I'll start with what I assume is an unpopular opinion here: I am not convinced that the field of finance is 100% bullshit. Yes, we all know about the prominent current example of how markets can fail, but (a) note that, in principle, the market does have a mechanism to punish the people who do too much short-selling, even if the capitalist class isn't currently letting that mechanism do its job, and (b) in the long run, we all know Gamestop stock isn't going to be at a high price forever, and one way or another it will eventually fall to the price it "should" be. Most of the time, markets are okay, perhaps even, dare I say, GOOD, at aggregating information from a wide variety of sources about the value and scarcity of things.

I think that many of the things finance is supposed to do -- e.g. distributing risk over time and space, allocating resources to promising technologies, incentivizing people to make bets that contribute to aggregated predictions about the future of the economy -- are good things that a socialist economy would need to have a good replacement for. At the very least, I think there's a baby in the bathwater here.

So, considering the things that I associate with "finance" in the capitalist country I live in (e.g. stock markets, insurance, banking, venture capital) what alternatives have past and current socialist countries used?

  • borismlkzika [none/use name]
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    edit-2
    4 years ago

    One of the main purposes of a financial system is to ration funds from lenders to borrowers, thereby allowing these resources to be put to a more productive use to the economy as a whole than they would be stashed away under a mattress. In a capitalist system, a (commercial) bank operates by charging higher interest rates to the borrowers than they pay to those who hold money in their deposits, making a profit on that difference (the banking spread). The mechanism isn't exactly like this on an individual level (the money you borrow doesn't literally come from someone else's deposit) but its more or less true on the aggregate.

    You can't really have commercial banking (and especially stock markets or derivatives) without private enterprise, since the whole system revolves around banks and other intermediaries trying to evaluate the future profits of firms, so they can get the biggest return without risk of default from the borrower.

    The problem with the logic of the above paragraph is that, as someone on this site already might expect, the credit market doesn't necessarily allocate the investments that would lead to a country's development or increase its standards of living. So what many countries do (and socialist ones did) is to try to "manually" ration funds through the state by financing long term, low-interest loans to sectors of the economy which are compatible with the government economic policy for the following years (or their x-year plan, if you will). These are Development Banks, which often serve to nudge enterprise in the right direction rather than have an explicit profit motive.

    This makes sense if you are a socialist party trying to develop the productive forces in a country through market forces, but not if you are in a centrally planned economy like the Soviet Union (in that case, the loans would be subsidies since they would just redistribute government funds for different uses).