A Rational Theory of Socialist Public Ownership

Abstract

This paper asks why socialist economies were historically centered on public ownership of industry, despite its many drawbacks, and offers an explanation founded on rational individual choice. It first shows that the Marxian program of state socialism was subject to intense competition from alternative blueprints by the turn of the 20th century. It then argues that the superiority of the Marxian program lay in the contract enforcement property of an arrangement in which a politicized bureaucracy in charge of production was accountable to a party controlled by the workers. Formally, in a setting in which all participants are selfish and rational, the workers’ sole objective is redistribution, and an initial system choice has to be made. Party-state control of enterprises turns out to be the optimal contract between a principal (the workers) and its agent (the party) for a one-time transaction plagued by extreme informational asymmetry. Finally, modifications of this choice setting and implications for the decline of, and transition from, communism are discussed.