When Socialism Comes One Country at a Time

1. Introduction

Once upon a time, socialists dreamed of a world revolution. Many socialists thought that when the revelation that workers need capitalists like a hole in the head finally dawned on people, it would spread quickly, leading workers everywhere to throw off their yokes.

Not only in the nineteenth century but well into the twentieth century, socialist “parties” in different countries continued to think of themselves merely as “branches” of a “socialist international.” And even when splits between anarchists, democratic socialists, and communists gave us a second international, and eventually a third international as well, socialist parties in different countries continued to think of themselves as branches of one international socialist organization or another deep into the twentieth century. After the October Revolution, many Bolsheviks, including Lenin, believed that socialist revolutions might soon break out in other European countries. ¹ And even when socialist revolutions in Europe after World War I were crushed, and socialists came to power only in Russia, arguments continued within the Bolshevik party between the Left Opposition, Trotsky, and Stalin over whether socialism required a “world revolution,” or could be “built in one country” as Stalin declared in 1924 (see Smith 2018: 285). Four decades later in the 1960s, Che Guevara forcefully argued that “socialist solidarity” required its trading partners in COMECON to grant Cuba the lion’s share of efficiency gains from international trade between them—a position that the Cuban government continued to advocate until the demise of COMECON in 1991 (see Yordanov 2021).

In 2021 all this seems like a very long time ago. I suspect most who continue to count ourselves socialists now expect socialism will come to different countries at different times. Or, to put it in a negative way, that unless socialism can be successfully built in one country at a time, it may not be built at all. Which leads to the following question:

In a world where some countries are more economically developed and some are considerably less so, and where most countries still have capitalist economies, suppose a country succeeds in replacing capitalism with a socialist economic system. How might such a country engage in international trade and investment with other countries to its advantage and still remain true to its socialist principles? ²

It seems likely that for some time the global economy will continue to be composed of countries with significantly different levels of economic development, and most countries will continue to have capitalist economies. In which case, how should a country with a socialist economy interact with countries that are more developed, countries that are less developed, countries with capitalist economies, and eventually with other countries with socialist economies? Since it is easier to analyze the case where a country with a socialist economy is small enough so it cannot affect the international terms of trade or international interest rates, I first treat the case for a “small country” with a socialist economy and consider possible complications that arise for a “large country” with a socialist economy afterward.

Finally, a word to clarify what “socialist economy” means for purposes of this article. The defining features of a socialist economy can vary considerably depending on whom you ask today. Is it a planned system? If so, how is the planning carried out? Is it a market system? If so, as Diane Elson (1988) once put it, how should markets be “tamed”? Is it a system, as many assume today, where both planning and markets, and perhaps private enterprise as well play some role? If so, what roles do each play? Fortunately, for the present purposes we do not need to delve deeply into the weeds of what is meant by “a socialist economy.” We need only assume a country seeks to be guided in some way by the following two principles:

So while I personally believe that socialists should be advocating for something like the “model” of a participatory economy as described most recently in Hahnel (2021), I believe the arguments presented in this article regarding international trade and investment apply to a broad range of “models” of socialism.

In sum: Hoping to stimulate others to also address issues that will inevitably arise whenever a country attempts to build a socialist economy, this article makes specific proposals for how such a country can benefit from international trade and investment but avoid undermining its own core principles by following a few simple “rules.”

2. Direct Foreign Investment

A country committed to the principle that workers should manage themselves cannot permit foreign businesses to make direct foreign investments (DFIs) in its economy, nor make direct foreign investments abroad, because DFI is incompatible with worker self-management. DFI by foreign companies cannot be permitted in a socialist economy because it would turn workers in the socialist economy into employees—in this case of foreign owners—and rob them of their right to self-management. And while workers in a socialist economy may encourage and even help establish worker cooperatives in other countries, the principle of economic self-management also does not allow those in a socialist economy to own and operate businesses abroad because that would make foreign workers employees and rob them of their right to self-management.

There is a substantial literature analyzing what happened when the Mondragon cooperatives in Spain began to establish foreign subsidiaries where foreign workers were employees rather than equal members of a Mondragon cooperative. ³ I agree with others who have argued that lessons from that experience demonstrate why we should not permit workers in a socialist economy to do likewise, especially since workers in a socialist economy will not be subject to the competitive pressures that pushed Mondragon workers into foreign ventures, which violated their own defining principle, worker self-management.

While the case against DFI is simple and straightforward, the remainder of this article argues that a country with a socialist economy can take advantage of benefits from international trade (IT) as well as international financial investment (IFI) without violating any of its fundamental principles provided it is careful to follow some important rules. But first a short reminder about why IT and financial investment are always tempting, and an important trade-off that must be considered.

3. Potential Benefits from IT and IFI

Differences in opportunity costs of production among countries create opportunities for countries to benefit from specializing in the production and export of goods in which they enjoy a comparative advantage, and importing in exchange goods in which trading partners have a comparative advantage. Naturally, like any other country, a country with a socialist economy will want to take advantage of these opportunities.

However, that logic takes into account only the short-run effects of international trade. All countries seek to increase their economic productivity, and the pace of productivity enhancing technological change often varies considerably among industries. This means it is advantageous to enjoy comparative advantages in industries producing products where the pace of technological change is more rapid and productivity increases are greater, and unfortunate if one’s comparative advantages happen to lie instead in industries that are more stagnant. In other words: Not all comparative advantages are created equal! Moreover, by pursuing strategic trade policies over time a country can change its comparative advantages to become more advantageous, rather than merely accept whatever its historic comparative advantages happen to be as a fait accompli. ⁴

Like any country, a country with a socialist economy should be guided by both these short-run and long-run goals regarding its own self-interests when trading with other countries. However, unlike countries with capitalist economies, countries with socialist economies are based on the principles that workers should manage themselves and that people’s efforts, sacrifices, and needs should guide how income is distributed.

A socialist economy cannot engage in DFI because doing so would violate its commitment to the principle of economic self-management, as just explained. However, a socialist economy can advance its own interests by taking advantage of opportunities provided by IT and IFI without violating its commitment to economic democracy since IT and IFI do not deny workers anywhere the right to manage themselves. However, when engaging in IT and IFI, a socialist economy must be careful not to violate its commitment to the principle that compensation be based on people’s efforts, sacrifices, and needs, which I argue can be done by following a few simple rules.

4. Issues to Bear in Mind Regarding IT

Before beginning, it is important to keep three issues in mind with regard to IT:

If opportunity costs of producing goods are different in different countries, there are always potential efficiency gains from specialization and trade. Ricardo’s theory of comparative advantage is unassailable when it concludes that because it creates global efficiency gains that could be shared, all countries could be better off when they produce and export goods they are relatively better at producing, and in exchange import goods that other countries are relatively better at producing. But contrary to what is sometimes assumed, this does not mean free trade, or trade liberalization, will always lead to patterns of specialization and trade that improve global efficiency.

If commercial prices inside countries do not accurately reflect the true social opportunity costs of traded goods, and/or if commercial transportation costs underestimate the full social costs of international transportation, free trade can produce counterproductive patterns of international specialization, yielding global efficiency losses rather than gains. Discrepancies between commercial prices and true social costs can send false signals and lead to what we might call false comparative advantages, leading in turn to international divisions of labor that are less productive than less specialized patterns of global production would be. ⁵ In a socialist economy, therefore, relative prices can be expected to accurately reflect true social opportunity costs. ⁶ However, we must be wary of situations where this may not be the case for potential trading partners of a country with a socialist economy. ⁷

The theory of comparative advantage is often interpreted to imply that a country should continue to specialize in its traditional exports, since those would presumably be the industries in which the country enjoys a comparative advantage. But what if productivity increases are less likely in traditional industries than in other industries? Less developed economies are less developed precisely because they have lower levels of productivity than other economies. If less developed economies continue to specialize in traditional sectors where the pace of technical change is slow, they may be less likely to increase productivity. In other words, pursuing static efficiency gains by continuing to specialize in today’s comparative advantages may prevent changes that would increase productivity a great deal more, and therefore come at the expense of what we might call dynamic efficiency.

This second point has long been the subject of debates over strategic trade policy. The hallmark of the Asian development model—pioneered after World War II by Japan, and later imitated with great success by South Korea, Hong Kong, Taiwan, Singapore, and most recently by China—is that these countries did not accept their comparative advantages as a fait accompli. Instead, they aggressively pursued policies to create new comparative advantages in industries where it would be easier to achieve larger productivity increases.

Japan moved from exporting textiles, toys, and bicycles right after World War II, to exporting steel and automobiles in the 1960s and early 1970s, to exporting electronic equipment and computer products by the late 1970s and early 1980s. The remarkable performance of the Japanese economy from 1950 to 1980 was not the result of laissez-faire trade policy by the Japanese government. Japan’s successful transition to a different and more successful role in the international division of labor was accomplished through an elaborate system of differential tax rates and terms of credit for businesses in different industries at different times, planned by the Ministry of International Trade and Industry and coordinated with the Bank of Japan and taxing authorities. The whole point of the exercise was to create new comparative advantages in high-productivity industries rather than continue to specialize in industries where productivity growth was slow. Neither Japan nor any of the other countries that followed the Asian development model allowed relative commercial prices to pick their comparative advantages and determine their pattern of industrialization and trade for them. Had they done so, it is unlikely they would have enjoyed as much economic success as they have. ⁸ In any case, the point is it will be very important for any country with a socialist economy, particularly if it happens to be less developed, to take all this into account when making strategic international economic plans.

For countries with economies lacking any moral compass, these questions never arise. For such countries, the answers are simply: “Always strive to capture as large a share of any efficiency gain from international trade as you can for yourself. Always seek to build new comparative advantages in industries with the highest rate of productivity increase.” But a fundamental principle of a socialist economy is that people should be rewarded according to their efforts, sacrifices, and needs. A country with a socialist economy cannot drop this moral principle at its borders—not only because it would be wrong to do so but also because embracing the doctrine of “dog eat dog” in international economic relations would undermine a fundamental moral principle that undergirds its own economic system. This means that a country with a socialist economy must sometimes approach the distribution of efficiency gains from trade and strategic trade policy differently than countries with amoral economic systems. ⁹

5. Three Rules to Guide Trade Policy

What rules should guide a country with a socialist economy regarding international trade?

This first rule prevents a country with a socialist economy from participating in international divisions of labor that are actually counterproductive and likely contrary to its own self-interest as well. This rule is standard economic trade theory, and I already discussed the only part that is not always well understood, namely, that when commercial prices deviate from social opportunity costs, they can mislead countries into pursuing false comparative advantages that create global efficiency losses rather than gains.

This second rule ensures that when a country with a socialist economy engages in mutually beneficial international trade it will be reinforcing, rather than undermining, a fundamental moral principle that undergirds its own economic system, namely, that economic justice requires that people be paid according to their efforts and sacrifices.

There are currently large differences between levels of economic development in different countries, which means that on average people in less developed countries (LDCs) receive less for their efforts and sacrifices than people in more developed countries (MDCs). It is conceivable, in theory, that current differences in levels of economic development between countries are entirely due to differences in the efforts and sacrifices people in those countries made in the past, for which compensation in the present is justifiable. A dynamic model in Hahnel (2020) elucidates a situation where differences in rewards among people in the same economy can arise when some make greater sacrifices than others in an early time period, which permits them to accumulate more productive assets, but demonstrates that even so over time compensation from accumulation will inevitably become excessive, that is, far beyond what can be morally justified. However, the conclusions would be the same if, on average, citizens in different countries made different sacrifices in an early time period—compensation for countries who become MDCs would inevitably exceed what can be morally justified. However, unlike the case for individuals in the same economy who may well choose to sacrifice more or less, I find it unlikely that given the history of colonialism and imperialism, early generations in today’s MDCs actually did sacrifice more than early generations in today’s LDCs on average, and more likely that if there were any differences the opposite was the case.

In any case, terms of trade that give fifty percent of the efficiency gains to the LDC and fifty percent to the MDC simply maintain their relative status and do nothing to narrow the gap between them. What rule 2 does instead is to narrow the gap between MDCs and LDCs by giving what we might call “the bulk” or “lion’s share” of the efficiency gain to the LDC, while still making the more developed trading partner better off than it would have been absent specialization and trade. In other words, the more than fifty percent rule acknowledges that to a great extent international differences in levels of economic development are unjust. However, the more than fifty percent rule also recognizes the practical reality that these unjust historical differences cannot and need not be eliminated overnight. One could make a moral case for distributing one hundred percent of all efficiency gains from trade to LDCs until such time as they reach the same level of development as MDCs. However, I would argue that to insist that a country with a socialist economy abide by such a hundred percent rule—particularly in a world where many countries still have amoral economic systems and continue to practice “dog eat dog” international economic politics—is unreasonable.

To be clear: What we are talking about here is different from foreign aid where presumably the recipient country is made better off but the donor country is made worse off. ¹⁰ One could argue that MDCs are morally obligated to provide foreign aid to their detriment sufficient to eliminate all differences in living standards between LDCs and MDCs. But that is not what the far less demanding more than fifty percent rule requires with regard to international trade and investment. Even if a richer country with a socialist economy strictly applied a hundred percent rule it would be no worse off than under autarky. It would simply receive none of the efficiency gain from international trade so that its poorer international trading partner might receive the entire efficiency gain. What the more than fifty percent rule does instead is commit a country with a socialist economy to make material progress on rectifying long-standing international economic injustices, while at the same time benefiting to some extent from trade itself. In sum: If a country with a socialist economy is less developed than a trading partner, this frees it to fight for the most favorable terms of trade it can secure. However, when trading with an LDC the more than fifty percent rule restricts how a country with a socialist economy approaches negotiations over terms of trade in order to avoid undermining its own principle of economic justice.

Should it matter if the country with a socialist economy is trading with a country with a capitalist economy rather than another country with a socialist economy? As long as the country with the socialist economy is less advanced than its trading partner, it is free to seek the best terms of trade it can secure irrespective of what economic system its trading partner may have. Moreover, an LDC with a socialist economy is certainly justified—and well advised!—to protect itself from any form of economic destabilization from a hostile MDC with a capitalist economy. And when trading with a country with an economic system like its own, a country with a socialist economy is obliged to follow rule 2 and agree to terms of trade that give the bulk of the efficiency gain to its LDC trading partner. But what should a country with a socialist economy do when trading with an LDC with a capitalist economy?

I believe that in general a country with a socialist economy is morally obliged to apply rule 2 in this case as well, that is, agree to terms of trade that give the LDC with a capitalist economy more than fifty percent of the efficiency gain from trade between them. However, there may be situations where considerations dictate otherwise. The problem is that granting generous terms of trade to an LDC with an immoral economic system may not benefit the majority of its population but serve instead to further enrich a privileged minority and consolidate the power of an oppressive government representing their interests. Situations may arise where the government of an MDC with a socialist economy should take this consideration into account.

This issue clearly requires more careful consideration. One possibility is that an MDC with a socialist economy should abandon rule 2 only when asked to do so by credible progressive opposition forces inside a trading partner with an immoral economy. It should be up to credible political actors in the LDC with an immoral economy to weigh the disadvantages of economic hardship that an MDC with a socialist economy would conceivably inflict on ordinary people in an LDC with a capitalist economy by imposing more harsh terms of trade, against the advantages harsh terms of trade might have in undermining an oppressive government. An important historical example of this in practice was the international economic boycott against apartheid in South Africa that the African National Congress requested when it judged the time to be right.

This third rule is also necessary to prevent a country with a socialist economy from violating its commitment to economic justice. As already explained, not all comparative advantages are created equal, and through strategic trade policies countries can change their comparative advantages over time to develop new comparative advantages in industries where productivity increases are higher.

As in the case of rule 2, in some cases rule 3 does not restrain a country with a socialist economy, but in other cases it does. If the country with a socialist economy is underdeveloped, it is free to engage in aggressive strategic trade policies to climb the ladder up to more advantageous comparative advantages as quickly as possible. On the other hand, if the country with a socialist economy is highly developed, rule 3 imposes constraints on how it approaches strategic trade policy, just as rule 2 imposes constraints on how it approaches negotiations over terms of trade. Because the relative advantages of different comparative advantages are more complicated to estimate than how terms of trade distribute efficiency gains, admittedly it will be more difficult for a country with a socialist economy to apply rule 3 than rule 2 when it seeks to avoid hypocrisy, which would undermine the moral glue that holds its socialist economy together. But I believe we now know how it can be done, at least in theory.

6. Evaluating Comparative Advantages

Determining how terms of trade distribute efficiency gains to trading partners is straightforward enough. However, evaluating how advantageous different comparative advantages are is more complicated because simple increases in output per hour for an industry is not the same as how much changes in technology in the industry increase economic productivity in the economy as a whole. Fortunately, a theorem proved in Hahnel (2017) allows us to calculate how much any technical change introduced in any industry increases overall labor productivity in the economy.

Let A be the (n × n) input-output matrix for the economy, L be the (1 × n) row vector of direct labor input coefficients, and b be a (n × 1) column vector representing a real wage bundle per hour worked that is sufficiently high to render the initial rate of profit in the economy equal to zero. Let {A′, L′} represent the input-output matrix and labor input vector for the economy after a new technology in some industry replaces the old technology in that industry. ¹¹ Part iii of theorem 18 in Hahnel (2017) states: The size of the change in overall labor productivity caused by any change in technology in any industry is ρ(l) = (1 – β′), where β′ = dom(A′+bL′). At least in theory this theorem allows us to evaluate how much technical changes in a particular industry increased overall economic productivity.

For example, we could go back over ten years and perform this calculation for each industry for each year, and calculate the average increase in overall economic productivity in the economy due to technical changes in each industry over the previous ten years. Presumably we would discover that technical changes in some industries had increased overall productivity more than technical changes had in other industries. While past performance is not a perfect predictor of future performance, ¹² nonetheless these calculations of historic differences in how much technical change in different industries had increased overall productivity would provide a useful guide to rank industries, indicating in which industries it would be more or less advantageous to have a comparative advantage. This information could then be used to guide strategic trade policy for a country.

But it could also be used to compare and rank countries with regard to how advantageous their actual comparative advantages are. Depending on where a country with a socialist economy fell in such an international ranking of countries, it would know how to apply rule 3, that is, how aggressive or restrained it was fair for it to be in seeking to upgrade its comparative advantages.

Finally, just as one could make the moral case for a hundred percent rule instead of a more than fifty percent rule, one could also argue that only the least developed countries be permitted to engage in strategic trade policies to build new comparative advantages in what the Japanese Ministry of Trade and Industry once called “industries of the future,” until they had caught up completely with MDCs. But as before, for practical reasons I am inclined to recommend a less strict version of rule 3 and suggest that countries with socialist economies can remain true to their principle of economic justice so long as they engage in strategic trade policies that make material progress in overcoming differences in economic development among their trading partners.

7. Maximizing Efficiency Gains from Trade during Annual Planning ¹³

For convenience, assume there are only two tradable goods, x and m, and our country with a socialist economy is sufficiently small so the amount it exports or imports of a tradable good will not affect the international price of either good. For convenience, also assume our country with a socialist economy must achieve a zero balance on its trade account every year. ¹⁴ Until the domestic opportunity costs of the two tradable goods in our socialist economy become the same as the international terms of trade for the two tradable goods, there will be efficiency gains from further specialization and trade. This is how an efficient outcome that equalizes internal opportunity costs and terms of trade for tradable goods could be achieved by the annual participatory planning procedure proposed in the model of a socialist economy known as “a participatory economy.” ¹⁵

In this way, a small country using this annual participatory planning procedure could take advantage of trading opportunities to increase the average economic well-being of its citizens. Notice what happens if the international price of the imported good rises relative to the international price of the exported good, that is, if a country using this annual participatory planning procedure suffers a deterioration in its international terms of trade: If [p(mi)/p(xi)] rises the balanced trade constraint implies that [x/m] must also rise; that is, the country must shift more of its resources out of producing m and into producing x, and its citizens will necessarily suffer a loss in economic well-being because of a fall in the amount of goods available domestically. Of course if the terms of trade improve, [x/m] will fall and citizens will enjoy an increase in well-being.

8. International Financial Investment

The same principles apply to IFI as to IT. Just as differences in opportunity costs among countries give rise to potential efficiency gains from trade, differences in propensities to save and social rates of return on investment among countries give rise to potential efficiency gains from IFI. However, if rates of return on investment fail to accurately reflect true social rates of return, they can send false signals, and international financial liberalization can reduce global efficiency.

The rate of return in a country with a socialist economy might reflect the true social rate of return as accurately as can be hoped for. ¹⁶ But this may well not be the case in other countries with different economic systems. ¹⁷ More importantly, as long as competent regulation of international finance is lacking, huge global losses from financial crises will continue to occur. In any case, the trick for a country with a socialist economy will be to:

Having explained both the goals and the rules that should guide a socialist economy with regard to its international economic relations—that is how it should participate, or not participate, in DFI, IT, and IFI—how might a socialist economy go about doing all this? Explaining how a participatory annual planning procedure can find the efficient levels of imports and exports of different goods and services for the year to maximize benefits given the comparative advantages a country with a socialist economy has at any point in time is a big step in the right direction. Moreover, this is no mean accomplishment because it provides an “organic” way to answer what otherwise simply becomes an argument over differences of opinion over how “open” or “closed” any country with a socialist economy should be. However, annual participatory planning and the decisions it yields about exports and imports in a year would presumably take place in the context of a long-run, strategic international economic plan aimed at changing the country’s comparative advantages. How might such a plan be created?

9. What Does Participatory International Economic Planning Decide?

Annual planning would decide what a country with a participatory socialist economy exports and imports as explained above. But that says nothing about establishing the context in which those decisions are made. Will subsidies have helped an industry achieve a comparative advantage so the annual plan will call for exporting its products? Will tariffs have helped protect promising “infant” industries until such time as they can compete openly during annual planning? Will quotas be applied on nonessential consumer goods in order to prioritize imports of high-tech capital goods needed for economic development?

What strategic international economic planning will decide is: (a) whether to use such policies, (b) when to use such policies, and (c) for which industries such policies should be used. Another way to pose the issue is this: if we assume that annual planning takes maximum advantage of present comparative advantages, delivers the maximum efficiency gain possible from specialization and trade in any given year, and rule 2 is applied to distribute this efficiency gain fairly, will a country with a socialist economy sacrifice some of this static efficiency gain in order to increase dynamic efficiency gains in future years by intervening to help create new comparative advantages in sectors where productivity gains are expected to be higher? The policy tools for doing so are well known: differential taxes and subsidies for firms in different industries, differential terms of credit for firms in different industries, and differential tariffs on imports and subsidies for exports for different goods. The question is how a country with a socialist economy can use these tools while following rule 3.

10. An Efficient Transformation of Comparative Advantages

As already explained, there is a conflict between pursuing static efficiency in any year through specialization and trade based on current comparative advantages, and pursuing dynamic efficiency by taking action to improve future comparative advantages—which means there is an efficient tradeoff between these two goals. Strategic trade policies should be pursued up to the point where the loss in current benefits they forego is equal to the gain in future benefits they bring because the strategic trade policies create more favorable comparative advantages. Analysis of this tradeoff can help guide us in discovering who is best suited to estimate the different effects that must be taken into account.

Standard discussions of trade theory first explain why a country that imposes a tariff only hurts itself because the loss in consumer surplus is necessarily greater than the gain in producer surplus plus government revenue, even if its trading partners do not retaliate. Textbooks then sometimes go on to explain the theory of “optimal tariffs.” When a large country consumes enough to be able to generate a positive “terms of trade effect” by imposing a tariff, this can outweigh the negative “dead weight efficiency loss,” again assuming its trading partners do not retaliate. And finally, a few texts cover the issue we are focused on here, which they call the “infant industry argument.” For example, in chapters 8 and 10 of the sixteenth edition of his International Economics textbook, Thomas Pugel provides a particularly clear explanation of the potential advantage for a developing country of imposing a tariff on an “infant” tractor industry as follows, referring to his diagram 10.3, A and B:

If the country’s government imposes a tariff of 33 percent, the domestic price rises to $4,000 per tractor and domestic firms produce 20,000 tractors. Now (and for as many years as this situation persists) we know that the country incurs inefficiencies of area b and area d because of the tariff. [The standard dead weight efficiency losses]. The payoff to incurring these inefficiencies is that the infant industry grows up. As firms produce tractors, they find ways to lower their costs. Sometime in the future the domestic industry’s supply curve will shift down to S_df. The government can then remove the tariff. As shown in the right side of the figure, the country will then have a tractor industry that can produce 50,000 tractors per year at costs that are competitive with world standards. This competitive domestic production creates producer surplus of area v, surplus that would not exist if the country had not protected the industry in its early years. . . . The cost-competitive future production must create enough producer surplus to exceed the deadweight losses of the tariff. Because this is an investment problem over time, we should carefully say that it is a valid argument if the present value of the stream of national benefits [producer surpluses created] exceeds the present value of the stream of national costs [dead weight loses]. (Pugel 2016: 202) ¹⁹

Who in a country with a socialist economy is best situated to estimate both the costs—dead weight losses—and benefits—which Pugel describes as “producer surpluses” but I suggest are better understood as benefits from increasing production in industries undergoing more rapid technological progress? Because when understood in this way, it is clear that strategic trade policy is not only of interest to LDCs, but is always an important concern for all countries.

11. Participatory International Economic Planning

Who better to estimate the magnitude of dead weight losses for consumers than a national federation of consumers? As Mancur Olson (1971) explained, when benefits are concentrated and costs are diffuse, the logic of political lobbying favors those for whom there is much at stake. Putting the national federation of consumers in charge of estimating costs empowers the group for whom effects are smallest and most diffuse, and who therefore have most often had too little impact historically on trade policy, as Pugel reminds us.

Who better to argue the case for policies to advantage their industry than different industry federations of producers? While every industry federation will have an incentive to make the best case it can for why they should be awarded favorable treatment, there would be three checks on overexaggeration:

Armed with the estimates of dead weight losses, and future producer surpluses that emerge from this “dialogue” between a national consumer federation and industry federations, a Ministry for International Trade can be tasked with proposing tariffs and subsidies for different industries, including a schedule for their removal, to be debated and approved either by the national legislature or a national referendum. And as results from annual plans reveal errors in estimations of dead weight losses and producer surpluses, there will be opportunities for the Ministry for International Trade to make adjustments to mitigate welfare losses, also to be approved by the national legislature or referendum. ²⁰

Explaining who participates in drawing up and approving a strategic international economic plan is not the same as explaining details of how it should be implemented. One simple solution is to have a currency board as the only source of foreign exchange for workplaces buying imports, and the only buyer of foreign exchange from workplaces selling exports. And if needs be, a public insurance agency could insure workplaces against exchange rate risks.

12. Does Size Matter?

Ignoring any future effects on productivity, and assuming trading partners do not retaliate, the “optimal tariff” for a small country is zero, whereas the “optimal tariff” for a large country is positive because it is not a “price taker.” Size here does not refer to how developed or underdeveloped the country is, because we have already addressed that issue and proposed that countries with socialist economies follow rule 2 and rule 3, which take relative levels of economic development into account. Nor does size refer to population size, or size of land mass. Here size refers to what percentage of global GDP is produced and consumed in a country, although shares of global markets can vary for different goods.

I see no reason why a country with a socialist economy that produces and consumes a significant percentage of global GDP should behave any differently than a small country with a socialist economy if they are equally developed. While true that under standard assumptions the “optimal tariff” for a small country is zero and the optimal tariff for a large country is positive, this is due to the “terms of trade effect.” And rule 2 already provides all the guidance any country with a socialist economy requires regarding how it should try to influence terms of trade, irrespective of whether the country had an economy that is “small” or “large.”

To be clear, I believe an LDC with a socialist economy whose population is so large that it produces and consumes a significant percentage of global GDP is justified in securing the best terms of trade it can, including using its market share to advantage as optimal tariff policy teaches it can. For example, China now accounts for 15 percent of global GDP and therefore can affect terms of trade at least for some goods. If China had a socialist economy, I would argue that it would be justified in seeking the best terms of trade it can when trading with more developed trading partners like the United States, and in pursuing an optimal trade policy to do so. But China would not be justified in treating less developed trading partners like Indonesia or Thailand, for example, in this way.

13. Conclusion

This article has argued that a country that honors the principle of worker self-management cannot engage in direct foreign investment abroad or permit direct foreign investment in its own economy. This article has explained how annual participatory planning could lead a country with a socialist economy to export goods in which it enjoys a comparative advantage and import goods in which it has a comparative disadvantage, and thereby maximize efficiency gains from specialization and trade in any year. This article has explained why a country that honors the principle that everyone deserves to be compensated based on his or her efforts, sacrifices, and needs should apply rule 2 and rule 2A, and agree to terms of trade as well as interest rates on international loans that distribute more than fifty percent of efficiency gains to whichever country is less developed. But unlike many mainstream economists who minimize the benefits of strategic trade policies, caution against their use, and seldom see any justification for their use once countries have overcome underdevelopment; this article has argued that a country with a socialist economy should actively engage in strategic international economic planning irrespective of its level of economic development as long as it follows rule 3 and takes its level of economic development compared to its trading partners into account.

Finally, this article has explained how a national consumer federation and industry federations are well suited to debate estimates of the costs and benefits of tariffs and subsidies; how a Ministry for International Trade can use these estimates to design an appropriate set of strategic trade policies to maximize benefits, taking both short-run losses and long-run benefits into account; how these policies can be subject to approval by the national legislature and/or a national referendum; and finally how all this might be implemented by a currency board.

Hopefully by proposing concrete solutions to problems that will inevitably arise whenever a country tries to create a socialist economy in an international context still plagued by many countries with undemocratic and immoral economic systems as well as large discrepancies in levels of economic development, this article stimulates debate so those who face these problems in the future will be better prepared to address them when the time arrives. As in all matters, the better prepared we are beforehand, the better we will perform when opportunities arise.