Chapter 9: Order
conceptions part II
Outline:
01st Introduction
02nd The Laissez-faire liberalism
03rd The Ordoliberalism
04th The popular capitalism
05th The welfare state
06th The overall control
07th The Planning
08th The concerted action
09th The nationalisation of the key industries
10th The market socialism
11th The Yugoslav model
12th The centrally administered economy
05th The welfare state
The model of the welfare state propagated
by the Swedish Social Democrats after the Second World War also represents a
variant of a market economy order. The allocation is left to the free market,
as one is convinced that the market can solve allocation problems far better
than any state planned economy. The market-driven incentive systems promote, on
the one hand, the efficient use of scarce resources and, on the other hand,
help that it is constantly searched for new, more productive technical
procedures. In contrast, bureaucratic systems rather contribute to a
squandering of the scarce resources because of the lack of material
responsibility for the consequences of the decisions.
Just as in the variant of the popular
capitalism, a purely market-economy solution is nevertheless rejected, as it
solves the question of social security and the distribution of income to the
disadvantage of the low-income recipients. Due to monopolistic structures, the
wage rate can be pushed below the value of marginal product; moreover, in a
pure market economy the employee does not find a sufficient protection against
the social risks of illness, accident, disability, age and, finally,
unemployment.
According to the conception of the welfare
state, the allocation is thus left to the free market, distributive problems
and security problems are addressed in the context of generous welfare
institutions, though.
However, the Swedish welfare state failed
due to excessive demand on the economy because of too high tax burden and the
inefficiency of bureaucratic protection systems. On the one hand is valid: the
higher the tax burden rises, the lower are the financial incentives of the
market; on the other hand decreases the willingness for personal performance
with the growing provision of performance free transfer incomes.
06th The overall control
In the aftermath of the Second World War,
the concept of the overall control was developed by Karl Schiller, who was the
minister of economy and finance during the great coalition in the 1960s. Karl
Schiller was a follower of the Keynes school, but wanted to achieve
reconciliation with the neo-liberalism by trying a synthesis of the two
approaches. He applied the finding of the Liberalism that the free competition
market is best able to adapt production to the needs of the consumers. With
Keynes, however, he was also convinced that the market economy failed to solve
the macroeconomic problems and therefore needed a correction on the part of the
state.
It corresponded to Keynesian concepts that
the capital market itself was not capable of reducing imbalances because
neither the savings nor the investment reacted sufficiently to changes in
interest rates. If an economic downturn
takes place and with it an excess of the saving over the investment, the rate
of interest would have to be lowered actually and thus saving would be reduced
and the investment would be increased.
This compensation mechanism would fail,
however, because savings depend solely on the level of incomes, and because
entrepreneurs are not willing to increase investment expenditures even in the
case of interest rate cuts. Due to the decline in demand during the economic
downturn, the production capacity was already too large and the entrepreneurs
would not be interested in further increasing the production capacity by way of
investments.
On the capital and goods markets, the
imbalance (the supply surplus) would be rather relieved by reducing the
production of goods and by reducing the level of income. But this creates
unemployment; there is in fact an equilibrium trend on the goods markets, but
not on the labour markets.
The Keynesian theory was developed
originally to explain the underemployment during a depression or recession.
Later in the 1960s and 1970s, the world economy was hit less by unemployment
than by inflation processes; now the attempt was made to transfer the Keynesian
basic models to the problem of inflation.
Just as equilibrium of the goods market is
created in case of underemployment in times of economic downturn; equilibrium
of the goods market in the case of over-employment must be expected in times of
economic overheating. Equilibrium on the goods markets could only arrive in the
case of an employment which would exceed the existing supply of labour. Since
this is not possible, the goods market no longer reaches equilibrium here,
resulting in an inflationary gap.
The Keynesian theory was transferred to
the problems of economic growth already very early, most of all by Roy F.
Harrod. Roy F. Harrod tried to point out that a long-term balance between
investment and savings could only be achieved at a growth rate of the
investment that could no longer be expected in the highly developed, saturated
industrialised countries. Alvin Hansen complemented these considerations by
tracing back the too little investment confidence to the stagnation of the
population growth. Only in the case of high population growth would additional
housing and jobs be needed, which made a high investment demand necessary.
In other words, the weaknesses in the
capital markets cause that the overall economic problems of avoiding
unemployment and inflation, as well as the achievement of a continuous welfare
increase, could no longer be left to the market alone, but that an active
economic and growth policy of the state would be needed.
The Keynesian basic recipe for the
avoidance of macroeconomic unemployment consisted therein that the government
tries to compensate the low private demand with a deficit in the budget.
Equally, has the state, according to the Keynesian concept, to compensate the
inflationary tendencies in times of economic overheating which must be
attributed to a too great private demand by a correspondingly high surplus in
the state budget In the context of growth
policy it is finally necessary either by an increase in the state
infrastructure investments or by financial incentives for the enterprises to
increase the private or state investment insofar that an balanced rate of
growth of the domestic product is made possible.
In the criticism of the concept of the
overall control, primarily three different points were indicated: Firstly, it
must be considered that macroeconomic unemployment is not always of Keynesian
nature, thus at times it can not be attributed to demand deficits. We also have
to consider the possibility that autonomous cost increases can trigger
inflation processes. Secondly, Milton Friedman drew attention to the fact that
just the Keynesian economic policy has contributed to a significant part to the
instability which it is trying to combat with this policy.
The Keynesian economic policy is
characterised by a "go and stop", it speeds up during periods of
economic downturn and slows down in times of economic overheating. Just because
a longer period (about 1 to 1 1/2 years) passes until the stimulus measures
introduced to date show effect, and because the possibilities of the prognosis
are still limited, there is always the risk that the measures of the state will
be too late, for example, that economy boosts are still granted, although
demand reductions would be indicated.
In addition, it has to be taken into
account that investments have to be planned for a longer period and that by
perpetual changes in the interest rates the entrepreneurial risk is increased
and thus there is the risk that the private investment propensity declines
rather than it increases.
In the literature, thirdly a further
connection was pointed out; independent from the long-term investment
propensity of the entrepreneurs, the deficit policy of the government can lead
to a decline in the volume of investment indirectly by way of interest rate
increases. Here, one speaks of a crowding out of the fiscal policy. The state
finances its budget deficits by the issue of state securities; Hereby increases
the demand for capital and this tends to result in an increase of the interest
rate and can on this way reduce the private investment demand. In this case,
there would be lesser an increase than merely a reorganisation of the effective
demand from a private to a state activity.
Of course, one could avoid this 'crowding
out' by either that the state finances the budget deficit directly by borrowing
from the central bank, or by enforcing the central bank to support the
expansive fiscal policy by an equal expansionary monetary policy (money supply
expansion).
In practise, this way is obscured in
07th The Planning
The mainly by the Gaullists propagated
order conception of the planning in the French post war period was marked by
distrust of the allocation performance of the market. The free market would
show a number of market imperfections.
On the one hand, market failure had to be
taken into account. A market fails, for example, whenever the supply responds
abnormally. Let us take the case of the supply of the little boatmen, which
have only one small boat, and whose incomes are on the edge of the subsistence
level. If there is now a decline
in demand, the supply should also go back on a functioning market and thus
adapt to the demand.
In order to maintain their subsistence
level, the little boatmen see themselves compelled to even increase their
supply, though; thus they offset the partial decline in their income due to
lower prices by an increase in the supply volume. Thereby, however, the market
imbalance increases as well as the risk that more and more suppliers will have
to file for bankruptcy and leave the market. In order to avoid such an
existential crisis, the state finds itself forced to interfere in the market.
On the other hand, market deficits have to
be expected. Here, indeed the balance trend remains preserved, but the market
results differ more or less from the welfare optimum. The two most important
causes of market deficits are firstly the fact that the markets show
concentration phenomena, and secondly the existence of external effects.
One of the most important conditions for
the markets to head automatically for welfare optimum and adapt the production
to consumer preferences is that there is complete competition in all markets
and on both market sides. Now, it could not be expected that these conditions
are given in reality, rather are the market structures concentrated partly
monopolistic, partly oligopolistic.
Moreover, the welfare optimum is missed
also when external costs (or also revenues) occur. Here, the case of the
external costs is the more important one. We speak of external costs whenever
at the production (or also at the consumption) of certain goods of the national
economy are caused costs, which do not have to be borne by the enterprises, and
therefore ultimately neither by the consumers.
Because of too little commercial costs,
these goods are offered too cheaply by the enterprises, with the result that
also the demand for these goods is too high. In other words: the scarce
resources are not used for those usages where they would achieve the greatest
welfare.
Probably the most important case of
external costs is the environmental contamination, thus the fact that the
enterprises emit toxic wastewater into the rivers and seas as well as toxic
exhaust gases into the atmosphere in the course of production and thus pollute
the environment, but do not bear costs for this pollution. Although it would be highly desirable for the economy
to reduce the production of environmentally harmful products; due to too low
prices on a free market are these products more demanded than it would
correspond to the welfare optimum.
The magic word against these shortcomings
of the market within the scope of the order conception of the planning sounds:
indicative planning on the part of the state. A state authority points out how
the scarce resources of the national economy are to be allocated among the
individual sectors of the economy. As in a normal free market economy,
entrepreneurs freely decide on investment projects and production, though.
The plan drawn up by the state is not
binding; it only shows which investments are possible and desirable from the
perspective of the state. The reason why the enterprises are not forced to
follow the state plans is, above all, that one wishes to preserve the
individual freedom of consumption and production.
But how are the aims and the use of
resources that are set out in the state plans achieved without governmental
compulsion? The planning provides for a twofold approach. On the one hand, positive incentives are set, on the
basis of these it is relied that the entrepreneurs comply with the state
requirements on their own: the entrepreneurs associations are involved in
drawing up the state plans.
On the other hand, enterprises must fear
that if the enterprises do not comply with the governmental specifications, the
state will find itself compelled to nationalise the key industries. The
planning acts thus in the sense of the carrot and the stick: The involvement of
the entrepreneurs associations in the state plans represents the carrot, the
hidden threat to nationalise important industrial branches if necessary is the
stick which shall enforce the compliance with the state aim specifications.
The effective influence of the planning
remained low, though. On the one hand, the influence of the entrepreneurs
associations was large enough to prevent such governmental specifications,
which would have been contradictory to the interest of the enterprises. On the
other hand, was the threat of nationalisation obviously too dull to show any
effect. A nationalisation, carried out on a large scale, contradicted the
French basic ideas of a liberal market economy, and also the failures of state
planning in the past and in other states were too obvious than that a
nationalisation would have represented a plausible alternative.
08th The concerted action
The Stability Law, adopted in 1967,
allowed the Federal Minister of Economics the convening of a concerted action.
At this, the government and the collective bargaining partners should reach an
agreement on the guideline data for the forthcoming collective bargaining.
These wage guidelines were not binding, though.
Karl Schiller (then Minister of Economics
and Finance of the Federal Government) had developed this order conception,
since he opined that the aim of monetary stability owned the character of a
public good, and was therefore demanded inadequately according to a theory
developed by Mancur Lloyd Olson.
Mancur Lloyd Olson had shown that public
goods were demanded in a too low extent. The reason therefore was that, in the
case of public goods, the commercial marginal revenues which flow to the
producers are always lower than the marginal revenues occurring for the whole
of the national economy, with the result that the point of intersection between
the demand curve and the supply curve (the commercial balance) was at a lesser
output quantity than the point of intersection between macroeconomic marginal
returns and the supply curve (the welfare optimum). The following graphic
illustrates these relationships:
The red line shows the course of the
supply (marginal cost) curve, the light blue curve describes the macroeconomic
curve and the dark blue plotted curve displays finally the private economic
marginal revenue curve. (Xp) marks the private
economic balance, whereas (Xg) marks the overall
economic balance.
Since the point of intersection with the
private economic marginal revenue curve is at a lower output quantity than the
intersection point with the overall economic curve, it is proven that a too
small quantity is demanded of the public goods. Everyone is interested in the
public good 'monetary stability', but too little effort is made to achieve this
good. This conflict is referred to in the literature as public good dilemma.
Karl Schiller has now proposed the
concerted action in order to overcome this public good dilemma. If the wage
rates are decided in the individual collective bargaining, it must be feared
that often also wage increases are implemented which endanger monetary
stability.
The individual trade union would be better
off if it would demand lower wage increases and if at the same time monetary stability
would be preserved. For this purpose it would be necessary for all trade unions
to try to enforce wage demands that are neutral to the price level, though. A
single trade union would thus only be better off in the case of a wage increase
that is neutral to the price level if it could expect firmly that also the
other trade unions would behave conscious of the monetary value as well.
But as they can not count on this, they
will enforce wage increases which have a price level increasing effect. If a
single trade union behaves consistent to monetary stability, but if the other
trade unions do not follow this behaviour, then on the one hand the realised
wage increases in these economic sectors turn out below average, on the other
hand, carry the employees of these economic sectors the price increases of
other trade unions also. It is therefore not worthwhile for trade unions to
behave compliant with monetary value.
Here is where the proposal of the
concerted action comes in. If all the trade unions along with the government
determine which wage increases are classified as neutral to the monetary value
and thus can be coped economically, then each trade union could also expect
that all other unions adhere to the jointly agreed decisions. If, though, a
trade union can assume that all other trade unions behave compliant with the
monetary value, it is also appropriate for them to follow this concerted
behaviour and to comply with the monetary value likewise.
This concept equals the order conception of
the French planning. Also here, an indicative planning is present on the part
of the state, the actual power of decision remains with the tariff partners.
Here, it is worked with the carrot and the stick, too. The carrot consists
therein that the tariff associations are involved in the counselling on the
wage guidelines. The stick represents the
hidden threat that if this concept does not lead to success, restrictions of
the tariff autonomy could still be made.
Since the grand coalition in the
parliament had a sufficient majority at the time, in fact a change in the Basic
Law could have been decided if necessary, which would be restricting the tariff
autonomy, or at least an implementing law for the tariff autonomy could have
been enforced which underlines the overall economic responsibility of the
tariff partners and imposes certain conditions on the tariff partners.
In order to curb the cost explosion in the
healthcare in 1977 a concerted action was introduced likewise. In this case,
should the involved groups (health insurance provider, the medical profession,
collective bargaining partners) together with the state decide on again
non-binding guidelines for the cost increases that are still economically feasible.
In both sectors, certain initial successes
had been achieved in the first years after their introduction. The wage
increases enforced by the trade unions remained largely neutral to the price
level at first, corresponded thus to the growth of labour productivity, and the
cost inflation in the healthcare system could indeed be reduced for the years
after the introduction of the concerted action.
This initial success could not be
maintained for a longer time, though. Both in the labour market and particularly
in the healthcare system occurred cost increases which impaired monetary
stability.
This historical development (initial
success as well as failure in the long term) can also be explained simply in
theory. It is very likely that interest groups can be motivated to put their
individual interests behind the public welfare once. However, it will not be
achieved to bring about such a responsible behaviour in the long term. The task
of the interest groups is just to represent their own interests; it will not be
able to dissuade any group from this aim in the long term.
In reality, it was not achieved to resolve
the public good dilemma with the introduction of the concerted action, either.
In fact, actually is the establishment of the concerted action also accompanied
by false incentives which reward those who do not adhere to the jointly agreed
wage guidelines and punish materially those who comply with the wage
guidelines. Namely, if a single union enforces wage increases above the
guideline, on the one hand it receives an above-average high nominal wage
increase, but the hereby resulting price increases must be borne by all, so
that the real income of the respectively other groups of employees is
declining.
The following dynamisms might be expected:
In the first instance, almost all unions adhere to the jointly agreed wage
guidelines; as everyone complies, their expectations are also confirmed. Sooner
or later, though, a single trade union will break out of this concert and will
enforce higher wage demands either because there is a particularly high backlog
demand in this tariff area, or also because the enterprises will give way to
these demands due to above-average high returns.
The
success of this single union will be followed by further trade unions in this
non-compliant behaviour in the next bargaining rounds. Now that several trade
unions are breaking out of the concert, the resulting price increases are ever
greater and this means that conformal behaviour is being increasingly punished materially,
and that precisely therefore there is a risk that more and more single trade
unions will break out of the concerted action. Thus, one day the concerted
action finally collapses necessarily. This prognosis has indeed also taken
place in the labour market as well as in the healthcare system.
Moreover, the internal logic behind
collective bargaining also argues against a long-term success of the concerted
action. Collective bargaining is successful in the long term, when both tariff
partners are willing to compromise and therefore no tariff side loses its face
permanently. However, in order to be able to compromise, employers will begin
with wage concessions which are considerably below the level of wages which
they are willing to admit, while conversely the trade unions enter into the
collective bargaining with wage demands which are clearly higher than the wage
level they consider realistic.
If in the context of a concerted action a
certain wage increase is decided as acceptable and desirable, it is hardly
possible for employers to start the collective bargaining with an offer which
is below this wage guideline. After all, a higher wage increase was indeed
already accepted officially as desired. The employers must therefore enter the
collective bargaining with a wage permit, which corresponds largely to the wage
guideline adopted by the concerted action.
Any other behaviour would be contradictory
and would also jeopardise the success of further rounds of the concerted
action, given that the employers can not, on the one hand, agree to the decided
wage guidelines in the concerted action and, on the other hand, disagree with
the jointly agreed guidelines in the subsequent collective bargaining.
In this case, however, the employers lack
leeway for further concessions in the course of collective bargaining; the
climate for negotiating exacerbates, it is more difficult to arrive at a result
now. In any case, collective bargaining will generally end with higher wage
increases than indicated as desired wage increases in the concerted action.
This objection could be faced by
suggesting that this connection should be taken into account when the wage
guideline is determined at the concerted action and slightly lower wage
increases should be set than they are actually desired. Therefore, if for
instance the expected increase in labour productivity amounts 3%, then only a
2% wage increase would have to be spent as a wage guideline, so that the wage
increases of 3% would be achieved during the collective bargaining actually.
But just with this the trade unions would certainly not be willing to agree in
the context of the concerted action, and would argue with macroeconomic reasons
why the economically desired wage increase amounts just 3% anyway.
A further argument is added. We have to
assume de facto that different wage agreements are negotiated in the
proceedings of a bargaining round, since the single trade unions have different
positions of power and the individual economic increases in labour productivity
turn out differently in the individual industries. Such different agreements
may even be economically desirable to a limited extent as the shortage ratios
of the single industries are changing time and again, and therefore changes in
the wage structure are becoming necessary also.
If, however, a general wage guideline is
established within the context of the concerted action, then also these trade
unions will try to enforce this generally accepted wage increase, which would
otherwise have been satisfied with somewhat below-average wage increases
because of the peculiarities in the individual industries. The pressure of the
members on trade union negotiators is increasing when general wage guidelines
are decided, nevertheless if the government or the scientists may point out so
much the fact that a wage guideline defines only the average of wage increases.
If, on the other hand, the wage guidelines
decided in the concerted action are below the level that the trade unions are
striving for in this sector, they will find arguments wherefore a deviation of
their wage level upwards is indicated. They maybe report a backlog demand
because in the past bargaining rounds only an below-average wage increase has
been enforced, or else an above-average high revenue is achieved in the own
sector, which makes it necessary to participate in this above-average growth
due to distribution policy reasons.
It is also necessary to consider that
never all negotiators can be involved in the concerted action; the number of
the individual collective negotiations in the FRG is too large because of the
decentralised structure, only the representatives of the umbrella organisations
and single very large trade unions can participate in the meeting of the concerted
action.
But in this case, it is much easier for a
negotiator to dissociate from the decisions of the concerted action; he himself
did not participate at all in these resolutions usually. This, though, cancels
one of the essential prerequisites for the success of the concerted action.
Karl Schiller wanted to overcome the public good dilemma of the monetary
stability just thereby that the trade unions in the collective bargaining
accept the wage guidelines as their own resolutions and therefore also adhere
to these resolutions.
By and large, these considerations are
also likely to apply to the concerted action in the healthcare system. If we
examine the prospects of a concerted action healthcare, then there is another
argument, though. If guidelines for permitted cost increases are established,
then the groups involved will search for reasons why especially high costs are
justified in their area particularly. Such behaviour is counterproductive in a
competitive economy, though.
It is particularly desirable that the
involved enterprises search for possible cost reductions and reduce the costs
by improving the production technology. There is the risk now, that in the case
of a concerted action, the enterprises or hospitals are looking less for
rationalisations and increasingly for arguments in favour of cost increases or
at least an adherence to the existing cost level. In this way, more and more
possible cost reductions are avoided and the general cost level rises.
Continuation follows!