Chapter 8: Order analysis part III




1st Introduction to the difficulty

2nd Characteristics of the individual order types

3rd The distinction of different systems of order

4th The aim suitability of the individual order types

5th On the pathology of the order types



4th The aim suitability of the individual order types


Our previous considerations focused on the question of which elements a system of order exists and which order systems are distinguished in general. In the following, we will consider to what extent the individual systems of order are suitable for realising the most important aims of economic policy. Here, we want to confine ourselves to the schemes of order (market, negotiation, electoral system and bureaucracy) chosen by us.


Within the aims, we want to distinguish between the areas of the actual economic basic aims and the societal aims - superordinate to the economy. Part of the basic aims of each economic system are the allocation target, the distribution target, the growth target and the aim of the economic stabilisation; whereas the societal aims - superordinate to the economy - are individual freedom, security against social risks and social peace.


With regard to the allocation aim, the market economy system - as long as it is fully functional - is characterised by the fact that individual production decisions are optimally orientated to the preferences of private households; optimal means here, that no change in the production orientation could lead to an increase in the economic welfare of the single individuals.


This allocative task is not addressed that efficiently by any other system of order. The negotiation system can also lead to optimal allocation results, namely then if in the bilateral monopoly the parties behave as quantity adjusters, or if the parties apply the strategy of the step-by-step negotiation strategy. In this case, the allocation will be the same as in the case of functioning competitive markets.


A step-by-step negotiation strategy is understood as a behaviour in which in the first step the negotiation partners agree on all the questions which promise an advantage for both parts compared to the initial situation, and by which in further steps all these solutions are searched and accepted which bring further advantages for both partners.


The market form of the bilateral monopoly is, opposed to the other forms of the market - especially the market form of complete competition - characterised by the fact that the morphology does not determine the behaviour, such that the most diverse behaviours are conceivable. In the bilateral monopoly, the negotiation partners can also behave like monopolists and thus effect an allocation which leads away from the optimal solution. This is the reason why it can not be expected that in the negotiation system always the same optimal allocation solutions will be achieved as in functioning market-economy systems.


The bureaucratic system does not have a method of assessing the scarcity of goods comparable to the market price mechanism, and is therefore not able to create a Pareto-optimal solution for the allocation problem. This conclusion, of course, only applies on the assumption that the aim of the bureaucracy was to align the supply of goods on the preferences of private households.


Finally, the electoral system is able to realise the preferences of the majority under ideal conditions. However, the more the preferences of the single individuals differ from one another, the larger are the minorities, whose aims are not considered the best possible way. Since the electoral system is characterised by the fact that in functional respect it offers less options than the market system. In electoral systems there is a large probability that an optimal allocation of resources to the requested goods is not put to the vote at all. And that therefore the realised allocation solutions in these systems strongly differ from the individual preferences.


Now, at times the opinion is held that the single individual is not at all capable of recognising which supply is optimal for him. The individual would not have the information necessary for a proper production output, especially with regard to very specific goods such as health care or child-raising, and many individuals would not have the abilities to solve this allocation task in a reasonably appropriate way.


That is why it would be better to have these tasks solved by the state. Here, we speak of a meritorious need, which had to be expressed by the state or by a third person representative for the single individuals, meritorious in the sense that the state would take these decisions with 'commendable intentions' for the parties concerned.


It is clear: wherever there is a meritorious need in the affirmative, the bureaucracy is superior to the market, since in this case the consumer wishes could only interfere with the decisions of the state. However, it remains questionable why a bureaucrat should have better information than the persons concerned. If the information is available, why can this not be made accessible to the person concerned, why should the single individuals dispose over less information than the state; although the person concerned should have a much stronger interest in obtaining such information than a bureaucrat. Moreover, the application of a meritorious need contradicts the superordinate aim of the individual freedom of choice of every citizen.


Now let us turn to the question of which distribution of material goods is realised on markets. If we assume a functioning competitive market, the incomes are distributed according to the performance principle. In balance the factor prices adjust on their marginal products (marginal product remuneration), thus the single factor price corresponds in the balance to the contribution of the supplier of production factors to the domestic product. If other distribution principles are required, a correction is necessary, since the market can not realise any other distribution aims.


The distributive negotiated solution remains undetermined; the income distribution can take on all conceivable distributions, depending on the power position of the individual negotiating partners. If the trade unions held an option fixation power against the employers, they could achieve a wage rate corresponding to the average product of the work and then the entrepreneurs would not make any profits. If conversely the employers held an option fixation power, then wages could be pushed down to the subsistence level of the employees.


For a long time, the opinion was held that a democratic electoral system would automatically tend to a levelling of income. In contrast to the market economy in which the individual participants had a different allocation of material resources, each citizen in a democratic system had one and only one vote, thus the electoral vote distribution was perfectly equal.


But if every citizen had only one vote, the politicians could hope to gain votes in the election by promising a redistribution in favour of the low-income recipients. Naturally, politicians would have to reckon with losing the votes of the rich, who are now taxed for distributive reasons; But since the number of the rich was small compared to the number of the poor who benefited from the redistribution, the votes gained would exceed the vote losses.


In the reality this levelling trend could not be proven. The democratic countries have not led to a levelling of the incomes in comparison to the non-democratic countries. This circumstance can be explained by the fact that the vote is not the only way for a citizen to gain political influence. The individual citizen can increase his political influence in a representative democracy once by joining a party and participating as a party member in the nomination of the candidates in the election. Furthermore, citizens can join together in associations. Interest groups have the opportunity to influence politicians as they can express, on one side, certain recommendations to their members; but on the other side are often needed by the politicians to implement the laws and regulations.


Now every citizen has in principle the possibility to join an association. In reality, however, the organisational capacity of the individual interests is of different size. The larger a group is the greater are the costs which have to be deployed for formulating and enforcing interests. The result of this is that the actual influence of citizens on policy by way of the interest groups is very different. Not only the size of a group, but also the nature of the interests that are to be represented, are determining the organisational capacity. Thus, supplier interests are much more easily represented than the consumer interests; supplier interests are generally homogenous, but consumer interests are much differentiated.


Friedrich von Hayek has pointed out that a political electoral system tends to an exploitation of the respective minority, but that the respective minorities and majorities could alternate rapidly in the course of time since various possibilities exist for the formation of coalitions. This rapid change is to be expected mainly in the case of proportional representation systems, because usually a larger number of parties move into Parliament, but no single party has the majority of the votes. For the formation of a government, coalitions must therefore be formed by several parties, and quite different coalitions are conceivable in general.


Especially when a correction of the performance principle is required by the demand principle, bureaucratic systems are particularly suitable for such a subsequent change in the income distribution. The bureaucracy disposes over the instruments of power to correct the income distribution according to the demand principle. The distribution aim can be largely defined and implemented without consideration for the respective concrete scarcity conditions.


However, these advantages only apply to a subsequent redistribution of income. Bureaucracies are generally not suitable for also determining wage rates. On the one hand it is valid that employees are more satisfied with the wage rates granted to them, if they themselves or their representatives have contributed to the wage determination. On the other hand, central bureaucratic solutions are not that much able to consider the regional and functional differentiation between the individual industry branches and professions.


In the literature is discussed more controversially the question of how the individual systems of order impact on the economic policy aims and growth political aims. Here, we want to assume that to the most important aims of the economic stabilisation belong the aim of the full employment and the monetary stability. In terms of the classical and neo-classical theory full employment is then guaranteed if all employable workers which are willing to work are employed (full employment according to a complete balance).


According to a suggestion of Lord William Henry Beveridge it should already be spoken of full employment, if there is an overall economic balance, thus, if the number of the jobs corresponds to the number of the employees that are willing to work and employable. Here, it is accepted that not all employees do have a job, and to be more precise, to the extent to which also businessmen are not able to staff all jobs, too.


In opinion of the classics and neo-classics tends a free functioning competitive market by itself towards full employment. Most of all, according to Say's theorem overall economic unemployment cannot be explained by a too little goods demand. Unemployment must rather be explained therewith that due to power appearances on the labour market the real wages are above the level at which supply and demand for work correspond.


Now John Maynard Keynes was famously of the opinion that due to defects on the capital market the market would not automatically provide full employment. On the one hand, households were not willing to offer all their savings on the capital market, they would hoard parts of their income; on the other hand, it can not be expected that an increase in savings would automatically lead to an increase in the volume of investment by reductions of interest rates, and that therefore the reduced demand for consumer goods would be compensated by an increase in demand for investment goods.


The private investment is largely interest-inelastic, partly because in times of economic downturn – just because of the decline in sales - the enterprises have already free production capacities and are therefore not willing to expand their production capacities by increased net investments. On the other hand, in times of the economic downturn the competition between enterprises is so strong that interest rate reductions have to be passed on in the price of goods, so that any incentive to increase the investment is dropped.


From this Keynesian criticism the demand for an active fiscal policy emerged, in order to compensate the decline in private demand by expanding the demand of the state. Since the market fails with regard to the aim of full employment, political systems (the electoral system, especially the bureaucratic system) had the task to reduce mass unemployment.


However, doubts arose very soon, as to whether the political systems were in a position at all to guarantee full employment by deficits in the state budget. So has, in particular, William D. Nordhaus postulated that the political electoral mechanism triggers a cyclical expenditure behaviour, so that this system is more likely an intensification than a weakening of the cyclical movements (the thesis of a politically induced economic cycle).


Immediately prior to elections, the government would strive to increase government spending (at constant tax revenues) in order to win votes and thus the subsequent elections. Immediately after the elections, however, the governments would be under the pressure to carry out a contractive policy in order to reduce the negative effects of the past expansive policy and thus to create in the first place the prerequisites for the end of the legislature, the material conditions for a new expansive policy.


A contractive policy affecting the citizens is quite possible at the beginning of a legislative period, as the voter is very forgetful and depends his electoral behaviour mainly on the political actions immediately before the election.


These difficulties could be possibly avoided if the task of the economic management would be transferred to the central bank, which is a bureaucratic system. But here too, doubts arise as to whether the central bank is able to achieve the aim of full employment; the central bank is namely also interested in the stability of the currency (the exchange rate) - at least in systems of fixed exchange rates - and the aims of full employment and monetary stability conflict with one another.


It should also be considered that an effective full employment policy requires a prognosis. Measures introduced today will be reflected in the employment figures only after about 1 ½ years, so that an efficient economic policy requires the knowledge of not only today's level of employment, but also that of in about 1 ½ years. But it is agreed upon the fact that there is lack in reliable prognoses, particularly with regard to economic data. Thus, political systems will neither be able to solve the aim of full employment satisfactorily.


With regards to the aim of monetary stability, with certain exceptions there is consensus among the Neoclassics likewise as with the Keynesians, that the free market alone is incapable to guarantee monetary stability. There had to be a state monopoly on the issue of banknotes in order to ensure that the amount of money circulating does not rise more than the real domestic product. Only Friedrich von Hayek took the view that also the aim of monetary stability in a free competition would be achieved by issuing central bank money.


Therefore, there is a broad consensus on this question, that a bureaucratic system in the form of a national central bank is the prerequisite for achieving monetary stability. This central bank had to be committed to monetary stability as the ultimate aim, has to be largely independent of the government, and must be equipped with sufficient instruments to effectively control the creation of book money on the part of the commercial banks.


Keynesians, however, believe that inflation can only be effectively countered in the way that the government would skim an oversized demand with help of budget surpluses.


At the end of this section, a few words are given on the realisation of the growth policy aims. Who fears, like the Keynesians, that the investments will not react adequately to changes in interest rates, concludes necessarily that the market is failing with regard to the growth policy aim, and that therefore a control of the growth on the part of the political subsystems (electoral system, bureaucracy) would be necessary. However, doubts are justified, whether the state has the knowledge about which amount of investment is necessary to guarantee the largest possible growth rate for the domestic product; and furthermore, due to lack of liability provisions the state does not have sufficient incentives to enable the growth that corresponds to the demands of the private households.


Primarily it must be pointed out that in the context of growth policy it can not be about maximising the growth rate of the domestic product. The aim of growth rates that are as high as possible competes with at least three further aims. Firstly, the growth of the domestic product could be increased thereby that an ever smaller share of the income is used for the present consumption and an ever increasing share is used for investments. In an extreme case, growth would be the greatest in this regard, if only a subsistence minimum would be reserved for present-day consumption. It is obvious that such a division of material resources can not be regarded as optimal in the sense of private households.


Secondly, the domestic product could also be increased thereby that more and more working hours are used, again to the extreme that only an existentially necessary minimum is reserved for leisure time. Here, too, it is clear that such a division of the available time into working time and leisure would not be optimal.


Thirdly, the aim to maximise the growth of the domestic product is competing with the aim of protecting the environment and applying preferably sustainable production methods. Sustainable production is always referred to when it is ensured that the consumption of raw materials is as equal as possible to the reproduction of raw materials.


To enable such an optimal growth, on one side the initiatives and incentives are needed which only a free competitive market can provide, but the market needs numerous corrections, since a market can only lead to satisfactory results if no external costs (and income) occur, that is when producers and consumers have to pay for all the macroeconomic costs associated with production. However, this assumes that prices must be paid for environmental impacts at the amount of the damages caused.


Let us now turn to the question of how the superordinate socio-political aims are realised in the individual systems of order. The aim of guaranteeing the largest possible individual scope for action is most likely to be achieved in the market system. In principle, each individual can freely decide on how it uses its material resources.


The negotiation solution already limits the individual freedom to a greater degree because the negotiating groups have to agree on a joint compromise. The individual union members may have different ideas about whether they prefer more leisure time or higher wages; the collective agreement concluded with the employers contains a compromise that is valid for everyone.


A political electoral system also leaves little scope for individual decisions. The achievements of the policy (the laws and regulations) are offered as collective goods, and the larger is the minority outvoted in the election, the greater are the deviations from the individual needs.


The bureaucratic system offers the least scope of action for the individual citizen. Its services are generally offered as collective goods also and are therefore the same for all citizens regardless of their individual needs In addition, the bureaucracy is giving instructions on how the individual has to behave, in electoral systems and in negotiations, the groups are at least involved in the decision-making process.


Let us now consider how the aim of protection against social risks (illness, accident, age, and unemployment) can be achieved in different manners within the systems of order. In general, it is assumed that these risks can not be covered satisfactorily within the framework of the market economy and that therefore a correction on the part of the state is required.


Now in the context of market- and negotiation solutions, certain risks can however be distributed to the community by concluding of private insurance contracts. In general, the individual has to face an uncertainty which is greater than the uncertainty within an insurance community, which is quite calculable there.


So the individual does not know, for example, when, how often and to what extent it is affected by the disease risks, its individual risk is therefore extremely high. Nevertheless, the average disease rate within a larger group is quite calculable and much lower than the individual risk. In a larger group, it can quite be assumed that for each insured person who is affected to an above-average extent by diseases there will also be an insured person who is suffers diseases to a below-average degree.


The contribution that an insured person has to pay is therefore substantially lower than the material reserves that an individual must make in order to obtain adequate protection from the risks. In the case of individual provision by private savings, the individual has to take into account the highest possible risk namely, whereas the contribution within the insured community must only correspond to the substantially lower average risk in order to obtain complete protection.


However, there are also risks which are not insurable, which can only be satisfactorily covered in the context of political systems. This applies, for example, to the currency risk within the scope of the old-age pension. There is no way of fully covering the risk of inflation in the framework of private life insurance, as it is not known how the money will develop within the next 50 years. However, a bureaucratic pension- or social security system can cover this risk by applying the pay-as-you-go system.


The risk of unemployment is generally considered to be hardly insurable, too. Here too, is valid that the extent of unemployment depends on political factors and can hardly be predicted for a longer time. So there will be sufficient protection against the risk of unemployment only in the context of pension- or social insurance systems.


Finally, within the framework of private insurance systems, it is not possible to address all redistribution aims related to the social risks. Certainly it is possible, for example, in the scope of private health insurance, to relieve the person who is particularly strong affected by diseases at the expense of the person who is affected by disease at a below-average.


Ex ante, the contribution of a private insurance company can be graduated according to the level of the risks to be covered, only ex post - in retrospect – redistribution takes place. However, if the individual shall also be protected against hereditary diseases, this is only possible within the framework of a bureaucratic system, since in this case an individual has an above-average high risk and therefore has to pay a higher insurance contribution in the framework of a private insurance.


Finally, let us examine to which extent the various systems of order differ in terms of the aim of social peace. The starting point of our considerations is the thesis that social conflicts are the more likely to break out, the more the expectations of the individual are disappointed.


As already indicated, in a functioning market economy the income is distributed according to performance, whereby the individual performance is measured by the contribution that the individual provides with his productive activities for the domestic product (= objective assessment). However, the satisfaction of the individual employees is more dependent on subjective value conceptions, which efforts are entailed by economic work; it is the subjectively experienced working burden that defines the subjective value conceptions of the employees. But this also means that social dissatisfaction arises to the extent to which the objective and subjective value of the work diverge.


Now, the market knows quite well the mechanisms to reduce these differences between subjective and objective evaluation and thus also to reduce social dissatisfaction. Such a mechanism is, for example, the mobility of employees. If an employee receives a wage for his work which is less than the subjective work burden, he can try to change his workplace to where subjective and objective assessment correspond better.


This mobility causes two things: On the one hand, dissatisfaction is reduced by the migrations of employees to workplaces, which correspond better to the subjective expectations. On the other hand, this mobility also contributes to the fact that at the workplaces which are left the workforce is getting scarce and therefore a higher wage rate is granted, whereas, in the opposite direction at the jobs to which it is migrated, the workforce becomes less scarce, which will be reflected in a market economy therein that entrepreneurs try to reduce the wage rate. This, however, reduces the difference between subjective and objective evaluation.


A negotiation solution is in contrast characterised by the fact that - short-term and superficially considered - the conflict potential increases, since both collective bargaining partners have conflict means which are not permitted on the general markets. The employees have the right to unite in trade unions and to combine their wage demands with strike threats. Employers can also join forces and respond to a strike with a lockout of employees.


In the long term, however, also the negotiated solutions are likely to contribute to the strengthening of social peace. Firstly, it could be shown within the framework of the theory of collective bargaining that, in the case of a functioning tariff system, the threatened strike does not have to be realised at all, that a strike action usually occurs only if the partners deceive themselves in the behaviour of the respective opponent. If, for example, at their threat to strike the trade unions would originate from the false assumption that the employers have not yet reached their ultimate bargaining limit, or if the employers do not react to the threat of a strike because they erroneously assume that the trade unions would not carry out their strike threat even if employers are not ready to make any further concessions.


The fact that the collective bargaining parties are discussing before the outbreak of industrial actions and are trying to compromise is already contributing to reduce dissatisfaction. The willingness to compromise itself in turn depends on the extent to which the partners are able to carry out their threats and to what extent the threats are credible.


On the other hand, an openly addressed labour dispute contributes to reducing social dissatisfaction. Employees feel that they have shown it to the employers and that not everything can be done with them. ("If your strong arm would will, all wheels stand still."[“Bundeslied” - song of a labour federation]) An open strike outbreak prevents that the dissatisfaction, which recurs in the course of the everyday production process, cumulates and ultimately precipitates itself in a political revolution. It is also important to take into account that an employee is generally more satisfied with a result if he or his representatives participated actively in the wage agreement than if the same result is prescribed in form of a wage dictate by the entrepreneur or also by the state.


A functioning electoral process can also contribute to the reduction of social conflicts. If voters are dissatisfied with the achievements of the politicians elected by them, they can change over to the opposition parties in the next election and thus contribute by themselves to the policy measures being adapted to their expectations and thus dissatisfaction is reduced.


At first glance, the bureaucratic system seems to represent a system of order in which the smallest extent of conflicts is given, as the bureaucracy can simply forbid the outbreak of offensive measures. In the long run, however, just this system of order contains the greatest possible potential for conflict of all four systems of order. This system is particularly susceptible to conflicts since, on the one hand, the individual needs are least addressed, and on the other hand, the affected parties are not involved in the decision-making process, so that all the services of bureaucracy are perceived as heteronomous.


While all the types of order discussed so far know mechanisms for reducing social dissatisfaction, the bureaucratic system does not provide for any legal and easy-to-implement possibilities to reduce dissatisfaction. A reduction in dissatisfaction can only be achieved thereby that the dissatisfied emigrates; But since emigration involves very high material as well as immaterial costs, the individual will generally choose this path only if he is faced with an existential threat; Or the long time accumulated displeasure is finally discharged in a political revolution, since only in this way a change in the political situation is possible. However, every revolution entails very high and painful impairments of almost all citizens.



Continuation follows!