International Financial Investment

Dear all,
I just finished reading Robin Hahnel’s recently published book ‘Democratic Economic Planning’ and have some open questions to clarify regarding Hahnel’s ideas in the subchapter on “International Financial Investment” (pp. 277-278), as I think there are some problematic contradictions there (but maybe I just lack understanding).
Shortly before, Hahnel writes about ‘international direct investments’ that these are completely prohibited for a Participatory Economy, as they would run counter to the fundamental principles and values - especially workers’ self-management - of Parecon. Here is a longer excerpt:

“Should a country with a participatory economy engage in international trade (IT)? Should a country with a participatory economy engage in international financial investment (IFI)? Should a country with a participatory economy make direct foreign investments abroad (DFI) or permit DFI by foreigners in its economy? And, if a country with a participatory economy should enter into any of these international economic relationships, how should it go about doing so? […] However, we begin by explaining why a country with a participatory economy should not engage in DFI of any kind.
A country with a participatory economy will not have to decide whether any of its worker councils should make direct foreign investments abroad, or whether foreign businesses should be permitted to make direct foreign investments in its participatory economy because DFI is incompatible with a fundamental principle of participatory economics — worker self-management. […] And while worker councils and federations in a participatory economy may encourage and even help establish worker owned cooperatives in other countries, the principle of economic self-management also does not allow a worker council in a participatory economy to own and operate for profit a business abroad, because that would make foreign workers into employees rather than full members of a worker council with all the rights that entails.” (p. 268-269)

The same basic message with regard to (national) financial investment can be found in the FAQs (» Is there a stock market?)
(» Can I use my personal savings to make investments?)

So how should it then be legitimate to make financial investments on an international level and how would these concretely look like, so that the principles of Parecon are preserved? Doesn’t one then also let workers abroad work for oneself (now as a nation) to a certain extent and skim off the “rates of return on investment” and “interest rates on international loans” (p. 277), the created surplus value? And where can the central principle of ‘reward for effort’ be found in all this, if I (as a nation) let my capital ‘work’ for me abroad?

I hope these are not too many questions at once…


I’ll start off by asking where is the surplus cash coming from to allow foreign investments? In practice, there shouldn’t be any surpluses as there are in a capitalist economy because there is no longer any profit.

Worker councils produce goods/services for what is in demand. Demand is generated by the people participating in the economy, which are individuals living within a defined space like a country for example. So goods and services produced are in response to those demanding these within this area and not for any international clients. WCs are granted access to the means of production in order to accomplish this, access provided by the IFBs who approve WC proposals. Any excess production would have to be justified as meeting demand outside of the economy being served. If it were permitted, then a higher price could be charged for those goods which would generate a profit for the WC.

It could happen, but I’m not certain it would be allowed to happen.


Hello Claude, tanks for the quick answer.

So, if I understand you correctly, profit for investment and excess production should (in a participatory economy) not arise in the first place? I would have thought so until I came across the chapter ‘Participatory international economic planning’ in the mentioned book, where it is explained that it would be possibly an advantage for the welfare of the Parecon-citizens (and not against the Parecon-principles per se) to participate in international trade and therefore to produce (some) goods in excess for the world market (?) according to the comparative cost advantages (as far as I get that right). Based on this, the chapter on ‘international financial investment’ follows. Since this chapter is extremely short, I quote the main part of it:

"So far we have concentrated on international trade (IT). However, for the most part, the same principles apply to international financial investment (IFI). Just as differences in opportunity costs among countries give rise to potential efficiency gains from trade, differences in propensities to save and social returns 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 instead reduce global efficiency. As explained in Part IV, we believe rates of return in a participatory economy will reflect true social rates of return as accurately as can be hoped for. But this may not be the case in other countries with different economic systems. 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 is to (a) avoid efficiency losses due to false signaling and international financial crises and (b) for a country with a participatory economy to apply rule #2A:

  • Rule #2A: When a participatory economy negotiates interest rates on
    international loans, more than 50% of any efficiency gain should go to
    whichever country is less developed." (p. 277)

To me, it seems to sound like what is being suggested here is that a Parecon-economy – though not internal – could be moving in a market system ‘outside’, at the international level. Am I right about that? And if so, does this not contradict the claim to entirely free oneself from the shackles of market forces?

Best regards and thanks for the help,

The following is based on my reading of Democratic Economic Planning:

As far as I can tell Worker Councils would not accumulate any credits, since they invest through the planning process and are allocated additional capital goods according to Social Benefit / Social Cost etc, rather than offering credits.

However, individuals / households can save and borrow via their Consumer Council / Federation. So it seems the question of investment in other countries arises due to the savings preferences of consumers. I suppose the thinking would go that since in Parecon credits represent a claim on goods/services, and since saving therefore represents a temporary release of the claim on those goods/services, that those credits (and hence goods/services/resources) could in some situations achieve a higher rate of social return by being invested abroad rather than sitting in a bank account.

Concretely, suppose I earn €50,000 per year and save 5% of my income, €2500. What are my options? I could (a) leave it in my domestic bank account, accumulating 0% interest (if there is a zero interest policy), or (b) leave it in my domestic bank account, accumulating r% interest where r is the rate of growth of productivity in the economy (if there is a non-zero interest rate policy), or (c) I could lend it to someone abroad.

Why would someone abroad want to borrow my credits? Because those credits can be used to purchase goods/services in any country which uses that currency, in this case a Participatory Economy (or because someone else wants to purchase that currency). Since Direct Foreign Investment (DFI) is ruled out because it violates worker self-management (by taking an equity share in a firm worked by other people), the only way to make a return on the loan is interest. If, for example, the loan is used to invest in a foreign firm in a sector with a higher rate of social return than that in the Parecon, then the creditor can charge a higher interest rate than they otherwise could and both parties are winners.

That does, however, mean that the creditor has gotten a ‘free lunch’ and can now use that free lunch to purchase more goods/services in the Parecon.

I don’t think this is a complete answer but it is part of it.


Thank you, this all seems quite logical to me. But: If I would receive an interest-loan, wouldn’t this violate the principle of “income for effort”? Especially if I would pick the investment-opportunities myself – instead of having the bank choose for all the savors vicariously and paying them an equal (possibly democratically decided) interest-rate – it would again be largely dependent on personal luck and/or investment-knowledge, which return I will receive and thus would lead to outcomes, which are not in the first place dependent on my individual effort. Or (if we’ll for now just assume the seemingly less problematic case of investment by democratically controlled banks) does the"sacrifice" argument come in to play here; since I am giving up comsumption-opportunities in the present, I would have an entitlement to receive an (limitet?) interest (liquidity-preference/liquidity-premium)?


That’s an interesting question. I’m doing a series of interviews with Prof. Hahnel here and I will put that to him when we get to finance (and mention your name). It’s a question which applies equally to domestic finance. Why should anybody get a ‘free lunch’ by lending their PE dollars?

I imagine that a large part of the answer will be pragmatic - for example, if it is genuinely mutually beneficial, on a long term basis - but we’ll see.

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I had not seen this thread in the forum. And this is only a short reply for the moment.

Regarding personal saving for individuals in a PE (which comes up late in the thread):

Anyone who chooses not to spend all of their income during a year is welcome to save any part of it they want to, and there is no complication. As explained in DEP however, when individuals want to spend more than their income by borrowing, that poses a potential problem: What if someone keeps doing this year after year and it becomes clear they will not be able to repay, whether this is intentional on their part or not? So there is a discussion in DEP about the need for consumer councils, or credit union financial institutions attached to CCs, to monitor this, and refuse to keep loaning to an individual who isn’t going to repay. Regarding whether or not their will be an interest rate paid to those who save and charged to those who borrow from PE credit unions: I answer that question on p. 123: Either there is a zero interest rate, or the interest rate could be set equal to the annual rate of increase in economic wellbeing per capita with a small risk premium. We could discuss whether such an interest rate would somehow be savers exploiting borrowers inside a PE, or not. I think not, but it’s worth discussion.

Concerning international financial investment and the interest rate on international financial investment:

You are correct that I do argue that unlike direct foreign investment which should NOT be permitted in a PE, I argue that just as a PE should be able to engage in mutually beneficial international trade, it should be able to engage in mutually beneficial international financial investment… provided in both cases it passes the “equity test.” In the case of trade I explain why and how the terms of trade should give more than half of the efficiency gain from specialization and trade to whichever country is less developed., Rule #2. And I argue that the same principle holds w.r.t. international financial investment. There are times when there is a global efficiency gain from international lending. What the interest rate on that loan does is divide such an efficiency gain between the country which is lending and the country which is borrowing. My recommendation, which is Rule #2A on p. 277, is that the interest rate on international loans should distribute more than half of the efficiency gain from international lending to whichever country is less developed. This applies whether it is the PE which is the country lending or borrowing.

What you all mostly seem concerned with is WHO IN THE PE IS DOING THIS LENDING? The whole discussion in DEP implicitly assumes that the lender (or the borrower) in a PE is the whole country, or the government. So if the US had a participatory economy it would be the US Treasury Department that was lending to let’s say the government of Ghana. In which case the interest rate would have to be low enough so Ghana was getting more than half the efficiency gain from this international loan. I suppose the PE US Treasury could make international loans to private entities in Ghana at this same “fair” interest rate. But frankly I was assuming we were talking about international loans between governments.

Again: Whether any positive rate of interest in this situation would be exploitative is something we can discuss. I would argue that as long as Rule #2A is followed such international financial investment would not be exploitative, but rather (a) mutually beneficial, and (b) fair. For me the debate is simply whether to insist that 100% of all efficiency gains from either international trade or international financial investment should go to the less developed country, or more than 50% is “good enough.”

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First of all, thank you for the comprehensive clarification. So, as far as I get that right: Individuals would not invest (abroad) at all; the potential increase in productivity would flow at least higher than 50 percent to the poorer country; and (if there were an interest rate that would skim off parts of the productivity gain) the return would be distributed equally to all citizens of the PE.

I hope this doesn’t stray too far from the original topic of the thread, but now that you’ve brought up ‘international trade’, I have a question about that as well, if you don’t mind: The potential mutual benefits that spring from international trade are obvious, however I also have some concerns when imagining a PE operating in an international market system. If a PE were to engage in trading at the international level (use and possibly expand specialization/comparative advantages), how can it be ensured that market forces (‘from outside’) do not undermine the PE project/self-management. As far as I remember correctly, in your discussion with Erik Olin Wright (Alternatives to Capitalism. Proposals for a Democratic Economy - Chapter 5: Breaking with Capitalism) you had - in my opinion very much understandably - consistently rejected even a ‘pinch’ of market in a Parecon, because the danger would be too high that this could blow up the socialist project. With respect to international markets/trade, to what extent does this danger not exist (or not that much as to be negligible) that market forces would undermine PE if a significant number of parecon-companies were involved in international trade? Thanks in advance

My short answer is that until such time as we can replace international markets with participatory, democratic, planning on a world-wide basis… which I don’t think will happen soon… we are stuck with international markets where countries sell exports and buy imports. In other words, while we can rid ourselves of markets inside a PE… which as you note I argue we should do in the dialogue with E.O. Wright, we can’t do that for international markets in the foreseeable future.

That leaves a country with a PE with two options: 1. Opt out, i.e. complete “autarky,” do not participate in international trade. 2. Participate, but use Rule #2 when doing so. If the benefits of specialization and trade were small, option #1 might be best. But particularly for small countries, I don’t think that is true. In other words, I think that would be a very large self-imposed penalty. So that’s why I propose a way for a PE to benefit from international specialization and trade in a way that does not undermine its core principles: Follow Rule #1 and Rule #2.

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Why allow individual citizens of a country with a participatory economy to engage in international lending at all? Especially if we don’t put restrictions on interest rates that could lead to a citizen of a PE exploiting someone in a less developed country. If a citizen in a PE saves because they want to consume more than their income later, they can. And if we pay interest on domestic savings in a PE equal to the rate of growth of economic wellbeing per capita a citizen in a PE can even earn some interest on their savings.

When there are efficiency gains from international lending we can do that by having the whole PE borrow or lend to other countries, as I explain below. And in that case it is reasonable to expect we can put restrictions on interest rates for state to state loans that prevent exploitation of those in less developed countries. Monitoring international loans involving individual citizens in a country with a PE to make sure the interest rates are fair would be a practical nightmare, and is not necessary if we take advantage of efficiency gains from international lending through state lending.

Yes that makes sense. And I agree generally with the points that you made.

How can this be stopped?

How can this be stopped? GOOD QUESTION!

Here is my thinking: We have a solution on whether what most people think of as financial investment, but economists call “saving” should be paid some positive rate of interest. Our answer is either “no.” Or, alternatively, the rate of interest paid to individual savers in a PE should be equal to the average rate of increase of economic wellbeing per year.

When thinking about whether a PE should and could participate in international financial investment, IFI, I proposed that unlike the case of direct foreign investment, DFI, which no PE should engage in, a PE could engage in IFI: IF (1) it was advantageous for the PE to do so, and IF (2) the interest rate on the international loan between the country with the PE and the other country distributed more of the efficiency gain to whichever country was less economically developed. So I was thinking purely in terms of country to country loans.

You are asking about whether a citizen of a PE can loan money to a foreigner, a foreign business entity, or a foreign government for that matter. Frankly, I had not been thinking about that.

Why might a citizen of a country with a PE wish to do this? They well might if the rate of interest they were offered by a foreign citizen, business, or government were higher than the rate of interest paid on saving inside the PE.


So there is the dilemma as I see it… at least for now.

My inclination is to opt for telling individual citizens of a PE they have to do their saving inside the PE, i.e. they are not FREE to lend internationally. And if I had to explain to them WHY they should be so restricted, I would remind them that THEIR SOCIETY was under an obligation not to take advantage of those who lived in lesser developed countries, which THEIR COUNTRY WITH A PE was making sure of when it handled country-to-country international lending by using Rule #2A. And, it was just a practical impossibility for individual citizens of a PE to practice Rule #2A on an individual basis.

But you asked a damn good question… which I had not thought about before. So my answer is provisional at this point.