining is: we’re working at the same machine, and I go to a more lackadaisical pace and you put in greater effort, and you go at a higher pace, [that’s one way you] might have sacrificed more than I did. On the other hand, another way in which you could sacrifice more than I that than me is in your list of tasks there are just more unpleasant tasks than in my list of tasks. I think the accurate bottom line is it’s greater sacrifices in work that merit – in terms of an economic justice argument – that merit greater compensation. Any way in which somebody sacrifices more than somebody else. So, if I had it to do all over again, for clarity purposes I think I would call these ‘sacrifice rating committees’ inside workers councils. But effort certainly is one form of sacrifice.

Now I’ll admit to you one thing that I think is problematic. And it’s led to disagreements amongst those of us who propose a participatory economy. I think it’s relatively easy to deal with differences in sacrifices that people make within a workplace. But what if there are differences in the sacrifices people make on average in different workplaces?

[ATO] Yes, exactly. That was that was a question.

[RH] And an example of that would be coal mines versus air-conditioned offices. And how do you deal with that? Actually, my honest answer to that is that’s actually problematic. There’s more than one answer to how you would deal with it, and I think there are very legitimate arguments that can be made for each of those answers.

[ATO] Any good solutions?

[RH] Some of us think one solution is better, and some of us think a different solution is better. I know which my opinion is, but I can’t say, well, it would be wrong to do it the other way.

Inside workers councils it’s relatively easy. Not that it won’t be problematic. I mean, there’s a lot of discussion in the literature over the past decades about ‘won’t the effort ratings that some people get be inaccurate?’, ‘won’t they resent them?’, ‘would they be wrong to resent them?’. And my answer to all that is yeah there will be injustices in decisions about whether somebody’s efforts were higher than somebody else’s. And, in my opinion, that would be one reason that you might want to leave a workplace, if you feel your co-workers are not appreciating your efforts and sacrifices sufficiently, and you’re constantly getting screwed in your effort ratings. Well, that’s a good reason –  just like in capitalism, when you don’t get paid what you think you deserve it’s a good reason to look for work elsewhere. So I don’t argue that the process will be perfect. I do say there’s a remedy. The remedy is to go someplace else where you will be appreciated more, or at least you hope you will be. The other remedy is start up your own workplace with a group of co-workers that you’re sympatico with. We don’t have a model where people are tied down to a workplace, where they have to keep putting up with effort ratings that they that they feel are inaccurate, and where they have no remedy. You can appeal and then you can leave, you can vote with your feet as they say in economics.

[ATO] You’re talking about there being a social cost of work which is less pleasant or less desirable in some way, and how enterprises in a participatory economy would be incentivized to minimize the use of such labour – because it would carry a social cost. And so that naturally leads us into discussion of innovation, of automation, because the first thing that pops into one’s mind – you make that point – would be that ‘well, the logical thing to do would be to try to automate that process, so that it doesn’t require labour’.

So, let’s talk about automation. The goal surely is for automation of unwanted tasks to increase but to minimize the social costs of this process. As in, that automation should proceed such that the maximum gain is captured with the minimum of cost to those it affects. The primary cost of automation in capitalism being involuntary unemployment of labour, to the point of what some argue today is a crisis of secular [long-term], structural, mass unemployment in the private sector. Is this so in parecon? What is the role of automation in parecon?

[RH] In market economies, there can be unemployment of both humans and resources because not all the markets have equilibrated. And as we now know there even are disequilibrating dynamics that feed upon themselves when recessions build up some steam, etc. A participatory economy is a planned economy. So were the centrally planned economies in the Soviet Union. And you don’t have involuntary unemployment in a planned economy because the plan has a job for everybody that’s in the labour force.

Here what I want to do is I want to claim one of the traditional well-known advantages for comprehensive economic planned economies as compared to market systems. In a capitalist economy what incentive is there for capitalist employers to try and economize on labour with a high disutility, or what you’re calling automation? And the answer is, well, if they have to pay more to hire workers to do jobs with a high disutility, then that’s their incentive to look for new technologies to avoid, to eliminate, that kind of labour so they don’t have to pay so much for it. That same incentive exists in a participatory economy for a workplace, because they’re being charged more for labour that has higher disutility. There’s one additional way where I would expect enterprises in a participatory economy to be particularly interested in innovations that eliminated unpleasant labour: and that is the only reason that capitalist does it is because it’s going to cost me more to pay that labour; whereas there’s an extra reason for the workers in a worker council to do it, because they’re the ones that don’t have to do the labour anymore. So they have a direct interest in figuring out ‘how can we produce our socially valuable products in ways where our labour is not as burdensome, or awful, or boring, or has as high disutility as it has in the past?’ So they have every incentive that a capitalist enterprise did, that the social cost of using that kind of labour they’re going to be charged more for that when they’re trying to get their proposals accepted. And then they have the additional incentive that it’s us. I mean, the capitalist employer doesn’t care at all about that, whereas presumably they do.

[ATO] Yeah and, of course, one of the key criticisms of capitalism is that it systematically undervalues labour, because it’s commodified, and because of the structurally privileged position of the capitalist class having a monopoly over the means of production, and that the workers are dispossessed and have to rent themselves. That leads to a situation where labour is chronically undervalued and, therefore, the stimulus to actually not use this onerous, or difficult, or tedious, labour is less than it should be.

[RH] You know, there’s an interesting debate that has long gone on which is that mainstream economists argue any labour whose expenditure has a higher disutility capitalists should have to pay more for. On the other hand, when most people look at pay rates they basically say the most unpleasant labourer is always paid the least. And the people who are getting paid a lot are the ones sitting in air conditioned offices doing labour that isn’t that unpleasant. Square that with the theory that says if labour is more unpleasant, then the employer is going to have to pay more for it. I think it basically comes down to supply conditions.

On the other hand I think all of us socialists should take comfort in the fact that we have a good answer for this. Which is that in the case of any system that says ‘if you sacrifice more, then we’re going to pay you more’ we’re taking care of the unfairness of it for those who actually perform any kind of labour that has a higher disutility. And we also have a pricing mechanism that’s going to force the users of labour to be looking for ways to economize on the use of this labour that you’re going to be charged more for.

[ATO] Yes, I mean it’s about bargaining power. There’s a quote that I really like from [Yanis] Varoufakis about how ‘[neoclassical] economics is religion with equations’. When you look at the real world, we see that really today when we look at ‘essential workers’ during the pandemic. It’s about bargaining power.

[RH] It’s all about bargaining power, it’s exactly right.

[ATO] This is a point that you make, and I know this is a point that that Michael Albert makes, and have made again, and again, and again. It’s about what you can take.

But in terms of participatory economics, let’s look at this from the point of view of a worker council. We’d say in the abstract the situation we want, let’s say from the perspective of the social interest of society as a whole, we would like in general these undesirable tasks to be automated where possible and practical. And so does a worker council really have an incentive to do that? Are there any perverse incentives, you think? I suppose the aim in terms of economic rationality purely, just thinking in terms of what the cost is, the aim would be to reduce the social cost of [having used] that undesirable labour – which would have a lower supply in the planning procedure – by introducing some kind of mechanized or computerized process that can replace that, or by just finding some production process that avoids that entirely. I’m just asking are the incentives aligned so that will happen? Is there any case to be made that maybe workers might be hesitant to do that because it might undermine their own sacrifice ratings, or anything like that?

[RH] Let’s think about it this way. There’s this concept in in mainstream economics called consumer sovereignty, and the basic idea is consumers should be the ones that are letting us know what they like, and we want production to be guided by what consumers like. And there’s nothing wrong with that. The question is whether or not in very significant important ways market economies don’t actually achieve that. We can apply the same sort of thinking to the work process. And that is we would like work to be as pleasant as possible. Now who is it that wants work to be as pleasant as possible? It’s the workers. And if we have put them in charge of deciding what the work process will be like, then at least we’ve put the people in charge of deciding what the work process is like who are the ones who have an incentive to have work be as pleasant as possible.

Capitalists have no incentive directly to make the work process more pleasant, only if they have to pay labour more for a less pleasant work process would they have an indirect incentive. I think you could make the same criticism of centrally planned economies. Do the central planners and the plant managers really have an incentive to make work more pleasant? Well, they don’t have as much incentive as the actual workers do, that’s for sure. And I think you can argue that maybe they didn’t have much of an incentive at all. So, I think at least we’ve put the right people in charge of making the decisions and the proposals, etc, about what the work process is like. At least we put the right people in charge of making those decisions. We put the people in charge who are the ones who have an interest in work becoming more pleasant.

[ATO] Certainly. I can hear a market socialist in my ear and what they’re saying is ‘absolutely, completely agree with you, it’s very important and beneficial to have the workers in control of their own workplace; not to have this stratum, this unproductive stratum, on top who are controlling everything, and reaping the benefits, and who don’t have an interest in making work pleasant like you say.’ But let’s say in a market socialist society, a market socialist might argue ‘let’s say you have a worker cooperative – our furniture factory – they have an incentive just from their own personal feeling that they want to make work more pleasant. But in terms of economic rationality as well, if they automate that production process entirely they get to capture all of the profits which arise from that at the same time, and they can sit back and they can just work for two hours a day.’ And so in that case they would argue there’s fully the incentive to use automation in that way. And so I’m asking, let’s say compared to that, do you think there is an incentive to use automation as much as we would like?

[RH] When you use the word automation, actually it entails two things. One is you’re using it as it’ll make work more pleasant, the other is it will generate a loss of jobs. And in planned economies, where the plan ends up with a job for everybody that’s there, you don’t have to worry about the second problem. And I think that’s good, automation isn’t going to create an unemployment problem in a participatory economy, or a [Paul] Cockshott-[Allin] Cottrell centrally planned economy, or a [Pat] Devine-Fikret [Adaman] negotiated coordination economy. So the only aspect of automation that we are interested in is making work more pleasant.

So what you’re doing you’re eliminating more unpleasant tasks and substituting more pleasant tasks for those unpleasant tasks. And, of course, we want to incentivize and motivate that to the greatest extent possible. I think that just like I said one of the advantages of a centrally planned economy is at least it has full employment. I think one of the advantages of market socialist economies is that they align the incentives on changing technologies in work to [eliminate] less pleasant tasks, so I think they do that fairly well. A participatory economy does it also well for pretty much the same reasons that a market socialist economy does. A market socialist economy has a harder time guaranteeing full employment, but that’s because it’s the market system.

[ATO] Thank you for watching. If you found this interesting, useful, or thought provoking, then press the Like button, consider Subscribing, and, if you really enjoyed it, sacrifice your first born to Ghislaine Maxwell.

There’s a lot more such material to come. We will keep exploring the intricacies of better futures for humanity until we get there. And as always I want to read your thoughts in the comments section below.

That’s all for now. The only viable future for humanity is one After the Oligarchy.