Chapter 8: Order analysis part II

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

3rd The distinction of different systems of order

Our previous considerations were related to ideal-type differences. In reality, however, we must assume that there are almost always mixed systems present in which predominantly certain elements of order prevail, but in which almost always certain corrections are made, which are taken from other elements of order.

The four-part division of possible systems of order mentioned often in the literature: market, negotiation, electoral- and bureaucratic systems as such are to be understood as real types of societal order. We want to check by which combination of our three elements of order these four real types are characterised.

Let's start with the market system. This is characterised by the fact that the explicative information predominates clearly. Only by means of a minimum of rules, which restrict the scope of action of the individuals, normative information is present. The market system is furthermore an ideal example of strongly bundled information in which almost all decisions are concentrated on the question of which decision will bring the highest profit for the enterprises or the highest benefit for the households. Of course there are also attempts here to make distinctions which are not reflected in the price of a good; the price of goods is the most important, but not the only means of competition in a market economy system; it is e.g. also intended to influence the competition by advertisement.

With regard to the applying incentives, the market is characterised by the fact that the financial (material) interest is addressed primarily, negative influences in the same way as positive. Hence, production is oriented at the needs of the population primarily by the price system; if there is scarcity, thus too little is offered of a good, then the price increases and this price increase is an incentive for the suppliers to expand production, but represents a negative sanction for the buyers, which suggests a reduction of the demand.

Of course, also the market can function only if the market participants - especially the entrepreneurs - have a minimum of social responsibility, such as the willingness to recognise certain moral and legal standards, even if the observance of these standards brings along a reduction of their own profit. The profit of an entrepreneur might perhaps be increased in individual cases by fraud, deception, extortion, tax evasion, etc.; a market economy, however, can last and be able to satisfy only if the overwhelming majority of the market partners are willing to recognise these social standards.

However, a functioning market economy can confine itself to a minimum of moral and legal rules of conduct in comparison to other systems of order, since here the coordination of the particular interests occurs in the way that the individual interests are channelled towards the common welfare. What is meant here is that in a functioning market economy an entrepreneur achieves his highest profit just when he is ready to adapt production to the needs of the households. This canalisation is largely made by competition.

In these conditions, the entrepreneur can increase his revenue and thereby ultimately his profit only by looking for renewals that reduce costs and improve quality. If the entrepreneurs are under strong competition, they are forced to pass on cost reductions to the consumers; if they do not do so, they run the risk that previous customers change over to the competition. The interest in renewals, however, remains as the entrepreneur can continue to make profit increases in doing so until the other enterprises can take over these renewals.

But since there is a risk that these temporary profits (windfall profits) will not suffice to incite entrepreneurs to introduce renewals, the patent legislation tries to extend the duration of these windfall profits for the innovators. If the entrepreneur has filed a patent on an invention, then only he is allowed use this patented method for a certain time.

Just because the competition contributes to reducing entrepreneurial profits (thesis of the profit erosion) again and again, the entrepreneurs are trying to prevent the competition by a merger of the enterprises This requires legislation which either prohibits mergers in principle and permits them only under certain exceptional conditions (prohibition legislation) or it is at least necessary to put the existing mergers under supervision (abuse legislation) and to sanction the exploitation of this monopoly position by excessive prices.

With regard to the degree of differentiation of the decisions, the market system performs far better than any other system of order. We have already ascertained that the market in principle allows to react immediately on data changes without a major delay. Of course, this possibility does not apply to all economic decisions. As already indicated, investment decisions can not be corrected immediately after occurrence of a data change, since the production plants usually have an operating life of several years.

From a functional point of view, the degree of differentiation of the market is large, too. In principle, individuals have the opportunity to choose freely among the available alternatives for each individual need, regardless of how they have decided on the other needs. Actual limitations generally result from consciously exerted influences of other societal subsystems, such as, for example, when individuals are suggested out of an environmental awareness to inquire goods and services in the demand for food as well as clothing and energy which were created according to environmentally friendly criteria.

In personnel regards, we have already pointed out that the market offers individual goods and that in principle the choice of one household does not imply a restriction for other households. In so far as mutual influences actually emanate on consumption behaviour, they happen via the general price system.

Let's turn to the negotiation system. In some respects, the negotiation resembles the market, which has prompted some authors - especially Walter Eucken - to assign negotiation systems to the market economy. Like the market, the negotiation is characterised by the fact that mainly explicative information is exchanged. However, they are not strongly bundled like information of the market, but only very weakly bundled. In collective bargaining, for example, not only the scope of the strike decides on the extent to which the partner's ideas are approached The proclamation of the strike is preceded by wordy negotiations and the strike outbreak actually only occurs if the wage partners have deceived themselves in their ideas about the opposition.

Regarding the incentives, material interest is also addressed as in the market system. After all, the main purpose of collective bargaining is to increase wages. Nevertheless, social reputation plays a much greater role than in the market. Trade unions in particular are headed by officials who have developed a professional self-interest and are guided primarily by the aim of maintaining and expanding the own organisation.

The proportion of negative incentives is higher in the bargaining system than the market. While we were able to show that in the market system from the same incentive (for example, a price increase) are emanating both positive incentives (namely towards suppliers) as well as negative incentives (namely towards the demanders), the negative incentive predominates in the negotiation system. It is true that in the negotiations results movement thereby that one party is signalling the other party a concession in case that this also makes concessions, but the employers commitment to the demands of the trade unions depends ultimately on that trade unions threaten a strike in the event that the employers do not adequately meet their salary expectations.

The degree of differentiation of a negotiation is much lower than that of the market. In terms of time, collective bargaining usually takes place at intervals of one year. Even if the material conditions have worsened for the employees, for example due to strong price increases, the concluded collective agreement applies for the chosen period of collective agreement.

Also from a functional point of view, the degree of differentiation is significantly lower. If, for example, the union members are called to vote in favour of the negotiation result in a strike ballot after a strike has ended, they can only pronounce for or against the acceptance of the entire negotiating package; they can not decide approval or refusal for each individual subquestion.

In personnel regards, the degree of personnel differentiation corresponds to a collective good; there are collective agreements which decide on the changes in the working conditions, every employee who is a member of the collective bargaining union which concludes a wage agreement, receives in principle the same performance. This is especially the case - which has been a rule in the FRG for a long time - when the employers have negotiated only with one trade union, and if furthermore the negotiation results are granted to all concerned employees, regardless of whether they belong to the trade union or not.

In countries where trade unions are organised according to ideological criteria (Christian, socialist trade unions), and where employers conclude a separate collective agreement with each trade union, employees have the formal possibility to choose between these results thereby that they change to another trade union. In practice, these options are hardly given; they do not apply to the current collective agreement, but only in the very long term. In addition, an employee generally decides according to ideological fundamental convictions which trade union he wants to belong to. A believing employee will not change to a communist trade union because he is dissatisfied with the outcome of the collective agreement, nor does a convinced communist change to a Christian trade union for these reasons.

What order elements are now found in the third order system: in the electoral system? The electoral system has in common with the market that both systems are supported by information that is strongly bundled. What is the bill in the market is the ballot paper at the election. The decision for a particular good on the market depends primarily on the price level; in an exactly analogous manner decide the voting conditions in the election which alternative will gain the election victory.

Also in the question of the explicative or normative character of the information both systems are similar: Just as the entrepreneur receives information about the expected demand at alternative price offers, in the same way the politician looks for information that informs how certain policy projects affect the voter support.

In terms of incentives, however, the electoral system differs from the market. If the entrepreneur is predominantly guided in his production decisions by material interests, the politician is concerned about the social reputation and the power, which is expressed therein that the election winner can lead the government affairs. Just as the behaviour of the entrepreneur can be referred to (simplistic) as profit maximisation, the politician is concerned with maximising the votes. These incentives can be either positive or negative: the one policy measure may bring voices, while another may cost voices.

However, the most important differences to the market system are shown by the political electoral system regarding the degree of differentiation. In timely regards, usually only every 4 - 5 years a parliamentary election is held, in which the voters have the opportunity to correct their vote decision. Only in exceptional cases, for example, if the chancellor resigns, new elections may be convened.

Also from a functional point of view, voters in a representative democracy can only choose parties or candidates who always offer a bundle of political solutions. Here, the voter can not choose the solution of his choice for every single important task, he must always compromise. The situation is different for a direct democracy in which citizens are able to vote for specific problem cases. In reality, in the representative democracies the possibility of this direct participation is also given in certain fundamental questions. Such a referendum must usually take place when this is required by a certain percentage of citizens.

Finally in personnel regard, the performances of governments and parliaments are usually carried out as collective goods, which in principle are offered to all citizens. No matter how different the ideas about the collective goods offer are, almost always only one collective good can be offered. Of course, it is also possible with collective goods to organise the access rights differently according to general criteria for the individual citizens. Only in a few cases, for example, in granting a subsidy, quite different benefits can be granted to individual citizens.

Finally, we want to examine which order elements prevail in a bureaucratic system. In contrast to the systems of order discussed so far, the bureaucracy is characterised by the fact that it primarily works with normative information. This applies on one hand in the relationship between bureaucracy and citizens (external relationship). The bureaucracy decrees or implements laws; the citizen always has the position of a subordinate individual who must comply with these laws and ordinances. On the other hand, this also applies to the relation of bureaucrats among each other (the internal relationship), a bureaucracy is structured hierarchically. The subordinate bureaucrats receive instructions from the superordinate authorities of the bureaucracy.

With regard to bundling, too, the bureaucracy differs significantly from the previously discussed systems. Every regulation, every law, and every inner bureaucratic instruction describes in detail the standards which are to be applied. In this question, the negotiation system is still the closest to the bureaucracy.

Standards appeal to the sense of social responsibility, the conscience of the citizens and bureaucrats; these are mainly negative incentives: anyone who does not comply with these standards will be punished with a monetary fine or imprisonment, depending on the seriousness of the offense. In principle, there are naturally positive incentives here, too: good conduct of the citizens can be awarded with bonuses or medals, but these positive incentives tend to be the exceptions.

What about the degree of differentiation at bureaucratic decisions, the third element of order? In terms of time, it is initially valid that bureaucratic structures are intended to be permanent; reforms are the fewest here and need also the longest time.

Since the individual citizen generally does not have the right to choose between different bureaucracies, but has to fulfil the bureaucratic rules without choice possibilities, thus the degree of functional differentiation within the bureaucracy is the lowest. Naturally in the long run, if a citizen disagrees with the bundle of bureaucratic regulations, he can generally change the sovereign territory, move to another community or even to another country and thus choose indirectly the laws and ordinances with which he agrees the most.

Since the services of a bureaucracy are generally offered as collective goods, all citizens receive the same benefits, since the law requires equal treatment for every citizen. Thus, the degree of personnel differentiation is also very low, here. However, this applies only in the legal sense. In fact, the laws generally provide scope of action for the bureaucracy, which allows a certain approach to the individual situation of the citizens concerned.

In the literature, at times somewhat different characteristics have been brought out for distinguishing the individual systems of order. Karl Marx distinguished between capitalist and socialist economic systems. The capitalist economies are characterised by the fact that the capacity of acquisition is in the hands of a few private entrepreneurs, and that the most important economic decisions in capitalism emanate from capitalists alone, and that they have the potential to exploit the working population.

On the other hand, a socialist economy is characterised by the fact that the capacity of acquisition is nationalised or is controlled by the respective workforce. The state could also adjust the allocation and distribution to the needs of the national economy, here. It should be noted that while Karl Marx himself was trying to describe the laws of a capitalist society, he did barely comment on the functioning of a socialist society.

At Walter Eucken, we also find a binary division of the systems of order. Walter Eucken distinguishes between ‘Verkehrswirtschaft’ (a market economy) and a central administration economy. The decisive criterion here is the question whether the entire economic processes are regulated from the top downwards in a central plan - in this case, Walter Eucken speaks of the central administration economy - or whether every household and every enterprise set up their own plans, whether they thus operate at a decentralised level. In this case, a market economy is present.

In a market industry it is necessary, of course, to coordinate the individual plans and this coordination takes place via the anonymous market. However, it would be wrong to think that there is no need for coordination in a central administration, since all issues were regulated by a central plan. The planning of a national economy is so complex that this task can not only be performed by one person (an economic dictator), but also a large number of civil servants and subordinate respectively superordinate planning instances, and the activities of these bureaucrats also require a coordination

Thus, the actual distinction between the two systems of order is not that coordination is necessary only in the market economy, but not in the central administration economy, but rather in the manner in which this coordination takes place. In a market economy, the individual planning units are autonomous and equal in the legal sense; the coordination via the market happens in such a way that from the market emanate incentives due to which the individual economic units move towards one another. In a central administration economy, there is a hierarchy, the subordinate planning agencies always act only on behalf of the central office and thus they are bound by instructions.

Walter Eucken’s scheme of order now provides a further subdivision. Different market forms are provided for the market economy, depending on how many economic units act on the supply side and on the demand side of a market. The one extreme - the complete competition - is characterised by the fact that there are a large number of small economic units on both sides of the market; there is competition between the suppliers as well as among the demanders.

Since the share of the individual economic units is so small that they can not exert any market power, they refrain from an influence on the price; the price is taken out of the market like in a stock exchange, the individual adapts to this pre-set price, he chooses the quantity at which he maximises his profit (his benefit), he is a quantity adjuster.

The other extreme forms the bilateral monopoly, in which the two market sides consist solely of one economic unit; both sides have the possibility to exert influence on price and quantity. In contrast to the market form of complete competition, the morphology of the market (the number and size of the participants) does not determine clearly the behaviour, here. All conceivable behaviours (quantity adjustment, monopolistic price policy, option fixation) are possible. We always speak of option fixation if one market partner dictates price and quantity to the other, so that the other has only the option to agree to the offer or to dispense completely the occurrence of a deal.

Between these two extremes, a large number of market forms are conceivable, depending on how many partners are present on both market sides. For example, if there is only one supplier on the supply side, but on the demand side there is a large number of economic units; one speaks of a supply monopoly. The supply monopolist can raise the price of goods, as opposed to the conditions of full competition, while he shortens the supply. Similarly, in a demand monopoly (a demander, many small suppliers) the demander dictates the price by way of shortage; the price is less than in case of competition.

Between these extreme forms lie the oligopolistic market forms, in which a few large economic units share the market. For example, a supply oligopolist, due to his size and thus his market share, is likely to have an influence on the price of goods, but he is limited in his market power by the fact that he has competitors and has to consider their price policy.

Thus in oligopolies competition definitely takes place, but this is often ruinous. Not these prices are set at which the individual suppliers maximise their short-term profit. Rather, the prices are used as weapons to force competitors out of the market. Short-term losses are deliberately accepted in order to achieve a monopoly position in the long term, in order to later as a monopolist compensate and overcompensate the losses by means of monopolistic price increases. The deficiency in an oligopoly is therefore less that no competition takes place, but that the markets are unstable and tend to monopolistic market forms.

The morphology of the individual market forms is not limited to the fact that only one or a few or many are represented on the respective market sides. The behaviour of the market partners is also determined by whether the strength of the individual partners is approximately the same. Let's take two cases, where about 10 suppliers constitute the supply. The behaviour in these markets will be different if in the one case 10 suppliers of approximately the same size are present with a share of about 10%, than if the supplier side consists of one large enterprise with a market share of 91% and 9 other small suppliers of each only 1% market share. In the first case, the prices are more or less adjusted to the scarcity situation; in the second case, a large supplier determines the prices to a large extend.

Also for the centrally administered economy various sub forms are distinguished. The most stringent form is present when the consumption of the single individuals is planned entirely by the centre, and if the subordinate posts only have to execute the instructions stipulated by the centre. A somewhat loosened form of a centrally administered economy exists when private households can determine their consumption within the limits of their income, and if the subordinate posts are given certain scope for action.

Walter Eucken now opined that efficient central planning is not possible at all, so that basically only one satisfactory economic order is conceivable: the market economy. This radical conception, by the way, is similar to the ideas of Karl Marx, who famously tried to prove that capitalist society necessarily would evolve into a socialist economy. Both authors therefore assume that in the long run there can be only one economic order; the socialist society at Karl Marx, and the market economy at Walter Eucken.

A similar binary division as at Walter Eucken can also be found at Friedrich von Hayek. He distinguishes between spontaneous and sedate order. The market economy is a spontaneous order, in the sense that its rules arise on its own, spontaneously, whereas in a state planned economy the rules are stipulated by the state.

In contrast to the previously discussed systems, Kenneth E. Boulding distinguishes between three types of order: the exchange, the threat, and the integrative forms of order. The order type of the exchange corresponds more or less to the market system. There happens a 'Do ut des', the service of the one corresponds principally to an equivalent consideration of the other.

The system of threat takes place mainly in collective bargaining. The threat is characterised by the fact that the one partner who requires a particular service from the other partner, threatens a sanction in the event that he is not ready to offer this service; The counter performance of the threatening person consists in the fact that he promises to renounce to realise the threat if the performance is fulfilled. It can also be said that here the performance of the threatened one is a negative good of the threatening one.

Integrative systems such as the family or a friendship are characterised by the fact that the performance of the individual does not require any external incentives and therefore no consideration can be expected neither. Here, the 'Do ut Des' is dissolved at the exchange as well as at the threat. It is sufficient that one needs a certain performance in order that the others become active. The consideration of the presented takes place only in the long term, namely when he needs the help of the others. It is by no means ensured that the individual services correspond to each other ex post. The single individuals are only equal in so far as everyone gives what he can give in case of need. Ex post differences can arise from the fact that the ability to give is different, but also from the fact that the needs of the individuals are different.

The scheme of order presented at the outset corresponds most likely to the division of Robert A. Dahl and Charles E. Lindblom. These authors distinguish between four different systems of order: the market, the negotiation, the hierarchy (the bureaucracy) and the polyarchy (the electoral system). The distinctive feature of the individual types of order lies here in the distinction between leaders and led ones.

The market system here is characterised by the fact that all parties involved, the leaders (entrepreneurs) as well as the led ones (households as consumers and suppliers of production factors) control themselves reciprocally and among each other. Entrepreneurs exert control over their competitors as well as over the consumers, just as consumers are exercising control among themselves as well as against the enterprises.

In the negotiations, on the other hand, there is only a reciprocal control of the two sides, that is from the leaders (enterprises) to the led ones (employees) and vice versa from the led ones (trade unions) to the leaders (enterprises).

Polyarchies (electoral systems) are characterised by the fact that the leaders (the politicians) are controlled by the led ones (voters), while in a hierarchy (bureaucracy) a unilateral control of the leaders (bureaucrats) to the citizens takes place (led ones).

In addition to the question of the control direction (who controls whom?), Dahl and Lindblom also distinguish the systems according to which type of control means (competition, threat) and what scope of control is customary in the individual systems.

The here chosen distinction between leaders and led ones is borrowed from the bureaucratic system and can be transferred to other types of order only to a limited extent. It would be better to simply talk about supply and demand, whereas this conceptual pair is referred to the output of the system respectively. In this sense, the entrepreneurs are always providers, although they appear on the factor markets (thus at the input) as demanders also. The same applies to the households, which appear with regard to the output side as demanders for goods, but appear at the same time on the input markets as suppliers of production factors.

Philipp Herder-Dorneich chooses a somewhat different reference point in his ‘Theorie der Scheine’ (theory of document): he subdivides the order systems according to the nature of the control means, and distinguishes between authorisation-, election- and money bills. Since the bills function both as a computing unit (information medium) and as a control medium (incentive), the connection with the order scheme chosen by us is obvious.

Finally, Albert O. Hirschmann's regulative contribution shall be mentioned, which points to migration and contradiction as important societal mechanisms from which emanate a control of the leaders. We find a similar classification in the scheme of market forms between complete competition and bilateral monopoly.

The competition in the markets is characterised by the fact that at dissatisfaction one can change to another market, thus migrate and hereby gain influence on the behaviour of the entrepreneurs. In the bilateral monopoly, but also in political systems, the possibility of migration is only available in extreme special cases, the influence of the individual occurs here primarily by the fact that one is disagreeing in the event of dissatisfaction and thus gains influence to the problem solutions by contribution.

Continuation follows!