Chapter 9: Order conceptions part I





01st Introduction

02nd The Laissez-faire liberalism

03rd The Ordoliberalism

04th The popular capitalism

05th The welfare state

06th The overall control

07th The Planning

08th The concerted action

09th The nationalisation of the key industries

10th The market socialism

11th The Yugoslav model

12th The centrally administered economy



01st Introduction


Order conceptions determine the rules by which economies are directed. It is necessary to clarify who has the right to set up economic plans - only the state or all private enterprises and households - and how to resolve the conflicts of interests appearing between the individual economic units.


In the course of recent history, quite different order concepts have been developed, with almost all concepts being based on the two opposing economic systems of a centrally administered economy on the one hand and a market economy on the other. Most of the order proposals are understood as variants of these two basic conceptions or as an attempt to mediate between these two extremes.


At the beginning of modern times developed the mercantilism the economic order system of the absolutism. Within the framework of mercantilism, the state attempted to lead the development into an industrial society by means of dirigiste influence on the enterprises. The strong interventions in the entrepreneurial decisions led then, especially in England through Adam Smith, to the free trade movement and the liberalism, which developed the thesis that the economy left to itself would bring about the best results.


In France, the mainland of mercantilism, were developed similar reform concepts under the name of physiocratism at about the same time. The liberals of England and the physiocrats shared the demand to loosen the state influence on the decisions of the entrepreneurs and to abolish the barriers to external trade.


In the manner, in which liberal and physiocratic doctrine founded their conceptions and sought borrowings from the thriving natural sciences, these to schools differed, though. While physiocratism understood the economic system as an organism operating in a manner similar to a human body and in which, similarly to the human blood system, a cycle of goods and banknotes regulated economic activity, the liberalism of England took borrowings from mechanics; thus in particular it was spoken of the balance of supply and demand, and this was compared with the balance of the forces which determine the motion of the individual objects.


Very soon it came to the abolition of barriers, in particular to external trade and also to the domestic economy, which led to an enormous economic upturn, but subsequently to extremely bad working conditions also. It is therefore not surprising that this economic form of "laissez-faire" also provoked criticism. On the one hand, criticism came up from Marxism, a movement which propagated a state planned economy and the abolition of commercial private property.


On the other hand, reform movements also arose from the liberal side; in particular Friedrich List, who was certainly a representative of a market economy order, held the view that a national economy in the initial phase of its development would have to receive special protection in form of educational tariffs against those countries which had already been further developed and which could offer goods at much lower prices due to the elimination of development costs.


Also with regard to the domestic economy, proposals were made by the so-called academic socialists to relieve the distress of the employees by means of state corrective measures. The name 'academic socialist' was chosen by the Marxists, in order to indicate that these were purely theoretical, non-serious proposals that were lacking practical.


The academic socialists were economists who were led by the concept that human action could not be enlightened by the methods of exact natural science, that knowledge could only be formed in this field by a historical description of the economic processes. At the same time, this group stood up also for social reforms, though. That is why there is the term "academic socialists" for this group of economists.


The two world wars on the one hand as well as the inflationary symptoms and the global economic crisis on the other hand, led to the fact that market economy orders were being increasingly corrected by governmental economic elements and got undermined finally.


It is clear that in times of war all resources must be used for the defence of a country, and that the signals that are the result of the decisions of the consumers would only impair this objective. This influence on the part of the consumers could only be prevented in a state planned economy.


Whereas in times of inflation the results of a pure market, uninfluenced by the state, lead to ever-increasing injustices, so that the state feels increasingly compelled to demand maximum prices at least for the most vital goods, in order to prevent that the poorer income groups can not even buy the existentially necessary goods with their income.


Out of the criticism of the punctual and dirigiste intervention in the economic order during the Weimar Republic and against the controlled economic methods during the National Socialist regime, a renaissance of liberalism emerged in the Ordoliberalism, especially in the immediate period after the Second World War under the leadership of Walter Eucken.


This neo-liberalism recommended a restoration of a market economy order which, though in contrast to the old liberalism, conferred a leading role to the state not only for the establishment but also for the permanent defence of a market-economic order. These regulatory tasks of the state were recorded in the so-called constituent and regulating principles of a market economy.


In the following, we like to outline a systematic overview of the most important variants of an economic order, starting with the "laissez-faire" conception of the classical liberalism and concluding with the idea of a centrally administered economy in its purest form.


At the development of a system of order, three fundamental questions are of particular importance. These basic questions relate to the aims, the means and the lead executing agencies of economic policy.


First question:


Which basic aims are pursued and how are the individual basic aims weighted?


Second question:


Which policy measures are permitted for the realisation these aims?


And finally third question:


To which lead executing agencies are the political tasks conferred?


Here it gets evident that the main difference between the individual conceptions of order is the question of how the conflict between the aims of individual freedom on the one hand, and social security and justice on the other hand should be resolved. The most important differences refer to a different weighting of the aims, a different definition of the aims and finally a different assessment of the efficiency of the measures to be implemented.



2nd The Laissez-faire liberalism


In 1776, Adam Smith, developed in his 'Wealth of Nations' a very optimistic concept of the free development of a national economy exempt from the state, he offered hereby not only the basis for the emergence of modern economics, but furthermore laid the foundations of a modern economic conception for the defence of liberal opinions.


Jeremy Bentham (1789: An Introduction to the Principles of Morals and Legislation) and others came from the Enlightenment and transferred these ideas also to economic facts. The Enlightenment was directed primarily against intellectual paternalism by the official church and by the state, appealing to the human reason and to the infinite possibilities of an enlightened human. Thus the movement of the utilitarianism emerged which postulated the utility as the measure of economic action and called for a maximisation of this utility for everyone.


This, however, meant not only -as often bewailed- the departure of moral values. Of equal importance is the fact that with the liberal movement for the first time it was refrained from identifying the welfare of the national community with the welfare of the absolutist ruler. The public welfare was now equated with the welfare of the individual citizens of this national community. And this change certainly represented an enormous progress against medieval and absolutist ideas.


Bernard de Mandeville created the basis for a liberal economic order in 1714 with his famous Fable of the Bees. According to this, even vices, like luxury and envy, lead to an increase in the general welfare, thereby that they give incentives to enterprises to do exactly what is in the interest of the public, that is the public welfare.


The laissez-faire liberalism sees the individual freedom of choice threatened primarily by the state. It assumes that only the market knows a functioning coordination mechanism in order to align the production with the consumer wishes. The most important aim of liberalism is therefore the granting of the individual freedom of every citizen.


Freedom is understood in the sense of freedom of choice, here. The free market, on which competition prevails, is considered to be efficient with regard to the consumer wishes. The prices reflect the scarcity conditions; the competition between the enterprises ensures automatically that the entrepreneurs maximise their profits just when they produce the goods that are demanded most by the consumers.


The aim of social security is subordinated to the aim of the greatest possible freedom of the individual; Interventions in the market are - if at all - accepted (as e.g. at John Stuart Mill) at most to secure the minimum subsistence level. Social policy aims are only recognised as far as the fight against poverty is concerned.


However, a supplementation of the market by welfare facilities is certainly affirmed. However, the market can principally also solve security problems, namely in the context of private insurance. There are considerable doubts as to whether a state bureaucracy can yield more security than the market.


This liberal attitude was criticised primarily for the fact that the liberalism is characterised by too much confidence in the market. The fact that there are market deficits is recognised only very much later in the scope of the Ordoliberalism. A certain justification for these convictions can indeed be made by the fact that also for the state bureaucracy a policy failure can be determined.


The reference that market systems contain defects does not naturally lead to the conviction that a free market economy has to be replaced by a state planned economy.


It must always be expected that the state planned economy also shows deficiencies. Only the verification which deficiencies, these of the pure market economy or that of the state planned economy, are stronger on balance, provides the basis for which order system should be preferred.



03rd The Ordoliberalism


In the aftermath of the Second World War a renaissance of the liberal idea arose, one of the main representatives of this neo-liberalism was Walter Eucken and the Freiburg School.


Like the classical liberalism, also Walter Eucken was convinced that the free market alone is capable of efficiently aligning the production to the needs of consumers. And for this orientation of the production to the wishes of the consumers, Walter Eucken as well as Adam Smith regarded the competition among the enterprises as essential.


In contrast to the classical liberals, Walter Eucken, however, was convinced that individual freedom was not only threatened by the state, but also that entrepreneurs and private interest groups were striving to evade the competition necessary for the functioning of the market economy by way of monopolistic mergers.


Hence it would be insufficient that the state establishes a competition regime in a one-off act, but it applies to always defend this rule by active competition policy, too. It is precisely for these reasons that Walter Eucken campaigns, among other things, for a cartel prohibition.


Neo-liberalism calls for a strong state, which confines itself to market-compliant measures, though. While the classical liberalism rejected any intervention, with few exceptions, in the market economy by the state; Walter Eucken considered it quite necessary that the state takes economic measures which must always be market-compliant, though.


Walter Eucken speaks of a market-compliant measure whenever the state does not intervene directly in the market process, but only tries to achieve its economic policy aims indirectly by influencing the economic data. In the economic data Walter Eucken included the needs of the individuals, the stock of the three production factors: labour, land and capital, current technical knowledge and the governmental framework.


It would be essential that the actual economic decisions remained with the private participants of the market. A satisfactory production could only be expected if the private entrepreneurs decided by themselves which types of goods and quantities should be produced at which prices, with which technology and at which location.


If e.g. the state fixes a minimum price and thereby overrules the decision of the individual entrepreneur, then this would be a market-non-compliant measure. If, however, the state would strive to cover its financial requirements by means of a turnover tax, it also affected the result of the market process, but the actual economic basic decisions remained with the individual entrepreneurs, so that one could speak here of a market-compliant measure.


Even if the state forbids single private activities, which are contrary to general morality, and thus reduces the number of permitted alternatives, there still remains a - perhaps indeed limited - scope for private decisions. Theft, corruption and blackmail may potentially increase the entrepreneurial profit; they are to be forbidden in any case as they contradict to the general moral laws.


Although they reduce the number of alternatives, they still give the entrepreneur the freedom to choose between different options. It is not the prohibition to take certain actions, but the commandment to make quite certain economic decisions which overrides the market process.


Even if the state would prohibit all possible alternatives apart from a single one, which would formally correspond to a commandment, the prohibition regulation would be superior to the commandment regulation, since in this case entrepreneurs would certainly be able to look for new, previously unknown alternatives which, precisely because they are new, could not have been forbidden on the part of the state either.


In order for the market to be able to fulfil its tasks, Walter Eucken believes that it requires an order that is politico-economically guaranteed by the state (Ordo). Walter Eucken has named seven constituent principles, which are indispensable for the functioning of a market economy.


The actual basic principle of any market economy system has to be a functioning price system. Only if a free price mechanism is given, independent of state influences, it is also guaranteed that production is aligned with the needs of individuals the best possible way. An optimal allocation requires that the individual prices reflect the scarcity relations and this is only the case if a free price mechanism is allowed.


The further 6 constituent principles serve ultimately to enable a functioning price mechanism. Firstly, the primacy of monetary policy serves this purpose. Only if the monetary value is stable, the price relations reflect the scarcity of the resources. According to Walter Eucken can this aim only be realised, as we have already seen, if the public central bank is given a supply monopoly.


Secondly, the price mechanism presupposes competition, whereby it is only guaranteed that no monopolies emerge if the markets are kept open both inside and outside of the country.


Private ownership, freedom of contract and full liability are further prerequisites therefore that on the one hand the operating persons have sufficient incentives to apply the most efficient production methods in each case, but that there is on the other hand no possibility of limiting the freedom of the market partners and to pass on costs without justification on third parties.


After all, a stable economic order can only be maintained if economic policy is based on a constant and consistent policy, which is the only way to ensure that confidence develops, which is a prerequisite that the entrepreneurs are also willing to accept the risks associated with innovation and investment.


In addition to the constituent principles which determine the establishment of a market order, economic policy has always the task on the one hand to inhibit the internal erosion of the once established competition regime and on the other hand to prevent undesirable market results. For this purpose serve the regulating principles.


The most important regulating principle sees Walter Eucken in an active competition policy, which shall prevent the formation of monopolies. We already spoke about this. The other three regulatory principles serve to rule out market failure as far as possible.


Within the framework of an income policy, a minimum standard of living shall be guaranteed for all people, whereat the principle still has to apply that the distribution of income is to be coordinated essentially by the market, but can be supplemented by state subsidies.


External effects would have to be internalised in "exactly ascertainable cases" by state intervention. Even if an abnormal behaviour of the supply on the labour market would have to be feared, a state intervention would be necessary.


Within the scope of criticism of the ideas of Walter Eucken we have to distinguish two different directions. Criticism can once be directed against the principles of this order itself; this criticism is addressed in the discussion of the order concepts which will be discussed below.


On the other side, criticism can also take place within the framework of the order sketched out by Eucken; the criticism here refers to individual definitions of the economic order. So it was criticised, among others, by B. Steinmann that the criterion of market conformity refers one-sided only to the principle of a functioning price mechanism; it was proposed to measure the market compliance of a measure on all 7 constituent principles.


Or else it was ascertained by Theodor Pütz that the question of whether a measure was still market compliant depends on the nearer circumstances and, moreover, the extent of the applied measure.


So generally a monopolistic market form is rejected because monopolists try to increase their profit by artificially shortening the supply and are thus in contrast to the basic aim of all economic action: mastery of scarcity. Nevertheless, most liberal economists have been convinced that the creation and supply of banknotes should be reserved for a single central bank. In this case, a competition between several existing issuing banks would lead to an, by an increase in the quantity of goods justified, expansion of money supply with the result that the general price level would rise sharply and thus inflation would be effected.


It was only Friedrich Hayek who argued that a competition between several central banks would lead to a monetary stabilisation since every central bank should have a strong interest in preserving the value of its own currency so that even under competitive conditions there would be no risk that the money supply would be expanded too much.


Even if these considerations are also convincing, such a regulation seems hardly practicable. It would lead to a not bearable risk for employees because employees would always have to fear that the wages paid to them would be decimated when just the banknotes in which the wages were paid out would be devalued after the payment of wages to the employees.


As an example for the fact that it can also depend on the extent of a policy measure, whether this measure can be classified as market compliant; the increase of the amount of money on the part of the issue bank can be mentioned, which can be increased by a few percentage points on the one hand or by a doubling or even tripling of the circulating money on the other hand.


We assume generally that a slight increase in the amount of money seems likely to lead a national economy successfully out of a cyclical trough, whereas a doubling or tripling of the money amount in a relatively short period of time would inevitably lead to a galloping inflation, and hence in general to a collapse of the whole economic system.


Friedrich von Hayek finally objected to the proposal for a cartel ban, that the power of private interest groups often had to be traced to a deficient foreign trade policy, that at Walter Eucken it would be paid too much attention to the actual market compliance; it would be neglected that a competition sustaining effect would also emerge from a potential competition from abroad.


However, this criticism of Walter Eucken is not entirely justified, since Walter Eucken, as already shown, held the view that a free trade improves the competitive situation.


Thus, if a monopolistic position was to be accrued to domestic enterprises, this was usually simply the case because the state had previously inhibited the competition of domestic enterprises with foreign enterprises by a restrictive customs policy.


If the state had allowed by renouncing of the levying of import duties that also foreign enterprises can offer goods in the inland, then also enterprises which would have a monopoly position in the inland as the only supplier would be exposed to the foreign competition.


If they now attempted to raise the price by an artificial scarcity of their supply, they would have to fear that the foreign enterprises would import their goods more and more, and that therefore a part of the existing customers of the offer monopolist would migrate to these foreign competitors. The attempt of the domestic monopolist to raise prices would have failed here. This example makes it clear that in the case of free trade the domestic monopolists can not play their monopoly power.



04th The popular capitalism


Capitalist systems are characterised, according to widespread opinion, by the fact that while they contribute to a high growth, they benefit only a small upper class. Here, the idea is to take the advantages of the capitalist system: the high growth rates, but to change the system the way that the material advantages benefit all.


This is the idea of a popular capitalism, a system in which nearly the entire people become 'capitalists'. Such ideas were widely disseminated in the public and they also have different sources, one of these tendencies originates from the Christian social teaching.


The popular capitalism also affirms the market economy, since this assures the individual freedom of choice. For reasons of social policy, though, a reform of the property regime is striven, which is based on a broader distribution of the assets If employees also dispose over assets, then the income distribution is improved in favour of the employees. Besides his wage income, the employee receives in this case also an interest income, thus his total income increases.


Furthermore it is valid that the individual still disposes over income, even during a temporary loss of his ability to work and the relating loss of the regular wage income, namely interest income. Thus, he is also protected against the social risks by his assets. If necessary, the additional costs associated with the occurrence of a social risk (e.g. illness) can also be compensated thereby that parts of this property are dissolved.


In the case of the participation of the employees in the national economy occurs an integration of the employee into the enterprise at the same time, provided that a form of redistribution of the assets is chosen, at which the employee becomes a co-owner of the enterprise in which he is employed. Therewith one of the most important criticisms of a market economy regulation, namely that the labour was heteronomous, is avoided, though.


It is necessary to note critically that the role of private property for the solution of the security problems and distribution problems is overestimated here. First of all, it is valid to note that the existing institutions of social security allow a much more effective protection in the event of the social risks of illness, accident, disability, age and unemployment.


On the one hand, it can not be assumed that the mass of employees is able to accumulate so many assets that they are in this way completely protected against the social risks. On the other hand, the protection which is enabled by insurance enterprises is though always much cheaper than covering the risks by way of private assets. A full protection is only granted in the case of a purely individual provision if the reserves created by savings correspond to the maximum risk, whereas in the case of protection within the scope of an insurance pool it has to be covered always only the substantially lower average risk with the insurance contribution.


Secondly, it must be considered that an improvement in the distribution of income by means of assets participation is only to be expected if the amount of the wage income does not decline in the course of these reform measures. If we take the distribution theory developed by Nicholas Kaldor as a basis, an increase in the total income of the employees can only be expected to the extent that the savings rate of the employees increases.


If the employees are involved in commercial economic assets, there is always the risk that the previous savings of the employees will be liquidated, so that there occurs no increase at all, but only a reallocation of the savings (from savings on saving accounts to participations in the enterprises).


It should also be considered that only those employees who are employed in a commercial economic organisation can also be involved in the operational enterprise. All employees that are employed by the state or by associations (thus at non-commercial organisations) could not participate in this form of wealth distribution by definition.


Thirdly, the risk appetite of the employees is overestimated in these plans. There are basically two ways of acquisition of regular income. You can work as a self-employed person or as an employed person.


The mass of employees decides predominantly to remain employed because the profession of the self-employed is associated with a high income risk. To the extent that the individual employees are involved in the assets of the enterprises in which they are employed, they assume a part of the entrepreneurial risks, which should be avoided precisely thereby that the employee has decided for employment.



To be continued!