Famous Errors



6th Chapter: Do deterministic processes exist?





1st Introduction

2nd Karl Marx: capitalism necessarily leads to socialism

3rd Walter Eucken: a mixed system necessarily leads to a centrally administered economy




1st Introduction


In this chapter, we want to deal with theses that are based on the idea that the historical process proceeded deterministically, that a certain sequence of individual steps occurred necessarily and that it was therefore not possible for individual political leaders to steer this development in a certain direction in the long term. Individual leaders might perhaps be able to stop this development in the short term and perhaps also make certain superficial corrections to the general development. However, the pressure exerted by certain social forces was so strong that the development could at best be delayed, but not stopped.


It was on the contrary to be feared that the attempt to stop a predetermined development would practically have to lead to a worsening of the situation. Karl Marx, for example, was of the opinion that the contradictions arising in capitalist society had to lead inevitably to a socialist society. It was best not to try to stop this development, but even to accelerate it. If one tried to alleviate the social grievances of capitalist society through social reforms, one would only achieve that the process of impoverishment would be delayed and that the suffering of the workers would therefore be unnecessarily prolonged. However, while maintaining capitalist society, it was not possible to abolish the exploitation of workers through social reforms alone, not even to alleviate it decisively.


Probably the most important theory of a deterministically predetermined development path that was formulated in the course of economic doctrines was the Marxist doctrine of the forced collapse of capitalist society and the necessary transition to a socialist (communist) society. According to this doctrine, the action of the existing forces in capitalism would arise contradictions which would necessarily lead to the collapse of the capitalist economic system. The critical examination of this thesis is the focus of this chapter.


This theory of inevitable developments, however, can also be found in Walter Eucken's ideas on regulatory policy. Walter Eucken was of the opinion that a mixed economic system in which elements of the market economy (in Eucken's terms, the transaction economy) were combined with elements of a state planned economy (centrally administered economy) would necessarily end in a total centrally administered economy. The attempt to moderate the social deficiencies of the market economy by trying to steer parts of the national economy according to the principles of a state planned economy and thus deliberately interfering in the market process would fail and only lead to the necessity of further dirigiste measures until one finally arrived at a total centrally administered economy.


While Karl Marx was convinced of the deterministic development of history and the thesis of the forced transformation of capitalist society into a socialist societal system fitted seamlessly into this basic conviction, Walter Eucken fundamentally rejected a deterministic theory of society. Instead, he was convinced that the desired market economy could only be maintained if the state actively endeavoured to preserve competition by not allowing the formation of monopolies or at least by monitoring them.


Walter Eucken took a mediating position in the methodological dispute between Carl Menger and Gustav von Schmoller. He shared the view of the representatives of the historical school that the decisions of the individual economic agents led to a variety of different market structures. He was also convinced that each business cycle had its own individual features and that for these reasons there could be no general theory of business cycles.


If he was nevertheless convinced, along with Carl Menger, of the possibility and necessity of a general, always valid theory, it was because, in Walter Eucken's view, that although there was a diversity of market structures, each individual market form gave rise to very specific incentives that could be described within the framework of a general theory and, in this sense, were always valid.


2nd Karl Marx: capitalism necessarily leads to socialism


Karl Marx was the founder of the so-called 'scientific' socialism. He believed he could prove that capitalist societies necessarily evolved towards socialism (communism). In historico-philosophical terms he was a disciple of Hegel, who was convinced that history proceeded in a three-step process: thesis, antithesis and finally synthesis.


According to Hegel, the first step is to develop an idea, the 'thesis'. However, this is not accepted unchallenged, but in a second step gives rise to a counter-thesis, the so-called antithesis. Finally, in a third step, through the confrontation of thesis and antithesis, a synthesis is reached, which then contains elements of both the thesis and the antithesis.


On one crucial point, however, Karl Marx contradicted Georg Friedrich Hegel. While Hegel was convinced that history eventually progressed through ideas, Karl Marx thought that Hegel had turned the relations upside down, that ideas only reflected the development in material relations and that it was therefore the development in these material relations that drove history forward.


The concept that people develop ideas, that these experience contradictions and that from the confrontation of these opinions finally ideas are formed, which contain elements of all the ideas involved in the discussion, now certainly corresponds to the truth. What is wrong here, however, is the view that this process takes place deterministically, in the sense that there is always only one very specific antithesis for a given thesis and that finally from the confrontation of these two theses emerged one synthesis that is determined from the outset.


Rather, experience shows that, on the one hand, a certain thesis can certainly give rise to several antitheses and that it is by no means predetermined which elements of the most diverse theses will ultimately prevail. On the other hand, it is a kind of creative process that gives rise to ideas and antitheses, so that for these reasons alone it is not a foregone conclusion which antitheses will be developed.


Furthermore, it is certainly also true that material interests exert a decisive influence on ideas and with them on historical development. Again, however, it is wrong to assume that these material interests are the only determinants of historical development. Also, in the question of the relationship of material interests and the progress of development, it is true that certain material data by no means always generate one and the same idea, that rather the ideational response to certain material conditions is usually one among several possible responses.


A creative process is also at work here, it depends on the intellectual achievements of individual historical personalities which answers are eventually found to given questions and it depends to the same extent on the assertiveness of these personalities which idea finally prevails.


What can be assessed scientifically from the historical process lies in a completely different context. This question was discussed at length in the debate between neoclassical economics and the historical school in the late 19th century. While the representatives of the neoclassical school - above all Carl Menger - were of the opinion that economic conditions could also be analysed with the same scientific methods as the questions of natural science, the representatives of the historical school - here above all Gustav von Schmoller - promoted the idea that historical processes were beyond the reach of scientific analysis, that they could only be understood with the help of the methods of historical science, but could not be explained causally.


Walter Eucken tried to mediate in this dispute. Eucken was also of the opinion that there were no generally valid laws in the area of societal, especially economic processes, in the sense that each individual event was predetermined by historical processes. Every economic situation was of a unique nature and it was precisely for these reasons that Walter Eucken rejected the justification of a business cycle theory, since the concrete course of a business cycle was always of a unique nature.


However, this realisation did not mean that there were no universally valid connections in the area of economy and society. Rather, Walter Eucken started from the idea that there is a limited number of economic elements of order and that these elementary forms of order produce very specific effects on the solution of economic problems. Every concrete situation is therefore unique in the sense that there are very different and, in this sense, unique mixtures of the individual elements of order. Nevertheless, general regularities could very well be examined by economic theory, as long as one referred to the individual basic forms of the market or economic units. Thus, for example, it could be established that competitive markets are better able to align production with consumer wishes than monopolistic or oligopolistic markets.


Back to Karl Marx's thesis that socialist society would automatically and necessarily emerge from the collapse of capitalist societies. Historical experience has shown that the general historical development has not followed this pattern and is therefore not deterministically predetermined. The leading communist country in the past was the Soviet Union. However, it did not emerge from an industrialised capitalist economy, as it should have according to Marxist theory. Russia was still at a pre-industrial stage at the time of the communist revolution. Similar considerations apply to China, also a leading communist system.


Only in the former GDR it can apply that here an already industrialised and predominantly capitalist economic system was replaced by a socialist ordered system. But it was precisely here that the transition to a communist society did not correspond to the path of development laid out by Karl Marx. The former GDR became a socialist society precisely not because of capitalist contradictions, but solely because the Soviet occupying power enforced the socialist revolution by force of arms. The three western zones, like the eastern zone, had emerged from an industrialised and capitalist economic system - the share of the industrial sector was even higher in the western zones than in the eastern zone - and yet here it did not come to the establishment of a communist economy, but - again under the decisive influence of the occupying powers - to an economic system ordered by a free market economy.


One of the reasons why the prophecies of Marxist theory did not come true was that, contradicting Karl Marx's predictions, the core statements of the pauperisation theory, according to which the material situation of employees would have to deteriorate more and more in the course of economic development, were not confirmed. At the beginning of industrialisation, the economic situation of industrial workers was catastrophically bad, but in the course of the further development of industrialisation, real income was able to increase in absolute terms to a great extent, and not even the share of employees in the domestic product decreased in the long term.


The impoverishment of the industrial workers that could actually be observed at the beginning of industrialisation had nothing to do with industrialisation or with the capitalist economic order as such; it occurred because in the course of industrialisation the societal system of the medieval order broke down and internal migration on a large scale to the cities took place and thus, among other things, the control over the birth rate that existed in medieval society within the family ceased to exist. This led to an immense population growth, whereby the growth rate of the population initially exceeded that of the production of goods, which necessarily led to a decline in the per capita income of the population and thus also of the industrial workers, although industrialisation as such had certainly contributed to an increase in the growth rate of the domestic product in the long term.


The fact that the impoverishment of industrial workers did not increase with increasing development, contrary to Karl Marx's statements, but even decreased, was thus precisely because capitalist methods made it possible to raise the growth rate of production to such an extent that it rose above the growth rate of the population and thus also enabled an increase in the per capita income of employees.


Karl Marx's second thesis, which was supposed to bring about the collapse of capitalist society, was also refuted by historical experience. According to this thesis, the fierce competition between the capitalists would lead to the takeover of the small enterprises by the larger ones and that in this way a strong concentration would take place, which would end with only a few giant corporations remaining, which could then be taken over relatively easily by a communist government that had come to power in the meantime.


Indeed, it is true that free entrepreneurs find competition annoying and that they strive to overcome competition through monopolistic mergers. And indeed, the history of industrialisation around the world is characterised by concentration processes. However, history has also shown that this tendency towards monopolisation is repeatedly disrupted by the emergence of new competition, at least where it is not hindered by state measures.


In cases where monopoly situations were able to take hold for a longer period of time, it was primarily due to the fact that the states prevented otherwise possible competition by compartmentalising their economies (mainly through import duties and other obstacles to foreign trade). Furthermore, Walter Eucken and others have pointed out that a functioning competition can only be maintained by an active competition policy and that the state has the task of counteracting monopolising tendencies in the national economy either by prohibiting cartels or at least by controlling abuses.


Particularly as a result of the globalisation process that has taken place in recent decades, worldwide competition has arisen again and again. Although the size of enterprises has increased steadily, it has not generally led to the degree of concentration that Karl Marx predicted, since it is precisely the large corporations that have increasingly had to face international competition.


For Karl Marx's thesis of the collapse of capitalist society, however, it is essential that this process of concentration continues until finally only a small number of enterprises remain, which can then also be relatively easily socialised and transferred into state hands.



3rd Walter Eucken: a mixed system necessarily leads to a centrally administered economy


With regard to the economic order, Walter Eucken distinguishes between a centrally administered economy and a transaction economy. The essential distinctive feature here is the question of who draws up the economic plans. In a centralised economy, it is the state or a state bureaucracy that makes all the important economic decisions. In a transport economy, by contrast, all individuals, private households and private enterprises, have the right to decide on their own concerns.


The economic systems of ‘centrally administered economy’ and ‘transaction economy’ are ideal and not real types. We have to assume that in reality a mixture of these two ideal types is generally realised; in its pure form, which is created through abstraction and pointedly emphasising accentuation of certain essential features, there is neither an ideal-typical centrally administered economy nor an ideal-typical transportation economy. In wartime, however, the actual economic order came very close to the ideal type of centrally administered economy.


The economic orders of the state planned economy as well as monopoly capitalism or a pure laissez-faire order discussed in public represent always hybrids of these two ideal types. We would call the transaction economy today a market economy.


Let us look at the centrally administered economy in a little more detail. This can occur in several variants. In its most radical form, the state bureaucracy takes over the planning of consumption as well as the production. The state determines which consumer goods and in what quantities are allocated to individual private households and hands out ration cards etc. to the individual households at the beginning of a period. The only decision left to the individual is to buy the allocated goods at the price set by the state or to let the ration coupons expire.


A somewhat more generous variant of a centralised economy leaves it up to the individual to exchange the ration coupons for others. As a rule, this is not done through state bureaucracy, but rather a free grey market is created, grey because it is not desired by the state, but at least tolerated. A wide variety of ration coupons are traded on this market, and these ration coupons are either exchanged directly, which is very laborious, or a generally accepted medium of exchange (e.g. cigarettes) emerges.


Although money is the official means of payment in a centrally administered economy, it mostly functions only as a unit of account, but it is hardly suitable as a means of exchange, since money alone - without ration coupons - cannot buy anything. It does not need to be mentioned that the freedom of the consumer is only realised to a very small extent here, in any case it is a highly inefficient method of exchange.


A third variant of a centrally administered economy provides in principle for free choice of consumption. Here, the consumer decides for himself which goods he wants to purchase with the income allocated to him. The problem remains, of course, how the state learns about consumer wishes. It can hardly be expected that the state planning authorities will conduct market research in the same way as private enterprises and adjust production plans to these consumer wishes. It is more likely that consumers will be given the opportunity to bring their wishes to the attention of the lowest local planning authorities, which will then bundle the wishes and pass them on to the respective higher-level planning authority. It is clear that in this case only a fraction of the actual consumer wishes come to the attention of the highest planning authority. A satisfactory solution to consumer needs is not possible in this way.


Also, with regard to the planning of production, different variants of the centrally administered economy can be distinguished. As the name already suggests, in the most radical variant a central authority decides on the entire planning of the production of goods. Of course, it is inconceivable that this huge task can be fulfilled by a central authority or even by a single person - a dictator. A large national economy requires a large organisation comprising many thousands of servants, which in the radical version is structured hierarchically. The central authority makes the actual decisions, the subordinate authorities provide the information necessary for planning (e.g. number of consumers) and carry out the instructions of the central authority.


A somewhat more generous variant of the centrally administered economy leaves part of the production tasks to subordinate authorities, which in this way are given a certain amount of freedom of action. In this case, the central authority sets the broad framework, e.g. how many resources in total are to be allocated to a sub-sector, while the respective subordinate authorities are given the freedom to determine for themselves how and for the production of which goods these allocated resources are to be used. This is referred to as a decentralised variant of the centrally administered economy, as it was largely realised in the last phase of the USSR.


In such a variant, there is very easily the danger that the measures of the individual subordinate authorities will contradict each other and that there will be selective decisions, a result that Walter Eucken had criticised above all against the state planned economy during the Weimar Republic.


If one likes, one can also consider the restriction of state planning to individual key industries as a variant of the centrally administered economy. In this conception, which was primarily sought by the social democratic parties during the Weimar Republic, only the sectors: steel, energy and banks were to be nationalised. The idea was that, in principle, the entire economy could be managed in this way, since the majority of enterprises needed credit and energy as well as steel for production and could thus ultimately be controlled in line with state objectives through the allocation of these goods.


On the one hand, the establishment of a state economy encompassing the entire national economy is dangerous, since the state planning authorities have so much power that they can threaten the parliament's scope for decision-making; on the other hand, however, a total planned economy is not even necessary; the economic goals of the state can be achieved even if nationalisation is limited only to the key industries.


Of course, the question remains how a state authority is supposed to be able to use scarce resources efficiently in the sense of economic goals. Walter Eucken was sceptical as to whether this basic problem of every economic activity can be solved at all within the framework of state planning. For we have to assume that, on the one hand, the determination of the quantities of consumer goods presupposes that the value of the individual resources (labour, capital and raw materials) is already known, but that, on the other hand, the determination of the value of the individual resources in turn presupposes that the determination of the individual quantities of consumer goods has already taken place. However, K. Paul Hensel, a student of Walter Eucken, believed he could prove that a centrally administered economy could in principle carry out efficient planning.


If one realistically assumes production functions of a higher order, it would be extremely difficult to solve the systems of economic equations even using the most modern computer systems. One then helped oneself by simply assuming a linear course for all production functions, thus making the solution of the economic problem possible in principle by means of 'linear programming'. In most cases, however, these considerations continue to suffer from the fact that too little attention is paid to the special incentive systems within governmental organisations.


Now let us turn to the functioning of a transaction economy. This also has numerous variants, which we cannot discuss in detail here, however. Basically, in a transaction economy, every household and every enterprise is free to decide which goods and production factors are demanded or offered. The alternating coordination among each other then takes place on the markets, in which prices are available for the individual goods, to which the market partners align their decisions.


It was above all the concern of modern welfare theory to have shown that prices in a free and functioning market economy correspond in equilibrium to the scarcity relations and that in this way a solution is automatically - without an overall plan - brought about which leads to a welfare-optimal allocation of resources to the individual types of use.


However, a number of conditions must be met for the market to achieve this welfare optimum on its own. These conditions include the requirement that enterprises must pay for all costs incurred by the economy in connection with production; in other words, there must not be any external costs. A second precondition for a welfare-optimal solution is that the market form of full competition is realised in all markets.


In his "Principles of Economic Policy", Walter Eucken criticised the multitude of political corrections during the Weimar Republic primarily because they act selectively, but precisely in this way allow price ratios to be distanced from scarcity ratios and thus create the prerequisite for the market to lead to suboptimal results in the first place. The consequence would then be that new interventions would become necessary precisely for these reasons and thus a tendency towards state planned economies could be observed.


But also, a similar context has contributed to the fact that it is precisely the intervention of the state in the market that has led to a weakening of the forces emanating from the market at the most diverse points and thus to pathological phenomena. For example, legislation on dismissals has prevented labour demand from adjusting quickly to changes in economic data. The fact that collective agreements fix wage rates for a certain period of time and that this period cannot be reduced, even when a surplus of supply (unemployment) on the labour markets actually makes it necessary to lower wages, has the effect of increasing unemployment even more. Unfortunately, traditional social policy in many cases consists of measures which, although their objective is to combat some of the shortcomings of the market, mostly fail to achieve this objective and contribute to the fact that the market shortcomings are, on balance, even exacerbated.


In contrast to his student K. Paul Hensel, Walter Eucken was of the opinion that efficient central planning within the framework of a centrally administered economy was not possible at all, so that basically only one satisfactory economic order was conceivable: the transaction economy. This radical view is thus similar to the ideas of Karl Marx, who - as shown - tried to prove that capitalist society would necessarily develop into a socialist economy. Both authors thus assume that in the long run there could only be one economic order, the socialist society for Karl Marx, the transaction economy for Walter Eucken.


Walter Eucken's thesis is justified by the fact that it was quite impossible for a central planning authority to produce the knowledge of all market-related price relations necessary for an optimal allocation of resources. On the one hand, the final prices could only be determined if the prices of the production factors were known beforehand, but on the other hand, the price of the individual production factors themselves depended on the price of the final products. Only a simultaneous market process would be able to provide this information.


In addition, computer technology was in its infancy during Walter Eucken's lifetime and third-degree functions, which must be assumed for both the production functions and the utility functions, could by no means be calculated by machine at that time.


In the meantime, computer technology has advanced to such an extent that it is certainly possible to determine functions of a higher degree. It should also be remembered that K. Paul Hensel, Walter Eucken's student, subsequently tried to prove that these evaluation processes could also be solved in principle within the framework of an administration.


However, Walter Eucken was of the opinion that mixed systems, i.e. market economy systems with interventionist influence, were unstable. One intervention leads to another, with the consequence that this process would one day end in a centrally administered economy.


Now, one will certainly have to admit that, as a rule, interventions do indeed lead to further interventions. Several factors are responsible for this. First of all, there are substitution relationships and complementarity relationships between individual goods. These relationships make it essential that, as a rule, several areas must be included in the intervention in order to be successful. Let us take the case of substitutive goods. For example, the state wants to curb drug use, but would only ban some of the drugs. In this case, it would certainly be expected that demand would move towards the drugs that were still allowed, with the result that overall drug use was only slightly reduced.


As a second example, let us take two markets that are in a complementary relationship to each other: perhaps bread and spread. We assume that the state intends to subsidise the purchase of bread in order to enable even the lowest income recipients to consume sufficient bread. The price of bread would therefore fall due to the subsidy and this in turn would have the effect of increasing demand as desired. However, it must be expected that the demand for spread would then also increase, with the further consequence that the price of spread would rise and thus at least partially compensate for the positive effect on the price of bread.


But other interrelationships also mean that one intervention leads to others. If the state decides to dynamise old-age pensions (e.g. to adjust them to wage increases), it will very soon see itself obliged, for reasons of justice, to dynamise accident pensions as well. Furthermore, a government that grants subsidies or other benefits to a certain industry will very soon find itself under pressure from the interest groups of other industries, as they see this measure as distortion of competition.


Thus, we must indeed assume that in most cases it will not remain with individual interventions in the market process, that in most cases further interventions in neighbouring areas will be necessary so as not to frustrate the success of this measure. This does not mean, however, that this process will continue to progress and must necessarily end in a total state planned economy.


The development of the market economy at the beginning of the Federal Republic shows a very different picture. At first, when the most important markets were liberalised, important sectors of the economy, such as the housing market, were excluded. Thus, we started our market economy in the FRG with a mixed system. Over time, it now became possible to free up the sectors previously excluded from the market economy as well. The thesis formulated from Walter Eucken had claimed exactly the opposite.


The prerequisite for the fact that a mixed system does not always inevitably lead to a total centrally administered economy is, however, that the politicians quite consciously pursue the goal of maintaining the order system of a market economy and strive to carry out the market corrections, only with measures that conform to the market, if possible. Only by contributing to the preservation of the market-economy order by means of active competition policy do politicians prevent the regulated part of the national economy from permanently expanding.


Accordingly, a measure is considered to be market conform only as long as the state limits itself to changing the economic data, but the actual economic decisions about the appropriate price and the desired quantity of goods are still left to private households and enterprises. If, for example, the state is convinced that certain goods prices should be lowered for social reasons, a market-conforming measure would be to achieve this goal, e.g. by promoting competition or by providing incentives for increased technical progress. A compulsory price reduction, however, would be market-inconsistent, since it would replace the decisions of private individuals with a state decision. It would not achieve its objective, as this compulsory lowering of prices only perpetuates scarcity.