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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 6: Political economy II

 

 

Outline:

 

1st Introduction

2nd About the history of the political economics

3rd Essential features of political economics

4th Micro- versus macro consideration

5th Distinction against scientific socialism

6th Distinction against a science imperialism

7th Distinction against the economic policy teaching

8th Market economy versus democracy

9th Individual goods versus collective goods

 

 

7th Distinction against the economic policy teaching

 

Let us ask ourselves now, to which extent traditional teaching of the economic policy differs from the political economics. Both disciplines of knowledge have the economic policy as study subject, at least to the extent as the political economics is concerned with the political system of society. Nevertheless, the point of view, from which the political activities are examined, is another.

 

The traditional theory of economic policy examines how far certain economic political means are able to realize predetermined aims, and furthermore to what extent negative effects on other aims of economic policy are emanating from certain economic policy measures. This here examined aims-means connection treats basically the same problems as the economic theory, with the only difference that the cause-effect relationship of economic theory is reformulated socio-technically into an aim-means connection.

 

In the context of the employment theory, for example, it is examined the question, what are the causes (determinants) for unemployment; the unemployment is therefore regarded as an effect of very specific causes. The Keynesian employment theory, for example, explains unemployment with a too small demand for goods by households and enterprises.

 

With regards to content, we refer to the same connection when in the context of the teaching of economic policy an increase in demand - now on the part of the state - is regarded as a suitable means of fighting unemployment. Because employment depends on the level of demand for goods, it requires an increase in the demand for goods to increase employment.

 

A completely different problem is present when a representative of the political economics investigates the question under which conditions then a politician in a representative democracy ever has an incentive and moreover has the resources to also perform the measures recommended by the science of economic policy. Politicians are striving to be re-elected at the next election respectively, if they belong to the opposition, to gain the majority of votes, they will only implement such measures which do not hinder their re-election.

 

 

8th Market economy versus democracy

 

Subject of this section is the representative democracy. We had asserted above that the political economics in particular is characterized in that it transfers the perspectives of economic theory to non-economic areas. Subject of this knowledge discipline is here the political societal system.

 

In the field of economic theory we distinguish generally between a market economy and a state planned economy. In this context, Walter Eucken has referred to the market economy as the transport industry and to the state planned economy as a centrally administered economy. A market economy is characterized in this case by the fact that the individual economic persons exchange goods with each other, whereby the market represents the place on which the individual operating persons meet.

 

The characteristic of a state planned economy is here in no way that in contrast to a market economy the economic activities are planned. Planning takes place in all economic systems - also in the market economy. Each single company and each individual household draws up plans, in which it is determined which offer or which demand is exerted for individual goods.

 

According to Walter Eucken, a state planned economy rather differs from a market economy, thereby that here plans are established centrally under the direction of the state, which have to determine how much goods will be produced in detail.

 

Friedrich August von Hayek spoke in this context of spontaneous and sedate economic order. The market economy is in this sense a spontaneous order, since no one asserts in a plan how the existing scarce resources are distributed to the individual types of use (goods). Each individual participant establishes only an economic plan about which goods he wants to offer and demand. The market ensures then - of course only if certain conditions are met - as if by an invisible hand that the production in the whole economy will be aligned to the needs of consumers.

 

In contrast, von Hayek speaks about the state planned economy as of a sedate order as to indicate that here an attempt is made to define by aid of central plans, established by the State, at which allocation of scarce resources, the overall economic welfare is realized best possible.

 

Decisive factor here is: The difference between a spontaneous and sedate order is precisely not the fact that only in the state planned economy the production is geared to the common good. The Liberalism even tried to prove that only in a market economy the production will be aligned to consumer desires, whereas the attempt to optimize production in the context of a central plan must fail because no central authority has the knowledge that is necessary to align the production to the wide range of consumer needs.

 

This distinction between market economy and state planned economy now corresponds on the level of a political system to the distinction between a democracy and a monarchy or a dictatorship. While in a democracy all political power emanates from the people, in a dictatorship a single political leader determines the fate of the population.

 

In a democracy, thus the population is regarded as sovereign. The literal translation of democracy reads popular government. Therefore, the attempt of the Communists to describe their system as a people's democracy is misleading. In every genuine democracy the political power emanates from the people. Such an attempt to speak of people's democracy must appear suspiciously. In reality, shall here be covered up that the power actually does not emanate from the people. Already Gotthold Ephraim Lessing lets the Franziska in his work 'Minna of Barnhelm' say that one seldom speaks of the virtue that one possesses.

 

However, it is important to remember that even the sovereign of the monarchies has not done every single policy measure himself. Quite the contrary: the monarch left as a rule with few exceptions, the political routine business to the ministerial, which had to meet the individual policy decisions on behalf of the monarch.

 

A typical example is the role of Bismarck under the King (the later emperor) Wilhelm I. It was Bismarck, who foreign politically brought about the unification of Germany,  and who domestically created a comprehensive system of social security probably first in Europe, that had to be considered as exemplary at that time in Europe, although by today's standards can be viewed at best as a first step to a coverage against the social risks of the illness or accident and the age.

 

The role of the monarch then was essentially confined to the fact that he appointed the ministerial that took action for him and possibly dismissed them again and that those officials were acting on behalf of the monarch and that the king determined the policy guidelines. This means that one can speak even then of a democracy if not all political decisions are made directly by the people. The people as sovereign appoint also in the elections its representatives and releases them under certain circumstances by the fact that a government is voted out of office in an election, and that therefore other parties are entrusted with the formation of government. Also applies here, that the decisions of the representatives are taken on behalf of the population.

 

The counterpart to democracy is then the monarchy or dictatorship. Here, quite different varieties can be distinguished. In historical terms, the kings were either elected (elective monarchy) by a small circle of princes (in Roman German Empire by the electors), or were determined as a descendant of a predefined succession. Dictators came to power mostly by means of a revolution, whereat in some cases the existing government was overthrown on the basis of an open revolution such e.g. at the Soviet revolution; in some cases, however, as with the emergence of the National Socialist regime, the dictator came to power through elections, but then abrogated the democratic constitution.

 

There are two manifestations of democracy: the direct and the representative democracy. In both manifestations the political power emanates ultimately from the people. The emphasis here is on ultimately. As only in a direct democracy the individual policy decisions are taken directly by the population itself. The representative democracy, however, distinguishes itself by the fact that the actual policy decisions are performed of representatives. The population confines itself to elect these representatives at periodic intervals of 4 to 5 years.

 

We had already seen in the preceding introductory chapter that despite this fact (that the population is not involved in the policy decisions in a direct way) still can be said that the political power emanates from the people.

 

In the same way the population also takes action as a sovereign in a representative democracy. By the elections it appoints, so to speak, the politicians and at dissatisfaction, the present governing politicians are voted out at the next election. Of crucial importance is here alone that election takes place at regular intervals and that the election results cannot be manipulated by politicians.

 

A major difference between direct and representative democracy, therefore, consists in that the population in the representative democracy confines itself to voting decisions in terms of the determination of persons who have to conduct the political business; while in a direct democracy, the people determine the substantive decisions directly.

 

This is only true for the pure, ideal typical forms of democracy. In reality, we have to assume always that mixed systems are present which have realized elements of both ideal types. So also the representative democracy knows a limited participation of the people in the substantive decisions. In this context, one speaks of public opinion poll and referendum.

 

At the public opinion poll, the population has the opportunity to express their opinions on specific topics, politicians are then under political pressure to act within the meaning of the results of the survey, however, they are not forced to implement these results one-hundred percent.

 

At the referendum the will of the majority has to be implemented directly, the politicians here do not have the ability to negate this referendum, also not when they are convinced that this decision is prejudicial to the public interest.

 

Thus, although the real political orders certainly provide a certain participation of the population in these substantive decisions, in this chapter shall only be analyzed the pure form of the representative democracy.

 

 

9th Individual goods versus collective goods

 

We want to continue with the attempt to transfer the perspectives gained within the framework of the economic theory to the political system of a representative democracy. The market is seen as a place in which suppliers and demanders for goods and services meet and initially different ideas are reconciled. So there are goods in the broadest sense, which are at the focus of a market.

 

The role of the market in the economic system is assumed by the elections in the political system. Here, too, virtually goods or services are offered on the part of politicians or asked for by the voters. Here, too, it depends on that the different ideas of the individual voters and the politicians have to be reconciled.

 

A decisive difference, however, is present on this issue between the economic and the political system. On the markets individual goods are traded, in elections, however, public goods are traded. Under an individual good we understand a good that at the purchase on the market is passed to the hands of a consumer for the sole use. A collective good, however, is always collectively available to all the citizens, as opposed to the individual good the individual voter receives no ownership of the state services requested in the elections. The collective good is at disposal to the entirety of the population.

 

In the context of economic theory two different definitions of the collective good have been proposed. So has Mancur Olson suggested, speaking of public goods always when a potential user of the questionable good cannot be excluded from the consumption of this good, even if he is not willing to participate in the costs for the creation of such good.

 

Individual goods are generally only handed over to the demander against payment of a price. The one who is not willing to pay the price of this good, can neither enjoy this good. He can therefore be excluded from the consumption of this good. In the textbooks to finance usually it is referred to the street lamp as a prototype of a collective good. The street lamp gives light for all who linger in the relevant street.

 

It is impossible already for technical reasons, to exclude someone who lingers in a street from the benefit of the lantern, whether he lives there or whether he uses this street for other reasons. However, we presume here tacitly that in principle everyone has the right to linger in this street.

 

Of course, it would be conceivable to deny to someone to use a street and therefore exclude this person from also enjoying the lantern. Here, however, quite other goods are addressed (such as access to streets or living in a street). It is not possible to exclude somebody from enjoying a good, without additionally denying this person the consumption of other goods also.

 

Paul A. Samuelson has suggested a different definition of the collective good. According to Samuelson always then a collective good is present, if due to the fact that an individual makes use of a particular good, the consumption possibilities of another individual are not impaired at the same time.

 

Let us bring an example here again. Let us suppose that in the lecture room L of the University U will be held a lecture at a specified time T, but that the lecture room is not fully occupied. We allege that the lecture room contains, for example, 100 seats, but that so far only say 80 students attend the lecture. We now assume that another student enters the lecture room and wants to listen to the lecture. Here, we can say that the addition of another student does not affect the benefits that draw the present listeners from this lecture. Here, the lecture represents a collective good in the sense of Samuelson. Would indeed all seats have been occupied already, then the addition of another listener would have compromised the benefits of other listeners, for example, by the fact that now two classmates have to share a seat or some students have to listen to the lecture standing.

 

While according to Olson the question, whether a potential consumer can be excluded from the enjoyment of a good (exclusion principle) decides whether a collective good is present, it is according to Samuelson the question, whether the benefit of a consumer is reduced when an additional consumer shares this good, whether we are speaking of public goods (rivalry principle).

 

Now, for the analysis of political processes the term formulated by Olson is better suitable than the definition of Samuelson. It would be impractical, if we, for example, would no longer count the services of the jurisdiction as public goods only because the administrative apparatus is sufficient in the field of law enforcement and the dispensation of justice to fulfill the necessary tasks. We will therefore take the term coined by Olson as a basis in the course of this chapter.

 

Just as we had to add at the distinction of a direct and representative democracy that in reality no pure systems, but almost always mixed systems occur, we must adhere also here at the distinction of the goods or services that in reality mixed systems are quite found. Individual goods are offered sometimes also on behalf of the politicians. Each subsidy is provided to a quite specific company or a quite specific household at free disposal. Equally, certain facilities are used collectively in a market economy, we think, for example, of the railway system, which is shared by different transport companies. Nevertheless, it is also expedient in this chapter to subject only the providing of public goods to our analysis, while the economic theory is concerned solely with the problems arising from the production and consumption of individual goods.

 

Let us consider in somewhat greater detail the characteristics of a public good. The first main difference to private goods is the personal differentiation. While in a market economy, each consumer can choose how he spends his income, for which consumer goods he decides; the public goods are used in a political system together with the consequence that the voters have to decide for a particular solution, it is the same collective good for each and every citizen, thus it is not possible that every citizen decides for another collective. The decision of the majority applies to all citizens, regardless of whether the individual voter inferior at the voting had preferred a different good.

 

Let us take the example of a television broadcast. We want to insinuate that only one television broadcaster exists with a single transmission frequency and that therefore all citizens who want to watch a program can view only the same program. Here, a collective good is present. If, however, a variety of competing television programs are offered, so everyone could decide for the broadcast, which suits his needs best, it would not mind that other television viewers prefer other programs. Here, individual goods are offered.

 

It is clear that the offer of a collective good because of this personal undifferentiatedness guarantees a lower welfare as an offer of private goods. This is especially true because we have to assume in general that the demand structures of individual citizens differ more or less. Only when identical demand structures would be present for all citizens, could with the offer of a collective good be achieved the same welfare for all as with the equal offer of relevant private goods. The greater the outvoted minority is at majority voting - and it may be 49% in an extreme case -, the greater is the loss of welfare.

 

For these reasons, it is desirable that wherever needs can be satisfied by individual goods, the way of the individual good should be chosen and that a public goods offer appears only desirable where an individual offer cannot be realized. Let us take again the example of the television program. Technically, it is quite possible, to broadcast several different programs at the same time. The more use is made of these options, also the more can different needs of the individuals be attended.

 

Let us also take an example that certain tasks can be realized only through a collective offer. So the demand for equal rights for all citizens can just be satisfied only in that there is also only one jurisdiction for all individuals.

 

A second difference between collective and individual goods is the factual differentiation. In a market economy system, the individual consumer can in principle decide freely how he divides his income on the individual modes of use. The fact that a household when purchasing fats has decided for margarine and thus against butter, does not limit essentially in any way its decisions on the purchase of clothes.

 

Of course there are numerous complimentarily relations between the goods and it stands to reason that a household which at the purchase of fats has decided for organic food, probably at the purchase of proteins meets best to its needs when it prefers a health food also here. Nevertheless, it is the decision of the individual, how he decides at the individual types of goods, and the diversity of individual demand structures entails that very different usage types of income may be desired.

 

With regard to a public goods supply, though, these options do not exist anymore. If a voter has chosen a party, then he has also decided for a very specific division of requested services. He thereby chooses a particular foreign policy, economic policy, social policy and cultural policy.

 

It cannot be assumed that just this selection of the individual parts of a party program corresponds to the needs of the individual voter. It has to be assumed often that to a voter perhaps the economic program of the FDP, the foreign policy of the CDU and the social policies of the SPD would correspond to his own ideas better than the program of a single party. He must, however, opt for a party and thus enter into a more or less sized compromise with regard to the specific aims. The parties provide virtually a bundle of goods and, in contrast to a market economy, the voter has to opt for one of these bundles of goods, even if he himself has considered a different combination as expedient.

 

It is clear that this factual undifferentiatedness is a direct consequence of the representative democracy. In a direct democracy, voters decide on the individual policy measures. Even when in the vote on an economic problem they have decided for a solution, which was preferred by the FDP, during the vote on social policy issues they are by no means held to choose a solution which in turn is preferred by the FDP.

 

A third difference between a public good and an individual good consists in a temporal differentiation. The demand for individual goods can in principle be corrected at any time. If I as a customer have met my need for milk with whole milk in the past month, I can at any time change to a different product at the next purchase; I can spend these income parts at the next income reference for a completely different product. Parliamentary elections in comparison take place only every four to five years. So, in principle, a government can be voted out of office only after the expiry of this legislature, regardless that under certain circumstances the voters want to correct their decision a lot earlier.

 

Of course, here certain transitions take place in reality. Also the production of individual goods requires time and sometimes passes a certain time until a consumer can realize the change of his consumption desires. For example, he has closed a deal with a provider under which he is obliged to take a certain good monthly. Even if he has changed his consumption desires, he cannot switch readily to another product in this case. He must first terminate the existing contract and continue to obtain the current goods until the expiry of a notice period.

 

However, it is important in this context that these notice periods are not based in the nature of the goods. Technically, it would be quite possible to provide an immediate termination of a contract, or without a contract to decide new in each period whether and to what extent a product shall be obtained.

 

Conversely, it is conceivable in exceptional cases that a government gets under so much pressure that it withdraws prematurely, that the voting conditions do not permit the formation of a new government, so that elections must take place perforce before the expiry of the legislative period.

 

Also with regard to this third difference can be stated that in the production of individual goods the adaptation to changes in the demand structure occurs faster than in the provision of public goods and that therefore in a supply of individual goods generally a higher welfare can be achieved.