Chapter 9: Order conceptions part II





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


05th The welfare state


The model of the welfare state propagated by the Swedish Social Democrats after the Second World War also represents a variant of a market economy order. The allocation is left to the free market, as one is convinced that the market can solve allocation problems far better than any state planned economy. The market-driven incentive systems promote, on the one hand, the efficient use of scarce resources and, on the other hand, help that it is constantly searched for new, more productive technical procedures. In contrast, bureaucratic systems rather contribute to a squandering of the scarce resources because of the lack of material responsibility for the consequences of the decisions.


Just as in the variant of the popular capitalism, a purely market-economy solution is nevertheless rejected, as it solves the question of social security and the distribution of income to the disadvantage of the low-income recipients. Due to monopolistic structures, the wage rate can be pushed below the value of marginal product; moreover, in a pure market economy the employee does not find a sufficient protection against the social risks of illness, accident, disability, age and, finally, unemployment.


According to the conception of the welfare state, the allocation is thus left to the free market, distributive problems and security problems are addressed in the context of generous welfare institutions, though.


However, the Swedish welfare state failed due to excessive demand on the economy because of too high tax burden and the inefficiency of bureaucratic protection systems. On the one hand is valid: the higher the tax burden rises, the lower are the financial incentives of the market; on the other hand decreases the willingness for personal performance with the growing provision of performance free transfer incomes.



06th The overall control


In the aftermath of the Second World War, the concept of the overall control was developed by Karl Schiller, who was the minister of economy and finance during the great coalition in the 1960s. Karl Schiller was a follower of the Keynes school, but wanted to achieve reconciliation with the neo-liberalism by trying a synthesis of the two approaches. He applied the finding of the Liberalism that the free competition market is best able to adapt production to the needs of the consumers. With Keynes, however, he was also convinced that the market economy failed to solve the macroeconomic problems and therefore needed a correction on the part of the state.


It corresponded to Keynesian concepts that the capital market itself was not capable of reducing imbalances because neither the savings nor the investment reacted sufficiently to changes in interest rates. If an economic downturn takes place and with it an excess of the saving over the investment, the rate of interest would have to be lowered actually and thus saving would be reduced and the investment would be increased.


This compensation mechanism would fail, however, because savings depend solely on the level of incomes, and because entrepreneurs are not willing to increase investment expenditures even in the case of interest rate cuts. Due to the decline in demand during the economic downturn, the production capacity was already too large and the entrepreneurs would not be interested in further increasing the production capacity by way of investments.


On the capital and goods markets, the imbalance (the supply surplus) would be rather relieved by reducing the production of goods and by reducing the level of income. But this creates unemployment; there is in fact an equilibrium trend on the goods markets, but not on the labour markets.


The Keynesian theory was developed originally to explain the underemployment during a depression or recession. Later in the 1960s and 1970s, the world economy was hit less by unemployment than by inflation processes; now the attempt was made to transfer the Keynesian basic models to the problem of inflation.


Just as equilibrium of the goods market is created in case of underemployment in times of economic downturn; equilibrium of the goods market in the case of over-employment must be expected in times of economic overheating. Equilibrium on the goods markets could only arrive in the case of an employment which would exceed the existing supply of labour. Since this is not possible, the goods market no longer reaches equilibrium here, resulting in an inflationary gap.


The Keynesian theory was transferred to the problems of economic growth already very early, most of all by Roy F. Harrod. Roy F. Harrod tried to point out that a long-term balance between investment and savings could only be achieved at a growth rate of the investment that could no longer be expected in the highly developed, saturated industrialised countries. Alvin Hansen complemented these considerations by tracing back the too little investment confidence to the stagnation of the population growth. Only in the case of high population growth would additional housing and jobs be needed, which made a high investment demand necessary.


In other words, the weaknesses in the capital markets cause that the overall economic problems of avoiding unemployment and inflation, as well as the achievement of a continuous welfare increase, could no longer be left to the market alone, but that an active economic and growth policy of the state would be needed.


The Keynesian basic recipe for the avoidance of macroeconomic unemployment consisted therein that the government tries to compensate the low private demand with a deficit in the budget. Equally, has the state, according to the Keynesian concept, to compensate the inflationary tendencies in times of economic overheating which must be attributed to a too great private demand by a correspondingly high surplus in the state budget In the context of growth policy it is finally necessary either by an increase in the state infrastructure investments or by financial incentives for the enterprises to increase the private or state investment insofar that an balanced rate of growth of the domestic product is made possible.


In the criticism of the concept of the overall control, primarily three different points were indicated: Firstly, it must be considered that macroeconomic unemployment is not always of Keynesian nature, thus at times it can not be attributed to demand deficits. We also have to consider the possibility that autonomous cost increases can trigger inflation processes. Secondly, Milton Friedman drew attention to the fact that just the Keynesian economic policy has contributed to a significant part to the instability which it is trying to combat with this policy.


The Keynesian economic policy is characterised by a "go and stop", it speeds up during periods of economic downturn and slows down in times of economic overheating. Just because a longer period (about 1 to 1 1/2 years) passes until the stimulus measures introduced to date show effect, and because the possibilities of the prognosis are still limited, there is always the risk that the measures of the state will be too late, for example, that economy boosts are still granted, although demand reductions would be indicated.


In addition, it has to be taken into account that investments have to be planned for a longer period and that by perpetual changes in the interest rates the entrepreneurial risk is increased and thus there is the risk that the private investment propensity declines rather than it increases.


In the literature, thirdly a further connection was pointed out; independent from the long-term investment propensity of the entrepreneurs, the deficit policy of the government can lead to a decline in the volume of investment indirectly by way of interest rate increases. Here, one speaks of a crowding out of the fiscal policy. The state finances its budget deficits by the issue of state securities; Hereby increases the demand for capital and this tends to result in an increase of the interest rate and can on this way reduce the private investment demand. In this case, there would be lesser an increase than merely a reorganisation of the effective demand from a private to a state activity.


Of course, one could avoid this 'crowding out' by either that the state finances the budget deficit directly by borrowing from the central bank, or by enforcing the central bank to support the expansive fiscal policy by an equal expansionary monetary policy (money supply expansion).


In practise, this way is obscured in Germany, though. Since the basic law of the Federal Republic of Germany forbids the state to finance budget deficits with central bank credits in the long term, only temporary financial gaps can be bridged by this way. Furthermore, is the central bank (formerly the Federal Central Bank, today the European Central Bank) autonomous and can not be forced to a certain expansive monetary policy by the governments.



07th The Planning


The mainly by the Gaullists propagated order conception of the planning in the French post war period was marked by distrust of the allocation performance of the market. The free market would show a number of market imperfections.


On the one hand, market failure had to be taken into account. A market fails, for example, whenever the supply responds abnormally. Let us take the case of the supply of the little boatmen, which have only one small boat, and whose incomes are on the edge of the subsistence level. If there is now a decline in demand, the supply should also go back on a functioning market and thus adapt to the demand.


In order to maintain their subsistence level, the little boatmen see themselves compelled to even increase their supply, though; thus they offset the partial decline in their income due to lower prices by an increase in the supply volume. Thereby, however, the market imbalance increases as well as the risk that more and more suppliers will have to file for bankruptcy and leave the market. In order to avoid such an existential crisis, the state finds itself forced to interfere in the market.


On the other hand, market deficits have to be expected. Here, indeed the balance trend remains preserved, but the market results differ more or less from the welfare optimum. The two most important causes of market deficits are firstly the fact that the markets show concentration phenomena, and secondly the existence of external effects.


One of the most important conditions for the markets to head automatically for welfare optimum and adapt the production to consumer preferences is that there is complete competition in all markets and on both market sides. Now, it could not be expected that these conditions are given in reality, rather are the market structures concentrated partly monopolistic, partly oligopolistic.


Moreover, the welfare optimum is missed also when external costs (or also revenues) occur. Here, the case of the external costs is the more important one. We speak of external costs whenever at the production (or also at the consumption) of certain goods of the national economy are caused costs, which do not have to be borne by the enterprises, and therefore ultimately neither by the consumers.


Because of too little commercial costs, these goods are offered too cheaply by the enterprises, with the result that also the demand for these goods is too high. In other words: the scarce resources are not used for those usages where they would achieve the greatest welfare.


Probably the most important case of external costs is the environmental contamination, thus the fact that the enterprises emit toxic wastewater into the rivers and seas as well as toxic exhaust gases into the atmosphere in the course of production and thus pollute the environment, but do not bear costs for this pollution. Although it would be highly desirable for the economy to reduce the production of environmentally harmful products; due to too low prices on a free market are these products more demanded than it would correspond to the welfare optimum.


The magic word against these shortcomings of the market within the scope of the order conception of the planning sounds: indicative planning on the part of the state. A state authority points out how the scarce resources of the national economy are to be allocated among the individual sectors of the economy. As in a normal free market economy, entrepreneurs freely decide on investment projects and production, though.


The plan drawn up by the state is not binding; it only shows which investments are possible and desirable from the perspective of the state. The reason why the enterprises are not forced to follow the state plans is, above all, that one wishes to preserve the individual freedom of consumption and production.


But how are the aims and the use of resources that are set out in the state plans achieved without governmental compulsion? The planning provides for a twofold approach. On the one hand, positive incentives are set, on the basis of these it is relied that the entrepreneurs comply with the state requirements on their own: the entrepreneurs associations are involved in drawing up the state plans.


On the other hand, enterprises must fear that if the enterprises do not comply with the governmental specifications, the state will find itself compelled to nationalise the key industries. The planning acts thus in the sense of the carrot and the stick: The involvement of the entrepreneurs associations in the state plans represents the carrot, the hidden threat to nationalise important industrial branches if necessary is the stick which shall enforce the compliance with the state aim specifications.


The effective influence of the planning remained low, though. On the one hand, the influence of the entrepreneurs associations was large enough to prevent such governmental specifications, which would have been contradictory to the interest of the enterprises. On the other hand, was the threat of nationalisation obviously too dull to show any effect. A nationalisation, carried out on a large scale, contradicted the French basic ideas of a liberal market economy, and also the failures of state planning in the past and in other states were too obvious than that a nationalisation would have represented a plausible alternative.



08th The concerted action


The Stability Law, adopted in 1967, allowed the Federal Minister of Economics the convening of a concerted action. At this, the government and the collective bargaining partners should reach an agreement on the guideline data for the forthcoming collective bargaining. These wage guidelines were not binding, though.


Karl Schiller (then Minister of Economics and Finance of the Federal Government) had developed this order conception, since he opined that the aim of monetary stability owned the character of a public good, and was therefore demanded inadequately according to a theory developed by Mancur Lloyd Olson.


Mancur Lloyd Olson had shown that public goods were demanded in a too low extent. The reason therefore was that, in the case of public goods, the commercial marginal revenues which flow to the producers are always lower than the marginal revenues occurring for the whole of the national economy, with the result that the point of intersection between the demand curve and the supply curve (the commercial balance) was at a lesser output quantity than the point of intersection between macroeconomic marginal returns and the supply curve (the welfare optimum). The following graphic illustrates these relationships:


 Beschreibung: ger21 



The red line shows the course of the supply (marginal cost) curve, the light blue curve describes the macroeconomic curve and the dark blue plotted curve displays finally the private economic marginal revenue curve. (Xp) marks the private economic balance, whereas (Xg) marks the overall economic balance.


Since the point of intersection with the private economic marginal revenue curve is at a lower output quantity than the intersection point with the overall economic curve, it is proven that a too small quantity is demanded of the public goods. Everyone is interested in the public good 'monetary stability', but too little effort is made to achieve this good. This conflict is referred to in the literature as public good dilemma.


Karl Schiller has now proposed the concerted action in order to overcome this public good dilemma. If the wage rates are decided in the individual collective bargaining, it must be feared that often also wage increases are implemented which endanger monetary stability.


The individual trade union would be better off if it would demand lower wage increases and if at the same time monetary stability would be preserved. For this purpose it would be necessary for all trade unions to try to enforce wage demands that are neutral to the price level, though. A single trade union would thus only be better off in the case of a wage increase that is neutral to the price level if it could expect firmly that also the other trade unions would behave conscious of the monetary value as well.


But as they can not count on this, they will enforce wage increases which have a price level increasing effect. If a single trade union behaves consistent to monetary stability, but if the other trade unions do not follow this behaviour, then on the one hand the realised wage increases in these economic sectors turn out below average, on the other hand, carry the employees of these economic sectors the price increases of other trade unions also. It is therefore not worthwhile for trade unions to behave compliant with monetary value.


Here is where the proposal of the concerted action comes in. If all the trade unions along with the government determine which wage increases are classified as neutral to the monetary value and thus can be coped economically, then each trade union could also expect that all other unions adhere to the jointly agreed decisions. If, though, a trade union can assume that all other trade unions behave compliant with the monetary value, it is also appropriate for them to follow this concerted behaviour and to comply with the monetary value likewise.


This concept equals the order conception of the French planning. Also here, an indicative planning is present on the part of the state, the actual power of decision remains with the tariff partners. Here, it is worked with the carrot and the stick, too. The carrot consists therein that the tariff associations are involved in the counselling on the wage guidelines. The stick represents the hidden threat that if this concept does not lead to success, restrictions of the tariff autonomy could still be made.


Since the grand coalition in the parliament had a sufficient majority at the time, in fact a change in the Basic Law could have been decided if necessary, which would be restricting the tariff autonomy, or at least an implementing law for the tariff autonomy could have been enforced which underlines the overall economic responsibility of the tariff partners and imposes certain conditions on the tariff partners.


In order to curb the cost explosion in the healthcare in 1977 a concerted action was introduced likewise. In this case, should the involved groups (health insurance provider, the medical profession, collective bargaining partners) together with the state decide on again non-binding guidelines for the cost increases that are still economically feasible.


In both sectors, certain initial successes had been achieved in the first years after their introduction. The wage increases enforced by the trade unions remained largely neutral to the price level at first, corresponded thus to the growth of labour productivity, and the cost inflation in the healthcare system could indeed be reduced for the years after the introduction of the concerted action.


This initial success could not be maintained for a longer time, though. Both in the labour market and particularly in the healthcare system occurred cost increases which impaired monetary stability.


This historical development (initial success as well as failure in the long term) can also be explained simply in theory. It is very likely that interest groups can be motivated to put their individual interests behind the public welfare once. However, it will not be achieved to bring about such a responsible behaviour in the long term. The task of the interest groups is just to represent their own interests; it will not be able to dissuade any group from this aim in the long term.


In reality, it was not achieved to resolve the public good dilemma with the introduction of the concerted action, either. In fact, actually is the establishment of the concerted action also accompanied by false incentives which reward those who do not adhere to the jointly agreed wage guidelines and punish materially those who comply with the wage guidelines. Namely, if a single union enforces wage increases above the guideline, on the one hand it receives an above-average high nominal wage increase, but the hereby resulting price increases must be borne by all, so that the real income of the respectively other groups of employees is declining.


The following dynamisms might be expected: In the first instance, almost all unions adhere to the jointly agreed wage guidelines; as everyone complies, their expectations are also confirmed. Sooner or later, though, a single trade union will break out of this concert and will enforce higher wage demands either because there is a particularly high backlog demand in this tariff area, or also because the enterprises will give way to these demands due to above-average high returns.


 The success of this single union will be followed by further trade unions in this non-compliant behaviour in the next bargaining rounds. Now that several trade unions are breaking out of the concert, the resulting price increases are ever greater and this means that conformal behaviour is being increasingly punished materially, and that precisely therefore there is a risk that more and more single trade unions will break out of the concerted action. Thus, one day the concerted action finally collapses necessarily. This prognosis has indeed also taken place in the labour market as well as in the healthcare system.


Moreover, the internal logic behind collective bargaining also argues against a long-term success of the concerted action. Collective bargaining is successful in the long term, when both tariff partners are willing to compromise and therefore no tariff side loses its face permanently. However, in order to be able to compromise, employers will begin with wage concessions which are considerably below the level of wages which they are willing to admit, while conversely the trade unions enter into the collective bargaining with wage demands which are clearly higher than the wage level they consider realistic.


If in the context of a concerted action a certain wage increase is decided as acceptable and desirable, it is hardly possible for employers to start the collective bargaining with an offer which is below this wage guideline. After all, a higher wage increase was indeed already accepted officially as desired. The employers must therefore enter the collective bargaining with a wage permit, which corresponds largely to the wage guideline adopted by the concerted action.


Any other behaviour would be contradictory and would also jeopardise the success of further rounds of the concerted action, given that the employers can not, on the one hand, agree to the decided wage guidelines in the concerted action and, on the other hand, disagree with the jointly agreed guidelines in the subsequent collective bargaining.


In this case, however, the employers lack leeway for further concessions in the course of collective bargaining; the climate for negotiating exacerbates, it is more difficult to arrive at a result now. In any case, collective bargaining will generally end with higher wage increases than indicated as desired wage increases in the concerted action.


This objection could be faced by suggesting that this connection should be taken into account when the wage guideline is determined at the concerted action and slightly lower wage increases should be set than they are actually desired. Therefore, if for instance the expected increase in labour productivity amounts 3%, then only a 2% wage increase would have to be spent as a wage guideline, so that the wage increases of 3% would be achieved during the collective bargaining actually. But just with this the trade unions would certainly not be willing to agree in the context of the concerted action, and would argue with macroeconomic reasons why the economically desired wage increase amounts just 3% anyway.


A further argument is added. We have to assume de facto that different wage agreements are negotiated in the proceedings of a bargaining round, since the single trade unions have different positions of power and the individual economic increases in labour productivity turn out differently in the individual industries. Such different agreements may even be economically desirable to a limited extent as the shortage ratios of the single industries are changing time and again, and therefore changes in the wage structure are becoming necessary also.


If, however, a general wage guideline is established within the context of the concerted action, then also these trade unions will try to enforce this generally accepted wage increase, which would otherwise have been satisfied with somewhat below-average wage increases because of the peculiarities in the individual industries. The pressure of the members on trade union negotiators is increasing when general wage guidelines are decided, nevertheless if the government or the scientists may point out so much the fact that a wage guideline defines only the average of wage increases.


If, on the other hand, the wage guidelines decided in the concerted action are below the level that the trade unions are striving for in this sector, they will find arguments wherefore a deviation of their wage level upwards is indicated. They maybe report a backlog demand because in the past bargaining rounds only an below-average wage increase has been enforced, or else an above-average high revenue is achieved in the own sector, which makes it necessary to participate in this above-average growth due to distribution policy reasons.


It is also necessary to consider that never all negotiators can be involved in the concerted action; the number of the individual collective negotiations in the FRG is too large because of the decentralised structure, only the representatives of the umbrella organisations and single very large trade unions can participate in the meeting of the concerted action.


But in this case, it is much easier for a negotiator to dissociate from the decisions of the concerted action; he himself did not participate at all in these resolutions usually. This, though, cancels one of the essential prerequisites for the success of the concerted action. Karl Schiller wanted to overcome the public good dilemma of the monetary stability just thereby that the trade unions in the collective bargaining accept the wage guidelines as their own resolutions and therefore also adhere to these resolutions.


By and large, these considerations are also likely to apply to the concerted action in the healthcare system. If we examine the prospects of a concerted action healthcare, then there is another argument, though. If guidelines for permitted cost increases are established, then the groups involved will search for reasons why especially high costs are justified in their area particularly. Such behaviour is counterproductive in a competitive economy, though.


It is particularly desirable that the involved enterprises search for possible cost reductions and reduce the costs by improving the production technology. There is the risk now, that in the case of a concerted action, the enterprises or hospitals are looking less for rationalisations and increasingly for arguments in favour of cost increases or at least an adherence to the existing cost level. In this way, more and more possible cost reductions are avoided and the general cost level rises.


Continuation follows!