Outline:
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
5th
On the pathology of the order types
At
our previous considerations, we have always proceeded from the tacit assumption
that the individual systems of order do function. For example, the aim
suitability of the market was derived on the assumption that functioning competitive
markets are present. We now have to take into account that - and this applies
to all systems of order - only under certain conditions an order type can fulfil
the functions intended for it. If these conditions are not met, these tasks are
either not fulfilled at all or at least only inadequately fulfilled. Here, we
speak of pathological orders.
The
fact that an order system does not fulfil its tasks satisfactorily has already
been proved very early for market economy systems. It was spoken of an
ideal-typical market order, which would provide the predicted results only in
theory and distinguished this from the real, actual market economies. Of this
arouse the criticism on the market economy system and the demand that certain
tasks, which had originally been left to the market, shall be accomplished by
other systems, especially by the state.
It
was overlooked here that deviations from the ideal are to be expected in all
real systems, that there are actually also pathological negotiation-,
electoral- and bureaucratic systems. Therewith, however, change the conclusions
that have to be drawn from these pathological order types. The existence of
pathological processes alone does not reveal whether the existing market
regulation should be replaced by another system. It must indeed be reckoned
with the possibility that the alternative forms of order have even larger
deficiencies, and that the market may, under certain circumstances, be an
unsatisfactory, quite bad order, and nevertheless be the best among the
possible orders.
It
is unacceptable to compare an actual market with the results that can be expected
under real conditions and then opt for a different system of order because this
system can be expected to yield better results under ideal-typical conditions.
This approach, which is stigmatised as Nirvana approach, leads to false
results; the individual systems are to be tested always for their suitability
in such a way that either ideal-typical or real systems are compared with each
other.
Order
systems are then unsatisfactory if there is either a lack of the prerequisites
that supply and demand can be balanced at all; this is the question about the existence
or the stability of a balance. Here, we are speaking about the failure of the
order system.
Or
they do not satisfy when the realised solutions are to be described as suboptimal.
The determination of suboptimal results requires, though, that we have
previously determined when it can be spoken of an optimal solution of a problem.
This is the question which is examined within the framework of the traditional
welfare theory, which stems from Vilfredo Pareto. Within this theory, it has been
shown that the best of all factually possible solutions can only be expected
if, on the one hand, we are able to impose a complete competition on all
markets and on both sides of the market, thus all market partners refrain from
applying monopolistic scarcity strategies to improve their results.
On
the other hand, the best possible solution can only be expected if at both the
production decisions as well as the consumption decisions all costs are included
in the maximisation calculation (the same applies for the revenues) which arise
in the total economy. If one of these two prerequisites is not present, no
optimal solution can be expected, we are speaking about the deficiencies of a
system of order.
Let
us first turn to the question of the conditions under which a failure of an order
is present. It is assumed that a solution is conceivable at all, at which
supply and demand coincide, that is, a solution of equilibrium exists. On the
markets, this is precisely the case when there is an intersection between the
supply curve and the demand curve, in other words, if there is a price at which
the suppliers offer exactly the quantity of goods that is demanded by the
demanders at this price.
This
problem can be further limited by the fact that such a point of intersection
must be present at realistic prices and quantities. If, for example, the
intersection point were reached at prices which could never be paid by the
demanders, or if an equality of supply and demand would only appear with
quantities of goods that could not be produced at all because of a lack of
resources, then it has to be said also that no equilibrium is existent.
Much
more important than the question of the existence of equilibrium is the
question of the stability of the equilibrium, thus the question whether we can
expect that the equilibrium point will be reached by itself from any initial
position, hence whether there is a tendency to equilibrium. We therefore assume
that for any reason - we are talking about changes in data - an imbalance
arises, so that one of the two curves is shifted and a new point of
intersection arises and we check whether the market itself finds the new
equilibrium point.
For
such an automatic tendency to equilibrium to be present, two prerequisites are
necessary. On the one hand, the occurrence of an imbalance must lead to price
changes, namely an excess supply must lead to price reductions, whereas an
excess demand must lead to price increases. Only in this case we speak of
normal price reactions.
Furthermore,
these price variations must trigger very specific changes in supply and / or
demand. A price increase must entail, for example, either to a reduction in
demand and / or to an increase in the supply. Both effects reduce the imbalance
and thus trigger a trend to reduce the imbalance. The same applies to price
reductions. Only reactions in this direction are called normal.
It
is now easy to see that the equilibrium trend is generally higher the more
rapid the price changes and the quantity adjustments are, and the greater the
changes in quantities are that are caused by a price variation of one percent.
We measure the extent of a price reaction with the price responsiveness, and
the quantity reduction by means of the price elasticity of supply and demand. A
market system is only politically sustainable if this equilibrium trend occurs
within reasonable periods of time.
Nevertheless,
it must be warned against a misinterpretation of an equilibrium theory. The
thesis that markets generally have an equilibrium trend does not mean that at
any moment, or even as a rule, an equilibrium is actually present, nor that it
would be desirable that equilibrium conditions are present whenever possible.
Exactly the opposite is the case. We have to assume that data changes occur
permanently which lead away from the equilibrium.
These
data changes are also desired in
general, as data changes in technology lead to an improvement in the
production, and thus to a welfare increase, as well as data changes in demand
express that consumers are endeavouring to allocate their material resources
better. These data changes are a result of free decisions of private
households.
Positively
worded, the equilibrium theory merely states that the market reduces imbalances
by itself, so that it has not to be feared that the imbalances will accumulate.
It has to be assumed that no economic unit - neither households nor enterprises
- has an unlimited capacity to bear imbalances, so that, for example, an
enterprise that only has losses will have to file for bankruptcy one day and
collapse.
If
there would occur an unlimited accumulation of imbalances, the individual
economic units would have to reach this capacity limit sooner or later, and one
day the market would necessarily collapse. In reality, this collapse would generally
not happen at all. Politics would feel compelled to enter the market even before
a final collapse.
Also
in the context of a negotiated solution, it must be reckoned also with the
possibility that in individual cases the conceptions of the collective
bargaining parties are so far apart that the parties fail to reach an
agreement. Then, there is no solution with which both partners can agree. One
helps oneself out of this difficulty by the fact that a neutral third party is
called in, which reveals new possibilities for solving the problem and
therewith settles the labour disputes. Also the fact that the trade unions are
calling for a strike, that is to realise the strike threats, can help under
certain conditions to increase the pressure on employers and under such
pressure they are willing to meet the ideas of trade unions more strongly than
before.
Within
an electoral system, several factors are known which can prevent the occurrence
of a decision and thus equilibrium. Thus, in the case of a tie, no majority
decision can occur for the alternative programs under discussion. However, this
first difficulty can be solved relatively easy by institutional provisions.
Thus, it can be provided that the number of voters (e.g. the number of
deputies) is always an odd number and that for these reasons a stalemate
situation can not arise at all. Or, it may be provided that in cases of
stalemate, the chairman of the parliament gives the casting vote for the
proportion of votes.
Larger
difficulties are to be expected if the so-called Arrow’s paradox is present.
Here, several alternative programs can achieve a majority depending on the order
in which it is voted.
Let
us make this theorem clear to us by means of a simple example. Three persons
(or parties): P1, P2, P3 shall participate in a vote. There were three alternatives
to the vote: A1, A2, A3. The following ranking scale would apply to the individual
parties:
Initially,
the question would come to the vote whether A1 or A2 should be chosen.
According to the scales of preference, P1 decides for A1, P2 for A2 and P3 for
A2. Thus, there results a majority for A2.
Secondly,
the question would be under consideration whether A2 or A3 should be chosen.
According to his preference scale decides P1 for A3, P2 for A3 and P3 for A2.
The majority therefore speaks for A3. The collective ranking is valid: A3>
A2> A1.
Now
we assume that it would have been voted in a somewhat different order. The
first question was whether it should be voted for A1 or A3. Then P1 would have
decided for A1, P2 for A3 and P3 for A1. So the alternative A1 would have won.
Now,
in a second step, it would have been decided whether the group preferred
alternative A1 or A2. P1 would again opt for A1, P2 for A2, P3 finally for A2.
Now the alternative A2 would be chosen. In this case, the collective ranking
scale would apply: A2> A1> A3.
Depending
on the random order of the votes, the result would be different - even at the
rational behaviour of the individuals – which signifies a contradiction. It is
not possible at the same time to apply the collective ranking: A3> A2> A1
and A2> A1> A3. In the first voting sequence, the alternative A3 would be
ranked 1st, but in the second voting sequence, it would be ranked 3rd. That can
not be. It is therefore impossible to constantly derive a consistent collective
indifference curve from consistent individual indifference curves.
Such
cyclic majorities can only be avoided if the number of alternatives is reduced
to two or if the preferences of the voters broadly coincide. A de facto reduction
to two alternatives usually takes place in majority voting systems, where only
two big parties stand for election and one party emerges victorious from the
elections. At the vote in the parliament, there are mainly two programs up for
election: the programme of the government and the programme of the opposition.
A
further precondition for absence of quorum is when qualified majorities or even
unanimity is required for the conclusion of a decision. For example, until recently the European Union's statutes provided that
all members of the EU Commission had to approve in order for the submission to
be considered as adopted.
Finally,
there is the possibility that at distribution policy issues a long-term balance
is prevented in a proportional representation with several smaller parties,
even if all parties behave rationally. Since just in
the distribution policy the ideas of a fair distribution of the incomes are
very different, the politicians are forced to rely on minimal majorities. Here,
an opposition can bring about a change thereby that it produces a differently
composed majority. In the long term results then a to and fro swinging between
different majorities and thus an unstable situation. In particular, Friedrich
von Hayek has pointed out this problem.
Finally,
a bureaucratic system can also get incapable of acting for various reasons.
This applies, for example, if individual departments of a government are not
sufficiently coordinated with one another and block each other. Let us take the
case that a question which is put to the vote touches the competence of two
ministries, but that the ministry A is led by the party S, the ministry B by
the party C, and that both parties have very different ideas about the solution
to the question, then it may well be that in the run-up to the consultations
both instances block each other.
It
is also conceivable that there is a lack of a loyalty relationship between supervisors
and subordinates, and that for these reasons the subordinate bureaucrats refuse
to carry out correctly the decisions of the government.
Let
us now turn to the problem of the system deficiencies, first of all to the question
of the importance of external effects. As already briefly pointed out, we always
speak of external effects when at the production or the consumption of individual
goods of the national economy arise costs which are not attributed to the
producer or the consumer. The same applies to national economic revenues which
are not assigned to the producer.
Probably
the most important example of external costs is the environmental pollution:
exhaust emissions are discharged into the air or into the water at the production,
resulting in impairments of the climate (ozone hole) or health hazards of the
residents. The most important example of external revenues is the one of the
collective goods according to Mancur Olson: individuals who are not willing to
participate in the costs of the production of these goods can not be excluded
from the consumption of these goods.
External
costs arise in market economy systems in connection with free goods, for which
there are no proprietary rights of neither private persons nor the state, which
can therefore be freely disposed without incurring costs for the users of these
goods. These goods are considered not to be scarce and therefore they neither
obtain price at markets.
However,
if there are external costs (and the same applies to external revenues), the
market mechanism fails and therefore does no longer lead automatically to a
welfare optimum. Without external costs, goods are produced only when the cost
increases that arise during production are lower than the benefit increases generated
by production.
Let
us assume an arbitrary allocation of material resources onto the individual
goods, and we ask ourselves whether a change in the allocation promises incremental
benefits; we thus produce one unit less of the one type of good A, and use the
thereby liberated production factors to produce another good B. The economic
cost increases of such an allocation change are caused thereby that a loss of
utility now takes place in the case of the reduced goods.
This
utility loss is compared with the incremental benefit at the increasingly produced
goods. As long as the incremental benefits are greater than the utility losses,
the allocation change acts welfare increasing; the welfare optimum has not been
reached yet. Conversely applies, when the utility losses correspond to the
incremental benefits, the welfare optimum is achieved; no change in the allocation
could result in an incremental benefit on balance.
However,
if some of the costs of a national economy are not included in the profitability
calculation of the operating person, if thus the actual costs are estimated too
low, these goods achieve a too low price, hence too much is produced of these
goods, there is produced too little of other goods and this means that the
allocation of the resources onto the individual goods deviates more or less
from the optimal allocation.
External
effects also occur in connection with negotiated solutions. As an example, at
labour disputes not only the directly concerned employees and employers are
affected, but also third groups are affected, for instance the employees and
employers in supplier companies or the population directly (labour disputes at
the passenger transport or refuse collection). In all of these cases, the
disputing parties are causing costs which are not paid directly by the
disputing parties but by third parties.
A
special kind of external effects has to be expected in electoral systems. Politicians
can increase their chances of re-election by focusing their activities primarily
on measures whose positively assessed effects are noticeable in the short term,
or whose negatively assessed effects are only visible in the far future. The
politicians can afford such behaviour because, according to the experience, the
voters have a very short memory. They orient their vote decision on the
measures of the politicians that are visible immediately before the elections,
thereby forgetting the loss of benefits they had to experience immediately
after the last election.
The
probability of external effects is especially high in bureaucratic systems.
Since at the decisions of bureaucrats their assets are not used, they can
neither be prosecuted materially with the loss of assets for wrong decisions.
Now, however, the responsibilities of the bureaucrats could also be maintained
by the fact that bureaucrats would be dismissed or demoted in the case of wrong
decisions, or an otherwise imminent promotion would be skipped.
However,
in practice, these possibilities are often obstructed by the fact that
non-promotion is excluded by means of a regular promotion (one is automatically
promoted after a series of service years), or that dismissal of official
bureaucrats is not possible since they have been employed for lifetime and a
dismissal is only permitted at very extreme misconduct at all.
Then
there remains only the possibility that the bureaucrats have to justify themselves
for their actions publicly or in front of a parliamentary control committee.
But these possibilities are also very limited in practice because the
bureaucrats often have better information than the public or parliamentarians who
are ought to control these bureaucrats.
In
a similar way to the external effects, a one-sided monopolisation of markets
leads to suboptimal results. The monopolist gains control over the entire
supply (the total demand) of a market, and can therefore shorten his supply
respectively demand and thus achieve a result that is more favourable for him.
Only in the case of a bilateral monopoly, under certain ideal preconditions,
the same allocation as in the case of full competition is realised. Thus the
allocation of resources occurs in these cases also optimally. These
preconditions include homothetic utility functions (the marginal utility of the
income remains constant!), furthermore homogeneous linear production functions
and a step-by-step negotiation strategy.
The
negotiated solution corresponds to the market form of the bilateral monopoly.
Therefore, an optimal allocation is theoretically conceivable here. In this connection,
John Kenneth Galbraith speaks of countervailing powers which take on the functions
of the competition.
Nevertheless,
it is necessary to state restrictively that an optimal allocation can be
reached only under limiting conditions, and that at least the assumption of a
constant marginal utility of the income does not correspond to the reality in
opinion of most economists. One assumes in general that a millionaire
experiences a considerably lower incremental benefit if his income is increased
by one unit as if the same income increase takes place at an individual with a
very low income. Therefore, one will have to assume under realistic conditions
that the negotiated solution leads to suboptimal negotiation results as a rule.
An
electoral system can lead to optimal results only if the electors can choose between
several parties. Nevertheless, it would be wrong if one would assume that the
results of an electoral system turn out the better the larger the number of the
parties is which stand for election. Within the scope of the economic theory of
the democracy it could be shown that the majority voting system basing essentially
on two competitive parties leads to better results than a proportional representation
system at which generally a variety of little parties stands for election.
The
reason for this lies particularly therein that in majority-voting systems the
parties are much more under pressure to consider the interests of as many sections
of the population as possible, while in proportional representation systems
there is the danger that the individual parties try to represent to a stronger
extent the interests of smaller groups. In a majority-voting system a party can
only form the government when it succeeds to poll the majority of the votes.
This is, though, in general only possible when no larger section of the
population is put at a disadvantage.
In
the framework of a proportional representation system no party can hope anyway
to poll the majority of the votes. Therefore coalition governments must be
formed with a majority of parties. In order to be involved in the government it
depends not on representing as many voters as possible. Also a party which represents
only a little section of the population has chances to be involved in the
government.
In
addition to this, experience has shown that majority election systems are much
more stable than proportional representation systems. In a majority election
system, it is generally sufficient that a slightly larger population group is
dissatisfied with the present government in order to achieve a replacement of
the government by the opposition in the next election. But precisely for this
reason, the democratic system can be maintained even at greater dissatisfaction
of the voters; only the party which represents the government has been
replaced.
Whereas
in proportional election systems there is a risk that the parties on the base
of the democratic order already belong to the government. So that in the event
of a great dissatisfaction with the present government there is the danger that
radical parties will prevail and that these intend to break down the democratic
order.
Thus,
for effective competition in the electoral system it depends less on the fact
that as many parties as possible are competing with each other. Nevertheless,
there is also the danger of monopolisation in the political electoral system,
e.g. when it is passed over to a one-party system, when an all-party government
is formed or when the existing parties arrange that certain particularly
critical problems are held off from the election campaign.
The
bureaucratic system is characterised thereby that even in an ideal-typical case
there is no competition present on the supply side. The function of competition
provided in the other systems of order is realised here the way that the bureaucracy
is subject to supervision of the parliament. But there is the risk that the
bureaucrats will have so much information advantage towards the parliamentarians
that the parliamentary control becomes ineffective.
Precisely
this thesis is supported by William A. Niskanen within the scope of his theory
of bureaucracy. Niskanen holds the view that the bureaucrats have the option
fixation power towards the government, and have therefore the possibility to
widen the government expenditures to a much greater extent than this meets the
wishes of voters.