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
4th
The aim suitability of the individual order types
Our previous considerations focused on the question of which elements a
system of order exists and which order systems are distinguished in general. In
the following, we will consider to what extent the individual systems of order
are suitable for realising the most important aims of economic policy. Here, we
want to confine ourselves to the schemes of order (market, negotiation,
electoral system and bureaucracy) chosen by us.
Within the aims, we want to distinguish between the areas of the actual
economic basic aims and the societal aims - superordinate to the economy. Part
of the basic aims of each economic system are the allocation target, the
distribution target, the growth target and the aim of the economic
stabilisation; whereas the societal aims - superordinate to the economy - are
individual freedom, security against social risks and social peace.
With regard to the allocation aim, the market economy system - as long
as it is fully functional - is characterised by the fact that individual
production decisions are optimally orientated to the preferences of private
households; optimal means here, that no change in the production orientation
could lead to an increase in the economic welfare of the single individuals.
This allocative task is not addressed that efficiently by any other
system of order. The negotiation system can also lead to optimal allocation
results, namely then if in the bilateral monopoly the parties behave as
quantity adjusters, or if the parties apply the strategy of the step-by-step
negotiation strategy. In this case, the allocation will be the same as in the
case of functioning competitive markets.
A step-by-step negotiation strategy is understood as a behaviour in
which in the first step the negotiation partners agree on all the questions
which promise an advantage for both parts compared to the initial situation,
and by which in further steps all these solutions are searched and accepted
which bring further advantages for both partners.
The market form of the bilateral monopoly is, opposed to the other forms
of the market - especially the market form of complete competition - characterised
by the fact that the morphology does not determine the behaviour, such that the
most diverse behaviours are conceivable. In the bilateral monopoly, the negotiation
partners can also behave like monopolists and thus effect an allocation which
leads away from the optimal solution. This is the reason why it can not be
expected that in the negotiation system always the same optimal allocation solutions
will be achieved as in functioning market-economy systems.
The bureaucratic system does not have a method of assessing the scarcity
of goods comparable to the market price mechanism, and is therefore not able to
create a Pareto-optimal solution for the allocation problem. This conclusion,
of course, only applies on the assumption that the aim of the bureaucracy was
to align the supply of goods on the preferences of private households.
Finally, the electoral system is able to realise the preferences of the
majority under ideal conditions. However, the more the preferences of the single
individuals differ from one another, the larger are the minorities, whose aims
are not considered the best possible way. Since the electoral system is
characterised by the fact that in functional respect it offers less options
than the market system. In electoral systems there is a large probability that
an optimal allocation of resources to the requested goods is not put to the
vote at all. And that therefore the realised allocation solutions in these
systems strongly differ from the individual preferences.
Now, at times the opinion is held that the single individual is not at
all capable of recognising which supply is optimal for him. The individual would not have the
information necessary for a proper production output, especially with regard to
very specific goods such as health care or child-raising, and many individuals
would not have the abilities to solve this allocation task in a reasonably appropriate
way.
That is why it would be better to have these tasks solved by the state.
Here, we speak of a meritorious need, which had to be expressed by the state or
by a third person representative for the single individuals, meritorious in the
sense that the state would take these decisions with 'commendable intentions'
for the parties concerned.
It is clear: wherever there is a meritorious need in the affirmative,
the bureaucracy is superior to the market, since in this case the consumer
wishes could only interfere with the decisions of the state. However, it remains questionable why a
bureaucrat should have better information than the persons concerned. If the information
is available, why can this not be made accessible to the person concerned, why
should the single individuals dispose over less information than the state;
although the person concerned should have a much stronger interest in obtaining
such information than a bureaucrat. Moreover, the application of a meritorious
need contradicts the superordinate aim of the individual freedom of choice of
every citizen.
Now let us turn to the question of which distribution of material goods
is realised on markets. If we assume a functioning competitive market,
the incomes are distributed according to the performance principle. In balance
the factor prices adjust on their marginal products (marginal product
remuneration), thus the single factor price corresponds in the balance to the
contribution of the supplier of production factors to the domestic product. If
other distribution principles are required, a correction is necessary, since
the market can not realise any other distribution aims.
The distributive negotiated solution remains undetermined; the income
distribution can take on all conceivable distributions, depending on the power
position of the individual negotiating partners. If the trade unions held an
option fixation power against the employers, they could achieve a wage rate
corresponding to the average product of the work and then the entrepreneurs
would not make any profits. If conversely the employers held an option fixation
power, then wages could be pushed down to the subsistence level of the
employees.
For a long time, the opinion was held that a democratic electoral system
would automatically tend to a levelling of income. In contrast to the market
economy in which the individual participants had a different allocation of
material resources, each citizen in a democratic system had one and only one
vote, thus the electoral vote distribution was perfectly equal.
But if every citizen had only one vote, the politicians could hope to
gain votes in the election by promising a redistribution in favour of the
low-income recipients. Naturally, politicians would have to reckon with losing
the votes of the rich, who are now taxed for distributive reasons; But since
the number of the rich was small compared to the number of the poor who
benefited from the redistribution, the votes gained would exceed the vote
losses.
In the reality this levelling trend could not be proven. The democratic
countries have not led to a levelling of the incomes in comparison to the
non-democratic countries. This circumstance can be explained by the fact
that the vote is not the only way for a citizen to gain political influence.
The individual citizen can increase his political influence in a representative
democracy once by joining a party and participating as a party member in the
nomination of the candidates in the election. Furthermore, citizens can join
together in associations. Interest groups have the opportunity to influence
politicians as they can express, on one side, certain recommendations to their
members; but on the other side are often needed by the politicians to implement
the laws and regulations.
Now every citizen has in principle the possibility to join an
association. In reality, however, the organisational capacity of the individual
interests is of different size. The larger a group is the greater are the costs
which have to be deployed for formulating and enforcing interests. The result of this is that the actual
influence of citizens on policy by way of the interest groups is very
different. Not only the size of a group, but also the nature of the interests
that are to be represented, are determining the organisational capacity. Thus, supplier interests are much
more easily represented than the consumer interests; supplier interests are generally
homogenous, but consumer interests are much differentiated.
Friedrich von Hayek has pointed out that a political electoral system
tends to an exploitation of the respective minority, but that the respective
minorities and majorities could alternate rapidly in the course of time since
various possibilities exist for the formation of coalitions. This rapid change
is to be expected mainly in the case of proportional representation systems,
because usually a larger number of parties move into Parliament, but no single
party has the majority of the votes. For the formation of a government,
coalitions must therefore be formed by several parties, and quite different
coalitions are conceivable in general.
Especially when a correction of the performance principle is required by
the demand principle, bureaucratic systems are particularly suitable for such a
subsequent change in the income distribution. The bureaucracy disposes over the
instruments of power to correct the income distribution according to the demand
principle. The distribution aim can be largely defined and implemented without
consideration for the respective concrete scarcity conditions.
However, these advantages only apply to a subsequent redistribution of
income. Bureaucracies are generally not suitable for also determining wage
rates. On the one hand it is valid that employees are more satisfied with the
wage rates granted to them, if they themselves or their representatives have
contributed to the wage determination. On the other hand, central bureaucratic
solutions are not that much able to consider the regional and functional
differentiation between the individual industry branches and professions.
In the literature is discussed more controversially the question of how
the individual systems of order impact on the economic policy aims and growth
political aims. Here, we want to assume that to the most important aims of the
economic stabilisation belong the aim of the full employment and the monetary
stability. In terms of the classical and neo-classical theory full employment
is then guaranteed if all employable workers which are willing to work are
employed (full employment according to a complete balance).
According to a suggestion of Lord William Henry Beveridge it should
already be spoken of full employment, if there is an overall economic balance,
thus, if the number of the jobs corresponds to the number of the employees that
are willing to work and employable. Here, it is accepted that not all employees
do have a job, and to be more precise, to the extent to which also businessmen
are not able to staff all jobs, too.
In opinion of the classics and neo-classics tends a free functioning
competitive market by itself towards full employment. Most of all, according to
Say's theorem overall economic unemployment cannot be explained by a too little
goods demand. Unemployment must rather be explained therewith that due to power
appearances on the labour market the real wages are above the level at which supply
and demand for work correspond.
Now John Maynard Keynes was famously of the opinion that due to defects
on the capital market the market would not automatically provide full
employment. On the one hand, households were not willing to offer all their
savings on the capital market, they would hoard parts of their income; on the
other hand, it can not be expected that an increase in savings would
automatically lead to an increase in the volume of investment by reductions of
interest rates, and that therefore the reduced demand for consumer goods would
be compensated by an increase in demand for investment goods.
The private investment is largely interest-inelastic, partly because in
times of economic downturn – just because of the decline in sales - the
enterprises have already free production capacities and are therefore not
willing to expand their production capacities by increased net investments. On the other hand, in times of the
economic downturn the competition between enterprises is so strong that
interest rate reductions have to be passed on in the price of goods, so that
any incentive to increase the investment is dropped.
From this Keynesian criticism the demand for an active fiscal policy emerged,
in order to compensate the decline in private demand by expanding the demand of
the state. Since
the market fails with regard to the aim of full employment, political systems
(the electoral system, especially the bureaucratic system) had the task to
reduce mass unemployment.
However, doubts arose very soon, as to whether the political systems
were in a position at all to guarantee full employment by deficits in the state
budget. So has, in particular, William D. Nordhaus postulated that the political
electoral mechanism triggers a cyclical expenditure behaviour, so that this
system is more likely an intensification than a weakening of the cyclical
movements (the thesis of a politically induced economic cycle).
Immediately prior to elections, the government would strive to increase
government spending (at constant tax revenues) in order to win votes and thus
the subsequent elections. Immediately after the elections, however, the
governments would be under the pressure to carry out a contractive policy in
order to reduce the negative effects of the past expansive policy and thus to
create in the first place the prerequisites for the end of the legislature, the
material conditions for a new expansive policy.
A contractive policy affecting the citizens is quite possible at the
beginning of a legislative period, as the voter is very forgetful and depends
his electoral behaviour mainly on the political actions immediately before the
election.
These difficulties could be possibly avoided if the task of the economic
management would be transferred to the central bank, which is a bureaucratic
system. But here too, doubts arise as to whether the central bank is able to
achieve the aim of full employment; the central bank is namely also interested
in the stability of the currency (the exchange rate) - at least in systems of
fixed exchange rates - and the aims of full employment and monetary stability
conflict with one another.
It should also be considered that an effective full employment policy
requires a prognosis. Measures
introduced today will be reflected in the employment figures only after about 1
½ years, so that an efficient economic policy requires the knowledge of not
only today's level of employment, but also that of in about 1 ½ years. But it
is agreed upon the fact that there is lack in reliable prognoses, particularly
with regard to economic data. Thus, political systems will neither be able to
solve the aim of full employment satisfactorily.
With regards to the aim of monetary stability, with certain exceptions
there is consensus among the Neoclassics likewise as
with the Keynesians, that the free market alone is incapable to guarantee
monetary stability. There had to be a state monopoly on the issue of banknotes
in order to ensure that the amount of money circulating does not rise more than
the real domestic product. Only Friedrich von Hayek took the view that also the aim of monetary
stability in a free competition would be achieved by issuing central bank
money.
Therefore, there is a broad consensus on this question, that a
bureaucratic system in the form of a national central bank is the prerequisite
for achieving monetary stability. This central bank had to be committed to
monetary stability as the ultimate aim, has to be largely independent of the
government, and must be equipped with sufficient instruments to effectively
control the creation of book money on the part of the commercial banks.
Keynesians, however, believe that inflation can only be effectively
countered in the way that the government would skim an oversized demand with
help of budget surpluses.
At the end of this section, a few words are given on the realisation of
the growth policy aims. Who fears, like the Keynesians, that the investments
will not react adequately to changes in interest rates, concludes necessarily
that the market is failing with regard to the growth policy aim, and that
therefore a control of the growth on the part of the political subsystems
(electoral system, bureaucracy) would be necessary. However, doubts are
justified, whether the state has the knowledge about which amount of investment
is necessary to guarantee the largest possible growth rate for the domestic
product; and furthermore, due to lack of liability provisions the state does
not have sufficient incentives to enable the growth that corresponds to the
demands of the private households.
Primarily it must be pointed out that in the context of growth policy it
can not be about maximising the growth rate of the domestic product. The aim of growth rates that are as
high as possible competes with at least three further aims. Firstly, the growth
of the domestic product could be increased thereby that an ever smaller share
of the income is used for the present consumption and an ever increasing share is
used for investments. In an extreme case, growth would be the greatest in this
regard, if only a subsistence minimum would be reserved for present-day
consumption. It is obvious that such a division of material resources can not
be regarded as optimal in the sense of private households.
Secondly, the domestic product could also be increased thereby that more
and more working hours are used, again to the extreme that only an
existentially necessary minimum is reserved for leisure time. Here, too, it is clear
that such a division of the available time into working time and leisure would
not be optimal.
Thirdly, the aim to maximise the growth of the domestic product is
competing with the aim of protecting the environment and applying preferably
sustainable production methods. Sustainable production is always referred to
when it is ensured that the consumption of raw materials is as equal as
possible to the reproduction of raw materials.
To enable such an optimal growth, on one side the initiatives and incentives
are needed which only a free competitive market can provide, but the market
needs numerous corrections, since a market can only lead to satisfactory
results if no external costs (and income) occur, that is when producers and
consumers have to pay for all the macroeconomic costs associated with
production. However,
this assumes that prices must be paid for environmental impacts at the amount
of the damages caused.
Let us now turn to the question of how the superordinate socio-political
aims are realised in the individual systems of order. The aim of guaranteeing
the largest possible individual scope for action is most likely to be achieved
in the market system. In principle, each individual can freely decide on how it
uses its material resources.
The negotiation solution already limits the individual freedom to a
greater degree because the negotiating groups have to agree on a joint
compromise. The individual union members may have different ideas about whether
they prefer more leisure time or higher wages; the collective agreement
concluded with the employers contains a compromise that is valid for everyone.
A political electoral system also leaves little scope for individual
decisions. The
achievements of the policy (the laws and regulations) are offered as collective
goods, and the larger is the minority outvoted in the election, the greater are
the deviations from the individual needs.
The bureaucratic system offers the least scope of action for the
individual citizen. Its services are generally offered as collective goods also
and are therefore the same for all citizens regardless of their individual
needs In addition, the bureaucracy is
giving instructions on how the individual has to behave, in electoral systems and
in negotiations, the groups are at least involved in the decision-making
process.
Let us now consider how the aim of protection against social risks
(illness, accident, age, and unemployment) can be achieved in different manners
within the systems of order. In general, it is assumed that these risks can
not be covered satisfactorily within the framework of the market economy and
that therefore a correction on the part of the state is required.
Now in the context of market- and negotiation solutions, certain risks
can however be distributed to the community by concluding of private insurance
contracts. In general, the individual has to face an uncertainty which is
greater than the uncertainty within an insurance community, which is quite
calculable there.
So the individual does not know, for example, when, how often and to
what extent it is affected by the disease risks, its individual risk is
therefore extremely high. Nevertheless, the average disease rate within a
larger group is quite calculable and much lower than the individual risk. In a larger group, it can quite be
assumed that for each insured person who is affected to an above-average extent
by diseases there will also be an insured person who is suffers diseases to a below-average
degree.
The contribution that an insured person has to pay is therefore
substantially lower than the material reserves that an individual must make in
order to obtain adequate protection from the risks. In the case of individual
provision by private savings, the individual has to take into account the
highest possible risk namely, whereas the contribution within the insured
community must only correspond to the substantially lower average risk in order
to obtain complete protection.
However, there are also risks which are not insurable, which can only be
satisfactorily covered in the context of political systems. This applies, for
example, to the currency risk within the scope of the old-age pension. There is
no way of fully covering the risk of inflation in the framework of private life
insurance, as it is not known how the money will develop within the next 50
years. However, a bureaucratic pension- or social security system can cover
this risk by applying the pay-as-you-go system.
The risk of unemployment is generally considered to be hardly insurable,
too. Here too, is valid that the extent of unemployment depends on political
factors and can hardly be predicted for a longer time. So there will be sufficient protection
against the risk of unemployment only in the context of pension- or social insurance
systems.
Finally, within the framework of private insurance systems, it is not
possible to address all redistribution aims related to the social risks. Certainly it is possible, for
example, in the scope of private health insurance, to relieve the person who is
particularly strong affected by diseases at the expense of the person who is affected
by disease at a below-average.
Ex ante, the contribution of a private insurance company can be
graduated according to the level of the risks to be covered, only ex post - in
retrospect – redistribution takes place. However, if the individual shall also
be protected against hereditary diseases, this is only possible within the
framework of a bureaucratic system, since in this case an individual has an
above-average high risk and therefore has to pay a higher insurance
contribution in the framework of a private insurance.
Finally, let us examine to which extent the various systems of order
differ in terms of the aim of social peace. The starting point of our
considerations is the thesis that social conflicts are the more likely to break
out, the more the expectations of the individual are disappointed.
As already indicated, in a functioning market economy the income is
distributed according to performance, whereby the individual performance is
measured by the contribution that the individual provides with his productive
activities for the domestic product (= objective assessment). However, the satisfaction
of the individual employees is more dependent on subjective value conceptions,
which efforts are entailed by economic work; it is the subjectively experienced
working burden that defines the subjective value conceptions of the employees.
But this also means that social dissatisfaction arises to the extent to which
the objective and subjective value of the work diverge.
Now, the market knows quite well the mechanisms to reduce these
differences between subjective and objective evaluation and thus also to reduce
social dissatisfaction. Such a mechanism is, for example, the mobility of
employees. If an employee receives a wage for his work which is less than the
subjective work burden, he can try to change his workplace to where subjective
and objective assessment correspond better.
This mobility causes two things: On the one hand, dissatisfaction is
reduced by the migrations of employees to workplaces, which correspond better
to the subjective expectations. On the other hand, this mobility also contributes
to the fact that at the workplaces which are left the workforce is getting
scarce and therefore a higher wage rate is granted, whereas, in the opposite
direction at the jobs to which it is migrated, the workforce becomes less
scarce, which will be reflected in a market economy therein that entrepreneurs
try to reduce the wage rate. This, however, reduces the difference between
subjective and objective evaluation.
A negotiation solution is in contrast characterised by the fact that -
short-term and superficially considered - the conflict potential increases,
since both collective bargaining partners have conflict means which are not
permitted on the general markets. The employees have the right to unite in
trade unions and to combine their wage demands with strike threats. Employers
can also join forces and respond to a strike with a lockout of employees.
In the long term, however, also the negotiated solutions are likely to
contribute to the strengthening of social peace. Firstly, it could be shown
within the framework of the theory of collective bargaining that, in the case
of a functioning tariff system, the threatened strike does not have to be
realised at all, that a strike action usually occurs only if the partners
deceive themselves in the behaviour of the respective opponent. If, for
example, at their threat to strike the trade unions would originate from the
false assumption that the employers have not yet reached their ultimate
bargaining limit, or if the employers do not react to the threat of a strike
because they erroneously assume that the trade unions would not carry out their
strike threat even if employers are not ready to make any further concessions.
The fact that the collective bargaining parties are discussing before
the outbreak of industrial actions and are trying to compromise is already
contributing to reduce dissatisfaction. The willingness to compromise itself in
turn depends on the extent to which the partners are able to carry out their
threats and to what extent the threats are credible.
On the other hand, an openly addressed labour dispute contributes to
reducing social dissatisfaction. Employees feel that they have shown it to the
employers and that not everything can be done with them. ("If your strong
arm would will, all wheels stand still."[“Bundeslied”
- song of a labour federation]) An open strike outbreak prevents that the
dissatisfaction, which recurs in the course of the everyday production process,
cumulates and ultimately precipitates itself in a political revolution. It is
also important to take into account that an employee is generally more
satisfied with a result if he or his representatives participated actively in
the wage agreement than if the same result is prescribed in form of a wage
dictate by the entrepreneur or also by the state.
A functioning electoral process can also contribute to the reduction of
social conflicts. If voters are dissatisfied with the achievements of the
politicians elected by them, they can change over to the opposition parties in
the next election and thus contribute by themselves to the policy measures
being adapted to their expectations and thus dissatisfaction is reduced.
At first glance, the bureaucratic system seems to represent a system of
order in which the smallest extent of conflicts is given, as the bureaucracy
can simply forbid the outbreak of offensive measures. In the long run, however, just this
system of order contains the greatest possible potential for conflict of all
four systems of order. This system is particularly susceptible to conflicts
since, on the one hand, the individual needs are least addressed, and on the
other hand, the affected parties are not involved in the decision-making
process, so that all the services of bureaucracy are perceived as heteronomous.
While all the types of order discussed so far know mechanisms for
reducing social dissatisfaction, the bureaucratic system does not provide for
any legal and easy-to-implement possibilities to reduce dissatisfaction. A
reduction in dissatisfaction can only be achieved thereby that the dissatisfied
emigrates; But since emigration involves very high material as well as
immaterial costs, the individual will generally choose this path only if he is
faced with an existential threat; Or the long time accumulated displeasure is
finally discharged in a political revolution, since only in this way a change
in the political situation is possible. However, every revolution entails very
high and painful impairments of almost all citizens.
Continuation follows!