Chapter 8: Order analysis part I

Outline:

1st Introduction to the difficulty

2nd Characteristics of the individual order types

3rd The distinction of different systems of order

4th The aim suitability of the individual order types

5th On the pathology of the order types

1st Introduction to the difficulty

The primary task of a system of order is the coordination of individual decisions. There is a need for coordination wherever a number of individuals form a community. This applies initially to market-based systems in which the individual enterprises and households themselves decide on how they use their material resources. It stands to reason without more ado that the individual plans need a mutual coordination.

However, coordination is also needed in a state planned economy. Here the economic decisions shall emanate from a central plan of the State. But coordination is here also necessary for two reasons. On the one hand, it would exceed the abilities of an otherwise all-powerful dictator if he tried to make all the pending economic decisions of a national economy, composed of more than a handful of citizens, alone. He requires a bureaucracy consisting of a variety of bureaucrats, and their extent is larger the larger the size of the national economy is, for which a central plan is to be drawn up.

A bureaucracy consists of a multitude of superordinate and subordinate entities, even the central authority is formed by several people, and the dictator who controls the community is only in some circumstances present in this bureaucracy.

However, coordination is necessary in a state planned economy generally also because, even in a very tight planned economy, the individual citizens have to be granted certain rights of freedom, which in turn require coordination. Only in an ideal-typical form of a state centralised administration economy will all the forthcoming decisions be transferred to the headquarters, and the individual enterprises and households are only recipients of orders of the headquarters.

There are mainly two reasons why individual decisions need to be coordinated. A first reason for a need for coordination lies in the fact that almost all decisions of an individual have external and primarily negative effects which trigger a conflict of interests. On the one hand, the material resources are scarce and this means that to the extent that the one individual appropriates a larger part of the resources, fewer resources are available for the other individuals. On the other hand, the activities of an individual often have direct effects on the field of interest of the other individuals, for example, when the cultivation and use of an individual causes numerous annoyances such as noise, view hindrance, etc. for the owner of a neighbour property.

A second reason why the activities of single individuals have to be coordinated is that the economic tasks in a modern society are mostly addressed collaboratively. In general, households do not produce by themselves for their own need of economic goods; rather, enterprises are formed in which individual goods are produced together.

At the same time, the individual enterprises and households specialise in specific activities and goods, the one produces the one good, the other one another good. Through this specialisation and division of labour, productivity increases enormously, and on average, much more goods are available to all individuals, than if everyone made the attempt to produce all alone for his own needs.

However, such a division of labour requires a wide range of coordination. On the one hand, the individual activities within an enterprise must be coordinated. On the other hand, the individual is only ready for such a specialisation if he can rely on the fact that he can acquire all other goods of his need in exchange with the goods produced by him.

An economic order determines the aims to be pursued in detail, the means by which these aims are addressed, and the bodies to which certain tasks are assigned. The individual systems of order differ in the reply of each of these three basic questions.

A market economy system is characterised especially by the fact that in principle it is free to every household and enterprise how to use its resources. In a state planned economy, however, the use of resources is determined by the state.

2nd Characteristics of the individual order types

On the one hand, the coordination of individual decisions is usually achieved thereby that the single individuals receive information which is necessary in order to carry out the mutual adaption of the planning bodies; on the other hand occur incentives including sanctions that ensure that the individuals behave according to this information.

An entrepreneur needs firstly information on how large the demand for the goods produced by him is at alternative prices, the quality of goods that consumers are asking, the number of competitors who produce this good or related goods, at which prices the competing entrepreneurs offer these goods, and so on and so forth.

However, in order that the entrepreneur acts in accordance with this information, it must be ensured that the entrepreneur maximises his profit precisely when he aligns his production with the wishes of the consumers and that a production orientation which disregards these needs is penalised with losses. In general, it can be assumed that precisely these incentives emanate from a full competition between entrepreneurs.

Information can be distinguished firstly according to whether they are of normative nature or explicative nature. Normative information is present when the individual parties are informed of how they are ought to behave. So receives, for example, a production manager in a state planned economy instructions from his superordinate authority about the goods and quantities he has to produce.

Information of a quite different kind is present when an entrepreneur comes to know in a market economy which goods and what quantities he can possibly sell at certain alternative prices. This information differs not only therein that no instructions are given here, but that it is only informed about the possibilities, that no instructions are placed on the persons concerned. As a rule, explicative information is acquired out of individual initiative.

A second distinctive feature of possible information lies in the possible bundling of the information. Information can be given weakly bundled; the necessary steps are individually listed and described. On the other hand, the bundling can be so strong that the information consists only of a symbol, so that the communication of this symbol is sufficient to communicate the necessary information to the addressee.

A strong bundling of the information takes place e.g. in a monetary system in comparison to the pure exchange economy. In the framework of a monetary system, all goods are evaluated with prices, and the indication of the prices is sufficient in order to make a clear ranking of the individual goods. In a market economy, most of the decision-relevant information can be assessed in monetary terms.

In a similar way, democratic electoral systems are working with a strong bundling. The individual parties may differ so much according to the most different criteria; in the end, the number of votes decides alone who will be the winner of the elections. Also here, all politically relevant factors of influence can thus be expressed finally in proportion of votes.

The bureaucratic system, in contrast, is characterised by a very weak bundling of information. Many laws and ordinances define and describe precisely how the subordinates ought to behave. Similarly, a negotiation system operates with a large amount of information. In order to find out which negotiating position a trade union has reached against the employer, it is necessary to obtain a lot of information. A single reference value is generally not enough to provide the negotiators with sufficient information.

A trade union negotiator must be informed, for example, of the productivity of the workforce, the profit situation of the entrepreneurs, the bindingness of the orders and the material consequences for the event that the goods can not be delivered on time because of a strike, in order to be able to take appropriate decisions on wage claims and threat of strike.

If we combine both distinctive features (strong / weak bundling, normative / explicative) we get four different types of information acquisition:

Firstly, the information of an order system can be strongly bundled and of a normative nature. An important example of this first type of information acquisition is the traffic lights. The system of the traffic lights regulates the right of way at crossroads only by the colours: red, yellow and green. Further information is not needed to clearly determine who currently has the right of way and who has to stop.

Secondly, information can be strongly bundled and of explicative nature. As mentioned above, such type of information is present in the field of money economy, but also in the electoral system. The price determines what goods are bought, just as the voting conditions decide who is to be given power in a democracy.

Thirdly, we know normative information systems with weak bundling. Each law and regulation corresponds to this information type. An ordinance, for example, regulates very detailed what the dos and don'ts are for certain individuals.

Fourthly, we know the information type, which is only weakly bundled and of explicative nature. We have already mentioned as an example the negotiations of the collective bargaining partners; here, quite a lot of information is exchanged between the negotiating partners.

Let us turn to the second characteristic of coordination: the incentives. Here, we can distinguish firstly between positive and negative incentives. Positive incentives are characterised by the fact that they reward the desired activities, whereas negative incentives, on the other hand, sanction (penalise) actions which are undesirable. A positive incentive would be, for example, a premium; a negative incentive would be a fine.

Secondly, we can distinguish the incentives according to which mental authority they address, whereby material interest, conscience or reputation in the community can be addressed. Combining these two characteristics, we obtain a total of six possible types of incentives.

An incentive can be addressed firstly to the material interest and be of a positive nature: each price reduction is an incentive for the buyer to ask for more of the concerned good, just as price increases give the sellers an incentive to produce and offer more of this product.

Secondly, price variations represent, however, material negative incentives at the same time. The same price reduction, which gives the buyer a positive incentive, causes the producer to produce less of this good; and the same price increase, which encourages the producer to produce more of a good, causes the buyer of this good to demand less.

Thirdly, we take the case of a positive incentive which shall promote the social prestige. An example would be a medal which is awarded to a citizen therefore that he stood up for the community; the bestowals of orders gives an incentive to the citizens to do more for the community.

Fourthly, a public defamation represents a negative incentive which addresses the social reputation of the defamed: single citizens are punished by the defamation for having shown an undesired behaviour. This way they are to be deterred from the unwanted behaviours (e.g. the drug consumption).

Of this kind of defamation, however, those forms are to be distinguished which are exercised against people with certain inherent characteristics, for example the defamation of foreigners, which are, for example, defamed by their skin colour. Since these features can not be removed, they do neither present a real deterrence. Of course, such defamation often takes place in order to impel the persons concerned to leave the country.

Fifthly, a positive incentive that addresses to conscience takes place, for example, when the citizens are asked to buy predominantly those goods produced in their own country.

A final, sixth incentive, which is of a negative nature and is directed at the conscience of the parties involved, is present, for example, at the appeals for moderation of the politicians. For example, in the context of the Concerted Action, the collective bargaining partners were asked to decide only wage increases which are not higher than the wage guidelines established by the State. Because of the tariff autonomy applicable in the FRG, it was not possible to force the bargaining partners to such a behaviour which promotes monetary stability. It was therefore appealed to the social conscience (the social responsibility) of trade unions and employers to refrain from any wage increases that could endanger monetary stability.

However, the coordination performance of an order system depends not only on the type of information and the incentives. Coordination requires always a mutual adaptation of the participants and this adaptation differs, among other things, of how fast and how differentiated it can be reacted to changes. Here, a distinction can be made between a temporal, functional and personal degree of differentiation.

In terms of time, very different periods can elapse before adaptation to the data changes is possible at all. Let us take the market in which, at least in principle, an adaptation of one's own behaviour to data changes (e.g. price increases) is possible immediately after the occurrence of the data change. If a household finds out that the prices of certain vegetable varieties have drastically increased and if it is appropriate for a household to consume other vegetable varieties, the household may carry out this adjustment immediately after the price change.

Of course, delays in the adjustment are to be expected in the market sometimes. Thus prevent cancellation periods the immediate reduction in the demand for the labour force, at which wage increases have occurred. Cancellation periods, however, represent already corrections of the market, which were introduced subsequently due to political aims. There are, however, also adaption delays which are in the nature of the production process.

If an enterprise has acquired a production plant which allows production for a number of years, it is not advantageous in the case of price reductions of another production plant to immediately dismantle the old plant and purchase a new plant which, however, performs approximately the same function. An enterprise will generally only acquire the new, cheaper or technically better plant if the service life of the existing plant has largely expired.

Let us take as a counterexample the electoral processes within the framework of a state democracy. It is usually voted at intervals of four to five years. If within this legislative period changes are made which, from the point of view of the voters, require a different composition of the government, the electors can generally carry out this change only after the end of the legislative period. Thus, a very much longer period elapses here, until it can be reacted to the data changes.

Of course there are also exceptions to this rule. In the case of particularly drastic events, certain constitutions provide that a new election may also be made prematurely; or the government sees itself impelled to resign prematurely due to exceeding discontent in the population, and thus pave the way for new elections. In this case, the delay period would then be reduced. Despite these exceptions in the electoral process and in the markets, however, it can be assumed that in economic systems, it can be reacted much faster to data changes than in political electoral systems. The temporal degree of differentiation of a market system is much larger than that of a political electoral system.

Secondly, the depth of adaptation can also differ in functional regards from one order system to another. Adaptation to data changes has a different result, depending on whether many or few alternatives are under consideration. Let us first take the example of politics and assume a majority election system, in which predominantly two parties compete with each other. If a voter is dissatisfied with the policy of the current government, then he has merely the possibility to change over to the opposition party at the next election.

Every party composes in their election program a combination of solutions of different problem areas. It is quite possible that an individual voter prefers the economic policy and cultural policy of party A, but the social and foreign policy of party B; nevertheless he has to decide for one party and thus accept the solution bundle offered by this party.

If we have a proportional representation system, the choice options of the voter are somewhat greater, in general he can choose between several parties; however, the restriction remains, that he must decide for a solution bundle of one party.

The choice options of a consumer in a market system are generally different. Here, he is not forced at adaptation processes to choose between a few bundles of goods. He can, in principle, decide freely what kind of good he chooses at every single good he is demanding; the fact that he has decided to buy organic food is not compelling him to make a certain choice, for example, at furniture.

Of course, it is conceivable that certain goods compilations are offered for ideological reasons or for fashion reasons; whoever prefers organic food will, for reasons of fundamental considerations, favour also, for example, energy types which are obtained from renewable energy resources. But here, too, one will have to assume that market systems as a whole offer a larger number of alternatives than political electoral systems. The functional degree of differentiation of the markets is greater than the differentiation of political systems.

Differences in the order systems result thirdly also in the personnel degree of differentiation. On markets are offered individual goods, but in political systems are offered collective goods. The fact that the one individual has decided for the good A does not force the other individuals in market-economy systems to choose also the good A. In the market, the decisions of the single individuals are basically independent of each other.

Of course, decisions of one individual also influence the decisions of others. The fact that an individual asks for a particular good increases the price and by the price the demand decision of the other individuals is affected. In addition, there are efforts, for example by fashion, to influence the demand of individual consumers in such a way that all individuals demand preferably similar goods.

But here it is less about incentives which emerge from the economic subsystem than rather about the influences of the cultural subsystem. Nevertheless, the individual decisions in the legal sense are independent of one another; the individual can very well defy these influences and thus not orient oneself to general fashion.

In political systems, on the other hand, the services are offered principally as collective goods which benefit the entire citizenship, or at least a large part, the individual does not have the possibility to consume another collective good than his fellow citizens; he can strive, by influencing the politicians, for that collective goods of his choice are offered, but in these efforts he only has success if a majority of the voters also prefers these goods.

Continuation follows!