Chapter 10: Order dynamics part II




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



3rd Order and level of development


If we follow the historical development in the European states, it is noticeable that at the beginning of the industrialisation of most national economies a state planned economy prevailed. From a certain moment on, though, the obstructions of the enterprises on the part of the state bureaucracy became so strong that they hindered the further development. It came to the demand that the state should withdraw from the economy and the broad liberalisation of the national economies was the result. The dirigiste interventions of the state increased once again later, though, and especially in the course of the two world wars an orientation towards a state planned economy occurred again.


It appears that the question of which system of order is chosen depends primarily on the level of development of a national economy; that at the beginning of the economic development a state planned economy prevails initially and later a liberal market economy, but which then again turns into a state planned economy.


These connections can be observed to a certain extent also in today's developing countries, especially Africa and Asia. Here again, a bureaucratic economic order prevails initially in many national economies, but also here the national economies are opening up which adopt the status of a newly industrialised country.


A closer examination of these development strands shows, though, that the connections between the level of development and type of order are in reality somewhat more complicated. Firstly, it is important to note that there are also significant exceptions to this rule, the most important example being the USA, which began their economic development after the founding of the North American state with a market economy immediately. Moreover, a closer examination at the historical development shows that also in the European states there are considerable differences to be observed in the individual types of orders and in the transitions from bureaucratic order to a liberal market economy.


The classical example of a bureaucratic economic order at the beginning of the industrialisation was the mercantilism in France. Significantly more generous regulations can be found in the mercantilism of England. The mercantilism in the individual small German states manifested itself in other forms as well. In this context, the term "cameralism" was used, which was expressed especially in internal relations.


Again something different was valid for the Soviet Union. At the takeover of communist rule, Russia was still characterised by a predominantly agricultural economy. From a mere external view, the industrialisation phase in Russia also began with a state planned economy. Already under Lenin, though, it came to a certain degree of loosening temporarily in the scope of the so-called 'modern economy'; the orientation to a total centrally administered economy was then carried out mainly by Stalin. Under Khrushchev and later under Gorbachev, a certain liberalisation of the economy was initiated by the freedom of consumption and decentralisation of the planning authorities.


Similar development lines can be observed in the European eastern bloc states and also the communist regimes in the Far East (especially China) began with planned economy systems and brought about a certain loosening of the bureaucratic influence in the course of further development. North Korea, though, differs in this sequence to the extent that liberalisation trends failed to appear largely until now.


Nevertheless, the development in the communist countries has fallen outside of the parameters drawn so far. Because according to the ideas of Karl Marx, a completely different development of the types of order was to be expected. Within the framework of "scientific socialism", Karl Marx tried to prove that socialist societies necessarily evolved from market-based (capitalist) orders and that the transition to a communist society was to be expected only after a certain maturity of industrial production. As said before, communism began in almost every communist state reversely with an agricultural society. These countries - primarily Russia - were not ripe at all for a development to socialism in the sense of Karl Marx.


Only the former GDR deviated from this development trend and corresponded actually to the scheme drawn up by Karl Marx; the socialist society was introduced here into an already highly industrialised economy. But also here, it was not the societal process that triggered this transition to socialism - as described by Karl Marx - but the Soviet victorious power which forced this transition, as is well known.


Let us now ask for the reasons for these connections between the state of development and order type of a national economy. Here, a whole series of connections can be pointed out. The Mercantilism in the European states of the 17th and 18th century was evidently necessary primarily because a highly specialised, based on division of labour economy can only function if it has sufficient collective infrastructures. In the transition from agricultural economy to the industrial economy, there was especially a lack of transport routes, but also of educational establishments and a legal system, which are essential for a smooth running of production and exchange relations.


For the proper functioning of a market economy, the prerequisite is furthermore that there is a sufficient amount of individuals who dispose of acquisitiveness, are prepared to take risks and are therefore able to take on entrepreneurial tasks. These conditions were and are fulfilled very different, though, in the individual countries.


While on the European continent many entrepreneurial personalities had already existed in the trade and the industry in the Middle Ages, and while a sense of economic activity had developed very early in the Arab and Far Eastern countries, these qualities were lacking primarily in many African countries. There prevailed a mentality for a long time which only triggered productive activities when material need appeared and these activities were necessary for the mere survival. In these countries it was necessary that the single individuals had to be taught to an economic behaviour the way that the state urged the individuals to such behaviour.


A third requirement for the functioning of market economy systems is that wealth is at least so high that almost all citizens can at least dispose over a material subsistence level. Market economic systems will always lead to different successes in the individual households, thus there will always be persons who earn much more than an average income; but if the domestic product is so low, though, that the per capita income is close to the subsistence level, then there is a risk that a considerable part of the population in a market economy which is uninfluenced by the state will acquire an income that does not even correspond to the physical subsistence level.


Precisely in this question arose a hardly solvable problem in free market economies at the beginning of the industrialisation in the European states. The release of the productive forces by transition to the industrial mode of production led to high, rapidly rising growth rates of the domestic product on one side, though. But the simultaneous dissolution of the feudal economic order of the Middle Ages, especially the destruction of the family structures and the abandonment of restrictions on the production of children, led to a rapid increase in the growth rate of the population, which was so strong that it exceeded the growth rate of the domestic product for a longer period and thus necessarily had to lead to a decline in the per capita income.


The result was widespread poverty and social grievances; the individual workers had to work 12 to 14 hours a day, the children were involved to economic work very early and therefore could not be educated adequately; the conditions at the workplace as well as in the housings were devastating and lacked the simplest minimum conditions of health. It was very clear that under these conditions the demand was raised soon that the state had to prevent the worst of these excesses by means of social policy measures.


The fact that the birth rate was drastically declining in the course of the economical development in the highly industrialised economies, but the growth of the domestic product persisted, though, led finally thereto that the per capita income of the employees also rose far above the subsistence level at a certain point of time.


Friedrich List has still pointed out a further prerequisite for the functioning of a market economy. It does not only depend on achieving a certain absolute level of growth; for a market economy to function smoothly, it is evidently necessary - as at least meant Friedrich List - that also the economies which engage in reciprocal international trade have arrived at a comparable level of growth, too.


Now, the economic development of England began in the ending 18h century around 50 years before the beginning of industrialisation on the European continental countries. This led, in the opinion of Friedrich List, to the fact that the German enterprises were hopelessly inferior to the English producers, though. At the introduction of new production methods indeed very high development costs accrue, which are eliminated subsequently.


Since the English industrialisation had already begun about fifty years before the European industrialisation, the German enterprises had to raise higher unit costs than their British counterparts due to the still accruing development costs at Friedrich List's time, with the result that they underlay the British producers. Friedrich List was therefore of the opinion that in its initial phase of industrialisation, German industry should have to be protected by import tariffs for a certain period of time. These demands led to the abandonment of free trade in Germany under Bismarck and to the transition to a far-reaching protective customs policy.


These ideas of Friedrich List did not remain unchallenged, though. Experience has shown that it is extremely difficult - especially because of the lobbyist influence of the industry associations on politics - to reduce once granted benefits, even if this was necessary for factual reasons; furthermore, it has to be feared that the incentive for the acquisition of new technology ceases under the protective shield of import tariffs.


Above all, it is unclear why it should lack of enterprises which would be willing to accept also those productions which lead to losses in the first few years, but nevertheless prove to be profitable in the long term. Only if these subsequent profits are attributable to enterprises other than those who have introduced the renewals it is to be feared that the incentive to include such innovations is too small. This danger can, however, be encountered much better by a patent law than by a protective tariff policy.



4th The interdependence of the orders


Especially Walter Eucken drew attention to the fact that orders ought to be interdependent, which means that the individual orders of societal subsystems ought to correspond. Thus Walter Eucken assumes that a market economy can only function smoothly if there is a liberal democratic order given at the political level. Conversely, a centrally administered economy can only function if a dictatorship is achieved at the political level.


Walter Eucken has confined his considerations on the interdependence to the relations between the economic and the political subsystem. Now, we distinguish in general between three subsystems of our modern secondary society; besides economy and politics the cultural sphere is distinguished, thirdly. In this sense, the problem of the interdependence could also be extended to the relations between cultural and economic orders.


Christianity, for example, knew the prohibition of interest in the Middle Ages, since it was assumed that the lending of money did not constitute work and that therefore no remuneration could be demanded. Similar ideas are encountered in the Islamic economies in which a theocratic state was established. Here, too, religious believers are forbidden to demand an interest rate for a capital offer. After all, communism was subject to a prohibition on interest, in this case guided by the conviction that only the employment of work would result in value, and therefore only the work was qualified for remuneration.


It is obvious that a clear interest prohibition affects the efficiency of any economic activity. The price relations between wage and interest reflect the scarcity relations between labour and capital. If no price is paid for capital, then the demand for capital is greater than the supply, the capital intensity of the productions is too high, labour is demanded to a too small extent, and thus unemployment is created massively in this way.


As shown in the article on the order analysis, Walter Eucken has distinguished only the two order forms of the market economy and the centrally administered economy. We ourselves, however, followed in this article a fourfold division of the market, negotiation, election and bureaucracy. If one follows the latter scheme of classification, one might see certain correspondences between the political order of feudalism in the Middle Age or the at times propagated corporative state in modern times and the negotiated solution.


The thesis of the interdependence of the orders can now be understood in the sense that the individual orders, especially in their ideal-type form, are based on very specific models, and thus the same societal model also requires very specific types of order on the individual levels of the subsystems. The model of a market economy order is the greatest possible realisation of individual freedom. But on a political level is this freedom ideal only realised in a constitutional democracy.


Conversely is valid that both in the scope of the centrally administered economy and its political correspondence of a dictatorship the primary objective is the subordination of the individual citizens below the aims of the society as a whole, whereat these aims are formulated by government representatives. Finally, in the feudal system, the community will emerged from the interaction of the individual population groups (the estates), so that here the economic order of the negotiated solution corresponds best to this aim.


The thesis of interdependence can secondly be understood also in the sense that the proper functioning of an economic order is only guaranteed if a very definite order is realised on the political level. While in the first case it is rather spoken of a normative context, in the second it is thought of a factual connection; in order that the welfare can be maximised in a market economy order, thus a very definite order is needed in the political area as well.


A political dictatorship generally leads to a hindrance of a market economy. The dictator can achieve his aims namely only if these can not be crossed by the admission of a market economic freedom of the single individuals. Thus, especially the free trade with other national economies entails the risk that individual citizens can compare the achievements of their own government with the achievements of the foreign government, the citizens also learn by their free circulation with foreign countries in which points their own government has failed. There is the risk that the criticism of the own government will prevail and that in this way the position of the own government will be endangered in the long term.


Now, attempts have also been made by communist states in recent decades, which have chosen the political form of the dictatorship, to allow market relations in the economic sphere. The reason for this was mainly the fact that in the competition between the systems (capitalism versus socialism) the centrally administered economy proved to be inferior to the market economy, and that therefore the communist leaders were forced to adopt methods of the market economy in the economic sphere.


On the one hand, the threat of a revolution could only be prevented by adapting the consumption standard to the standard of liberal democratic states. On the other hand, the willingness to defend itself against the foreign states could only be maintained by adapting to the efficiency of market economy systems.


In a similar manner, the aims of a market economy (the welfare increase of the individuals) would be endangered if a dictatorship would be implemented on a political level. A dictatorship will always intervene in the market in order to achieve its political aims and correct the market results if the political aims appear to be at risk. Since the dictator has certain ideas about how the individual has to behave, what is good for him and what is bad for him, in this case numerous corrections of the free market are necessary on the part of the state.


Thirdly, the thesis of interdependence can also be interpreted as meaning that the order forms of the individual societal subsystems have effects on other subsystems which either endanger the orders of the respectively other subsystems, or conversely increase their stability.


Thus, especially the attempts of the policy to correct the market can ultimately lead to a collapse of the market economy system in general. In this connection, Walter Eucken has forwarded the thesis that mixed systems were unstable and would finally necessarily lead thereto that the economic system would end in a total centrally administered economy ultimately.


Walter Eucken explains this trend towards the centrally administered economy thereby that because of the reciprocal relationships between the markets, the intervention in one market necessarily forces intervention in further markets and that in such a way more and more markets must be intervened politically.


The fact that markets are linked to one another and that therefore the intervention on a market will lead to further interventions is broadly undisputed. There exist substitutive and complementary relationships between the individual markets. Someone who wants to regulate the oil market in order to reduce energy consumption in this way will not be able to avoid to involve the gas market in the regulation either because it is likely that consumers will switch to the energy form of gas and that the aims of the government can be crossed. At the same time, there is a need for a common regulation of complementary goods, since scarcity occurrences on one market must automatically have retroactive effects on markets with complementary goods.


Nevertheless, it is more than questionable whether the thesis is necessarily valid that interventions in individual markets necessarily have to result therein that all markets are politically intervened and that this process ends necessarily with a centrally administered economy. Reality clearly contradicts this thesis. The Federal Republic has begun with strong regulations on numerous markets in its early years. However, these regulations did not lead to a widening of bureaucratic rules, but quite the contrary was the case, a lot of the regulated markets were released again.


It remains also uncertain why individual regulations should end in a total centrally administered economy, since not all goods are in a complementary relationship to each other. It is true that all goods are, in a sense, in competition with one another - they compete for the same national income - but the elasticity of substitution of the individual goods to one another is often so small that it can be neglected.


We thus have to assume that political systems have negative effects on the economic order and that these negative effects on the market economy are to be expected to a stronger extent from a political dictatorship than from a democratic order.


But what about the reverse case, do we also have to expect that e.g. a free market itself leads to the collapse of dictatorial systems? Certainly, communist dictators have suppressed free-market orders in the past, because they feared that free markets threaten the political system. Conversely, it was the hope of western governments that the introduction of market elements would initiate the collapse of communist systems. De facto, the Soviet Empire actually collapsed in the early 90s of the past century.



5th Support of an order by foreign powers


In the scope of the order analysis, we have seen that Friedrich von Hayek distinguishes between orders which are formed “spontaneous” and those which are "set". This distinction plays a decisive role also in the context of the order dynamics. The development of a system of order, its emergence and its destruction, have been considered hitherto in relation to the stability of a system as well as the interdependence of the individual orders to one another.


In the historical course, systems of order have been formed or terminated sometimes by the intervention of foreign powers, though. This observation clearly applies to the emergence of the Soviet bloc in the post-war period. Only the Soviet Union itself had achieved a socialist order from its own strength, by a social and political revolution. In the other states dependent on Russia, especially in the former GDR, the economic order was imposed by the Soviet Union, the victorious power. Neither were the prerequisites present for the independent emergence of a socialist order in these states, nor have these orders survived the disintegration of the Soviet Empire; they collapsed at the very moment when the Soviet Union also came to its end.



In a similar way it can be said that also in West Germany the victorious powers were responsible for the fact that the original Federal Republic was created as a market economy order, thus in both cases (in East and West Germany) the victorious powers contributed to the fact that in the zones administered by them the economic order was established which also prevailed in the own countries of the victorious powers.


This dependence on foreign powers differs to a severe degree at one point, however. In West Germany a rather stable economic order developed, which no longer depended on the development of the economic order of the former victorious powers, as we had to observe in the case of East Germany. Of course also in the western countries the individual economies depend on developments in the other countries. Here also it is valid that an economic crisis with it origin e.g. in the USA, has a negative impact on other market economically organised national economies as well.


Here, this is not a matter of one-sided dependencies, though; the economic situation in the USA itself is dependent on the development in the European states. The dependencies discussed here arise from the interaction of the market economy orders with one another, whereas in the above-mentioned dependencies the political system of foreign powers is responsible one-sidedly for this dependence.


Of course one can ask how such foreign powers can get to such supremacy that these foreign powers can determine the economic order of the dependent states. In the above-mentioned examples, this supremacy resulted from armed conflicts; those states which emerged victorious from these conflicts had the power to determine the economic order of the defeated countries.


In the most general sense, there are also different types of order for the interaction of the states. Especially Britain had been pursuing a strategy of equilibrium for a long time, according to which England was anxious for to disallow predominance within Europe. England, therefore, formed alliances with countries which ran the risk to succumb without British participation.


After the end of the Franco-Prussian War of the 80s of the 19th century, Bismarck also tried to prevent the outbreak of further wars by means of alliances with the potential allies as well as with the opponents; thus preventing the fulfilling of the prerequisites for the emergence of a supremacy of one of the European countries. Bismarck's policy did not achieve its aim in the long term, though, mainly because this reciprocal alliance policy was abandoned again under the rule of William II.


After the collapse of Germany in the Second World War, a new international order emerged. On the one hand, the attempt was made to prevent the possibility of unilateral supremacies in the future by the formation of the UNO - a kind of world government. De facto, the political development was determined to a much greater extent by the nuclear balance of the two great powers the United States and the Soviet Union, both of which had the power to extinguish the enemy by a nuclear strike, in a way that even after a surprising first strike the attacked state still had the possibility of defeating the attacker.


Since both powers were still accessible to rational calculus and were not willing to risk their own destruction for ideological reasons, by this stalemate the outbreak of a third world war was at least apparently prevented for a long time. De facto, some casualties have also prevented that this system ended in a Third World War. A nuclear balance can namely be maintained only if very certain conditions are fulfilled.


Firstly, a balance of terror can only be guaranteed if the number of the great powers is in principle limited to two states or at least groups of states. If a multitude of states have nuclear weapons, a third power may create the impression that another power would be nuclear threatening its main adversary and thus triggering a nuclear war.


Furthermore works such a system only if, secondly, the leaders of both nuclear powers behave rationally in the sense that wars are only instigated, if there is a justified hope in the success of the attacker. These requirements were presumably not always given among the followers of Khrushchev.


Thirdly, this equilibrium of terror presupposes finally that both approaches have the techniques to clearly and comprehensively recognise the warlike actions of their opponents. But there is no absolutely safe technique here on earth. It must always be expected that techniques fail in individual cases. Thus it can not be expected that the balance of the terror will work in any case.


As a result of the collapse of the Soviet Union, this order has collapsed then, and it remains initially unclear by which strategies the world peace can be maintained.



6th The influence of ideas and personalities


Historical events can be analysed in two ways. Within the scope of science of history, historical facts are understood as the result of individual personalities and their ideas. There have been outstanding individuals who brought about the event, the way that they had brilliant ideas for solving the pending problems, thereby that they continued to have the courage to take a risk and to dare to act and by possessing the persuasive power to convince the masses of the rightness and necessity of their actions.


Whereas within the scope of the theoretical sciences, the events are understood as the result of very specific constellations, the time was ripe for the occurred changes, and the historical processes can be clearly traced back to specific objective conditions.


Let us give an example for each of these two approaches. For the historian it was Prince Bismarck, who had understood how to rearrange European conditions the way to make the peaceful coexistence of hitherto disputed nations seem possible. On the one side, Bismarck was convinced that only a war between France and Germany could lead out of the impasse into which Europe had been overthrown in the course of the Napoleonic wars.


But on the other hand, Bismarck had also had an eye for not to urge for further conquests after the victory of Germany against France, but rather to safeguard what was achieved so far by concluding mutual treaties with the most important great powers. After all, Bismarck's alliance policy brought Europe a peace of more than 30 years, and the First World War broke out mainly because the successors of Bismarck abandoned his alliance policy.


On the other hand, let us try to understand the collapse of the Soviet Union as a result of very certain historical developments. The superiority of the West, especially the United States, in material terms led thereto that Russia became overburdened in the arms race. The bureaucratic order of communism had also proved to be incapable of leading a giant empire like Russia with its satellites efficiently in the long run. The collapse of the Russian Empire was, seen in this manner, only a matter of time.


A more detailed analysis of the history, though, reveals that historical events can not be traced back solely on the basis of the work of individual personalities or on the basis of objective circumstances alone. It requires almost always the interaction of the two forces: the commitment of personalities and the presence of certain objective structures. Viewed from the outside, history can still appear so strongly shaped by individual leading persons, there must always be certain objective conditions without which an ever so exemplary action does not lead to the desired result; the time has to be - as the saying goes - ripe for the desired changes.


Thus, since the days of Adams Smith and particularly in the post-Second World War period, leading economists have convincingly pointed out that a dirigiste policy of protectionism affects the material welfare of the national economies which are operating international trade, and this is true not only for the countries against which the import duties are aimed, but this is also valid in the long term for the countries which are setting the import duties.


The unilateral collection of import duties will improve the terms of trade for the duty levying country in the short term, but the extent of the productivity increasing foreign trade volume will decrease. In the long run, the negatively affected governments will defend themselves and will raise tariffs for their part; this leads to tariff war, the terms of trade are returning to their starting position, the reduction of the foreign trade volume increases again and therewith the material welfare of all countries involved in foreign trade is reduced.


Although in the scope of the Havana Charter an attempt was made to introduce a free international trade, a large number of dirigiste barriers to foreign trade remained for a long time, and it was only since the 1980s that politicians - initially within Europe, and later also worldwide -were willing to reduce a major part of the dirigiste interventions in international trade. Although the idea of a welfare increasing free trade had been developed for a long time, politicians were still not willing to put these ideas into practice; only because of very certain objective developments since the 80s of the past century the time was ripe for the introduction of a free trade.


Thus very specific objective developments are needed in order that new ideas can also be put into practice. It is not enough that outstanding personalities develop new ideas. On the other hand, may the time for an upheaval be still so ripe, but when there is a lack of personalities who have ideas about how certain difficulties can be overcome and which are also willing to achieve these ideas under personal commitment - even against the greatest resistances - it will nevertheless not be possible to achieve the desired solution.


Let us take again the example of the collapse of the Soviet Union; it had been foreseen for a long time, and it had been pointed out repeatedly that the communist system should have had collapsed since long time; it was the opening up of the Soviet system both outwardly and inwardly, which was initiated by Gorbachev, which then had actually led to the collapse.


This interaction between personal decisions and objective conditions can also be observed in the context of the dispute over the question whether man has the freedom to make a decision or whether any action represents the result of a deterministic process. It is true that human action is always constricted more or less by the fact that only a few alternatives can ever be taken at all due to objective circumstances, and that not every arbitrary desire can be achieved.


It is equally true, however, that in the majority of cases the path to be pursued is not clearly delineated, it could have been acted differently also. This applies also when a decision of an individual can be traced back on very specific objective conditions - e.g. on the character traits of this person - and therefore the decision appears to be deterministically defined in retrospect; another contrary decision would presumably have been traced back equally plausible on other character traits of this person, since the personality of an individual may show in general quite different and quite contradictory qualities in the individual case.


The question of the influence of ideas and personalities was initially related quite generally to any historical development. However, these considerations apply in particular to the introduction and development of systems of order. The introduction of a liberal society at the end of mercantilism at the end of the 18th century can certainly not be understood without the contributions of Adam Smith, Jeremy Bentham, and John Locke. But also here, differences appear in the individual countries. For this purpose, let us compare the introduction of liberalism in England and in France. Both countries had a mercantilist economic constitution, in both countries mercantilism was overcome by the introduction of liberal economic forms.


In spite of these similarities, there resulted considerable differences between the two countries, which can be explained thereby that, on the one hand, the mercantile initial form in France occurred much more pronounced than in England, and on the other hand the intellectual engagement with the economic circumstances was led by other ideas and personalities. In England, the renaissance of the economy was based on the idea of the free trade movement, and it was primarily borrowings from physics which were adduced to explain the economic process, whereas in France Quesnay tried to explain the economic cycle rather with biological and medical connections.


Similar differences can also be observed in the development of classical and liberal ideas. For one thing, there was a conception of the Ordo - idea of Walter Eucken, which was essentially confined to the German language area. This was the result of the criticism of National Socialism, but also of interventionist procedures during the Weimar Republic. Whereas in the Anglo-Saxon states the neo-liberalism of Haberler, Pigou, and Friedman, had arisen mainly from the criticism of Keynesianism, and therefore had involved in particular the sector of economic policy.


Continuation follows!