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Chapter 10: Order dynamics part III

Outline:

1st Introduction to the difficulty

2nd The question of the stability of an order

3rd Order and level of development

4th The interdependence of the orders

5th Support of an order by foreign powers

6th The influence of ideas and personalities

7th Internal dynamics of the systems?

8th About the convergence thesis

7th Internal dynamics of the systems?

In our previous considerations, the change in the order systems was explained on the one hand thereby that the individual forms of order have different characteristics or by the fact that different developments in the economic orders in the individual countries can be traced back to the fact that a different interaction with the political forms of order took place.

At times, we encounter the concept that orders undergo a biographical development similar to living beings: They have a birth, they have to struggle with initial difficulties in the first years after their emergence, but after overcoming these initial difficulties they show the ability to adapt to the ever-changing environment; as more mature economies, though, almost unbridgeable difficulties occur, they lose their ability to adapt, they begin to suffer from sclerosis like elderly persons, due to which they then also perish one day.

These theses from a sclerosis of mature economies were supported in the literature mainly by Mancur Olson. The older industrialised societies were no longer able to adapt to the changes in the environment and would eventually perish on this too low flexibility. Of course it is true that in the course of history almost no economic order had existed for centuries; the economic orders which had arisen in antiquity and in the Middle Age had all perished with the rise of modern times. However, a closer look shows also that it was often not endogenous, but externally imposed processes, which have led to the disintegration of past economic systems.

Let us ask ourselves nevertheless, based on which individual processes economic orders have perished in the past. We had already shown in the second section of this article that the stability of a system is mainly determined by three factors: on the price flexibility, which shows how quickly and how strongly data changes and the imbalances, which are triggering them, cause price changes; furthermore on the price elasticity of supply and demand, thus on the question of how quickly, to what extent and in what direction supply and demand react on price variations; finally, on the question of how frequently data changes occur and how these data changes affect the equilibrium position. Atomised data changes cause market imbalances to a far lesser degree than changes in data which are enacted for the entire economy by the government by law.

There are now several factors that have led to a reduction of stability at increasing welfare. It must be assumed that adjustment processes to data changes are generally considered as unpleasant and annoying. It is therefore no wonder that along with increasing welfare the individuals endeavour to expand the time periods when adjustments have to be made. The price adjustment then occurs only at certain intervals, thus tariff increases are only decided after the expiry of a collective agreement, whereby the duration of the contract usually lasts one to two years. The planning security of the employees as well as of the employers is increased by this, but the time which elapses until an imbalance is diminished becomes longer and thus naturally also the welfare losses are increased, which are caused by the fact that the price relations do not correspond to the scarcity conditions for a longer period of time.

Although it is true that this trend can be counteracted thereby that market corrections are made within the period of collective agreement by increasing or reducing over-tariff extra pays. But the practice of the labour courts has in turn reduced the adjustment process, since the courts have accepted a legal claim for the payment of over-tariff extra pays when these extra pays have been paid for a long time already. Under these circumstances, enterprises can only reduce these extra pays if necessary when they have specifically pointed out at the introduction of these extra pays that they can not be paid permanently.

Also the adjustment times of the quantity reactions to price variations were increased in the course of the extension of the cancellation periods, and thus again extending the time of the market adjustment to the data changes. It is precisely due to these trends that there is the risk that enterprises which get into sale crises are no longer able or have at least greater difficulties in adapting to market changes, i.e. by shifting production to other products, which naturally can also lead to the dismissal of some employees.

There is also the risk that the economic upturn will be delayed, as enterprises will only make new hires if they can be sure that the increase in orders is indicating a long-term recovery. Protection against dismissal is justified and necessary when it comes to dismissing employees arbitrarily, but not if an adjustment to the data changes is only possible by means of dismissals.

A worsening of the adjustment process is also triggered by the increasing growth, but also by the kind of technological progress. In many cases, technical progress is linked thereto that, as already shown, it is proceeded to more and more capital-intensive production equipment and that as a result of these technical changes the share of fixed costs in the total costs of an enterprise increases. Fixed costs are characterised by the fact that their amount is independent of the output quantity, so that unit costs are reduced with increasing production volume. The unit costs of a production plant with a value of 10,000 €, if only one production unit would be produced, would also amount to 10,000 €, but they will drop to 1 € at a production volume of 10,000.

If the share of the fixed costs in the total costs is very high, not only the fixed costs but also the total unit costs increase with a drop in production, with the result that the enterprises are striving to increase the price of goods at a decline in sales. A reduction in the supply surplus could only be expected, though, if the prices would fall in the event of a decline in sales and would not increase.

Now Erich Schneider has already pointed out that the process of mechanisation, that means the increase in the share of capital costs, does not necessarily mean that the fixed costs increase. It is always up to the decision of an enterprise whether it budgets certain types of costs as fixed or as variable costs. If an enterprise would e.g. be renting a production plant and agreeing in the rental contract that the rental rate depends on how much products are produced with this plant, than these capital costs would have the characteristic of variable costs. In this case, however, suppliers of production plants must be found who are ready to accept this therewith arising risk (that the rental income depends on the level of the production).

The oligopolistic theory has mentioned another cause for a delay in the adjustment process. Under the conditions of oligopolistic competition, it had to be expected very often that the price would be inflexible downwards; this fact is explained therewith that the price-selling function has a kink when oligopolists expect their competitors to adopt price reductions, but do not adopt price increases on their own products. However, a kink in the price-demand function causes the marginal revenue function derived thereof (the first derivation of the price-demand function) to have a leap at the place of the kink.

Now, if there appears a reduction in costs by lowering the supply (marginal cost) curve, then this does not initially lead to a quantity adjustment since as a result of the kink in the demand curve, the intersection point lies still at the previous output volume:

What does this behaviour of the oligopolists have to do with the growth process, though? We can assume that the mechanisation process leads not only to an increase in the fixed costs, but often leads to a reduction in the number of competing enterprises at the same time: The market form of complete competition is left in favour of oligopolistic market structures. Here, it is taken for granted that the expansion of the total production is less than the expansion of the production capacity of a single enterprise.

But this process, in turn, can be prevented or at least slowed down by the fact that in the course of economic growth the international trade increases and therewith the number of competing enterprises. The number of domestic enterprises is then reduced indeed, but the domestic enterprises are now increasingly competing with foreign enterprises, with the result that the total number of competing companies does not have to decline at all due to these growth processes.

Moreover, also monopolistic market structures are likely to contribute to keep prices as constant as possible in the course of time. The monopolists try to establish a link between price consistency and consistency of quality. The consistent price shall be regarded as an indication of consistent quality.

Also the volume of non-atomised data changes may have risen in the course of the growth. We have pointed out above that the stability of an order system depends not only on the extent to which it is reacted on data changes; but also the extent of the data changes can endanger stability, especially if non-atomised data changes are to be expected predominantly. The more data changes are occurring at the same time and pointing in the same direction, the greater are the imbalances caused thereby and the longer the reduction of the imbalances will last.

The growth process and the concomitant increase in the average enterprise size have now also fostered the emergence of associations which are attempting to influence politics by lobbying activities. Subsidies are demanded, which complicate the adjustment of the price relations to the changed scarcity conditions, with the result that the real adaptation processes are less and less suitable for reducing imbalances.

8th About the convergence thesis

Within the framework of the interdependency difficulty, we have seen that the individual subsystems of our societal system are in relation with each other. There are, however, not only relations between the individual subsystems, but also connections between the order systems of the individual states with each other. This section is intended to address this issue now.

The convergence thesis which is dealt with here is the result of the reciprocal relations between the western states and communist states. According to this thesis, the interdependencies between the two national communities led to a systematic convergence. Each system adopts certain characteristics of the other system. If this connection is thought out well, then both systems would have to equal finally.

The facts seem to confirm this thesis from a purely external point of view. In fact, market-based systems have emerged initially as pure laisser-faire economies, in which all essential economic tasks were left to the market. In the course of time, however, emerged the need to shape the market economy systems more humanly, mainly due to the partially devastating social conditions at the beginning of the industrialisation, by social and political measures and later also by economic policy measures.

It was realised that the market can only consider the distribution of incomes according to the achievement principle, and that therefore the demand principle can only be met by state systems. Above all, the equalisation of family burdens and a satisfactory protection against the social risks of illness, accident, age and unemployment can hardly be solved satisfactorily market based alone. In so far as just the communist states made in total more arrangements for social concerns, the western economies in fact approached the communist states over time.

Conversely, it can also be determined that the communist countries, which in a first step corresponded to the conceptions of a pure centrally administered economy, have gradually approached to the market based systems, especially under Khrushchev and later under Gorbachev. Thus Khrushchev introduced a certain limited freedom of consumption under the heading of consumer communism, and under Gorbachev a strong decentralisation of the planning took place.

However, if one examines the relations between the western and communist economies more closely, it can be seen that there occurred in no case a straightforward approach of both state systems. It is true, of course, that the west adopted some political solutions from the communist states just as the communist states were willing to adopt certain characteristics of market economy systems.

But it was by no means an ever-increasing, continuous approach; rather, periods of approximation have alternated with other periods, in which the states have striven more for a mutual demarcation. Communism in Russia began with a nationalisation and centralisation of almost all production and distribution, with a duty to hand over food, a ban on private trade. As a consequence of this radical restructuring of the national economy, there has been a serious decline in production and drastic supply shortages, culminating in a severe famine. Hereupon the population reacted with strikes and unrests. In March 1921, at the X. Congress of the CPR (B) Lenin, asserted himself with his concept of the New Economic Policy (NEP), a temporary liberalisation of the economy, which led to a boom particularly in the agricultural production.

In 1927/28 the economy of Russia had recovered so far that Stalin was able to declare the liberal transition period of Lenin's New Economic Policy as completed and to introduce the planned economy. With the first five-year plan (1928-1932) the industrialisation was initiated, especially by the expansion of the heavy industry, and by the liquidation of the kulaks and the formation of kolkhozes and sovkhozes the agriculture was collectivised. After the production of consumer goods was neglected for a long time, Khrushchev initiated a turnaround, in which he promised especially an increase in the production of consumer goods.

Communist economists pleaded for incorporating capitalist elements into the communist economic order to increase production in this way. The profit motive should be recognised as an incentive to increase the effectiveness of the enterprises. Above all, Kosygin regarded these thoughts with favour. Although the principle of the centralistic economic planning was maintained in principle, some elements of capitalism were introduced with the help of an operational calculation, a demand production and wage incentives.

Finally, in the 90s of the last century, communism collapsed, which certainly contradicts the convergence thesis. Corresponding to the conceptions of convergence thesis, communism should have also gained stability by approaching the market economy system.

Even within the western states, a straight approach to elements of a planned economy did not become apparent at all. Rather, the fact that in democracies parties could be deprived brought along that one moment more market-economy elements, next more planned economy methods were introduced. When the conservative and liberal parties gained the upper hand in the elections, then market elements were strengthened; but when the socialist and social-democratic parties were victorious, then economies were approaching state planned economy in turn.

Let us wonder now which forces decide whether a convergence of the systems took place or failed to appear. Applied to the relations between the western and communist systems of the time after the Second World War, it was mainly two factors which allowed a certain convergence to be expected.

On the one hand, the defend readiness of the two world powers depended decisively on the ratio of the economic growth level. The one block could only feel safe from attacks of the hostile force if its defences were roughly the same as those of the enemy. But this was only possible with an approximately equal prosperity level of the opponent.

If the growth rate of a national economy is much lower than that of the respectively other block, then this state falls behind: The material value of the defence systems is lower if both blocks spend about the same percentage of the domestic product for defence purposes. Thus the block of states with the lower growth level would have to reserve a larger percentage of the domestic product for defence purposes in order to be safe from any attacks by the enemy.

But just therein is the second problem. The ideologies of both power blocks claimed to correspond better to the 'true' needs of the population. There can be no doubt now that the market economy is the more efficient system with regard to the aim of maximising material welfare. If communism, as an economically weaker system, has to spend an already smaller percentage of domestic consumption on the consumption needs of the population, thus the communist system is under great pressure to adopt the more efficient production methods of a market oriented national economy.

But how come that, especially in the development of the communist states, the approximation process has been stopped repeatedly nevertheless? Now the compulsion to adopt the more efficient methods of the market presupposes obviously that the population in the communist countries also learns about the prosperity in the western states. But this condition was not given for a long time. The communist rulers sealed the native population largely off from foreign influences.

The population was not allowed to travel abroad and the attempt to get information about the conditions abroad by press and radio was made punishable. In this way, the communist states could prevent the local population from comparing their consumption standards with those of the foreigners for a long time, and in this way the striving for more freedom of consumption could be suppressed. For these reasons, communist leaders have not been willing to accept a larger international trade for a long time, since every opening up of the trade borders necessarily entails that the local population receives information about the conditions abroad.

These possibilities of isolation, though, have declined more and more in the course of modern communications technology. It was still relatively easy to prevent the reading of foreign newspapers by not allowing the importation of newspapers. Impeding the listening to messages from foreign radio stations was a little more difficult since radio waves do not know borders; the interception of foreign stations could be banned and somewhat hindered by the use of jamming transmitters, but this could not be prevented completely simply because the observance of this prohibition could hardly be controlled.

Even more difficult are the control possibilities against television and in particular the Internet. Words from foreign broadcasters can be portrayed as false and demagogic, while pictures from television speak for themselves, and depict the conditions at home and abroad in a way that they can hardly be disproved by counterpropaganda.

At our previous considerations, the thesis of the convergence of regulatory systems referred always to the relationship between domestic and foreign states. However, it is also said that within a political order, the competing parties show the trend to approximate to each other.

In this context, too, we can determine historically that at the beginning of democratic orders the parties appealed to different groups of the population and therefore differed decisively from each other. We know conservative and liberal parties, which have traditionally represented the interests of entrepreneurs and civil leaders, and these parties have clearly distinguished themselves from the socialist and social democratic parties which place the interests of employees at the focus of their aims.

Now the competition of the parties forces them to win the majority in the elections, only then they are commissioned with the formation of government; but in general no population group is so large that a party can rely only on its core voters and on a narrowly limited population group. The democratic competition in the elections forces the parties to address as many population groups as possible, and this in turn leads inevitably to the fact that the individual parties are increasingly converging in their general principles.

Within the framework of the economic theory of democracy, also the thesis was developed that the competition between the parties leads ultimately to the fact that all parties head for the same compromise between the interests of the individual population groups. The objectives of the voters and the distribution of the population among the various population groups define a very specific bundle of policy measures which is necessary to achieve the majority in the elections; if one bases rational behaviour on the part of the politicians and assumes that there exists an effective competition between the parties, then each party would have to promise the same bundle of policy measures according to this theory.

This conclusion requires certain restrictions, though. Firstly, it should be noted that this approximation process is valid more likely to a majority voting system than to a proportional representation. In the case of a majority voting system, as is in particular the case in the Anglo-Saxon countries, a party in an electoral district only acquires a seat in the parliament when it obtains an absolute majority of the cast votes; this aim can only be achieved by large parties which appeal to most population groups. The majority voting system knows therefore also almost only the competition between two major parties, one party emerges victorious from the elections and represents the government, the other party underlies and forms the opposition in the parliament.

In the case of a proportional voting system, the composition in the parliament corresponds generally to the distribution of the voters among the individual parties. Here, a large number of smaller parties can be elected generally. The individual parties can afford to represent a small interest group without thereby reducing their chances of participating in the government. The compulsion to approximate to the ideas of the other parties is largely dropped here. No party reaches the majority here, thus coalition governments are necessary. The capacity to govern is measured less by whether the majority of voters support this party, but by the extent to which there are common objectives between the governmental parties that make government work possible.

But also in a majority voting system the approximation process is interrupted time and again. An opposition has only then the prospect of winning the majority in the next election if it can demonstrate that it can lead the political deals better than the current government. It seems necessary to distinguish oneself clearly from the opposing party.

End of the lecture