BOHANON & CUROTT: Democratic socialism raises a fundamental question

So just what is democratic socialism? It is often equated with a more extensive and generous federal welfare state. Rep. Alexandria Ocasio-Cortez’s (AOC) tweet calling for “Medicare for all” appears an enlargement of Obamacare. Sen. Bernie Sanders’ call to “make public colleges and universities tuition-free for working families” seems an expanded version of existing federal programs.

However, democratic socialism is much more than bumping up federal social spending. It is designed to generate fundamental changes in our economic order. This is not fearmongering, nor very controversial. Look at the website of the Democratic Socialists of America, an organization that explicitly endorsed both Sanders and AOC. (Although Sanders is not a member of DSA, both AOC and Michigan U.S. Rep. Rashida Tlaib are members.)

Interestingly, the DSA website proclaims its members “do not want to create an all-powerful government bureaucracy,” that they do not want to engage in economy-wide “central planning,” and that “market mechanisms” are needed for much of the economy. However, the lead statement on the website proclaims: “We believe that working people should run both the economy and society democratically to meet human needs …”

The site goes on to argue that the current economic system benefits “corporate executives (and) … a few wealthy stockholders,” whereas DSA members “believe that the workers and consumers who are affected by economic institutions should own and control them.” Even more detail is provided: “Social ownership could take many forms, such as worker-owned cooperatives or publicly owned enterprises managed by workers and consumer representatives.” What is missing from this, of course, are outside shareholders. Apparently, publicly traded shares of stock are supposed to disappear.

This insight raises many serious questions. Here is just one: What replaces the role of outside shareholders in providing equity financing for new, growing and maturing enterprises under democratic socialism? If ownership must be vested in workers, then neither outsider investors nor government can provide the equity funds currently used for business expansion.

Unfortunately, “Save Equity Financing” does not make a good bumper sticker. Nor do we foresee whipping the crowds up with this arcane point. Nevertheless, readers of IBJ—and we hope most second-year b-school students—know that forcing successful enterprises to rely exclusively on debt financing and forbidding them from selling ownership shares fundamentally hampers business expansion and economic prosperity.

Equity financing has been an essential cornerstone of capitalism since at least the 1800s. Ending it would be a disaster.•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.