General economic policy



01.  Approaches

02.  Methods

03.  Target analysis

04.  Means analysis

05.  Institution analysis

06.  Political economy

07.  Welfare economy

08.  Order analysis

09.  Order conception

10.  Order dynamics



Chapter 5: Institution analysis





0th Introduction

1th The question about the features of political institutions

2th The question about the intrinsic value: The subsidiarity principle

3th The question about the intrinsic value: The centralism

4th The question about the intrinsic value: The democracy precept

5th The problem of the conflict of interests

6th The problem of the lacking resources



0th Introduction


The contribution of economic policy teaching to the institution analysis consists in the answering of the following questions:


Firstly, what are the characteristic features of an institution? Similar to the means analysis, the superiority of an institution can here also be determined only if previously the specific differences of the individual institutions are known (question of the characteristic features of an institution).


Secondly, it must be checked whether a certain positive or negative intrinsic value is awarded to a particular institution, regardless of its suitability for solving the tasks entrusted to it (Question about an intrinsic value of an institution).


Thirdly, it must be checked whether in some circumstances the self-interest of a possible institution complicates the acceptance of certain tasks because conflicts of interests are given (question about a conflict of interests)?


Fourthly and finally, the suitability of an institution could fail because an institution does dispose of the resources which are indispensable for the realization of certain tasks (question about the lack of opportunities).


1th The question about the features of political institutions


For the characterization of an institution the decision-making process is crucial. Only when an institution would be merely of one person, the question of how the unified will of this institution comes about was unnecessary. Generally, however, a carrier represents an institution which consists of a variety of people, and here it is of importance for the question of the suitability of an institution, how a process will proceed. Two questions arise in this context:


Firstly, how is the will of an organ consisting of several persons detected? This is the question about the voting rules. Secondly, it is necessary to determine which factors work towards a compromise which brings the, at first different, ideas of the individual members together.


The voting rules determine whether, for example, unanimity is necessary or whether a simple or a qualified majority is required, further, how to proceed in the event of a tie. The importance of voting rules for the suitability of an institution gets immediately apparent when one considers that an organ which can act only by unanimity remains incapable of acting on most issues.


Of equal importance as the voting rules are the agreement mechanisms of the institution. In general, we have to assume that at the beginning of the decision-making process prevail very different opinions among the members of the decision-making bodies. Therefore, a mechanism is required that allows a compromise between the various opinions.


Firstly, one is able to assume that common cultural values, furthermore, the affiliation to a party works towards that certain common fundamental convictions consist and that therefore differences of opinion stay within limits.


The logrolling (the Vote Trading) represents another agreement mechanism. Here, one group is willing to give in to the respectively other subgroup at a partial question, if this in turn expresses willingness to accommodate in another issue of the first subgroup.


The joint discussion can lead to an agreement, if in this way the information horizon can be extended and misunderstandings can be cleared up by bringing forward factual arguments. However, the discussion will only be able to lead to an agreement if the differences of opinion are based on factual questions and if both discussion partners emanate from the same or at least similar basic ideas.


Finally, the fact that there is uncertainty in some questions can contribute to an agreement, too. So the agreement will can increase if it is unknown whether a group already has the majority. Here, one secures the majority in the way that one makes concessions to some subgroups and wins these for the own position.


Further, D. C. Mueller, an American economist and representative of Modern Political Economy and others have pointed out that the uncertainty about whom certain measures finally benefit can produce a willingness to compromise.


Thus, distribution problems would only be hardly resolvable in the context of everyday politics, but approached easier in the constitution. The individual adopts a quasi-altruistic attitude when out of the uncertainty as to whether he is among the winners or losers of a measure he comes to the decision according to more objective criteria.


If a rich man could be sure that a certain measure of redistribution had a reduction of his assets or net income as a result, then he would use any means available (especially through lobbying activities) to ensure that this legislative proposal will fail in parliament. One also has to worry that these attempts lead to success very often.


However, if this measure is applied in the very long term, this rich one can expect that the same measure may possibly benefit also his children and grandchildren. After all, even the rich families are also not immune to that they can meet the misfortune one day.


But as it is absolutely unclear which of these opportunities for rich families can occur actually, this rich one has to assume that both options (benefits or losses) have the same probability and in this case an action against this measure would be irrational. It is then equiprobable that this measure is useful or even harmful to his children. He then behaves exactly as if he would decide altruistic. Measures which are applied in the very long term - for example, in the constitution – thus, lead to a quasi-altruistic behavior.


Finally, an agreement may also be forced thereby that it is threatened with formal or informal sanctions, such as for example, with the expulsion from the party if certain party members are not willing to agree to the general solution sketched out by the party leadership.


In connection with the question of which properties now the individual institutions under discussion have, it is not only to determine whether a competition between multiple institutions exists, to which institution a task shall be transferred expediently, it must also be seen that in certain cases a task is to be transmitted to multiple institutions together. So is the execution of social welfare primarily a responsibility of the municipalities, nevertheless, the funding can be borne mainly by the countries or even from the parent state.


A first form of coordination consists therein that from the outset a clear separation of duties is determined which makes all other coordination efforts unnecessary. So had H. G. Johnson and R. A. Mundell famously suggested that the central bank alone should be responsible for external monetary stability (for equilibrating the foreign exchange balance), whereas the government should be responsible for the internal economic stabilization.


However, such a simple division of tasks is not possible in many cases, because in a dynamic, changing world always new tasks arise in which no allocation of competence was yet possible. It is also questionable whether in each case a clear separation of duties brings the best results, since this kind of separation of duties creates monopolistic positions, thereby promoting the possible abuse of power.


A second possibility of external coordination results from the principle of competing allocation of competences, such as those provided, for example, by the basic law on the issue of division of responsibilities between federal and state governments. In principle, federation and countries have the right to take the initiative for political reform measures. But if both instances intend to become active in these areas at the same time, the power lies with a predetermined executive agency. Under such a scheme, the chance is significant that certain problems are addressed, as the problem resolution is approached both, when the federation and also when the countries are interested in the realization of these tasks. Also the competition between the authorities can increase performance.


A third kind of external coordination consists in that the involved institutions bring about a compromise in joint negotiations. This kind is chosen especially in collaborative projects at international level; but also the collective bargaining are among this form of compromise, unless one is willing to look at private organs as institutions of economic policy actions. Negotiations are mainly successful when negotiating partners have exchange options as well as thread potential.


Negotiations can also be led to a success by the consultation of an external arbitrator. However, here arises the problem, for which reason an arbitrator should be successful if the bargaining parties alone find no agreement and if the acceptance of the arbitration decision cannot be enforced. Here, the arbitration dilemma arises: Why it requires an arbitrator, if there is a solution, which both negotiators can agree with voluntarily, in this case, why do not find the negotiating partners alone the solution without the consultation of an external arbitrator? But if the negotiating partners do not know any solution that both partners can agree with, why should an arbitrator be successful? How can this dilemma be solved?


A first possibility of a successful arbitration is when emotions come up during the negotiations and when the negotiating partners therefore persist in irrational positions, and therefore disagree also with such compromises that would be acceptable for both partners thoroughly with rational judgment. Here, the task of the arbitrator would be to urge the partners to rational behavior.


A second possibility for a successful arbitration is given if the individual partners try to improve their position by bluffing strategies during negotiation, and that it is seen from the opposite side quite possible that it is simply a bluff and that precisely in this way the mutual trust to each other dwindles. Here, an agreement could be prevented even if solutions thoroughly exist which both partners could agree with. Task of the arbitrator is in these cases to recover mutual confidence.


A third arbitration function may lie therein when the arbitrator takes a strong position and can persuade the partners to a compromise that those would not have gone by themselves, as there is the risk that a compromise leads to a loss of confidence among the members. This loss of confidence is lower when the chief negotiators are virtually forced to this compromise than when they enter into the compromise by their own volition.


Compromise possibilities rise also if the arbitrator has the opportunity to reward a yielding, either through financial incentives (a state arbitrator could promise subsidies in case of an agreement) or in that a partner loses prestige in the public because of the absence of compliancy.


A final arbitration function may be that the arbitrator will get innovatively active and presents with his arbitration a solution which was so far unknown to both partners. So made, as it is well known, Erwin Häußler in 1954 as arbitrator the previously unknown proposal to grant a part of the wage increases in form of a participation wage.


A very different kind of coordination is present in the political leadership. One of the involved institutions stalks ahead, the other institutions are willing to follow suit.


Finally, in this connection the possibility of automatic adjustment shall be mentioned, as discussed e.g. within the scope of the oligopoly theory. Thus, e.g. could the policy of municipalities at the fixation of municipal rates bring about such an automatic compromise, in which the municipality rates take here the same role as the prices of goods of the oligopolistic.


The amount of the municipal rates would depend in this case, among other things, on the level of municipal rates in a neighboring community, as communities would always have to fear that at relatively high municipal rates a migration to neighboring communities takes place. Under certain conditions this automatism of mutual adjustment of municipal rates - as the oligopoly theory has shown - can eventually lead to an equilibrium in which the communities see no more reason to revise their municipal rates.


2th The question about the intrinsic value: The subsidiarity principle


We already mentioned that with regard to the institution problem it has to be expected that certain institutions are preferred, it is not because they are considered as better suited for the task, but because this institution is granted a positive intrinsic value.


In this connection the so-called subsidiarity principle plays a decisive role. According to this principle, which was recommended primarily by the Christian social ethics, it should first be checked whether certain public tasks could not be performed by the municipalities, i.e. the political bodies at the lowest level. Only when certain tasks could not be properly embraced by the lowest organs, these tasks should be assigned to the next higher organ.


The subsidiarity principle refers to two problem areas: on one hand the tension relationship between individual and community. So here it is essential to emphasize the rights and duties of the individual towards the community. On the other hand, the subsidiarity principle says also something about the relationship between the subordinate and superordinate community.


After a very popular, but not quite exact interpretation the subsidiarity principle emphasizes thus the priority of the individual (or the subordinate community) over the (superordinate) community. Only when the individual (or the subordinate community) will not cope with specific tasks alone, the superordinate community had the right to intervene subsidiary in the issues. Each relocation of societal tasks from the state to the free professional associations, or to the companies, or finally to the families is endorsed according to this interpretation of the subsidiarity principle, regardless of what form of community can solve the respective problem more properly and more expediently. As e.g. the problem of the equalization of family burdens was transferred to the professional associations, it was spoken of a solution according to the principle of subsidiarity.


The here stipulated priority of the individual can refer to an order on a value basis, but also to a chronological order. If one thinks of a chronological order, then one entitles the individual the right to first of all cope with the current problems alone. Only then, when the practice has shown that the individual cannot cope with this problem, the superordinate community will step in assisting.


But if one thinks of an order on a value basis, then the theoretical consideration of whether a particular task can be solved by the individuals themselves is sufficient. If this question is answered in the negative, then the state has immediately the right to approach the solution of these tasks. Mostly in the literature it is only thought of this value based order.


But even with an only value-based priority of the individual, the principle of subsidiarity has undergone a too narrow interpretation, here. At least, is this interpretation understandable in our present historical situation and also partly justified. Our modern mass society has led to strong collectivization tendencies. In order to fight these collectivization tendencies effectively, it is necessary to emphasize the importance of the individual and of the subordinated communities more than ever. Of course there are also today tasks that are still solved better and more appropriate by the state (by the respectively superordinate community). It is not necessary, however, to point this out in public, because with today´s strong collectivization tendencies there is not a lacking, but an excess of government activity up for discussion.


A second interpretation of the subsidiarity principle draws on the original text: thereafter, the task of the state and of the superordinate communities confines itself to provide for the individual, respectively the subordinate community, an assistance, thus, a help for self-help. But also here an objection is justified. Help for self-help is certainly a very important, but by no means the only task of the state.


Now, what is the full meaning of the subsidiarity principle? Each individual and each community form is suitable for certain types of tasks due to its natural disposition (structure). According to the subsidiarity principle shall the fullness of issues arising in a society now be allocated to the individuals and the individual communities in the way that each will be entrusted with the tasks for which he is most qualified due to his natural structure.


This can be in the specific case the individual, the enterprise, the association, but also very often the state. A priori without knowledge of the special abilities and advantages of the individuals, as well as all forms of community, and without knowledge of the specific problem situation it is impossible to determine whether the individual or a specific community form has to be preferred in the concrete individual case. Rather, it requires in each case an appropriate solution to the present problem-and this proper solution can only be found on the basis of a thorough investigation on the actual advantages of the single community forms. Therefore, one may quite possible take the view that the problem of the family burdens equalization can be solved more appropriate by the state as of the professions or enterprises and one still does not offend against the principle of subsidiarity.


The subsidiarity principle can therefore be formulated negatively as well as positively. The first historical interpretation was certainly a purely negative formulation. It restricts the claims of the state towards the individuals. However, this purely negative formulation is not sufficient; it also requires a positive formulation. These we have found in our second and third interpretation of this principle. Thereafter, the respective superordinate community has to deal with their specific tasks and one of these specific tasks is the help for self-help.


The principle of subsidiarity does not only talk of rights but also of duties. It is the right of the individual to be allowed to solve by himself the problems that are satisfactorily solvable by himself, too. He has, though, also the obligation to do so. Perhaps one should just point out to the second aspect of the subsidiarity principle in our day and age. All too often, the individual spares his own responsibility, and often he lacks of his own initiative, he is too lazy to act on one´s own person and he also gladly lets the tasks, that he could solve better, be fulfilled by the state.


Precisely in this dangerous attitude lies one (though not the only) of the reasons for the above-stated collectivization tendency. Where the individual leaves a vacuum, the superordinate community pushes forward.


These considerations apply not only to the subordinate, but also to the superordinate communities. If the individual cannot help himself, the state has not only the right but also the duty to intervene.


Often the question is asked whether the principle of subsidiarity constitutes not only a purely formal principle, which basically does not allow to answer any of the real problems. This concern applies in fact to many formulations of this principle made in public. Thus, for example, the principle of subsidiarity is often paraphrased with the formula: "As much freedom as possible, as much compulsion as necessary." With this answer it is still not clear how much freedom then is possible and how much compulsion then is necessary, especially remains unclear who has to decide how these two questions have to be answered.


Anyway, quite different solutions of current problems can be justified with this abbreviated formulation. Who speaks up just for the solution of a problem on a state level, will always argue that government regulation is necessary and vice versa will the one who calls for an individual solution deny just this necessity. It always requires also a substantive provision of the principle of subsidiarity. The subsidiarity principle has to be preceded always by a superior standard. This standard then refers to the respective public service obligations.


In which manner can the subsidiarity principle be applied in the business? Our market economy is characterized precisely by the fact that it transmits the most important economic decisions to the households and the free enterprises and that to the state only a regulatory function belongs within the economy that abstains from any direct intervention in the market.


In a market economy the production does not take place due to a central economic plan, established by the state, but due to a large number of individual plans, which are finally coordinated by the market forces of the price and the mutual competition to a meaningful, overall economic plan without governmental assistance.


This decentralization in the economic decisions stops, though, at the enterprise. The individual companies are nowadays structured hierarchically centrally in the majority of cases. Eugen Schmalenbach and others have therefore asked justifiably whether this central structure of the enterprises does not constitute a foreign body in a free market economy. Should it not be possible, to find as well as for the whole economy also for the individual enterprise a decentralized system, which can still achieve satisfactorily the tasks with witch the enterprise is confronted with?


In this case, the individual workers would be autonomously acting economic agents, which would comply in their workplace their tasks on their own responsibility by means of certain specifications such as, for example, transfer prices. The task of the enterprise would then primarily be to provide to the individual employees a workplace that is machines and tools and to set transfer prices and other specifications in a manner that the employees, out of their own interest, take respectively the decisions which guarantee for the fulfillment of the overall corporate aims. We will later deal with problems of internal structure under the keyword: Participation in more detail.


Now we had pointed out further above that whenever the question of the intrinsic value of aims or means is addressed, the economist would be unable to cope with deciding how this intrinsic value is assessed. In other words, the claim of Max Weber for a value-freedom of science is necessary here.


Basically, these restrictions also apply to the question of how the indication to the intrinsic value of an executive agency should be assessed. Nevertheless, this judgment applies only to a limited extent for the subsidiarity principle, as we have seen, that properly understood the subsidiarity principle requires an allocation of societal tasks according to the suitability of the individual agencies. But the question of the better suitability of an agency is indeed a question that can be decided with scientific arguments.


Closely related to the principle of subsidiarity is the federalism. The parliaments of representative democracies generally consist of two chambers. Thus, for example, the Parliament in the FRG consists of the Bundestag, the representation of the people and the Federal Council, in which the interests of the federal states are represented. Or else in the USA there is besides the House of Representatives the Senate, which in turn represents the interests of the individual federal states.


Common to both countries (the FRG and the USA) is that they are federal states in which at the union of different countries to a federation not the entire state authority has been delegated to the central body of the state, but a part of the state authority continues to remain at the countries as before.


The federalism is now demanding that the actual state authority lies with the federal states, which then transfer the tasks to the federal government, which can not be or only less well perceived of the headquarters than of the individual federal states. Also here, the priority of the subordinate forms of community is demanded as with the principle of subsidiarity.



3th The question about the intrinsic value: The centralism


An opposite standpoint to the subsidiarity principle takes the centralism which strives to transfer all substantial decisions to the central, thus to the highest level. Just as at the subsidiarity principle, where a positive intrinsic value is attributed to the transfer of a task to the lowest level, so the centralism sees a positive value therein when the headquarters can take all substantial decisions itself.


Now, with which arguments is centralism justified? Firstly, it has to be advised that the centralism throughout history grew out of the desire of the rulers to expand their power and to retain as much power as possible to themselves. The rulers in the Middle Ages often understood themselves as called of God and therefore entitled to attract possibly all power to themselves. Other rulers were convinced that there is no need at all to justify their exercise of authority, that in accordance with a kind of Darwinian principle in a social selection process, the more powerful prevails.


But even if the rulers are convinced that there is no need to justify their striving for power, they considered it expedient to justify their power therewith that a pooling of power at a central body is superior to all other forms of exercise of power. Just the fact that the ruler was able to win out over his opponents with success, would show that he possesses the better knowledge of how societal problems will be resolved expediently.


Friedrich von Hayek spoke in this context of an arrogation of knowledge. No ever so much developed central authority could have all the knowledge that the market provides automatically, thereby that all decisions of individual households and enterprises are included in the prices.


The very fact that also the centralism is partly justified by that the central authorities have also the better suitability as subordinated instances, in turn makes it possible for science to co-operate in decision to whether the central bureaucracies of the state actually have always better suitability for resolving existing societal tasks than the subordinate communities (provinces, municipalities, etc.).


4th The question about the intrinsic value: The democracy precept


A positive intrinsic value is also addressed when the claim is made to organize democratically the decision-making process internal to the institutions. However, this demand is interpreted quite differently. So often this demand is understood in terms of a direct democracy whereby the members of an organization should be involved in as many decisions as possible and with high decision intensity. It is clear that this demand can be answered the less, the greater the group is and the more different the interests and ideas of the group members are. It then arises a conflict of interests between efficient policies and democratic decision-making process.


Secondly, democracy can also be understood in the sense of a representative democracy. Here, the actual decision-making power lies with the executives. Here, the democratic character takes effect in that the citizens can elect periodically the politicians, and that the competition among the politicians automatically results in that the politicians develop such activities which are also of benefit to the majority of the voters.


Thirdly, the demand for a democratic structure is at times identified with the demand to grant equal rights and duties to all citizens in the sense of equality. To this interpretation corresponds that to each member one and only one vote is granted. However, it must be pointed out that even with formal vote equality, the influence of the individual group members may vary as e.g. citizens can exercise political influence not only by elections, but also by associations, the ability to form interest groups, however, is pronounced very differently. Thus, for example, small groups are more easily to organize than large groups; or supplier interests are more homogeneous than consumer interests and therefore easier to organize.



5th The problem of the conflict of interests


An unsuitability of an institution for the assumption of a particular societal task may be that in addressing this problem, a conflict of interests arises. This is, for example, always the case when the institution under discussion pursues own aims, which are in contradiction with the tasks under discussion, here. In this case, it cannot be expected that such an executive agency is committed to an optimal solution of the existing problem.


We want to insinuate, for example, that a political solution to the problem of the family burdens equalization is wanted. An employee who has to provide for children should for the same performance have a higher net income at disposal than a single person. Now will be examined whether this task can be transferred to private enterprises; in other words whether it is possible that the enterprises grant their employees a family fair wage.


Now, the mutual competition of entrepreneurs brings along that only such enterprise can survive, which utilizes all possible cost reductions. Now, if one would entrust the enterprises to provide a family-friendly wage, then would just the enterprises, which adhere to this obligation to family wage, obtain competitive disadvantages compared to the enterprises which do not comply with this obligation.


If one wanted to overcome this difficulty by the fact that one would commit the entrepreneurs to family allowances, the problem would still not be solved, because now there is the danger that some enterprises would try to gain a competitive advantage in the way that they employ as few workers with children as possible. Just out of these difficulties one has concluded that the problem of family burdens equalization can only be achieved appropriately thereby that this task is not entrusted to the enterprises, but that in addition to the earnings the state grants subsequently a child allowance.


Now, often is concluded from the mere fact that certain institutions pursue individual aims that they are therefore generally not suitable for public service missions, as well as from the fact that public institutions are statutorily obliged to fulfill public service missions, it is concluded that these institutions are suitable per se to fulfill political tasks. Both views are wrong. Public service missions can be met very well even with self-interest pursuit, as well as public corporations may pursue self-interests of its executives despite public service obligations.


Liberalism has pointed out that under certain requirements, especially in strong competition, just the self-interest pursuit can contribute to the realization of the common good, because on free competitive markets the enterprises maximize their profit just when they align production to the needs of consumers. Liberalism pointed also out that self-interest pursuit triggers much stronger incentives to reduce costs and improve quality than the commitment to the common good behavior. Therefore, it is not primarily a question of by what motives the political actors are guided, but whether a functioning order exists which coordinates the various interests so that the public good interests get a chance just when the individual entrepreneur align their decisions to their own interests.


Joseph Alois Schumpeter showed that the decisions of politicians also emerge from self-interest concepts that the profit maximization as the main motive of the entrepreneurs corresponds to the striving for vote maximization of the politicians in a democracy. But here is true that a functioning democratic order ensures that the decisions of politicians despite self-interest striving are aligned to the common good ultimately. The competition among politicians causes that the politicians improve their electoral chances just then if they meet the aims of the majority of the voters.



6th The problem of the lacking resources


The suitability of an institution can also fail because it does not have the possibilities to carry out certain tasks. In this case, the institution is under circumstances willing to do everything possible to fulfill the tasks assigned to him, but it does not have the necessary prerequisites to achieve the task. In general, one can assume that policy gets only effective thereby that the individuals are induced to a quite particular behavior. There are several reasons why certain executive agencies do not have these opportunities to influence.


Firstly, lack of possibilities can be due to that the considered organ lacks of financial opportunities. Thus, it is generally assumed that a stimulation of the economy requires such an extend of spending increases that municipalities, but also the countries would be overextended if one wanted to delegate this task to them; therefore, it corresponds to a general conviction that only the federation (possibly in cooperation with the states and municipalities) is able to operate an efficient economic stabilization policy.


Secondly, the lack of influence of an institution may also lie therein that an adequately trained staff of officials is necessary to fulfill the entrusted tasks, and this is not present, however. So could e.g. fail the containment of economic crime because the financial administration does not have sufficient economic and financial experts who are ever able to detect fraud at an early stage.


Finally, an executive agency may lack, thirdly, of the ability to constrain the citizens to a very definite behavior. Especially tasks of redistribution make it necessary that coercion is applied. If we assume that it is considered to provide certain forms of redistribution within the scope of the private insurance in favor of persons affected disproportionately by social risk. However, a real redistribution is not possible within the scope of a private insurance because the insurance members that are affected negatively by such redistribution can escape the burden through exiting the insurance.