Comrade-in-chief?

"WHEN I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America."

Those were the words of Republican Sen. Jim Bunning of Kentucky, the day after the Treasury Department announced in September its plan to put Fannie Mae and Freddie Mac under a "conservatorship"--in other words, to nationalize the world's two largest mortgage companies which control nearly half the home loans in the U.S.

Since then, the Bush administration--not to mention other governments around the world--has gone much, much further.

Yesterday, Treasury Secretary Henry Paulson compelled nine major banks--Bank of America/Merrill Lynch, Citigroup, Wells Fargo, JPMorgan Chase, Morgan Stanley, Goldman Sachs, Bank of New York Mellon and State Street Financial--to accept a federal government investment of $125 billion in their preferred stock.

After decades of promoting the gospel of free markets globally and deregulation at home, the scale of the U.S. government's intervention in the economy no doubt seems like the "End of Days" to conservative ideologues in the U.S. political and business establishment.

But how could a plan that rescues some of the world's largest financial institutions and aims to calm panic among Wall Street investors, while letting the lives of working people be ripped apart by foreclosures, evictions, inflation and unemployment, have anything to do with socialism--the vision of a society controlled by the working majority, whose highest aim is to put people before profits?

Those at the top recognize as much. Thus, the Financial Times, a fierce defender of the global capitalist order, sought to reassure its readership in an editorial this week:

Does this rescue mean the end of private financial capitalism? Of course not. Although the size of the crisis requires an exceptional response, this is but the latest in a long line of banking crises and state rescues. Nationally owned banks seem likely to be a reality in many countries for a decade...

These leaders are not putting capitalism to the sword in favor of the gentler rule of the state. They are using the state to defeat the marketplace's most dangerous historic enemy: widespread depression. And they are right to do so.

Likewise, George Bush sought to comfort free-market hardliners as he announced the plan to follow the lead of European central banks by injecting capital into the U.S. banking system through stock purchases in financial institutions. "These measures are not intended to take over the free market, but to preserve it," Bush told reporters.

IN MORE normal economic circumstances, the free-market zealots have a very simple test: State ownership equals socialism--period. So naturally, a massive injection of state funds into the economy, which has made the U.S. government the owner of the world's largest insurance company and two largest mortgage companies, set off alarm bells in some quarters.

But only a minority of the U.S. establishment is complaining about the demise of American capitalism and the Bush administration's unexpected devotion to the socialist cause. That's because most financial and political decision-makers have absorbed that dramatic action is necessary to save global capitalism from itself.

Under normal conditions, U.S. corporations push for deregulation and free markets because this makes it easier to maximize their profits.

Deregulation of the energy industry, for example, allowed Enron to make big profits by manipulating the supply of electricity, until their sham accounting practices and bad bets brought them down. Likewise, the lack of government oversight let the mortgage industry and a shadow banking system create huge markets in securities trading based on sub-prime loans, which no investment bank or hedge fund could refuse to participate in if it wanted to keep pace with its rivals.

Now that those investments have become toxic, however, the push for deregulation has been replaced--for all but the most ideologically blinkered--by the gospel of state intervention. "The goal is to get the engine of capitalism going as productively as possible," Nancy Koehn, a historian at the Harvard Business School, told the New York Times. "Ideology is a luxury good in times of crisis."

The bailout of various financial firms and nationalization of the banks, however, is nothing more than a way to use the taxes paid by the working class to "socialize" the losses incurred by Wall Street's gamblers--ironically, the very same bankers and speculators whose multimillion-dollar paychecks are defended by free-market apologists as deserved compensation for their unique ability to make wise decisions.

ACTUALLY, STATE intervention in the economy, despite the angry denunciations from proponents of the free market, is a recurring theme in economic history--both in the U.S. and internationally.

In the U.S., the New York Times recently pointed out, "over the last century, the federal government has occasionally nationalized railways, coal mines and steel mills, and has even taken a controlling interest in banks when it was deemed to be in the national interest."

Sometimes, these takeovers took place during times of war to facilitate production and distribution for military purposes. But the federal government has also seized failing companies and banks--for example, the 1984 takeover of Continental Illinois Bank and Trust, then the seventh-largest U.S. bank--when such collapses threatened to impact the rest of the economy.

During the Great Depression of the 1930s, the administration of Franklin Roosevelt bought shares in thousands of banks, undertook massive spending to stimulate the economy and imposed a series of regulations on the finance industry (a number of which were repealed under the presidency of Bill Clinton, thus opening the way for the rapid growth of a shadow banking system that triggered the current crisis).

In fact, in different places and times during the last 100 years, various nations around the world have relied on even more heavy-handed state intervention in the economy to promote capitalist development.

In Europe, upsurges in workers' struggles forced many countries to use more aggressive social spending in an effort to co-opt the labor movement and head off more radical challenges to the capitalist system. In addition, mobilizing resources on a large enough scale to rebuild from the devastation of the First and Second World Wars led many European states to direct investment into critical areas.

In the USSR, after Joseph Stalin and his allies effectively overturned all vestiges of workers' democracy and workplace control over production, the state bureaucracy undertook a rapid development of productive forces based on the brutal exploitation of the Russian working class, enabling what had been a backwards economy to contend as a world superpower for a number of decades.

Thus, various countries, including the U.S, have used state capitalist measures to manage both economic development and economic crisis at various junctures--not as a means to abolish capitalism but in order to preserve it.

In fact, even in "normal" times, the U.S. state directs huge amounts of investment outside the free market--for example, the building and maintenance of the federal interstate highway system and military spending.

But because Corporate America benefits from such investment in many direct and indirect ways, they don't see fit to denounce this as "socialism." Instead, they see these measures as the state fulfilling the useful function of maintaining a "healthy business climate."

SO IF socialism isn't state control over important parts of the economy, what is it?

First, it should be said that a socialist society would indeed need to nationalize key industries in order to replace the irrationalities of capitalist finance with a more rational way of directing investment.

The Financial Times editorial board's own defense of the banking industry is an indictment of the crisis-prone nature of capitalism:

Modern capitalism needs well-functioning banks. Businesses and individuals need liquidity and an effective means of turning their savings into productive investments.

But banks perform this function by making bets on the future. This is the purpose for which they exist--but it makes them inherently unstable. They tend to overextend themselves in the good times and are overcautious in the bad, exacerbating booms and busts. The reason we insist on keeping our economic systems built on these trembling fault lines is that they are normally so effective at this job of intermediation.

This passage beautifully captures the anarchy of the free market. Capitalism's lifeblood depends on finance capital granting credit to firms seeking to make new investments. But when bankers get together and decide whether to finance a proposal put before them by a particular firm, they do so without regard to any consideration except whether they can expect to have their loan repaid with interest.

Likewise, companies don't produce any goods except those they expect to be able to sell profitably on the free market.

This dynamic carries with it two fundamental problems. First, those goods that people need, but are too poor to afford, simply won't get produced. So even if there is a need for more food to be produced or more houses to be built, if the hungry and the homeless have no money, they also have no way of making their demand "effective"--and thus, no profit can be made from producing such goods for the market.

Second, competition between rival firms means that in good times, every firm must rush to produce more goods, grab as large a share of expanding markets as possible and attempt to undersell the competition. Failure to do so will leave any individual firm with a smaller mass of profits to undertake the next round of innovation and investment.

But investment into a particular type of production must be made today, while the products of that investment are sold some time in the future--in some cases, years in the future. For example, in the case of automobile production, investments made today require years of building up assembly lines, supply chains and production facilities to bring them online.

But if every auto company is rushing to take advantage of a perceived increase in demand, by the time they all get their cars to market, they can produce a glut. The seemingly shrewd decision to extend credit to a big auto producer now suddenly looks bad when excess supply means that all the cars that have been produced can't be sold profitably.

In a similar fashion, the current financial crisis is the product of a rush by investment firms to take advantage of the housing bubble by making loans to homeowners at high interest rates that seemed certain to be repaid--so long as the bubble continued to expand.

Every kind of hedge fund, investment bank and financial institution found it impossible to resist investing in the high-yield bundles of these loans--precisely because if they didn't, their return might look anemic compared to rivals that were enjoying handsome rewards.

Now that the housing bubble has burst, and these investments have become so toxic, the banks fear making loans to anyone, unsure of whether the potential borrower may be the next to go down, and hence unable to repay the loan.

This is what the Financial Times means when it states that banks "tend to overextend themselves in the good times and are overcautious in the bad, exacerbating booms and busts." Nevertheless, the Financial Times asserts, banks "raise living standards" while state control over investment tends to "sacrifice efficiency and growth for stability."

With the current financial crisis destroying housing equity, creating unemployment and producing a huge bill to be footed by taxpayers, the claim that banks "raise living standards" ought to make the editorial writers blush--unless they mean to make the more obvious point that banks raise living standards for bankers.

IN A socialist society, banks and finance would be replaced by democratic planning. The accumulated savings of society would not be handed over to a class of people, unelected and unaccountable, to invest for the purpose of their private gain. Instead, the economic output of society would be used to address the social needs of the producers.

The critical determining factor of whether state ownership of the means of production (or the means of finance) has a socialist character depends on the answer to a simple question: If the state controls the economy, who controls the state?

The Bush administration's state intervention in the economy today is designed to preserve decision-making power for the owners of banks and corporations. And in any case, the principle that the state will use in deciding how to exercise its ownership stake will be to maintain a "healthy business climate," not to put the needs of workers and the poor first.

In truth, the capitalist state is ill equipped to direct a socialist economy. It may hold political power, but economic power remains in the hands of the owners of factories and businesses, giving them effective veto power over policies they don't like.

Take, for example, the battering that the stock market took after the House of Representatives failed to pass the $700 billion bailout bill. Disinvestment is a powerful weapon against legislators who buck the will of the economic elite.

Democratic socialist planning, therefore, requires workers' control over the state and over the process of production. Workers' councils at the factory level are necessary to give workers a say in the day-to-day running of their workplace. But each factory council would send elected delegates to coordinate decision-making on an industry-wide and economy-wide basis.

Because these delegates would be drawn directly from and accountable to the workplace, because they would be paid the same as the rest of the workers in that workplace and known by their co-workers, and because they would be recallable if they failed to exercise the will of those who elected them, such councils would give workers the ability to have a real and deciding say in every aspect of society.

In fact, such councils grow organically out of workers' struggles. At the high points of struggles during the last century--from Russia in 1917, to Minneapolis in 1934, to Hungary in 1956, to Chile in 1973 and Iran in 1979--workers who organized inspiring fights against capitalist exploitation also set up workers' councils to coordinate their fight, and these provided a means of carrying out production under their own control.

Needless to say, the political and business establishment in these countries didn't relinquish their wealth, power and privilege without a fight. Thus, achieving workers' democratic control over production requires a confrontation with the state.

As a result, the transition from capitalism to socialism can't be a gradual or incremental process by which the state enacts reforms and progressively takes ownership of more and larger chunks of the economy.

Rather, socialism represents a radical break with the present system--and depends on the active struggles of workers and their subsequent engagement with every aspect of governing society in their own interest, under the guiding principle of human need before corporate greed.